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2023 ReportAnnual Report 2019 Content 3 4 7 19 60 62 68 72 76 79 This is Nordic Message from the CEO Report from the Board of Directors Financial Statements Declaration to the Annual Report Standards of Corporate Governance Auditor Opinion Letter Board of Directors Executive Management Alternative Performance Measures (APM) Executive Management 2019: Pål Elstad, Marianne Frydelund, Svenn-Tore Larsen, Svein-Egil Nielsen, Ole Fredrik Morken, Geir Langeland, Katarina Finneng, Kjetil Holstad and Ebbe Rømcke (Absent: Ståle Ytterdal) THIS IS NORDIC Nordic Semiconductor (Nordic or the Group) is a leading provider of ICs for wireless connectivity and IoT solutions. Nordic is a market leader in short- range wireless and ready to take on the large emerging market opportunity within cellular IoT. Headquartered in Norway, Nordic is a technology success story with operations and presence across the globe. Bluetooth® Low Energy (Bluetooth LE) and cellular IoT will be key enabling connectivity technologies for Internet of Things (IoT) solutions, which holds the potential to improve people’s lives, optimize the use of resources and create large economic value at the same time. IoT will become a major contributor to a sustainable global economic development, within areas such as healthcare, industry, innovation, infrastructure, smart cities and clean energy. Nordic pioneered the development of ultra-low power wireless connectivity solutions during the early 2000s, and later became a key contributor for the creation and evolution of Bluetooth LE as a wireless standard. Over the past years the company has further developed its ICs to include support for IEEE standards such as Zigbee and Thread across its nRF52 Series and its new generation nRF53 Series. Nordic’s multiprotocol portfolio ensures that the company is well positioned to benefit from projects seeking to improve compatibility across the different standards. Nordic believes the market for its Bluetooth and multiprotocol products will grow by 20-30% annually in the medium-term, with potentially disruptive market opportunities in areas such as smart home, logistics and asset tracking, drug delivery & drug monitoring, and smart lighting. IoT will require more than short-range connectivity., which is why Nordic launched the nRF91 Series towards the end of 2018. The nRF91 Series is Nordic’s first family of low power devices for cellular IoT. Nordic’s solution has integrated LTE-M, NB-IoT, GPS, RF Front-End and power management into a very small System in Package (SiP), under the highest security standards and with significantly higher energy-efficiency than any comparable products on the market. The cellular IoT market is still in the early stages of the commercialization phase, with Nordic measuring its progress in the number of development kit shipments and customer pilot projects. The company sees projects ongoing across a wide range of industries and applications. Nordic`s ambition for cellular IoT is that it will over time grow to generate revenue on par with the company’s short-range business. 3 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | MESSAGE FROM THE CEO MESSAGE FROM THE CEO Nordic ended 2019 on a high note after a weak start to the year for the semiconductor industry. In the first half, product demand was negatively affected by trade tensions and inventory reductions throughout the value chain. Demand from broad-market customers gradually picked up during the second half, when Nordic also saw its long-term investments into customer relationships with tier-1 clients beginning to yield results. We ended 2019 with an excellent platform on which to build in 2020 and beyond. Nordic reported revenue of USD 288 million and an overall revenue growth of 6% in 2019, and the gross margin of 50.9% exceeded our 50% target. At the same time, we saw the order backlog increasing to USD 107 million at the end of 2019, which was an increase of more than 50% from the end of 2018. market. The Bluetooth segment now accounts for more than three- quarters of our total revenue. The Bluetooth Low Energy portfolio remains our main growth engine with a revenue increase of 19% last year, whereas revenue from the proprietary portfolio declined by 22%. The Bluetooth segment now accounts for more than three-quarters of our total revenue. We believe Bluetooth LE and multiprotocol products with Thread and Zigbee will see annual growth of 20-30% in the medium term, with upside potential in disruptive verticals such as smart homes, smart lighting, drug delivery and disease monitoring, and logistics and asset tracking. Cellular IoT is still in the early stages of commercialization and generated only moderate revenue in 2019. In our view, the outlook for the long-range business remains very solid. We aim to gradually build up the cellular IoT business to a similar size as the short-range business over the next five years. Our overall aspiration for the Group is to build Nordic into a USD 1 billion company within five years. To achieve this goal, we have taken a lead on connectivity in the IoT space. I am very pleased to see us maintain or even strengthen our leadership position in the Bluetooth LE market in 2019. In terms of new designs, data provided by the Federal Communications (FCC) Commission and collected by DNB Markets show that 41% of the Bluetooth LE end products that were certified during 2019 had Nordic inside. This puts us as the clear market leader in the broad market. Svenn-Tore Larsen, Chief Executive Officer Over the past five years, the FCC has certified more than 2,100 different Bluetooth LE products built on Nordic technology. This broad customer engagement makes us an attractive partner for the large global platform companies, that are fighting for dominance in the home automation or smart home market. We have been working for years to build strong customer relationships with these major players, as well as with the market leaders in the verticals in which we operate. We have invested considerable resources into sales, R&D and quality control and assurance towards these customers, and it is very rewarding to see the initial results of these efforts beginning to show through in our order book and revenue figures. 4 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | MESSAGE FROM THE CEO Taking the lead on connectivity also requires that we continue to push the frontiers with new products and solutions. The nRF52 Series is a winning product family that has served us well and will continue to grow and develop over the coming years. The broad-market adoption of the nRF52 Series offers unique market insights, which has allowed us to tactically expand the product offering through the introduction of lower-end and higher-end versions. This scalability has enabled us to increase realized average selling price over the past few years in a market characterized by declining prices. In 2019, the previously launched nRF52810, nRF52832 and nRF82840 SoCs were complemented by the lower- end nRF52811 - a multiprotocol SoC with direction finding capabilities - and the mid-range nRF52833 multiprotocol SoC that supports temperatures of up to 105°C. Late in the year we launched the first product in the next generation nRF53 Series, with the dual-core nRF5340 SoC. This is the world’s first wireless SoC with separate network and application processors. Supporting Bluetooth Low Energy, Thread, ZigBee and NFC as well as Bluetooth mesh, this is a production generation that moves the market forward in terms of significantly lower power consumption, increased performance, and strengthened security. Nordic's nRF5340 dual-core flagship SoC Within cellular IoT, we introduced the Nordic Thingy:91 module in 2019. This is a prototyping tool that lowers the barrier for customers to run proof-of-concept trials for the wide array of future IoT applications we expect to emerge across both consumer and industrial markets in the years to come. The Nordic Thingy:91 builds on our nRF9160 SiP, which leads the field in size and power consumption, and so far, remains the only product on the market with embedded low-power application MCU and software development kit. Over the past year, we have made great progress with regulatory and telecom carrier certification processes and continue working with the aim to offer worldwide coverage. Through our technology advancements in both short- range and cellular IoT Nordic continues to excite developers. We were very glad to see development kit shipments increase by 34% to more than 86,000 in 2019, and that the share of cellular IoT kits was close to 10% and increasing. technical support community, Nordic Our online DevZone, also continues to thrive, attracting visits from some 80 000 developers during 2019 entering more than 20 000 questions. Through our Tech Tour seminar program, we also met more than 4 000 developers face- to-face during the year. We want to be “the engineers’ best friend”, and our strong ties to and collaboration with the developer community represent integral and invaluable parts of our truly customer-centric company culture and DNA. At Nordic, we have a history of investing early and patiently to stay at the forefront of potential high- growth market opportunities. This has been evident over the past few years as we have continued to allocate significant resources to grow the short-range business at the same time as we have made large investments into the development of cellular IoT technologies and products. Nordic Semiconductor’s success is based on the work of a highly specialized, skilled and diverse workforce, and our very competent organization continued to grow in 2019. The overall headcount increased by 12% to 767 people, with the R&D workforce increasing by 9% to 563 people and the sales and marketing staff by 13% to 113 people. Their level of competence and ideas is crucial to drive the business forward and make us succeed with existing and new initiatives. With 46 different nationalities represented, Nordic is uniquely positioned to foster an inclusive and diverse company culture. Nordic has built its short-range portfolio on low energy connectivity solutions and is now receiving market acknowledgement and industry awards for our disruptive lead on power consumption for our cellular IoT products. We hold the potential to contribute to significant energy savings enabled by cellular connectivity, for applications ranging from environmental monitoring and disaster prediction, to agriculture and industrial monitoring, and smart home logistics. Focus on sustainability will be ever more important for Nordic going forward. 5 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | MESSAGE FROM THE CEO Social and environmental aspects are increasingly becoming a part of our corporate strategy, and our progress can be review in our separate ESG Report. I am particularly proud of our new program for support and contribution to the UN Sustainable Development Goals (SDGs). Summing up, our fundament strengthened further through 2019, and we have made inroads into customer segments that have enabled us to build a larger and higher-quality order book than ever before. This is an excellent platform from which to build in 2020 and beyond. During February and March 2020, it has become clear that the measures to stop the ongoing spread of the coronavirus (SARS-CoV-2) will have significant effects on global economic activity in 2020. While this reduces the near-term visibility also for us, we have an excellent platform to keep building towards our long-term targets. A global and truly permeating Internet of Things represents a massive long-term market opportunity, and we will continue to invest heavily in both the short- range and long-range parts of our business in the years to come. We remain confident that this is the right way to maximize the long-term value of our market opportunities. Realization of these business opportunities and a high operational leverage will gradually generate margin improvements on the way towards our long-term EBITDA-margin target of 20%. Revenue excluding cellular IoT (USD million) 300 250 200 150 100 50 0 Short-range IoT Wearables PC Peripherals Game controllers Proprietary/ASIC Bluetooth 6 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | REPORT FROM THE BOARD OF DIRECTORS REPORT FROM THE BOARD OF DIRECTORS Nordic saw overall revenue growth of 6% to USD 288 million in 2019, with a year-on-year decline in the first half of the year followed by an increasingly strong rebound in the second half. Bluetooth revenue increased 19% year- on-year, reflecting both continued good momentum in the broad market and higher sales and order inflow from tier-1 customers. Group Overview Nordic Semiconductor is a fabless semiconductor company specializing in wireless technology that powers the Internet of Things (IoT). The company’s award winning Bluetooth® LE solutions have made it the market leader, and are complemented by ANT+, Bluetooth mesh, Thread, and Zigbee products. Nordic’s latest technologies, NB-IoT and LTE-M leverages cellular infrastructure to extend the IoT. The company has been a longstanding pioneer from proprietary 2.4GHz in wireless connectivity, technology for PC accessories via pure Bluetooth LE products, to todays’ short-range multiprotocol products and long range cellular IoT solutions. Over the past decade, the company has built an undisputed leading position in the Bluetooth LE market, and around 40% of the new designs coming to the market use Nordic’s connectivity solution. Nordic’s components are manufactured by world class subcontractors and are distributed through an extensive network of global and regional partners to manufacturers of branded electronics. End-user verticals include consumer electronics and wearables, building and retail, healthcare, and an increasing number of other verticals and applications. Nordic Semiconductor was founded in 1983 as an integrated circuits manufacturer. The Company is headquartered in Trondheim (Norway) with offices in Oslo (Norway), San Diego (USA), Beijing, Shanghai, Shenzhen and Hong Kong (China), Taipei (Taiwan), Manila (the Philippines), Yokohama (Japan), Seoul (South Korea), Düsseldorf (Germany), Eindhoven (the Netherlands) and London (UK). R&D activities are carried out in Portland (USA), Krakow (Poland), Oulo, Espoo and Turku (Finland) and in Trondheim (Norway). At the end of 2019, Nordic Semiconductors had 767 employees, of which 563 work within R&D and 113 in sales and marketing. Strategy and long term target Nordic’s mission is to be a world-leading supplier of low- power connectivity solutions in both the short-range and long-range markets, based on proprietary 2.4 GHz RF technology, Bluetooth Low Energy technology, and cellular IoT technology. Nordic is a pioneer in ultra-low power wireless technologies, building its development on six strategic pillars; integration and solutions and tier-1 customer engagement model performance, feature-rich, reliable and robust Lead on connectivity – low power, high Excite developers – ease-of-use, value-add Customer engagement – combined broad market Scalability – scalability across technologies, Investing early – investing early in- and growing High financial ambitions – strong long-term with- high growth markets profitable growth and value generation markets and customers Based on these fundamental strategic elements, the company has developed a market leading position in the short-range connectivity space, with a broad portfolio of integrated circuits, systems and solutions. The company delivered approximately 370 million units in 2019, to a wide variety of applications and a broad customer base ranging from single developers to high-volume tier-1 customers. Nordic also delivered around 87,000 developer kits in 2019, and Nordic’s very active and growing developer 7 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | REPORT FROM THE BOARD OF DIRECTORS community ‘DevZone’ now counts more than 80,000 user profiles. Nordic holds a particularly strong position in the growing Bluetooth LE market, and Bluetooth solutions accounted for 79% of Group revenue in 2019. The company’s proprietary 2.4 GHz RF products accounted for 20% of Group revenue, mainly from sales into the mobile/PC peripherals markets, with the remaining 2% generated from cellular IoT, ASIC components, and consulting services. The cellular IoT product portfolio is in the early stages of commercialization after five years of development, with Nordic ready to deploy almost two decades of sales and distribution experience from the short-range business into the commercialization process. The market opportunity within cellular IoT remains strong and we see increased activity from both carriers, operators and end customers. The company aspires to build a USD 1 billion revenue base within five years, through an expected 20-30% annual growth for Bluetooth and multi-protocol products, and a gradual build-up of the cellular IoT business to a similar size as the short-range business. Operational review Nordic continued to strengthen its product portfolio in 2019. The highly successful nRF52 Series was further broadened with the introduction of the lower-end nRF52811 System-on-Chip (SoC) and the mid-range nRF52833. Both are multiprotocol SoCs for Bluetooth LE, Thread and Zigbee, meeting specific customer demands such as direction finding and high temperature tolerance, at the right price points. Late in the year, the company launched the first product in its new nRF53 generation, pushing the boundaries further in terms of low power consumption, performance, and security. The nRF5340 is the world’s first dual processor multiprotocol System-on-Chip (SoC). Towards the end of the year, the company also launched its first front end module for range extension with the nRF2150. On the customer side, Nordic continued to attract new broad market clients but also began to see results of years of work to establish customer relationships with new tier-1 customers such as the global platform companies. The introduction of more tier-1 customers is demonstrated by the strong order backlog, which increased from USD 70.0 million at the end of 2018 to USD 106.6 million at the end of 2019. In the cellular IoT area, Nordic launched the Thingy:91, a multi sensor prototyping tool for customers to easily run proof of concept trials for cellular applications. The product builds on the nRF91 Series LTE-M/NB-IoT low- power cellular IoT solution that was launched late in 2018. The company is progressing with the cellular carrier certification processes and has now obtained certification from leading telecom carriers such as Verizon, Deutsche Telecom and Vodafone, in addition to the general GCF certification. Review of the annual accounts In accordance with the provisions of the Norwegian Accounting Act, the Board of Directors confirms that the accounts have been prepared on a going concern basis and that the going concern assumption applies. Nordic prepares consolidated annual accounts in accordance with IFRS (International Financial Reporting Standards) as approved by the EU, relevant interpretations, and the Norwegian Accounting Act. A summary of internal controls related to the accounting process can be found in the Corporate Governance section of this Annual Report. Note that the Group has identified gross margin, EBITDA, EBITDA margin, adjusted EBITDA margin, total operating expenses, cash operating expenses, and order backlog as Alternative Performance Measures in addition to the financial information as prepared in accordance with IFRS as adopted by the EU. Please see page 79 for further details. Income Statement The Group classifies its revenues into the following technologies: Short-range wireless components, including Bluetooth Low Energy based and proprietary products, long range (cellular IoT), ASIC components and Consulting services. 2018 Change% Revenue by technology: USDm Proprietary wireless Bluetooth Cellular IoT ASIC Components Consulting services 2019 59.9 221.2 1.0 6.0 0.2 77.3 158.2 0.2 8.0 0.5 Total 288.4 271.1 -22% 19% 351% -24% -57% 6% Total revenue increased by 6.4% to USD 288.4 million in 2019, up from USD 271.1 million in 2018. Revenue from Bluetooth LE increased by 19% to USD 221.2 million. Bluetooth sales were negatively affected by trade uncertainties and distributor inventory adjustments in the last part of 2018 and the first part of 2019. In the second half of 2019 the market returned to growth. The year-on-year growth pattern thus changed considerably during the year, from a year-on-year decline of 13% in the first quarter and 1% in the second quarter, to year- on-year growth of 4% in the third quarter and 36% in the fourth quarter. 8 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | REPORT FROM THE BOARD OF DIRECTORS Going forward the Company expects medium-term annual growth of 20%-30% for Bluetooth LE and multi- protocol solutions including Thread and ZigBee. of 2019. Total cellular development kit shipments since launch has now passed 10,000, Revenue from Proprietary wireless products declined by 22% to USD 59.9 million in 2019, down from USD 77.3 million in 2018. The decline is partly explained by customer migration from proprietary solutions to Bluetooth LE. However, the decline was stronger than anticipated, due to inventory reductions in the sales channels. Split by end-product markets, revenue from the short- range wireless components are divided into Consumer Electronics, Wearables, Building & Retail, Healthcare, and Others. Wireless components revenue by end-product application, excluding cellular IoT: USDm Consumer electronics Wearables Building/retail Healthcare Other Total 2019 119.4 50.4 51.6 19.7 40.0 281.1 2018 Change % 111.7 43.8 48.6 22.6 35.6 262.4 7% 15% 6% -13% 12% 7% Consumer electronics overall showed 7% growth in 2019. Most of the company’s proprietary products fall into this category, and growth for Bluetooth LE products was considerably higher. Wearables revenue grew 15% and Building/Retail 7% in 2019, with very high year-on-year growth levels toward the end of the year. The Healthcare segment declined by 13% in 2019. This portfolio is still quite narrow and dependent on a small number of customers. One of the company’s main Healthcare clients is currently between product generations, and volumes are expected to pick up in the second half of 2020. The ‘Other’ segment increased 12%, mainly reflecting increased revenue from 88 different modules produced by our module partners. Cellular IoT is still in an early stage of commercialization, and the company focuses on KPIs such as the volume of cellular development kit shipments and the number of customer projects rather than revenues. the nRF9160 shipments of cellular Combined development kit and the cellular prototyping tool Nordic Thingy:91 amounted to approximately 8,300 units in 2019. Shipments in the second half of the year accounted for two thirds of this, and for more than 10% of total development kit shipments in the second half Sales of ASIC products declined by 24% in 2019. The Company has not designed new ASICs since 2014 and future revenue hence depend on demand from existing customers and applications. ASIC sales and consulting services combined accounted for 2% of Group revenue in 2019. Gross profit USDm Gross Profit Gross Margin 2019 2018 Change% 146.8 135.0 9% 50.9% 49.8% 1.1%p.p. Nordic Semiconductor had targeted a gross margin of 50% and exceeded this level in 2019. Gross profit amounted to USD 146.8 million, which was an increase of 9% from the previous year. The gross margin hence increased to 50.9% from 49.8% in 2018. The gross margin was stable around the full-year level in the first half of the year, before dropping below 50% in the third quarter and rebounding in the final quarter of the year. The dip in the third quarter mainly reflected increasing volume calls from tier-1 customers under agreements that on average carry a lower gross margin. In the fourth quarter this was more than balanced by a favorable product mix, with a higher share of more advanced chips such as the nRF52840. Going forward the company expects to see changes in product mix continuing to generate fluctuations between quarters, and that higher tier-1 volumes will translate into a reduction in gross margin for the short- range business to 48%-50% in the medium-term. The long-range module-based business model is expected to have lower gross margins in the range of 35%-40%, with the effect on the total gross margin for the Group depending on the pace of the volume ramp. Operating expenses USDm Payroll expenses Other OPEX OPEX excl. D&A Depr. & Amort. Total 2019 80.3 33.7 113.9 23.5 137.5 2018 Change % 70.0 34.2 104.2 16.7 121.0 15% -2% 9% 41% 14% Operating expenses amounted to USD 113.9 million in 2019, excluding depreciation and amortization. This was an increase of 9% from USD 104.2 million in 2018. The higher expenses mainly reflect a 12% increase in the number of employees from 685 to 767 during the year, which in turn reflects increased R&D activity and 9 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | REPORT FROM THE BOARD OF DIRECTORS strengthened sales efforts for both Bluetooth and cellular IoT. Measured by function, expensed R&D accounted for USD 73.5 million of operating expenses, compared to USD 64.1 million in 2018. R&D is expected to continue to increase in absolute terms for both the short-range and long-range businesses. The R&D intensity, however, is expected to decline from a peak level in 2019, measured as a percentage of revenue. Sales, general and administration (SG&A) expenses increased to USD 40.5 million from USD 40.2 million in 2018. SG&A is also expected to continue the increase in absolute terms, as the Company builds up its long- range organization. However, increased operational leverage is expected to reduce the cost as a percentage of revenue going forward. Total cash operating expenses amounted to USD 123.4 million, when adjusting for non-cash items, capitalized development expenses, equity-based compensation, and depreciation and amortization. This was an increase from USD 116.0 million in 2018. Cellular IoT accounted for USD 30.4 million of total cash operating expenses in 2019, compared to USD 26.8 million in 2018. Nordic capitalized USD 11.3 million in 2019, down from USD 13.0 million in 2018. Option expense for equity based compensation was USD 1.8 million, compared to USD 1.2 million in 2018. Please see the section on Alternative Performance Measures for more details. IFRS Effective January 1, 2019 the Group implemented accounting according 16- Leases. This to reduced operating expenses before depreciation and amortization by USD 4.4 million for the full year and increased depreciation and amortization by USD 3.8 million. The effect on profit before tax was USD 22,000. Reported numbers for 2019 are in accordance with IFRS 16 but no adjustments have been made to the 2018 numbers. Please see note 1 for a detailed overview of the 2019 effects. EBITDA and Operating profit USDm EBITDA EBITDA-margin Adjusted EBITDA 2019 32.8 11.4% 57.6 Adj. EBITDA-margin 20.0% Operating profit EBIT-margin 9.3 3.2% 2018 Change % 30.8 11.4% 47.7 17.6% 14.0 5.2% 6% 0% 19% 2.4%-p -35% -2.0%-p interest, Earnings before tax, depreciation and amortization (EBITDA) amounted to USD 32.8 million, an increase from USD 30.8 million in 2018. The corresponding EBITDA-margin was flat at 11%. Adjusted for negative EBITDA of USD 24.7 million in the long-range (cellular IoT) business, the EBITDA was USD 57.6 million and the margin 20%. This compared to an adjusted EBITDA of USD 47.7 million and a margin of 18% in 2018. The Company has a long-term EBITDA margin ambition of 20% for the Group. Depreciation and amortization amounted to USD 23.5 million in 2019, compared to USD 16.7 million in 2018. The introduction of IFRS 16 Leasing accounting increased depreciation and amortization by USD 3.8 million compared to 2018. Please see note 21 for further details. Operating profit (EBIT) hence amounted to USD 9.3 million, compared to USD 14.0 million in 2018. Net financial items USDm Net interest Net foreign exchange Net financial items 2019 2018 0.8 -0.4 0.4 1.4 -0.3 1.0 Net interest declined slightly from 2018 to 2019, mainly due to a lower average cash balance. Profits and taxes USDm Profit before tax Income tax expense Net profit after tax 2019 2018 9.7 -2.4 7.3 15.1 -6.2 8.9 The Group recognized tax charges of USD 2.4 million, corresponding to an average tax rate of 25%. This compares to USD 6.2 million and an average tax rate of 41% in 2018. The tax return is prepared in NOK, with currency effects on taxable profit the main explanation for the deviations from the nominal tax rate of 23%. Tax payable amounted to USD 3.9 million, compared to USD 6.1 million in 2018, with the balance reflecting changes in deferred tax and tax benefit. 10 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | REPORT FROM THE BOARD OF DIRECTORS Financial position Balance sheet Nordic has total assets of USD 318.4 million at the end of 2019, of which USD 219.6 million in current assets and USD 98.8 million non-current assets. These assets were financed by total equity of USD 232.2 million at the end of 2019, non-current liabilities of USD 20.2 million and current liabilities of USD 66.0 million. Current assets stood at USD 219.6 million at the end of 2019, compared to USD 205.5 million at the end of 2018. This included cash and cash equivalents of USD 90.6 million at the end of the year, down from USD 103.9 million at the end of 2018. Inventory increased to USD 53.1 million from USD 42.7 million at the end of 2018 and accounts receivables to USD 64.5 million from USD 51.8 million at the end of 2018. Overall, net working capital amounted to USD 70.2 million, compared to USD 61.3 million at the end of 2018. Measured as a percentage of full year revenue, net working capital increased to 24.3% from 22.6% at the end of 2018. This reflects a significantly higher activity and sales level towards the end of 2019 than in 2018, and a significantly higher year-end order backlog requiring a higher inventory. Non-current assets amounted to USD 98.8 million at the end of 2019, compared to USD 61.7 million at the end of 2018. The increase is mainly explained by the inclusion of USD 23.9 million of right-of-use assets as a result of the implementation of IFRS 16 -Leases with effect from January 1, 2019. Fixed assets increased to USD 26.6 million from USD 17.6 million, which mainly reflects the finalization of the new lab facilities in Trondheim. Software and other intangible assets declined to USD 11.4 million from 15.1 million, reflecting amortization in the period. Capitalized development expenses increased to USD 34.0 million from USD 27.7 million at the end of 2018. Total shareholders’ equity amounted to USD 232.2 million at the end of 2019, up from USD 221.5 million at the end of 2018. The Group equity ratio was hence 72.9%, compared to 82.9% at the end of 2018. The decline is mainly explained by the higher asset base as a result of IFRS 16 - Leases. Total liabilities amounted to USD 86.2 million, compared to USD 45.6 million at the end of 2018. The increase is mainly driven by the implementation of IFRS 16. Non-current liabilities increased to USD 20.2 million from USD 0.3 million, of which USD 19.9 million reflect the non-current portion of lease liabilities after the implementation of IFRS 16, and the remainder pension liabilities. Current liabilities increased to USD 66.0 million from USD 45.3 million, of which current lease liabilities accounted for USD 4.0 million. The remainder of the increase is explained by an increase in accounts payable to USD 19.7 million from USD 10.4 million at the end of 2018, which in turn reflects the increased activity and sales level. Cash flow and funding USDm Net cash flow from: Operating activities Investing activities Financing activities Currency adj. Net change in cash and cash equivalents Cash and cash equivalents 1.1 Cash and cash equivalents 31.12 2019 2018 19.7 -31.5 -1.5 0 -12.2 103.9 90.6 30.5 -30.5 66 8 0.4 67.2 36.7 103.9 Cash flow from operating activities was USD 19.7 million in 2019, compared with USD 30.5 million in 2018. The somewhat reduced cash conversion is explained by working capital developments in the respective periods, with significantly higher activity towards the end of year than in 2018. Cash flow used for investing activities was USD 31.5 million in 2019, compared to USD 30.5 million in 2018. Capital expenditure increased to USD 20.2 million from USD 17.5 million, including software, whereas capitalized development expenses declined to USD 11.3 million from USD 13.0 million. Cash flow from financing activities was a negative USD 1.5 million, reflecting that USD 3.9 million repayment of lease obligations was partly counterbalanced by USD 2.4 million cash inflow from sales of treasury stock. In 2018 the company saw a cash inflow of USD 66.8 million, mainly reflecting the effect of a share issue, repayment of debt and purchase of treasury shares. Including the effect of exchange rates, net change in cash and cash equivalents was a cash outflow of USD 13.2 million in 2019, compared to a cash inflow of USD 67.2 million in 2018. Cash and cash equivalents hence declined to USD 90.6 million at the end of 2019, from USD 103.9 million at the end of 2018. The cash is mainly held in the Group’s functional currency USD, in order to minimize the impact of currency fluctuations. 11 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | REPORT FROM THE BOARD OF DIRECTORS In addition to cash at hand, Nordic has undrawn revolving credit facilities (RCFs) of USD 40 million and USD 25 million, and an unutilized EUR 10 million overdraft facility with the company’s main bank. Including these credit lines, available cash amounted to approximately USD 167 million at the end of 2019, compared to approximately USD 169 million at the end of 2018. Both RCFs expire in November 2022, the USD 40 million facility was refinanced in December 2019. The only financial covenant on the RCFs is for the company to maintain an equity ratio above 40%, which compares to the actual equity ratio of 73% at the end of 2019. Tight cash management is a key priority for the Group, as a strong financial position is required to realize the Company’s strategic priorities and growth opportunities. The Board of Directors’ assesses the liquidity position as adequate given the company current activity level, investment plans, and business outlook. Allocation of net profit for parent company The parent company Nordic Semiconductor ASA has a net profit after tax of USD 4.3 million in 2019, compared to USD 6.4 million in 2018. The entire net profit is attributable to the equity holders of the parent. Net profit after tax corresponds with ordinary and fully diluted earnings per share of USD 0.042 for 2019. This compares to ordinary earnings per share of USD 0.051 and fully diluted earnings per share of USD 0.049 in 2018. Nordic pursues an ambitious long-term growth strategy which requires significant investments in R&D and sales and marketing. The Board of Directors recommends that Nordic maintains a solid balance sheet with a high equity ratio and a cash reserve that enables the company to continue driving its technology and product roadmap. The Board of Directors will hence propose to the Annual General Meeting that the net profit of the parent company is transferred to ‘Other equity’, and that no dividend is distributed for 2019. Risk Management The Board of Directors oversee the risk management process and carries out biannual reviews of the Group’s most important areas of exposure and internal controls. In addition, the Board receives regular updates and risk assessments in board meetings. Nordic complies fully with the Norwegian Code of Practice for Corporate Governance. Risk Factors Based on the information currently known to us, we believe that the following information identifies the most significant risks affecting our business. Any of the factors described below, or any other risk factor discussed elsewhere in this report, could have negative impact on our results or on our outlook. Four major groups of risks are identified within the Group: Strategic, Operational, Financial and Legal & Compliance. Some of the risks are outside of Nordic’s control, including industry and specific cyclical risks. Strategic risk Demand for semiconductors and electronic products is sensitive to global economic conditions and international trade flows. While the underlying, long-term market trends point towards increasing demand for Nordic’s products, the operations are exposed to a variety of factors with real or perceived impact on the economy. Geopolitical risk and trade tensions Challenging global economic conditions and political unrest and uncertainty can result in reduced demand for our products. Geopolitical risks and trade frictions, for example the ongoing trade war between China and the US, could negatively impact global operations. This includes selection of sourcing of products, as the geographic location might be subject to tariffs or increased costs, which may not be recoverable. In turn this may lead to reduced demand for our customers' end products. During 2019, Nordic saw increased trade tensions having a negative impact on the industry, particularly in the first half of the year. Demand temporarily declined, which resulted in increased risk for obsolete inventories and excess manufacturing capacity. Mitigation actions Nordic actively monitors the geopolitical situation and is taking actions to reduce the impact on the business, for example by supporting our customers in optimizing their value chain. Coronavirus The spreading of the coronavirus has increased the uncertainty in our business outlook. The outbreak, with origin in China, disrupted industry supply channels in China. Although this has normalized in China, the spreading of the virus outside of China, has lead authorities in a number of countries to enforce strong measures that are likely to affect global economic activity for a period of time. This may impact demand for end-user products in our industry, which in turn could affect both Nordic’s products, distributor inventories, and other parts of the industry supply chain. So far, the company has seen only limited impact on demand and operations, but a prolonged period of reduced global 12 activity and product demand may have significant negative effects on the company’s business and financial results. Mitigation actions During the first quarter of 2020, Nordic imposed strict travel restrictions worldwide, and limited the number of physical meetings to a minimum. The organization is strengthening its capabilities for remote work. Nordic is continuously monitoring the situation, and will make necessary supply chain adjustments to optimize its own production in alignment with any new signals from governments, manufacturers, customers and distributors. Changes in competitive landscape Nordic Semiconductor’s strategic goal is to maintain or improve its market share, and remain a leading vendor of wireless connectivity and embedded processing solutions for internet connected things. Nordic has a leading market share in Bluetooth low energy. The markets in which we operate, are highly competitive in terms of price, functionality and software solutions. In a growing market, we face tough competition from existing competitors as well as new entrants, mainly from China. With Bluetooth Smart being adopted across more than 25 identified market verticals, it is likely that more focused and specialized competitors gain market share, especially in verticals where Nordic’s position is weaker. Mitigation actions In order to stay competitive and gain market share, Nordic continues to invest in both products and software. Over the past years the company has further developed its products to include support for additional low power short range connectivity standards, such as Zigbee and Thread, across its nRF52 Series and its new generation nRF53 Series. Nordic’s multiprotocol portfolio ensures that the company is well positioned to benefit from projects seeking to improve compatibility across the different standards. Nordic continues to invest around 20% of short-range revenue in R&D. This is required in order to stay competitive in this market. As all technology players, we are dependent of continuous innovation and development, to be able to bring new products and product enhancements to our existing portfolio. Our success depends on our substantial R&D activities, and there can be risk and uncertainty associated with these. Risk of Bluetooth being replaced There is a risk that Bluetooth becomes unattractive compared to other technologies or is bundled with non- Nordic technologies. The most immediate threat comes from various wi-fi standards tightly integrated with Bluetooth in combo-chipset, but other technologies like UWB may be a risk factor longer term. Mitigation actions Nordic is a part of the Bluetooth Special Interest Group (Bluetooth Sig), which is continuously developing the Bluetooth standards. In addition, Nordic has developed Zigbee and Thread solutions and will continue to monitor the trends in the market, keeping the product portfolio relevant. Cellular IoT There is a risk that we may not be successful in executing our strategy to capture the cellular IoT market opportunity in terms of scale, time and volume. Nordic launched the nRF91 Series at the end of 2018, which is Nordic’s first family of low power devices for cellular IoT. There is still a risk that cellular IoT will not be as successful as Nordic had hoped for, or that the market is skewed toward NB-IoT. Customers may choose other low power wide area network (LPWAN) technologies or cancel roll-out of products due to lack of available technologies. Mitigation actions Nordic’s solution has integrated LTE-M, NB-IoT, GPS, RF Front-End and power management into a very small System in Package (SiP), under the highest security standards and with significantly higher energy-efficiency than any comparable products currently on the market. As carriers continue to roll out LTE-M and NB-IoT capabilities and certification programs, there are more and more customers looking to adopt these two technologies. In order to mitigate the risk of cellular not being as successful as Nordic had hoped for, Nordic focuses on delivering user friendly products and works closely with regulators and carriers to remove barriers to entry. Key personnel In order to deliver on the roadmap we have promised our customers, we are dependent on attracting talent and building strong teams. Our employees are a key success factor for executing our strategy. Losing key employees, or not being able to attract key competencies, will affect sales, quality of products or delay time to market. Mitigation actions Nordic focuses on talent management and succession planning, and the evolvement of the organizational culture. We are continuously improving and adapting our compensation program to attract and retain key talent. Operational risk Product availability, quality, safety and integrity Nordic is a fabless semiconductor company, outsourcing component manufacturing, and relying on distribution partners for sales to the broad market of original electronics manufacturers and to end-users. 13 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | REPORT FROM THE BOARD OF DIRECTORS Being “Fabless”, Nordic Semiconductor outsources the capital-intensive production of silicon wafers, packaging and testing of its products to third-party suppliers, mainly in South-East Asia. The manufacturing pipeline involves multiple stages with multiple suppliers. The failure of any of these third-party vendors to deliver products or otherwise perform as required, could damage revenue in the short-term, and customer relationships in the long-term. While execution is outsourced, the manufacturing processes involved often depend on specific toolings developed and provided by Nordic Semiconductor, hereunder the chip design itself, as well as certain test programs and hardware used for quality screening. Failure on Nordic Semiconductor’s end to provide good quality or enough quantity of such toolings may have the same consequences as outlined above. The main risk is that one supplier cannot deliver according to requirements due to disasters (natural disaster, fire, other force majeure situations) or due to increased demand for supplier’s products, and that Nordic does not have an alternative source. Mitigation actions To mitigate the risk of product shortage, Nordic keeps a buffer stock of wafers or finished good, which covers short-term demand. For medium-term demand, Nordic seeks to have a second sourcing alternative, and is insured in the event of supply disruption related to disasters. Nordic’s partners are selected through extensive qualification programs. Lastly, Nordic has its own testers, often a bottleneck in production, which helps improve availability and right quality of the products. Product ramp There is a risk that Nordic is not able to ramp new products according to customer requirements, either as volume demands are not met or due to high yield loss. Mitigation actions Given the constraint for some key product introductions, tight control over the New Product Introduction process is imperative, including quality-assurance during high volume product ramps. In addition, Nordic has invested heavily in its own failure analysis lab, to be able solve any issues as quickly as possible. IT and cyber risk Our operations are complex, several critical operations are centralized and any disruptions to these operations can impact our ability to deliver products to customers. Further on, Nordic’s operations are dependent on a fully reliable IT-infrastructure and that all systems operate 100%. Downtime can impact development of new products (delay launch, day to day support to customers, manufacturing and delivery of end products to end customers). Activities related to cyber-attacks are a risk for our day to day operations. Mitigation actions Significant effort is put into having the best solutions for data protection available on the market. We provide awareness training to employees to reduce the risk related to human behavior. In order to mitigate any effects of potential cyber-attacks, Nordic has implemented disaster recovery and backup routines, and also seek to maintain appropriate insurance coverage. Financial risk Nordic’s strategy and growth ambitions require an adequate cash position to fund the R&D activities needed to drive the technology and product roadmaps forward. Maintaining a solid R&D cash coverage, measured as cash holding divided by R&D spending, is necessary to pass the procurement due diligence of tier-one customers. Tier-one customers are expected to make up an increasing part of the revenue base going forward. At the end of 2019, the R&D cash coverage was 1.22X, down from 1.35x at the end of 2018. Available cash at the end of 2019 was approximately USD 167 million, including credit facilities described above under ‘Cash Flow and Funding’. The Board of Directors assesses the current liquidity risk as low. Interest-rate risk Nordic holds minimal interest-bearing debt, whereas cash and cash equivalents are held as cash, mainly in USD. We consider the direct risk associated with interest rate fluctuations as low. Foreign currency risk Nordic is exposed to foreign exchange risk, as our sales revenue and direct production costs are almost entirely nominated in USD, whereas our operating expenses primarily are in NOK and EUR. Hence, fluctuations in the exchange rates between these currencies may impact profit margin. Nordic does not use any financial instruments to hedge the currency risk. A 1% increase in USD/NOK would – all other things equal – translate into USD 0.6million in added profit before tax. The company presents its accounts in USD, with profits translated into NOK for taxation purposes. Credit risk Nordic is exposed to credit risk related to both its distributors and certain end-customers. The main counterparties are leading international distributors of electronic components based in Asia, and the company has historically not suffered any significant credit losses. 14 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | REPORT FROM THE BOARD OF DIRECTORS Nordic sells to electronics distributors and the 10 largest distributors (customers) accounted for 90% of the total revenue in 2019, with no losses on receivables. Credit monitoring routines are integrated into any new credit lines, requiring security in the form of payment guarantees or advance payment requirements if needed. The company’s receivables are not credit insured. The credit risk is considered low. Legal and compliance With an increasing global presence, focus on governance and ensuring compliance to foreign, local requirements is important. Nordic recognizes the importance of behaving as a good corporate citizen across the globe and adopts international standards for compliance. With the introduction of new laws and regulations, there is a temporary risk that Nordic can be non-compliant, and as such can be exposed to penalties or rulings against the company. In the normal course of business, we are involved in legal proceedings related to commercial disagreements, claims related to product quality, intellectual property as well as governmental inquires. An unfavorable ruling in any of these cases can have a material impact on our results. Our products are complex and vulnerabilities in our products may not have been detected during product development and manufacturing. This may result in damages to our customers revenue and reputation if no work-around is possible. Customer contracts regulates our responsibilities, however there is a risk that legal action can be brought forward representing a material risk on our results. Mitigating actions Nordic follows very high standards in terms of policies, training and audit in order to secure that our zero- tolerance policy against fraud and corruption is adhered to. Our whistleblowing channel is open to the public and handled by the Executive Management Group. Investing in lab equipment and testers reduces time used on fault-finding and enables work-arounds to be implemented faster. Nordic tries to limit the contractual liability to an acceptable level in the industry. Intellectual property rights The current landscape of intellectual property rights in and to patents that are essential for the radio communication standards which Nordic base its products on is difficult to navigate in. Most owners of standard essential patents have decided to only license the end-device, leaving it up to Nordic’s customers to get in place third party IP necessary for their products, instead of enabling Nordic to secure such for the whole value chain. Nordic Semiconductor has never been prevented from selling its established line of products under any intellectual property rights, and is continuously investigating any new allegations by patent holders that Nordic’s products infringe on intellectual property of others. Nordic is taking steps to ensure that any such allegations do not prevent the selling, purchasing and use of our products. The Bluetooth specifications are intended written so that all patent claims, which are necessary to implement them, are held by members of the Bluetooth SIG. Any necessary claims held by members of the Bluetooth SIG, are automatically licensed to members like Nordic as a condition of membership. However, there are other participants in the industry, that own patents and are not members of the Bluetooth SIG, who assert their patents towards companies like Nordic. The current landscape of both LTE and Bluetooth is considered when Nordic assesses potential loss in connection with litigation. While we believe the risk of loss is minimal due to the company’s vast experience and prior art from working with Bluetooth and cellular technology, we will defend any claims asserted against Nordic vigorously, in light of the inherent uncertainties of access to licensing on component level. Mitigating actions Nordic is a willing licensee, and invites the owners of standard essential patents for NB-IoT and LTE-M to license Nordic’s products, based on FRAND terms and on component level. Nordic Semiconductor ASA is a member of the Fair Standards Alliance and plays an active part in raising awareness around the implications lack of licensing has on the industry. Nordic is, and has always been, an active contributor to standard setting organizations, promoting openness and availability for all to standard essential patents. Personnel and organization The Group had 767 employees at the end of 2019, an increase of 12% from 685 at the end of 2018. The increase reflects increased R&D efforts in both the short-range business and cellular IoT, as well as increased Sales & Marketing resources. The number of R&D personnel increased by 9% to 563 during 2019, representing 73% of the total number of employees. The Sales & Marketing staff increased by 13% to 113 people at the end of the year, with the remaining 91 working in administration and other staff functions. At year end 2019, 376 or 49% of the employees were employed outside of Norway, compared to 319 or 47% of the employees at the end of 2018. 15 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | REPORT FROM THE BOARD OF DIRECTORS The Executive Management consists of 8 men and 2 women, whereas the Board of Directors consists of 4 male and 3 female shareholder elected members, and 4 male employee-elected members. At the end of 2019, Nordic had 107 female employees (89), corresponding to 14% of the total number of employees (13%). 61 women were employed in the Norwegian operation (57), corresponding to 15% of the workforce in Norway (16%). The relatively skewed gender balance in the workforce must be viewed in an industry context. In Norway, women represent around 33% of science and engineering professionals but only around 15% of science and engineering associate professionals. 46 women were employed outside of Norway (33), corresponding to 12% of the workforce in Finland, China, Hong Kong, South Korea, Japan, the Philippines, Taiwan, Switzerland, Poland, the UK, the Netherlands and the US. Gender equality is a fundamental principle for the Group, and efforts are being made to ensure that there is no gender bias in the recruitment processes. Nordic continuously work on employer branding development, with emphasis on promoting gender equality and employee diversity, and sees an increase in the number of applications from female students and graduate candidates. Nordic participates in the Norwegian University of “Jenteprosjektet Ada”, Science and Technology’s which aims to recruit, motivate and educate females within the Norwegian IT industry. From 2020, Nordic also participates in ‘Womens Directory’, a Global Semiconductor Alliance initiative targeted at women in the semiconductor industry. Within the R&D functions in Norway, the average salary for women is 95% of the average salary for males, which is due to differences in seniority. The average salary for female employees in all functions was 76% of the average salary for male employees (83%), excluding executive management. Gender difference in salary can be explained both by function and location. A larger relative proportion of the women in administrative functions are based in the Philippines, where the salary level is below the Group average. To ensure a good working environment, the organization seeks to maintain well-functioning cooperation and open communication lines between management and employee representatives and ensure that any issues and challenges are being addressed at an early stage. Sick leave remained below industry averages in 2019 with absence due to illness of 2.4% (2.2%). No occupational illnesses or injuries were reported in 2019. Corporate Social Responsibility (CSR)/ Environmental Social and Governance (ESG) Nordic has a high focus on environmental and social responsibility. The company’s commitments to CSR and ESG topics are established in adherence to the UN Global Compact’s (UNGC) ten principles on human rights, labor, environment and anti-corruption, the Responsible Business Alliance’s (RBA) Code of Conduct for social, environmental, and ethical issues in the electronics industry supply chain, and Nordic’s Corporate Social Responsibility policy and other company policies. The framework is established in the ISO-certification of the company’s management systems for Quality (ISO 9001), Environmental (ISO 14001), Occupational Health and Safety (ISO 45001), and Information Security (ISO 27001). These standards enable a systematic approach to improvement of the company’s business processes and performance on ESG include hazardous substances, GHG emissions, responsible sourcing of minerals, diversity, health & safety, anti- corruption, non-retaliation, IP-protection, data privacy, responsible supply chain, and transparency. topics, These identifying and addressing Along with the commitment to UN Global Compact principles and its ambitions for greater engagement, Nordic Semiconductor in 2019 started a program the UN supporting, Sustainable Development Goals (SDGs). While the initial focus has been on identification and prioritization of the most relevant SDGs with a qualitative approach, Nordic targets to establish more quantitative measures of the SDGs contribution going forward. For further information, please refer to the separately prepared ESG Report for 2019, which is prepared in accordance with the UNGC, RBA Code of Conduct, and the Norwegian Accounting Act, Section 3-3. The report also represents the company’s official Communication on Progress as a signatory to the UN Global Compact. The ESG Report is available on www.nordicsemi.com, along with the company’s CSR policy, the RBA Code of Conduct, the ten principles of UN Global Compact, the UN Global Compact letter of commitment. Corporate Governance Nordic’s guidelines and practices for Corporate Governance comply fully with the Norwegian Code of Practice for Corporate Governance (“the Code”), dated 17 October 2018. The guidelines also meet the disclosure requirements of the Norwegian Accounting Act and the Securities Trading Act.A thorough review of the guidelines and compliance with the Code is included as a separate section in this Annual Report. 16 Shareholder Matters The Nordic Semiconductor share is listed on the Oslo Stock Exchange (OSE) under the ticker NOD. Total return for the Nordic share was 93% in 2019, compared to an 14% increase for the Oslo Stock Exchange (OBX) and an 62%, increase for the PHLX Semiconductor Sector Index (SOX). The Nordic share closed at NOK 55.7 at year-end 2019, corresponding to a market capitalization of NOK 10.0 billion. Nordic had 175.7 million shares outstanding at the end of 2019, of which 4.1 million treasury shares. Purchase of treasury shares is viewed as an effective way to cover the obligations related to equity-based compensation. On the Annual General Meeting in April 2019 the Board was given the authorization to purchase own shares, and to hold treasury shares within the limits of the Norwegian Public Limited Liability Companies Act. The company will seek the same approval on the 2020 Annual General Meeting. Nordic had approximately 3 300 shareholders at the end of 2019, compared to 3 400 at the end of 2018. The top 20 shareholders held 60.9% of the registered shares. 74.9% of the shares were held by institutions and individuals based in Norway, down from 80.1% in 2018. The below table outlines the geographical split of our shareholder base. The geographical split is based on results from our shareholder analysis vendor, are is looking at data per 30th November 2018 and data per 1st December 2019. Region Norway USA Other Europe England Sweden Rest of World 1st December 2019 74.9% 12.4% 4.5% 2.6% 2.5% 1.0% Nordic aims to have an open dialog with shareholders and investors. Through active communication with the capital market and shareholders in 2019, Nordic ensured that all relevant information required for external evaluation of the company was published in accordance with applicable rules and guidelines issued by the Oslo Stock Exchange. The company hosted well attended and webcasted interim result presentations each quarter, and a thorough Capital Markets Day outlining the longer- term strategy and business outlook in connection with the presentation of the third quarter results in October. The company also conducted investor roadshows both in Norway and internationally in connection with the interim results and participated on a number of industry and investment seminars during the year. Environmental statement Nordic is a fabless semiconductor company and does not own or operate manufacturing facilities. The direct environmental effect of the Group’s operations is hence limited. Manufacturing is outsourced to leading third-party providers, required to operate in compliance with the ISO 14001 environmental standards and under other certifications and qualifications. Nordic seeks to limit its resource consumption, prevent unnecessary environmental pollution and manage waste in an environmentally friendly and resource efficient manner. The Group has established routines to monitor these conditions under management systems certified under ISO 9001, ISO 14001 and OHSAS 18001. Nordic complies with all current applicable laws and regulations, and all its products comply fully with the REACH and RoHS hazardous substance directives. This allows the Group to market itself as a “Green supplier”, which is an advantage towards major customers subject to stringent environmental standards of operation. In line with the recommendation of the Oslo Stock Exchange, the Board of Directors has prepared a separate report on corporate social responsibility including employee and environmental considerations. The report can be downloaded from www.nordicsemi.com. Outlook Revenue growth rebounded in the second half of 2019 after a disappointing start to the year, and Nordic Semiconductor ended the year with all time high revenue levels and a strong order backlog. While this represented a strong platform for further growth in 2020, the overall business environment has been severely affected by the outbreak of the coronavirus (SARS-CoV-2) in the first months of the year. In the initial phase, the virus outbreak in China led to temporary value chain disruptions which increased the uncertainty in the near-term revenue outlook. Nordic accounted for this by introducing a wider than normal revenue guidance range of USD 64- 71 million for the first quarter 2020, when the company presented its Q4 results on 7 February 2020. The gross margin for the first quarter was expected at around 50%. 17 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | REPORT FROM THE BOARD OF DIRECTORS The guidance range for Q1 2020 remains intact at the time of writing. Further disruptions in the value chain or distribution channels cannot be ruled out given the extent and magnitude of the measures that the governments in several countries currently are implementing to prevent further spreading of the coronavirus. It has become increasingly clear that these measures will have effects on the the global economy, and this also affects the near-term visibility for Nordic Semiconductor. While Nordic expects revenue from Bluetooth Low Energy and multiprotocol solutions to grow at an annual rate of 20-30% in the medium-term, it is difficult to estimate how changes in consumer spending will affect the demand for end-user products for the rest of 2020. Nordic’s proprietary business is expected to continue to contribute to revenue and profits, although the contribution is expected to gradually decline as a result of customer migration to other short-range connectivity solutions such as Bluetooth Low Energy. Gross margins for the short-range business is expected within the 48%-50% range in the medium term. Looking further ahead, Nordic Semiconductors believes the evolvement of Internet of Things (IoT) represents a massive long-term market opportunity that relies on robust and energy-efficient connectivity solutions. Nordic Semiconductor is already a leader in short-range connectivity solutions, with a particularly strong position in Bluetooth Low Energy and multi-protocol solutions, which are core technologies in the IoT space. Nordic’s market position strengthened further in 2019, with an expanding product portfolio and a customer base including an increasing number of potentially high- volume tier-1 customers. The long-range cellular IoT business is still in the early stages of commercialization. The technology holds a large potential, and Nordic’s ambition is to gradually build this business to a similar size as the short-range business within five years. Gross margins for this module- based business is expected at 35%-40% in the medium- term, with the effect on Group margins depending on the pace of the volume ramp-up. Provided supply chains and the markets for Nordic's products normalize in the aftermath of the coronavirus, Nordic believes the long-term market outlook and the company’s own product and customer roadmaps offer a favorable backdrop for its aspiration to build a USD 1 billion revenue company within five years. The technology and product roadmaps needed to fulfill the growth ambitions will continue to require investments in R&D and sales and marketing, although the operational leverage is expected to generate higher operating margins over time. The Company’s long-term EBITDA margin ambition is 20%. Oslo, March 18, 2020 Endre Holen Board member Birger Steen Chair Øyvind Birkenes Board member Inger Berg Ørstavik Board member Svenn-Tore Larsen Chief Executive Officer Jan Frykhammar Board member Anita Huun Board member Jon Helge Nistad Board member, employee Annastiina Hintsa Board member Asbjørn Sæbø Board member, employee Susheel Raj Nuguru Board member, employee Morten Dammen Board member, employee 18 Financial Statements Income statement (for the year ended December 31) GROUP PARENT 2019 2018 Amount in USD 1000 Note 2019 2018 288 395 -141 290 -351 271 134 Total Revenue -136 111 Cost of materials -1 Direct project costs 146 753 135 021 Gross profit 3 4 289 226 -141 290 -351 147 584 -80 281 -70 048 Payroll expenses 9/10/12/18 -48 735 -33 665 -23 535 9 272 1 910 -1 102 -375 9 706 -2 379 7 327 -34 199 Other operating expenses -16 727 Depreciation 14 047 Operating profit 1 782 Financial income -428 -320 Financial expenses Net foreign exchange gains (losses) 15 081 Profit before tax -6 222 Income tax expense 8 859 Net profit after tax Attributable to: 7 327 8 859 Equity holders of the parent 0,04 0,04 2019 7 327 -83 18 -117 0,05 0,05 Ordinary earnings per share (USD) Fully diluted earnings per share (USD) 2018 Statement of comprehensive income 8 859 Net profit after tax -21 Actuarial gains (losses) on defined benefit plans (before tax) 5 Income tax effect -324 Currency translation differences 5/21 11/12/21 6/22 6/21/22 6/22 7 8 8 7 271 878 -136 111 -1 135 766 -42 796 -68 546 -13 781 10 642 1 782 -427 -319 11 678 -5 263 -73 695 -19 789 5 365 1 910 -1 018 -373 5 885 -1 577 4 308 6 415 0,03 0,02 2019 4 308 -83 18 0,04 0,04 2018 6 415 -21 5 7 145 8 519 Total Comprehensive Income 4 243 6 399 20 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Statement of financial position (as of December 31) GROUP PARENT 2019 2018 Amount in USD 1000 Note 2019 2018 ASSETS Non-current assets 27 686 Capitalized development expenses 15 063 Software and other intangible assets 1 335 Deferred tax assets 0 Right of use assets 17 582 Fixed assets 0 Shares in subsidiaries 33 990 11 408 2 813 23 934 26 625 0 98 770 61 667 Total non-current assets 53 067 64 519 11 359 90 645 219 589 Current assets 42 679 Inventory 51 784 Accounts receivable 7 155 Other current receivables 103 876 Cash and cash equivalents 205 494 Total current assets 12 12 7 21 11/22 1/13 4 14/22 15 16/22 33 990 11 120 2 429 22 272 22 354 43 92 208 53 067 64 519 10 045 89 205 216 836 27 686 14 604 1 168 0 13 530 43 57 031 42 679 51 784 7 269 100 522 202 254 318 359 267 161 TOTAL ASSETS 309 044 259 285 303 -5 113 355 118 551 EQUITY 303 -5 Share capital Treasury shares 113 355 Share Premium 107 896 Other components of equity 232 205 221 549 Total equity LIABILITIESIABILITIES Non-current liabilitiesn-current assets 310 19 886 20 196 19 738 3 136 3 761 4 044 35 279 65 958 86 155 279 Pension liability 0 Non-current lease liabilities 279 Total non-current liabilities Current liabilitiesn 10 424 Accounts payable 5 043 Income taxes payable 2 901 Public duties 0 Current lease liabilities 26 966 Other current liabilities 45 333 Total current liabilities 45 612 Total liabilities 17 17 17 18 21 20/22 7 20 21 15/20 303 -5 113 355 108 101 303 -5 113 355 100 718 221 754 214 370 310 19 085 19 396 17 988 2 886 3 181 3 142 40 696 67 894 87 289 279 0 279 9 681 4 854 2 471 0 27 630 44 636 44 915 318 359 267 161 TOTAL EQUITY AND LIABILITY 309 044 259 285 21 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Oslo, March 18, 2020 Endre Holen Board member Birger Steen Chair Øyvind Birkenes Board member Inger Berg Ørstavik Board member Svenn-Tore Larsen Chief Executive Officer Jan Frykhammar Board member Anita Huun Board member Jon Helge Nistad Board member, employee Annastiina Hintsa Board member Asbjørn Sæbø Board member, employee Susheel Raj Nuguru Board member, employee Morten Dammen Board member, employee 2222 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Nordic Semiconductor Group Consolidated statement of changes in equity Amount in USD 1000 Share capital Treasury shares Share premium Other paid in capital Currency translation reserve Retained earnings Total equity Equity as of 01.01.18 283 -2 14 436 2 094 134 108 008 124 953 Net profit for the period Other comprehensive income Purchase of treasury share Issue of share capital Share based compensation Equity as of 31.12.18 Net profit for the period Other comprehensive income Sale of treasury shares (option exercise) Share based compensation 20 303 98 919 113 355 -4 1 -5 0 Equity as of 31.12.19 303 -5 113 355 8 859 8 859 -324 -16 -12 071 -341 -12 075 98 939 1 214 -190 104 780 221 549 7 327 7 327 -119 -65 -184 2 106 1 407 -309 112 042 232 205 1 213 3 307 2 105 1 407 6 819 Share capital Treasury shares Share premium Other paid in capital Retained earnings Total equity 283 -2 14 436 541 104 999 120 258 Nordic Semiconductor Parent Statement of changes in equity Amount in USD 1000 Equity as of 01.01.18 Net profit for the period Other comprehensive income Purchase of treasury shares Issue of share capital 20 Share based compensation Equity as of 31.12.18 Net profit for the period Other comprehensive income Sale of treasury shares (option exercise) Share based compensation Equity as of 31.12.19 303 98 919 113 355 -4 1 -5 0 303 -5 113 355 6 415 6 415 -16 -16 -12 071 -12 075 98 939 850 99 327 214 370 4 308 -65 4 308 -65 2 106 1 033 103 570 221 754 849 1 391 2 105 1 033 4 530 23 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Statement of cash flows for the year ended December 31 GROUP PARENT 2019 2018 Amount in USD 1000 Note 2019 2018 Cash flows from operating activities 15 081 -2 759 16 727 Profit before tax Taxes paid for the period Depreciation 7 11/12/21 5 885 -4 208 19 789 -4 708 Change in inventories, trade receivables and payables 4/14/20/22 -14 816 9 706 -4 846 23 535 -13 798 1 100 31 3 950 19 678 -20 182 -11 271 1 231 -30 Share-based compensation Movement in pensions 4 974 Other operations related adjustments 30 516 Net cash flows from operating activities Cash flows used in investing activities -17 530 Capital expenditures (including software) -12 993 Capitalized development expenses -31 454 -30 523 Net cash flows used in investing activities 2 412 -12 075 Changes in treasury shares Cash flows from financing activities - - 98 939 Capital increase -32 Cash settlemet of options contract and issue of share capital -3 906 - Repayment of interest bearing debt - -20 000 Interest bearing debt -1 494 66 832 Net cash flows from financing activities 37 357 Effects of exchange rate changes on cash and cash equivalents -13 232 103 876 67 181 Net change in cash and cash equivalents 36 695 Cash and cash equivalents as of 1.1. 11 678 -2 759 13 781 -4 748 882 -30 7 243 26 046 -14 384 -12 993 -27 377 -12 075 98 939 -32 - 726 31 10 340 17 748 -17 233 -11 271 -28 504 2 412 - - -2 972 11/12 12 17 - -20 000 -560 66 832 - -11 316 100 522 - 65 501 35 020 90 644 103 876 Cash and cash equivalents as of 31.12. 16/22 89 205 100 522 1 847 1 560 Restricted cash incl. in the cash and cash equivalents as of 31.12. 16 1 847 1 560 24 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Note 1: Basis for preparation Nordic Semiconductor ASA is a public limited company whose shares are listed on the Oslo Stock Exchange with ticker code NOD. The Company is domiciled in Norway, and the registered head office is at Otto Nielsens vei 12, 7052 Trondheim. Accounting standards adopted in 2019 The Group has adapted new accounting standard issued by the International Accounting Standards Board, IFRS 16 Leases effective January 1, 2019. The nature and effect of the changes as a result of adoption of this new accounting standard is described below. includes The Group the parent company Nordic Semiconductor ASA and five wholly owned subsidiaries, Nordic Semiconductor Inc., Nordic Semiconductor Poland Sp. z.o.o, Nordic Semiconductor Finland OY, Nordic Semiconductor Japan KK and Nordic Semiconductor Germany GmbH. Nordic Semiconductor develops and sells integrated circuits and related solutions for short- and long-range wireless communication. The company specializes in ultra-low power (ULP) components, based on its proprietary 2.4 GHz RF, Bluetooth low energy and LTE-M and NB-IoT. The financial accounts for the Group have been prepared International Financial Reporting in accordance with Standards (“IFRS”) as endorsed by the European Union and Norwegian authorities and are effective as of 31 December 2019. The consolidated financial statements also comply with IFRS as issued by the International Accounting Standards Board (“IASB”) and the disclosure requirements as specified under the Norwegian Accounting Law (Regnskapsloven). The consolidated financial statements are presented in US dollars (“USD”), which is the functional currency of the parent company. All USD amounts are rounded to the nearest thousand, if nothing else is noted. As a result of rounding differences, it is possible that amounts and percentages do not add up to the total. Gross profit is revenue less cost of materials and direct project costs. Cost of materials include direct and indirect cost of production. Nordic Semiconductor uses gross profit for internal reporting and has therefore chosen to include it in the external financial reporting. The Group has only one operating segment. The group does not report or monitor profitability on a lower level, but breaks down its revenue into the following end product markets: Consumer Electronics, Wearables, Healthcare, Building and Retail, Others, Long-Range (cellular IoT), ASIC components and Consulting Services. The Group also breaks down its revenues in the geographical areas in which its distributors are located. The financial accounts were audited and approved for publication by the Board of Directors on March 18 2020, and will be presented for approval at the Annual General Meeting on April 21, 2020. IFRS 16 Leases IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to recognize most leases on the balance sheet. The Group adopted IFRS 16 using the modified retrospective method of adoption, with the cumulative effect recognized at the date of initial application. Comparative figures are not restated and the cumulative effect of initially applying the standard is recognized as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the date of initial application. Impact on the statement of financial position (increase/ (decrease) as at January 1, 2019: Amounts in USD thousand Assets Property, plant and equipment (right-of-use assets) 21 010 Liabilities Lease liability 21 010 The Group has lease contracts for offices, office machinery and equipment and vehicles. The main leases recognized in the balance sheet are the different office leases. Before the adoption of IFRS 16, the Group classified each of its leases (as lessee) at the inception date as either a finance lease or an operating lease. Upon adoption of IFRS 16, the Group applied a single recognition and measurement approach for all leases except for short-term leases and leases of low-value assets. The Group has leases of certain office equipment (i.e., copy machines, coffee machines etc.) that are considered of low value. The standard provides specific transition requirements and practical expedients, which have been applied by the Group. reasonably similar characteristics Used a single discount rate to a portfolio of leases with Relied on its assessment of whether leases are onerous immediately before the date of initial application 25 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Applied the short-term leases exemptions to leases with lease term that ends within 12 months of the date of initial application assets. The right-of-use assets were recognized based on the amount equal to the lease liabilities, and the assets are depreciated on a straight line basis over the lease term. of the right-of-use asset at the date of initial application Excluded the initial direct costs from the measurement Used hindsight in determining the lease term where the contract contained options to extend or terminate the lease The Group recognized right-of-use assets and lease liabilities for those leases previously classified as operating leases, except for short-term leases and leases of low-value Lease liabilities were recognized based on the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application. If the expected lease payments change as a result of index-linked consideration, the liability is remeasured. The weighted-average incremental borrowing rate for lease liabilities initially recognized as of January 1, 2019 was 4.05 % p.a. Operating lease commitment December 31, 2018 as disclosed in the financial statements Recognition exemption for: Short-term leases Leases for low-value assets Effect from discounting at the incremental borrowing rate as of January 1, 2019 Lease liability recognized at January 1, 2019 IFRS 16 EFFECTS ON THE INCOME STATEMENT Amount in USD thousand Other Operating expenses EBITDA Depreciation EBIT Interest expense Foreign exchange adjustments Profit before tax 30 182 -250 -380 -8 541 21 010 2019 4 381 4 381 -3 853 528 -834 328 22 Accounting standards and interpretations issued but not adopted as at December 31, 2019 Amendments to IFRS 9, IAS 39 and IFRS 7 Interest Rate Benchmark Reform. The amendments to IFRS 9, IAS 39 and IFRS 7 have a mandatory effective date of January 1, 2020. The changes in regulations will not have any impact for the Group. However, the Group will have to negotiate a new reference rate for bank loan facilities and apply a new discount rate for additions for IFRS 16 Leases when LIBOR is replaced. 26 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Note 2: Significant Accounting Principles 2.1 Basis of consolidation The consolidated financial statements incorporate the results, cash flows and assets and liabilities of the parent company and its subsidiaries. A subsidiary is an entity that is controlled, either directly or indirectly, by the parent company. Control exists when the parent company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power to direct the relevant activities of the investee. Generally, such power exists where the parent company holds a majority of the voting rights of an investee. Subsidiaries are consolidated from the date control is obtained until the date that control ceases. All subsidiaries are wholly owned by the parent company and there are no non-controlling interests. Intercompany transactions, balances and unrealized gains on transactions between group companies are eliminated. 2.2 Significant accounting judgements, estimates and assumptions The preparation of financial statements requires that management uses judgement, estimates and assumptions that effect the amounts reported in the financial statements and its disclosures. Management bases its estimates and judgement on previous experience and on various other factors deemed to be reasonable and sensible given the specific circumstances. The main areas of uncertainty for assessments and estimates on the balance sheet date, which represent a risk of creating significant changes to the value of assets and liabilities, are discussed below. Estimates are continuously reassessed based on changes in the underlying assumptions. Changes in accounting estimates are recognized in the period in which such changes occur. If such changes also apply to future periods, the effect is distributed between current and future periods. Revenue recognition Revenue recognition principles are described in Note 2.4 Nordic Semiconductor predominantly sells to electronic distributors under a distribution agreement. The distributors will hold a given level of Nordic Semiconductors inventory that is subsequently shipped to an end customer. Nordic Semiconductor uses a “sell in” model in connection with revenue recognition to distribution customers. Under a “sell in” model, management needs to make judgements and estimates the amount that can affect the reported amounts of revenues and expenses. The main judgments are described as follows. Variable consideration for “Ship and Debit” When a distributor sells components to specified customer accounts, the distributor will receive an additional rebate after the sale is made, commonly known as a “Ship and Debit” rebate. In estimating the variable consideration, the Group is required to use the expected value method. The Group estimate the rebate based on historical discounts to each distributor, the distributors’ inventory level as of 31 December 2019 and expected sales mix. An estimate for this rebate is provided in the accounts, reducing the revenue and increasing refund liabilities. See Note 3.3. Development costs Development costs are capitalized in accordance with the principles in Note 2.5. In order to determine the amount to be capitalized, it is necessary for management to make assumptions regarding expected future cash flow, and the expected period of benefits. Capitalized development costs are subject to amortization on a straight-line basis over the period of expected future benefits, normally 3-5 years. Uncertainty exists with respect to the estimated period of expected future benefit, as this depends on the future technological development in the market. During 2019 USD 11.3 million was capitalized, mainly related to the long-range cellular IoT products. The carrying amount of capitalized development costs as of December 31, 2019 and 2018 was USD 34 million and USD 27.7 million respectively. Leases - Estimating the incremental borrowing rate The Group cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Group ‘would have to pay’ , which requires estimation when no observable rates are available (such as for subsidiaries that do not enter into financing transactions) or when they need to be adjusted to reflect the terms and conditions of the lease (for example, when leases are not in the subsidiary’s functional currency). The Group estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates (such as the subsidiary’s stand- alone credit rating). 2.3 Foreign currency translation Each entity within the Group has a functional currency, which is normally the currency in which the entity primarily generates and expends cash. The parent company is the most significant entity in the Group, and its functional currency is USD. 27 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS At entity level, a foreign currency is a currency other than the entity’s functional currency. Transactions in the profit and loss statement denominated in foreign currencies are recorded in the entity’s functional currency at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate prevailing at the balance sheet date. Currency translation differences arising at entity level are recognized in profit or loss. The Group’s presentation currency is USD, and foreign operations are those of the parent company’s subsidiaries and branches whose functional currency is not the USD. On consolidation, assets and liabilities of foreign operations are translated into USD according to the exchange rates prevailing on the balance sheet date. Profit or loss items are translated according to monthly average exchange rates. Changes in net assets resulting from exchange rate movements are recognized in other comprehensive income and taken to the currency translation reserve. 2.4 Revenue recognition The Group is in the business of developing and selling integrated circuits. Revenue from customers is mainly generated from sale of products. Services delivered consists of consulting services. The Group and the customer do not receive financing from the sales, and therefore there are no significant financing components to be accounted for separately from the revenue transaction. The normal credit term is 30-60 days upon delivery. In other terms, the sale contracts do not require the customer to pay in advance, and the contract do not require the customer to pay significantly after delivery. Sale of products Sales of products are mostly made direct to distributors (“customer”). Revenue from the sale of products is recognized when control of the goods is transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods. The time of delivery, and the time where control of goods is transferred, is usually the time when the goods are transferred to the transport carrier. At the delivery time, the Group has the right of payment for the asset, the customer has legal title to the asset, physical possession has been transferred to the customer and customer has the significant risks and rewards of ownership of the asset. Revenue recognized on the sale of products is measured at the fair value of the consideration received or receivable, excluding sales taxes and after making allowance for variable considerations such as rebates and product returns. Ship and debit rebate The Group sells products to certain distributor on “ship and debit” terms. It means that the distributor may be entitled to a rebate if the distributor sells the product to end customers at a price lower than the price at which the distributor purchased the products from the Group. The difference in price is then claimed (debited) by the distributor. The Ship and Debit rebates are recognized as reduction in revenue and increase in liabilities before the distributor do their actual sale to end customers. Stock rotation rights Some distributors are entitled to limited rights of return, referred to as stock rotation rights. The Group tracks the distributor's inventory and can initiate a stock rotation earlier if a certain product is selling better with another distributor. As the products have similar margin, there are no significant losses for the Group when stock rotations are initiated. The Group does not make provisions or adjustments for stock rotation unless we expect the goods returned to be obsolete. Stock rotation provisions are made if necessary, based on most likely amount method. Sale of services Revenue from services is recognized as the services are rendered/delivered. Contract balances Contract assets A contract asset is the right to consideration in exchange for goods or services transferred to the customer. If the Group performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, a contract asset is recognized for the earned consideration that is conditional. Contract assets are subject to impairment assessment. Refer to accounting policies on impairment of financial assets in Note 2.9 Trade receivables A receivable represents the Group’s right to an amount of consideration that is unconditional (i.e., only the passage of time is required before payment of the consideration is due). Refer to accounting policies of financial assets in Note 2.10 Contract liabilities A contract liability is the obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer. If a customer pays consideration before the Group transfers goods or services to the customer, a contract liability is recognized when the payment is made or the payment is due (whichever is earlier). Contract liabilities are recognized as revenue when the Group performs under the contract. Assets and liabilities arising from rights of return Right of return asset Right of return asset represents the Group’s right to recover the goods expected to be returned by customers. The asset is measured at the former carrying amount of the inventory, less any expected costs to recover the goods, including any potential decreases in the value of the returned goods. 28 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS The Group updates the measurement of the asset recorded for any revisions to its expected level of returns, as well as any additional decreases in the value of the returned products. As the customers are only able to exchange the goods, the Group does not have a right of return asset. Refund liabilities A refund liability is the obligation to refund some or all of the consideration received (or receivable) from the customer and is measured at the amount the Group ultimately expects it will have to return to the customer. The Group updates its estimates of refund liabilities (and the corresponding change in the transaction price) at the end of each reporting period. Cost to obtain a contract The Group does not pay commission to employees and all costs related to getting a customer order is immediately expensed. The amortization period for a contract asset would be one year or less, hence the Group is able to use the practical expedient and expense costs directly. 2.5 Intangible assets Research and development expenditure Research costs are expensed as incurred. Costs associated with development are capitalized if the following criteria are met in full: cost elements can be identified and measured reliably; The product or the process is clearly defined and the The technical feasibility is demonstrated; The product or the process will be sold or used in the The asset will generate future financial benefits; Sufficient technical, financial and other resources for project completion are in place. business; Costs expensed in prior accounting periods will not be capitalized. Depreciation begins when the product is transferred from development to production. Depreciation is calculated on a straight-line basis over 5 years. Uncertainty exists with respect to the expected period of benefits, as this depends on the future technological development in the market. During the period of development , the asset is tested for impairment annually. Other intangible assets Other intangible assets comprise computer software. The assets held by the Group have finite useful lives, and are carried at cost less accumulated amortization and impairment losses, if any. The other intangible assets are amortized on a straight- line basis over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The estimated useful lives are normally 3 years. The amortization period and the amortization method for intangible assets are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortization period or method, as appropriate, and are treated as changes in accounting estimates. 2.6. Government grants Grants received are tax refunds and are classified as operating grants. Operating grants are accounted for at the same time as the costs they are intended to cover. Tax refunds are accounted for as a cost reduction. See Note 5 and 9. 2.7 Property, plant and equipment Property, plant and equipment is valued at the lower of cost net of accumulated depreciation and net realizable value. When an asset is sold or discontinued, the gain or loss from the transaction is recognized in the income statement. Cost comprises the purchase price of the asset including fees/ taxes and any direct costs associated with commissioning the asset for use. Repair and maintenance costs are expensed when incurred. If repair and maintenance increase the value of the asset, the cost will be added to the asset on the balance sheet. Depreciation is calculated on a straight-line basis over the following periods of time: Office and lab equipment Computer equipment Leasehold improvements 1-5 years 3-5 years 5 years The assets’ residual value, useful lives and methods of depreciation are reviewed on an ongoing basis and adjusted prospectively, if necessary. 2.8 Impairment of non-financial assets The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash generating unit’s (CGU) fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the 29 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. 2.9 Financial instruments A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. The Group is recognizing a financial asset or liability when it becomes a party to the instrument's contractual terms. The Group’s financial assets and liabilities includes accounts receivable and other current receivables, , accounts payable and other current financial liabilities (borrowings, including bank overdrafts). Financial assets Initial recognition and measurement At initial recognition, the Group measures a financial asset at its fair value plus or minus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the asset. There is an exemption for accounts receivables, that do not contain a significant financing component or for which the Group has applied the practical expedient, are measured at the transaction price determined under IFRS 15. Refer to the accounting policies in section 2.4 Revenue recognition. Depending of the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them, the assets are at initial recognition as subsequently measured at amortized cost, fair value through other comprehensive income (OCI) or fair value through profit or loss. Financial assets are classified and measured at amortized cost or fair value through OCI, if it gives rise to cash flows that are ‘solely payments of principal and interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity instruments) Financial assets at fair value through profit or loss The only category relevant for the Group is amortized cost, including accounts receivables and other short-term receivables. The Group measures financial assets at amortized cost if both of the following conditions are met: The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows, and The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding Financial assets at amortized cost are subsequently measured using the effective interest rate (EIR) method and are subject to impairment. Gains and losses are recognized in profit or loss when the asset is derecognized, modified or impaired. Derecognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e., removed from the Group’s consolidated statement of financial position) when: expired, or The rights to receive cash flows from the asset have The Group has transferred the asset according to IFRS 9.3.2.4 and 9.3.2.5 Impairment of financial assets For trade receivables and contract assets, the Group applies a simplified approach in calculating expected credit losses (ECLs). The Group does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Financial liabilities Initial recognition and measurement All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and accounts payables, net of directly attributable transaction costs. Subsequent measurement For purposes of subsequent measurement, financial assets are classified in four categories: Financial assets at amortized cost (debt instruments) Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt instruments) Subsequent measurement All financial liabilities are measured at amortized cost, except for financial liabilities at fair value through profit or loss. After initial recognition, borrowings are subsequently measured at amortized cost using the EIR method. Gains 30 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS and losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR amortization process. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the statement of profit or loss. Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as defined by IFRS 9. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognized in the statement of profit or loss. Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied. The Group has not designated any financial liability as at fair value through profit or loss. Derecognition A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the statement of profit or loss. Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, to realize the assets and settle the liabilities simultaneously. 2.11 Cash and cash equivalents Cash and cash equivalents include cash at banks and in hand, short- term deposits with an original maturity of three months or less, which are subject to an insignificant risk of changes in value. 2.12 Inventory Inventory is valued at the lower of cost and net realizable value after deduction for obsolescence. Net realizable value is estimated as the selling price less cost of completion and the cost necessary to make the sale. Costs are determined by using the FIFO method. Work in progress includes variable cost and non-variable cost which can be allocated to items based on normal capacity. Obsolete inventory is written down completely. 2.13 Leases The Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Group recognizes lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. recognizes right-of-use assets at Right-of-use assets The Group the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the lease term. If ownership of the leased asset transfers to the Group at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset. The right-of-use assets are also subject to impairment, see note 2.8. Lease liabilities At the commencement date of the lease, the Group recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating the lease, if the lease term reflects the Group exercising the option to terminate. Variable lease payments that do not depend on an index or a rate are recognized as expenses in the period in which the event or condition that triggers the payment occurs. 31 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS In calculating the present value of lease payments, the Group uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset. Short-term leases and leases of low-value assets The Group applies the short-term lease recognition exemption to its short-term leases (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option) and low-value assets. Lease payments on short-term leases and leases of low value assets are recognized as expense on a straight- line basis over the lease term 2.14 Income taxes Income tax expenses consist of taxes due and changes to the deferred tax. Deferred tax assets and liabilities are calculated based on the differences between the carrying value of assets and liabilities in the financial accounts and their tax basis when such differences are considered at temporary in nature. Deferred tax assets are recognized to the extent that it is probable that the individual company will have sufficient taxable income in later periods to utilize the tax asset. Deferred tax liabilities are accounted for at the nominal value and classified as long-term obligations in the balance sheet. Deferred income tax relating to items recognized in Other Comprehensive Income (“OCI”) or directly in equity is recognized outside profit or loss. The parent company pays its tax obligation in NOK and the fluctuations between the NOK and the USD impact the financial items. The Group’s legal entities that do not have their tax base in USD are exposed to changes in the USD/ tax base currency rates. Effects within the current year are classified as tax expense. time value is insignificant, the amount of the provision will be equal to the estimated expenditure required to settle the obligation. When the time effect is significant, the amount of the provision will be equal to the present value of future estimated expenditures to settle the obligation. 2.16 Employee benefits Defined benefit pension plans The Group had a defined benefit pension plan for its employees who were hired before December 31, 2007. The group has also established a similar plan for employees in the Philippines. This plan is still open. Pension plan assets are valued at fair value. The defined benefit scheme in Norway was converted to a defined contribution scheme. In connection with the transfer, the employees received a “Paid up benefit” for all earned benefits in the defined benefit plan. As there exist certain obligations related to retirees and employees on sick leave, an actuarial calculation is performed and a liability for these employees is included as of December 31, 2019. Defined contribution pension plans Employees hired after January 1, 2008 have a defined contribution pension plan described in Note 18. Share based payments The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an appropriate valuation model, further details of which are given in Note 19. That cost is recognized in employee benefits expense, together with a corresponding increase in equity (other paid in capital), over the period in which the service and, where applicable, the performance conditions are fulfilled (the vesting period). See Note 19. 2.17 Treasury shares When treasury shares are purchased, the purchase price, including directly attributable costs are recognized as changes in equity. Treasury shares are presented as a reduction of equity. Gains or losses on transactions in treasury shares are not recognized in the income statement. 2.18 Cash flow statement The cash flow statement is prepared in accordance with the indirect method. Cash and cash equivalents include cash, bank deposits and other short-term liquid investments. 2.15 Provisions Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that economic benefits will be required to settle the obligation and a reliable estimate can be made. Provisions are reviewed each balance sheet date and the level reflects the best estimate of the obligation. When the 2.19 Events after the balance sheet date Information available after the balance sheet date and applicable to conditions existing at the balance sheet date is included in the preparation of the financial statements. Events after the balance sheet date that do not affect the Group’s financial position as of the balance sheet date, but that will affect the Group’s financial position in the future, are disclosed if they are significant. See Note 23. 32 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Note 3: Revenues All figures in USD 1000 3.1 Disaggregated revenue information Revenue classified by end product applications: The Group focuses on the sale of standard components for wireless communication. These wireless components are broken into the following end product areas: Consumer Electronics, Wearables, Building and Retail, Healthcare and Others. In 2019, wireless components accounted for 97.5% of sales versus 96.8% in 2018. In addition to standard components, the Group sells customer-specific ASIC components (Application Specific Integrated Circuits) and related Consulting Services. The Group recognized the first long-range (cellular IoT) revenue in the second half of 2018. Most of Nordic’s cellular IoT customers are still in the development phase and revenue from this technology is mainly sale of development kits. When cellular IoT revenue materialize, Nordic will report the revenue in the relevant end product areas. GROUP 2019 2018 Revenue 119 409 50 386 51 595 19 725 39 979 111 724 Consumer Electronics 43 838 Wearables 48 646 Building/Retail 22 578 Healthcare 35 618 Others 281 094 262 404 Wireless components 1 046 6 039 216 - 232 Long-range (cellular IoT) 7 994 ASIC components 504 Consulting services - Management fee 288 395 271 134 Total revenues Revenue classified by customers’ location: The Group also classifies its revenues on a geographical basis according to its customers’ location. GROUP 2019 31 464 27 946 2018 33 608 Europe 32 810 Americas 229 014 204 716 Asia/Pacific 288 395 271 134 Total revenues PARENT 2019 2018 119 409 50 386 51 595 19 725 39 979 111 724 43 838 48 646 22 578 35 618 281 094 262 404 1 046 6 039 216 831 232 7 994 504 744 289 226 271 878 PARENT 2019 32 090 28 094 2018 34 195 32 966 229 042 204 717 289 226 271 878 The Group sells its components to distributors, which then sell components onward to electronics manufacturers which build end products and sell them to customers across the world. One distributor represented more than 10% of the Group’s total revenues in 2019 with 28% of total revenues. In comparison, two distributors represented more than 10% of the Group’s total revenues in 2018 (in total 40%), with 28% and 11% of revenues respectively. These distributors are based in Asia. 33 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Revenue from contracts with customers classified by timing of revenue recognition: 2019 2018 288 179 270 630 Goods transferred at a point in time 216 505 Services transferred over time 288 395 271 134 Total revenue from contracts with customers 3.2 Contract balances 2019 64 519 2018 51 784 Trade receivables 2019 2018 288 179 270 630 1 047 1 248 289 226 271 878 2019 64 519 2018 51 784 Trade receivables are non-interest bearing and are generally on terms of 30 to 60 days. See note 22 for further details. 3.3 Right of return assets and refund liabilities 2019 13 881 2018 11 393 Refund liability – arising from ship & debit 0 1 600 Refund liability – arising from stock rotation 2019 13 881 0 2018 11 393 1 600 3.4 Performance obligations The performance obligations for the sale of components is normally satisfied upon the time of delivery. Payment is generally due 30 to 60 days within delivery. For the consulting services the performance obligation is satisfied over-time and the customer is generally invoiced at month-end for the work performed. The Group has decided to use the practical expedient and not disclose unsatisfied or partially unsatisfied performance obligations. All remaining performance obligations are expected to be recognized within one year. 34 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Note 4: Cost of materials / inventory All figures in USD 1000 GROUP 2019 2018 151 677 135 003 Purchased materials -10 387 1 108 Changes in inventory 141 290 19 699 11 559 21 808 136 111 Cost of materials 21 491 Raw material 7 291 Work in Progress 13 898 Finished Goods 53 067 42 679 Total inventory 2 919 1 993 Amount written down PARENT 2019 2018 151 677 135 003 -10 387 141 290 19 699 11 559 21 808 1 108 136 111 21 491 7 291 13 898 53 067 42 679 2 919 1 993 As Nordic Semiconductor is a fabless manufacturer, all inventories, including raw materials and finished goods, are located at sub-contractors. Note 5: Other operating expenses All figures in USD 1000 GROUP 2019 2018 11 264 9 3511 1 428 1 095 5 236 -15 9 033 Service and maintenance 8 011 Other consultancy fees 5 403 Office rental expenses 1 087 Office equipment 4 947 Material and components -36 Tax grant -3 495 -3 210 Capitalized development expenses 4 023 4 778 0 3 811 Travel and meeting expenses 5 153 Other operating expenses 0 Other operating expenses intercompany 33 665 34 199 Total other operating expenses Auditor remuneration, excl. of VAT Fees to the auditor are included in consultancy fees above. GROUP 2019 91 36 44 171 2018 106 Statutory audit services 28 22 Tax advisory services Other audit related services 156 Total revenues PARENT 2019 2018 10 605 6 641 1 023 859 8 478 5 182 4 144 907 4 729 4 483 -15 -3 495 2 635 4 459 -36 -3 210 2 649 4 890 46 254 41 059 73 695 68 546 PARENT 2019 2018 68 36 44 148 82 24 21 128 35 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Note 6: Net financial items All figures in USD 1000 GROUP 2019 1 910 1 910 834 268 375 1 477 2018 1 782 1 782 Interest income Financial income 0 Interest expenses on lease liabilities 428 320 748 Financial expense Foreign exchange loss (net) Financial expense PARENT 2019 1 910 1 910 750 268 373 1 391 2018 1 782 1 782 0 427 319 746 433 1 034 Net financial income 519 1036 Note 7: Tax All figures in USD 1000 GROUP 2019 -3 852 1 473 -2 379 2018 -6 119 Tax expense consists of Tax payable -103 Change in deferred tax / tax benefit -6 222 Tax expense GROUP 2019 9 706 -2 135 -39 155 45 0 2018 Reconciliation of nominal and actual tax expense 15 081 Profit before tax -3 469 Tax at nominal rate 22 % (23% 2018) -30 Tax effect of different tax rates in other countries -153 Tax effect permanent differences 0 -51 Excess tax provision previous year Effect of change in tax rate -405 -2 521 Currency effect from translation to USD -2 379 -6 222 Tax expense PARENT 2019 -2 833 1 256 -1 577 2018 -5 160 -103 -5 263 PARENT 2019 2018 5 885 -1 295 11 678 -2 686 -27 97 45 0 -62 93 0 -51 -398 -1 577 -2 557 -5 263 36 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Balance Sheet Income Statement Other Comp. income 2019 2018 2019 2018 2019 2018 645 1 408 15 707 68 22 322 951 0 453 61 22 323 457 15 254 -11 0 1 037 -14 -409 -423 12 0 1 472 86 -6 0 130 -6 -1 202 -25 409 384 78 0 -103 0 0 0 0 18 0 18 0 0 0 0 0 18 0 0 0 0 5 0 5 0 0 0 0 0 5 Balance Sheet Income Statement Other Comp. income 2019 2018 2019 2018 2019 2018 GROUP Deferred taxes: Deferred tax benefit Inventory Fixed Assets Leasing Options (share based payments) Pension obligation Accruals Deferred tax benefit - gross 2 865 1 809 Gain and loss account Net other tax-obligations Deferred tax obligation - gross Currency effect of translation to USD 52 0 52 0 65 409 474 0 Net deferred tax benefit (obligation) 2 813 1 335 Deferred tax expense PARENT Deferred taxes: Deferred tax benefit Inventory Fixed Assets Leasing Options (share based payments) Pension obligation Accruals Deferred tax benefit - gross Gain and loss account Net other tax-obligations Deferred tax obligation - gross Currency effect of translation to USD 645 1 024 15 707 68 22 2 481 52 0 52 0 Net deferred tax benefit (obligation) 2 429 Deferred tax expense 322 784 0 453 61 22 1 642 65 409 474 0 1 168 323 241 15 254 -11 0 821 -14 -409 -423 12 0 1 256 86 2 0 130 -11 -1 205 -25 409 384 75 0 -103 0 0 0 0 18 0 18 0 0 0 0 0 18 0 0 0 0 5 0 5 0 0 0 0 0 5 37 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS GROUP 2019 1 335 1 472 18 -12 2018 Reconciliation of net deferred tax benefit: 1 516 -104 Opening balance as of 1.1 Tax expense/income recognized in profit and loss 5 Tax expense/income recognized in other comprehensive income -82 Currency effect from translation to USD PARENT 2019 1 168 1 256 18 -12 2018 1 341 -104 5 -75 2 813 1 335 Net deferred tax benefit 31.12 2 429 1 168 GROUP 2019 2018 Net deferred tax recognized in OCI as of 31.12: 18 18 5 5 Net gain/(loss) on actuarial gains and losses Total tax other comprehensive income Note 8: Shares outstanding Basis for calculation of basic earnings per share Earnings for the year (USD ‘000) Weighted average number of outstanding shares (‘000) Earnings per share (USD) Basis for calculation of fully diluted earnings per share Earnings for the year (USD ‘000) Weighted average number of outstanding shares (‘000) Earnings per share (USD) The number of shares was as follows: PARENT 2019 2018 18 18 5 5 2019 2018 7 327 175 313 0,04 7 327 176 394 0,04 8 859 172 591 0,05 8 859 179 454 0,05 Date 2019-01-01 2019-12-31 Balance at beginning of period Balance at end of period 179 781 600 179 781 600 175 236 600 175 661 690 Number of shares issued Shares outstanding Options granted to employees are considered to be potential ordinary shares. They have been included in the determination of diluted earnings per share if they have been vested at the reporting date, and to the extent to which they are dilutive. The options have not been included in the determination of basic earning per share. Details relating to the options are set out in note 19. 38 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Note 9: Payroll expenses All figures in USD 1000 GROUP 2019 2018 Combined expenses for salary and other compensation are distributed as follows: 62 556 57 604 Salary and vacation pay 12 846 6 756 -497 6 396 -7 776 11 364 5 904 Other compensation Payroll tax -482 Tax grant 5 432 Defined contribution pension -9 774 Capitalized development expenses (hourly costs) 80 281 70 048 Total 722 641 Weighted average number of full time employees GROUP 2019 391 188 51 39 26 26 16 13 4 4 4 1 1 1 1 1 2018 366 174 35 30 19 19 16 10 4 4 3 1 1 1 1 1 Employees as of December 31, are distributed as follows: Norway Finland Poland USA Taiwan Philippines Hong Kong China South Korea Japan Sweden Switzerland Germany Spain UK The Netherlands PARENT 2019 2018 37 968 36 412 9 415 8 330 6 421 -497 3 204 -7 776 5 661 -482 2 649 -9 774 48 735 42 796 461 415 PARENT 2019 391 2018 366 0 0 1 26 26 16 13 4 0 4 1 0 1 1 1 0 0 1 19 19 16 10 4 0 3 1 0 1 1 1 767 685 Total 485 442 39 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Note 10: Compensation to Group management and Board of Directors All figures in USD 1000 Total compensation expensed for Board Members Birger Steen, Chair (from 14.12.2018) Terje Rogne, Chair (until 24.10.2018) Inger Berg Ørstavik, Board Member Endre Holen, Board Member Jan Magnus Frykhammar, Board Member Øyvind Birkenes, Board Member Annastiina Hintsa, Board Member Anita Huun, Board Member Tore Valderhaug (Vice Chair until 24.4.19) Craig Ochikubo, Board Member (until 24.4.19) Anne-Cecilie Fagerlie, Board Member (until 24.4.19) Beatriz Malo de Molina, Board Member (until 30.4.18) Jon Helge Nistad, Board Employee Representative (Board remuneration only) Asbjørn Sæbø, Board Employee Representative (Board remuneration only) Susheel Nuguru, Board Employee Representative (Board remuneration only) Morten Dammen, Board Employee Representative (Board remuneration only) Joakim Ferm, former Board Employee Representative (Board remuneration only) 2019 104 0 50 53 50 45 37 40 14 8 0 0 11 11 11 9 3 2018 87 67 31 0 0 0 0 0 55 85 9 9 12 12 10 0 2 Total 446 380 40 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Total compensation* expensed during the year for the CEO and other executives: 2019 Svenn-Tore Larsen, CEO Pål Elstad, CFO Svein-Egil Nielsen, CTO & Strategy Director Geir Langeland, Sales & Marketing Director Ebbe Rømcke, Quality Director Ole Fredrik Morken, Supply Chain Director**** Marianne Frydenlund, Legal Director Ståle Ytterdal, Director IR & Strategic Sales**** Kjetil Holstad, Director of Product Management Katarina Finneng, HR Director (from 1.9.2019) Total 2018 Svenn-Tore Larsen, CEO Pål Elstad, CFO Svein-Egil Nielsen, CTO Geir Langeland, Sales & Marketing Director Ebbe Rømcke, Quality Director Ole Fredrik Morken, Supply Chain Director**** Marianne Frydenlund, Legal Director Thomas E. Bonnerud, Director of Strategy and IR*** Salary Bonus Options** RSU Other Compensation Pension expenses Total 394 240 279 255 168 314 130 325 142 68 65 42 39 39 27 33 22 6 0 0 58 38 40 39 20 37 5 17 10 0 48 30 36 31 20 25 16 22 18 0 2 2 2 2 2 2 2 3 2 1 16 16 16 16 16 16 15 16 16 5 583 368 412 383 253 427 190 390 188 74 2 315 273 265 246 20 151 3 269 Salary Bonus Options** RSU Other Compensation Pension expenses Total 421 241 226 233 166 304 103 147 70 45 42 42 30 36 24 0 78 52 52 52 26 52 2 0 314 0 0 0 0 0 0 0 0 0 2 2 2 2 2 1 1 1 13 16 16 16 16 16 16 12 12 587 356 338 345 240 409 142 160 120 2 577 Total 1 841 289 *Management compensation is paid in NOK. Exchange rate for 2019: 8.80 and 2018: 8.13 **Option cost is the expense of fair value of options based on Black Scholes calculation ***Until August 2018 **** Includes expat allowances (housing, school, etc.) Executive Compensation Declaration 2020 The Board has established a People, Leadership and Compensation Committee to recommend and evaluate remuneration principles and execution for the CEO and to guide and evaluate, principles and strategy for the compensation of Executive Management. Furthermore, the People, Leadership and Compensation Comittee evaluates and oversees the overall compensation strategy for the Group and provides deeper Board oversight other people and organization related matters. The CEO's total compensation, and any adjustments, is first reviewed by the Committee and then approved by the Board. The Board considers CEO compensation each year. The compensation of the other members of the Executive Management, including adjustments of these, are agreed between the CEO and the respective manager in the context of an overall compensation plan recommended by the Committee and approved by the Board. The Board proposes the following Declaration of the Principles for Compensation of the CEO and other members of the Executive Management according to the Norwegian Public Limited Liability Companies Act § 6-16a: Nordic operates in a highly competitive international technological market. The Board has approved a reward strategy document that sets out the guiding principles of Nordic’s remuneration strategy to support the attraction, engagement and retention of the relevant talent. Nordic’s remuneration strategy is based on the principles of aligning remuneration arrangements with our strategic drivers and rewarding executives and employees fairly for their contribution. The Remuneration Strategy is underpinned by Nordic’s values of Engagement, Contribution, Knowledge, Respect and Responsibility. 41 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS The main principle of the Group’s policy for remuneration and compensation is that the members of the Executive Management team shall be offered competitive terms, to attract and retain leaders with the desired competence to the Group’s Executive Management team. Compensation shall be split between fixed salary, short-term incentives and long-term incentives. The mix between the short-term and long-term incentives is set to reward the optimal value creation for our shareholders. The Group has established an annual performance bonus program (“The Plan”) for the Executive Management team, in which the executive must remain within his or her position (not resigned) until the start of the following year in order to be eligible. The bonuses are awarded as a direct cash payment. The Plan's targets are set for the entire team to recognize Nordic’s culture, collaboration and interdependencies among the existing team members in addition to individual KPIs. Company and team targets are set by the People and Compensation Committee combined with achievement of individual KPIs. Achievement of targets will result in performance pay bonus of 25% of base salary. The performance bonus is capped at 50% of base salary. In 2015, a long-term incentive plan (LTI) was introduced for the Executive Management team and other employees, structured as a 4-year option plan commencing in 2016. Under the plan, 4 692 812 option grants have been made to both executives and other employees in 2016, 2017 and 2018. In 2019, an amendment was made to the plan where part of the options granted to executives was replaced by Performance Shares. For 2020, the Board will propose to the Annual General Meeting to replace the stock option program with a Restricted Stock Unit (RSU) program for all employees, and a combination of Restricted Stock Units and Performance Shares for Executive Management. The RSUs will vest over 2 years and will be delivered to the employee at the vesting date at par value. For the Executive Management team of 10 people, 50% of the LTI plan will be given as Performance Shares. Executives are granted Performance Shares which are conditional upon the achievement of a certain set of objectives, including revenue growth, EBITDA growth, individual KPIs and Nordic’s share price performance relative to the relevant indices. The Performance Shares vest and will be delivered at par value upon the completion of the performance period, which is three years. Granting of shares is dependent on achievement of at least 80% of the set performance targets. At the threshold, 50% of the shares will be granted, whilst on 120% achievement of targets a maximum 2 times the shares will be granted. In line with the market practices, the number of RSUs and Performance Shares to be granted is changed during the annual grant cycle in consideration of the proven results, development and importance to the company of each executive. The grant size is proposed by the CEO. The Board reviews the basis for grants and refines and/or approves the grant sizes. The maximum dilutive effect (i.e. the sum of the number of share options and performance shares) of both the employee RSU program and the Executive Management Long Term Incentive plan is set to 0.6% for 2020, assuming maximum target achievement after 3 years. The LTI rewards employees for creating shareholder value over the long term. While the targets for the LTI is set at Group level, the grant size per individual may differ given the performance of the individual. The LTI is subject to an absolute limit and fulfillment of performance criteria, both decided by the Board at its discretion. The Group offers pensions plans to all employees; managers included. In addition, the Group provides managers with other limited benefits in kind such as a company telephone. The Group’s Chief Executive Officer has agreed to a 6-month mutual resignation period, except that the resignation period increases to 12 months in the event that the Group is acquired or merged with another company. The rest of the executive management team has a 3-month resignation period and there are no severance pay agreements. The guidelines for determination of salary and other compensation for leading employees, as outlined for the Annual General Meeting in 2019, have been complied with. 42 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS The Group has granted executives and employee Board members the following options according to the terms: Executives and employee Board members Options granted 2019* Options granted 2018* Svenn-Tore Larsen, CEO Pål Elstad, CFO Geir Langeland, Sales Director Svein-Egil Nielsen, CTO Ebbe Rømcke, Quality Director 38 163 stock options 62 000 stock options 23 163 stock options 42 000 stock options 24 767 stock options 42 000 stock options 28 144 stock options 42 000 stock options 15 761 stock options 21 000 stock options Ole Fredrik Morken, Supply Chain Director 19 701 stock options 42 000 stock options Marianne Frydenlund, Legal Director 12 946 stock options 5 000 stock options Ståle Ytterdal, Director IR & Strategic Sales 17 499 stock options 15 000 stock options Kjetil Holstad, Director of product management 14 072 stock options 10 000 stock options Katarina Finneng, HR Director 0 Stock options 0 stock options Morten Dammen, Board Employee Representative 3 559 stock options 5 100 stock options Jon Helge Nistad, Board Employee Representative 2 781 stock options 3 000 stock options Susheel Nuguru, Board Employee Representative Asbjørn Sæbø, Board Employee Representative 2 563 stock options 3 452 stock options 0 stock options 5 100 stock options *No options were exercised in 2019 and 2018 by primary insiders. Note 11: Fixed assets All figures in USD 1000 GROUP 2019 Opening balance Additions Acquisition cost as of 31.12 Opening balance Depreciation expenses Accumulated depreciation as of 31.12 Net carrying value as of 31.12 PARENT 2019 Opening balance Additions Acquisition cost as of 31.12 Opening balance Depreciation expenses Accumulated depreciation as of 31.12 Net carrying value as of 31.12 Office and lab equipment Computer equipment and machinery Fixture and fittings Property Total 14 882 10 231 25 113 8 723 4 233 12 957 12 157 39 425 5 961 45 386 29 236 4 434 33 670 11 717 Office and lab equipment Computer equipment and machinery 36 594 5 717 2 689 2 046 4 735 1 788 528 2 317 2 418 Fixture and fittings 2 269 1 827 333 57 329 0 18 239 333 75 568 0 0 0 39 747 9 196 48 943 333 26 625 Property Total 333 48 103 0 15 426 8 907 7 882 16 789 5 509 1 968 7 447 9 312 42 311 4 095 333 63 529 27 395 1 668 0 34 573 4 219 416 31 615 2 084 0 0 6 603 41 176 10 697 2 012 333 22 354 43 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS GROUP 2018 Opening balance Additions Acquisition cost as of 31.12 Opening balance Depreciation expenses Accumulated depreciation as of 31.12 Net carrying value as of 31.12 PARENT 2018 Opening balance Additions Acquisition cost as of 31.12 Opening balance Depreciation expenses Accumulated depreciation as of 31.12 Net carrying value as of 31.12 GROUP AND PARENT Estimated useful life Depreciation method Office and lab equipment Computer equipment and machinery Fixture and fittings Property Total 10 394 4 488 14 882 5 889 2 834 8 723 6 159 31 062 2 240 333 44 029 8 364 39 425 24 437 4 799 29 238 449 2 689 1 445 343 1 788 - 13 300 333 57 329 - - - 31 771 7 976 39 747 10 189 901 333 17 582 Office and lab equipment Computer equipment and machinery Fixture and fittings Property 28 396 2 043 333 6 598 2 309 8 907 4 748 761 5 509 3 398 8 198 36 594 23 225 4 170 225 2 269 1 398 270 27 395 1 668 Total 37 370 10 733 - 333 48 103 - 29 371 - - 5 201 34 573 9 199 601 333 13 530 3 – 5 years 3 – 4 years 5 years Not Straight-line Straight-line Straight-line Depreciated Total depreciation expenses consist of depreciation of fixed assets and depreciation of intangible assets (note 12). Write-offs There are no indicators that assets need to be written off. Change in depreciation periods There has been no basis for changing depreciation periods on fixed assets. Non-depreciable property assets: The Parent company has an apartment in Trondheim for use by employees in the Oslo office while in Trondheim. The apartment is assessed at acquisition cost. The residual value is expected to be at least equal to the book value. Scrapped capital assets All capital assets that are ready to be scrapped have been fully depreciated and have no residual book value. Capital assets temporarily out of operation The Group has no capital assets that are temporary out of operation. 44 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Note 12: Intangible assets All figures in USD 1000. GROUP 2019 Acquisition cost Opening balance Additions Accumulated cost as of 31.12 Accumulated depreciation Opening balance Depreciation expenses Total accumulated depreciation as of 31.12 Net carrying amount PARENT 2019 Acquisition cost Opening balance Additions Accumulated cost as of 31.12 Accumulated depreciation Opening balance Depreciation expenses Total accumulated depreciation as of 31.12 Net carrying amount GROUP 48 973 24 515 73 487 84 758 Non-capitalized R&D expenses: Personnel expenses Other operating expenses Total cost recognized in income statement Total cost for R&D (incl. capitalized development cost) Purchased Software Capitalized Development costs Total 31 368 1 863 33 231 16 305 5 519 21 824 11 407 54 704 86 073 11 271 13 134 65 976 99 207 27 018 43 324 4 967 10 486 31 986 53 810 33 990 45 398 Purchased Software Capitalized Development costs Total 30 727 1 807 32 533 16 123 5 290 21 413 11 120 54 704 85 431 11 271 13 078 65 976 98 509 27 018 43 141 4 967 10 258 31 985 53 399 33 990 45 110 PARENT 26 256 16 296 42 552 53 823 45 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS GROUP 2018 Acquisition cost Opening balance Additions Accumulated cost as of 31.12 Accumulated depreciation Opening balance Depreciation expenses Total accumulated depreciation as of 31.12 Net carrying amount PARENT 2018 Acquisition cost Opening balance Additions Accumulated cost as of 31.12 Accumulated depreciation Opening balance Depreciation expenses Total accumulated depreciation as of 31.12 Net carrying amount Purchased Software Capitalized Development costs Total 27 296 4 072 31 368 11 787 4 518 16 305 15 063 41 711 69 007 12 993 17 066 54 704 86 073 22 786 34 573 4 232 8 751 27 018 43 324 27 686 42 749 Purchased Software Capitalized Development costs Total 27 075 3 651 30 727 11 775 4 348 16 123 14 604 41 711 68 786 12 993 16 645 54 704 85 431 22 786 34 561 4 232 27 018 8 580 43 141 27 686 42 290 PARENT 22 783 13 505 36 288 49 281 GROUP 43 790 19 846 63 636 72 208 Non-capitalized R&D expenses: Personnel expenses Other operating expenses Total cost recognized in income statement Total cost for R&D (incl. capitalized development cost) Total depreciation expenses consist of depreciation of intangible assets and depreciation of fixed assets (note 11). Estimated useful life Depreciation method 3 – 10 years Straight-line 1 – 5 years Straight-line Expensed research and development activities relate to new technologies and new services and products. 46 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Note 13: Subsidiaries All figures in USD 1000. The following subsidiaries have been included in the financial statements: Subsidiaries consolidated in Nordic Semiconductor Inc Nordic Semiconductor Poland S.P z o.o. Nordic Semiconductor Finland OY Nordic Semiconductor Japan KK Nordic Semiconductor Germany GmbH Established Year 2006 2013 2014 2017 2018 Location USA Poland Finland Japan Germany Share Ownership Voting Rights 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Subsidiaries as of 31 December 2019 Ownership Share of votes Net profit 2019 Equity 31. Dec 2019 Nordic Semiconductor Inc, USA Nordic Semiconductor Poland S.p Z o.o. Nordic Semiconductor Finland OY Nordic Semiconductor Japan KK Nordic Semiconductor Germany GmbH 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 267 297 2 486 8 6 1 641 650 8 146 83 51 All intellectual property (IP) is owned by Nordic Semiconductor ASA. All subsidiaries operate as contract research and development centers and invoice Nordic Semiconductor ASA according to the Group's transfer pricing policy. Nordic Semiconductor Inc is mainly a sales company, but in 2016 a small R&D department was also started. All sales conducted are on behalf of the parent company. Nordic Semiconductor Poland Sp. z.o.o. is an extension of the software development team in the parent company. Nordic Semiconductor Finland OY is a development company. This R&D team works closely alongside the rest of the R&D teams in the Group. Nordic Semiconductor Japan KK is a sales company. All sales conducted are on behalf of the parent company. Nordic Semiconductor Germany GmbH is a sales company. All sales conducted are on behalf of the parent company. 47 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Note 14: Accounts Receivable All figures in USD 1000 GROUP 2019 2018 64 519 51 784 Gross receivables 0 0 Provision for doubtful accounts 64 519 51 784 Accounts Receivable, net Note 15: Intercompany balances All figures in USD 1000 PARENT Receivables Receivables group companies Total Payables Short-term debt group companies Total Note 16: Cash and cash equivalents All figures in USD 1000 GROUP PARENT 2019 2018 64 519 51 784 0 0 64 519 51 784 2019 2018 224 224 10 586 10 586 1 250 1 250 4 732 4 732 PARENT 2019 2018 Cash and cash equivalents as of the balance sheet date were as follows: 2019 2018 88 797 102 316 Cash holdings 1 847 1 560 Tax deduction account (restricted funds) 90 645 103 876 Cash and cash equivalents in statement of financial position 87 358 1 847 98 961 1 560 89 205 100 522 Cash at banks earns interest at floating rates based on daily bank deposit rates. The parent company presents total bank deposits in the international cash pool, while Nordic Semiconductor OY presents its share of the international cash pool as a receivable from group company. Nordic Semiconductor ASA and Nordic Semi- conductor OY participate in the cash-pool, which is operated by Danske Bank. For information on liquidity risk, see note 22. 48 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Note 17: Share capital and shareholder information Share capital The share capital in Nordic Semiconductor as of December 31, 2019 consists of one share class with a total of 179 781 600 shares with a face value of NOK 0.01, with a total share capital of NOK 1 797 816. Each share grants the same rights in the company, and in the event of any increase in capital, existing shareholders have pre-emptive rights for any new shares. During the year the following changes have been made in the number of shares, share capital and share premium: GROUP Number of shares Share capital (USD 1000) Treasury shares (USD 1000) Share premium (USD 1000) 2019 2018 2019 2018 2019 2018 2019 2018 Holdings as of 1.1 Issue of share capital Change in treasury shares 179 781 600 163 481 600 303 283 - - 16 300 000 - - - 20 - Holdings as of 31.12 179 781 600 179 781 600 303 303 -5 - 0 -5 -2 - -3 -5 113 355 14 436 - - 98 919 - 113 355 113 355 Stock Option Grant With reference to the Extraordinary General Meeting (“EGM”), on December 8, 2015, Nordic Semiconductor approved a 4-year option program for the Group. See note 19 for further information on each annual grant. Dividend No dividend was paid during 2019. Treasury shares The Company owned 4,119,910 treasury shares on December 31, 2019. At January 1, 2019, the Company owned 4,545,000 treasury shares. Based on a resolution of the annual general meeting of April 24, 2019, the Board has authority to purchase the company’s own shares with a limit of a face value of NOK 179,000 through one or more transactions. This authority is limited to 9.96% of the company’s share capital, and the price per share that the company may pay for shares shall not be lower than the face value and not higher than NOK 200. This authority applies until the company’s regular general meeting in 2020, and by June 30, 2020 the latest. 49 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Shareholder overview of December 31, 2019: The largest shareholders in Nordic Semiconductor ASA were as follows as of December 31, 2019: Shares Percentage Shareholder FOLKETRYGDFONDET ACCELERATOR LTD VERDIPAPIRFONDET DNB NORGE STATE STREET BANK AND TRUST COMP CITIBANK, N.A. VERDIPAPIRFONDET KLP AKSJENORGE NORDIC SEMICONDUCTOR ASA DANSKE INVEST NORSKE INSTIT. II. KOMMUNAL LANDSPENSJONSKASSE ALDEN AS DNB MARKETS AKSJEHANDEL/-ANALYSE VERDIPAPIRFONDET PARETO INVESTMENT PASSESTA AS MP PENSJON PK JPMORGAN CHASE BANK, N.A., LONDON VERDIPAPIRFONDET ALFRED BERG GAMBA TTC INVEST AS VERDIPAPIRFONDET DNB TEKNOLOGI KLP AKSJENORGE INDEKS DANSKE INVEST NORSKE AKSJER INST Total for the 20 largest shareholders Other shareholders Total shares outstanding Shares held by the Board of Directors and Executive Management were as follows as of December 31, 2019. Board of Directors Birger Steen Inger Berg Ørstavik Jan Frykhammar Anita Huun Endre Holen Øyvind Birkenes Annastiina Hintsa Jon Helge Nistad Asbjørn Sæbø Susheel Nuguru Morten Dammen Total Shares 169 460 1 000 10 000 10 000 156 500 5 112 0 0 Executive Management Svenn-Tore Larsen Pål Elstad Katarina Finneng Geir Langeland Svein-Egil Nielsen Ebbe Rømcke Ole Fredrik Morken Ståle ytterdal 10 000 Kjetil Holstad Marianne Frydenlund 0 0 352 072 Total 24 006 970 17 482 950 11 499 060 8 565 244 5 750 358 5 160 588 4 119 910 3 809 487 3 642 944 2 950 000 2 778 797 2 735 000 2 510 000 2 467 434 2 378 696 2 330 588 2 300 000 1 801 014 1 717 302 1 582 800 109 589 142 70 192 458 179 781 600 13,35 % 9,72 % 6,40 % 4,76 % 3,20 % 2,87 % 2,29 % 2,12 % 2,03 % 1,64 % 1,55 % 1,52 % 1,40 % 1,37 % 1,32 % 1,30 % 1,28 % 1,00 % 0,96 % 0,88 % 60,96 % 39,04 % 100 % Shares 1 905 400 8 846 0 177 700 17 000 68 900 160 000 244 000 6 604 2 000 2 590 450 50 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Note 18: Pensions and other long-term employee benefits The pension liability for the group consists of liabilities in Norway and The Philippines. Nordic has set up a pension plan for the Philippine office as of January 2014. The retirement plan is unfunded and of the defined benefit type which provides a retirement benefit calculated based on number of years of credited service. At the end of 2018 the pension liability was USD 59 000. For the company in Finland pensions are financed by contributions from the insured employees and employers. The Norwegian company in the Group is required to have mandatory employment pension for employees in Norway, according to the Mandatory Employment Pension Act. The defined benefit plan was closed for new members effective January 1, 2008 and from this point a new defined contribution plan was established. The two different types of pensions are described below: Defined Pension Plan Current service cost Interest expense Expected return on plan assets Administration fee Total pension expense excl. social security tax Social security tax Total pension expense incl. social security tax Net pension obligation for the year was calculated as follows: Pension obligations Plan assets Estimated net pension obligations Social security tax Total pension expense incl. social security tax Total pension liability for the Group Employees in Norway Employees in Philippines Total 2019 0 27 -23 2 6 1 7 2019 1 141 921 220 31 251 2019 251 59 310 2018 0 26 -21 2 7 1 8 2018 1 096 905 192 27 219 2018 219 60 279 Defined contribution pension plan All employees in Norway have a defined contribution pension plan from 01.01.2016. The main benefit is a contribution of 7% of salary up to 7.1 basis points (G) and 18% of salary between 7.1 and 12 basis points. Along with this the company has a disability pension of approximately 66% of salary including estimated social security based on 40 years of full employment. In 2019, the cost of the defined contribution pension was USD 3 204 000, and the plan had 392 members. Note 19: Stock options and performance shares All employee options vest over three years and expire after five years. On February 26, 2016, Nordic Semiconductor granted 1,590,000 share options to 320 employees. The options were granted at a strike price of NOK 47.72 (10% above volume weighted average share price the week following Q4 2015 results). If the company’s share price exceeds a cap of NOK 143.16, the company may settle the option grant by compensating the employee the difference between the cap and the strike price. 51 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS On February 22, 2017, Nordic Semiconductor granted 1,625,412 share options to 307 employees. The options were granted at a strike price of NOK 35.77 (10% above volume weighted average share price the week following Q4 2016 results). If the company’s share price exceeds a cap of NOK 107.31, the company may settle the option grant by compensating the employee the difference between the cap and the strike price. On February 27, 2018, Nordic Semiconductor granted 1,477,400 share options to 300 employees. The options were granted at a strike price of NOK 47.27 (10% above volume weighted average share price the week following Q4 2017 results). If the company’s share price exceeds a cap of NOK 141.81, the company may settle the option grant by compensating the employee the difference between the cap and the strike price. On March 15, 2019, Nordic Semiconductor granted 1,752,366 share options to 666 employees. The options were granted at a strike price of NOK 39.44 (10% above volume weighted average share price the five days prior to the grant date). If the company’s share price exceeds a cap of NOK 118.32, the company may settle the option grant by compensating the employee the difference between the cap and the strike price. On May 3, 2019, Nordic Semiconductor granted 196,644 share options and 55,814 performance shares to the management group. The options were granted at a strike price of NOK 45.1 (10% above volume weighted average share price the five days prior to the grant date If the company’s share price exceeds a cap of NOK 135.3, the company may settle the option grant by compensating the employee the difference between the cap and the strike price. The performance shares are issued conditional upon the achievement of a certain set of objectives. The performance shares vest and will be delivered at par value upon the completion of the performance period, which is three years. A summary of share option transactions during 2019 and 2018 is below: Outstanding options 1.1 Options granted Options forfeited Options exercised Options expired Outstanding options 31.12 Of which exercisable Weighted average exercise price 2019 2018 4 194 293 3 127 663 1 947 010 1 477 400 222 384 448 545 0 97 060 283 710 0 5 470 374 4 194 293 2 283 646 1 265 338 42.62 43.56 The fair value of the options and performance shares are set on the grant date and expensed over the vesting period. USD 1 540 thousand was expensed during 2019 and USD 1 213 thousand in 2018. The fair value per option for employee and management options granted in 2019 was NOK 9.5 and NOK 11.1, respectively. The value has been estimated using the Black & Scholes model, subject to the following assumptions: Share price on the grant date The share price is set to the volume weighted average share price the five days prior to the grant date, which for employees and management in 2019 was NOK 35.9 and NOK 41.0, respectively. Volatility It is assumed that historic volatility is an indication of future volatility. The expected volatility is therefore stipulated to be the same as the historic volatility, which equaled 41.28% on the date of grant in 2019. Strike price The strike price is the share price on the grant date +10%. Cap price The cap price on the options granted for employees and management was NOK 118.32 and NOK 135.3, respectively. At this price, the company may settle the option grant by compensating the employee the difference between the cap and the strike price. When calculating the value of the stock option, the value of the cap is calculated through the Black Scholes model, and deducted from the uncapped value of the option to the employee. Average option term The options are expected to have an average term of 4 years (between the minimum vesting period of one year and the maximum exercise period of five years). Dividend and interest rate Nordic does not forecast a dividend payout in the Black-Scholes model. The risk-free interest rate is set equal to the relevant interest rate on government bonds on the date of grant in 2019, i.e. 1.37 %. 52 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Note 20: Current liabilities All figures in USD 1000 GROUP 2019 2018 19 738 10 424 Accounts payable - 3 136 3 761 6 258 13 881 4 044 15 141 - Accounts payable subsidiaries 5 043 Income taxes payable 2 901 5 751 Social security tax and payroll tax Holiday pay 11 393 Provision of Ship and Debit - Current lease liabilities 7 821 Accrued expenses PARENT 2019 17 988 10 586 2 886 3 181 4 271 13 881 3 142 11 958 2018 9 681 4 732 4 854 2 471 3 970 11 393 - 7 535 65 958 45 333 Total Current liabilities 67 894 44 636 Note 21: Leases All figures in USD 1000. The Group's lease agreements consists of office buildings, office equipment and machinery and vehicles. Office buildings have a lease period of 1-7 years. IT equipments and office machines are leased in a 3-5 year period, and vehicles are leased for less than 3 years. There are no leases with variable lease payments, other than lease payments linked to an index. Extension and termination options are included in a number of property and equipment leases across the Group. These are used to maximise operational flexibility in terms of managing the assets used in the Group’s operations. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor. Extension options have not been included in the lease liability, because the Group could replace the assets without significant cost or business distruption. The Group also has certain leases of office buildings and office equipment and machinery with lease terms of 12 months or less and leases of office equipment and machinery and vehicles with low value. The Group applies the "short-term lease" and ‘lease of low-value assets’ recognition exemptions for these leases. Minimum lease payments payable on leases are presented in note 24 Financial assets and liabilities. The Group implemented IFRS 16 January 1, 2019. The implementation is further presented in note 1. Amounts recognized in the balance sheet The balance sheet shows the following amounts relating to leases: GROUP 31.12.2019 01.01.2019 Right of use assets 20 639 Property 371 Office equipment and machinery 21 010 Total 23 237 696 23 934 GROUP 31.12.2019 01.01.2019 Lease liabilities 4 044 19 886 23 931 3 200 17 810 Current Non-Current 21 010 Total PARENT 31.12.2019 01.01.2019 21 575 696 22 272 18 013 371 18 384 PARENT 31.12.2019 01.01.2019 3 142 19 085 22 272 3 142 15 283 18 425 53 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS GROUP 2019 7 672 845 2018 0 0 Additions to the right-of-use assets Disposals to the right-of-use assets Amounts recognized in the statement of profit or loss: The statement of profit or loss shows the following amounts relating to leases: GROUP 2019 3 648 205 3 853 837 470 199 5 360 4 393 2018 Depreciation charge of right-of-use assets - - - 0 0 0 0 0 Properties Office equipment and machinery Total Interest expense Expenses relating to short-term leases Expenses relating to leases of low-value Total amount recognised in profit and loss Total cash outflow for leases Set out below are the carrying amounts of lease liabilities and the movements during the period: GROUP Cash flow information for lease liabilities 20 010 Net liabilties as at 1 January 2019 -3 906 Cash flows from financing activitites 3 87 7 672 Aquisitionsons -845 Disposals - Other changes 23 931 Net liabilties as at 31 December 2019 PARENT 2019 7 672 845 2018 0 0 PARENT 2019 2 723 205 2 928 753 357 94 4 132 3 420 2018 0 0 - 0 0 0 0 0 PARENT 18 4250 - 2 972 7 661 -845 -42 22 227 Operating leases: Before the adoption of IFRS 16, the Group classified each of its leases (as lessee) at the inception date as operating lease (IAS 17). 2019 2018 Amounts recognized in the statement of profit or loss 602 67 669 4 331 Office lease 385 Lease of machinery 4 717 Total lease expense 2019 391 60 451 2018 3 244 255 3 469 54 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Note 22: Financial instruments All figures in USD 1000. Capital structure Nordic Semiconductor’s strategy relating to its capital structure is to maintain sufficient cash and cash equivalents to meet the Group’s requirements for ongoing operations and for new investments. Management believes that it is especially important to retain a strong credit rating and significant liquidity as the Group competes in a global market against larger companies. Nordic Semiconductor manages its capital structure and makes revisions in light of changes in the overall economy and its operating assumptions. In order to maintain or amend the capital structure, Nordic may purchase its own shares on the market, pay dividends to shareholders, pay back capital to shareholders or issue new shares. No changes were made in procedures or processes in the course of 2019. Nordic Semiconductor targets to have an equity ratio above 50% at all times, measured as total equity divided by total assets. GROUP 2019 2018 232 205 221 549 Total equity 318 359 267 161 Total assets 73 % 83% Equity ratio Financial assets The group holds the following financial assets: GROUP 2019 2018 64 519 51 784 Accounts receivables 3 190 7 155 Other short-term receivables 90 645 103 876 Cash and cash equivalents 158 353 162 815 Total Financial liabilities The group holds the following financial liabilities: GROUP 2019 19 738 35 279 2018 Financial liabilities at amortised cost 10 424 Accounts payable 26 966 Other short-term debt Lease Liabilities 23 391 0 Lease Liabilities 78 408 37 390 Total PARENT 2019 2018 221 754 214 370 303 076 259 285 73 % 83% PARENT 2019 2018 64 519 51 784 2 322 7 269 83 237 100 522 150 078 159 575 PARENT 2019 17 988 2018 9 681 40 696 27 630 22 227 80 912 0 37 311 55 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Interest-bearing loans and borrowings: The Group has long-term revolving credit facilities ("RCF"), which enables it to borrow up to USD 40 million and USD 25 million at any time with an interest rate equal to LIBOR + margin. The line of credit agreements of USD 40 million and USD 25 million expire in November 2022. As of December 31, 2019, Nordic had not drawn on any of the credit lines. The security is provided by inventory, receivables and operating equipment with book values as follows; inventories USD 53 million, accounts receivable USD 65 million and operating equipment USD 24 million. The following financial covenants are included for the revolving credit facilities: Equity ratio shall not be lower than 40 %. In addition to the two RCFs, the Group has a EUR 10 million bank overdraft facility with its main bank. This overdraft is not utilized at the end of December. The remainder of the Group’s financing is made through short-term, non-interest bearing debt. This financing typically consists of debt to suppliers, the public sector, employees and others. Nordic has entered into a Tenancy Guarantee with Danske Bank as unconditional guarantor for NOK 40 million. The warranty is given to secure payments of up to 24 months of rent for the office in Trondheim. Financial risk management The Group's finance departement is responsible for carrying out the policies and guidelines for financial risk management approved by the Board. The Group is mainly exposed to counterparty credit risk, liquidity risk, interest rate risk and foreign currency risk. Credit risk Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its operating activities (primarily trade receivables) and from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments. The Group’s sale of components takes place through its distribution partners within defined geographic regions, where Asia is the dominant region. The Group depends on a relatively small number of customers. Customer credit risk is managed by each region subject to the Group’s established policy, procedures and control relating to customer credit risk management. Credit quality of a customer is assessed based on an extensive credit evaluation and individual credit limits are defined in accordance with this assessment. Outstanding customer receivables are regularly monitored and assurance from distributors that end customer sales is secured through letter of credits is obtained. The Group's provision matrix is initially based on the historical observed default rates. The Group has calibrated the matrix to adjust the historical credit loss experience with forward-looking information. Age distribution of customer receivables was: GROUP 2019 2018 Gross total 55 052 44 391 Not due 6 214 1 948 1 304 3 587 2 535 Past due 0-30 days Past due 31-120 days 1 271 Over 120 days 64 519 51 784 Total PARENT 2019 2018 55 052 44 391 6 214 1 948 1 304 3 587 2 535 1 271 64 519 51 784 56 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS 85% of customer receivables are within terms. Expected credit loss for all receivables is limited, and allowances for doubtful accounts at 31 December 2019 equal 0. The Group has historically not suffered any significant credit losses. The Group has a limited number of customers, regular contact and long-term relationships with most of its customer base. Some of the customers are dependent on Nordic Semiconductor to stay in business. The book value of financial assets represents the maximum credit exposure. The maximum exposure to credit risk on the balance sheet date was: GROUP 2019 2018 64 519 11 359 51 784 Accounts receivable 7 156 Other short-term receivables 75 878 58 939 Total PARENT 2019 2018 64 519 10 045 51 784 7 269 74 563 59 053 Liquidity risk Overall, the Group seeks to minimize risk when investing its cash balance. Investments can only be made in securities which have been approved by the Board. The company holds no debt securities. The Group has no externally imposed capital requirements or agreements, and has no contracts or legal requirements which are not being upheld. The Group has the following due dates with regard to contracts for financial liabilities as of December 31, 2019: GROUP Carrying amount Contractual cash flow 0-3 months 3-6 months 6-12 months 1-2 years 2-5 years 5-10 years Accounts payable 19 738 19 738 19 738 Other short-term liabilities 42 176 42 176 29 958 8 555 3 663 Lease liabilities 23 931 27 116 1 236 1 224 2 410 4 588 9 554 8 103 Total 85 845 89 030 50 933 9 779 6 073 4 588 9 554 8 103 PARENT Carrying amount Contractual cash flow 0-3 months 3-6 months 6-12 months 1-2 years 2-5 years 5-10 years Accounts payable 17 988 17 988 17 988 Other short-term liabilities 46 763 46 763 36 781 6 569 3 412 Lease liabilities 22 227 25 333 987 987 1 937 3 773 9 546 8 103 Total 86 979 90 085 55 756 7 556 5 349 3 773 9 546 8 103 *Lease liabilities is mainly office facility rent in Oslo and Trondheim 57 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Interest rate risk The Group’s liquidity requirements and risk assessment determine its investment strategy and interest rate exposure. The Group’s policy is to maintain a short-term investment horizon for its surplus cash. The investment portfolio should not have an average duration longer than six (6) months. long-term revolving credit The Group has facilities, which allows it to borrow up to a total of USD 65 million at an interest rate of LIBOR + margin. The line of credit agreement of USD 40 million and USD 25 million expires end of November 2022. If interest rates increase 1 basis point, the negative effect on profit before tax given current utilization of the RCF is USD 0 per year as the credit facility is not utilized. Foreign currency risk The Group is subject to foreign currency risk as it has its development and commercial activities in different countries. Nearly all revenues and cost of goods are in USD, while approximately 50% and 20% of the Group’s operating expenses excluding depreciation are in NOK and EUR. Nordic does not hedge its exposure to foreign currency risk. Below is a sensitivity analysis of changes in the NOK exchange rate on balance sheet items, and their impact on profit before tax: NOK exchange rate +/- 10% Profit before tax +/- 2 692 The table below shows the Group's exposure in sales to foreign currency risk in the most significant currencies: GROUP 2019 Local currency (1000) 287 124 1 134 Share of total revenues in % Local currency (1000) 99,6 % 0,4 % 100,0 % 268 597 2 163 USD (1000) 287 124 1 271 288 395 2019 2018 USD (1000) 268 597 2 537 271 134 2018 Share of total revenues in % 99,1 % 0,9 % 100,0 % Local currency (1000) USD (1000) Share of total revenues in % Local currency (1000) USD (1000) Share of total revenues in % 287 124 1 730 287 124 1 933 169 99,3 % 0,7 % 0,1 % 289 226 100,0 % 268 713 2 598 268 597 3 050 115 271 762 98,8 % 1,1 % 0,0 % 100,0 % USD EUR Total PARENT USD EUR Other Total The table below shows the Group's exposure at the end of reporting period in the most significant currencies: All amounts stated in USD 1000 GROUP USD EUR NOK Other Total PARENT USD EUR NOK Other Total 2019 Accounts receivable 64 519 Accounts receivable 51 236 548 Accounts papayable 15 809 1 886 1 547 497 64 519 19 738 51 784 2019 Accounts receivable 64 519 Accounts receivable 51 236 548 Accounts payable 15 809 109 1 547 523 64 519 17 988 51 784 2018 2018 Accounts payable 8 098 595 1 216 515 10 424 Accounts payable 8 98 -144 1 216 511 9 681 58 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Determination of fair value As of December 31, 2019 the Group had no financial assets or financial liabilities where there is considered to be a difference between book value and fair value. Below is an overview of Nordic’s financial instruments: GROUP 2019 2018 Book value Fair market value Book value Fair market value Financial assets Accounts receivables Short-term receivables Cash and cash equivalents Financial liabilities Accounts receivables Other short-term liabilities 64 519 3 190 90 645 19 738 35 279 64 519 3 190 90 645 19 738 35 279 51 784 7 155 103 876 10 424 26 966 51 784 7 155 103 876 10 424 26 966 PARENT 2019 2018 Book value Fair market value Book value Fair market value Financial assets Accounts receivable Short-term receivables Cash and cash equivalents Financial liabilities Accounts payable Other short-term liabilities 64 519 2 322 83 237 17 988 40 696 64 519 2 322 83 237 17 988 40 696 51 784 7 269 100 522 9 681 27 630 51 784 7 269 100 522 9 681 27 630 Book value is a reasonable estimate of fair value in cases where these numbers are identical. Note 23: Events after the balance sheet date There are no events after the balance sheet date with materially affect on the financial statements. Note 24: Related party transactions Nordic Semiconductor ASA, the parent company of the Group, is listed on Oslo Stock exchange. The Group has no material transactions with related parties. 59 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | FINANCIAL STATEMENTS Declaration to the Annual Report DECLARATION TO THE ANNUAL REPORT Responsibility Statement The Chief Executive Officer and the Board of Directors confirm, to the best of our knowledge, that the financial statements for 2019 have been prepared in accordance with current accounting standards and give a true and fair view of the Parent company and the Group’s assets, liabilities, financial position and results of the operations. We also confirm that the report by the Board of Directors provides a fair overview of the parent company and the Group and its development, financial results and position, and describes the Group’s key risks and uncertainties. Oslo, March 18, 2020 Endre Holen Board member Birger Steen Chair Øyvind Birkenes Board member Inger Berg Ørstavik Board member Svenn-Tore Larsen Chief Executive Officer Jan Frykhammar Board member Anita Huun Board member Jon Helge Nistad Board member, employee Annastiina Hintsa Board member Asbjørn Sæbø Board member, employee Susheel Raj Nuguru Board member, employee Morten Dammen Board member, employee 61 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | DECLERATION TO THE ANNUNAL REPORT NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | STANDARDS OF CORPORATE GOVERNANCE STANDARDS OF CORPORATE GOVERNANCE The Board of Directors ("Board") and Management of Nordic Semiconductor ASA ("Nordic" or the "Company") aim to execute their respective tasks in accordance with the highest standards for corporate governance. standards Nordic Semiconductor’s for corporate governance provide a critical foundation for the company’s management. These principles must be viewed in conjunction with the company’s efforts to constantly promote a sound corporate culture throughout the organization. The company’s core values of respect, trust, accountability and equal treatment are central to the Board’s and management’s efforts to build confidence in the company, both internally and externally. Nordic Semiconductor is a UN Global Compact (UNGC) signatory and is committed to the Ten Principles as set forth by the UNGC in the areas of Human Rights, Labor, Environment and Anti-corruption. Nordic Semiconductor has adopted the Responsible Business Alliance (RBA) Code of Conduct, which specifically focuses on topics relevant for the electronics industry, and promotes this to ensure sustainable business operations and supply chain. Additional information on this work can be read in the annual Environmental, Social, Governance (ESG) report, as published on Nordic Semiconductor’s website. The Board’s statement on corporate governance is set out below. It complies with the structure adopted by the Norwegian Corporate Governance Board (NUES). The statement also meets the information requirements set out in Section 3-3b of the Accounting Act and Section 5-8a of the Securities Trading Act. The Articles of Association do not contain provisions that deviate from Chapter 5 of the Public Limited Liability Companies Act. The information requirements in the Accounting Act are integrated into the statement below where appropriate. This also applies to information about matters related to shareholders. Statement of corporate governance The Company adheres to the NUES and is subject to reporting requirements relating to corporate governance according to Section 3-3b of the Accounting Act. The Company's foundational values are described in Nordic’s Company Policies, and the procedures and guidelines for ethics and corporate responsibility have been designed based on these policies. The company has a separate annual report on ESG. Deviations from the Code of Practice: None Activities The Articles of Association describe the objective and set clear limits for the company’s business. According to Nordic’s Articles of Association, “The objective for which the company is established is the development and sale of electronic components, integrated circuits, design tools and related solutions.” Nordic designs, sells and delivers integrated circuits and related intellectual property for use in short and long- range wireless applications. The company specializes in ultra-low power components, based on its proprietary 2.4 GHz RF, various Bluetooth related standards and emerging standards for cellular IoT communications like NB-IoT and LTE-M. All manufacturing and direct distribution of components are outsourced to specialist subcontractors. The company is headquartered in Trondheim, Norway, and has offices in USA, China, Korea, Japan, Taiwan, Poland, Finland, Germany and the Philippines. The Board sets clear objectives for the business with a view to create value for shareholders. The Board leads the company’s strategic planning and make decisions that form a basis for the company’s executive management to prepare and carry out investments to drive future growth. Strategic plans are evaluated on an ongoing basis, with a Board strategy review being conducted annually in an off-site multi-day meeting. New and updated long-term objectives, strategies and risk profiles are agreed on towards the end of the year, or in connection with major events. rights and social matters, The objectives include matters that relate to human rights, employee the prevention of corruption, the working environment equal treatment, discrimination and environmental impact.; see the separate ESG report. The objectives are revised and adopted annually. Objectives for the coming year are revised and determined annually towards the end of the current year. Deviations from the Code of Practice: None 62 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | STANDARDS OF CORPORATE GOVERNANCE Equity and dividends The Board of Directors ensures that the company has a capital structure that is appropriate to the Company’s objectives, strategy and risk profile. The Company’s growth philosophy, as well as the cyclicality of its business, means that the Company will aim to maintain a high equity ratio and considerable liquidity. The Company aims primarily to provide shareholders with returns in the form of appreciation of the shares and has a long-term goal to pay dividends based on surplus cash generated by the company, while taking longer term growth targets into consideration. The company’s dividend policy is reviewed each year by the Board of Directors. The Annual General Meeting can mandate the Board the authorization to pay dividends based on the latest approved Annual Report. The justification for this authorization needs to be explained and should reflect the Company’s dividend policy. The Board of Directors, in accordance with the resolution of the Annual General Meeting held April 24, 2019, has been authorized to buy back up to 17,900,000 own shares for a total par value of NOK 179,000.00 in one or more transactions. The authorization is limited to 10 percent of the Company’s share capital, and the price per share which the Company may pay for shares acquired in this manner shall not be less than the par value nor greater than NOK 200. This power of attorney will remain in effect until the company’s ordinary Annual General Meeting in 2020. The Board believes that it is expedient for the Board to be authorized to purchase own shares, partly to fulfil the remuneration schemes for employees, and partly so that shares can be used as a consideration in connection with the acquisition of businesses or for subsequent sale or cancellation. Such authorization must be decided by the General Meeting and will apply until 30 June the following year. In accordance with the decision passed at the general meeting held April 24, 2019, the Board of Directors has the authority to increase the company’s share capital by issuing up to 17,900,000 shares with a total par value of NOK 179,000. The authority is to be used for purposes defined in the Notice of the Annual General Meeting, including strengthening the Company’s shareholder’s equity, to execute share capital increases with one or more strategic partners, or to complete a merger or acquisition using shares or cash. This power of attorney will remain in effect until the Company’s Annual General Meeting in 2020, and can be implemented through a private placement, rights issue or public offering. Nordic Semiconductor has one class of shares, where each share has one vote at the Company’s shareholders’ meeting. Nordic Semiconductor strictly adheres to the principle of equal treatment of all shareholders. The Company’s transactions in its own shares are conducted in accordance with good stock exchange practice in Norway. If the Board wishes to quickly raise capital, the Board has been authorized to direct a share capital increase to selected investors chosen by the Board, up to the limits quantified above. In this event, the Company will notify the stock exchange of its reasons for implementing a directed share placement. Existing shareholders’ preemptive subscription rights under §10-4 in the Norwegian Companies Act can be waived under these circumstances. Such capital increases shall be executed at or near the current stock price listed on the Oslo Stock Exchange. This authorization remains valid until the Company’s ordinary annual general meeting in 2020. Deviations from the Code of Practice: None. Equal treatment of shareholders and transactions with close associates The Company is generally cautious in regard to transactions with shareholders, members of the Board of Directors, senior employees or related parties to the above. To ensure that the best code of conduct applies, the Board requires notification and review of any process or transaction in which both the company and a senior employee or member of the Board of Directors may have interests. Nordic Semiconductor will seek to comply with the principles of equal treatment of related parties and possible transactions with related parties that are laid down in the Norwegian Code of Practice for Corporate Governance. The Company considers Shareholders’ preemption rights in connection with an increase in share capital to be an important and fundamental right in a healthy shareholder community, and the preemption right can only be waived in exceptional circumstances. Waiving of this right will be based on the Company’s and shareholders’ mutual interests. In such case, there will be full transparency about the matter, and the shareholders will receive identical information simultaneously through a stock exchange announcement and subsequently on the Company's website. This also applies if the Board utilizes the authorizations it has been granted. The Company’s transactions in own shares must always comply with the arm’s length principle and be on ordinary market terms. Deviations from the Code of Practice: None. 63 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | STANDARDS OF CORPORATE GOVERNANCE Freely negotiable shares Nordic Semiconductor’s shares are freely tradable and there are no restrictions on the sale and purchase of the Company’s shares beyond those pursuant to Norwegian law. Each share carries one vote. Deviations from the Code of Practice: None. General Meeting The Annual General Meeting is the company’s highest body and the shareholders exert their authority in the company through the Annual General Meeting. Nordic Semiconductor and the Board encourages all shareholders to participate and exercise their rights at the Annual General Meeting. The Board of Directors should ensure that the Annual General Meeting is held in accordance with the Norwegian Code of Practice for Corporate Governance ensuring all shareholders the ability to participate. The notice of the Annual General Meeting, including relevant information shall be announced and distributed at least 21 days in advance of the Annual General Meeting, and the final date for notification of attendance is one working day prior to the Annual General Meeting. The Board of Directors should further ensure that: The resolutions and supporting information distributed are sufficiently detailed, comprehensive and specific to allow shareholders to form a view on all matters to be considered at the meeting Any deadline for shareholders to give notice of their intention to attend the meeting is set as close to the date of the meeting as possible The Chair of the Board of Directors and the Chair of the Nomination Committee are present at the general meeting. In addition, the Chair of the Audit Committee and the Compensation Committee should attend the meeting The general meeting is able to elect an independent Chair for the general meeting including on each Shareholders should be able to vote on each individual matter, individual candidate nominated for election. Shareholders who cannot attend the meeting in person should be given the opportunity to vote. The Company should design the form for the appointment of a proxy to make voting on each individual matter possible and should nominate a person who can act as a proxy for shareholders. Deviations from the Code of Practice: None. Nomination Committee Nordic Semiconductor has a Nomination Committee, as provided for in the Articles of Association. The Annual General Meeting stipulate guidelines for the duties of the nomination committee, elect the chair and members, and stipulates the committee´s remuneration. The Nomination Committee’s duties are to represent the interests of the shareholders in general, and to propose qualified candidates for the Annual General Meeting’s election of the Board of Directors as well as to propose the remuneration to the Board of Directors. The Nomination Committee should justify why it is proposing each candidate in the notice for the AGM separately, including information on the candidates’ competence, capacity and independence. The nomination committee holds regular meetings with major shareholders as well as management and individual shareholder elected Board members. In addition, all shareholders can submit suggestions to the nomination committee through a link on Nordic’s webpage. The Nomination Committee consists of three members who are shareholders or who represent the shareholders. The Company’s executive personnel are not represented on the Nomination Committee. The deadline for submitting proposals to the Nomination Committee is one month before the Annual General Meeting. The members of the Nomination Committee are: John Harald Henriksen Viggo Leisner Jarle Sjo Deviations from the Code of Practice: None. The composition and independence of the Board of Directors The Board of Directors and the Chair of the Board of Directors are elected by the shareholders at the Annual General Meeting on the basis of proposals from the Nomination Committee. The composition of the Board of Directors should ensure that the Board can attend to the common interests of all shareholders and meets the company’s need for expertise, capacity and diversity. Attention should be paid to ensuring that the Board can function effectively as a collegiate body. 64 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | STANDARDS OF CORPORATE GOVERNANCE The composition of the Board of Directors should ensure that it can operate independently of any special interests. The majority of the shareholder-elected members of the Board should be independent of the Company’s executive personnel and material business contacts. No executive personnel or representatives of business associates are members of the Board. The shareholder-elected Board members are elected, in accordance with the Articles of Association, for one year at a time. The employee representatives are elected for two years at a time. A more detailed description of the background, qualifications, and term of service of each member of the Board of Directors and the number of Nordic Semiconductor shares they own are provided in the annual report and on the Company’s webpage. Members of the Board are encouraged to hold shares in the company. Deviations from the Code of Practice: None. The work of the Board of Directors The conduct of the Board of Directors is in accordance with the Board instructions of Nordic Semiconductor ASA. In accordance with the said instructions, the Board is responsible, to the degree necessary, for approving business strategies and budgets for the company. The Board is also responsible for ensuring that the company has competent executive management with clear internal distribution of responsibility and work. Each year, the Board of Directors adopts a specific meeting and activity plan for the following year. This plan covers strategic planning, monitoring of the business, and other relevant business issues. The Board’s activity plan for 2020 stipulates eight meetings, two of which are scheduled as all day or multi-day meetings to discuss and explore strategy and technology-specific issues. The Board of Directors carries out an evaluation of its activities each year and on this basis discusses improvements in the organization and implementation of its work. The Board has established two board committees comprising Board members – the Compensation Committee and the Audit Committee. The committees’ mandates are based on a group perspective. The board committees do not have decision-making power but are charged with making proper preparations for board meetings in the matters with which they are concerned. In the Board's experience, the work of board committees makes make the overall Board more effective and efficient and has allows for deeper and stronger involvement in the business’s challenges and initiatives. The Board has established a Compensation Committee to recommend and evaluate remuneration principles and execution for the CEO, to guide and evaluate, principles and strategy for the compensation of executive management and to evaluate and oversee the overall compensation strategy for the company. The committee consists of four members and have planned 5 meetings in 2020. The Audit Committee consists of three members of the Board. The Committee collectively has the competence required in the Public Limited Liability Companies Act § 6-42. Both members are independent according to § 6-42 Public Limited Liability Companies Act, and at least one member has the required qualifications within accounting or auditing. The Committee supports the Board with respect to the assessment and control of financial risk, financial reporting, auditing, control, and prepares discussions and resolutions for Board meetings. The Audit Committee held 6 meetings in 2019 and has been in regular contact with the Company’s auditor regarding audits of the statutory accounts and it also assesses and monitors the auditor’s independence, including non-audit services provided by the auditor. Deviations from the Code of Practice: None. Risk Management and internal control The Board and Management are committed to ensure that the company maintains sound and effective internal controls to safeguard the value of the enterprise, as well as its principles of ethical conduct and corporate social responsibility. Nordic Semiconductor’s risk management system is fundamental to the achievement of its financial goals. The Board complies with NUES’s recommendations in its work on risk management and internal control. The Company’s most important risk areas and the internal control system are continuously reviewed. The Company’s primary internal control routines related to financial reporting are as follows: The finance team prepares a monthly financial report which is distributed to and reviewed by CEO and the Board of Directors. In preparing the monthly financial report, the accounting team conducts reconciliations of all major balance sheet items, which are independently reviewed by a second member of the team. Balance sheet items subject to accounting estimates are regularly analyzed to ensure that all assumptions relating to the accounting estimate remain valid. As part of the monthly financial report, the financial results are compared with the company’s budget and prior forecast to analyze variances and ensure that they are not the result of incorrect reporting. 65 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | STANDARDS OF CORPORATE GOVERNANCE Each year, the external auditor performs tests of the company’s internal control routines. The quarterly and annual financial reports are also subject to review and approval by the Board. In addition, the Board of Directors performs annual review of the company’s business strategy focusing on market development, technology updates, competitive positioning and risk factors. In addition, the Board reviews various aspects of the company’s business throughout the year, including performing a half yearly detailed risk review. Information and Communications The Board of Directors has established a communications strategy for the company’s reporting of financial and other information based on openness and taking into account the requirement for equal treatment of all participants in the securities market. The strategy has been published on the Company’s investor relations web pages (www.nordicsemi.com/About-us/Investor- Relations). The Board presents an in-depth description and analysis of the company’s financial status in the report of the Board of Directors in the company’s annual report. The report also describes the main drivers and risks related to the operation of the business. Deviations from the Code of Practice: None. Remuneration to the Board of Directors Remuneration to the Board of Directors is decided by the Annual General Meeting based in the Nomination Committees recommendation. All remuneration to the Board of Directors is disclosed in Note 10 of the Nordic Semiconductor Group annual accounts. The remuneration to Board members is not performance based or linked to the company’s performance, and the company does not provide share options to Board members. Members of the Board of Directors receives remuneration for work related to Board committees. Deviations from the Code of Practice: None. Remuneration to the Executive Management Board of Directors discusses and approves the terms and conditions for the CEO once a year and reviews and monitors the general terms and conditions for other senior employees of the group. The main principle in the Company’s policy for remuneration and compensation is that the leading employees shall be offered competitive terms, so as to ensure the Company continues to attract and retain the desired and necessary talent . Compensation for executive management is established in accordance with the above-mentioned main principle. The Company has established an annual performance bonus for the executive management team, for which the employee must remain within his position until the start of the following year to be eligible. The bonuses are awarded through a direct cash payment and, when appropriate, long-term incentives in the form of restricted shares and/or stock options. Performance- based compensation is subject to absolute payout limits and fulfillment of performance criteria, both decided by the Board at its discretion. Deviations from the Code of Practice: None. Nordic Semiconductor aims to communicate actively, openly and in a timely fashion with the financial market. The Company's accounting procedures are highly transparent and its financial statements are prepared and presented in accordance with the International Financial Reporting Standards (IFRS). The Board of Directors monitors the company’s reporting. Nordic Semiconductor’s financial reporting calendar for 2020 has been announced to the Oslo Stock Exchange and can be found on the company’s website. The company’s annual and quarterly reports contain extensive information about the various aspects of the company’s activities. The Company’s quarterly presentations are transmitted directly on the internet and may be found on Nordic Semiconductor’s investor relations webpages together with the quarterly and annual reports and a comprehensive and detailed presentation of other information, reports and documents. Nordic Semiconductor’s Chief Financial Officer is responsible for contact with shareholders outside of the General Meeting. The Chief Financial Officer reports regularly to the Board about the Company’s investor relations activities. Deviations from the Code of Practice: None. Takeovers The Board of Directors have established guiding principles for how it will act in the event of a takeover bid. The Board of Directors will not seek to hinder or obstruct any takeover bid for the Company’s activities or shares. In the event of a takeover bid, as discussed in item 14 of the Norwegian Code of Practice for Corporate Governance, the Board of Directors will seek to comply with the recommendations therein as well as complying with relevant legislation and regulations. If the Company is acquired, the CEO’s resignation period extends to 12 months, and any remaining retention bonus to the CEO will be paid in its entirety following the closing of the acquisition, as described in Note 10 of the Group financial statements. There are otherwise no material obligations expected by the Company as a result of an acquisition, aside from normal legal and advisory fees. Deviations from the Code of Practice: None. 66 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | STANDARDS OF CORPORATE GOVERNANCE Auditor PWC has been elected by the Annual General Meeting to act as auditor to confirm to the Annual General Meeting that Nordic Semiconductor’s annual accounts have been prepared and presented in accordance with current laws and regulations. Fees paid to the auditor are approved at the Annual General Meeting. In the fall, the external auditor presents to the Audit Committee an evaluation of risk, internal control and the quality of reporting at Nordic Semiconductor, and the audit plan for the current year. In addition, the auditor meets the Audit Committee on a regular basis. The external auditor also takes part in the Board’s discussions on the annual financial statements. On both occasions, the Board of Directors ensures that the Board and the external auditor are able to discuss relevant matters at a meeting at which the executive management is not present. The auditor shall be independent of the company. Therefore, Nordic Semiconductor does not engage the elected auditor for tasks other than the financial audit required by law. Nevertheless, the auditor is used for tasks that are naturally related to the audit, such as technical assistance with tax returns, annual accounts, understanding of accounting and tax rules and confirmation of financial information in various contexts. Deviations from the Code of Practice: None. 67 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | AUDITOR OPINION LETTER AUDITOR OPINION LETTER To the General Meeting of Nordic Semiconductor ASA Independent Auditor’s Report Report on the Audit of the Financial Statements Opinion We have audited the financial statements of Nordic Semiconductor ASA, which comprise: • The financial statements of the parent company Nordic Semiconductor ASA (the Company), which comprise the balance sheet as at 31 December 2019, the income statement, statement of changes in equity and cash flow statement for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and • The consolidated financial statements of Nordic Semiconductor ASA and its subsidiaries (the Group), which comprise the balance sheet as at 31 December 2019, the income statement, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion: • The financial statements are prepared in accordance with the law and regulations. • The accompanying financial statements give a true and fair view of the financial position of the Company as at 31 December 2019, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU. • The accompanying consolidated financial statements give a true and fair view of the financial position of the Group as at 31 December 2019, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU. Basis for Opinion We conducted our audit in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, including International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company and the Group as required by laws and regulations, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. PricewaterhouseCoopers AS, Dronning Eufemias gate 71, Postboks 748 Sentrum, NO-0106 Oslo T: 02316, org. no.: 987 009 713 VAT, www.pwc.no State authorised public accountants, members of The Norwegian Institute of Public Accountants, and authorised accounting firm 68 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | AUDITOR OPINION LETTER Independent Auditor's Report - Nordic Semiconductor ASA Key Audit Matter How our audit addressed the Key Audit Matter Revenue Recognition – ship and debit provision Revenue from contracts with customers is recognized when control of the goods is transferred to the customer (distributor). The time of delivery, and the time where control of goods is transferred, is usually the time when the goods are transferred to the transport carrier. When a distributor sells components to specified customer accounts, the distributor will receive an additional discount after the sale is made, commonly known as a “Ship and Debit” discount. The group uses the expected value method for calculating the discount. The method requires assessing historical discounts to each distributor, the distributors’ inventory level as of 31 December 2019 and expected sales mix. An estimate for this discount is provided for in the financial statements, reducing revenue and increasing liabilities with 13,9 million as of 31 December 2019. Due to the judgements involved we determine the ship and debit provision to be a key audit matter Refer to note 2.2 and note 2.4 where group management explain the Group’s revenue recognition policy, including significant judgements, estimates and assumptions, and the recorded ship and debit provision as of 31 December 2019. Other information We assessed the Group’s revenue recognition policy, including revenue recognition for ship and debit sales. Furthermore, we obtained an understanding of management’s process for estimating the ship and debit provision as of 31 December 2019 and reviewed a sample of distributor sales agreements. We performed a retrospective review of the monthly ship and debit provisions throughout 2019 and compared the monthly discount provision levels to actual ship and debit discount levels. We compared the estimated ship and debit provision as of 31 December 2019 to historical discount levels and discussed with management to challenge their estimated distributor discounts on an individual distributor basis. We performed an assessment of the outcome of management’s prior year estimates by comparing actual discounts in 2019 to the prior year ship and debit provision. We tested the mathematical accuracy of the calculation of the provision. We also obtained the actual ship and debit claims in January 2020 and compared the ship and debit level to the ship and debit provision as of 31 December 2019. Based on our audit procedures we found management’s assumptions to be reasonable. We also assessed the information in note 2.2 and 2.4 and found it appropriate. Management is responsible for the other information. The other information comprises information in the annual report, except the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. (2) 69 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | AUDITOR OPINION LETTER Independent Auditor's Report - Nordic Semiconductor ASA Responsibilities of the Board of Directors and the Managing Director for the Financial Statements The Board of Directors and the Managing Director (Management) are responsible for the preparation in accordance with law and regulations, including fair presentation of the financial statements in accordance with International Financial Reporting Standards as adopted by the EU, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company’s and the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, including ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, including ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error. We design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's or the Group's internal control. • • evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company and the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company and the Group to cease to continue as a going concern. • evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. (3) 70 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | AUDITOR OPINION LETTER Independent Auditor's Report - Nordic Semiconductor ASA • obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with the Board of Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Board of Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Board of Directors, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on Other Legal and Regulatory Requirements Opinion on the Board of Directors’ report Based on our audit of the financial statements as described above, it is our opinion that the information presented in the Board of Directors’ report and in the statements on Corporate Governance and Corporate Social Responsibility concerning the financial statements, the going concern assumption and the proposed allocation of the result is consistent with the financial statements and complies with the law and regulations. Opinion on Registration and Documentation Based on our audit of the financial statements as described above, and control procedures we have considered necessary in accordance with the International Standard on Assurance Engagements (ISAE) 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information, it is our opinion that management has fulfilled its duty to produce a proper and clearly set out registration and documentation of the Company’s accounting information in accordance with the law and bookkeeping standards and practices generally accepted in Norway. Oslo, 18 March 2020 PricewaterhouseCoopers AS Eivind Nilsen State Authorised Public Accountant (This document is signed electronically) (4) 71 Board of directors & Executive Management NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | BOARD OF DIRECTORS BOARD OF DIRECTORS Birger Steen Chair Birger Steen is a technology investor based in Seattle, WA. He served as CEO of Parallels, Inc. from 2010 to 2016. He was Vice President of Worldwide SMB and Distribution at Microsoft Corp. in Redmond and General Manager of Microsoft Russia and Microsoft Norway from 2002 to 2010. Prior to joining Microsoft, Mr. Steen was CEO of Scandinavia Online and Vice President of Business Development in Schibsted ASA, where he first served as a consultant while at McKinsey & Company from 1993 to 1996. Mr. Steen received his MSc in Computer Science and Industrial Engineering from the Norwegian Institute of Technology in Trondheim. He also holds a degree in Russian language from the Defense School of Intelligence and Security in Oslo and received his MBA from INSEAD in France. Mr. Steen has served as a Non-Executive Director of Schibsted ASA since 2014 and at Nordea Bank AB since 2015. Current holdings in the company: 169 460 shares. Jan Frykhammar Board Member Jan Frykhammar is former interim CEO, CFO, Head of Professional Services and CFO North America in Ericsson AB. He has extensive knowledge of the telecom market and a broad experience in the accounting area in his former role as CFO. Current holdings in the company: 10 000 shares. Inger Berg Ørstavik Board Member Inger Berg Ørstavik is an associate professor at the Department of Private Law, University of Oslo. She has previously been a partner with Advokatfirmaet Schjødt AS and a lawyer at the office of the Attorney General for Civil Affairs. Mrs. Ørstavik has a law degree from the University of Oslo, a Ll.M. from Ruprecht-Karls-Universität in Heidelberg, Germany, and a Ph.D. from the University of Oslo in the areas of intellectual property law and competition law. She has taught international human rights law at Fudan University in Shanghai, China where she resided from 2005 to 2009. Mrs. Ørstavik is member of the BoD in REC Silicon ASA, and she chairs the Food and Drink Industry Professional Practices Committee (MFU). Current holdings in the company: 1 000 shares. Anita Huun Board Member Anita Huun, currently CFO in Cappelen Damm and a former CFO of Microsoft Norway with background as equity analyst with focus on IT companies. She has also been a Director at Link Mobility ASA. Current holdings in the company: 10 000 shares. 73 BOARD OF DIRECTORS Endre Holen Board Member Endre Holen has more than 25 years consultancy experience from McKinsey & Co. He has primarily worked with large international technology companies and has been Managing Partner for McKinsey's Global Tech Media and Telecom team. Mr. Holen also has a broad experience and a wide professional network from counseling Fortune 1000 CEOs on topics like strategy, corporate performance, succession planning, leadership and Board governance. Current holdings in the company: 156 500 shares. Øyvind Birkenes Board Member Øyvind Birkenes, currently the CEO at Airthings AS, and formerly General Manager for Low Power RF at Texas Instruments (TI) in the USA, where he headed the product lines that developed and sold ultra-low power wireless MCUs, radio transceivers and System on Chips. Current holdings in the company: 5 112 shares. Annastiina Hintsa Board Member Annastiina Hintsa is the COO of Hintsa Performance in Finland, a company focusing on enhancing the performance and leadership of client companies, best known for working with Formula 1 teams. Ms. Hintsa also has experience from McKinsey & Co. and from the Bank of Finland. Current holdings in the company: 1 000 shares. 74 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | BOARD OF DIRECTORS BOARD OF DIRECTORS Jon Helge Nistad Board Employee Representative Jon Helge Nistad has a Master of Science degree in Electrical Engineering from NTNU in Trondheim. Jon Helge has been employed in Nordic Semiconductor since 2006, where he has gained experience in application development, embedded software design and project management. He is currently working as a Senior R&D engineer in Nordic Semiconductor. Current holdings in the company: 0 shares, 12 782 share options. Asbjørn Sæbø Board Employee Representative Asbjørn Sæbø has a Ph.D. degree in Telecommunications from NTNU in Trondheim. He has been with Nordic since 2006, working with development of firmware for Bluetooth Low Energy in various roles. Currently he dedicates his time to participating in the development of new Bluetooth specifications and implementation of those specifications. Before that, he was responsible for development and release of Nordic’s Bluetooth Low Energy protocol stack, delivering 150 releases of that over five years. Before joining Nordic, Asbjørn Sæbø worked as a development engineer in a startup company on active noise control and as a Post.Doc. at the Centre for Quantifiable Quality of Service in Communication Systems (a Centre of Excellence at NTNU). Current holdings in the company: 10 000 shares, 14 152 share options. Susheel Ray Nuguru Board Employee Representative Susheel Ray Nuguru has a Master of Science in Electronics from Tampere University of Technology. He has been with Nordic since 2012 but has been working with embedded programming since 2004. His area of focus is the software side of real time systems. Susheel is currently employed as a Technical Support senior engineer at Nordic. During his employment with Nordic he has gained experience within sales, marketing and R&D while working for various departments. Current holdings in the company: 0 shares, 2 563 share options. Morten Dammen Board Employee Representative Morten Dammen has a Master of Science degree in Electrical Engineering from NTNU in Trondheim. Morten has been employed in Nordic Semiconductor since 2001, with a seven-year break between 2007 and 2014. Morten is currently working as a Senior Project Manager in IC development. Morten has also been working in Q-Free ASA for 10 years, in several positions from project management, team management to VP R&D. Current holdings in the company: 0 shares, 18 227 share options. 75 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | BOARD OF DIRECTORS NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | EXECUTIVE MANAGEMENT EXECUTIVE MANAGEMENT Svenn-Tore Larsen Chief Executive Officer Mr. Larsen is an Electronic Engineer from the University of Strathclyde, UK. He was appointed Chief Executive Officer of Nordic Semiconductor in February 2002. Mr. Larsen has broad international experience in the semiconductor business, previously as Director for the Nordic region for Xilinx Inc. He has also been working at Philips Semiconductor. Larsen was member of the Board of Nordic Semiconductor from 2000-2002. Holdings in the company: 1 905 400 shares and 231 313 share options and 13 436 performance share. Pål Elstad Chief Financial Officer Pål Elstad has held several senior financial positions, most recently as investor relations responsible for REC Silicon ASA and Head of Finance for REC Solar in Singapore. In addition, he has extensive manufacturing and supply-chain experience from General Electric Healthcare. Mr. Elstad holds a Bachelor of Economics degree from the Norwegian Business School (BI) and is a State Authorized Public Accountant (CPA). Holdings in the company: 8 846 shares and 153 249 share options and 6 402 performance shares. Katarina Finneng Human Resources Director Mrs. Finneng has extensive international experience within management, Human Resources and Communications/PR from several different sectors. Her most recent position before being appointed HR Director in Nordic Semiconductor from September 2019 was with Norwegian Air Shuttle ASA. Katarina Finneng holds a Master of Political Science degree from the University of Gothenburg, Sweden, as well as an Executive Master degree in Management from BI Norwegian Business School. Mrs. Finneng is a Director of the Board in the real estate development company Solon Eiendom ASA. Marianne Frydenlund Legal Director Mrs. Frydenlund holds a law degree from the University of Oslo and North Dakota. She started her career in 2007 as a Warranty Responsible in StatoilHydro (Equinor), before taking on various Legal Counsel and Contract Manager positions. Her experience includes working for Huawei Technologies, Aker Engineering & Technologies (Aker Solutions) and Nexans Norway. Marianne sits on the Board of the Norwegian Company Lawyers Association and the Fair Standards Alliance. Mrs. Frydenlund was appointed Legal Director at Nordic Semiconductor in February 2018, and also acts as Secretary to the Board of Directors. Holdings in the company: 2 000 shares and 17 946 share options and 3 506 performance shares. 76 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | EXECUTIVE MANAGEMENT EXECUTIVE MANAGEMENT Kjetil Holstad Director of Product Management Mr. Holstad has a B.Sc degree in Electronics from Høgskolen i Sør-Trøndelag. After working 15 years in various technical and marketing positions related to MCUs and wireless technologies in Atmel Corporation and Texas Instruments, he joined Nordic in 2015 as a Product Manager for the short range wireless business. In 2019 Kjetil was appointed Director of Product Management. Holdings in the company: 6 604 shares and 35 741 share options and 3 811 performance shares. Geir Langeland Sales and Marketing Director Mr. Langeland has a B.eng Honours degree in Electronics from University of Manchester Institute of Science and Technology (UMIST). He was appointed Product Manager Standard Components at Nordic Semiconductor in October 1999, before being appointed to Director Sales and Marketing September 2005. Before joining Nordic, Mr. Langeland worked as Field Sales/Applications Engineer in Memec Norway, a leading global electronic components distribution company. Holdings in the company: 177 700 shares and 154 375 share options and 6 707 performance shares. Ole-Fredrik Morken Supply Chain Director Mr. Morken joined the company as an Analog IC designer in 1994 and has since held numerous positions related to Project- and Supply Chain Management, including a brief employment for SensoNor ASA in 1999. He was appointed Supply Chain Director in 2010 and is currently based in Taipei. Mr. Morken holds a Master’s degree in Electronics Engineering from Norwegian University of Science and Technology (NTNU). Holdings in the company: 160 000 shares and 149 309 share options and 5 335 performance shares. 77 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | EXECUTIVE MANAGEMENT EXECUTIVE MANAGEMENT Svein-Egil Nielsen Chief Technology Officer & Director of Strategy Mr. Nielsen holds MBA from the Haas School of Business at the University of California, Berkeley and Bachelor of Engineering honors degree in Computer and Electronics Systems from University of Strathclyde.He joined Nordic in 2001 as Director of Sales and Marketing. He also held a position as R&D director from 2005 to 2006 and Director of Emerging Technologies and Strategic Partnerships from 2010 to 2012. Additionally, he served Innovation Norway as their Director of San Francisco and Houston offices where he was in charge of promoting Norwegian technology from 2007 to 2010. Prior to Nordic, he worked for Boston Consulting Group as a consultant. Holdings in the company: 17 000 shares and 157 752 share options and 7 622 performance shares. Ebbe Rømcke Quality Director Mr. Rømcke has a M.Sc. degree in Electronics Engineering from Norwegian University of Science and Technology (NTNU). He was appointed Quality Director of Nordic Semiconductor in 2002. Prior to this Mr. Rømcke worked eight years in the company as Digital Designer, Project Manager and Group Manager. He has also experience from Digital Design and Project Management in Normarc AS (now Park Air Systems), a leading manufacturer of aviation systems. Holdings in the company: 68 900 shares and 80 303 share options and 4 268 performance shares. Ståle "Steel" Ytterdal Director Investor Relations Mr. Ytterdal holds a Bachelor of Electronics Engineering and Business Administration from NKI College of Engineering in Oslo, Norway. He worked several years in Ericsson Standard Component before starting in Nordic as Regional Sales Manager for Asia and the Pacific in 2001. Between 2004 and 2019, Mr. Ytterdal was stationed in Hong Kong as Director of Sales&Marketing in APAC, establishing Nordic’s presence in the region. He also held a position as Director of the Board of the Norwegian Chamber of Commerce in Hong Kong from 2005-2008. Mr. Ytterdal is from 2019 based in Oslo, Norway, appointed as Director IR. Holdings in the company: 244 000 shares and 64 955 share options and 4 726 performance shares. 78 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | ALTERNATIVE PERFORMANCE MEASURES ALTERNATIVE PERFORMANCE MEASURES The financial information is prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by EU. Additionally, it is management’s intent to provide alternative performance measures (APM) that are regularly reviewed by management to enhance the understanding of the Group’s performance. An Alternative Performance Measure is a measure of historical or future financial performance, financial position, or cash flows other than a financial measure defined or specified in the applicable financial reporting framework. The Group has identified the following APMs used in reporting (amount in USD million): Gross Margin. Gross Profit divided by Total Revenue. Gross margin is presented as it is the main financial KPI to measure the Group’s operations performance. GROUP Gross profit Total revenue Gross Margin 2019 146.8 288.4 2018 135.0 271.1 50.9% 49.8% EBITDA terms are presented as they are commonly used by investors and financial analysts. EBITDA. Earnings before interest, taxes (operating profit), depreciation and amortization. GROUP Operating profit Depreciation EBITDA 2019 9.3 23.5 32.8 2018 14.0 16.7 30.8 EBITDA Margin. EBITDA divided by Total Revenue. GROUP EBITDA Total Revenue EBITDA Margin 2019 32.8 288.4 11.4% 2018 30.8 271.1 11.4% Adjusted EBITDA Margin. EBITDA excluding cellular IoT, divided by Total Revenue exluding cellular IoT revenue. This APM shows Nordic's profitability excluding products in an investment phase with limited revenue. GROUP Reported EBITDA Long-range (cellular IoT) EBITDA loss Adjusted EBITDA Total revenue (excluding cellular IoT revenue) 2019 32.8 24.7 57.6 2018 30.8 16.9 47.7 287.3 270.9 Adjusted EBITDA margin 20.0% 17.6% 79 79 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2019 | ALTERNATIVE PERFORMANCE MEASURES Cash Operating Expenses. Total payroll and other operating expenses adjusted for non-cash related items including option expenses, receivable write-off and capitalization of development expenses. Nordic management believes that this measurement best captures the expenses impacting the cash flow of the Group. GROUP Payroll expenses Other opex Depreciation Total operating expenses Depreciation Option expense Capitalized expenses Cash Operating Expenses 2019 80.3 33.7 23.5 137.5 -23.5 -1.8 11.3 123.4 2018 70.0 34.2 16.7 121.0 -16.7 -1.2 13.0 116.0 Last twelve months operating expenses exluding depreciation divided by last twelve months revenue. Nordic’s business is seasonal and by dividing last twelve months operating expenses excl. depreciation by last twelve months revenue, management is able to track cost level trends in relation to revenue. As a growth business it is key to keep cost level under control while still growing the business, and this ratio keeps track on that. Total operating expenses Depreciation Operating expenses excluding depreciation Total revenue LTM opex / LTM revenue 2019 137.4 -23.5 113.9 288.4 39.5% 2018 121.0 -16.7 104.2 271.1 38.4% Net working capital divided by last twelve months revenue. Net working capital is a measure of both a company's efficiency and its short-term financial health, and by dividing the measure by last twelve months, seasonal effects are excluded. Nordic management uses this ratio to report on liquidity management to the financial market and internally to track performance. Current assets Cash and cash equivalents Current liabilities Current lease liabilities Income taxes payable Net working capital Total revenue NWC / LTM revenue 2019 219.6 -90.6 -66.0 4.0 3.1 70.2 288.4 24.3% 2018 205.5 -103.9 -45.3 - 5.0 61.3 271.1 22.6% Backlog. Customer orders placed by the end of the reporting period for delivery in next and following quarters. This APM can be used as support for guidance for next quarter. 80 80 Nordic offices TRO HEIM, ND NORWA HEAD OFFICE Y OSLO, NORWAY PORTLAND, USA LONDON, UNITED KINGDOM OU LU, FINLAND ESPOO, FINLAND TURKU, FINLAND SAN JOS USA E, EINDHOVEN, THE NETHERLANDS KRAKOW , POLAND BEIJING, CHINA SEOUL, KOREA YOKOHAMA, JAPAN SHANGHAI, CHINA SHENZHEN, CHINA HONG KONG CHINA TAIPEI, TAIWAN A, LA PH GUN ILIPPI NES NORWAY | TRONDHEIM Otto Nielsens veg 12 7004 Trondheim, Norway Phone: +47 72 89 89 00 NORWAY | OSLO Karenslyst Allé 5 0213 Oslo, Norway Phone: +47 22 51 10 50
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