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2023 ReportANNUAL RE P O RT 20 20 Content 3 4 9 27 75 77 83 88 92 95 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 2020: 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 Norwegian fabless semiconductor company specializing in wireless communication technology that powers the Internet of Things (IoT). The company was established in 1983 and has offices across the globe. Nordic’s award-winning Bluetooth® Low Energy (Bluetooth LE) solutions pioneered ultra- low power wireless, making it the market leader. The technology range was later supplemented by ANT+, Thread, Zigbee and in 2018 the low power, compact LTE-M/NB-IoT cellular IoT solutions was launched, extending Nordic’s penetration of the IoT. The product portfolio was further complemented by the acquisition of Wi-Fi technology in 2020. Nordic built its market reputation by supplying leading-edge wireless technologies supported by development tools that shield the designer from RF complexity, allowing anyone with a bright idea to build innovations based on the IoT platform. Today, these award-winning, high-performance, yet easy to design- in, Bluetooth LE solutions are used by the world’s leading brands in a variety of products, including wireless PC peripherals, gaming, sports and fitness, mobile phone accessories, consumer electronics, toys, healthcare and automation. Nordic is a member of the ANT+ Alliance, Bluetooth SIG, Thread Group, Zigbee Alliance, Wi-Fi Alliance, and GSMA. Multiprotocol solutions ensures that companies will be able to benefit from compatibility advancement across different standards. This is becoming the industry benchmark as a host of technology players are focusing on an open connectivity platform rather than the legacy 1-to-1 product to accessory model. This new way of looking at connectivity will enable a tremendous wave of product innovation driven by anything from an early stage start-up to an established market leading company - and right in the middle of it all, lies a Nordic nRF System-on-Chip. IoT is not merely standalone short-range connectivity, it also entails the long-range cellular IoT which has been in the making for the past few years. The nRF91® Series, which was launched towards the end of 2018, 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 Telecom operator certifications, development kit shipments and customer pilot projects. Nordic completed the acquisition of the Wi-Fi assets, IP and the Wi-Fi development team of Imagination Technologies at the end of 2020. The synergies between this team’s unique expertise and Nordic’s low power DNA philosophy will strengthen the future product portfolio enabling the goal of becoming the global leader of connectivity. 3 Message from the CEO Despite a challenging environment in 2020 due to the pandemic, the year became a breakthrough year for IoT solutions in many areas. We delivered unprecedented growth, major global platform companies embraced our Bluetooth and multiprotocol technologies and took important steps towards a leading position in long range and Wi-Fi. More importantly, our people and partners continued to deliver and to serve our customers with no disrup-tions. The pandemic accelerated technology adoption and healthcare companies expanded into a myriad of applications. Looking ahead, Nordic is well positioned to further create value from the broad IoT market. Entering 2020 with solid growth momentum, we soon ran into a new and unknown challenge with the Covid-19 pandemic. The main priority in such a situation is the safety and welfare of our employees and partners and their communities. We have operated in full compliance with local and national rules and regulations in all our locations, and I am glad that we have seen very few Covid-19 cases across our global organization. The other main priority was to secure business continuity, as the restrictions on work, travel and cross- border goods shipments tested the resilience of our supply chain in Asia in the initial phase of the pandemic. With hard work from our employees and our partners we managed to tackle these challenges and fulfill our delivery schedules throughout 2020. Our concerns about the potential negative demand effects of the pandemic have so far proved to be unfounded, and our revenue overall increased by 41% to USD 405 million in 2020. Bluetooth revenue increased by 43%, significantly exceeding the 20%-30% growth range we have earlier outlined. Our proprietary products were also in high demand, and saw revenue increasing by 27%. Cellular IoT revenue is still modest although the technology is gaining traction with revenue increasing more than fivefold. The shift in demand might be even better illustrated by the order backlog. We started the year with a backlog of USD 107 million, primarily for delivery in the first and second quarter of 2020. We ended the year with a backlog of USD 492 million, with deliveries stretching out over the entire 2021. What does this growth in order backlog volumes tell us? The strong backlog may be an indication that some truly permeating customers are placing early orders to secure supply throughout 2021 and into 2022. However, it is also evidence that the IoT wave is building momentum. In my comment in the Annual Report 2019, I said that “a global and Internet of Things represents a massive long-term market opportunity”, and that we saw “upside potential in disruptive verticals such as smart homes, smart lighting, drug delivery and disease monitoring, and logistics and asset tracking”. This is exactly what is happening as this market opportunity now is beginning to materialize. 44 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | MESSAGE FROM THE CEO Four things stand out if I am to describe our development in this market environment: Firstly, we are seeing the effects of years of work to set our sales, operations, and innovative capabilities up to meet the demands of major global platform companies. Our leading position in the broad market makes us an attractive partner for these companies, and our combined Bluetooth and multiprotocol products can enable thousands of different devices to connect with the smart home hubs and speakers that are driving the growth in the smart home market. Our strong product offering and customer relations in this market will continue to support our growth in the years to come. Secondly, we see that IoT for industrial applications is gaining ground at a fast pace. The number of potential applications is near endless within machine and building automation, logistics and asset tracking, retail solutions and more. Our technologies are ideally positioned to take part in this growth. Thirdly, we saw a breakthrough in technology adoption in the healthcare market. Covid-19 generated a wave of new products for testing, disease detection and prevention, monitoring of social distancing, and more recently vaccine delivery. Even more importantly for the longer-term, the pandemic has fast-forwarded the digitalization process in the sector by several years. Patients, GPs, medical companies, and hospitals all see that connected medical devices can add value, improve convenience, and reduce costs compared to traditional drug delivery and disease monitoring solutions. Finally, we saw solid demand growth in our most established end-product markets in consumer electronics and wearables. Changes in work practices increased the need for efficient home office solutions, supporting growth for both Bluetooth and proprietary products, and we also saw increased demand from the gaming and entertainment industry. The accelerating demand growth through 2020 put pressure on the supply chain. As a fabless semiconductor company, we rely on supplies of wafers and other components from third parties and we have partnered up with world-leading suppliers in Asia. However, the increasing supply/demand imbalances through the semiconductor value chain have temporarily limited the global supply of wafers, and we and others have been informed about caps to our wafer allocations in 2021. Although the wafer suppliers are significantly increasing their investments, this temporarily limits our ability to take full advantage of the strong demand. Despite the short-term challenges, the accelerated adoption of IoT is a clear indication of a stronger long- term market outlook, and we have the innovative mindset, the technologies, the product portfolio, the support ecosystem, and the sales and marketing capabilities needed to exploit this opportunity. We define ourselves as a leader in connectivity, and we continue to dominate the Bluetooth lower energy broad market in terms of new designs. Data compiled by DNB Markets show that 45% of all new Bluetooth Low Energy (LE) designs registered with Bluetooth Special Interest Group (Bluetooth SIG) in 2020 had Nordic inside. This fortifies the number 1 position we have built over the 55 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | MESSAGE FROM THE CEO years. Bluetooth SIG has certified more than 2,450 different Bluetooth LE products built on Nordic technology over the past five years. We have the broadest portfolio of Bluetooth LE and multiprotocol portfolio products, ranging from entry- level Systems-on-Chip (SoCs) for cost constrained applications to highly advanced SoCs for more complex and demanding applications. This product breadth offers a unique opportunity to tailor the offering to the customers’ needs and maximize the portfolio value. In 2020, we also entered volume production with the first products in our next generation nRF53® Series. With dual core processors supporting Bluetooth Low Energy, Thread, ZigBee, NFC, and Bluetooth mesh, this is a product generation that will move the market forward with significantly lower power consumption, increased performance, and strengthened security. (SiP) and compact and power-efficient We are early movers and pride ourselves on having the most connectivity products in the emerging market for cellular IoT. Our nRF9160 System-in-Package the Nordic Thingy:91® prototyping module are continuously being improved with new versions and have received industry regional and global accolades and awards at semiconductor events. The cellular IoT market needs to be developed jointly with telecom operators and network providers and other eco-system partners, and we are making steady progress in this respect. Our products have now been verified by a number of telecom majors across North America, Europe, and the largest Asian market, and globally by Deutsche Telecom and Vodafone. The products have also been included in reference IoT designs and several new cellular IoT modules. We continue to see a wide array of future cellular IoT applications being developed across both consumer and industrial markets in the years to come. In 2020 we also added cutting-edge Wi-Fi technologies to our technology portfolio, completing a ‘technology triangle’ comprising of leading short-range, mid-range and long-range connectivity solutions. The acquisition of the W-Fi team of 81 employees and Wi-Fi technology assets of Imagination Technologies places us in the forefront for the development of future low-power Wi-Fi connectivity solutions. The entire portfolio of Bluetooth LE and multiprotocol products and cellular IoT products are already supported by one common software solution on the nRF Connect Software Development Kit (SDK), enabling end-product developers to use the same software environment and tools for both short- range and long-range applications. The addition of Wi- Fi technology enables us to create a development platform unifying all the wireless technologies in future generations of Nordic products, which expands our addressable market significantly. to offer We continue industry-leading developer support, and saw the number of development kit shipments increase to almost 100,000 last year. Our DevZone developer community remains vibrant, with visits from some 90 000 developers over the course of the year. Covid-19 stopped us from meeting developers face-to-face on our Nordic Tech Tours, but we have successfully replaced these with digital tools and well- attended webinars. We want to remain ‘the engineers’ best friend’ and believe our collaboration with the developer community is an invaluable part of our customer-centric culture and company DNA. We have a highly skilled sales and marketing organization that time and again has shown the ability to act as business developers as well as salespeople. Many of our greatest customer successes are rooted in the ability to turn the customers’ challenges, requests, and demands into new products and solutions that add significant value both for our customers and us. Our success with global platform companies and vertical market leaders are good examples. Our R&D staff increased by 18% to 665 people last year and further to 746 when including our Wi-Fi acquisition. The sales and marketing staff increased by 10% to 125. We also increased our supply chain management staff by 24% to 57 people, recognizing the logistical challenges of our growth profile. All in all, we counted 987 employees at the end of the year, which means we have welcomed more than 220 new colleagues to Nordic over the past year. Competent people and innovative ideas will continue to be the key building blocks to drive the business forward. With 50 different nationalities represented in 18 countries, I think Nordic fosters the kind of inclusive, diverse, and ingenious company culture required to continue to attract and retain top talent. With increasing scale and high growth ambitions, we are paying increasing attention to the sustainability aspects of our operational value chain, business models, and end-product markets, and have been working to integrate sound ESG principles into our strategic roadmap. IoT holds great potential to solve some of the most pressing environmental and societal challenges, and Nordic’s commitments and contributions to the UN Sustainable Development Goals (SDGs) show that we want to take an active part in this progress. At the same time, we recognize our responsibilities with regards to our own sourcing, manufacturing, and business conduct, and measure ourselves to the highest of standards. For information about our performance, I recommend you read our separate 2020 ESG Report which is issued in connection with the Annual Report. 66 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | MESSAGE FROM THE CEO Summing up, we see a long-term market outlook at the end of 2020, that is stronger than what we saw at the end of last year. Growth rates have been higher than expected for our short-range business, and although wafer supplies may hold us back in 2021 we have still been allocated wafer volumes that will allow us to increase our 2021 production by a minimum of 25% versus 2020. We also remain confident in the huge potential of cellular IoT, and the addition of Wi-Fi capabilities completes our connectivity offering and further expands our market opportunity. In 2019 we set ourselves an ambitious goal to become a USD 1 billion company within five years, and expected increasing scale and high operational leverage to generate gradual margin improvements towards a long-term target of 20%. In my opinion the positive demand trends and continued strengthening of the customer base increase the confidence in this aspiration. Revenue (USD million) 450 400 350 300 250 200 150 100 50 0 Short-range IoT Wearables PC Peripherals Game controllers Proprietary/ASIC Bluetooth Cellular 77 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS N ORD IC FAC TS N ORD IC FAC TS 45% Bluetooth LE design listings 80 WO R K I N G S T U D E N T S EVERY YEAR ≈1000 E M P LOY E E S R&D Sales Supply Admin PMT QA 75% 11% 6% 4% 2% 2% 50 nationalities in 18 countries world wide 1983 E s tab lis h e d in by fo ur r es e ar ch e r s from Tr on dh eim Male 86.2% Female 13.8% >1.000.000 Nordic SoCs sold daily Report from the Board of Directors Nordic has remained fully operational during the Covid 19-pandemic. The company experienced strong revenue growth across all technologies and end- product markets in 2020, and improvements in gross margin. Combined with operational leverage and cost control, this generated a solid improvement in profitability compared with the previous year. The order backlog increased almost fivefold to nearly USD 500 million at the end of the year. Group Overview Nordic Semiconductor is a fabless semiconductor company designing, marketing, selling, and supporting hardware products and embedded software that enable wireless connectivity solutions. Founded in 1983 as an integrated circuits manufacturer, Nordic has been a long-standing pioneer within wireless connectivity. Over the past 20 years, the company has developed its technology base from proprietary 2.4 GHz technology for PC accessories to also include a broad portfolio of Bluetooth LE and multiprotocol solutions for short-range connectivity and products and solutions for the emerging long-range cellular IoT market. In 2020, Nordic expanded into the medium-range connectivity market through the acquisition of Wi-Fi assets, IP, and the Wi-Fi development team of Imagination Technologies. The product offering includes integrated circuits (ICs), System-on-Chip (SoCs), System-in-Package (SiPs), and Software Development Kits (SDKs). The components for these products are manufactured by world-class subcontractors in Asia and distributed to branded electronics manufacturers through an extensive network of global and regional partners. and Retail also showed high growth with digitization and automation processes driving demand for connectivity solutions. Since the introduction of Bluetooth LE products in 2012, Nordic has built a leading position in the broad market and increasingly strong customer relationships with global platform companies and other tier-1 customers. These have been the main growth drivers behind Nordic’s average annual revenue growth of 16% over the past five years and the 41% revenue growth to USD 405 million in 2020. 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, Tampere and Turku (Finland), Hyderabad (India), Bristol and Hertfordshire (UK), Stockholm and Lund (Sweden) and in Oslo and Trondheim (Norway). Strategy and long term target The end-product markets for Nordic’s products include consumer electronics, wearables, building and retail, and healthcare, with all verticals seeing an increasing number of applications and designs. The company also supplies products to module manufacturers. Nordic’s mission is to be a world-leading supplier of connectivity solutions, with ultra-low power proprietary and Bluetooth technologies for short-range, Wi-Fi for medium-range, and cellular IoT technology for the long- range market. All these end-product markets contributed to the revenue growth in 2020. The company experienced high demand both in its largest vertical in the consumer electronics market and the well-established wearables vertical. However, the highest growth came in increasing technology adoption in the medical community and further accelerated by the Covid-19 pandemic. Building the Healthcare vertical, driven by in Nordic builds its operations on six strategic pillars: performance, feature-rich, reliable and robust Lead on connectivity – low power, high Scalable solutions – scalability across technologies, markets, and customers 99 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS Excite developers and engage customers– ease- of-use, value-add integration, and solutions, in a combined broad market and tier-1 customer engagement model workforce Attract talent – build and retain a high-quality Early movers – innovate and invest early, and grow Sustainable business – in own operation and with high growth markets throughout the value chain Based on these 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 shipped approximately 500 million units in 2020, to a wide variety of applications and a broad customer base ranging from single developers to globally leading high-volume customers. Nordic’s R&D, sales and marketing functions are both intertwined with its industry leading developer support and the very active and growing developer community ‘DevZone’. This now counts more than 90 000 user profiles, and the company also shipped close to 100,000 development kits in 2020. Nordic is recognized as a leader in the broad market for Bluetooth LE products. According to data compiled by DNB Markets, approximately 45% of all new Bluetooth Low Energy designs approved by the Bluetooth Special Interest Group (Bluetooth SIG) in 2020 had Nordic inside. Although Nordic continues to attract new broad market clients, the company has seen a shift in the customer mix over the past years. Years of work to establish and develop customer relationships with global platform companies and other tier-1 customers has resulted in significantly increasing order volumes from these customers, who typically have higher volume designs with longer product lifecycles than the average customer. The cellular IoT product portfolio is dependent on telecom operator certifications and relations to a growing eco-system of IoT solutions providers. Nordic maintains its high ambitions for this area and is ready to deploy two decades of sales and distribution experience from the short-range business to develop the long-range market opportunity. Given the size and growth opportunities in Nordic’s markets and the company’s strong competitive position, the Board of Directors believes that sound execution of its strategic roadmap will enable strong long-term profitable growth and value generation, in line with the company’s high financial ambitions. Operational review Bluetooth and multiprotocol products Nordic views its broad product portfolio of Bluetooth and multiprotocol products and solutions as a clear competitive advantage. The company offers alternatives ranging from entry-level SoCs for cost-constrained applications to highly advanced SoCs for more complex high-performance applications. This enables the company to meet different customer requirements at the right price points. The company continued to add new variants to its highly successful nRF52® Series also in 2020. The low- end nRF52805 and the mid-range nRF52820 are both multiprotocol SoCs combining Bluetooth LE with the internet protocols Thread and Zigbee. The nRF52805 SoC is supplied in a wafer level chip scale package (WLCSP) measuring only 2.48x2.46mm and is optimized for cost-saving two-layer PCB-designs. Hence, the product enables small and low-cost designs, which normally would be design trade-offs. The nRF52 Series now counts seven different SoCs. The new generation nRF53 Series was introduced in late 2019, with the first nRF5340 SoC going into volume production towards the end of 2020. Offering the first dual processor multiprotocol SoCs on the market, this generation shifts the benchmark in terms of low power consumption, performance, and security. Cellular IoT In the cellular IoT area, Nordic released several product upgrades for its nRF9160 SiP and the Thingy:91 multi- sensor prototyping tool in 2020, as well as improved software solutions. The products are recognized in the industry as market leading on low power consumptions and size and form factor. The Thingy:91 in April won “Most Competitive Development Tools in China” at the 2019 China Electronic Market (CEM) Editors’ Choice Awards, whereas the nRF9160 in June was shortlisted as a finalist in the ‘IoT Connectivity Solution’ category of the IoT World Awards 2020. 1010 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS through 2020. Nordic continued to make progress with its telecom operator certification program In addition to general GCF certification and global certifications from Deutsche Telecom and Vodafone, the company has now obtained certifications from Verizon in the US and Bell in Canada, Telstra in Australia, China Telecom in China, KDDI and Softbank in Japan, and LGU+ in Korea. Nordic has obtained all necessary certifcations to market and sell cellular IoT products in key markets. in the same to operate Nordic expects cellular IoT to gain traction from the launch of the unified and common nRF Connect Software Development Kit (SDK) across the entire portfolio of Bluetooth LE and multiprotocol products and cellular IoT products in 2020. This enables software developers environment for both short-range and long-range applications, as well as for products combining the two. A significant share of customers developing long-range products are existing customers in the short-range business that are looking to expand their reach. Developers of new cellular IoT applications will also benefit from Nordic’s launch of the faster and more cost-efficient Power Profile Kit II for real-time power measurement during wireless product development. This kit can be used with all Nordic Development Kits and custom designs, including the nRF9160. Wi-Fi In 2020, Nordic entered the medium-range connectivity market through the acquisition of the entire Wi-Fi development team, core Wi-Fi expertise, and the Wi-Fi IP technology assets of Imagination Technologies Group. The Wi-Fi assets include Wi-Fi 4, 5, and 6, and a significant patent portfolio. Wi-Fi has been requested by several customers and we believe it will complement the current portfolio and be an important differentiatior for Nordic. The acquisition makes Nordic one of few companies offering all three of the world’s most popular IoT technologies: Bluetooth, Wi-Fi, and cellular IoT. The acquisition will also enable Nordic to create a development platform unifying all the wireless technologies in future generations of Nordic products, which could expand Nordic’s addressable market significantly. The acquisition increased Nordic's R&D staff by 81 people across several locations in the UK, Sweden, India, and Taiwan. The team also includes Bluetooth Low Energy specialists who will further strengthen Nordic's existing R&D team. Nordic expects annual R&D spend to increase by USD 10-12 million due to the acquisition and expects to see a meaningful revenue contribution from Wi-Fi products within three years. Suppy Chain As a fabless semiconductor company, Nordic’s products are manufactured and assembled at subcontractors in Asia and delivered to customers by global and regional distributor partners. Nordic in 2020 shipped around 500 million products, which was an increase of 35% from 2019. In the first half of 2020, the resilience of the supply chain was challenged by restrictions on travels and cross-border goods shipments due to Covid-19. These challenges were overcome with joint efforts of Nordic and its partners, enabling the company to fulfil its delivery schedules through 2020. High and increasing demand generated increasing imbalances in the supply/demand balance in the semiconductor industry through the second half of 2020 and into 2021, with demand exceeding the supply of wafers. Based on high order inflow, Nordic had placed early orders for wafer volumes that would allow for a significant production increase in 2021 but has later been informed by its main wafer supplier in Taiwan of limitations in the wafer allocation for 2021. The secured wafer deliveries nevertheless allow Nordic to increase production by a minimum of 25% from 2020 to 2021. The wafer shortage is expected to have the largest impact in Q2 2021, with higher volumes expected in the second half of the year. Nordic has established excess capacity in crucial areas such as in-house testing capabilities to ensure sufficient backend production capacity increased demand. to meet 1111 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS 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 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. the EU, Note that the Group has identified gross margin, EBITDA, EBITDA margin, short-range EBITDA margin, total operating expenses, cash operating expenses, Performance and order backlog as Alternative Measures in addition to the financial information as prepared in accordance with IFRS as adopted by the EU. Please see page 91 for further details. Income Statement The Group classifies its revenues into the following technologies: components, short-range wireless including Bluetooth LE based and proprietary products, IoT), ASIC components and long range Consulting services. (cellular Revenue by technology: USDm Bluetooth 2020 316.0 Proprietary wireless 76.1 2019 Change% 221.2 59.9 42.9% 27.0% Short-range wire- less components 392.0 281.1 39.5% Cellular IoT ASIC Components Consulting services 6.5 6.3 0.2 1.0 6.0 0.2 524.3% 4.3% 6.6% Total 405.2 288.4 40.5% Total revenue increased by 40.5% to USD 405.2 million in 2020, up from USD 288.4 million in 2019. Revenue from Bluetooth and multiprotocol products have increased by an average 23% over the past five years and increased by 42.9% to USD 316 million last year. Bluetooth accounted for 78% of Group revenue in 2020. The revenue increase reflects strong demand across all end-product markets both tier-1 customers and the broad market. Due to the Covid-19 pandemic, we have seen a more rapid digitization and an accelerated technology adoption. from to Revenue from Nordic’s proprietary products has been in decline due to technology migration to Bluetooth LE and other standards. However, revenue rebounded in for mobile/PC increased demand 2020 due peripherals for home office solutions. Growing by 27% to USD 76 million in 2020, proprietary revenues more or less returned to the revenue levels seen in 2015-2018. Proprietary solutions accounted for 19% of Group revenue in 2020. 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 2020 2019 Change % Consumer electronics 163.1 119.4 Wearables 63.0 50.4 Building/retail Healthcare Other Total 81.9 37.8 46.4 392.2 51.6 19.7 40.0 281.1 36.6% 25.0% 58.7% 91.8% 16.0% 39.5% Consumer electronics increased by 37% in 2020. Nordic has had high deliveries of Bluetooth and proprietary products for PC accessories for a growing home office market in 2020. Gaming accessories have also been a driver in Consumer Electronics over the last year. Wearables revenue grew 25% in 2020, with strong pull from the Chinese domestic market. Building/retail revenue increased by 59% in 2020, reflecting continued growth in home automation and industrial applications. Healthcare increased by 91.8% in 2020. The coronavirus outbreak has generated strong momentum for connected medical devices. The revenue comes both related applications and general from Covid-19 connected healthcare devices. The ‘Other’ segment increased by 16%. This mainly reflects sales to module manufacturers servicing many end-products in all markets and regions. Revenue in the cellular IoT market increased more than fivefold in 2020 to USD 6.5 million. This revenue reflects both sales of development kits and initial sales of end- IoT prototyping platform. Combined user cellular 1212 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS shipments of the nRF9160 cellular IoT prototyping platform amounted to approximately 11 000 units in 2020, up from 8 300 units in 2019. Operating expenses amounted to USD 137.2 million in 2020, excluding depreciation and amortization. This was an increase of 20.4% from USD 113.9 million in 2019. Sales of ASIC products increased by 4.3% in 2020 to USD 6.3 million. The Company has not designed new ASICs since 2014, hence future revenue depends on demand from existing customers and applications. Gross profit USDm 2020 2019 Change% Gross Profit 213.9 146.8 Gross Margin 52.8% 50.9% 45.8% 1.9%p.p. Gross profit amounted to USD 213.9 million, which was an increase of 45.8% from the previous year. Hence, the gross margin increased to 52.8% from 50.9% in 2019. The margin levels in 2020 reflect good demand for high- end, high-margin SoCs, positive scale effects, and continuous cost improvements on recently launched products. This was only partly offset by the negative gross margin effects of a larger number of tier-1 customers and cellular IoT revenue with lower gross margin. 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 2020 2019 Change % Payroll expenses Other OPEX 101.2 36.0 80.3 33.7 OPEX excl. D&A 137.2 113.9 Depr. & Amort. 31.1 23.5 Total 168.3 137.5 26.1% 6.8% 20.4% 32.0% 22.4% The higher expenses mainly reflect a 17% increase in the number of employees from 767 to 897 during the year. The increased workforce in turn reflects increased R&D activity and strengthened sales efforts for both Bluetooth and cellular IoT. 81 employees were added through the acquisition of the Wi-Fi development team of Imagination Technologies Group on December 31, 2020. the number of this acquisition, employees was 978 at year end. Including Measured by function, expensed R&D accounted for USD 89.0 million of operating expenses, compared to USD 73.5 million in 2019. R&D is expected to continue to increase in absolute terms for both the short-range and long-range businesses. The R&D intensity, measured as a percentage of revenue, declined by 3.5 percentage points from a peak level in 2019 of 25% to 22% in 2020. Sales, general and administration (SG&A) expenses increased to USD 48.1 million from USD 40.5 million in 2019. SG&A is also expected to continue to increase in absolute terms, as the Group builds up its long- range organization. However, increased operational leverage is expected to reduce the cost as a percentage of revenue going forward. As a percentage of revenue, SG&A decreased from 14% in 2019 to 12% in 2020. Total cash operating expenses amounted to USD 141.2 million, when adjusting for non-cash items, capitalized development expenses, equity-based compensation, and depreciation and amortization. This was an increase from USD 123.4 million in 2019. Cellular IoT accounted for USD 34.9 million of total cash operating expenses in 2020, compared to USD 30.4 million in 2019. Nordic capitalized USD 8.4 million in 2020, down from USD 11.3 million in 2019. Equity based compensation was USD 4.3 million, compared to USD 1.8 million in 2019. Please see the section on Alternative Performance Measures for more details. 1313 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS EBITDA and Operating profit USDm EBITDA 2020 2019 Change % 76.8 32.8 134.0% EBITDA-margin 18.9% 11.4% Short-range EBITDA 106.9 57.6 7.6%-p 85.6% Short-range EBITDA-margin 26.8% 20.0% 6.8%-p Operating profit 45.7 9.3 393.0% EBIT-margin 11.3% 3.2% 8.1%-p The Group recognized tax charges of USD 4.5 million, corresponding to an average tax rate of 10.5%. This compares to USD 2.4 million and an average tax rate of 25% in 2019. The company’s statutory tax rate is 22%. The low tax rate in 2020 is a result of foreign exchange losses in the statutory NOK accounts and tax deduction on option gain payments. Tax payable amounted to USD 5.3 million, compared to USD 3.9 million in 2019, with the balance reflecting changes in deferred tax and tax benefit. interest, Earnings before tax, depreciation, and amortization (EBITDA) amounted to USD 76.8 million, an increase from USD 32.8 million in 2019. The corresponding EBITDA-margin increased 7.6 percentage points to 18.9%. Financial position Balance sheet Nordic has total assets of USD 515.8 million at the end of 2020, of which USD 401.9 million in current assets and USD 113.9 million non-current assets. Short-range EBITDA totaled USD 106.9 million and the margin 26.8% in 2020. This compared to a short-range EBITDA of USD 57.6 million and a margin of 20% in 2019. These assets were financed by total equity of USD 402.5 million at the end of 2020, non-current liabilities of USD 21.7 million and current liabilities of USD 91.9 million. Depreciation and amortization amounted to USD 31.1 million in 2020, compared to USD 23.5 million in 2019. Operating profit (EBIT) hence amounted to USD 45.7 million, compared to USD 9.3 million in 2019. EBIT- margin increased to 11.3% in 2020 from 3.2% in 2019. Net financial items USDm Net interest Net foreign exchange Net financial items 2020 2019 -0.8 -2.0 -2.8 0.8 -0.4 0.4 Nordic had a negative net interest of USD 0.8 million in 2020 due to a USD 40 million drawdown on Revolving Credit Facility in Q1 2020 as a precautionary move to secure the liquidity. The loan was repaid during Q3 2020. Profits and taxes USDm Profit before tax Income tax expense Net profit after tax 2020 2019 42.9 -4.5 38.4 9.7 -2.4 7.3 Current assets were USD 401.9 million at the end of 2020, compared to USD 219.6 million at the end of 2019. This included cash and cash equivalents of USD 242.5 million at the end of the year, up from USD 90.6 million at the end of 2019. Inventory increased to USD 61.9 million from USD 53.1 million at the end of 2019 and accounts receivables to USD 88.0 million from USD 64.5 million at the end of 2019, due to higher revenues. Overall, net working capital amounted to 78.5 USD million, compared to USD 70.2 million at the end of 2019. Measured as a percentage of full year revenue, net working capital decreased to 19.4% from 24.3% at the end of 2019. This is mainly a result of a lower inventory in percentage of revenue. Non-current assets increased to USD 113.9 million at the end of 2020 compared to USD 98.8 million end of 2019, mainly reflecting intangible Wi-Fi assets acquired from Imagination Technologies Group in Q4 2020. Fixed assets totaled USD 28.3 million at year end, up from USD 26.6 in 2019. Software and other intangible assets increased to USD 19.9 million from 11.4 million, due to the IP acquisition from Imagination Technologies. Capitalized development expenses increased to USD 34.6 million from USD 34.0 million at the end of 2019. 1414 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS Total shareholders’ equity amounted to USD 402.5 million at the end of 2020 up from USD 232.2 million at the end of 2019. The Group equity ratio was hence 78%, compared to 73% at the end of 2019. The significantly strengthened equity position during 2020 primarily reflects earnings in 2020 and a private placement where the company in September 2020 issued 13 million new shares at a subscription price of NOK 88 per share. transaction generated gross proceeds of The approximately USD 125 million. Total liabilities amounted to USD 113.3 million, compared to USD 86.2 million at the end of 2019. Non-current liabilities increased to USD 21.5 million from USD 20.2 million. Lease liabilities of USD 21.0 million are included in the non-current liabilities. Current liabilities increased to USD 91.9 million from USD 66.0 million. The increase is mainly explained by higher accounts payable, volume rebates and short-term employee benefit obligations and related taxes. Cash flow and funding USDm 2020 2019 Net cash flow from: Operating activities Investing activities Financing activities Currency adj. Net change in cash and cash equivalents 65.3 19.7 -38.0 -31.5 123.6 1.0 -1.5 0 151.9 -13.2 Cash and cash equivalents 1.1 90.6 103.9 Cash and cash equivalents 31.12 242.5 90.6 Cash flow from operating activities was USD 65.3 million in 2020, compared with USD 19.7 million in 2018. The strong operating cash flow is a result of improved earnings and lower percentage of net working capital. Cash flow used for investing activities was USD 38.0 million in 2020, compared to USD 31.5 million in 2019. This included USD 13.2 million related to the acquisition of Wi-Fi technology and IP-assets from Imagination Technologies Group. Capital expenditure decreased to USD 16.5 million from USD 20.2 million, including software, whereas capitalized development expenses declined to USD 8.4 million from USD 11.3 million. Cash inflow from financing activities was USD 123.6 million in 2020, mainly reflecting the share issue in September 2020. In comparison, there was a cash outflow of USD 1.5 million in 2019 from financing activities. Including the effect of exchange rates, net change in cash and cash equivalents was a cash inflow of USD 151.9 million in 2020, compared to a cash outflow of USD13.2 million in 2019. Cash and cash equivalents increased to USD 242.5 million at the end of 2020, from USD 90.6 million at the end of 2019. The cash is mainly held in the Group’s functional currency USD, in order to minimize the impact of currency fluctuations. In addition to cash at hand, Nordic has undrawn revolving credit facilities (RCFs) of USD 65 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 320 million at the end of 2020, compared to approximately USD 167 million at the end of 2019. Available credits included a USD 40 million RCF and a USD 25 million RCF expiring in November 2022. The RCFs were 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 78% at the end of 2020. 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 35.8 million in 2020, compared to USD 4.3 million in 2019. The entire net profit is attributable to the equity holders of the parent. Net profit after tax corresponds with ordinary earnings of USD 0.198 and fully diluted earnings per share of USD 0.184 for 2020. This compares to ordinary and fully diluted earnings per share in 2019 of USD 0.025 and 0.024, respectively. 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 2020. 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 to getting updates with regards to risks in board meetings. Nordic complies fully with the Norwegian Code of Practice for Corporate Governance. 1515 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS 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 and external factors 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, can have a negative impact on Nordic. The overwhelming reliance on Taiwan for critical supply to the semiconductor industry creates a critical situation for the global economy. Response: Nordic actively monitors the geopolitical situation and is taking actions to reduce the impact on the business, for example supporting our customers in optimizing their value chain and placing early orders to secure supply. Coronavirus The spreading of the coronavirus has increased the uncertainty in our business outlook. The initial outbreak in China disrupted industry supply channels, and although this has normalized, the spreading of the virus has made authorities in a number of countries enforce strong measures that will affect global economic activities for a period of time. This may affect demand for end-user products in our industry, which in turn will affect both Nordic’s products, distributor inventories, and other parts of the industry supply chain. So far, the pandemic has had limited impact on demand and operations, but a prolonged period of reduced global activity and product demand may have significant negative effects on the company’s business and financial results. Response: Nordic has imposed strict travel restrictions and work from home policies worldwide. 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. Climate change and natural disasters The nature of our business as a fabless manufacturer, means that Nordic is heavily reliant on semiconductor in Taiwan. Nordic's manufacturing manufacturing partners are exposed to adverse effects of climate change and natural disasters. Response: Nordic's manufacturing partners have implemented multiple initiatives to understand and manage the effects of climate change and natural disasters on their own operations. Changes in competitive landscape Nordic Semiconductor’s strategic goal is to maintain or preferably improve its market share and remain a leading vendor of wireless connectivity and embedded processing solutions for internet connected things. Nordic has had a leading market share in Bluetooth LE. 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 LE being adopted across more than 25 identified market verticals, it is likely that more focused and specialized competitors gain market shares, especially in verticals where Nordic’s position is weaker. Response: In order to stay competitive and gain market share, Nordic continues to invest in both products, software, and strategic partnerships. Over the past few 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. We depend upon the development of new products and enhancements to our existing products, and the success of our substantial research and development activities can be uncertain. However, Nordic continues to invest more than 20% of revenue in R&D. This is required in order to stay competitive in this market. 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 biggest immediate threat comes from various wi-fi standards tightly integrated with Bluetooth in combo-chipset. There are other wireless standards, like UWB, that may be a risk factor longer term in some of the verticals where Bluetooth plays a dominant role today. Response: Nordic is a part of the Bluetooth Special Interest Group (Bluetooth SIG), which is continuously developing the Bluetooth standards. In addition, Nordic 1616 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS has developed Zigbee and Thread solutions and added a Wi-Fi team and Wi-Fi assets. Nordic 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 in 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. Response: 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 at adopting 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 working closely with regulators and carriers to remove barriers to entry. Key personnel In order to deliver on the roadmap that we have promised our customers, we depend on attracting the best team. Our business is our employees. Losing key employees and not attracting key competencies will affect sales, quality of products, delay time to market, and more. Response: Nordic focuses on talent management and succession planning and to develop organizational culture. We are continuously improving and adapting our benefit policy to attract and keep key talent. continues 1717 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS 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. 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 tooling’s developed and provided by Nordic Semiconductor, specifically 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 tooling’s may have the same consequences as outlined above. Response: Nordic mitigates this risk of lack of products by either keeping a buffer stock of wafers or finished goods to cover short-term demand. For medium-term requirements Nordic seeks to have second sourcing and having insurance for supply disruptions related to disasters. Nordic’s partners are selected through extensive qualification programs. Lastly, Nordic has its own testers, improving availability of the products and ensuring the right quality. Product ramp There is a risk that Nordic is not able to ramp new products according to customer requirements, either resulting in not meeting customer volume demands or resulting in high yield loss. Response: Given the timetables 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 have an impact on our ability to deliver products to customers. Furthermore, Nordic’s operations are highly 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 our end customers). Activities related to cyber-attacks are a risk for our day to day operations. Response: Significant effort is put into having the best solutions for data protection available in the market, and to reduce the risk related to human behavior by providing awareness training to employees. Nordic has implemented disaster recovery plans and backup routines in order to mitigate any effects of potential cyber-attacks, and seeks to maintain appropriate insurance coverage. Finally, Nordic has implemented disaster recovery plans and backup routines in order to mitigate any effects of cyber-attacks in addition to a cyber insurance that will assist in handling eventual threats and attacks. 1818 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS 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 also necessary to pass the procurement due diligence of tier-one customers, who are expected to make up an increasing part of the revenue base going forward. 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 0.8 million in added profit before tax. The company presents its accounts in USD, with profits translated into NOK for taxation purposes. At the end of 2020, the R&D cash coverage stood at 2.72x, up from 1.22x at the end of 2019. Nordic had available cash of approximately USD 320 million at the end of 2020, including credit facilities described above under ‘Cash Flow and Funding’. The Board of Directors assesses the current liquidity risk as low. 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. 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 Nordic’s 10 largest customers (distributors) accounted for 90% of total revenue in 2020, with no significant 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. 1919 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS Legal and compliance With an increasing global presence, the focus on governance and ensuring compliance to foreign and local requirements is important. Nordic recognizes the importance of behaving as a good corporate citizen across the globe and adopts international standards for compliance. There is a risk that Nordic temporarily will be non-compliant with new laws or regulations and as a result be exposed to penalties or rulings against us. In the normal course of business, we might be 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 regulate our responsibilities, however there is a risk that legal action can be brought forward representing a material risk on our results. Response: Nordic follows very high standards in terms of quality assurance. Investing in lab equipment and testers reduces time used on fault-finding, enables workarounds to be implemented faster, and effectively screens production defects. Nordic tries to limit the contractual liability to an acceptable level in the industry. Nordic has implemented policies, training and audits in order to secure that our zero- tolerance policy against fraud, corruption and other unethical behavior are adhered to. Our whistleblowing channel is open to the public and handled by a trusted team including representatives from the Executive Management Team. Intellectual property rights The current landscape of intellectual property rights in and to patents that are essential for the radio communication standards on which Nordic base its products is difficult to navigate. Many owners of standard essential patents have decided to only license the end-device, leaving it up to Nordic’s customers to get third party IP necessary for their products, as opposed to licensing Nordic’s products. Knowing that the royalty rate for such licenses will be based on the end-product, Nordic has not followed the same path of unacceptable risk-acceptance as many competitors who have extended indemnification to customers despite the lack of licenses. Instead, Nordic has had open and honest conversations with its customers and with the major patent owners on how to solve this situation, with the goal of enabling access to the relevant licenses through Nordic. Nordic’s customers generally appreciate this approach which also enables the customer to be compliant with relevant patent law. rights, and Nordic Semiconductor has never been prevented from selling its established line of products under any intellectual property 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 to be 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 are 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 in 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. Response: Nordic is a willing licensee and invites the owners of standard essential patents to NB-IoT and LTE-M to license Nordic’s products on FRAND terms on component level, or to enable access to such license to its customers. Nordic Semiconductor ASA is a member of the Fair Standards Alliance and plays an active part in raising awareness around the implications which the lack of licenses has on the industry. Furthermore, Nordic is and has always been active in, and contributing setting organizations, promoting openness and availability for all to standard essential patents. standard to, 2020 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS Personnel and organization The Group had 978 employees at the end of 2020, including 81 employees added through the acquisition Imagination of Technologies Group in Q4 2020. The number of employees increased 28% from 767 at the end of 2019. the Wi-Fi development team of 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 18% to 665 during 2020, further to 746 when including the Wi-Fi acquisition. R&D employees represent 76% of the total number of employees. The Sales & Marketing staff increased by 10% to 125 people at the end of the year, with the remaining 107 working in administration, supply chain and other staff functions. At year end 2020, 529 or 54% of the employees were employed outside of Norway, compared to 376 or 49% of the employees at the end of 2019. Sick leave (Norway specific) Sick leave remained below industry averages in 2020 with absence due to illness of 1.4%, down from 2.4% in 2019. No occupational illnesses or injuries were reported in 2020. Non-discrimination, equality and diversity The Board of Directors’ People and Compensation Committee at Nordic Semiconductor work actively together with the Executive Management Team to enhance diversity and overall people focus. Diversity is also on the agenda for internal audits as well as the annual management business review. Satisfaction surveys and Leadership surveys give continuous feedback enabling the company to prioritize actions for positive and relevant development. Nordic Semiconductor’s business is based on a diverse composition of a highly specialized and skilled workforce. With 42 different nationalities represented at the company’s headquarters, Nordic has a unique position for fostering an inclusive and diverse company culture based on innovation. Nordic has also seen the need to expand its global presence in order to hire desired and required skillsets. This increases Nordic Semiconductor’s competitive edge in a challenging marketplace for talent, thus it underscores the desire to hire competent employees from across the world, regardless of ethnicity and cultural background. *Excludes the acquisition made in 2020 ** Based on data from Statistics Norway from 2019 Nordic has implemented a Non-Discrimination Policy: All Nordic Semiconductor employees shall be treated equally and with dignity, courtesy, and respect. Nordic Semiconductor prohibits any form of discrimination against and/or harassment of employees or applicants for employment due to race, color, nationality or ethnic origin, age, religion, disability, political opinions, gender or sexual orientation, as described by ILO conventions. Nordic Semiconductor’s organizational culture shall be characterized by openness and good internal communication so that any misconduct or problems can be addressed, discussed and resolved in a timely manner. Nordic Semiconductor’s employees are encouraged to report any incident of discrimination to their nearest leader or through the applicable whistle-blower channels. Retaliation against any employee who has reported misconduct, is prohibited. There shall be no unfavorable treatment to any whistle blowers In 2020 there were no reported discrimination issues, or findings indicated discrimination or harassment in the organization. internal surveys from that A detailed description of work done in relation to non- discrimination, equality and diversity is included in the ESG report for 2020 published on the Nordic webpage. Employee gender distribution* At the end of 2020, 13.8% of the total number of employees were female, down from 14.4% in 2019. In the Norwegian operation 16% of the workforce were female, up from 15% in 2019. The relatively skewed gender balance in the workforce must be viewed in an industry context. In Norway, women working in the private sector represent around 37%** of the work force, but only around 14%** of electrical engineers and computer science professionals. The Executive Management consist 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. 2121 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS Employee gender distribution* 2020 2019 Total percentage female employees 13.8% 14.4% Percentage of new female hires globally 11.4% 14.5% Percentage of new female hires in Norway 21% 22% Percentage of new female junior hires in Norway 24% 17% Promoted or hired females to management positions 25% Nordic participates in the Norwegian University of Science and Technology’s “Jenteprosjektet Ada”, which aims to recruit, motivate and educate females within the Norwegian IT industry. Nordic also participates in ‘Womens Directory’, a Global Semiconductor Alliance initiative targeted at women in the semiconductor industry. The increase in percentage of new female junior hires in Norway shows a positive effect of the initiatives aimed at female applicants and the importance of continuing with this focus globally going forward. 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 works 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. to Age diversity* Nordic Semiconductor aspires to be a healthy and attractive workplace for employees in all age groups and during all phases of life across the globe. The company has implemented a Phase of Life Policy, aiming facilitate employee development and knowledge growth throughout the employee journey. The phase of life policy consists of three stages: Junior, Middle and Senior stage. Each phase is based on the perception that employees will have different needs and selected priorities relevant to the various stages of their lives. This gives us an opportunity as an employer to accommodate the personal needs and requirements of our employees. to The policy was established in Norway at an early stage, and further expanded to include several countries during 2020. The global implementation process that will continue in 2021. *Excludes the acquisition made in 2020 The average age of permanent employees in Nordic was 40.2 years old, with an age range between 21 years old and 69 years old. Equal pay Nordic strives to ensure that work of equal value shall receive equal pay, regardless of cultural diversity, gender, etc. Salary levels are determined based on objective measures, such as seniority, education, experience, and local market expectations. Career ladder Close to 80% of the employees work within Research and Development, and Nordic has developed a standardized framework to determine and adjust salary levels referred to as the Nordic Career Ladder. All salary levels are fixed and illustrated by the advancement through the Ladder. The company aims to continuously develop employee competence and ensure that all employees advance according to personal and professional career goals. This practice was revised for the Nordic countries in late 2020 and adopting and aligning similar practices globally will be further analyzed during 2021. The Career Ladder is applicable for all employees within the Research and Development department, including lower managerial levels, and is currently being implemented across the board. Salary increases are initiated through a globally aligned salary review process. Employees are expected to advance through the career ladder, where salary levels are adjusted according to position and related responsibilities. This decreases the risk of any subjective salary assessments based solely on personal performance and preferences, reducing the risk of making biased salary decisions. Within the R&D department in Norway, the average salary in 2020 for women is 92% of the average salary for males. The average salary for female employees in all departments was 77%, excluding executive management. Within the top management, the average salary of female employees was 76%. The salary gap between women and men is largely due to the fact that there is still a majority of men in the company’s senior positions. Furthermore, gender differences in salary are also affected by department 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. Permanent employees in part time positions Nordic has limited permanent employees in part time positions (5.5%). All part time employees work in reduced positions voluntarily, and at their own request. 2222 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS In 2020, 62.5% of part-time employees were males and 37.5% females, two of the females were partially disabled, working according to a percentage recommended by medical personnel. Part time employees are offered an opportunity to reevaluate their working percentage during the annual performance conversation with their manager, and more often if desired. Parental leave (Norway specific) Since 1993, a part of the parental leave was devoted to the father as a measurement to promoting gender equality in the labor market in Norway. Nordic pays parental benefits above and beyond the National Insurance Scheme. While Insurance Scheme refunds annual salary up to 6 G, Nordic pays up to 9 G, if the employee has been working for at least 6 of the past 10 months before the birth. the national During 2020, 29 employees in Nordic were on parental leave, 23 of these were men and 8 women. The average number of weeks on leave for men was 15.7 weeks, while the average for women was 16.4. This shows a healthy distribution of the parental leave across genders. Activity plan / goals for 2021 Nordic Semiconductor’s Board of Directors, Executive Management Group and Working Environment Committee will in 2021 continue to identify both risk and opportunity measurements connected to diversity and non-discrimination. The working environment committee will include employee representatives in the work to ensure a comprehensive and valuable dialogue through diverse perspectives, both locally and globally. Activity plan/goals for 2021: Strengthen our focus on diversity and non- discrimination through reviewing and updating our current corporate employee policies, including ethical guidelines for both employees and managers Continue to strive towards equal pay by incorporating fair and appropriate benchmarking processes across the board Continue a close dialogue and collaboration between employee representatives, HR and management topic in the employee satisfaction survey in 2021 Include gender equality, discrimination and as a Increase the percentage of female employees for a Promoting more women into management more balanced overall gender distribution positions through more hands-on HR support to managers during internal recruitment processes and promotions in addition to leadership mapping and development 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 supply chain, and Nordic’s Corporate Social Responsibility policy and other company policies. industry 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 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). identifying, and addressing For further information, please refer to the separately prepared ESG Report for 2020, which is prepared in accordance with the UNGC, RBA Code of Conduct, and the Norwegian Accounting Act, Section 3-3. The report also company’s official Communication on Progress as a signatory to the UN Global Compact. represents the 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, and 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. 2323 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS 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 148% in 2020, compared to an 5% increase for the Oslo Stock Exchange (OSEBX) and an 53%, increase for the PHLX Semiconductor Sector Index (SOX). The Nordic share closed at NOK 138.0 at year-end 2020, corresponding to a market capitalization of NOK 26.6 billion. Nordic had 191.0 million shares outstanding at the end of 2019, of which 1.8 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 2020 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 2021 Annual General Meeting. Nordic had approximately 8 800 shareholders at the end of 2020, compared to 3 300 at the end of 2019. The top 20 shareholders held 58.6% of the registered shares. 58.7% of the shares were held by institutions and individuals based in Norway, down from 74.9% in 2019. The below table outlines the geographical split of our shareholder base. The geographical split is based on results from our shareholder analysis vendor, based on data as of December 15, 2020. Region Norway USA Other Europe England Sweden Rest of World December 15, 2020 58.7% 22.3% 8.1% 7.5% 2.5% 0.9% Nordic aims to have an open dialog with shareholders and investors. The company conducted virtual investor roadshows both in Norway and internationally in connection with the interim results and participated on several industry and investment virtual seminars during the year. Through active communication with the capital market and shareholders in 2020, 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. Environmental statement Nordic is a fabless semiconductor company and does not own or operate manufacturing facilities. Hence, the direct environmental effect of the Group’s operations is 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 to advantage stringent environmental standards of operation. towards major customers subject 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 nordicsemi.com. 2424 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS Outlook Nordic reported 41% revenue growth to USD 405 million in 2020, and a shift in the order backlog from USD 107 million at the end of 2019 to USD 492 million at the end of 2020. The high demand reflects accelerated technology adoption across the company’s end-product markets, a widespread technology migration from Bluetooth classic to Bluetooth Low Energy, and a require significant growth multiprotocol solutions. Nordic has also seen a change in its customer mix, with several global platform companies and other tier-1 customers now placing more orders for high-volume products with longer product lifecycles. in applications that Bluetooth revenue increased by 43% to USD 316 million in 2020, exceeding the 20%-30% growth range the company has earlier indicated for the Bluetooth and multiprotocol product range. Proprietary revenue was also higher increasing by 27%, supported by high demand for home office equipment. Proprietary revenue is expected to show a percentage decline in the high single-digits in 2021 as the technology migration to Bluetooth continues. than expected, Based on increasing order volumes, Nordic placed early orders for wafer volumes that would allow for a significant increase in production also in 2021. The high demand in the semiconductor market has, however, put increasing strains on the global supply chain through 2020 and into 2021, and the demand/supply imbalances temporarily limit the availability of wafers. Although the main wafer suppliers have indicated significant capital expenditures to increase capacity going forward, this temporarily limits Nordic’s ability to take full advantage of the strong demand. The wafer volumes the company has been allocated nevertheless allow Nordic to increase its production by a minimum of 25% in 2021. The wafer shortage is expected to have the largest impact in the second quarter 2021, with higher volumes expected in the second half of the year. As described in the interim report for the fourth quarter and full year 2020, Nordic guides for a revenue level of USD 130-140 million for the first quarter 2021. There is always inherent uncertainty to future prospects. Nordic’s gross margin improved to 52.8% in 2020 from 50.9% in 2019, with the company reporting a gross margin of 52.7% for the fourth quarter 2020. The high margin level reflects both a product mix with high volumes of advanced high-margin products, and continuous cost improvements on newly launched products. Nordic expects a gross margin of 50%-51% for the first quarter 2021, and reiterates the expectation that a higher share of sales to tier-1 customers will move the gross margins for the short-range business into the 48%-50% range in the medium term. The high demand underlines Nordic’s solid market position and is a clear indication of the company’s growth opportunities and market potential. In 2019, Nordic presented a bold aspiration to build a USD 1 billion company within five years, and the positive demand trends and continued strengthening of the customer base increase the confidence in this aspiration. The company sees continued growth beyond this timeframe, as the evolvement of the Internet of Things (IoT) is set to generate a massive long-term market relying on robust and energy-efficient connectivity solutions for billions of IoT products and solutions. 2525 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS Oslo, March 16, 2021 Jan Frykhammar Board member Birger Steen Chair Anita Huun Board member Inger Berg Ørstavik Board member Svenn-Tore Larsen Chief Executive Officer Endre Holen Board member Øyvind Birkenes Board member Jon Helge Nistad Board member, employee Annastiina Hintsa Board member Joel Stapelton Board member, employee Susheel Raj Nuguru Board member, employee Morten Dammen Board member, employee 2626 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | REPORT FROM THE BOARD OF DIRECTORS Financial Statements Income statement (for the year ended December 31) GROUP PARENT 2020 2019 Amount in USD 1000 Note 2020 2019 405 217 288 395 Total Revenue -190 690 -141 290 Cost of materials -584 -351 Direct project costs 213 943 146 753 Gross profit 3 4 406 242 289 226 -190 690 -141 290 -584 -351 214 968 147 584 -101 211 -80 281 Payroll expenses 9/10/12/18 -61 444 -48 735 -35 954 -33 665 Other operating expenses -31 063 -23 535 Depreciation 45 714 9 272 Operating profit 642 -1 416 -2 016 42 925 -4 534 38 391 1 910 Financial income -1 102 Financial expenses 9 706 Profit before tax -2 379 Income tax expense 7 327 Net profit after tax Attributable to: -375 Net foreign exchange gains (losses) 6/22 38 391 7 327 Equity holders of the parent 0,21 0,20 2020 38 391 -84 19 688 0,04 Ordinary earnings per share (USD) 0,04 Fully diluted earnings per share (USD) 2019 Statement of comprehensive income 7 327 Net profit after tax -83 Actuarial gains (losses) on defined benefit plans (before tax) 18 Income tax effect -117 Currency translation differences 5/21 11/12/21 6/22/23 6/21/22/23 7 8 8 7 -84 325 -73 695 -27 128 42 071 642 -1 336 -2 014 39 363 -3 564 -19 789 5 365 1 910 -1 018 -373 5 885 -1 577 35 799 4 308 35 799 4 308 0,20 0,18 2020 35 799 -84 19 0,03 0,02 2019 4 308 -83 18 39 014 7 145 Total Comprehensive Income 35 734 4 243 Attributable to: 39 014 7 145 Equity holders of the parent 35 734 4 243 28 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Statement of financial position (as of December 31) GROUP PARENT 2020 2019 Amount in USD 1000 Note 2020 2019 ASSETS Non-current assets 2 393 0 Goodwill 34 563 33 990 Capitalized development expenses 11 408 Software and other intangible assets 2 813 Deferred tax assets 23 934 Right of use assets 26 625 Fixed assets 19 905 3 668 25 092 28 284 0 24 12 12 7 21 249 0 34 563 33 990 19 286 3 029 20 616 11 120 2 429 22 272 11/22/23 24 960 22 354 0 Shares in subsidiaries 1/13 1 590 43 113 906 98 770 Total non-current assets 104 294 92 208 Current assets 61 915 53 067 Inventory 88 034 64 519 Accounts receivable 9 372 11 359 Other current receivables 4 14/22/23 15/22/23 61 955 88 034 10 062 53 067 64 519 10 045 242 547 90 645 Cash and cash equivalents 16/22/23 238 615 89 205 401 909 219 589 Total current assets 515 814 318 359 TOTAL ASSETS EQUITY 317 303 Share capital 235 448 113 355 Share Premium 166 727 118 551 Other components of equity 402 492 232 205 Total equity LIABILITIES Non-current liabilities 448 21 004 21 452 310 Pension liability 19 886 Non-current lease liabilities 20 196 Total non-current liabilities Current liabilities 22 812 19 738 Accounts payable 4 976 8 789 5 520 302 3 136 Income taxes payable 3 761 Public duties 4 044 Current lease liabilities 0 Current financial liaibilities 398 666 216 836 502 960 309 044 317 303 235 448 113 355 153 501 108 101 389 266 221 754 448 18 338 18 785 21 059 4 889 7 777 3 616 302 310 19 085 19 396 17 988 2 886 3 181 3 142 0 17 17 18 21/22/23 20/22/23 7 20 21/22/23 22/23 49 472 35 279 Other current liabilities 15/20/23 57 265 40 696 91 871 65 958 Total current liabilities 113 323 86 155 Total liabilities 515 814 318 359 TOTAL EQUITY AND LIABILITY 94 908 113 694 67 894 87 289 502 960 309 044 29 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Oslo, March 16, 2021 Jan Frykhammar Board member Birger Steen Chair Anita Huun Board member Inger Berg Ørstavik Board member Svenn-Tore Larsen Chief Executive Officer Endre Holen Board member Øyvind Birkenes Board member Jon Helge Nistad Board member, employee Annastiina Hintsa Board member Joel Stapelton Board member, employee Susheel Raj Nuguru Board member, employee Morten Dammen Board member, employee 30 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 01.01.19 303 -5 113 355 3 307 -190 104 780 221 549 Net profit for the period Other comprehensive income Sale of treasury shares (option exercise) Share based compensation 0 Equity as of 31.12.19 303 -5 113 355 Net profit for the period Other comprehensive income Sale of treasury shares (option exercise) Share based compensation Capital increase* Equity as of 31.12.20 14 317 2 122 093 7 327 7 327 -119 -65 -184 2 106 1 407 -309 112 042 232 205 38 391 38 391 688 -65 623 5 899 3 265 122 108 2 105 1 407 6 819 5 897 3 265 -3 235 448 15 980 379 150 368 402 492 Nordic Semiconductor Parent Consolidated statement of changes in equity Amount in USD 1000 Share capital Treasury shares Share premium Other paid in capital Retained earnings Total equity Equity as of 01.01.19 303 -5 113 355 1 391 99 327 214 370 Net profit for the period Other comprehensive income Sale of treasury shares (option exercise) Share based compensation Equity as of 31.12.19 Prior year adjustment Net profit for the period Other comprehensive income Sale of treasury shares (option exercise) Share based compensation Capital increase* Equity as of 31.12.20 4 308 4 308 -65 -65 2 106 1 033 103 570 221 754 -21 -21 35 799 35 799 -65 -65 5 899 3 792 122 108 2 105 1 033 4 530 5 897 3 792 0 303 -5 113 355 2 122 093 14 317 * The group increased the share capital with NOK 1 144 million, approximately USD 125 million. The amount net of transaction cost was USD 122.1 after tax. 31 -2 235 448 14 219 139 283 389 266 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Statement of cash flows for the year ended December 31 GROUP PARENT 2020 2019 Amount in USD 1000 Note 2020 2019 Cash flows from operating activities 42 925 9 706 Profit before tax 39 363 5 885 -2 955 -4 846 Taxes paid for the period 7 -1 922 -4 208 31 063 23 535 Depreciation 11/12/21 27 128 19 789 -29 561 -13 798 Change in inventories, trade receivables and payables 4/14/20/22 -29 333 -14 816 3 151 138 1 100 Share-based compensation 31 Movement in pensions 20 530 3 950 Other operations related adjustments 65 292 19 678 Net cash flows from operating activities Cash flows used in investing activities -16 480 -20 182 Capital expenditures (including software) -8 398 -13 158 -11 271 Capitalized development expenses - Business Combination, net of cash acquired -38 035 -31 454 Net cash flows used in investing activities 10 455 121 277 -4 557 Cash flows from financing activities 2 412 Changes in treasury shares - Capital increase - Cash settlement of options contract and issue of share capital -3 552 -3 906 Repayment of interest bearing debt 40 000 -40 000 RCF drawdown - RCF repayment 11/12 12 24 17 2 357 138 726 31 21 845 10 340 59 576 17 748 -14 752 -17 233 -8 398 -11 271 -11 694 - -34 844 -28 504 10 455 121 277 -4 557 2 412 - - -2 496 -2 972 40 000 -40 000 - 123 622 -1 494 Net cash flows from financing activities 124 677 -560 1 024 37 Effects of exchange rate changes on cash and cash equivalents 151 902 -13 232 Net change in cash and cash equivalents 90 645 103 876 Cash and cash equivalents as of 1.1. - - 149 409 -11 316 89 205 100 522 242 547 90 644 Cash and cash equivalents as of 31.12. 16/22 238 615 89 205 4 202 1 847 Restricted cash incl. in the cash and cash equivalents as of 31.12. 16 4 202 1 847 32 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Note 1: Background 1.1 Corporate information Nordic Semiconductor ASA is a public limited company whose ordinary 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. The Group includes the ultimate parent company Nordic Semiconductor ASA and the wholly owned subsidiaries, Nordic Semiconductor Norway AS, Nordic Semiconductor UK Ltd, Nordic Semiconductor Inc., Nordic Semiconductor Poland Sp. z.o.o, Nordic Semiconductor Finland OY, Nordic Semiconductor Japan KK and Nordic Semiconductor Germany GmbH. In addition, on December 31, 2020, Nordic completed the acquisition of 100% of the shares in Imagination Technologies AB and Imagination Technologies Hyderabad Pvt Ltd. Nordic Semiconductor is a Norwegian fabless semiconductor company specializing in wireless communication technology that powers the Internet of Things (IoT). Nordic was established in 1983 and has more than 1000 employees across the globe. The company’s award-winning Bluetooth Low Energy solutions pioneered ultra-low power wireless, making it the global market leader. Nordic’s technology range was later supplemented by ANT+, Thread and Zigbee, and in 2018 Nordic launched its low power, compact LTE-M/NB-IoT cellular IoT solutions to extend the penetration of the IoT. The Nordic portfolio was further complemented by Wi-Fi technology in 2021. 1.2 Basis for preperation The financial accounts for the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as endorsed by the European Union and Norwegian authorities and are effective as of 31 December 2020. The consolidated financial statements also comply with IFRS as issued by the International Accounting Standards Board (“IASB”) and the disclosure requirements the Norwegian Accounting Law as specified under (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 16 2021, and will be presented for approval at the Annual General Meeting on April 20, 2021. 1.3 Accounting standards adopted in 2020 In 2020, there are few revisions by the International Accounting Standards Board to the financial reporting requirements in accounting policies. The Group has adopted the following amendments: Amendments to IFRS 3 - Definition of a Business In October 2018, the IASB issued amendments to IFRS 3 Business Combinations aimed at resolving the difficulties that can arise when an entity determines whether it has acquired a business or a group of assets. The amendments will help the Group to determine whether an acquisition made is of a business or a group of assets. The amended definition emphasizes that the output of a business is to provide goods and services to customers, whereas the previous definition focused on returns in the form of dividends, lower costs or other economic benefits to investors and others. In addition to amending the wording of the definition, the Board has provided supplementary guidance. Distinguishing between a business and a group of assets is important because an acquirer recognizes goodwill only when acquiring a business. The amendments will be effective for business combinations with an acquisition date on or after 1 January 2020. Amendments to IFRS 16 - Covid-19-Related Rent Concessions The amendment exempts lessees from having to consider individual lease contracts to determine whether rent concessions occurring as a direct consequence of the covid-19 pandemic are lease modifications and allows lessees to account for such rent concessions as if they were not lease modifications. It applies to covid-19-related rent concessions that reduce lease payments due on or before June 30, 2021. In 2020, there has been one lease agreement with rent concessions as a direct consequence of the covid-19 pandemic. The direct impact on profit and loss was not material for the Group. 33 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Revised Conceptual Framework for Financial Reporting The IASB has issued a revised Conceptual Framework. The effective date is January 1, 2020. The Group considers to be in line with the Conceptual Framework, and there is no need for any changes in accounting principles. 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 transactions, balances and unrealized gains on transactions between group companies are eliminated. Intercompany interests. 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 2.5 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 2020 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 2.6. 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 2020 USD 8.4 million was capitalized. The carrying amount of capitalized development costs as of December 31, 2020 and 2019 was USD 37 million and USD 34 million respectively. Leases - Estimating the incremental borrowing rate The interest rate implicit in the lease cannot readily be determined, therefore the incremental borrowing rate (IBR) is used to measure lease liabilities. The lessee's IBR is defined in IFRS 16 as “the rate of interest that a lessee 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 Group has a centralized treasury department, and all financing is from the parent company in order to minimize the costs of finance. The subsidiaries are self-financed with low credit risk due to cost-plus inter-company invoicing for services, and do not enter into financing transactions into third parties. The Group entities have stand-alone arrangements for lease payments either with deposits or bank guarantee. The IBR reflects what the companies of 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 34 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS (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 standalone credit rating). 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. 2.3 Business combination A business combination is a transaction or other event in which the Company obtains control of one or more businesses. Business combinations are accounted for using the acquisition method. Goodwill is the difference between consideration transferred and net assets recognized and is classified as an intangible asset. Consideration transferred represents the sum of the fair values at the acquisition date of the assets given and liabilities incurred or assumed. Acquisition costs such as advisory, legal, accounting, valuation and other professional fees are expensed to profit or loss in the period in which they are incurred. Identifiable assets and liabilities of the acquired business are measured at their fair value at the acquisition date, except for certain items that are measured in accordance with the relevant Group accounting policy, such as leases and deferred tax assets. Right-of-use assets and lease liabilities for leases where the target is the lessee are recognized at the present value of the remaining lease payments as if the acquired lease were a new lease at the acquisition date. The acquirer measures the right-of-use asset at the same amount as the lease liability. 2.4 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. 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 2.5 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 35 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS 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. End-customer volume rebates Some end customers have entered into agreements with Nordic to receive a rebate based on their purchase quantity and price from the distributor. The rebates are recognized as reduction in revenue and increase in liabilities before payout is done to the end customer. 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. 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 the corresponding change in the transaction price) at the end of each reporting period. its estimates of refund liabilities (and 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. 2.6 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 business; project completion are in place. 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. Goodwill Goodwill acquired in a business combination is carried at cost as established at the acquisition date, less impairment losses, if any. in business Other intangible assets Other intangible assets comprise identifiable intangibles acquired (IP, developed technology), licenses and computer software. The assets held by the Group have finite useful lives determined by the expected usage of the asset by the entity. The assets are amortized on a straight-line basis over its estimated useful lives, normally 3-5 years. combination The other intangible assets are carried at cost less accumulated amortization and impairment losses, if any. Cost comprises the purchase price of the asset (including 36 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS non-refundable purchase taxes) and any costs directly attributable to preparing the asset for its intended use. In the case of an asset acquired in a business combination, the cost is its fair value at the acquisition date. 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. A CGU of one non-financial asset is the smallest group of assets that includes the asset and generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill does not generate cash flows independently of other assets and is, therefore, tested for impairment at the level of the CGU or group of CGUs that are expected to benefit from the synergies of the related business combination. If any indication exists, 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. 2.7. 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. 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. 2.8 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 1-5 years Computer equipment 3-5 years Leasehold improvements 5 years The assets’ residual value, useful lives and methods of depreciation are reviewed on an ongoing basis and adjusted prospectively, if necessary. 2.9 Impairment of non-financial assets The Group’s non-financial assets includes: Goodwill Capitalized development expenses Other intangible assets (software and IP) Property, plant and equipment Right-of-use assets Non-financial assets are tested for impairment whenever there is an indication that their carrying amounts may not be recoverable. Goodwill and intangible assets still under development are subject to an annual impairment test. 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 or other available fair value indicators. 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 time value of money and the risks specific to the asset. 2.10 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 money market fund, accounts receivable and other current receivables, accounts payable, currency swap 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. 37 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS the Group’s business model Depending of the financial asset’s contractual cash flow characteristics and for managing them, the assets are at initial recognition and 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. 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. 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) 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 (held for trading) The categories relevant for the Group is amortized cost, including accounts current receivables, and fair value through profit or loss (held for trading), including money market fund. receivables and other 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. Financial assets at amortized cost are subsequently at fair value with resulting gains and losses recognized in profit or loss. 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 paragraph 3.2.4 and 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. 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 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 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 includes derivative financial instruments (currency swap) entered into by the Group that are not designated as hedging instruments in hedge relationships as defined by IFRS 9. Gains or losses on liabilities held for trading are recognized in the statement of profit or loss. 38 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS 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 bank, short- term deposits with an original maturity of three months or less and money market fund. Money market funds are defined as cash equivalents because they are highly liquid and not subject to material fluctuations 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. 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 Group has used the optional exemption in IFRS 16 and not accounted lease concessions, such as reduction in lease payments, due to Covid-19 as a lease modification. The following conditions are met: less than the original consideration The reversed consideration is substantially the same or The reduction in lease payments relates to payments No other substantive changes have been made to the due on or before 30 June 2021 terms of the lease That means reductions in lease payments are accounted for as negative variable lease payments and be recognized in profit and loss. The right-of-use assets are also subject to impairment, see note 2.9. 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. lease is not readily determinable. After 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 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. 39 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS lease the short-term Short-term leases and leases of low-value assets The Group applies 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. The low value election is made on a lease-by-lease basis, and it refers to underlying assets with a value in order of USD 5,000 or less. 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 net deferred tax assets or liabilities. 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 assets. 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. 2.15 Provisions Provisions (such as legal claims and contractual severance) 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 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, 2020. Defined contribution pension plans Employees hired after January 1, 2008 have a defined contribution pension plan described in Note 18. Share based compensation The Group grants restricted stock units and other awards over its ordinary shares to all employees. 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. Accounting treatment of social security tax is not treated in IFRS 2. Social security tax is accrued over the vesting period based on the actual value of the stock unit. 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. 2.19 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 25. 40 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Note 3: Revenues All figures in USD 1000 3.1 Disaggregated revenue information of sales versus 97.5% in 2019. In addition to standard components, the Group sells customer-specific ASIC components (Application Specific Integrated Circuits) and related Consulting Services. 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 2020, wireless components accounted for 96.8% 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 2020 2019 Revenue 163 131 119 409 Consumer Electronics 62 967 50 386 Wearables 81 871 51 595 Building/Retail 37 830 19 725 Healthcare 46 364 39 979 Others 392 163 281 094 Wireless components 6 527 6 297 230 - 1 046 Long-range (cellular IoT) 6 039 ASIC components 216 Consulting services - Management fee PARENT 2020 2019 163 131 119 409 62 967 50 386 81 871 51 595 37 830 19 725 46 364 39 979 392 163 281 094 6 527 6 297 230 1 025 1 046 6 039 216 831 405 217 288 395 Total revenue from contracts with customers 406 242 289 226 Revenue classified by customers’ location: The Group also classifies its revenues on a geographical basis according to its customers’ location. GROUP 2020 2019 37 726 31 464 Europe 34 038 27 946 Americas 333 453 229 014 Asia/Pacific 405 217 288 395 Total revenue from contracts with customers PARENT 2020 2019 38 519 32 090 34 234 28 094 333 488 229 042 406 242 289 226 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. Two distributors represented more than 10% of the Group’s total revenues in 2020 with 30% and 11% of total revenues, respectively. These distributors are based in Asia. In comparison, one distributor represented more than 10% of the Group’s total revenues in 2019 with 28%. 41 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Revenue from contracts with customers classified by timing of revenue recognition: 2020 2019 404 987 288 179 Goods transferred at a point in time 230 216 Services transferred over time 405 217 288 395 Total revenue from contracts with customers 3.2 Contract balances 2020 2019 88 034 64 519 Trade receivables 2020 2019 404 987 288 179 1 255 1 047 406 242 289 226 2020 2019 88 034 64 519 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 2020 16 184 0 2019 13 881 Refund liability – arising from ship & debit 0 Refund liability – arising from stock rotation 2020 16 184 0 2019 13 881 0 8 515 6 300 Refund liability – arising from end-customer volume rebates 8 515 6 300 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. 42 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Note 4: Cost of materials / inventory All figures in USD 1000 GROUP 2020 2019 199 578 151 677 Purchased materials -8 888 -10 387 Changes in inventory 190 690 141 290 Cost of materials 18 751 19 699 Raw material 17 566 11 559 Work in Progress 25 638 21 808 Finished Goods 61 955 53 067 Total inventory 3 242 2 919 Amount written down PARENT 2020 2019 199 578 151 677 -8 888 -10 387 190 690 141 290 18 751 19 699 17 566 11 559 25 638 21 808 61 955 53 067 3 242 2 919 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 2020 12 733 11 470 953 1 005 6 180 -22 2019 11 264 Service and maintenance 9 351 Other consultancy fees 1 428 Office rental expenses 1 095 Office equipment 5 236 Material and components -15 Tax grant -2 647 -3 495 Capitalized development expenses 1 246 5 036 0 4 023 Travel and meeting expenses 4 778 Other operating expenses 0 Other operating expenses intercompany 35 954 33 665 Total other operating expenses Auditor remuneration, excl. of VAT Fees to the auditor are included in consultancy fees above. GROUP 2020 2019 69 0 8 78 91 Statutory audit services 36 Tax advisory services 44 Other audit related services 171 Total revenues PARENT 2020 2019 11 877 10 605 8 059 615 797 5 581 -22 6 641 1 023 859 4 729 -15 -2 647 -3 495 891 4 780 2 635 4 459 54 394 46 254 84 325 73 695 PARENT 2020 2019 61 0 8 69 68 36 44 148 43 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Note 6: Net financial items All figures in USD 1000 GROUP 2020 2019 515 127 642 768 648 1 910 Interest income - Other financial income 1 910 Financial income 834 Interest expenses on lease liabilities 268 Financial expense 2 016 375 Foreign exchange loss (net) 3 431 1 477 Financial expense -2 790 433 Net financial income/expense Note 7: Tax All figures in USD 1000 GROUP 2020 2019 Tax expense consists of -5 264 -3 852 Tax payable 730 1 473 Change in deferred tax / tax benefit -4 534 -2 379 Tax expense GROUP 2020 2019 Reconciliation of nominal and actual tax expense 42 925 9 706 Profit before tax -9 444 -2 135 Tax at nominal rate 22 % -62 2 551 -104 620 -39 Tax effect of different tax rates in other countries 155 Tax effect permanent differences - Tax effect of tax benefit not being recognized in the balance sheet 45 Excess tax provision previous year 1 904 -405 Currency effect from translation to USD PARENT 2020 2019 515 127 642 768 568 2 014 1 910 - 1 910 750 268 373 3 350 1 391 -2 708 519 PARENT 2020 2019 -4 077 -2 833 513 -3 564 1 256 -1 577 PARENT 2020 39 363 -8 660 -99 2 694 - 620 1 881 2019 5 885 -1 295 -27 97 - 45 -398 -4 534 -2 379 Tax expense -3 564 -1 577 44 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Balance Sheet Income Statement Other Comp. income 2020 2019 2020 2019 2020 2019 GROUP Deferred taxes: Deferred tax benefit Inventory Fixed Assets Leasing Options (share based payments) Pension obligation Financial instrument Accruals 494 1 825 157 982 99 66 145 645 1 408 15 707 68 0 22 Deferred tax benefit - gross 3 769 2 865 Gain and loss account Net other tax-obligations Deferred tax obligation - gross Currency effect of translation to USD 43 58 101 0 52 0 52 0 Net deferred tax benefit (obligation) 3 668 2 813 Deferred tax expense 730 1 472 PARENT Deferred taxes: Deferred tax benefit Inventory Fixed Assets Leasing Options (share based payments) Pension obligation Financial instrument Accruals 494 1 187 157 982 99 66 145 645 1 024 15 707 68 0 22 Deferred tax benefit - gross 3 130 2 481 Gain and loss account Net other tax-obligations Deferred tax obligation - gross Currency effect of translation to USD 43 58 101 0 52 0 52 0 Net deferred tax benefit (obligation) 3 029 2 429 Deferred tax expense 513 1 256 -151 417 143 275 12 66 123 886 -9 58 49 -106 323 457 15 254 -11 0 0 1 037 -14 -409 -423 12 -151 162 143 275 12 66 123 631 -9 58 49 -69 323 241 15 254 -11 0 0 821 -14 -409 -423 12 Balance Sheet Income Statement Other Comp. income 2020 2019 2020 2019 2020 2019 0 0 0 0 19 0 0 19 0 0 0 0 19 0 0 0 0 18 0 0 18 0 0 0 0 18 0 0 0 0 19 0 0 19 0 0 0 0 19 0 0 0 0 18 0 0 18 0 0 0 0 18 45 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS GROUP 2020 2019 Reconciliation of net deferred tax benefit: 2 813 1 335 Opening balance as of 1.1 730 19 107 1 472 Tax expense/income recognized in profit and loss 18 Tax expense/income recognized in other comprehensive income -12 Currency effect from translation to USD 3 668 2 813 Net deferred tax benefit 31.12 PARENT 2020 2019 2 429 513 19 69 1 168 1 256 18 -12 3 029 2 429 The group has not recognized net deferred tax benefit of USD 149 thousand related to the subsidiary in India and USD 104 thousand related to the subsidiary in Poland. GROUP 2020 2019 Net deferred tax recognized in OCI as of 31.12: 19 19 18 Net gain/(loss) on actuarial gains and losses 18 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 2020 2019 19 19 18 18 2020 2019 38 391 181 021 0.21 7 327 175 313 0.04 38 391 7 327 194 704 176 394 0.20 0.04 Date 01.01.2020 31.12.2020 Number of shares issued Shares outstanding Balance at beginning of period Balance at end of period 179 781 600 192 781 600 175 661 690 190 958 613 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. 46 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Note 9: Payroll expenses All figures in USD 1000 GROUP 2020 2019 Combined expenses for salary and other compensation are distributed as follows: 72 522 62 556 Salary and vacation pay 18 553 12 846 Other compensation 9 520 6 756 Payroll tax -535 -497 Tax grant 6 898 6 396 Defined contribution pension -5 747 -7 776 Capitalized development expenses (hourly costs) 101 211 80 281 Total 831 722 Weighted average number of full time employees GROUP 2020 449 211 74 46 32 31 15 17 4 4 4 3 2 2 1 1 1 2019 Employees as of December 31, are distributed as follows: 391 Norway 188 Finland 51 Poland 39 USA 26 26 Taiwan Philippines 16 Hong Kong 13 China 4 4 4 South Korea Japan Sweden 1 Germany 1 Spain 0 Australia 1 Switzerland 1 UK 1 The Netherlands PARENT 2020 2019 42 462 37 968 12 804 9 007 -535 9 415 6 421 -497 3 453 3 204 -5 747 -7 776 61 444 48 735 520 461 PARENT 2020 449 2019 391 0 0 0 32 31 15 17 4 0 4 0 2 2 1 1 1 0 0 1 26 26 16 13 4 0 4 0 1 0 1 1 1 897 767 Total excluding business combination 559 485 14 39 22 5 80 977 0 0 Sweden India 0 UK 0 0 Taiwan Total from business combinations 767 Total 0 0 0 5 5 0 0 0 0 0 564 485 47 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | 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 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) 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) Joel Stapleton, Board Employee Representative (Board remuneration only) Joakim Ferm, former Board Employee Representative (Board remuneration only) 2020 120 2019 104 53 50 62 45 37 53 0 0 11 3 11 11 8 0 50 53 50 45 37 40 14 4 11 11 11 9 0 3 Total 473 446 48 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Total compensation* expensed during the year for the CEO and other executives: 2020 Salary Bonus Options** RSU Other Comp. Pension expenses Total 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 412 245 278 262 173 299 152 200 173 190 65 40 33 42 25 31 21 28 23 32 33 21 23 22 12 21 5 10 7 5 57 31 36 33 21 26 19 20 20 17 1 2 2 2 2 2 1 2 2 3 15 15 15 15 15 15 15 15 15 15 584 356 388 376 247 394 213 275 240 262 Total 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) 2 385 342 159 279 20 151 3 335 Salary Bonus Options** RSU Other Comp. Pension expenses Total 394 240 279 255 168 314 130 325 142 68 65 42 39 39 27 33 22 6 0 0 58 48 38 30 40 36 39 20 37 5 17 10 0 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 Total 2 315 273 265 246 20 151 3 269 *Management compensation is paid in NOK. Exchange rate for 2020: 9,41 and 2019: 8.80 **Option cost is the expense of fair value of options based on Black Scholes calculation ***Includes expat allowances (housing, school, etc.) 49 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Executive Compensation 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 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. related matters. The CEO's 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. 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 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. collaboration culture, 2019, an amendment was made to the plan where part of the options granted to executives was replaced by Performance Shares. For 2020, the Annual General Meeting approved 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 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 was 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. 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. Refer to note 19 for details of grants made in 2020. 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 2020, have been complied with. New guidelines for senior executives will be proposed for the 2021 Annual General meeting and will be made available on the company’s website. 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. In 50 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS The Group has granted executives and employee Board members the following options according to the terms: Executives and employee Board members RSU granted 2020* Options granted 2019 Svenn-Tore Larsen, CEO Pål Elstad, CFO Geir Langeland, Sales Director Svein-Egil Nielsen, CTO Ebbe Rømcke, Quality Director Ole Fredrik Morken, Supply Chain Director 10 621 RSU 6 345 RSU 6 621 RSU 7 172 RSU 4 276 RSU 5 241 RSU 38 163 stock options 23 163 stock options 24 767 stock options 28 144 stock options 15 761 stock options 19 701 stock options Marianne Frydenlund, Legal Director 4 000 RSU 12 946 stock options Ståle Ytterdal, Director IR & Strategic Sales Kjetil Holstad, Director of Product Management Katarina Finneng, HR Director Morten Dammen, Board Employee Representative Jon Helge Nistad, Board Employee Representative Susheel Nuguru, Board Employee Representative 4 414 RSU 4 276 RSU 5 241 RSU 2 150 RSU 600 RSU 600 RSU 17 499 stock options 14 072 stock options 20 000 Stock options 3 559 stock options 2 781 stock options 2 563 stock options Asbjørn Sæbø, Board Employee Representative ** 3 452 stock options Joel Stapleton, Board Employee Representative 2 650 RSU ** During 2020 the executives excercised the following options: Executives Svenn-Tore Larsen, CEO Pål Elstad, CFO Geir Langeland, Sales Director Svein-Egil Nielsen, CTO Ebbe Rømcke, Quality Director Ole Fredrik Morken, Supply Chain Director Ståle Ytterdal, Director IR & Strategic Sales Kjetil Holstad, Director of Product Management Grant year Number of options exercised Strike price Cash payout in USD 1000 2017 2017 2017 2016 2017 2016 2017 2016 2017 2017 2016 2017 65 575 43 804 43 804 43 804 43 804 21 771 21 771 20 000 43 804 17 506 6 069 5 600 35.77 35.77 35.77 47.72 35.77 47.72 35.77 47.72 35.77 35.77 47.72 35.77 498 333 333 191 333 95 165 0*** 333 133 34 24 *The RSU for management vest after three years for management two years for employees ** Not Board Employee Representative for this period *** Purchased shares, no cash payout from the company 51 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Note 11: Fixed assets All figures in USD 1000 GROUP 2020 Opening balance Additions Addition from business combination Office and lab equipment Computer equipment and machinery Fixture and fittings Property Total 25 113 4 881 60 45 386 4 735 333 75 568 8 025 58 814 6 - - 13 721 124 Acquisition cost as of 31.12 30 055 53 470 5 556 333 89 414 Opening balance Depreciation expenses Accumulated depreciation as of 31.12 Net carrying value as of 31.12 12 957 5 768 18 725 11 330 33 670 5 632 39 302 14 168 2 317 787 3 104 2 453 - - - 48 943 12 188 61 131 333 28 284 PARENT 2020 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 16 789 3 775 20 565 7 477 3 554 11 031 9 533 42 311 4 095 333 63 529 7 739 699 - 12 213 50 051 4 794 333 75 743 31 615 2 084 5 400 653 37 014 2 737 - - - 41 176 9 607 50 782 13 036 2 057 333 24 960 52 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS 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 GROUP AND PARENT Estimated useful life 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 2 689 333 57 329 5 961 2 046 - 18 239 45 386 4 735 333 75 568 29 236 1 788 4 434 528 33 670 2 317 - - - 39 747 9 196 48 943 11 717 2 418 333 26 625 Office and lab equipment Computer equipment and machinery Fixture and fittings Property Total 8 907 7 882 16 789 5 509 1 968 7 447 9 312 36 594 2 269 333 48 103 5 717 1 827 - 15 426 42 311 4 095 333 63 529 27 395 1 668 - 34 573 4 219 416 31 615 2 084 - - 6 603 41 176 10 697 2 012 333 22 354 3 – 5 years 3 – 4 years 5 years Depreciation method Straight-line Straight-line Straigth- line No Depreciation Total depreciation expenses consist of depreciation of fixed assets and depreciation of intangible assets (note 12). 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. Impairment There has been no indications of impairment losses during the year. Change in estimate with respect to useful lives and depreciation methods There has been no basis for changing useful lives and depreciation methods during the year. 53 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Note 12: Intangible assets All figures in USD 1000. GROUP 2020 Acquisition cost Opening balance Additions Addition from business combination Accumulated cost as of 31.12 Accumulated depreciation Opening balance Depreciation expenses Total accumulated depreciation as of 31.12 Net carrying amount PARENT 2020 Acquisition cost Opening balance Additions Addition from business combination Accumulated cost as of 31.12 Accumulated depreciation Opening balance Depreciation expenses Total accumulated depreciation as of 31.12 Net carrying amount Software and other intangible assets Capitalized Development expenses Godwill Total 33 231 3 121 11 447 47 799 21 824 6 070 27 894 19 905 65 976 8 398 - - 99 207 11 518 - 2 393 13 840 74 373 2 393 124 566 31 986 7 825 39 811 34 563 - - - 53 810 13 895 67 705 2 393 56 861 Software and other intangible assets Capitalized Development expenses Goodwill Total 32 533 2 539 11 445 46 517 21 413 5 818 27 231 19 286 65 976 8 398 - 74 373 31 985 7 825 39 811 34 563 GROUP Non-capitalized R&D expenses: 65 242 23 796 89 038 97 436 Personnel expenses Other operating expenses Total cost recognized in income statement Total cost for R&D (incl. capitalized development cost) - - 249 249 - - - 98 509 10 937 11 694 121 140 53 399 13 643 67 042 249 54 098 PARENT 34 968 16 607 51 575 59 973 54 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS 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 Estimated useful life Depreciation method Purchased Software Capitalized Development expenses 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 expenses 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 3 – 10 years 1 – 5 years Straight-line Straight-line 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) PARENT 26 256 16 296 42 552 53 823 Expensed research and development activities relate to new technologies and new services and products. Impairment There has been no indications of impairment losses during the year. Change in estimate with respect to useful lives and depreciation methods There has been no basis for changing useful lives and depreciation methods during the year. 55 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | 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 Nordic Semiconductor Norway AS Nordic Semiconductor UK Limited Established Year 2006 2013 2014 2017 2018 2020 2020 Location USA Poland Finland Japan Germany Norway UK Share Ownership Voting Rights 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Subsidiaries as of 31 December 2020* Ownership Share of votes Net profit 2020 Equity 31. Dec 2020 Nordic Semiconductor Inc, USA Nordic Semiconductor Poland S.p Z o.o. Nordic Semiconductor Finland OY Nordic Semiconductor Japan KK Nordic Semiconductor Germany GmbH Nordic Semiconductor Norway AS Nordic Semiconductor UK Limited 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 217 162 1 977 6 0 0 0 2 017 962 11 655 97 65 111 0 All intellectual property (IP) is owned by Nordic Semiconductor ASA. Nordic Semiconductor ASA is the ultimate parent company of the Group. All subsidiaries operate as contract research and development centers and invoice Nordic Semiconductor ASA according to the Group's transfer pricing policy. R&D teams in the Group. R&D department was also started. Nordic Semiconductor Inc is a market development and product promotion and support company, but in 2016 a small 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 Nordic Semiconductor Japan KK is a market development and product promotion and support company, Nordic Semiconductor Germany GmbH is a market development and product promotion and support company, Nordic Semiconductor Norway AS is the parent company of Nordic Semiconductor UK Limited and the companies Nordic Semiconductor UK limited was established in December 2020 and had no activity in 2020. It will have acquired as part of the business combination 31.12.2020, see note 24 for more information. development activities from 2021. *In addition to the companies in the table, Nordic Semiconductor ASA acquired 100% of the shares of Imagination Technologies AB and Imagination Technologies Hyderabad Pvt Ltd through Nordic Semiconductor Norway AS 31.12.2020. See not 24 for further information. 56 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Note 14: Accounts Receivable All figures in USD 1000 GROUP 2020 2019 88 034 64 519 Gross receivables 0 0 Provision for doubtful accounts 88 034 64 519 Accounts Receivable, net Note 15: Intercompany All figures in USD 1000 PARENT Loan to group companies Receivables group companies Total Payables Accounts payable, group companies Total PARENT Service fee for management services Total revenue intercompany Service fee for R&D and product promotion Total intercompany expenses Note 16: Cash and cash equivalents All figures in USD 1000 GROUP PARENT 2020 2019 88 034 64 519 0 0 88 034 64 519 2020 2019 2 551 1 070 3 621 - 224 224 17 268 10 586 17 268 10 586 2020 1 025 1 025 2019 831 831 54 394 46 254 54 394 46 254 PARENT 2020 2019 Cash and cash equivalents as of the balance sheet date were as follows: 2020 2019 183 644 88 797 Cash at bank 4 202 1 847 Restricted cash (witholding tax account) 54 701 - Money market funds 179 712 87 358 4 202 1 847 54 701 - 242 547 90 645 Cash and cash equivalents in statement of financial position 238 615 89 205 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 Semiconductor OY participate in the cash-pool, which is operated by Danske Bank. not available for general use by the entities within the group. Restricted deposits is held by Nordic Semiconductor ASA, and are subject to regulatory restrictions and are therefore Interest on bank deposit is set to floating rates based on daily bank deposit rates. For information on liquidity risk, see note 23. 57 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Note 17: Share capital and shareholder information Share capital The share capital in Nordic Semiconductor as of December 31, 2020 consists of one share class with a total of 192 781 600 shares with a face value of NOK 0.01, with a total share capital of NOK 1 927 816. 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) 2020 2019 2020 2019 2020 2019 2020 2019 Holdings as of 1.1 179 781 600 179 781 600 303 303 Issue of share capital 13 000 000 Change in treasury shares - - - 14 - - - Holdings as of 31.12 192 781 600 179 781 600 317 303 -5 - 2 -2 -5 113 355 113 355 - 0 122 093 - - - -5 235 448 113 355 Long-Term Incentive plan With reference to the annual general meeting, on April 21, 2020, Nordic Semiconductor approved a Restricted Stock Unit (RSU) program for all employees, and a combination of RSUs and Performance Shares for Executive Management. See note 19 for further information. Dividend No dividend was paid during 2020. Treasury shares 1,822,987 treasury shares on The Company owned December 31, 2020. At January 1, 2020, the Company owned 4,119,910 treasury shares. Based on a resolution of the annual general meeting of April 21, 2020, 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 2021, and by June 30, 2021 the latest. 58 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Shareholder overview The largest shareholders in Nordic Semiconductor ASA were as follows as of December 31, 2020 (based on shareholder register): Shareholder FOLKETRYGDFONDET ACCELERATOR LTD State Street Bank and Trust Comp VERDIPAPIRFONDET ALFRED BERG GAMBA DANSKE INVEST NORSKE INSTIT. II. Morgan Stanley & Co. LLC PASSESTA AS JPMorgan Chase Bank, N.A., London ALDEN AS Euroclear Bank S.A./N.V. CLEARSTREAM BANKING S.A. Morgan Stanley & Co. LLC VPF DNB AM NORSKE AKSJER MP PENSJON PK VERDIPAPIRFONDET DNB NORGE TTC INVEST AS State Street Bank and Trust Comp VERDIPAPIRFONDET KLP AKSJENORGE IN NORDIC SEMICONDUCTOR ASA VERDIPAPIRFONDET KLP AKSJENORGE Total for the 20 largest shareholders Other shareholders Total shares outstanding Shares Percentage 25 152 296 17 482 950 17 209 743 3 533 814 3 208 861 2 848 762 2 800 000 2 640 570 2 475 000 2 289 697 2 275 719 2 226 095 2 099 655 1 911 696 1 907 576 1 853 000 1 831 217 1 830 589 1 822 987 1 779 459 99 179 686 93 601 914 192 781 600 13.0 % 9.1 % 8.9 % 1.8 % 1.7 % 1.5 % 1.5 % 1.4 % 1.3 % 1.2 % 1.2 % 1.2 % 1.1 % 1.0 % 1.0 % 1.0 % 0.9 % 0.9 % 0.9 % 0.9 % 51 % 49 % 100 % 59 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS The largest shareholders in Nordic Semiconductor ASA were as follows as of December 15, 2020 based on data provided by an investor relations advisory service provider*, and is obtained through an analysis of benificial ownership and fund manager information provided in replies to disclusure of ownership notices issued to all custodians on the Nordic VPS share register. Shareholder Folketrygdfondet Accelerator LTD Capital Group Danske Bank Asset Management Invesco Alfred Berg DNB Asset Management Vanguard Group KLP Oberweis Asset Management BlackRock Contour Asset Management Passesta AS Alden AS Storebrand Asset Management BMO Global Asset Management (UK) Skoien AS MP Pensjon TTC Invest AS Nordic Semiconductor ASA Total for the 20 largest shareholders Other shareholders Total shares outstanding Shares Percentage 25 430 896 17 482 950 13.2 % 9.1% 7 609 836 3.9% 6 858 718 6 802 690 6 315 564 6 126 443 4 703 245 4 222 815 3 981 785 3 182 775 3 074 707 2 800 000 2 475 000 2 221 956 2 085 179 2 050 000 1 911 696 1 853 000 1 822 987 113 012 242 79 769 358 3.6% 3.5% 3.3% 3.2% 2.4% 2.2% 2.1% 1.7% 1.6% 1.5% 1.3% 1.2% 1.1% 1.1% 1.0% 1.0% 0.9% 59% 41 % 192 781 600 100 % Shares held by the Board of Directors and Executive Management were as follows as of December 31, 2020: Board of Directors Birger Steen Inger Berg Ørstavik Jan Frykhammar Anita Huun Endre Holen Øyvind Birkenes Annastiina Hintsa Jon Helge Nistad Joel Stapleton Susheel Nuguru Morten Dammen Total Shares 181 231 3 431 22 431 11 431 157 931 8 773 2 431 0 0 0 0 Executive Management Svenn-Tore Larsen Pål Elstad Katarina Finneng Geir Langeland Svein-Egil Nielsen Ebbe Rømcke Ole Fredrik Morken Ståle Ytterdal Kjetil Holstad Marianne Frydenlund Shares 1 905 400 8 846 0 177 700 17 000 68 900 180 000 244 000 6 604 2 000 387 659 Total 2 590 450 *Every reasonable effort has been made to verify the data; however neither Nordic nor the investor relations advisory service provider, can guarantee the accuracy of the analysis. 60 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Note 18: Pensions Defined benefit plan 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 2020 the pension liability was USD 204 869. 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 2020 2019 0 19 -15 2 5 1 6 2020 1 174 961 213 30 243 2020 243 205 448 0 27 -23 2 6 1 7 2019 1 141 921 220 31 251 2019 251 59 310 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 2020, the cost of the defined contribution pension was USD 3 380 522, and the plan had 469 members. 61 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Note 19: Long-term incentive plans 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. 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. These options reached cap in 2020, and outstanding options were settled in cash. On February 27, 2018, Nordic Semiconductor granted 1,444,600 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. On April 29, 2020, Nordic Semiconductor granted 754,224 Restricted Stock Units (RSUs) and Performance shares to 775 employees. A share price of NOK 58.4 was used as basis for the calculation of RSUs and Performance Shares, which was the weighted average share price the five trading days after the Annual General Meeting. The RSUs vest after two and three years. 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 2020 and 2019 is below: 2020 2019 Outstanding options 1.1 Granted Forfeited Exercised Expired Outstanding options 31.12 Of which exercisable A summary of RSUs transactions during 2020 and 2019 is below: Outstanding RSUs 1.1 Granted Forfeited Exercised Outstanding RSUs 31.12 5 470 374 4 194 293 - 1 947 010 53 976 2 850 587 17 222 97 060 448 545 - 2 548 589 5 470 374 954 923 2 283 646 2020 0 696 017 5 400 0 690 617 2019 0 0 0 0 0 62 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS A summary of performance shares transactions during 2020 and 2019 is below: Outstanding perormance shares 1.1 Granted Forfeited Exercised 2020 55 813 58 207 - - 2019 0 55 813 0 0 Outstanding performance shares 31.12 114 020 55 813 The fair value of the options, RSUs and performance shares are set on the grant date and expensed over the vesting period. USD 3 123 thousand was expensed during 2020 and USD 1 540 thousand in 2019. The fair value per RSU and performance share without market condition granted in 2020 was NOK 60.95. The fair value of the performance shares with Relative Total Shareholder Return performance condition granted in 2020 was NOK 84.5457. The valuation is based on a Monte Carlo simulation model with the following assumptions: Share price on the grant date The closing share price of the company and peer group companies (SOX Index) of NOK 60.95 and USD 1797.76, respectively. Risk-free interest rate The risk-free interest rate is set equal to the relevant interest rate on government bonds on the date of grant in 2020, i.e. 0.35 % in Norway and 0.23% in the US. 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 45.33% on the date of grant in 2020 for the company and 34.55% for the SOX Index. Expected lifetime Performance shares vest on the April 29, 2023. Performance end date is December 31, 2022, so as of vesting date the quantity to vest is known. Performance shares expire 3 years from grant date, i.e. 29th of April 2023. Correlation coefficients Correlation coefficient quantifies the degree to which the companies’ share prices jointly react to the news flow. The historic correlation coefficients has been calculated by using daily share price logarithmic returns of peer group. companies in local currency. 63 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Note 20: Current liabilities All figures in USD 1000 GROUP 2020 2019 22 812 19 738 Accounts payable - - Accounts payable from subsidiaries 4 976 3 136 Taxes payable 11 398 5 942 Employee benefit obligations 277 203 Board members benefit obligations 8 789 3 761 Social security tax and payroll tax 7 633 6 258 Holiday pay 16 184 13 881 Ship and debit rebate 8 515 6 300 End-customer rebate 362 - Contractual severance payment 5 520 4 044 Current lease liabilities 302 0 Currency swap 4 446 2 602 Accrued expenses 656 93 Other current liabilities 91 871 65 958 Total Current liabilities PARENT 2020 2019 21 059 17 988 17 268 10 586 4 889 2 886 6 417 3 312 277 203 7 791 3 181 5 019 4 271 16 184 13 881 8 515 6 300 - - 3 616 3 142 302 - 2 928 2 049 642 93 94 908 67 894 64 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Note 21: Leases All figures in USD 1000. The Group is a lessee and has entered into agreements to lease office space, office equipment, machinery and vehicles. The Group's office leases range between 1 to 7 years, equipment and machinery range between 3 to 5 years and vehicles are leased for less than 3 years. There are no leases with variable lease payments, other than lease payments linked to an consumer price index. Extension and termination options are included in a number of property and equipment leases across the Group. These are used to maximize 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 disruption. 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. In 2020, there has not occurred any material rent concessions as a direct consequence of the Covid-19 pandemic. Minimum lease payments payable on leases are presented in note 24 Financial assets and liabilities. Amounts recognized in the balance sheet: The balance sheet shows the following amounts relating to leases: GROUP 31.12.2020 31.12.2019 Right of use assets 24 730 23 237 Property 362 696 Office equipment and machinery 25 092 23 934 Total GROUP 31.12.2020 31.12.2019 Lease liabilities 5 520 4 044 Current 21 004 19 886 Non-Current 26 523 23 931 Total PARENT 31.12.2020 31.12.2019 20 255 21 575 362 696 20 616 22 272 PARENT 31.12.2020 31.12.2019 3 616 3 142 18 337 19 085 21 953 22 227 65 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS GROUP 2020 2019 6 042 7 672 Additions to the right-of-use assets - 845 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 2020 2019 Depreciation charge of right-of-use assets 4 617 3 648 Properties 363 205 Office equipment and machinery 4 980 3 853 Total 844 339 523 837 Interest expense 470 Expenses relating to short-term leases 199 Expenses relating to leases of low-value 6 686 5 360 Total amount recognised in profit and loss 5 563 4 393 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 23 931 Net liabilties as at 1 January 2020 -3 414 Cash flows from financing activities incl. foreign exchange adjustment 6 006 Acquisitions - Disposals 26 523 Net liabilties as at 31 December 2020 PARENT 2020 2019 2 197 7 661 - 845 PARENT 2020 2019 3 514 2 723 363 205 3 878 2 928 768 169 296 753 357 94 5 111 4 132 4 358 3 420 PARENT 22 227 -2 471 2 197 - 21 953 66 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | 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. In September, Nordic Semiconductor issued 13 million new shares at a subscription price of NOK 88 per share. The transaction generated gross proceeds of approximately USD 12m. Nordic Semiconductor targets to have an equity ratio above 50% at all times, measured as total equity divided by total assets. GROUP 2020 2019 402 492 232 205 Total equity 515 814 318 359 Total assets 78% 73% Equity ratio Financial assets The group holds the following financial assets at amortised cost: GROUP 2020 2019 Amortised cost 88 024 64 519 Accounts receivables 4 170 3 190 Other short-term receivables 187 846 90 645 Cash and cash equivalents 280 050 158 353 Total financial assets at amortised cost GROUP 2020 2019 Fair value through profit or loss 54 701 54 701 - Money market fund - Total financial assets at fair value through profit or loss Changes in financial assets at fair value through profit or loss: GROUP 2020 2019 - - As at 1 January 2020 51 809 87 2 805 54 701 Acquisition of financial instruments Changes in fair value - Currency translation difference - As at 31 December 2020 PARENT 2020 2019 389 266 221 754 502 960 309 044 77% 72% PARENT 2020 2019 88 034 64 519 2 322 2 322 183 914 83 237 274 270 159 575 PARENT 2020 2019 54 701 54 701 - - PARENT 2020 2019 - 51 809 87 2 805 54 701 - - - 67 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Financial liabilities The group holds the following financial liabilities: GROUP 2020 2019 Amortised cost 22 812 19 738 Accounts payable 49 472 35 279 Other current liabilities Lease Liabilities 21 004 19 886 Non-current lease liabilties 5 520 4 044 Lease Liabilities 98 807 78 948 Total financial liabilities at amortised cost GROUP 2020 2019 Fair value through profit or loss 302 302 - Currency swap - Total financial liabilities through profit or loss Changes in financial liabilities at fair value through profit or loss: GROUP 2020 2019 - 302 302 - As at 1 January 2020 - Changes in fair value - As at 31 December 2020 PARENT 2020 2019 21 059 17 988 57 567 40 696 18 338 19 085 3 616 3 142 100 580 80 911 PARENT 2020 2019 302 302 - - PARENT 2020 2019 - 302 302 - - - Interest-bearing loans and borrowings: The Group has long-term revolving credit facilities ("RCF"), which enables it to borrow up to USD 40m and USD 25m at any time with an interest rate equal to LIBOR + margin. The line of credit agreement of USD 40m and USD 25m expires in November 2022. As of December 31, 2020, Nordic has 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 62m, accounts receivable USD 88m and operating equipment USD 23m. 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 10m 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 41m for the office in Trondheim and SEK 0.4m for the office in Stockholm. The first warranty is given to secure payments of up to 24 months of rent for the office in Trondheim. Fair value measurement The financial instruments that are carried at fair value are revalued on a recurring basis. The financial instruments are not designated at fair value through profit or loss on intital recognition. In 2020, the Group has invested in these financial assets and liabilities using the following methods and assumptions: Money market fund is defined as cash equivalents because the asset is liquid and not subject to material flucations in value. The asset is measured at quoted market price in an active market at the balance sheet date. Currency swap represents the present value of the future contractual cash flows. The fixed side is specified in the swap agreement as the agreed currency rate and the floating side is the observable spot exchange rates. 68 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Note 23: Financial risk management All figures in USD 1000. The Group's finance department 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 accounts receivables) and from its financing activities, including foreign exchange transactions, cash and cash equivalents with banks and other financial institutions and other financial instruments. Age distribution of customer receivables was: GROUP 2019 2019 Gross total 74 901 55 052 Not due 12 632 6 214 Past due 0-30 days 125 376 1 948 Past due 31-120 days 1 304 Over 120 days 88 034 64 519 Total 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 accounts receivables are regularly monitored and assurance from distributors that end customer sales is secured through letter of credits is obtained. The Group make an allowances for expected credit losses on receivables based on a provision matrix that 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. PARENT 2020 2019 74 901 55 052 12 632 125 376 6 214 1 948 1 304 88 034 64 519 Historically there has not been any significant credit losses. On a forward looking perspective, 85 percent of trade receivables are within terms. On that basis, expected credit loss for trade receivables are limited and allowances for doubtful accounts at 31 December 2020 equal 0. 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. Financial assets at fair value through profit or loss The Group is also exposed to credit risk in relation to debt investments that are measured at fair value through profit and loss. The maximum exposure to credit risk on the balance sheet date was: GROUP 2020 2019 88 034 64 519 Accounts receivable 9 372 11 359 Other short-term receivables 97 406 75 878 Total PARENT 2020 2019 88 034 64 519 10 062 10 045 98 096 74 563 69 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Liquidity risk Liqudity risk is the risk that the Group will encounter difficulty in meeting financial obligations when due and to close out market positions. As of 31 December 2020, cash and cash equivalents amounted to USD 242.5m (USD 90.6m), see note 16 for details. The total balance includes money market fund at fair value USD 54.7m. Overall, we monitor cash flows at both Group and entity level. The Group seeks to minimize risk when investing its cash balances and . Investments can only be made in securities which have been approved by the Board. 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, 2020: GROUP Accounts payable Currency swap Other short-term liabilities Lease liabilities* Total PARENT Accounts payable Payable to subsidiaries Currency swap Other short-term liabilities Lease liabilities* Total Carrying amount Contractual cash flow Less than one year One to five years More than five year 22 812 302 63 539 26 523 113 177 22 812 302 63 539 29 277 115 930 22 812 302 63 539 6 322 92 975 17 092 17 092 5 863 5 863 Carrying amount Contractual cash flow Less than one year One to five years More than five year 21 059 4 618 302 65 313 21 953 21 059 4 618 302 65 313 27 116 113 245 118 408 21 059 4 618 302 65 313 4 345 95 637 14 362 14 362 5 863 5 863 *Lease liabilities is mainly office facility rent in Oslo and Trondheim 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. The Group has long-term revolving credit facilities, which allows it to borrow up to a total of USD 65m at an interest rate of LIBOR + margin. The line of credit agreement of USD 40m and USD 25m 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 exchange risk arises from future commercial transactions and liabilities denominated in a currency that is not the functional currency of the relevant group entity. recognised assets and The dominated functional currency for the Group is USD. Nearly all revenues and cost of goods are in USD, but approximately 50% and 20% of the Group’s operating expenses (excluding depreciation and amortisation) and tax cash flows are denominated in NOK and EUR. The Group does not use hedging instruments to minimize its exposure to foreign currency risk from operating activities affecting profit and loss. Below is a sensitivity analysis of changes in the NOK exchange rate on Group balance sheet items, and their impact on profit and loss: Foreign currency risk The Group is subject to foreign currency risk as it operates internationally with development and commercial activities. Profit before tax NOK exchange rate +/- 10% +/- 4 488 70 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS The table below shows the Group's exposure in sales to foreign currency risk in the most significant currencies: GROUP 2020 2019 Local currency (1000) 404 011 1 061 USD EUR Total USD (1000) Share of total revenues in % Local currency (1000) USD (1000) Share of total revenues in % 404 011 1 206 405 217 99.7 % 0.3 % 100.0 % 287 124 287 124 1 134 1 271 99.6 % 0.4 % 288 395 100.0 % PARENT 2019 2018 Local currency (1000) USD (1000) Share of total revenues in % Local currency (1000) USD (1000) Share of total revenues in % USD EUR Other Total 404 217 1 605 404 217 1 830 194 99.5 % 0.5 % 0.0 % 287 124 287 124 1 730 1 933 169 99.3 % 0.7 % 0.1 % 406 242 100.0 % 289 226 100.0 % The Group uses derivative financial instruments to reduce its exposure to currency exchange rate movements and hold currency swap in relation to fixed income fund investments. Derivatives are not held for speculative purposes. All derivative financial instruments are recognized as assets and liabilities measured at fair value, and all fair value gains and losses are recognized in profit or loss. Where the fair value of a derivative on initial recognition differs from the transaction price, if any, the difference is recognized immediately in profit or loss only if the fair value is evidenced by a quoted price in an active market or is based on a valuation technique that uses only data from observable markets. 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 2020 2019 Accounts receivable 64 519 Accounts receivable Accounts payable 87 731 300 19 898 2 007 480 427 88 034 22 812 64 519 2020 2019 Accounts payable 15 809 1 886 1 547 497 19 738 Accounts receivable Accounts payable Accounts receivable Accounts payable 87 731 300 19 898 64 519 351 480 330 88 034 21 059 64 519 15 809 109 1 547 523 17 988 71 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | 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 2020 2019 Book value Fair market value Book value Fair market value Financial assets Accounts receivables Short-term receivables Cash and cash equivalents incl. money market fund Financial liabilities Accounts payable Current financial liabilities Other short-term liabilities 88 034 9 372 242 547 54 701 22 812 302 49 472 88 034 9 372 242 547 54 701 22 812 302 49 472 64 519 3 190 90 645 19 738 0 35 279 64 519 3 190 90 645 19 738 0 35 279 PARENT 2020 2019 Book value Fair market value Book value Fair market value Financial assets Accounts receivables Short-term receivables Cash and cash equivalents incl. money market fund Financial liabilities Accounts payable Current financial liabilities Other current liabilities 88 034 10 062 228 024 54 701 21 059 302 57 265 88 034 10 062 228 024 54 701 21 059 302 57 265 64 519 2 322 83 237 17 988 0 40 696 64 519 2 322 83 237 17 988 0 40 696 Book value is a reasonable estimate of fair value in cases where these numbers are identical. 72 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Note 24: Business combination On 31 December 2020, the Group completed the acquisition of Imagination Technologies’ Wi-Fi business in UK, Taiwan, the India and Sweden. The acquisition development team, 81 employees, associated Wi-Fi IP tech assets and 100 % of the shares in Imagination Technologies AB and Imagination Technologies Hyderabad Pvt Ltd. included Our provisional allocation of the purchase price to the identifiable assets and liabilities and goodwill is set out below. Identifiable intangible assets being transferred to the Group as part of the transaction comprise of Wi-Fi 6, which is still under development, Wi-Fi 5 and Wi-Fi 4. The goodwill arising on this business combination can be attributed to the skills and talent of the in-place work-force and the synergies expected to be achieved from integrating the acquired operations into the Group’s existing business. Provisional fair value of net assets acquired Software and other intangible assets Fixed Assets Other current receivables Accounts payable Income taxes payable Public duties Other current liabilities Net identifiable assets acquired Goodwill arising on acquisition Consideration Satisfied by: Cash consideration Cash acquired Total consideration The acquisition date was December 31, 2020 meaning the business acquired did not contribute to any profit and loss in Q4-2020. During Q4 2020, we incurred transaction costs of USD 296 254. Expected economic lifetime of identifiable intangible asset is 5 years for accounting and tax purposes. Goodwill is acquired through business combination and represent the fair value of know-how from the employee related Imagination the Wi-fi business unit of Technologies UK Ltd. We have only identified one business unit that the acquired goodwill is allocated to, and that represents the Nordic business as whole. to Goodwill is tested for impairment annually, first in Q3 2021, at the level of the cash generating segment to which it is allocated. USD thousand 11 447 125 397 (87) 151 271 (1 540) 10 765 2 393 13 158 14 245 (1 087) 13 158 Goodwill is deductive for tax purposes, with 20 % annual rate. If the acquisition had occurred on 1 January 2020, consolidated pro-forma revenue would have been unchanged and Group profit for the year ended 31 December 2020 would have been reduced by USD 8.4 million. The amounts have been calculated using the subsidiary’s results and adjusting them for: group and the subsidiary, and differences in the accounting policies between the the additional depreciation and amortisation that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from 1 January 2020, together with the consequential tax effects. 73 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | FINANCIAL STATEMENTS Cash flows in relation to business combination The net cash outflow on the purchase of businesses was as follows: Cash flows from investing activities (amount in USD thousand) Cash consideration Cash and cash equivalents acquired Net cash consideration within investment activities 14 245 (1 087) 13 158 Note 25: Events after the balance sheet date There are no events after the balance sheet date with materially affect on the financial statements. Note 26: Related party transactions Nordic Semiconductor ASA, the ultimate parent company of the Group, is listed on Oslo Stock exchange. The Group has no material transactions with related parties. The ultimate parent company has transactions with its wholly-owned subsidiaries, see note 15 for further information. 74 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | 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 2020 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 16, 2021 Jan Frykhammar Board member Birger Steen Chair Anita Huun Board member Inger Berg Ørstavik Board member Svenn-Tore Larsen Chief Executive Officer Endre Holen Board member Øyvind Birkenes Board member Jon Helge Nistad Board member, employee Annastiina Hintsa Board member Joel Stapelton Board member, employee Susheel Raj Nuguru Board member, employee Morten Dammen Board member, employee 76 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | DECLERATION TO THE ANNUNAL REPORT 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, India, Sweden, UK, Japan, Taiwan, Poland, Finland, Germany and the Philippines. for form a basis 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 the company’s executive that 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 7777 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | 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 21, 20120 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 2021. 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 21, 2020, 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 2021, 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 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. the stock exchange of reasons its 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. 7878 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | 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 for notification of attendance is one working day prior to the Annual General Meeting. The Board of Directors should further ensure that: the final date 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. In 2020 and in 2021 the Annual General Meeting was held as a video conference and all shareholders were given the opportunity to both view and participate in the 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. shareholders or who The Nomination Committee consists of three members who are 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. represent The members of the Nomination Committee are: John Harald Henriksen (Chair) Viggo Leisner Eivind Lotsberg Deviations from the Code of Practice: None. The composition and independence of the Board of Directors Norwegian companies can be governed by either a one-tier or a two-tier board structure, consisting of a board of directors and, in a two-tier structure, a corporate assembly. Any company with more than 200 employees is generally required to have a corporate assembly, with two-thirds of the members elected by shareholders and one-third elected by the company's employees. If a company agrees with its employees not to have a corporate assembly, employees have the right to appoint additional representatives to the board of directors. The company has agreed with its employees to not have a corporate assembly and thereby 7979 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | STANDARDS OF CORPORATE GOVERNANCE increased the numbers of employees elected Board members. In 2020, the Board consisted of 7 shareholder elected Board Members and 3 employee elected Board Members. recommends The Norwegian Code of Practice for Corporate Governance that a majority of shareholder-elected directors are independent of the Company and its executive management and that no members of executive management serve as directors. Furthermore, the Norwegian Public Companies Act prohibits the CEO from serving as chair and requires that public companies have boards of directors consisting of at least 40% women. Board is responsible, to the degree necessary, for approving business strategies and budgets for the company. The Board is also responsible for ensuring executive that management with clear internal distribution of responsibility and work. company has competent the 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 2021 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 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. During 2020, the Board held 8 ordinary Board Meetings and 5 extraordinary meetings. As a result of the pandemic, all meetings except one were conducted online. All Board Members attended all meetings. 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. 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. At least 40% of the shareholder elected Board Members are female (in 2020 three out of seven or 43%). 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 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. to The Board has established a People and Compensation Committee 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 had 5 meetings in 2020. The People and Compensation committee consist of the following Board Members: Endre Holen (Chair) Birger K. Steen Jon Helge Nistad The members of the People and Compensation Committee are the compensation programs are fair and appropriate, but also reflect the challenges related to attracting and to ensure selected that 8080 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | STANDARDS OF CORPORATE GOVERNANCE retaining key talent in a global technology market for engineers. Therefore, the committee both consists of an employee elected Board Member and two shareholder elected Board Members with extensive experience from the global technology space. All members participated in all meetings. 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 for Board meetings. resolutions The Audit Committee held 6 meetings in 2020 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. The Audit Committee consists of the following Board Members: Jan Frykhammar (Chair) Inger Berg Ørstavik Anita Huun The members of the of the Audit Committee have extensive experience to be able to properly oversee the Company's accounting, financial reporting, and internal and external audits; and general adherence to principles of good corporate governance. One of the members has extensive experience from the CFO role in a global technology company, one member has experience from both investment banking and the CFO role and the final member has experience as a professor in Law. All members participated in all meetings. 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 risk social management system is fundamental to the achievement of its financial goals. responsibility. Nordic Semiconductor’s 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. 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. 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 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. accounts. annual Deviations from the Code of Practice: None. 8181 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | STANDARDS OF CORPORATE GOVERNANCE 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, 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. long-term incentives Deviations from the Code of Practice: None. 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). 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 2021 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 quarterly company’s 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. The Company’s activities. Nordic Semiconductor’s Chief Financial Officer is responsible for contact with shareholders outside of the General Meeting. In addition the Investor Relations Director has extensive contact with shareholders. The Chief Financial Officer and Investor Relations Director 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. Auditor PWC was elected effective 2019 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. All other services than audit services performed by PWC are approved by the Audit Committee. Deviations from the Code of Practice: None. 8282 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | STANDARDS OF CORPORATE GOVERNANCE 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 statement of financial position as at 31 December 2020, 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, and • The consolidated financial statements of Nordic Semiconductor ASA and its subsidiaries (the Group), which comprise the statement of financial position as at 31 December 2020, 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 2020, 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 2020, 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. 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 8383 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | AUDITOR OPINION LETTER Independent Auditor's Report - Nordic Semiconductor ASA 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. The business activities are largely unchanged compared to last year. We have not identified regulatory changes, transactions or other events that qualified as new key audit matters. Revenue recognition has the same characteristics and risks this year as the previous year and consequently have been an area of focus also for the 2020 audit 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 2020 and expected sales mix. An estimate for this discount is provided for in the financial statements, reducing revenue and increasing liabilities with 16,2 million USD as of 31 December 2020. Due to the judgements involved, we determine the ship and debit provision to be a key audit matter. Refer to note 2.2, note 2.5 and note 3.3 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 2020. 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 2020 and reviewed a sample of distributor sales agreements. We performed a retrospective review of the monthly ship and debit provisions throughout 2020 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 2020 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 2020 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 2021 and compared the ship and debit level to the ship and debit provision as of 31 December 2020. Based on our audit procedures we found management’s assumptions to be reasonable. We also assessed the information in note 2.2, note 2.5 and note 3.3 and found it appropriate. (2) 8484 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | AUDITOR OPINION LETTER Independent Auditor's Report - Nordic Semiconductor ASA Other information 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. 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 a true and fair view 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 (3) 8585 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | AUDITOR OPINION LETTER Independent Auditor's Report - Nordic Semiconductor ASA 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 a true and fair view. 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. (4) 8686 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | AUDITOR OPINION LETTER Independent Auditor's Report - Nordic Semiconductor ASA 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, 16 March 2021 PricewaterhouseCoopers AS Eivind Nilsen State Authorised Public Accountant (This document is signed electronically) (5) 8787 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | AUDITOR OPINION LETTER Board of Directors & Executive Management Board of Directors Birger Steen | Chair Chair of the Board since 2018 and board member since 2017 Birger Steen is a technology investor based in Munich, Germany and serves as Principal at Summa Equity AB. 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, Nordea Bank AB since 2015, where he chairs the Board Operations and Sustainability Committee, and at Cognite AS and Pagero AB since 2019. He is the founder and Chair of the Nordic Innovation Summit in Seattle and Chair of the Advisory Board at Digital Norway. Current holdings in the company: 181 231 shares. Inger Berg Ørstavik | Board Member Board member since 2017 Inger Berg Ørstavik is a 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 has experience as a member of the Board of Directors in several listed companies. Current holdings in the company: 3 431 shares. Jan Frykhammar | Board Member Board member since 2019 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: 22 431 shares. 89 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | BOARD OF DIRECTORS Anita Huun | Board Member Board member since 2019 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: 11 431 shares. Endre Holen | Board Member Board member since 2019 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: 153 061 shares. Øyvind Birkenes | Board Member Board member since 2019 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: 8 773 shares. Annastiina Hintsa | Board Member Board member since 2019 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: 2 431 shares. 90 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | BOARD OF DIRECTORS Employee Representatives Jon Helge Nistad | Board Employee Representative Board member since 2017 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, 2 854 share options and 600 RSUs. Joel Stapelton | Board Employee Representative Board member since 2020 Joel Stapleton is an Engineer, graduating with honors from The Australian National University in 2002. He joined Nordic in 2008 after working with GPS systems and secure communication systems in Australia. At Nordic, Joel has had several roles as an embedded SW Engineer, SW Architect, and since 2012, as a Technical Product Manager specifying Wireless SoC and Bluetooth SW platform products working with Nordic Sales and R&D teams and key customers. Current holdings in the company: 0 shares, 3 889 shares options and 2 650 RSUs. Susheel Ray Nuguru | Board Employee Representative Board member since 2018 Susheel Raj 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, 1 709 share options and 600 RSUs. Morten Dammen | Board Employee Representative Board member since 2019 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, 4 073 share options and 2 150 RSUs. 91 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | BOARD OF DIRECTORS 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, 46 109 share options, 10 621 RSUs and 24 057 performance shares. 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: 18 846 shares, 29 761 share options, 6 345 RSUs and 12 747 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. Holdings in the company: 0 shares, 13 334 share options, 5 241 RSUs and 5 241 performance shares. 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 is on the committee for the annual winter seminar for Industrijuristgruppen/Industry Lawyer Association. 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: 2 200 shares, 10 298 share options, 4 000 RSUs and 7 506 performance shares.and 7 506 performance shares. 9292 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | 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, 12 714 share options, 4 276 RSUs and 8 087 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: 187 700 shares, 30 511 share options, 6 621 RSUs and 13 328 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: 180 000 shares, 27 134 share options, 5 241 RSUs and 10 576 performance shares. 9393 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | 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, 32 763 share options, 7 172 RSUs and 14 794 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, 17 507 share options, 4 276 RSUs and 8 544 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: 126 000 shares, 16 633 share options, 4 414 RSUs and 9 140 performance shares. 9494 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | EXECUTIVE MANAGEMENT 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. EBITDA Margin. EBITDA divided by Total Revenue. GROUP Gross profit Total revenue Gross Margin 2020 2019 GROUP 213.9 146.8 EBITDA 405.2 288.4 Total Revenue 52.8% 50.9% EBITDA Margin 2020 76.8 2019 32.8 405.2 288.4 18.9% 11.4% EBITDA terms are presented as they are commonly used by investors and financial analysts. EBITDA. Earnings before interest, taxes (operating profit), depreciation and amortization. Short-range 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 Operating profit Depreciation EBITDA 2020 2019 GROUP 45.7 31.1 76.8 9.3 23.5 32.8 Reported EBITDA Long-range (cellular IoT) EBITDA loss 2020 76.8 2019 32.8 30.2 24.7 Short-range EBITDA 106.9 57.6 Total revenue (excluding cellular IoT revenue) 398.7 287.3 Short-range EBITDA margin 26.8% 20.0% 9595 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | 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 operating expenses Depreciation Total operating expenses Depreciation Option expense Capitalized expenses Cash Operating Expenses 2020 101.2 35.9 31.1 168.2 -31.1 -4.3 8.4 141.2 2019 80.3 33.7 23.5 137.5 -23.5 -1.8 11.3 123.4 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 2020 168.2 -31.1 137.2 405.2 33.8% 2019 137.4 -23.5 113.9 288.4 39.5% 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 financial liabilities Current lease liabilities Income taxes payable Net working capital Total revenue NWC / LTM revenue 2020 401.9 -242.5 -91.7 0.3 5.5 5.0 78.5 405.2 19.4% 2019 219.6 -90.6 -66.0 - 4.0 3.1 70.2 288.4 24.3% 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. 9696 NORDIC SEMICONDUCTOR | ANNUAL REPORT 2020 | ALTERNATIVE PERFORMANCE MEASURES Nordic offices TRONDHEIM, NORWAY HEAD OFFICE OSLO, NORWAY OULU, FINLAND STOCKHOLM, SWEDEN TAMPERE, FINLAND LUND, SWEDEN UNITED KINGDOM ESPOO, FINLAND TURKU, FINLAND KRAKOW, POLAND DÜSSELDORF, GERMANY PORTLAND, USA SAN JOSE, USA HYDERABAD, INDIA HONG KONG, CHINA 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 BEIJING, CHINA SEOUL, KOREA SHENZHEN, CHINA YOKOHAMA, JAPAN SHANGHAI, CHINA TAIPEI, TAIWAN MANILA, PHILIPPINES
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