Adeia Inc. - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-39304

XPERI HOLDING CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware		84-4734590
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

3025 Orchard Parkway, San Jose, California		95134
(Address of Principal Executive Offices)		(Zip Code)

(408) 321-6000

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock (par value $0.001 per share)

XPER

Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the registrant’s common stock as of October 30, 2020 was 105,707,630.

XPERI HOLDING CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2020 and 2019	3
	Condensed Consolidated Statements of Comprehensive Loss – Three and Nine Months Ended September 30, 2020 and 2019	4
	Condensed Consolidated Balance Sheets – September 30, 2020 and December 31, 2019	5
	Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2020 and 2019	6
	Condensed Consolidated Statements of Equity – Three and Nine Months Ended September 30, 2020 and 2019	7
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
Item 4.	Controls and Procedures	55

	PART II
Item 1.	Legal Proceedings	57
Item 1A.	Risk Factors	58
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults Upon Senior Securities	60
Item 4.	Mine Safety Disclosures	60
Item 5.	Other Information	60
Item 6.	Exhibits	61

Signatures		62

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

XPERI HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended						Nine Months Ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Revenue:
Licensing, services and software	$	195,319		$	57,750		$	448,802		$	189,093
Hardware		7,478			117			9,291			456
Total revenue		202,797			57,867			458,093			189,549
Operating expenses:
Cost of licensing, services and software revenue, excluding depreciation and amortization of intangible assets		21,854			1,462			31,646			5,970
Cost of hardware revenue, excluding depreciation and amortization of intangible assets		12,216			44			13,688			271
Research, development and other related costs		57,731			25,998			124,565			78,004
Selling, general and administrative		63,785			27,588			168,586			84,120
Depreciation expense		6,753			1,629			11,815			5,056
Amortization expense		50,894			25,146			105,447			75,919
Litigation expense		8,527			1,527			14,501			4,049
Total operating expenses		221,760			83,394			470,248			253,389
Operating loss		(18,963	)		(25,527	)		(12,155	)		(63,840	)
Interest expense		(13,393	)		(5,506	)		(24,602	)		(18,390	)
Other income and expense, net		2,305			429			3,448			7,537
Loss on debt extinguishment		—			—			(8,300	)		—
Loss before taxes		(30,051	)		(30,604	)		(41,609	)		(74,693	)
Provision for (benefit from) income taxes		482			(14,583	)		(6,761	)		(27,080	)
Net loss	$	(30,533	)	$	(16,021	)	$	(34,848	)	$	(47,613	)
Less: net loss attributable to noncontrolling interest		(781	)		(407	)		(1,819	)		(1,095	)
Net loss attributable to the Company	$	(29,752	)	$	(15,614	)	$	(33,029	)	$	(46,518	)
Loss per share attributable to the Company:
Basic	$	(0.28	)	$	(0.32	)	$	(0.44	)	$	(0.95	)
Diluted	$	(0.28	)	$	(0.32	)	$	(0.44	)	$	(0.95	)

Weighted average number of shares used in per share calculations-basic		107,499			49,459			75,441			49,036
Weighted average number of shares used in per share calculations-diluted		107,499			49,459			75,441			49,036

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

XPERI HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

	Three Months Ended						Nine Months Ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Net loss	$	(30,533	)	$	(16,021	)	$	(34,848	)	$	(47,613	)
Other comprehensive income, net of tax:
Change in foreign currency translation adjustment		740			—			895			—
Net unrealized gain (loss) on available-for-sale debt securities		(91	)		53			(23	)		321
Other comprehensive income, net of tax		649			53			872			321
Comprehensive loss		(29,884	)		(15,968	)		(33,976	)		(47,292	)
Less: comprehensive loss attributable to noncontrolling interest		(781	)		(407	)		(1,819	)		(1,095	)
Comprehensive loss attributable to the Company	$	(29,103	)	$	(15,561	)	$	(32,157	)	$	(46,197	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

XPERI HOLDING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for par value)

(unaudited)

	September 30, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	115,725		$	74,551
Available-for-sale debt securities, at fair value (amortized cost and allowance for credit losses of $87,262 and $0, respectively, at September 30, 2020)		87,258			45,802
Equity securities		—			1,124
Accounts receivable, net of allowance for credit losses of $3,624 and $566, respectively		111,915			24,177
Unbilled contracts receivable		164,138			121,826
Other current assets		36,084			13,735
Total current assets		515,120			281,215
Long-term unbilled contracts receivable		15,083			26,672
Property and equipment, net		65,432			32,877
Operating lease right-of-use assets		84,230			17,786
Intangible assets, net		1,005,522			232,275
Goodwill		846,913			385,784
Other long-term assets		136,395			71,336
Total assets	$	2,668,695		$	1,047,945
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	18,829		$	4,650
Accrued legal fees		9,607			1,316
Accrued liabilities		98,762			41,433
Deferred revenue		37,045			720
Current portion of long-term debt, net		43,704			—
Total current liabilities		207,947			48,119
Deferred revenue, less current portion		23,400			—
Long-term deferred tax liabilities		29,751			29,735
Long-term debt, net		956,530			334,679
Noncurrent operating lease liabilities		69,463			13,414
Other long-term liabilities		95,637			76,898
Total liabilities		1,382,728			502,845
Commitments and contingencies (Note 15)
Company stockholders’ equity:
Preferred stock: $0.001 par value; authorized (2020: 15,000 shares; 2019: 10,000 shares) and no shares issued and outstanding		—			—
Common stock: $0.001 par value; (2020: authorized 350,000 shares, issued 110,020 shares, outstanding 105,692 shares; 2019: authorized 150,000 shares, issued 63,622, outstanding 49,620 shares)		110			64
Additional paid-in capital		1,255,856			768,284
Treasury stock at cost (2020: 4,328 shares; 2019: 14,002 shares)		(55,920	)		(368,701	)
Accumulated other comprehensive income (loss)		819			(53	)
Retained earnings		89,709			148,317
Total Company stockholders’ equity		1,290,574			547,911
Noncontrolling interest		(4,607	)		(2,811	)
Total equity		1,285,967			545,100
Total liabilities and equity	$	2,668,695		$	1,047,945

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

XPERI HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended
	September 30, 2020			September 30, 2019
Cash flows from operating activities:
Net loss	$	(34,848	)	$	(47,613	)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation of property and equipment		11,815			5,056
Amortization of intangible assets		105,447			75,919
Stock-based compensation expense		26,614			22,832
Deferred income taxes		(28,158	)		(43,101	)
Loss on debt extinguishment		8,300			—
Other		8,635			1,484
Changes in operating assets and liabilities:
Accounts receivable		14,982			9,202
Unbilled contracts receivable		37,874			96,905
Other assets		(21,793	)		2,726
Accounts payable		921			626
Accrued and other liabilities		(6,471	)		(17,402	)
Deferred revenue		6,115			(2,420	)
Net cash from operating activities		129,433			104,214
Cash flows from investing activities:
Purchases of property and equipment		(2,975	)		(7,956	)
Proceeds from sale of property and equipment		—			55
Cash acquired in merger transaction		117,424			—
Purchases of intangible assets		(692	)		—
Purchases of short-term investments		(68,093	)		(34,475	)
Proceeds from sales of investments		7,189			6,833
Proceeds from maturities of investments		19,683			22,490
Net cash from investing activities		72,536			(13,053	)
Cash flows from financing activities:
Dividend paid		(25,579	)		(29,588	)
Proceeds from debt, net		1,010,286			—
Repayment of debt		(357,125	)		(100,000	)
Repayment of assumed debt from merger transaction		(734,609	)		—
Contingent consideration payments after acquisition		—			(1,200	)
Proceeds from exercise of stock options		2			672
Proceeds from employee stock purchase program		4,763			5,329
Repurchase of common stock		(59,291	)		(4,282	)
Net cash from financing activities		(161,553	)		(129,069	)
Effect of exchange rate changes on cash and cash equivalents		758			—
Net increase (decrease) in cash and cash equivalents		41,174			(37,908	)
Cash and cash equivalents at beginning of period		74,551			113,625
Cash and cash equivalents at end of period	$	115,725		$	75,717
Supplemental disclosure of cash flow information:
Interest paid	$	20,372		$	16,517
Income taxes paid, net of refunds	$	30,647		$	12,374
Stock issued in merger transaction	$	828,334		$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

XPERI HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands)

(unaudited)

	Total Company Stockholders' Equity
Three Months Ended September 30, 2020	Common Stock						Additional Paid-In			Treasury Stock						Accumulated Other Comprehensive			Retained			Noncontrolling
	Shares			Amount			Capital			Shares			Amount			Income			Earnings			Interest			Total Equity
Balance at July 1, 2020		108,148		$	109		$	1,245,717			1,277		$	(17,572	)	$	170		$	124,887		$	(3,844	)	$	1,349,467
Issuance of subsidiary shares to noncontrolling interest		—			—			(18	)		—			—			—			—			18			—
Net loss		—			—			—			—			—			—			(29,752	)		(781	)		(30,533	)
Other comprehensive income		—			—			—			—			—			649			—			—			649
Cash dividends paid on common stock ($0.05 per share)		—			—			—			—			—			—			(5,426	)		—			(5,426	)
Issuance of restricted stock, net of shares canceled		595			1			—			—			—			—			—			—			1
Repurchases of common stock, shares exchanged		(219	)		—			—			219			(3,262	)		—			—			—			(3,262	)
Repurchases of common stock		(2,832	)		—			—			2,832			(35,086	)		—			—			—			(35,086	)
Stock-based compensation expense		—			—			10,157			—			—			—			—			—			10,157
Balance at September 30, 2020		105,692		$	110		$	1,255,856			4,328		$	(55,920	)	$	819		$	89,709		$	(4,607	)	$	1,285,967


	Total Company Stockholders' Equity
Nine Months Ended September 30, 2020	Common Stock						Additional Paid-In			Treasury Stock						Accumulated Other Comprehensive			Retained			Noncontrolling
	Shares			Amount			Capital			Shares			Amount			Income (Loss)			Earnings			Interest			Total Equity
Balance at January 1, 2020		49,620		$	64		$	768,284			14,002		$	(368,701	)	$	(53	)	$	148,317		$	(2,811	)	$	545,100
Issuance of subsidiary shares to noncontrolling interest		—			—			(23	)		—			—			—			—			23			—
Net loss		—			—			—			—			—			—			(33,029	)		(1,819	)		(34,848	)
Other comprehensive income		—			—			—			—			—			872			—			—			872
Cash dividends paid on common stock ($0.45 per share)		—			—			—			—			—			—			(25,579	)		—			(25,579	)
Issuance of common stock in connection with employee stock purchase plan		355			—			4,763			—			—			—			—			—			4,763
Issuance of restricted stock, net of shares canceled		1,929			2			—			—			—			—			—			—			2
Repurchases of common stock, shares exchanged		(602	)		—			—			602			(9,206	)		—			—			—			(9,206	)
Repurchases of common stock		(3,910	)		—			—			3,910			(50,085	)		—			—			—			(50,085	)
Common stock issued in merger transaction		58,300			58			828,276			—			—			—			—			—			828,334
Retirement of treasury stock		—			(14	)		(372,058	)		(14,186	)		372,072			—			—			—			—
Stock-based compensation expense		—			—			26,614			—			—			—			—			—			26,614
Balance at September 30, 2020		105,692		$	110		$	1,255,856			4,328		$	(55,920	)	$	819		$	89,709		$	(4,607	)	$	1,285,967

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

XPERI HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (continued)

(in thousands)

(unaudited)

	Total Company Stockholders' Equity
Three Months Ended September 30, 2019	Common Stock					Additional Paid-In			Treasury Stock					Accumulated Other Comprehensive			Retained			Noncontrolling
	Shares			Amount		Capital			Shares		Amount			Income (Loss)			Earnings			Interest			Total Equity
Balance at July 1, 2019		49,338		$	63	$	749,187			13,990	$	(368,459	)	$	(60	)	$	199,759		$	(2,001	)	$	578,489
Issuance of subsidiary shares to noncontrolling interest		—			—		(4	)		—		—			—			—			4			—
Net loss		—			—		—			—		—			—			(15,614	)		(407	)		(16,021	)
Other comprehensive income		—			—		—			—		—			53			—			—			53
Cash dividends paid on common stock ($0.20 per share)		—			—		—			—		—			—			(9,902	)		—			(9,902	)
Issuance of common stock in connection with exercise of stock options		9			—		152			—		—			—			—			—			152
Issuance of common stock in connection with employee stock purchase plan		158			—		2,218			—		—			—			—			—			2,218
Issuance of restricted stock, net of shares canceled		32			—		—			—		—			—			—			—			—
Repurchases of common stock, shares exchanged		(1	)		—		—			1		(18	)		—			—			—			(18	)
Stock-based compensation expense		—			—		7,988			—		—			—			—			—			7,988
Balance at September 30, 2019		49,536		$	63	$	759,541			13,991	$	(368,477	)	$	(7	)	$	174,243		$	(2,404	)	$	562,959

	Total Company Stockholders' Equity
Nine Months Ended September 30, 2019	Common Stock					Additional Paid-In			Treasury Stock					Accumulated Other Comprehensive			Retained			Noncontrolling
	Shares			Amount		Capital			Shares		Amount			Income (Loss)			Earnings			Interest			Total Equity
Balance at January 1, 2019		48,408		$	62	$	730,695			13,804	$	(364,195	)	$	(328	)	$	253,208		$	(1,295	)	$	618,147
Issuance of subsidiary shares to noncontrolling interest		—			—		14			—		—			—			—			(14	)		—
Net loss		—			—		—			—		—			—			(46,518	)		(1,095	)		(47,613	)
Other comprehensive income		—			—		—			—		—			321			—			—			321
Other ⁽¹⁾		—			—		—			—		—			—			(2,859	)		—			(2,859	)
Cash dividends paid on common stock ($0.60 per share)		—			—		—			—		—			—			(29,588	)		—			(29,588	)
Issuance of common stock in connection with exercise of stock options		40			—		671			—		—			—			—			—			671
Issuance of common stock in connection with employee stock purchase plan		386			—		5,329			—		—			—			—			—			5,329
Issuance of restricted stock, net of shares canceled		889			1		—			—		—			—			—			—			1
Repurchases of common stock, shares exchanged		(187	)		—		—			187		(4,282	)		—			—			—			(4,282	)
Stock-based compensation expense		—			—		22,832			—		—			—			—			—			22,832
Balance at September 30, 2019		49,536		$	63	$	759,541			13,991	$	(368,477	)	$	(7	)	$	174,243		$	(2,404	)	$	562,959

(1)

Refer to “Note 1 – The Company and Basis of Presentation.”

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

XPERI HOLDING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

On December 18, 2019, Xperi Corporation (“Xperi”) entered into an Agreement and Plan of Merger and Reorganization with TiVo Corporation (“TiVo”) to combine in an all-stock merger of equals transaction (the “Mergers”). Immediately following the consummation of the Mergers on June 1, 2020, (the “Merger Date”), Xperi Holding Corporation (the “Company”), a Delaware corporation founded in December 2019 under the name “XRAY-TWOLF HoldCo Corporation,” became the parent company of both Xperi and TiVo. The common stock of Xperi and TiVo were de-registered after completion of the Mergers. On June 2, 2020, Xperi Holding Corporation’s common stock, par value $0.001 per share, commenced trading on the Nasdaq Global Select Market (“Nasdaq”) under the ticker symbol “XPER.” See “Note 7 – Business Combination” for a more detailed description of the Mergers.

Xperi was determined to be the accounting acquirer in the Mergers. As a result, the historical financial statements of Xperi for periods prior to the Mergers are considered to be the historical financial statements of Xperi Holding Corporation. As used herein, the “Company” refers to Xperi when referring to periods prior to June 1, 2020 and to Xperi Holding Corporation when referring to periods subsequent to June 1, 2020. The Company’s results of operations include the operations of TiVo after June 1, 2020, and TiVo’s assets and liabilities were recorded at their estimated fair values in the Company’s Condensed Consolidated Balance Sheets as of June 1, 2020. See “Note 7 – Business Combination” for additional information on the Mergers.

Xperi Holding Corporation is a leading consumer and entertainment technology licensing company and one of the industry’s largest intellectual property (IP) licensing platforms, with a diverse portfolio of media and semiconductor intellectual property and more than 11,000 patents and applications. The Company invents, develops, and delivers technologies that enable extraordinary experiences. The Company’s technologies, delivered via its brands (DTS, HD Radio, IMAX Enhanced, Invensas, and TiVo) and by its subsidiary Perceive Corporation, make entertainment more entertaining, and smart devices smarter. The Company’s technologies are integrated into billions of consumer devices, media platforms, and semiconductors worldwide, driving increased value for customers, partners and consumers. The Company shapes how millions of consumers access and experience entertainment content, and the Company’s innovations are found in billions of devices and hundreds of millions of interfaces around the globe.

The Company has two principal businesses, a product business and an IP licensing business. The product business consists primarily of licensing Company-developed audio, digital radio, imaging, edge-based machine learning and multi-channel video user experience (“UX”) solutions. Edge based machine learning, audio, digital radio, and imaging solutions include the delivery of software and/or hardware-based solutions to the Company’s consumer electronics (“CE”) customers, automotive manufacturers or their supply chain partners. UX products and services revenue is primarily derived from multi-channel video service providers and CE manufacturers, licensing the TiVo service and selling TiVo-enabled devices, Personalized Content Discovery, enriched Metadata, viewership data and advertising.

The IP licensing business consists primarily of licensing of the Company’s innovations to leading companies in the media and semiconductor industries. Licensing arrangements include access to one or more of the Company’s foundational patent portfolios and may also include access to industry-leading technologies and proven know-how. In the media industry, the Company’s licensees include pay television (“Pay-TV”) providers, both in the United States and internationally, consumer electronics manufacturers, and other providers of video experiences across various platforms, including over-the-top (OTT) video. In the semiconductor industry, the Company’s licensees include semiconductor manufacturers, fabless companies, foundries, and packaging companies.

The accompanying interim unaudited condensed consolidated financial statements as of September 30, 2020 and 2019, and for the three and nine months then ended, have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) for interim financial information. The amounts as of December 31, 2019 have been derived from the Company’s annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto as of and for the year ended December 31, 2019, included in Xperi’s Annual Report on Form 10-K for the year ended December 31, 2019

and TiVo’s Annual Report on Form 10-K for the year ended December 31, 2019, both of which were filed on February 18, 2020.

The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020 or any future period and the Company makes no representations related thereto.

In the fourth quarter of 2018, the Company funded a new subsidiary, Perceive Corporation (“Perceive”), which was created to focus on delivering edge inference solutions. As a result of issuing new shares in Perceive to noncontrolling interests, the Company’s ownership interest in Perceive was approximately 81% as of September 30, 2020. The operating results of Perceive have been consolidated in the Company’s condensed consolidated financial statements for all periods presented.

In the first quarter of 2019, the Company recorded an out-of-period adjustment to decrease current unbilled receivables and decrease retained earnings by $2.9 million to correct an error that originated in the first quarter of 2018 in connection with its adoption of Accounting Standards Update (“ASU”) No. 2014-09 (Topic 606) “Revenue from Contracts with Customers.” The adjustment relates to an error in the Company’s interpretation of the payment terms of a contract entered into in a prior year. The Company determined that the error was not material to any of its prior annual and interim period financial statements, and the impact of such correction was not considered to be material to the financial statements for the three and nine months ended September 30, 2019.

Reclassification

As a result of the Mergers, certain reclassifications of prior period amounts have been made to improve comparability and conform to the current period presentation. Presentation changes were made to the Condensed Consolidated Statements of Operations. In addition, certain reclassifications of prior period data have been made in the Notes to Condensed Consolidated Financial Statements to conform to the current period presentation.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies are detailed in “Note 2 – Summary of Significant Accounting Policies” in its Form 10-K for the year ended December 31, 2019. Certain updates to its revenue recognition policy as a result of the Mergers are provided in “Note 3 – Revenue.”

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates and assumptions that require management’s most significant, challenging, and subjective judgment include the estimation of licensees’ quarterly royalties prior to receiving the royalty reports, the determination of stand-alone selling price and the transaction price in an arrangement with multiple performance obligations, the estimation of variable consideration, judgment used to estimate the progress toward completion in the Company’s engineering services, the collectability of accounts receivable, other intangible assets and investments, the assessment of the recoverability of goodwill, the assessment of useful lives and recoverability of other intangible assets and long-lived assets, recognition and measurement of current and deferred income tax assets and liabilities, the assessment of unrecognized tax benefits, and purchase accounting resulting from business combinations, among others. Actual results experienced by the Company may differ from management’s estimates.

The COVID-19 pandemic has resulted in a global slowdown of economic activity which is likely to reduce the future demand for a broad variety of goods and services, while also disrupting sales channels, marketing activities and supply chains for an unknown period of time until the virus is fully contained. The Company’s business operations have been negatively impacted by the COVID-19 pandemic and related events and the Company expects this disruption to continue to have a negative impact on its revenue and results of operations, the size and duration of which is currently difficult to predict. The impact to date has included a decline in demand in various markets and industries, particularly the automotive market. For example, the Company anticipates approximately 20% decline in its royalty revenue in 2020 from the products sold to the automotive market, such as HD Radio, as compared to the prior year. Although the Company is unable to predict the full impact and duration of COVID-19 on its business, the Company is actively managing its financial expenditures in response to the current uncertainty.

The impact of the COVID-19 pandemic and related events, including actions taken by various government authorities in response, have increased market volatility and make the estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes more difficult. As of the date of issuance of the financial statements, the Company is not aware of any specific event or circumstance that would require it to update its estimates, judgments or revise

the carrying value of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the consolidated financial statements as soon as they become known.

Recently Adopted Accounting Pronouncements

In September 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. The current expected credit loss model is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect collectability. Current expected credit losses, and subsequent adjustments, represent an estimate of lifetime expected credit losses that are recorded as an allowance deducted from the amortized cost of the financial instrument. The updated guidance also amends the other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments for credit-related losses through an allowance and eliminating the length of time a security has been in an unrealized loss position as a consideration in the determination of whether a credit loss exists. On January 1, 2020, the Company adopted the new standard using a modified retrospective transition approach for the provisions related to application of the current expected credit loss model to financial instruments and using a prospective transition approach for the provisions related to credit losses on available-for-sale debt securities. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. For additional detail, refer to “Note 3 – Revenue.”

In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”) modifying the requirements for capitalizing costs incurred to implement a hosting arrangement that is a service contract. The modified requirements were intended to align the cost capitalization requirements for hosting arrangements with the cost capitalization requirements for internal-use software. The Company adopted the standard on January 1, 2020 and applied the modified requirements prospectively to all implementation costs incurred after the date of adoption. The adoption did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements

In December 2019, the FASB released ASU 2019-12, “Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). The purpose of the update is to reduce the complexity pertaining to certain areas in accounting for income taxes. Key amendments from ASU 2019-12 include, but are not limited to, the accounting for hybrid tax regimes, step-up in tax basis for goodwill in non-business combination transactions, intraperiod tax allocation exception to the incremental approach, and interim period accounting for enacted changes in tax law. ASU 2019-12 is effective for the Company in the first quarter of the year ending December 31, 2021. The Company is in the process of evaluating the impact of the adoption of this new standard on its consolidated financial statements and does not currently anticipate a material impact.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in ASU 2020-04 apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 is effective beginning on March 12, 2020 and may be applied prospectively through December 31, 2022. The Company is currently assessing the potential impact of the standard on its consolidated financial statements.

NOTE 3 – REVENUE

Revenue Recognition

General

Revenue is recognized when control of the promised goods or services is transferred to a customer in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services, which may include various combinations of goods and services which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of sales taxes collected from customers which are subsequently remitted to governmental authorities. In situations where foreign withholding taxes are withheld by the Company’s licensee, revenue is recognized gross of withholding taxes that are remitted directly by the licensee to a local tax authority.

Arrangements with Multiple Performance Obligations

Some of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the individual performance obligations are separately accounted for if they are distinct. In an arrangement with multiple performance obligations, the transaction price is allocated among the separate performance obligations on a relative stand-alone selling price basis. The determination of stand-alone selling price considers market conditions, the size and scope of the contract, customer and geographic information, and other factors. When observable prices are not available, stand-alone selling price for separate performance obligations is based on the cost-plus-margin approach, considering overall pricing objectives. The allocation of transaction price among performance obligations in a contract may impact the amount and timing of revenue recognized in the Consolidated Statements of Operations during a given period.

Contract Modifications

Contracts may be modified due to changes in contract specifications or customer requirements. Contract modifications occur when the change in terms either creates new enforceable rights and obligations or changes existing enforceable rights and obligations. The effect of a contract modification for goods and services that are not distinct in the context of the contract on the transaction price is recognized as an adjustment to revenue on a cumulative catch-up basis. Contract modifications that result in goods or services that are distinct from the existing goods or services are accounted for as separate contracts if they are sold at their stand-alone selling price, or otherwise prospectively.

Variable Consideration

When a contract with a customer includes a variable transaction price, an estimate of the consideration which the Company expects to be entitled to for transferring the promised goods or services is made at contract inception. Depending on the terms of the contract, variable consideration is estimated using either the expected value approach or the most likely value approach. Under either approach to estimating variable consideration, the estimate considers all information (historical, current and forecast) that is reasonably available at contract inception. The amount of variable consideration is estimated at contract inception and updated as additional information becomes available. The estimate of variable consideration is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Subsequent changes in the transaction price resulting from changes in the estimate of variable consideration are allocated to the performance obligations in the contract on the same basis as at contract inception. Certain payments to licensees, retailers and distributors, such as market development funds and revenue shares, are treated as a reduction of the transaction price, and therefore a reduction to revenue, unless the payment is in exchange for a distinct good or service that the licensee, retailer or distributor transfers to the Company.

When variable consideration is in the form of a sales-based or usage-based royalty in exchange for a license of IP, or when a license of IP is the predominant item to which the variable consideration relates, revenue is recognized at the later of when the subsequent sale or usage occurs or the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied or partially satisfied.

Nature of Goods and Services

The following is a discussion of the principal activities from which the Company generates its revenue.

License Agreements

The Company operates in two business segments. In its Product segment, the Company licenses its audio, imaging, edge-based machine learning and multi-channel video user experience (“UX”) solutions. In its IP Licensing segment, the Company licenses its media patent portfolios (“IP Media licensing”) to Pay-TV, CE manufacturers and other providers of video experiences across various platforms. In addition, the Company licenses its semiconductor technologies and associated patent portfolios (“IP Semiconductor licensing”) to semiconductor manufacturers, fabless companies, foundries and packaging companies. The Company licenses its technologies and portfolios under three revenue models: (i) fixed-fee IP Media licensing, (ii) fixed-fee or minimum guarantee Product or IP Semiconductor licensing, and (iii) per-unit or per-subscriber royalty licenses.

Fixed-fee IP Media licensing

The Company's long-term fixed-fee IP Media licensing agreements provide its customers with rights to future patented technologies over the term of the agreement that are highly interdependent or highly interrelated to the patented technologies provided at the inception of the agreement. The Company treats these rights as a single performance obligation with revenue recognized on a straight-line basis over the term of the fixed-fee license agreement.

At times, the Company enters into license agreements in which a licensee is released from past patent infringement claims or is granted a license to ship an unlimited number of units or for an unlimited number of subscribers over a future period for a fixed fee. In these arrangements, the Company allocates the transaction price between the release for past patent infringement claims and the future license. In determining the stand-alone selling price of the release for past patent infringement claims and the future license, the Company considers such factors as the number of units shipped in the past or the number of past subscribers and the relevant geographies of the shipped units or subscribers, the future number of subscribers or units, as well as the licensing rate the Company generally receives for per subscriber or units shipped in the same geographies. As the release from past patent infringement claims is generally satisfied at execution of the agreement, the transaction price allocated to the release from past patent infringement claims is generally recognized in the period the agreement is executed and the amount of transaction price allocated to the future license is recognized ratably over the future license term.

Fixed-fee or minimum guarantee IP Semiconductor or Product licensing

The Company enters into IP Semiconductor or Product licenses that have fixed fee or minimum guarantee arrangements, whereby licensees pay a fixed fee for the right to incorporate the Company’s technology in the licensee's products over the license term. In arrangements with a minimum guarantee, the fixed fee component corresponds to a minimum number of units or dollars that the customer must produce or pay, with additional per-unit fees for any units or dollars exceeding the minimum. In most cases, the customer pays the fixed license fee in specified installments over the license term. For both fixed fee and minimum guarantee agreements for IP Semiconductor or Product licensing, the Company recognizes the full fixed fee as revenue at the beginning of the license term, when the licensee has the right to use the IP and begins to benefit from the license.

If the contract term of a fixed fee or minimum guarantee arrangement is longer than one year, the Company also considers the scheduled payment arrangements to determine whether a significant financing component exists. In general, if the payment arrangements extend beyond the initial twelve months of the contract, the Company treats a portion of the payments as a significant financing component. The discount rate used for each arrangement reflects the rate that would be used in a separate financing transaction between the Company and the licensee at contract inception and takes into account the credit characteristics of the licensee and market interest rates as of the date of the agreement. As such, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component. As payments are received from the licensee, the Company recognizes a portion of the financing component as interest income, reported as other income and expense in the Consolidated Statements of Operations.

Per-unit or per-subscriber royalty licenses

The Company recognizes revenue from per-unit or per-subscriber royalty licenses in the period in which the licensee's sales or production are estimated to have occurred, which results in an adjustment to revenue when actual sales or production are subsequently reported by the licensee, which is generally in the month or quarter following usage or shipment. The Company generally recognizes revenue from royalty licenses on a per-subscriber per-month model for licenses with service providers and a per-unit shipped or manufactured model for licenses with CE manufacturers.

Compliance Audits

The Company actively monitors and enforces its IP, including seeking appropriate compensation from customers that have under-reported royalties owed under a license agreement and from third parties that utilize the Company’s intellectual property without a license. As a result of these activities, the Company may, from time to time, recognize revenue from payments resulting from periodic compliance audits of licensees for underreporting royalties incurred in prior periods, as part of a settlement of a patent infringement dispute, or from legal judgments in a license dispute. These recoveries and settlements may cause revenue to be higher than expected during a particular reporting period and such recoveries may not occur in subsequent periods. The Company recognizes revenue from recoveries when a binding agreement has been executed and the Company concludes collection under that agreement is likely.

Arrangements with Multiple System Operators for the TiVo Service

The Company's arrangements with multiple system operators ("MSOs") typically include software customization and set-up services, associated maintenance and support, limited training, post-contract support, TiVo-enabled DVRs, non-DVR Set-Top Boxes (“STBs”), and the TiVo service.

The Company has two types of arrangements with MSOs that include technology deployment and engineering services. In instances where the Company hosts the TiVo service, non-refundable payments received for customization and set-up services are deferred and recognized as revenue ratably over the hosting term. The related cost of such services is capitalized to the extent it is deemed recoverable and amortized to cost of revenue over the same period as the related TiVo service revenue is

recognized. The Company estimates the stand-alone selling prices for training, DVRs, non-DVR STBs and maintenance and support based on the price charged in stand-alone sales of the promised good or service. The stand-alone selling price for the TiVo service is determined by considering the size of the MSO and expected volume of deployment, market conditions, competitive landscape, internal costs and total gross margin objectives. For a term license to the TiVo service, the Company receives license fees for the hosted TiVo service on either a per-subscriber per-month basis or a fixed fee. The Company recognizes revenue from per-subscriber per-month licenses during the month the TiVo service is provided to the customer and recognizes revenue from fixed fee licenses ratably over the license period.

In arrangements where the Company does not host the TiVo service, which includes engineering services that are essential to the functionality of the licensed technology or involve significant customization or modification of the software, the Company recognizes revenue as progress toward completion is made using an input method based on the ratio of costs incurred to date to total estimated costs of the project. Project costs are primarily labor related to specific activities required for the project. Costs related to general infrastructure or uncommitted platform development are not included in the project cost estimates and are expensed as incurred. Estimating project costs requires forecasting costs, tracking progress toward completion and projecting the remaining effort to complete the project. These estimates are reassessed throughout the term of the arrangement, and revisions to estimates are recognized on a cumulative catch-up basis when the changed conditions become known. Provisions for losses are recorded when estimates indicate it is probable that a loss will be incurred for the contract. The Company generally recognizes revenue from license fees for the TiVo service that the Company does not host on a per-subscriber per-month basis due to the recognition constraint on intellectual property usage-based royalties.

Subscription Services

Subscription services revenue primarily consists of fees to provide customers with access to one or more of the Company's hosted products such as its iGuide interactive program guide (“IPG”), advanced search and recommendations, metadata and analytics products, including routine customer support. The Company generally receives per-subscriber per-month fees for its iGuide IPG and search and recommendations service and revenue is recorded in the month the customer uses the service. The Company generally receives a monthly or quarterly fee from its metadata or analytics licenses for the right to use the metadata or access its analytics platform and to receive regular updates. Revenue from the Company's metadata and analytics service is recognized ratably over the subscription period.

TiVo-enabled DVRs and TiVo Service

The Company sells TiVo-enabled DVRs and the related service directly to customers through sales programs via the TiVo.com website and licenses the sale of TiVo-enabled DVRs through a limited number of retailers. All customers have the right to cancel their subscription to the TiVo service within 30 days of subscription activation for a full refund. After the initial subscription period, all customers have various pricing options when they renew their subscription.

The transaction price allocated to the DVR is recognized as revenue upon shipment to the customer and the transaction price allocated to the TiVo service is recognized as revenue ratably over the service period. Subscription revenue from lifetime subscriptions are recognized ratably over the estimated useful life of the DVR associated with the subscription. The estimated useful life for a DVR depends on a number of assumptions, including, but not limited to, customer retention rates, the timing of new product introductions and historical experience. The Company periodically reassesses the estimated useful life of a DVR. When the actual useful life of the DVR materially differs from the Company's estimate, the estimated useful life of the DVR is adjusted, which could result in the recognition of revenue over a longer or shorter period of time.

Significant Judgments

Determining whether promises to transfer multiple goods and services in contracts with customers are considered distinct performance obligations that should be accounted for separately requires significant judgment, including related to the level of integration and interdependency between the performance obligations. In addition, judgment is necessary to allocate the transaction price to the distinct performance obligations, including whether there is a discount or significant financing component to be allocated based on the relative stand-alone selling price of the various performance obligations.

Significant judgment is required to determine the stand-alone selling price for each distinct performance obligation when an observable price is not available. In instances where stand-alone selling price is not directly observable, such as when the Company does not sell the good or service separately, the stand-alone selling price is determined using a range of inputs that includes market conditions and other observable inputs. More than one stand-alone selling price may exist for individual goods and services due to the stratification of those goods and services, considering attributes such as the size of the customer and geographic region.

Due to the nature of the work required to be performed on some performance obligations, significant judgment may be required to determine the transaction price. It is common for the Company's license agreements to contain provisions that can either increase or decrease the transaction price. These variable amounts are generally estimated based on usage. In addition to estimating variable consideration, significant judgment is necessary to identify forms of variable consideration, determine whether the variable consideration relates to a sales-based or usage-based royalty of intellectual property and determine whether, and when to include estimates of variable consideration in the transaction price.

For certain licensees, royalty revenue is generated based on a licensee’s production or shipment of licensed products incorporating the Company’s intellectual property, technologies or software. Licensees with a per-unit or per-subscriber arrangement pay a per-unit royalty for each product manufactured or sold, or for each subscriber, as set forth in its license agreement. Licensees generally report manufacturing, sales or subscriber information in the month or quarter subsequent to when the production, shipment or subscription activity takes place. The Company estimates the royalties earned each quarter based on its forecast of manufacturing and sales activity by its licensees in that quarter. Any differences between actual royalties owed by a licensee and the Company’s estimate are recognized when the licensee’s royalty report is received. Estimating licensees’ quarterly royalties prior to receiving the royalty reports requires the Company to make significant assumptions and judgments related to forecasted trends and growth rates used to estimate quantities manufactured, shipped or subscribed by licensees, which could have a material impact on the amount of revenue recognized.

Some hardware products are sold with a right of return and, in certain circumstances, credits or incentives may be provided to customers or resellers at the time of sale. Such credits and incentives are accounted for as variable consideration and recognized as a reduction to revenue. Estimates of returns, credits and incentives are made at contract inception and updated each reporting period.

In contracts where the Company does not host the TiVo service and that include engineering services that are essential to the functionality of the licensed technology or involve significant customization or modification of software, or where the Company provides non-recurring engineering (“NRE”) services, the Company recognizes revenue as progress toward completion occurs using an input method based on the ratio of costs incurred to date to total estimated costs of the project. Significant judgment is required to estimate the remaining effort to complete the project. These estimates are reassessed throughout the term of the arrangement.

Management evaluates its estimates, inputs and assumptions related to revenue recognition on an ongoing basis. The use of different estimates, inputs or assumptions may materially affect the reported amounts of assets and liabilities as of the date of the financial statements and the results of operations for the reporting period.

Practical Expedients and Exemptions

The Company applies a practical expedient to not perform an evaluation of whether a contract includes a significant financing component when the timing of revenue recognition differs from the timing of cash collection by one year or less.

The Company applies a practical expedient to expense costs to obtain a contract with a customer as incurred as a component of selling, general and administrative expenses when the amortization period would have been one year or less.

The Company applies a practical expedient when disclosing revenue expected to be recognized from unsatisfied performance obligations to exclude contracts with customers with an original duration of less than one year; contracts for which revenue is recognized based on the amount which the Company has the right to invoice for services performed and amounts attributable to variable consideration arising from (i) a sales-based or usage-based royalty of an intellectual property license or (ii) when variable consideration is allocated entirely to a wholly unsatisfied performance obligation; or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation.

For additional detail on the Company's revenue disaggregated by geographic location, refer to “Note 16 – Segment and Geographic Information.”

Contract Balances

Contracts Assets

Contract assets primarily consist of unbilled contracts receivable that are expected to be received from customers in future periods, where the revenue recognized to date (or cumulative adjustments to retained earnings in the initial period of adopting Topic 606) exceeds the amount billed. The amount of unbilled contracts receivable may not exceed their net realizable value and are classified as long-term assets if the payments are expected to be received more than one year from the reporting date.

Contract assets also include the incremental costs of obtaining a contract with a customer, principally sales commissions when the renewal commission is not commensurate with the initial commission, and deferred engineering costs for significant software customization or modification and set-up services to the extent deemed recoverable. Contract assets were recorded in the Condensed Consolidated Balance Sheets as follows (in thousands):

	September 30, 2020		December 31, 2019
Unbilled contracts receivable	$	164,138	$	121,826
Other current assets		566		—
Long-term unbilled contracts receivable		15,083		26,672
Other long-term assets		1,360		—
Total contract assets	$	181,147	$	148,498

Contract Liabilities

Contract liabilities are mainly comprised of deferred revenue related to consumer lifetime subscriptions for the TiVo service, multi-period licensing or cloud-based services, and other offerings for which the Company is paid in advance while the promised good or service is transferred to the customer at a future date or over time. Deferred revenue also includes amounts received related to professional services to be performed in the future. Deferred revenue arises when cash payments are received, including amounts which are refundable, in advance of performance obligations being completed.

Allowance for Credit Losses

The allowance for credit losses, which includes the allowance for accounts receivable and unbilled contracts receivable, represents the Company’s best estimate of lifetime expected credit losses inherent in those financial assets. The Company’s lifetime expected credit losses are determined using relevant information about past events (including historical experience), current conditions, and reasonable and supportable forecasts that affect collectability. The Company monitors its credit exposure through ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended when deemed necessary. In addition, the Company performs routine credit management activities such as timely account reconciliations, dispute resolution, and payment confirmations. The Company may employ collection agencies and legal counsel to pursue recovery of defaulted receivables.

The Company’s long-term unbilled contracts receivable is derived from fixed-fee or minimum-guarantee arrangements, primarily with large well-capitalized companies. It is considered to be of high credit quality due to past collection history and the nature of the customers.

The following table presents the activity in the allowance for credit losses for the three and nine months ended September 30, 2020 (in thousands):

	Three Months Ended September 30, 2020							Nine Months Ended September 30, 2020
	Accounts Receivable					Unbilled Contracts Receivable		Accounts Receivable				Unbilled Contracts Receivable
Beginning balance	$	2,469				$	357	$	566			$	—
Provision for credit losses		1,163		(1	)		232		3,391		(1)		589
Recoveries/charged-off		(8	)				1		(333	)			1
Balance at end of period	$	3,624				$	590	$	3,624			$	590

(1) The increase in provision for credit losses was due to late payments and collection issues with certain of the Company’s customers in the third quarter of 2020.

(2)The increase in provision for credit losses was based on assessment of current conditions including the COVID-19 pandemic and anticipation of delayed or delinquent payments on existing accounts receivable as a result of the declining financial health and liquidity positions of certain of the Company’s customers during the first quarter, as well as late payments and collection issues in the third quarter of 2020.

Additional Disclosures Under Topic 606

The following table presents additional revenue and contract disclosures (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenue recognized in the period from:
Amounts included in deferred revenue at the beginning of the period	$	12,364	$	175	$	50	$	3,130
Performance obligations satisfied in previous periods (true ups, licensee reporting adjustments and settlements)*	$	12,232	$	1,349	$	66,454	$	2,941

*True ups represent the differences between the Company’s quarterly estimates of per unit royalty revenue and actual production/sales-based royalties reported by licensees in the following period. Licensee reporting adjustments represent corrections or revisions to previously reported per unit royalties by licensees, generally resulting from the Company’s inquiries or compliance audits. Settlements represent resolutions of litigation during the period for past royalties owed pursuant to expired or terminated IP license agreements.

Remaining revenue under contracts with performance obligations represents the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) under the Company’s fixed-fee IP, software-as-a-service agreements and engineering services contracts. The Company's remaining revenue under contracts with performance obligations was as follows (in thousands):

	As of
	September 30, 2020		December 31, 2019
Revenue from contracts with performance obligations expected to be satisfied in:
2020 (remaining 3 months)	$	48,032	$	5,337
2021		145,813		990
2022		99,594		345
2023		89,523		—
2024		75,883		—
Thereafter		74,079		—
Total	$	532,924	$	6,672

NOTE 4 – COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Other current assets consisted of the following (in thousands):

	September 30, 2020		December 31, 2019
Prepaid income taxes	$	3,895	$	2,364
Prepaid expenses		21,707		8,802
Inventory		6,154		79
Other		4,328		2,490
	$	36,084	$	13,735

Property and equipment, net, consisted of the following (in thousands):

	September 30, 2020			December 31, 2019
Equipment, furniture and other	$	58,366		$	32,504
Building and improvements		18,309			18,258
Land		5,300			5,300
Leasehold improvements		26,149			8,103
		108,124			64,165
Less: accumulated depreciation and amortization		(42,692	)		(31,288	)
	$	65,432		$	32,877

Other long-term assets consisted of the following (in thousands):

	September 30, 2020		December 31, 2019
Non-current income tax receivable	$	109,745	$	64,570
Long-term deferred tax assets		5,735		3,660
Other assets		20,915		3,106
	$	136,395	$	71,336

Accrued liabilities consisted of the following (in thousands):

	September 30, 2020		December 31, 2019
Employee compensation and benefits	$	35,819	$	18,404
Accrued expenses		22,367		7,930
Current portion of operating lease liabilities		17,577		5,845
Accrued severance		6,695		—
Third-party royalties		3,775		6,165
Other		12,529		3,089
	$	98,762	$	41,433

Other long-term liabilities consisted of the following (in thousands):

	September 30, 2020		December 31, 2019
Long-term income tax payable	$	91,676	$	76,767
Other		3,961		131
	$	95,637	$	76,898

Accumulated other comprehensive income (loss) consisted of the following (in thousands):

	September 30, 2020			December 31, 2019
Foreign currency translation adjustment, net of tax	$	895		$	—
Unrealized loss on available-for-sale debt securities, net of tax		(76	)		(53	)
	$	819		$	(53	)

Other income and expense, net, consisted of the following (in thousands):

	Three Months Ended,					Nine Months Ended,
	September 30, 2020		September 30, 2019			September 30, 2020			September 30, 2019
Interest income from significant financing components under Topic 606	$	547	$	906		$	2,243		$	4,626
Interest income from investments		456		420			1,248			1,702
Unrealized/realized gain (loss) on marketable equity securities		—		(1,060	)		(707	)		563
Other income/(expense), net		1,302		163			664			646
	$	2,305	$	429		$	3,448		$	7,537

NOTE 5 – FINANCIAL INSTRUMENTS

The Company has investments in debt securities which include corporate bonds and notes, treasury and agency notes and bills, commercial paper, certificates of deposit, and in equity securities consisting of money market funds. The Company classifies its debt securities as available-for-sale (“AFS”), which are accounted for at fair value with credit related losses recognized as a provision for credit loss expense in its Condensed Consolidated Statements of Operations and all non-credit related unrealized gains and losses recognized in accumulated other comprehensive income or loss on the Condensed Consolidated Balance Sheets. Under ASU 2016-01 (Topic 321), equity securities are measured at fair value with unrealized gains and losses recognized in other income and expense, net, on the Condensed Consolidated Statements of Operations.

The following is a summary of marketable securities at September 30, 2020 and December 31, 2019 (in thousands):

	September 30, 2020
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Allowance for Credit Losses		Estimated Fair Values
Marketable securities
Corporate bonds and notes	$	72,273	$	61	$	(62	)	$	—	$	72,272
Treasury and agency notes and bills		4,999		—		(1	)		—		4,998
Commercial paper		9,990		—		(2	)		—		9,988
Total debt securities		87,262		61		(65	)		—		87,258
Money market funds		4,771		—		—			—		4,771
Total equity securities		4,771		—		—			—		4,771
Total marketable securities	$	92,033	$	61	$	(65	)	$	—	$	92,029
Reported in:
Cash and cash equivalents										$	4,771
Available-for-sale debt securities											87,258
Total marketable securities										$	92,029

	December 31, 2019
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Values
Marketable securities
Corporate bonds and notes	$	41,730	$	29	$	(13	)	$	41,746
Commercial paper		4,052		4		—			4,056
Total debt securities		45,782		33		(13	)		45,802
Money market funds		2,601		—		—			2,601
Marketable equity securities		3,405		—		(2,281	)		1,124
Total equity securities		6,006		—		(2,281	)		3,725
Total marketable securities	$	51,788	$	33	$	(2,294	)	$	49,527
Reported in:
Cash and cash equivalents								$	2,601
Available-for-sale debt securities									45,802
Equity securities									1,124
Total marketable securities								$	49,527

At September 30, 2020 and December 31, 2019, the Company had $203.0 million and $121.5 million, respectively, in cash, cash equivalents and short-term investments. These balances include $111.0 million and $72.0 million in cash held in operating accounts not included in the tables above at September 30, 2020 and December 31, 2019, respectively.

Debt Securities

The gross realized gains and losses on sales of marketable debt securities were not significant during the three and nine months ended September 30, 2020 and 2019, respectively.

Unrealized losses on AFS debt securities were $0.1 million and $0.1 million, net of tax, as of September 30, 2020 and December 31, 2019, respectively. The Company evaluated whether the decline in fair value has resulted from credit losses or other factors and concluded these amounts were related to temporary fluctuations in value of AFS securities and were due primarily to changes in interest rates and market conditions of the underlying securities. In addition, the contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. The Company does not intend to sell the debt securities and it is more-likely-than-not that it will not be required to sell the investments before recovery of their amortized cost bases. The Company did not recognize a provision for credit loss expense related to its AFS debt securities for the three and nine months ended September 30, 2020, respectively. No impairment charges were recorded on the AFS debt securities for the three and nine months ended September 30, 2019, respectively.

The following table summarizes the fair value and gross unrealized losses related to individual AFS debt securities at September 30, 2020 and December 31, 2019, which have been in a continuous unrealized loss position, aggregated by investment category and length of time (in thousands):

	Less Than 12 Months					12 Months or More				Total
September 30, 2020	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Corporate bonds and notes	$	52,933	$	(62	)	$	—	$	—	$	52,933	$	(62	)
Treasury and agency notes and bills		4,998		(1	)		—		—		4,998		(1	)
Commercial paper		9,988		(2	)		—		—		9,988		(2	)
Total	$	67,919	$	(65	)	$	—	$	—	$	67,919	$	(65	)

	Less Than 12 Months					12 Months or More					Total
December 31, 2019	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Corporate bonds and notes	$	20,031	$	(10	)	$	8,753	$	(3	)	$	28,784	$	(13	)
Total	$	20,031	$	(10	)	$	8,753	$	(3	)	$	28,784	$	(13	)

The estimated fair value of marketable debt securities by contractual maturity at September 30, 2020 is shown below (in thousands). Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

	Estimated Fair Value
Due in one year or less	$	47,005
Due in one to two years		40,253
Total	$	87,258

Equity Securities

On September 19, 2018, the Company purchased 7.0 million common shares of Onkyo Corporation (“Onkyo”), a publicly traded Japanese company and a long-standing customer of the Company, pursuant to the Capital Alliance Agreement entered into between the two parties on September 3, 2018. Upon making the investment, the Company held a 6.3% ownership interest in Onkyo. Due to changes in business expectations, the Company determined not to continue discussions on the business alliance. In July 2019, the Company sold approximately 2.8 million shares of Onkyo stock and realized a gain of $0.9 million. In June 2020, the Company sold the remaining 4.2 million shares of Onkyo stock. For the nine months ended September 30, 2020, total realized loss on the Onkyo investment was approximately $0.7 million.

Non-marketable Equity Securities

Investments in non-marketable equity securities are accounted for using either the equity method or the cost method. Investments in entities over which the Company has the ability to exercise significant influence, but does not hold a controlling interest, are accounted for using the equity method. Under the equity method, the Company records its proportionate share of income or loss in other income and expense, net, in the Condensed Consolidated Statements of Operations. Investments in entities over which the Company does not have the ability to exercise significant influence are accounted for using the cost method. The Company monitors its non-marketable securities portfolio for potential impairment. When the carrying amount of an investment in a non-marketable security exceeds its fair value and the decline in fair value is determined to be other-than-temporary, the loss is recorded in other income and expense, net, in the Condensed Consolidated Statements of Operations.

Upon merging with TiVo on June 1, 2020, the Company assumed certain investments in non-marketable equity. As of September 30, 2020, other long-term assets included equity securities accounted for under the equity method with a carrying amount of $4.1 million and equity securities without a readily determinable fair value with a carrying amount of $0.1 million, respectively. No impairments or adjustments to the carrying amount of the Company's equity securities without a readily determinable fair value were recognized in the three and nine months ended September 30, 2020, respectively. The Company had no investments in non-marketable equity securities prior to June 1, 2020.

NOTE 6 – FAIR VALUE

The Company follows the authoritative guidance for fair value measurement and the fair value option for financial assets and financial liabilities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:


Level 1	Quoted prices in active markets for identical assets.

Level 2	Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

When applying fair value principles in the valuation of assets, the Company is required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The Company calculates the fair value of its Level 1 and Level 2 instruments based on the exchange traded price of similar or identical instruments, where available, or based on other observable inputs. There were no significant transfers into or out of Level 1 or Level 2 that occurred between December 31, 2019 and September 30, 2020.

The following sets forth the fair value, and classification within the hierarchy, of the Company’s assets required to be measured at fair value on a recurring basis as of September 30, 2020 (in thousands):

	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Marketable securities
Money market funds - equity securities (1)	$	4,771	$	4,771	$	—	$	—
Treasury and agency notes and bills (2)		4,998		—		4,998		—
Commercial paper (2)		9,988		—		9,988		—
Corporate bonds and notes - debt securities (2)		72,272		—		72,272		—
Total Assets	$	92,029	$	4,771	$	87,258	$	—

(1)

Reported as cash and cash equivalents in the Condensed Consolidated Balance Sheet.

(2)

Reported as AFS debt securities in the Condensed Consolidated Balance Sheet.

The following sets forth the fair value, and classification within the hierarchy, of the Company’s assets required to be measured at fair value on a recurring basis as of December 31, 2019 (in thousands):

	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Marketable securities
Money market funds - equity securities (1)	$	2,601	$	2,601	$	—	$	—
Marketable equity securities (2)		1,124		1,124		—		—
Commercial paper - debt securities (3)		4,056		—		4,056		—
Corporate bonds and notes - debt securities (3)		41,746		—		41,746		—
Total Assets	$	49,527	$	3,725	$	45,802	$	—

(1)

Reported as cash and cash equivalents in the Condensed Consolidated Balance Sheet.

(2)

Reported as equity securities in the Condensed Consolidated Balance Sheet.

(3)

Reported as AFS debt securities in the Condensed Consolidated Balance Sheet.

Financial Instruments Not Recorded at Fair Value

The Company’s long-term debt is carried at amortized cost and is measured at fair value on a quarterly basis for disclosure purposes. The carrying amounts and estimated fair values are as follows (in thousands):

	September 30, 2020				December 31, 2019
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
2020 Term B Loan Facility ⁽¹⁾	$	1,000,186	$	978,152	$	—	$	—
2021 Convertible Notes		48		48		—		—
2018 Amended Term B Loan ⁽¹⁾		—		—		334,679		335,642
Total long-term debt, net	$	1,000,234	$	978,200	$	334,679	$	335,642

(1)	Carrying amounts of long-term debt are net of unamortized debt issuance costs of $36.7 million and $9.3 million as of September 30, 2020 and December 31, 2019, respectively. See “Note 9 – Debt” for additional information.

If reported at fair value in the Condensed Consolidated Balance Sheets, the Company’s debt would be classified within Level 2 of the fair value hierarchy. The fair value of the debt was estimated based on the quoted market prices for the same or similar issues.

NOTE 7 – BUSINESS COMBINATION

Effective June 1, 2020, Xperi and TiVo completed the previously announced merger of equals transaction (the “Merger”) contemplated by the Agreement and Plan of Merger and Reorganization, dated as of December 18, 2019, as amended on January 31, 2020, (the “Merger Agreement”), by and among Xperi, TiVo, XRAY-TWOLF HoldCo Corporation (“Xperi Holding”), XRAY Merger Sub Corporation (“Xperi Merger Sub”) and TWOLF Merger Sub Corporation (“TiVo Merger Sub”). Immediately prior to the consummation of the Merger, Xperi Holding changed its name to “Xperi Holding Corporation” (the “Company”). Pursuant to the Merger Agreement, (i) Xperi Merger Sub was merged with and into Xperi, with Xperi surviving the merger as a subsidiary of Xperi Holding Corporation (the “Xperi Merger”) and (ii) TiVo Merger Sub was merged with and into TiVo, with TiVo surviving the merger as a subsidiary of Xperi Holding Corporation (the “TiVo Merger” and together with the Xperi Merger, the “Mergers”). Immediately following the consummation of the Mergers, each of Xperi and TiVo became wholly-owned subsidiaries of the Company.

Upon completion of the Xperi Merger, each share of common stock, par value $0.001 per share, of Xperi (the “Xperi Common Stock”) (excluding any shares of Xperi Common Stock that were held in treasury immediately prior to the effective time of the Xperi Merger, which were automatically canceled and retired for no consideration) was converted into the right to receive one fully paid and non-assessable share of common stock, par value $0.001 per share, of the Company (“Company Common Stock”). Upon completion of the TiVo Merger, (i) each share of common stock, par value $0.001 per share, of TiVo (the “TiVo Common Stock”) (excluding any shares of TiVo Common Stock that were held in treasury immediately prior to the effective time of the TiVo Merger, which were automatically canceled and retired for no consideration) was converted into the right to receive 0.455 fully paid and non-assessable shares of common stock of the Company (the “Exchange Ratio”), in addition to cash in lieu of any fractional shares of the Company Common Stock.

As provided in the Merger Agreement, at the effective time of the Mergers, (i) all options, restricted shares, restricted stock unit awards and other equity awards relating to shares of Xperi Common Stock outstanding immediately prior to the effective time of the Mergers were generally automatically converted into options, restricted shares, restricted stock unit awards and other equity awards, respectively, relating to shares of Company Common Stock after giving effect to appropriate adjustments to reflect the Mergers and otherwise generally on the same terms and conditions as applied under the applicable plans and award agreements immediately prior to the effective time of the Mergers, and (ii) all options, restricted shares, restricted stock unit awards and other equity awards relating to shares of TiVo Common Stock that were outstanding immediately prior to the effective time of the Mergers (including Exchange Ratio) were generally automatically converted into options, restricted stock unit awards, restricted shares and other equity awards, respectively, relating to shares of Company Common Stock after giving effect to appropriate adjustments to reflect the Mergers and otherwise generally on the same terms and conditions as applied under the applicable plans and award agreements immediately prior to the effective time of the Mergers.

Following the Mergers, Xperi Common Stock and TiVo Common Stock were delisted from the Nasdaq Global Select Market (“Nasdaq”) and deregistered under the Securities Exchange Act of 1934, as amended. Since June 2, 2020, the shares of the Company’s common stock have been listed for trading on Nasdaq under the ticker symbol “XPER.”

The Mergers created a leading consumer and entertainment technology and IP licensing company. The Company’s IP business includes one of the industry’s largest and most successful IP portfolios licensed to a diverse base of customers. On the product side, the Company offers a seamless end-to-end entertainment experience from creation to consumption; with greater scale, technology depth and breadth, and a platform relevant to one of the biggest challenges consumers of entertainment face today – how to quickly and easily find, watch and enjoy entertainment.

The Company is currently contemplating and may pursue, subject to the receipt of approval by the Company’s board and any required regulatory approvals, a separation of the Company’s product business and IP licensing business through a tax-efficient transaction, resulting in two independent, publicly traded companies. The Company is currently evaluating the optimal timing of the contemplated business separation.

Merger Consideration

The merger consideration of $828.3 million was calculated as follows (amounts in thousands except exchange ratio and share price):

TiVo common shares outstanding as of June 1, 2020		128,132
TiVo exchange ratio		0.455
Xperi Holding Corporation common stock issued in exchange		58,300
Xperi Common Stock closing share price on June 1, 2020	$	14.00
			$	816,201
Fair value of replaced TiVo equity awards relating to pre-acquisition vesting of the equity award holders’ requisite service periods				12,133
Total merger consideration			$	828,334

Assumed TiVo Equity Awards

In connection with the Mergers, the Company assumed unvested TiVo equity incentive awards with a fair value of $34.1 million, of which $12.1 million related to pre-acquisition services and was included in the purchase price, and $22.0 million related to post-acquisition services. The Company valued the restricted stock units at the Company’s closing stock price and stock options using a Black-Scholes pricing model as of the date of acquisition. The fair value relating to post-acquisition services will be amortized as stock-based compensation expense over an estimated weighted average remaining service period of 2.5 years.

Preliminary Purchase Price Allocation

Based on an evaluation of the provisions of ASC 805, “Business Combinations,” Xperi was determined to be the accounting acquirer in the Mergers. The Company has applied the acquisition method of accounting that requires, among other things, that identifiable assets acquired and liabilities assumed generally be recognized on the balance sheet at fair value as of the acquisition date. In determining the fair value, the Company utilized various forms of the income, cost and market approaches depending on the asset or liability being fair valued. The estimation of fair value required significant judgment related to future net cash flows (including revenue, operating expenses, and working capital), discount rates reflecting the risk inherent in each cash flow stream, competitive trends, market comparables and other factors. Inputs were generally determined by taking into account historical data (supplemented by current and anticipated market conditions) and growth rates.

The table below presents the preliminary fair value that was allocated to TiVo's assets and liabilities based upon fair values as determined by the Company. The initial allocation of the purchase price was based on preliminary valuations and assumptions and is subject to change within the measurement period, including current indirect taxes payable, current and non-current income taxes payable and deferred taxes as additional information is received and tax returns are finalized. The Company expects to finalize the allocation of the purchase price within the measurement period. Final determination of the fair values may result in further adjustments to the values presented in the following table ($ in thousands):

	Estimated Useful Life (years)		Estimated Fair Value
Cash and cash equivalents			$	117,424
Accounts receivable				105,778
Unbilled contracts receivable				69,058
Other current assets				21,690
Long-term unbilled contracts receivable				129
Property and equipment				41,307
Operating lease right-of-use assets				71,444
Identifiable intangible assets:
Patents	10	457,400
Customer contracts and related relationships	4-9	358,200
Developed technology	5	34,800
Content database	9	6,200
Trademarks and tradenames	N/A	21,400
Total identifiable intangible assets				878,000
Goodwill				461,129
Other long-term assets				43,700
Accounts payable				(13,258	)
Accrued legal fees				(5,619	)
Accrued liabilities				(79,071	)
Current portion of deferred revenue				(29,291	)
Current portion of long-term debt				(734,609	)
Deferred revenue, less current portion				(24,319	)
Long-term deferred tax liabilities				(27,949	)
Long-term debt				(48	)
Noncurrent operating lease liabilities				(59,291	)
Other long-term liabilities				(7,870	)
Total purchase price			$	828,334

The following is a description of the methods used to determine the fair values of significant assets and liabilities.

Identifiable Intangible Assets

Identifiable intangible assets primarily consist of patents, developed technology, customer relationships, trademarks and tradenames, and content database. The fair value of intangibles was based on valuations using assumptions developed by management and other information compiled by management including, but not limited to, discounted future expected cash flows. The fair value of certain customer relationships was calculated by comparing the estimated value with customer relationships in place against the value without those customer relationships in place. The fair value of intangibles relies heavily on projected future net cash flows including, but not limited to, key assumptions for revenue, operating expenses and working capital. The discount rates used for intangible assets are based on current market rates and reflect the risk inherent in each cash flow stream. The estimated useful life reflects the time period in which the Company expects to receive the benefits of the related cash flows. Discounted future expected cash flows and other management estimates are based on significant unobservable inputs and, as a result, the intangible assets acquired would be presented in Level 3 of the fair value hierarchy.

Long-term Debt

On the Merger date, TiVo had outstanding debt under the 2019 Term Loan Facility Agreement (“TiVo 2019 Term Loan”), pursuant to which TiVo was required to pay a 3.0% prepayment premium if the loan was prepaid on or prior to November 22, 2020. Under the 2019 Term Loan Facility Agreement, the Mergers triggered certain change of control conditions that constitute an event of default, thus requiring the debt to be paid immediately following the consummation of the Mergers. In connection with the consummation of the Mergers, the Company, on June 1, 2020, paid the full amount of the outstanding loan balance, including the 3.0% prepayment penalty. See “Note 9 – Debt” for additional information.

Fair value of the TiVo 2019 Term Loan was measured based on the par value of principal outstanding plus prepayment premium, which is equal to the amount that was paid by Xperi immediately following the consummation of the Mergers. The fair value of the TiVo 2019 Term Loan would be classified in Level 2 of the fair value hierarchy.

Goodwill

The excess of the consideration transferred over the fair value of assets acquired and liabilities assumed was recognized as goodwill. The goodwill is generated from operational synergies and cost savings the Company expects to achieve from the combined operations, as well as the expected benefits from future technologies that do not meet the definition of an identifiable intangible asset and TiVo’s knowledgeable and experienced workforce. See Note 8 for the allocation of goodwill to the reportable segments. Of the total goodwill acquired, $16.4 million is expected to be deductible for tax purposes; the remainder of the goodwill is not expected to be deductible for tax purposes.

TiVo Results of Operations

TiVo’s results of operations and cash flows have been included in the Company’s condensed consolidated financial statements for periods subsequent to June 1, 2020, and TiVo’s assets and liabilities were recorded at their estimated fair values in the Company’s Condensed Consolidated Balance Sheets as of June 1, 2020. For the three and nine months ended September 30, 2020, TiVo contributed $159.0 million and $211.8 million in revenue, respectively, and $28.9 million and $20.9 million in operating income, respectively, to the operating results of the Company.

Transaction and Severance Costs

In connection with the Mergers, the Company incurred significant one-time expenses in the first three quarters of 2020 such as transaction related costs (e.g. bankers fees, legal fees, consultant fees, etc.), lease impairment charges due to facilities consolidation, severance and retention costs (including stock-based compensation expense resulting from the contractually-required acceleration of equity instruments for departing executives). Total transaction related costs amounted to $1.2 million and $29.1 million for the three and nine months ended September 30, 2020, respectively. Lease impairment charges were $0.7 million and $0.7 million for the three and nine months ended September 30, 2020, respectively. In addition, post-merger severance and retention costs (including related stock-based compensation expense) were $3.6 million and $12.1 million for the three and nine months ended September 30, 2020, respectively. The Company may incur additional expenses for integration, severance and retention, and the impairment of right-of-use assets due to facilities consolidation in future quarters.

Supplemental Pro Forma Information

The following unaudited pro forma financial information assumes the companies were combined as of January 1, 2019. The unaudited pro forma financial information as presented below is for informational purposes only and is based on estimates and assumptions that have been made solely for purposes of developing such pro forma information. This is not necessarily indicative of the results of operations that would have been achieved if the Mergers had taken place on January 1, 2019, nor is it necessarily indicative of future results. Consequently, actual results could differ materially from the unaudited pro forma financial information presented below. The following table presents the pro forma operating results as if TiVo had been included in the Company's Condensed Consolidated Statements of Operations as of January 1, 2019 (unaudited, in thousands):

	Three Months Ended						Nine Months Ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Revenue	$	202,797		$	214,610		$	708,675		$	676,888
Net income (loss) attributable to Xperi Holding Corporation	$	(23,085	)	$	(193,898	)	$	(145,649	)	$	(337,906	)

The unaudited supplemental pro forma information above includes the estimated impact of purchase accounting and other material, nonrecurring adjustments directly attributable to the Mergers. These pro forma adjustments primarily include the following (in thousands):

	Three Months Ended					Nine Months Ended
	September 30, 2020		September 30, 2019			September 30, 2020			September 30, 2019
Estimated increase (decrease) to earnings due to revenue adjustments resulting from purchase accounting	$	—	$	(1,781	)	$	(4,823	)	$	(5,592	)
Estimated increase (decrease) to earnings to adjust for transaction related costs incurred in connection with the Mergers	$	1,187	$	—		$	31,835		$	(21,918	)
Estimated increase (decrease) to earnings to adjust for stock-based compensation expense for TiVo equity awards	$	—	$	524		$	3,436		$	(1,260	)
Estimated increase (decrease) to earnings to adjust for severance and retention costs incurred in connection with the Mergers	$	3,591	$	(1,710	)	$	10,254		$	(13,696	)
Estimated increase (decrease) to earnings to reflect payoff of historical debt and new debt financing in connection with the Mergers	$	1,116	$	(3,693	)	$	21,867		$	(20,401	)
Estimated increase (decrease) to earnings due to pro forma adjustments for income taxes (1)(2)	$	117	$	(19,884	)	$	16,374		$	(39,161	)

(1)

For the three and nine months ended September 30, 2020, the pro forma tax adjustments relate primarily to the alignment of TiVo’s methodology for interim period accounting for income taxes to Xperi's methodology, as well as the recognition by TiVo of a refund request of South Korean withholding taxes prior to the Mergers in the quarter ended June 30, 2020.

(2)

For the three and nine months ended September 30, 2019, the adjustment relates primarily to the alignment of TiVo's methodology for interim period accounting for income taxes to Xperi's methodology, as well as the assumption that the combined company placed a valuation allowance on its Federal and state DTAs prior to 2019.

The unaudited supplemental pro forma information above does not include any cost saving synergies from operating efficiencies.

NOTE 8 – GOODWILL AND IDENTIFIED INTANGIBLE ASSETS

Goodwill allocated to the reportable segments and changes in the carrying amount of goodwill by reportable segment were as follows (in thousands):

	Product		IP Licensing		Total
December 31, 2019	$	378,084	$	7,700	$	385,784
Goodwill acquired through the Mergers (1)		146,061		315,068		461,129
September 30, 2020	$	524,145	$	322,768	$	846,913

(1)

In connection with the TiVo Merger, the Company recorded $461.1 million of goodwill, representing the preliminary fair value as of the effective date of the Mergers. See “Note 7 – Business Combination” for additional details.

Goodwill at each reporting unit is evaluated for potential impairment annually, as of the beginning of the fourth quarter, and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable.

During the third quarter of 2020, the COVID-19 pandemic continued to have a significant and negative impact on business and economic activities in the U.S and around the world. The resulting global economic downturn has negatively impacted, and is expected to continue to negatively impact, the Company’s consolidated financial results for the remainder of 2020 and into 2021. Due to continued reduction in demand in certain markets and industries, including the automotive market, as well as declines in the Company’s share price, the Company’s management concluded there were indicators of potential goodwill impairment. The Company proceeded with a quantitative interim goodwill impairment test as of September 30, 2020. Based on the quantitative assessment, the Company concluded that the fair value of the reporting units exceeded the carrying amount for both the Product and IP Licensing reporting units. As a result, no goodwill impairment charges were recognized in the three months ended September 30, 2020.

Identified intangible assets consisted of the following (in thousands):

	Average	September 30, 2020							December 31, 2019
	Life (Years)	Gross Assets		Accumulated Amortization			Net		Gross Assets		Accumulated Amortization			Net
Finite-lived intangible assets
Acquired patents / core technology (1)	3-15	$	609,085	$	(154,418	)	$	454,667	$	151,184	$	(135,952	)	$	15,232
Existing technology / content database (2) (3)	5-10		247,959		(159,430	)		88,529		206,878		(130,890	)		75,988
Customer contracts and related relationships (4)	3-9		650,079		(229,450	)		420,629		291,769		(174,741	)		117,028
Trademarks/trade name	4-10		40,083		(19,786	)		20,297		40,083		(16,056	)		24,027
Non-competition agreements	1		2,231		(2,231	)		—		2,231		(2,231	)		—
Total finite-lived intangible assets			1,549,437		(565,315	)		984,122		692,145		(459,870	)		232,275
Indefinite-lived intangible assets
TiVo Tradename/trademarks (5)	N/A		21,400		—			21,400		—		—			—
Total intangible assets		$	1,570,837	$	(565,315	)	$	1,005,522	$	692,145	$	(459,870	)	$	232,275

(1)

In June 2020, $457.4 million of patents was acquired through the Mergers. See “Note 7 – Business Combination.”

(2)

In June 2020, $34.8 million of existing (developed) technology was acquired through the Mergers. See “Note 7 – Business Combination.”

(3)

In June 2020, $6.2 million of content database was acquired through the Mergers. See “Note 7 – Business Combination.”

(4)

In June 2020, $358.2 million of customer contracts and related relationships was acquired through the Mergers. See “Note 7 – Business Combination.”

(5)

In June 2020, $21.4 million of TiVo Tradename/trademarks was acquired through the Mergers. See “Note 7 – Business Combination.”

As of September 30, 2020, the estimated future amortization expense of total finite-lived intangible assets was as follows (in thousands):

2020 (remaining 3 months)	$	50,257
2021		195,771
2022		147,332
2023		136,452
2024		97,647
Thereafter		356,663
	$	984,122

NOTE 9 – DEBT

The outstanding amounts of debt were as follows (in thousands):

	September 30, 2020			December 31, 2019
2020 Term B Loan Facility	$	1,036,875		$	—
2021 Convertible Notes		48			—
2018 Amended Term B Loan		—			344,000
Unamortized debt issuance costs		(36,689	)		(9,321	)
		1,000,234			334,679
Less: current portion, net of debt issuance costs		(43,704	)		—
Total long-term debt, net of current portion	$	956,530		$	334,679

2020 Term B Loan Facility

On June 1, 2020, in connection with the consummation of the Mergers with TiVo, the Company entered into a Credit Agreement (the “2020 Credit Agreement”) by and among the Company, the lenders party thereto and Bank of America, N.A.,

as administrative agent and collateral agent. The 2020 Credit Agreement provides for a five-year senior secured term loan B facility in an aggregate principal amount of $1,050 million (the “2020 Term B Loan Facility”). The interest rate applicable to loans outstanding under the 2020 Term B Loan Facility is equal to, at the Company’s option, either (i) a base rate plus a margin of 3.00% per annum or (ii) LIBOR plus a margin of 4.00% per annum. Commencing on September 30, 2020, the 2020 Term B Loan Facility will amortize in equal quarterly installments in aggregate quarterly amounts equal to (i) with respect to repayments occurring on or prior to June 1, 2023, 1.25% of the original principal amount of the 2020 Term B Loan Facility and (ii) with respect to repayments occurring after June 1, 2023 and prior to June 1, 2025, 1.875% of the original principal amount of the 2020 Term B Loan Facility, with the balance payable on the maturity date of the 2020 Term B Loan Facility (in each case subject to adjustment for prepayments). The 2020 Term B Loan Facility will mature on June 1, 2025. Upon the closing of the 2020 Credit Agreement, the Company borrowed $1,050 million under the 2020 Term B Loan Facility. Net proceeds were used on June 1, 2020, together with cash and cash equivalents, to refinance the existing indebtedness of the combined Company (the “Debt Financing”), including paydown of the TiVo 2019 Term Loan of $734.6 million. See “Note 7 – Business Combination” for additional information relating to the Mergers. Additionally, debt issuance costs of approximately $39.7 million were incurred and capitalized in connection with the 2020 Term B Loan Facility in June 2020.

The obligations under the 2020 Credit Agreement are guaranteed by Xperi, TiVo and certain other of the Company’s wholly-owned material domestic subsidiaries (collectively, the “Guarantors”) pursuant to the Guaranty, dated as of June 1, 2020 (the “Guaranty”), among Xperi, TiVo, the other Guarantors party thereto and Bank of America, N.A., as administrative agent. The obligations under the 2020 Credit Agreement are secured by a lien on substantially all of the assets of the Company and the Guarantors pursuant to the Security Agreement, dated as of June 1, 2020 (the “Security Agreement”), among the Company, Xperi, TiVo, the other pledgors party thereto and Bank of America, N.A., as collateral agent.

The 2020 Credit Agreement contains customary events of default, upon the occurrence of which, after any applicable grace period, the lenders will have the ability to accelerate all outstanding loans thereunder. The 2020 Credit Agreement also contains customary representations and warranties and affirmative and negative covenants that, among other things, restrict the ability of the Company and its subsidiaries to create or incur certain liens, incur or guarantee additional indebtedness, merge or consolidate with other companies, transfer or sell assets and make restricted payments. These covenants are subject to a number of limitations and exceptions set forth in the Credit Agreement. The Company was in compliance with all requirements as of September 30, 2020.

2018 Amended Term B Loan

On December 1, 2016, in connection with the consummation of the acquisition of DTS, the Company entered into a Credit Agreement (the “Credit Agreement”) by and among the Company, Royal Bank of Canada, as administrative agent and collateral agent, and the lenders party thereto. The Credit Agreement provided for a $600.0 million seven-year term B loan facility (the “Term B Loan Facility”) which matures on November 30, 2023. Upon the closing of the Credit Agreement, the Company borrowed $600.0 million under the Term B Loan facility. Net proceeds were used on December 1, 2016, together with cash and cash equivalents, to finance the acquisition of DTS.

On January 23, 2018, the Company and the loan parties entered into an amendment to the Credit Agreement (the “Amendment”). In connection with the Amendment, the Company made a voluntary prepayment of $100.0 million of the term loan outstanding under the Credit Agreement using cash on hand. The Amendment provided for, among other things, (i) a replacement of the outstanding initial term loan with the new tranche term B-1 loan (the “2018 Amended Term B Loan”) in a principal amount of $494.0 million, (ii) a reduction of the interest rate margin applicable to such loan to (x) in the case of Eurodollar loans, 2.50% per annum and (y) in the case of base rate loans, 1.50% per annum, (iii) a prepayment premium of 1.00% in connection with any repricing transaction with respect to the 2018 Amended Term B Loan within six months of the closing date of the Amendment, and (iv) certain amendments to provide the Company with additional flexibility under the covenant governing restricted payments. Using cash on hand, the Company made three voluntary prepayments totaling $150.0 million during 2019. On June 1, 2020, the entire remaining balance of $344.0 million was paid off by using the proceeds from the 2020 Term B Loan Facility in connection with the Mergers. As a result of the refinancing transaction, the Company recorded a loss on early extinguishment of debt of $8.3 million, which consisted of unamortized debt issuance costs, in its Condensed Consolidated Statements of Operations during the second quarter of 2020.

2019 Term Loan Facility

In connection with the Mergers, the Company paid off the outstanding balance under the TiVo’s 2019 Term Loan. The 2019 Term Loan Facility Agreement was entered into on November 22, 2019 between TiVo, as borrower, and the lenders party thereto and HPS Investment Partners, LLC as administrative agent and collateral agent. Under the 2019 Term Loan, TiVo borrowed $715.0 million, which was scheduled to mature on November 22, 2024.

Under the 2019 Term Loan Facility Agreement, TiVo was required to pay a 3.0% prepayment premium if the loan was prepaid on or prior to November 22, 2020. Further, under the same Loan Facility Agreement, the Mergers triggered certain change of control conditions that constituted an event of default, thus requiring the debt to be repaid immediately following the consummation of the Mergers. Using the proceeds from the aforementioned 2020 Term B Loan Facility, the Company, on June 1, 2020, made a full repayment of the 2019 Term Loan along with the prepayment penalty for a total payoff amount of $734.6 million.

2021 Convertible Notes

Upon consummation of the TiVo Merger on June 1, 2020, the Company assumed $48.0 thousand of Convertible Senior Notes that were issued by TiVo Solutions Inc. (“TiVo Solutions”) in September 2014 and mature October 1, 2021 (the “2021 Convertible Notes”). The 2021 Convertible Notes bear interest at an annual rate of 2.0%, payable semi-annually in arrears on April 1 and October 1 of each year.

Interest Expense and Expected Principal Payments

At September 30, 2020, $1,036.9 million in total debt was outstanding with an interest rate, including the amortization of debt issuance costs, of 5.1%. Interest is payable monthly. Interest expense was $13.4 million and $24.6 million for the three and nine months ended September 30, 2020, respectively. Interest expense was $5.5 million and $18.4 million for the three and nine months ended September 30, 2019, respectively. Amortized debt issuance costs, which were included in interest expense, amounted to $2.3 million and $4.0 million for the three and nine months ended September 30, 2020, respectively, and $0.6 million and $1.9 million for the three and nine months ended September 30, 2019, respectively.

As of September 30, 2020, future minimum principal payments for long-term debt are summarized as follows (in thousands):

2020 (remaining 3 months)	$	13,125
2021		52,548
2022		52,500
2023		72,188
2024		78,750
Thereafter		767,812
Total	$	1,036,923

Additional cash payments, as outlined in the 2020 Credit Agreement, must be made on an annual basis beginning March 31, 2022 based on certain leverage ratios and excess cash flow generated for the immediately preceding fiscal year.

NOTE 10 – NET LOSS PER SHARE

The following table sets forth the computation of basic and diluted shares (in thousands):

	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Denominator:
Weighted average shares of common stock outstanding		107,499		49,459		75,441		49,036
Less: shares of restricted stock subject to repurchase		—		—		—		—
Total common shares-basic		107,499		49,459		75,441		49,036
Effect of dilutive securities:
Options		—		—		—		—
Restricted stock awards and units		—		—		—		—
Total common shares-diluted		107,499		49,459		75,441		49,036

Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period, excluding any unvested restricted stock awards that are subject to repurchase. Diluted net income (loss) per share is computed using the treasury stock method to calculate the weighted average number of shares of common stock and, if dilutive, potential common shares outstanding during the period. Potentially dilutive common shares include unvested restricted stock awards and units and incremental common shares issuable upon the exercise of stock options, less shares

repurchased from assumed proceeds. The assumed proceeds calculation includes actual proceeds to be received from the employee upon exercise and the average unrecognized stock compensation cost during the period.

For the three and nine months ended September 30, 2020, there was no difference in the weighted average number of shares of common stock used for the calculation of basic and diluted loss per share as the effect of all potentially dilutive shares outstanding was anti-dilutive. A total of 5.6 million and 4.0 million shares, subject to stock options and restricted stock awards and units, were excluded from the computation of diluted net loss per share for the three and nine months ended September 30, 2020, respectively, because including them would have been anti-dilutive.

For the three and nine months ended September 30, 2019, there was no difference in the weighted average number of shares of common stock used for the calculation of basic and diluted loss per share as the effect of all potentially dilutive shares outstanding was anti-dilutive. A total of 2.5 million and 1.5 million shares, subject to stock options and restricted stock awards and units, were excluded from the computation of diluted net loss per share for the three and nine months ended September 30, 2019, respectively, because including them would have been anti-dilutive.

NOTE 11 – STOCKHOLDERS’ EQUITY

As more fully described in Note 7, Xperi and TiVo completed the Mergers on June 1, 2020 to form Xperi Holding Corporation. Upon completion of the Mergers, each share of common stock of Xperi was converted into the right to receive one fully paid and non-assessable share of Company Common Stock. Further upon completion of the Mergers, each share of TiVo Common Stock was converted into the right to receive 0.455 fully paid and non-assessable shares of the Company Common Stock (the “Exchange Ratio”), in addition to cash in lieu of any fractional shares of the Company Common Stock. Following the Mergers, Xperi Common Stock and TiVo Common Stock were delisted from Nasdaq. Since June 2, 2020, the shares of Company Common Stock have been listed for trading on Nasdaq under ticker symbol “XPER.”

As provided in the Merger Agreement, at the effective time of the Mergers, (i) all options and restricted stock unit awards relating to shares of Xperi Common Stock outstanding immediately prior to the effective time of the Mergers were generally automatically converted into options and restricted stock unit awards respectively, relating to shares of the Company Common Stock on a one-for-one basis and otherwise generally on the same terms and conditions (including vesting exercisability and/or settlement requirements) as applied to such options and awards under the applicable plans and award agreements immediately prior to the effective time of the Mergers, and (ii) all options and restricted stock unit awards relating to shares of TiVo Common Stock that were outstanding immediately prior to the effective time of the Mergers were generally automatically converted into options and restricted stock unit awards, respectively, relating to shares of the Company Common Stock after giving effect to appropriate adjustments to reflect the Mergers (including the Exchange Ratio) and otherwise generally on the same terms and conditions (including vesting exercisability and/or settlement requirements) as applied to such options and awards under the applicable plans and award agreements immediately prior to the effective time of the Mergers.

Equity Incentive Plans

Prior to the Merger Date, the Company had implemented and granted equity awards under the Xperi Corporation Seventh Amended and Restated 2003 Equity Incentive Plan. As of the effective date of the Mergers, no future grants will be made under the plan.

The 2020 EIP

In connection with the Mergers and immediately prior to June 1, 2020, the Company adopted the Xperi Holding Corporation 2020 Equity Incentive Plan (the “2020 EIP”).

Under the 2020 EIP, the Company may grant equity-based awards to employees, non-employee directors, and consultants for services rendered to the Company (or any parent or subsidiary) in the form of stock options, stock awards, restricted stock awards, restricted stock units, stock appreciation rights, dividend equivalents and performance awards (or any combination thereof). A total of 8,000,000 shares have been reserved for issuance under the 2020 EIP provided that each share issued pursuant to “full value” awards (i.e., stock awards, restricted stock awards, restricted stock units, performance awards and dividend equivalents) are counted against shares available for issuance under the 2020 EIP on a 1.5 to 1 ratio.

The 2020 EIP provides for option grants designed as either incentive stock options or nonstatutory options. Options generally are granted with an exercise price not less than the value of the common stock on the grant date and have a term of ten years from the date of grant and vest over a four-year period. The vesting criteria for restricted stock awards and restricted stock units is generally the passage of time or meeting certain performance-based objectives, and continued employment through the

vesting period generally over four years for time-based awards. As of September 30, 2020, there were 3.2 million shares reserved for future grant under the 2020 EIP.

Assumed Plans

On June 1, 2020, the Company assumed all then-outstanding stock options, awards, and shares available and reserved for issuance under all legacy Equity Incentive Plans of TiVo (collectively, the “Assumed Plans”). Stock options assumed from the Assumed Plans generally have vesting periods of four years and a contractual term of seven years. Awards of restricted stock and restricted stock units assumed from the Assumed Plans are generally subject to a four year vesting period. The number of shares subject to stock options and restricted stock unit awards outstanding under these plans are included in the tables below. Shares reserved under the Assumed Plans will be available for future grants. As of September 30, 2020, there were 7.4 million shares reserved for future grants under the Assumed Plans.

A summary of the stock option activity is presented below (in thousands, except per share amounts):

	Options Outstanding
	Number of Shares Subject to Options			Weighted Average Exercise Price Per Share
Balance at December 31, 2019		605		$	26.68
Options granted		—			—
Options assumed		175		$	49.24
Options exercised		—			—
Options canceled / forfeited / expired		(59	)	$	40.91
Balance at September 30, 2020		721		$	31.34

Restricted Stock Awards and Units

Information with respect to outstanding restricted stock awards and units as of September 30, 2020 is as follows (in thousands, except per share amounts):

	Restricted Stock and Restricted Stock Units
	Number of Shares Subject to Time- based Vesting			Number of Shares Subject to Performance- based Vesting			Total Number of Shares			Weighted Average Grant Date Fair Value Per Share
Balance at December 31, 2019		2,371			554			2,925		$	25.99
Awards and units granted		3,222			994			4,216		$	13.77
Awards and units assumed		2,185			253			2,438		$	13.99
Awards converted		107			(107	)		—		$	29.79
Awards and units vested / earned		(1,618	)		(390	)		(2,008	)	$	20.78
Awards and units canceled / forfeited		(414	)		(243	)		(657	)	$	21.15
Balance at September 30, 2020		5,853			1,061			6,914		$	16.28

Performance Awards and Units

Performance awards and units may be granted to employees or consultants based upon, among other things, the contributions, responsibilities and other compensation of the particular employee or consultant. The value and the vesting of such performance awards and units are generally linked to one or more performance goals or certain market conditions determined by the Company, in each case on a specified date or dates or over any period or periods determined by the Company, and may range from zero to 200 percent of the grant. For performance awards subject to a market vesting condition, the fair value per award is fixed at the grant date and the amount of compensation expense is not adjusted during the performance period regardless of changes in the level of achievement of the market condition.

Employee Stock Purchase Plans

Prior to the Mergers, the Company had implemented the Xperi Corporation 2003 Employee Stock Purchase Plan and the International Employee Stock Purchase Plan, both of which were terminated immediately prior to the effective time of the Mergers.

In connection with the Mergers and immediately prior to June 1, 2020, the Company adopted the Xperi Holding Corporation 2020 Employee Stock Purchase Plan (the “2020 ESPP”). The 2020 ESPP is implemented through consecutive overlapping 24-month offering periods, each of which is comprised of four six-month purchase periods. The first offering period commenced on September 1, 2020 and will end on August 31, 2022. Each subsequent offering period under the 2020 ESPP will be twenty-four (24) months long and will commence on each September 1 and March 1 during the term of the plan. Participants may contribute up to 100% of their base earnings and commissions through payroll deductions, and the accumulated deductions will be applied to the purchase of shares on each semi-annual purchase date. The purchase price per share will equal 85% of the fair market value per share on the start date of the offering period or, if lower, 85% of the fair market value per share on the semi-annual purchase date.

An eligible employee’s right to buy the Company’s common stock under the 2020 ESPP may not accrue at a rate in excess of $25,000 of the fair market value of such shares per calendar year for each calendar year of an offering period. If the fair market value per share of the Company’s common stock on any purchase date during an offering period is less than the fair market value per share on the start date of the 24-month offering period, then that offering period will automatically terminate and a new 24-month offering period will begin on the next business day. All participants in the terminated offering will be transferred to the new offering period.

As of September 30, 2020, there were 2.0 million shares reserved for grant under the Company’s 2020 ESPP.

Stock Repurchase Programs

Following the termination of Xperi’s prior stock repurchase program after the closing of the Mergers, on June 12, 2020 the Board of Directors (the “Board”) of the Company authorized a new stock repurchase program providing for the repurchase of up to $150.0 million of the Company's Common Stock dependent on market conditions, share prices and other factors. As of September 30, 2020, the Company has repurchased a total of approximately 3.9 million shares of common stock, since inception of the plan, at an average price of $12.81 per share for a total cost of $50.1 million. The shares repurchased are recorded as treasury stock and are accounted for under the cost method. No expiration date has been specified for this plan. As of September 30, 2020, the total remaining amount available for repurchase was $99.9 million. The Company plans to continue to execute authorized repurchases from time to time under the plan.

In connection with the Mergers, all shares repurchased by the Company as of June 1, 2020 and recorded as treasury stock were canceled and retired. The Company accounts for stock repurchases using the cost method and records retirement of treasury stock as a reduction of the cumulative treasury stock paid-in capital balance. Once the cumulative balance is reduced to zero, any remaining difference resulting from the retirement of treasury stock is recorded as a reduction of retained earnings.

The Company issues restricted stock units as part of the equity incentive plans described above. For the majority of restricted awards, shares are withheld to satisfy required withholding taxes at the vesting date. Shares withheld to satisfy required withholding taxes in connection with the vesting of restricted awards are treated as common stock repurchases in the condensed consolidated financial statements because they reduce the number of shares that would have been issued on vesting. However, these withheld shares are not included in common stock repurchases under the Company's authorized share repurchase plan. During the three months ended September 30, 2020 and 2019, the Company withheld 0.2 million and 0.1 million shares of common stock to satisfy $3.3 million and $0.1 million of required withholding taxes, respectively. During the nine months ended September 30, 2020 and 2019, the Company withheld 0.6 million and 0.2 million shares of common stock to satisfy $9.2 million and $4.3 million of required withholding taxes, respectively.

NOTE 12 – STOCK-BASED COMPENSATION EXPENSE

The effect of recording stock-based compensation (“SBC”) expense for the three and nine months ended September 30, 2020 and 2019 is as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Cost of licensing, services and software revenue	$	258		$	—		$	332		$	—
Research, development and other related costs		3,580			3,544			9,454			10,293
Selling, general and administrative		6,319			4,444			16,828			12,539
Total stock-based compensation expense		10,157			7,988			26,614			22,832
Tax effect on stock-based compensation expense		(55	)		(1,269	)		(1,550	)		(3,654	)
Net effect on net loss	$	10,102		$	6,719		$	25,064		$	19,178

In connection with the Mergers, the Company assumed unvested TiVo equity awards with a fair value of $34.1 million, of which $22.0 million related to post-acquisition services. For the three and nine months ended September 30, 2020, the Company recognized $1.9 million and $4.1 million of SBC expense, respectively, associated with the unvested TiVo equity awards assumed. See “Note 7 – Business Combination” for additional detail.

Stock-based compensation expense categorized by various equity components for the three and nine months ended September 30, 2020 and 2019 is summarized in the table below (in thousands):

	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Restricted stock awards and units	$	9,734	$	7,362	$	25,175	$	21,013
Employee stock purchase plan		401		577		1,387		1,638
Employee stock options		22		49		52		181
Total stock-based compensation expense	$	10,157	$	7,988	$	26,614	$	22,832

There were no options granted in the three and nine months ended September 30, 2020 and 2019.

The following assumptions were used to value the restricted stock units subject to market conditions granted in the three months ended September 30, 2020:

	July 2020
Expected life (years)		3.0
Risk-free interest rate		0.16	%
Dividend yield		1.4	%
Expected volatility		51.3	%

Previous ESPP grants occurred in February 2020 and August 2019. Pursuant to the Merger Agreement, on May 22, 2020, the Company granted its final ESPP purchases to the eligible employees under the legacy ESPP program before terminating the plan prior to the consummation of the Mergers. As stated in Note 11, the first offering period of the 2020 ESPP commenced on September 1, 2020.

The following assumptions were used to value the ESPP shares for these grants:

	September 2020			February 2020			August 2019			February 2019
Expected life (years)		2.0			2.0			2.0			2.0
Risk-free interest rate		0.13	%		1.4	%		1.7	%		2.5	%
Dividend yield		1.4	%		4.0	%		3.5	%		5.4	%
Expected volatility		57.5	%		45.8	%		51.7	%		53.4	%

NOTE 13 – INCOME TAXES

For the three months ended September 30, 2020, the Company recorded an income tax expense of $0.5 million on a pretax loss of $30.1 million and for the nine months ended September 30, 2020, the Company recorded an income tax benefit of $6.8 million on a pretax loss of $41.6 million, which resulted in an effective tax rate of 16.3% for the nine months ended September 30, 2020. The tax benefit of $6.8 million is comprised of a $12.2 million tax benefit related to the five month pre-merger period and a tax expense of $5.4 million related to the four month post-merger period. The five month pre-merger income tax benefit of $12.2 million was primarily related to a net decrease in valuation allowance as a result of the Mergers, deduction from foreign-derived intangible income, releases of unrecognized tax benefits due to the lapse of applicable statutes of limitation, and deduction from transaction expenses, offset by tax expense from operating income, shortfalls from stock-based compensation, certain non-deductible expenses, and unrealized foreign exchange losses from the prior period South Korea refund claim. The four month post-merger income tax expense of $5.4 million was primarily related to income tax expense from foreign operations, foreign withholding taxes and U.S. federal minimum tax offset by unrealized foreign exchange gains from the current period South Korea refund claim.

For the three months ended September 30, 2019, the Company recorded an income tax benefit of $14.6 million on a pretax loss of $30.6 million and for the nine months ended September 30, 2019, the Company recorded an income tax benefit of $27.1 million on a pretax loss of $74.7 million, which resulted in an effective tax rate of 36.3%. The income tax benefit for the three and nine months ended September 30, 2019 was primarily related to tax benefit from operating losses and the realization of certain tax credits, offset by foreign withholding taxes, certain non-deductible expenses, and shortfalls from stock-based compensation.

The Company's provision for income taxes is based on its worldwide estimated annualized effective tax rate, except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, and the tax effect of discrete items occurring during the period. The Company has applied separate effective tax rates to its pre- and post-merger activities; the Company’s post-merger effective tax rate is based on its worldwide estimated tax rate for the seven-month period ended December 31, 2020. The tax for jurisdictions for which a loss is expected and no benefit can be realized for the year is computed using a separate effective tax rate. The decrease in income tax benefit for the nine months ended September 30, 2020 as compared to the prior year is largely attributable to a decrease in operating losses, increase in valuation allowance in the post-merger period, foreign withholding taxes, and U.S. federal minimum taxes, partially offset by tax benefits from the release of unrecognized tax benefits due to the lapse of applicable statute of limitation and a decrease in valuation allowance as a result of the Mergers.

During the fourth quarter of 2019, the Company filed a refund claim for foreign taxes previously withheld from licensees in South Korea based on recent court rulings in South Korea and other business factors. These previously withheld foreign taxes were claimed as a foreign tax credit in the U.S. As a result of the Company’s refund claim, the Company recorded a non-current income tax receivable of $65.2 million in income tax receivable, an unrecognized tax benefit of $48.2 million in other long-term liabilities, and a reduction in deferred tax assets of $17.0 million. The Company anticipates filing a refund claim for the 2020 year-to-date South Korean withholding taxes.

During the first nine months of 2020, an additional non-current income tax receivable of $13.7 million, an unrecognized tax benefit of $8.4 million in other long-term liabilities, and a reduction in deferred tax assets of $5.0 million with an offset to valuation allowance were recorded in connection with the South Korea refund claim matter. As part of the Company’s acquisition of TiVo, the Company recorded a year-to-date non-current income tax receivable of $31.9 million and a reduction in deferred tax assets of $15.5 million with a corresponding offset to valuation allowance, with the residual recorded to goodwill. At September 30, 2020, the Company had recorded a cumulative unrealized foreign exchange loss of approximately $1.2 million as a reduction in non-current income tax receivable.

The impact on the Company’s pre-merger deferred tax assets and liabilities caused by the Mergers is recorded in the Company’s financial statements outside of acquisition accounting. Such impact is not a part of the fair value of the assets acquired and liabilities assumed. The Company released its valuation allowance which was previously applied to certain deferred tax assets. As a result, the Company recorded an income tax benefit of $19.8 million for the pre-merger period. Due to the composition of TiVo’s Federal deferred tax assets net of valuation allowance and deferred tax liabilities, the combined Company’s Federal deferred tax assets net of deferred tax liabilities are fully offset by a valuation allowance. The Company has adopted the policy of using a tax-law ordering approach when determining the extent to which the Company’s, or the acquired company’s deferred tax liabilities are able to be used as sources of income used to recognize the Company’s, or the acquired company’s deferred tax assets.

As of September 30, 2020, gross unrecognized tax benefits were $181.7 million, of which $97.3 million would affect the effective tax rate if recognized. As of September 30, 2019, unrecognized tax benefits were $34.1 million (which was included in long-term deferred tax and other long-term liabilities on the Condensed Consolidated Balance Sheets), of which $21.3

million would affect the effective tax rate if recognized. The Company is unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease.

It is the Company's policy to classify accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. For the three and nine months ended September 30, 2020 and 2019, the Company recognized an insignificant amount of interest and penalties related to unrecognized tax benefits. Accrued interest and penalties were $2.2 million and $1.2 million as of September 30, 2020 and December 31, 2019, respectively. It is the Company’s policy not to consider nonrecognized subsequent events in the calculation of its worldwide estimated annualized effective tax rate nor in its assessment of the recoverability of deferred tax assets. The Company has therefore not considered the event discussed in “Note 17 – Subsequent Events” when determining its worldwide estimated annualized effective tax rate nor in its assessment of the recoverability of deferred tax assets as of September 30, 2020.

At September 30, 2020, the Company’s 2015 through 2018 tax years were generally open and subject to potential examination in various jurisdictions. Earlier tax years for the Company and its subsidiaries are also open in certain jurisdictions which are currently subject to examination. In addition, in the U.S., any net operating losses or credits that were generated in prior years but not yet fully utilized in a year that is closed under the statute of limitations may also be subject to examination. The Company has submitted a withholding tax refund claim with the South Korean authorities and the final outcome is not anticipated to be settled within the next twelve months.

NOTE 14 – LEASES

The Company leases office and research facilities, data centers and office equipment under operating leases which expire through 2029. The Company’s leases have remaining lease terms of one year to nine years, some of which may include options to extend the leases for five years or longer, and some of which may include options to terminate the leases within the next 6 years or less. Leases with an initial term of 12 months or less are not recorded on the balance sheets; expense for these leases is recognized on a straight-line basis over the lease term. Variable lease payments are expensed as incurred and are not included within the lease liability and right-of-use assets calculation. As a practical expedient, the Company elected, for all office and facility leases, not to separate nonlease components (e.g., common-area maintenance costs) from lease components (e.g., fixed payments including rent) and instead to account for each separate lease component and its associated non-lease components as a single lease component. As most of the leases do not provide an implicit rate, the Company generally, for purposes of discounting lease payments, uses its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date.

The Company subleases certain real estate to third parties. The sublease portfolio consists of operating leases for previously exited office space. Certain subleases include variable payments for operating costs. The subleases are generally co-terminus with the head lease, or shorter. Subleases do not include any residual value guarantees or restrictions or covenants imposed by the leases. Income from subleases is recognized as a reduction to selling, general and administrative expenses.

The components of operating lease costs were as follows (in thousands):

	Three Months Ended					Nine Months Ended
	September 30, 2020			September 30, 2019		September 30, 2020			September 30, 2019
Fixed lease cost ⁽¹⁾	$	6,184		$	1,713	$	11,340		$	5,138
Variable lease cost		1,374			278		2,315			859
Less: sublease income		(2,452	)		—		(3,295	)		—
Total operating lease cost	$	5,106		$	1,991	$	10,360		$	5,997

(1) Includes short-term leases, which were immaterial.

Other information related to leases was as follows (in thousands, except lease term and discount rate):

	Three Months Ended,				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	6,041	$	1,482	$	10,767	$	4,498
ROU assets obtained in exchange for new lease liabilities:
Operating leases	$	461	$	361	$	4,312	$	5,136

	September 30, 2020			December 31, 2019
Weighted-average remaining lease term (years):
Operating leases		5.4			4.6
Weighted-average discount rate:
Operating leases		5.2	%		5.7	%

Future minimum lease payments and related lease liabilities as of September 30, 2020 were as follows (in thousands):

	Operating Lease Payments (1)			Sublease Income			Net Operating Lease Payments
2020 (remaining 3 months)	$	4,774		$	(1,647	)	$	3,127
2021		22,184			(6,257	)		15,927
2022		18,105			(6,117	)		11,988
2023		16,169			(6,231	)		9,938
2024		15,405			(6,293	)		9,112
Thereafter		23,451			(7,214	)		16,237
Total lease payments		100,088			(33,759	)		66,329
Less: imputed interest		(13,048	)		—			(13,048	)
Present value of lease liabilities:	$	87,040		$	(33,759	)	$	53,281

Less: current obligations under leases (accrued liabilities)		17,577
Noncurrent operating lease liabilities	$	69,463

(1) Future minimum lease payments exclude short-term leases as well as payments to landlords for variable common area maintenance, insurance and real estate taxes.

As of December 31, 2019, future minimum lease payments were as follows (in thousands):

	Operating Leases
2020	$	6,387
2021		4,558
2022		3,259
2023		3,235
2024		2,619
Thereafter		1,977
Total lease payments		22,035
Less: imputed interest		(2,776	)
Present value of lease liabilities:	$	19,259

Less: current obligations under leases (accrued liabilities)		5,845
Noncurrent operating lease liabilities	$	13,414

NOTE 15 – COMMITMENTS AND CONTINGENCIES

Inventory Purchase Commitment

The Company uses contract manufacturers to provide manufacturing services for its products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate supply, the Company enters into agreements with its contract manufacturer that either allow them to procure inventory based on criteria as defined by the Company or that establish the parameters defining the Company’s requirements. A significant portion of the Company’s purchase commitments arising from these agreements consist of firm, non-cancelable and unconditional purchase commitments. In certain instances, these agreements allow the Company the option to cancel, reschedule or adjust the Company’s requirements based on its business needs prior to firm orders being placed. As of September 30, 2020, the Company had total purchase commitments for inventory of $6.8 million, of which $1.4 million was accrued in the Condensed Consolidated Balance Sheet.

Other Purchase Obligations

On December 31, 2019, TiVo entered into a contract requiring the Company to generate a minimum number of Qualified Referred Subscribers (as defined in the contract) over a 30 month period. In the event that the aggregate number of Qualified Referred Subscribers generated by the Company within the specified time period is less than the minimum guaranteed subscribers, the Company is required to pay an amount equal to the shortfall between the number of Qualified Referred Subscribers generated by the Company and the required minimum multiplied by a per Qualified Referred Subscribers fee, up to a maximum of $5.0 million. As of September 30, 2020, $0.1 million was accrued in the Condensed Consolidated Balance Sheets related to this contract.

Under certain other contractual arrangements, the Company may be obligated to pay up to approximately $49.6 million, which is mostly related to unconditional purchase obligations to service providers and certain contingent payments to partners. The majority of these commitments and contingent payments are due within four years.

Indemnifications

In the normal course of business, the Company provides indemnifications of varying scopes and amounts to certain of its licensees, customers, and business partners against claims made by third parties arising from the use of the Company's products, intellectual property, services or technologies. The Company cannot reasonably estimate the possible range of losses that may be incurred pursuant to its indemnification obligations, if any. Variables affecting any such assessment include, but are not limited to: the nature of the claim asserted; the relative merits of the claim; the financial ability of the party suing the indemnified party to engage in protracted litigation; the number of parties seeking indemnification; the nature and amount of damages claimed by the party suing the indemnified party; and the willingness of such party to engage in settlement negotiations. To date, no such claims have been filed against the Company and no liability has been recorded in the Company’s financial statements.

As permitted under Delaware law, the Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company believes, given the absence of any such payments in the Company’s history, and the estimated low probability of such payments in the future, that the estimated fair value of these indemnification agreements is immaterial. In addition, the Company has directors’ and officers’ liability insurance coverage that is intended to reduce its financial exposure and may enable the Company to recover any payments, should they occur.

Contingencies

At each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of losses is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company is currently unable to predict the final outcome of lawsuits to which it is a party and therefore cannot determine the likelihood of loss nor estimate a range of possible losses. An adverse decision in any of these proceedings could significantly harm the Company’s business and consolidated financial position, results of operations or cash flows.

The Company and its subsidiaries are involved in litigation matters and claims in the normal course of business. In the past, the Company and its subsidiaries have litigated to enforce their respective patents and other intellectual property rights, to enforce the terms of license agreements, to protect trade secrets, to determine the validity and scope of the proprietary rights of others and to defend itself or its customers against claims of infringement or invalidity. The Company expects it or its subsidiaries will

be involved in similar legal proceedings in the future, including proceedings regarding infringement of its patents, and proceedings to ensure proper and full payment of royalties by licensees under the terms of its license agreements.

The existing and any future legal actions may harm the Company’s business. For example, legal actions could cause an existing licensee or strategic partner to cease making royalty or other payments to the Company, or to challenge the validity and enforceability of patents owned by the Company’s subsidiaries or the scope of license agreements with the Company’s subsidiaries, or could significantly damage the Company’s relationship with such licensee or strategic partner and, as a result, prevent the adoption of the Company’s other technologies by such licensee or strategic partner. Litigation could also severely disrupt or shut down the business operations of licensees or strategic partners of the Company’s subsidiaries, which in turn would significantly harm ongoing relations with them and cause the Company to lose royalty revenue.

The costs associated with legal proceedings are typically high, relatively unpredictable, and not completely within the Company’s control. These costs may be materially higher than expected, which could adversely affect the Company’s operating results and lead to volatility in the price of its common stock. Whether or not determined in the Company’s favor or ultimately settled, litigation diverts managerial, technical, legal, and financial resources from the Company’s business operations. Furthermore, an adverse decision in any of these legal actions could result in a loss of the Company’s proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from others, limit the value of the Company’s licensed technology or otherwise negatively impact the Company’s stock price or its business and consolidated financial results.

NOTE 16 – SEGMENT AND GEOGRAPHIC INFORMATION

In connection with the Mergers, the Company re-evaluated its reportable segments. The Company concluded that it has two reportable segments for financial reporting purposes: (1) Product and (2) Intellectual Property (“IP”) Licensing. There are certain corporate overhead costs that are not allocated to these reportable segments because these operating amounts are not considered in evaluating the operating performance of the Company’s business segments.

Reportable segments are identified based on the Company's organizational structure and information reviewed by the Company’s chief operating decision maker (“CODM”) to evaluate performance and allocate resources. The Company’s Chief Executive Officer is also the CODM as defined by the authoritative guidance on segment reporting.

The Product segment consists primarily of licensing Company-developed audio, digital radio, imaging, edge-based machine learning and multi-channel video user experience (“UX”) solutions. Edge based machine learning, audio, digital radio, and imaging solutions include the delivery of software and/or hardware-based solutions to the Company’s consumer electronics (“CE”) customers, automotive manufacturers or their supply chain partners. UX products and services revenue is primarily derived from multi-channel video service providers and CE manufacturers, licensing the TiVo service and selling TiVo-enabled devices, Personalized Content Discovery, enriched Metadata, viewership data and advertising.

The IP Licensing segment consists primarily of licensing the Company’s innovations to leading companies in the media and semiconductor industries. Licensing arrangements include access to one more of the Company’s foundational patent portfolios and may also include access to some of the Company’s industry-leading technologies and proven know-how. In the media industry, the Company’s licensees include pay television (“Pay-TV”) providers, both in the United States and internationally, consumer electronics manufacturers and other providers of video experiences across various platforms, including over-the-top (“OTT”) video. In the semiconductor industry, the Company’s licensees include semiconductor manufacturers, fabless companies, foundries and packaging companies.

The Company does not identify or allocate assets by reportable segment, nor does the CODM evaluate reportable segments using discrete asset information. Reportable segments do not record inter-segment revenue and accordingly there are none to report. The Company does not allocate other income and expense to reportable segments. Although the CODM uses operating income to evaluate reportable segments, operating costs included in one segment may benefit other segments.

The following table sets forth the Company’s segment revenue, operating expenses and operating income (loss) for the three and nine months ended September 30, 2020 and 2019 (in thousands):

	Three Months Ended							Nine Months Ended
	September 30, 2020				September 30, 2019			September 30, 2020				September 30, 2019
Revenue:
Product segment	$	122,552			$	46,028		$	242,618			$	152,026
IP Licensing segment		80,245				11,839			215,475				37,523
Total revenue		202,797				57,867			458,093				189,549
Operating expenses:
Product segment		116,149				45,693			228,941				139,409
IP Licensing segment		40,020				10,113			70,765				29,859
Unallocated operating expenses (1)		65,591		(2)		27,588			170,542		(3)		84,121
Total operating expenses		221,760				83,394			470,248				253,389
Operating income (loss):
Product segment		6,403				335			13,677				12,617
IP Licensing segment		40,225				1,726			144,710				7,664
Unallocated operating expenses (1)		(65,591	)			(27,588	)		(170,542	)			(84,121	)
Total operating loss	$	(18,963	)		$	(25,527	)	$	(12,155	)		$	(63,840	)

(1)

Unallocated operating expenses consist primarily of selling, marketing, general and administrative expenses, such as administration, human resources, finance, information technology, corporate development and procurement. These expenses are not allocated because these amounts are not considered in evaluating the operating performance of the Company’s business segments.

(2)

Includes approximately $1.2 million in one-time transaction costs related to the Mergers and $3.6 million in post-merger severance and retention costs.

(3)

Includes approximately $29.1 million in one-time transaction costs related to the Mergers and $12.1 million in post-merger severance and retention costs.

A significant portion of the Company’s revenue is derived from licensees headquartered outside of the U.S., principally in Asia, and it is expected that this revenue will continue to account for a significant portion of total revenue in future periods. The table below lists the geographic revenue for the periods indicated (in thousands):

	Three Months Ended								Nine Months Ended
	September 30, 2020				September 30, 2019				September 30, 2020				September 30, 2019
U.S.	$	125,753	62	%	$	9,733	17	%	$	191,847	42	%	$	33,740	18	%
Japan		19,107	10			18,368	32			84,461	18			69,427	37
South Korea		14,402	7			19,086	33			102,959	23			53,002	28
Canada		12,536	6			166	—			17,133	4			441	—
Europe and Middle East		10,606	5			4,780	8			22,035	5			15,243	8
Other		20,393	10			5,734	10			39,658	8			17,696	9
	$	202,797	100	%	$	57,867	100	%	$	458,093	100	%	$	189,549	100	%

For the three months ended September 30, 2020 and 2019, there were no customers and one customer, respectively, that accounted for 10% or more of total revenue. For the nine months ended September 30, 2020 and 2019, there were one customer and two customers, respectively, that accounted for 10% or more of total revenue. As of September 30, 2020 and December 31, 2019, there were three customers and three customers, respectively, that each accounted for 10% or more of total accounts receivable.

NOTE 17 - SUBSEQUENT EVENTS

On October 28, 2020, the Board declared a cash dividend of $0.05 per share of common stock, payable on December 21, 2020 to the stockholders of record at the close of business on November 30, 2020.

On November 9, 2020, the Company and certain of its affiliates, entered into a patent license agreement (the “Agreement”) with Comcast Corporation and certain of its affiliates (“Comcast”). In connection with the Agreement, the parties resolved all

of the outstanding litigation between the companies. The Agreement is effective as of the expiration of Comcast’s prior agreement in 2016 and its term continues into 2031. The Agreement also provides for an initial payment by Comcast upon execution and ongoing payments through the remainder of the Agreement. As the Agreement was entered into after September 30, 2020, the Company expects to record revenue from the out-of-license settlement in the fourth quarter of 2020 and revenue from the prospective license into 2031. In addition, the Company expects to make a substantial principal payment towards the 2020 Term B Loan Facility based on the leverage ratios and excess cash flow metrics as defined in the 2020 Credit Agreement. Refer to “Note 9 – Debt” for additional information.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited financial statements and notes thereto for the year ended December 31, 2019 found in the Form 10-K filed by Xperi Corporation on February 18, 2020 (the “Form 10-K”).

This Quarterly Report contains forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “could,” “would,” “may,” “intends,” “targets” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report. The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to our future revenue, product development, demand, acceptance and market share, growth rate, competitiveness, gross margins, levels of research, development and other related costs, expenditures, the outcome or effects of and expenses related to litigation and administrative proceedings related to our patents, our intent to enforce our intellectual property, our ability to license our intellectual property, tax expenses, cash flows, our ability to liquidate and recover the carrying value of our investments, our management's plans and objectives for our current and future operations, our plans for quarterly dividends and stock repurchases, our ability to achieve cost savings through the integration of the legacy businesses, the levels of customer spending or research and development activities, general economic conditions, the impact of COVID-19 (as defined below) pandemic and related events, the impact of the Mergers (as defined below) on our financial condition and results of operations, our plans to separate the combined product and IP licensing businesses, and the sufficiency of financial resources to support future operations and capital expenditures.

Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks, uncertainties, and changes in condition, significance, value and effect, including those discussed below under the heading “Risk Factors” within Part II, Item 1A of this Quarterly Report and other documents we file from time to time with the Securities and Exchange Commission (the “SEC”), such as our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report and are based on information currently and reasonably known to us. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report, other than as required by law. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

As used herein, the “Company,” “we,” “us” and “our” refer to Xperi when referring to periods prior to June 1, 2020 and Xperi Holding Corporation when referring to periods subsequent to June 1, 2020. Unless specified otherwise, the financial results in this Quarterly Report are those of the Company and its subsidiaries on a consolidated basis.

Business Overview

On December 18, 2019, Xperi Corporation (“Xperi”) entered into a definitive agreement with TiVo Corporation (“TiVo”), to combine in an all-stock merger of equals transaction (the “Mergers”). Following consummation of the Mergers on June 1, 2020, Xperi Holding Corporation became the parent company of both Xperi and TiVo. The common stock of both Xperi and TiVo were de-registered after completion of the Mergers. On June 2, 2020, Xperi Holding Corporation’s common stock, par value $0.001 per share, commenced trading on the Nasdaq Global Select Market (“Nasdaq”) under the ticker symbol “XPER.” Xperi was determined to be the accounting acquirer in the Mergers. As a result, the historical financial statements of Xperi for periods prior to the Mergers are considered to be the historical financial statements of Xperi Holding Corporation. Our results of operations include the operations of TiVo after June 1, 2020. For further discussion on the Mergers, refer to “Item 1A. Risk Factors,” and “Note 7 – Business Combination” in the Notes to Condensed Consolidated Financial Statements.

In connection with the Mergers, we incurred significant one-time expenses in the first three quarters of 2020 such as transaction related costs (e.g. bankers fees, legal fees, consultant fees, etc.), lease impairment charges due to facilities consolidation, severance and retention costs (including stock-based compensation expense resulting from the contractually-required acceleration of equity instruments for departing executives). Total transaction related costs amounted to $1.2 million and $29.1 million for the three and nine months ended September 30, 2020, respectively. Lease impairment charges were $0.7 million and $0.7 million for the three and nine months ended September 30, 2020, respectively. In addition, we incurred post-merger severance and retention costs of $3.6 million and $12.1 million for the three and nine months ended September 30, 2020,

respectively. We may incur additional expenses for integration, severance and retention, and the impairment of right-of-use assets due to facilities consolidation in future quarters. We currently expect to achieve at least $50.0 million of annualized run-rate cost savings by year-end 2021 through the integration of the respective product and IP licensing businesses of the legacy companies.

We are a leading consumer and entertainment technology licensing company and one of the industry’s largest intellectual property (IP) licensing platforms, with a diverse portfolio of media and semiconductor intellectual property and more than 11,000 patents and applications. We invent, develop, and deliver technologies that enable extraordinary experiences. Xperi technologies, delivered via our brands (DTS, HD Radio, IMAX Enhanced, Invensas, TiVo), and by our subsidiary, Perceive Corporation (“Perceive”), make entertainment more entertaining, and smart devices smarter. Our technologies are integrated into billions of consumer devices, media platforms, and semiconductors worldwide, driving increased value for partners, customers and consumers. We shape how millions of consumers access and experience entertainment content, and our innovations are found in billions of devices and hundreds of millions of interfaces around the globe. Headquartered in Silicon Valley with operations around the world, we have approximately 1,900 employees and over 35 years of operating experience.

We are currently contemplating and may pursue, subject to the receipt of approval by our board and any required regulatory approvals, a separation of our product business and IP licensing business through a tax-efficient transaction, resulting in two independent, publicly traded companies. We are currently evaluating the optimal timing of the contemplated business separation.

On November 9, 2020, we entered into a patent license agreement (the “Agreement”) with Comcast Corporation (“Comcast”) and certain of its affiliates. In connection with the Agreement, the companies resolved all of the outstanding litigation. The Agreement is effective as of the expiration of Comcast’s prior agreement in 2016 and its term continues into 2031. The Agreement also provides for an initial payment by Comcast upon execution and ongoing payments through the remainder of the Agreement. As the Agreement was entered into after September 30, 2020, we expect to record revenue from the out-of-license settlement in the fourth quarter of 2020 and revenue from the prospective license into 2031. In addition, we expect to make a substantial principal payment towards the 2020 Term B Loan Facility based on the leverage ratios and excess cash flow metrics as defined in the 2020 Credit Agreement.

COVID-19 Impact

In December 2019, a novel strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China, and has since spread throughout the world. In March 2020, the World Health Organization declared COVID-19 a pandemic. In an effort to protect the health and safety of our employees, we took proactive, aggressive action from the earliest signs of the outbreak to adopt social distancing policies at our locations around the world, including working from home, limiting the number of employees attending meetings, and suspending employee travel. In an effort to contain COVID-19 and slow its spread, governments around the world have also enacted various measures, including orders to close business locations, isolate people to their places of residence, and mandate social distancing and other health-related practices. Such orders or restrictions have resulted in business closures, work stoppages, slowdowns and delays in commercial activities, widespread unemployment, travel restrictions and cancellation of events, among other effects. While some governments recently have permitted reopening of businesses and approved gradual easing of various restrictions, the pandemic continues to have a significant and negative impact on business and economic activities in the U.S and around the world.

These actions and the resulting global economic downturn have negatively impacted, and are expected to continue to negatively impact, our consolidated financial results for the remainder of 2020. The impact to date has included significant volatility and a decline in demand in various markets and industries, particularly the automotive market, which has been adversely impacted and is expected to continue to adversely impact our revenue. For example, we anticipate approximately 20% decline in our royalty revenue in 2020 from our products sold to the automotive market, such as HD Radio, as compared to the prior year. In addition, we recorded, in the first quarter of 2020, an incremental provision for credit losses of approximately $2.0 million due to heightened risk of nonpayment on existing accounts receivable as a result of the impaired financial condition and liquidity positions of certain of our customers.

We have been closely monitoring the COVID-19 pandemic and its impact on our business, including legislation to mitigate the impact of COVID-19 such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act which was enacted on March 27, 2020. A significant portion of our anticipated revenue for 2020 is derived from fixed-fee and minimum-guarantee arrangements, primarily from large, well-capitalized customers which we believe somewhat mitigates the risks to our business. Although we are unable to predict the full impact and duration of COVID-19 on our business, we are actively managing our financial expenditures in response to the current uncertainty. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided under Part II, Item 1A – Risk Factors.

Results of Operations

Revenue

We generate our revenue from the following principal activities.

License Agreements

We operate in two business segments. In our Product segment, we license our audio, imaging, edge-based machine learning and multi-channel video user experience (“UX”) solutions. In our IP Licensing segment, we license (i) our media patent portfolios (“IP Media licensing”) to pay television providers, consumer electronics manufacturers and other providers of video experiences across various platforms and (ii) our semiconductor technologies and associated patent portfolios (“IP Semiconductor licensing”) to semiconductor manufacturers, fabless companies, foundries and packaging companies. We license our technologies and portfolios under three revenue models: (i) fixed-fee IP Media licensing, (ii) fixed-fee or minimum guarantee IP Semiconductor or Product licensing, and (iii) per-unit or per-subscriber royalty licenses.

Fixed-fee IP Media licensing

Our long-term fixed-fee IP Media licensing agreements provide our customers with the rights to future patented technologies over the term of the agreement that are highly interdependent or highly interrelated to the patented technologies provided at the inception of the agreement. We treat these rights as a single performance obligation with revenue recognized on a straight-line basis over the term of the fixed-fee license agreement.

At times, we enter into license agreements in which a licensee is released from past patent infringement claims and is granted a license to ship an unlimited number of units or for an unlimited number of subscribers over a future period for a fixed fee. In these arrangements, we allocate the transaction price between the release for past patent infringement claims and the future license. As the release from past patent infringement claims is generally satisfied at execution of the agreement, the transaction price allocated to the release from past patent infringement claims is generally recognized in the period the agreement is executed and the amount of transaction price allocated to the future license is recognized ratably over the future license term.

Fixed-fee or minimum guarantee IP Semiconductor or Product licensing

We enter into Product or IP Semiconductor licenses that have fixed fee or minimum guarantee arrangements, whereby licensees pay a fixed fee for the right to incorporate our technology in the licensee's products over the license term. In arrangements with a minimum guarantee, the fixed fee component corresponds to a minimum number of units or dollars that the customer must produce or pay, with additional per-unit fees for any units or dollars exceeding the minimum. In most cases, the customer pays the fixed license fee in specified installments over the license term. For both fixed fee and minimum guarantee agreements for IP Semiconductor or Product licensing, we recognize the full fixed fee as revenue at the beginning of the license term, when the licensee has the right to use the IP and begins to benefit from the license.

If the contract term of a fixed fee or minimum guarantee arrangement is longer than one year, we also consider the scheduled payment arrangements to determine whether a significant financing component exists. In general, if the payment arrangements extend beyond the initial twelve months of the contract, we treat a portion of the payments as a significant financing component. The discount rate used for each arrangement reflects the rate that would be used in a separate financing transaction between us and the licensee at contract inception and takes into account the credit characteristics of the licensee and market interest rates as of the date of the agreement. As such, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component.

We actively monitor and enforce our IP, including seeking appropriate compensation from customers that have under-reported royalties owed under a license agreement and from third parties that utilize our intellectual property without a license. As a result of these activities, we may, from time to time, recognize revenue from payments resulting from periodic compliance audits of licensees for underreporting royalties incurred in prior periods, as part of a settlement of a patent infringement dispute, or from legal judgments in a license dispute. These recoveries and settlements may cause revenue to be higher than expected during a particular reporting period and such recoveries may not occur in subsequent periods. We recognize revenue from recoveries when a binding agreement has been executed and we conclude collection under that agreement is likely.

Per-unit or per-subscriber royalty licenses

We recognize revenue from per-unit or per-subscriber royalty licenses in the period in which the licensee's sales or production are estimated to have occurred, which results in an adjustment to revenue when actual sales or production are subsequently

reported by the licensee, which is generally in the month or quarter following usage or shipment. We generally recognize revenue from royalty licenses on a per-subscriber per-month model for licenses with service providers and a per-unit shipped or manufactured model for licenses with CE manufacturers. Estimating licensees’ quarterly royalties prior to receiving the royalty reports requires us to make significant assumptions and judgments related to forecasted trends and growth rates used to estimate quantities shipped by customers, which could have a material impact on the amount of revenue we report on a quarterly basis.

Arrangements with Multiple System Operators for the TiVo Service

Our arrangements with multiple system operators (“MSOs”) typically include software customization and set-up services, associated maintenance and support, limited training, post-contract support, TiVo-enabled DVRs, non-DVR STBs and the TiVo service.

We have two types of arrangements with MSOs that include technology deployment and engineering services. In instances where we host the TiVo service, non-refundable payments received for customization and set-up services are deferred and recognized as revenue ratably over the hosting term. The related cost of such services is capitalized to the extent it is deemed recoverable and amortized to cost of revenue over the same period as the related TiVo service revenue is recognized. We estimate the stand-alone selling prices for training, DVRs, non-DVR STBs and maintenance and support based on the price charged in stand-alone sales of the promised good or service. The stand-alone selling price for the TiVo service is determined considering the size of the MSO and expected volume of deployment, market conditions, competitive landscape, internal costs and total gross margin objectives. For a term license to the TiVo service, we receive license fees for the hosted TiVo service on either a per-subscriber per-month basis or a fixed fee. We recognize revenue from per-subscriber per-month licenses during the month the TiVo service is provided to the customer and recognize revenue from fixed fee licenses ratably over the license period.

In arrangements where we do not host the TiVo service and that include engineering services that are essential to the functionality of the licensed technology or involve significant customization or modification of the software, we recognize revenue as progress toward completion is made using an input method based on the ratio of costs incurred to date to total estimated costs of the project. Estimating project costs requires forecasting costs, tracking progress toward completion and projecting the remaining effort to complete the project. These estimates are reassessed throughout the term of the arrangement, and revisions to estimates are recognized on a cumulative catch-up basis when the changed conditions become known. We generally recognize revenue from license fees for the TiVo service that the Company does not host on a per-subscriber per-month basis due to the recognition constraint on intellectual property usage-based royalties.

Subscription Services

Subscription services revenue primarily consists of fees to provide customers with access to one or more of our hosted products such as the iGuide IPG, advanced search and recommendations, metadata and analytics products, including routine customer support. We generally receive per-subscriber per-month fees for the iGuide IPG and search and recommendations service and revenue is recorded in the month the customer uses the service. We generally receive a monthly or quarterly fee from our metadata or analytics licenses for the right to use the metadata or access our analytics platform and to receive regular updates. Revenue from our metadata and analytics service is recognized ratably over the subscription period.

TiVo-enabled DVRs and TiVo Service

We sell TiVo-enabled DVRs and the related service directly to customers through sales programs via the TiVo.com website and license the sale of TiVo-enabled DVRs through a limited number of retailers. After the initial subscription period, all customers have various pricing options when they renew their subscription.

The transaction price allocated to the DVR is recognized as revenue upon shipment to the customer and the transaction price allocated to the TiVo service is recognized as revenue ratably over the service period. Subscription revenue from lifetime subscriptions is recognized ratably over the estimated useful life of the DVR associated with the subscription. The estimated useful life for a DVR depends on a number of assumptions, including, but not limited to, customer retention rates, the timing of new product introductions and historical experience. We periodically reassess the estimated useful life of a DVR. When the actual useful life of the DVR materially differs from our estimates, the estimated useful life of the DVR is adjusted, which could result in the recognition of revenue over a longer or shorter period of time.

The following table presents our historical operating results for the periods indicated as a percentage of revenue:

	Three Months Ended						Nine Months Ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Revenue:
Licensing, services and software		96	%		100	%		98	%		100	%
Hardware		4			—			2			—
Total revenue		100			100			100			100
Operating expenses:
Cost of licensing, services and software revenue, excluding depreciation and amortization of intangible assets		11			2			7			3
Cost of hardware revenue, excluding depreciation and amortization of intangible assets		6			—			3			—
Research, development and other related costs		28			45			27			41
Selling, general and administrative		32			48			37			45
Depreciation expense		3			3			3			3
Amortization expense		25			43			23			40
Litigation expense		4			3			3			2
Total operating expenses		109			144			103			134
Operating loss		(9	)		(44	)		(3	)		(34	)
Interest expense		7			10			5			9
Other income and expense, net		(1	)		(1	)		(1	)		(4	)
Loss on debt extinguishment		—			—			2			—
Loss before taxes		(15	)		(53	)		(9	)		(39	)
Provision for (benefit from) income taxes		—			(25	)		(1	)		(14	)
Net loss		(15	)%		(28	)%		(8	)%		(25	)%

Total Revenue (in thousands, except for percentages):

	Three Months Ended
	September 30, 2020		September 30, 2019		Increase/ (Decrease)		% Change
Total revenue	$	202,797	$	57,867	$	144,930		250	%

The $144.9 million, or 250% increase in total revenue for the three months ended September 30, 2020, compared to the same period in the prior year, was primarily due to the inclusion of revenue from the results of TiVo operations following the Mergers. Excluding TiVo revenue, legacy Xperi revenue would have decreased due primarily to a decrease in revenue from IP Semiconductor licensing revenue, partially offset by higher minimum guarantee (“MG”) revenue due to the timing and duration of MG contracts up for renewal and executed during the third quarter of 2020.

	Nine Months Ended
	September 30, 2020		September 30, 2019		Increase/ (Decrease)		% Change
Total revenue	$	458,093	$	189,549	$	268,544		142	%

The $268.5 million or 142% increase in total revenue for the nine months ended September 30, 2020, compared to the same period in the prior year, was primarily due to the inclusion of revenue from the results of TiVo’s operations following the Mergers and IP Semiconductor agreements executed during the first two quarters of 2020. These increases in revenue were partially offset by a decrease in royalty revenue from existing licensing agreements.

Cost of Licensing, Services and Software Revenue, Excluding Depreciation and Amortization of Intangible Assets

Cost of licensing, services and software revenue, excluding depreciation and amortization of intangible assets, consists primarily of employee-related costs, royalties paid to third parties, maintenance costs and an allocation of facilities costs, as

well as service center and other expenses related to providing the TiVo Service, non-recurring engineering (“NRE”) services and our metadata offering.

Cost of licensing, services and software revenue, excluding depreciation and amortization of intangible assets, for the three months ended September 30, 2020 was $21.9 million, as compared to $1.5 million for the three months ended September 30, 2019, an increase of $20.4 million. Cost of licensing, services and software revenue, excluding depreciation and amortization of intangible assets, for the nine months ended September 30, 2020 was $31.6 million, as compared to $6.0 million for the nine months ended September 30, 2019, an increase of $25.6 million. The increases were primarily due to the inclusion of $19.8 million and $26.6 million of post-merger TiVo expenses for the three and nine months ended September 30, 2020, respectively. Excluding TiVo expenses, the costs would have been relatively constant for the three months ended September 30, 2020 and would have decreased by $1.0 million for the nine months ended September 30, 2020, as compared to the corresponding periods in 2019. The decrease was due principally to lower royalties paid to a third party in connection with a Product segment contract in the first three quarters of 2020.

We anticipate cost of licensing, services and software revenue, excluding depreciation and amortization of intangible assets, will increase in 2020 when compared to 2019 primarily due to incremental expenses from the TiVo operations.

Cost of Hardware Revenue, Excluding Depreciation and Amortization of Intangible Assets

Cost of hardware revenue, excluding depreciation and amortization of intangible assets, includes all product-related costs associated primarily with TiVo-enabled devices, including employee-related costs, warranty costs, order fulfillment costs, certain licensing costs, and an allocation of facilities costs.

Cost of hardware revenue, excluding depreciation and amortization of intangible assets, for the three months ended September 30, 2020 was $12.2 million, as compared to $0.1 million for the three months ended September 30, 2019, an increase of $12.1 million. Cost of hardware revenue, excluding depreciation and amortization of intangible assets, for the nine months ended September 30, 2020 was $13.7 million, as compared to $0.3 million for the nine months ended September 30, 2019, an increase of $13.4 million. The increases were primarily due to the inclusion of $11.8 million and $13.2 million of post-merger TiVo expenses for the three and nine months ended September 30, 2020, respectively.

We anticipate cost of hardware revenue, excluding depreciation and amortization of intangible assets, will continue to increase in 2020 when compared to 2019 primarily due to incremental expenses from the TiVo operations.

Research, Development and Other Related Costs

Research, development and other related costs (“R&D expense”) are comprised primarily of employee-related costs, stock-based compensation expense, engineering consulting expenses associated with new product and technology development, product commercialization, quality assurance and testing costs, as well as costs related to patent applications and examinations, product "tear downs" and reverse engineering, materials, supplies, equipment depreciation and an allocation of facilities costs. All research, development and other related costs are expensed as incurred.

R&D expense for the three months ended September 30, 2020 was $57.7 million, as compared to $26.0 million for the three months ended September 30, 2019, an increase of $31.7 million. R&D expense for the nine months ended September 30, 2020 was $124.6 million, as compared to $78.0 million for the nine months ended September 30, 2019, an increase of $46.6 million. The increases were due to the inclusion of $30.2 million and $40.0 million of post-merger TiVo R&D expenses for the three and nine months ended September 30, 2020, respectively, increased headcount and personnel costs in Perceive which was created to focus on delivering edge inference solutions, and severance charges incurred in connection with consolidating and optimizing post-merger operations.

We believe that a significant level of R&D expense will be required for us to remain competitive in the future. We also anticipate that R&D expense will remain higher than in the prior year due primarily to inclusion of the TiVo R&D operations.

Selling, General and Administrative

Selling expenses consist primarily of compensation and related costs for sales and marketing personnel engaged in sales and licensee support, reverse engineering personnel and services, marketing programs, public relations, promotional materials, travel, trade show expenses, and stock-based compensation expense. General and administrative expenses consist primarily of compensation and related costs for general management, information technology, finance personnel, legal fees and expenses, facilities costs, stock-based compensation expense, and professional services. Our general and administrative expenses, other than facilities-related expenses, are not allocated to other expense line items.

Selling, general and administrative expenses for the three months ended September 30, 2020 were $63.8 million, as compared to $27.6 million for the three months ended September 30, 2019, an increase of $36.2 million. The increase was due principally to the inclusion of $27.8 million of TiVo expenses, legacy Xperi merger transaction related costs of $1.2 million, post-merger severance and retention costs of $1.4 million, separation costs of $2.1 million, and an increase of $2.2 million in stock-based compensation.

Selling, general and administrative expenses for the nine months ended September 30, 2020 were $168.6 million, as compared to $84.1 million for the nine months ended September 30, 2019, an increase of $84.5 million. The increase was due principally to the inclusion of $57.3 million of TiVo expenses, legacy Xperi merger transaction related costs of $15.4 million, post-merger severance and retention costs of $3.7 million, separation costs of $2.5 million, and an increase of $2.7 million in stock-based compensation.

We anticipate selling, general and administrative expenses will remain higher than in the prior year due to inclusion of the TiVo operations.

Depreciation Expense

Depreciation expense for the three months ended September 30, 2020 was $6.8 million, as compared to $1.6 million for the three months ended September 30, 2019, an increase of $5.2 million. Depreciation expense for the nine months ended September 30, 2020 was $11.8 million, as compared to $5.1 million for the nine months ended September 30, 2019, an increase of $6.7 million. The increases were primarily attributable to depreciation expense on TiVo fixed assets added through the Mergers in June 2020.

We anticipate depreciation expense will continue to increase in 2020 as compared to 2019 as a result of the Mergers.

Amortization Expense

Amortization expense for the three months ended September 30, 2020 was $50.9 million, as compared to $25.1 million for the three months ended September 30, 2019, an increase of $25.8 million. Amortization expense for the nine months ended September 30, 2020 was $105.4 million, as compared to $75.9 million for the nine months ended September 30, 2019, an increase of $29.5 million. These increases were primarily attributable to amortization of intangible assets recorded in connection with the Mergers in June 2020.

With the Mergers, we anticipate that amortization expenses will continue to be a significant expense since we acquired approximately $878 million in intangible assets which will be amortized over the next several years. See “Note 8 – Goodwill and Identified Intangible Assets” in the Notes to Condensed Consolidated Financial Statements for additional information.

Litigation Expense

Litigation expense for the three months ended September 30, 2020 was $8.5 million, as compared to $1.5 million for the three months ended September 30, 2019, an increase of $7.0 million. Litigation expense for the nine months ended September 30, 2020 was $14.5 million, as compared to $4.0 million for the nine months ended September 30, 2019, an increase of $10.5 million. These increases were primarily due to inclusion of post-merger TiVo litigation expenses for the three and nine months ended September 30, 2020, respectively, and increased case activity in the first three quarters of 2020.

In 2019 and in 2020 prior to the Mergers TiVo’s litigation expenses were significantly higher than Xperi’s litigation expenses in the same periods. We expect that litigation expense will continue to be a material portion of our operating expenses and, as a result of the Mergers, will increase significantly in future periods. Litigation expense may fluctuate between periods because of planned or ongoing litigation, as described in Part II, Item 1 – Legal Proceedings, and because of litigation planned for or initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights.

Upon expiration of our customers’ licenses, if those licenses are not renewed, litigation may become necessary to secure payment of reasonable royalties for the use of our patented technology. If we plan for or initiate such litigation, our future litigation expenses may increase.

Stock-based Compensation Expense

The following table sets forth our stock-based compensation expense for the three and nine months ended September 30, 2020 and 2019 (in thousands):

	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Cost of licensing, services and software revenue	$	258	$	—	$	332	$	—
Research, development and other related costs		3,580		3,544		9,454		10,293
Selling, general and administrative		6,319		4,444		16,828		12,539
Total stock-based compensation expense	$	10,157	$	7,988	$	26,614	$	22,832

Stock-based compensation awards include employee stock options, restricted stock awards and units, and employee stock plan purchases. The increases in stock-based compensation for the three and nine months ended September 30, 2020, compared to the corresponding periods in 2019, were primarily a result of including incremental expense of $1.9 million and $4.1 million from assumed TiVo stock awards and acceleration of equity instruments for departing executives for the three and nine months ended September 30, 2020, respectively.

Interest Expense

Interest expense for the three months ended September 30, 2020 and 2019 was $13.4 million and $5.5 million, respectively. Interest expense for the nine months ended September 30, 2020 and 2019 was $24.6 million and $18.4 million, respectively. The increases in interest expense were primarily a result of a higher average debt balance as compared to the corresponding periods in 2019, primarily due to the new $1,050 million term loan that was executed on June 1, 2020 to refinance the indebtedness of the combined Company in connection with the Mergers, which was partially offset by lower interest rates on our debt for the nine months ended September 30, 2020.

We anticipate interest expense to increase in 2020 when compared to 2019 as a result of increased borrowings and amortization of debt issuance costs in connection with the Mergers in June 2020.

Other Income and Expense, Net

Other income and expense, net, for the three months ended September 30, 2020 was $2.3 million, as compared to $0.4 million for the three months ended September 30, 2019. Other income and expense, net, in the third quarter of 2020 was higher than the corresponding period in 2019 due principally to inclusion of post-merger TiVo other income, net, as well as recognition of an unrealized loss of $1.1 million on our equity investment in Onkyo Corporation (“Onkyo”) common stock in 2019.

Other income and expense, net, for the nine months ended September 30, 2020 was $3.4 million, as compared to $7.5 million for the nine months ended September 30, 2019. Other income and expense, net, was lower in the first nine months of 2020 as compared to 2019 due principally to a decrease in interest income from financing components under Topic 606. Additionally, lower other income and expense in the first nine months of 2020 as compared to 2019 was attributable to recognition of a realized loss of $0.7 million in 2020, as compared to an unrealized gain of $0.6 million in the same period in 2019, on the aforementioned Onkyo investment.

Loss on Debt Extinguishment

In connection with the Mergers, we refinanced the indebtedness of the combined Company, and recognized a loss on early debt extinguishment of $8.3 million in second quarter of 2020. We did not incur a loss on early debt extinguishment in any other quarter in 2020 or the first nine months of 2019.

Provision for Income Taxes

For the three months ended September 30, 2020, we recorded an income tax expense of $0.5 million on a pretax loss of $30.1 million and for the nine months ended September 30, 2020, we recorded an income tax benefit of $6.8 million on a pretax loss of $41.6 million, which resulted in an effective tax rate of 16.3% for the nine months ended September 30, 2020. The tax benefit of $6.8 million is comprised of a $12.2 million tax benefit related to the five month pre-merger period and a tax expense of $5.4 million related to the four month post-merger period. The five month pre-merger income tax benefit of $12.2 million was primarily related to a net decrease in valuation allowance as a result of the Mergers, deduction from foreign-derived

intangible income, releases of unrecognized tax benefits due to the lapse of applicable statutes of limitation, deduction from transaction expenses, offset by tax expense from operating income, shortfalls from stock-based compensation, certain non-deductible expenses, and unrealized foreign exchange losses from the prior period South Korea refund claim. The four month post-merger income tax expense of $5.4 million was primarily related to income tax expense from foreign operations, foreign withholding taxes and U.S. federal minimum tax offset by unrealized foreign exchange gains from the current period South Korea refund claim.

For the three months ended September 30, 2019, we recorded an income tax benefit of $14.6 million on a pretax loss of $30.6 million and for the nine months ended September 30, 2019, we recorded an income tax benefit of $27.1 million on a pretax loss of $74.7 million, which resulted in an effective tax rate of 36.3% for the nine months ended September 30, 2019. The income tax benefit for the three and nine months ended September 30, 2019 was primarily related to tax benefit from operating losses and the realization of certain tax credits, offset by foreign withholding taxes, certain non-deductible expenses, and shortfalls from stock-based compensation.

Our provision for income taxes is based on our worldwide estimated annualized effective tax rate, except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, and the tax effect of discrete items occurring during the period. We have applied separate effective tax rates to our pre- and post-merger activities; our post-merger effective tax rate is based on our worldwide estimated tax rate for the seven-month period ended December 31, 2020. The tax for jurisdictions for which a loss is expected and no benefit can be realized for the year is computed using a separate effective tax rate. The decrease in income tax benefit for the nine months ended September 30, 2020 as compared to the prior year is largely attributable to a decrease in operating losses, increase in valuation allowance in the post-merger period, foreign withholding taxes, and U.S. federal minimum taxes, partially offset by tax benefits from the release of unrecognized tax benefits due to the lapse of applicable statute of limitation and a decrease in valuation allowance as a result of the Mergers.

During the fourth quarter of 2019, we filed a refund claim for foreign taxes previously withheld from licensees in South Korea based on recent court rulings in South Korea and other business factors. These previously withheld foreign taxes were claimed as a foreign tax credit in the U.S. As a result of our refund claim, we recorded a non-current income tax receivable of $65.2 million in income tax receivable, an unrecognized tax benefit of $48.2 million in other long-term liabilities, and a reduction in deferred tax assets of $17.0 million. We anticipate filing a refund claim for the 2020 year-to-date South Korean withholding taxes. During the first nine months of 2020, an additional non-current income tax receivable of $13.7 million, an unrecognized tax benefit of $8.4 million in other long-term liabilities, and a reduction in deferred tax assets of $5.0 million with an offset to valuation allowance were recorded in connection with the South Korea refund claim matter. As part of our acquisition of TiVo, we recorded a year-to-date non-current income tax receivable of $31.9 million and a reduction in deferred tax assets of $15.5 million with a corresponding offset to valuation allowance, with the residual recorded to goodwill. At September 30, 2020, we had recorded a cumulative unrealized foreign exchange loss of approximately $1.2 million as a reduction in non-current income tax receivable.

The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. After considering both positive and negative evidence to assess the recoverability of our net deferred tax assets, we determined that it was not more-likely-than-not that we would realize our federal, certain state and certain foreign deferred tax assets given the substantial amount of tax attributes that will remain unutilized to offset forecasted future tax liabilities. In the future, we may release our deferred tax asset valuation allowance associated with our federal, state or foreign deferred tax assets depending on achievement of future profitability in relevant jurisdictions, or implementing tax planning strategies that enable us to utilize deferred tax assets. Specifically, we will evaluate additional evidence provided by the nonrecognized subsequent event discussed in “Note 17 – Subsequent Events” which could result in the release of a portion of our deferred tax asset valuation allowance. We continue to monitor the likelihood that we will be able to recover our deferred tax assets, including those for which a valuation allowance is recorded. There can be no assurance that we will generate profits or implement tax strategies in future periods enabling us to fully realize our deferred tax assets. The timing of recording a deferred tax asset valuation allowance or the reversal of such valuation allowance is subject to objective and subjective factors that cannot be known in advance. Adjustments could be required in the future if we conclude that it is more-likely-than-not that deferred tax assets are recoverable. The release of a deferred tax asset valuation allowance could have the effect of decreasing the income tax provision in the period the valuation allowance is released.

Segment Operating Results

In connection with the Mergers, we re-evaluated our reportable segments. We concluded that we have two reportable segments: (1) Product and (2) IP Licensing. There are certain corporate overhead costs that are not allocated to these reportable segments because these operating amounts are not considered in evaluating the operating performance of our business segments.

Our Chief Executive Officer has been determined to be the Chief Operating Decision Maker (“CODM”) in consideration with the authoritative guidance on segment reporting.

The Product segment consists primarily of licensing our internally-developed audio, digital radio, imaging, edge-based machine learning and multi-channel video user experience (“UX”) solutions. Edge based machine learning, audio, digital radio, and imaging solutions include the delivery of software and/or hardware-based solutions to the Company’s consumer electronics (“CE”) customers, automotive manufacturers or their supply chain partners. UX products and services revenue is primarily derived from multi-channel video service providers and CE manufacturers, licensing the TiVo service and selling TiVo-enabled devices, Personalized Content Discovery, enriched Metadata, viewership data and advertising.

The IP Licensing segment consists primarily of licensing our innovations to leading companies in the media and semiconductor industries. Licensing arrangements include access to one or more of our foundational patent portfolios and may also include access to some of our industry-leading technologies and proven know-how. In the media industry, our licensees include pay television (“Pay-TV”) providers, both in the United States and internationally, consumer electronics manufacturers and other providers of video experiences across various platforms, including over-the-top (OTT) video. In the semiconductor industry, our licensees include semiconductor manufacturers, fabless companies, foundries and packaging companies.

We do not identify or allocate assets by reportable segment, nor does the CODM evaluate reportable segments using discrete asset information. Reportable segments do not record inter-segment revenue and accordingly there are none to report. Although the CODM uses operating income to evaluate reportable segments, operating costs included in one segment may benefit other segments.

The following table sets forth our segments’ revenue, operating expenses and operating income (loss) (in thousands):

	Three Months Ended						Nine Months Ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Revenue:
Product segment	$	122,552		$	46,028		$	242,618		$	152,026
IP Licensing segment		80,245			11,839			215,475			37,523
Total revenue		202,797			57,867			458,093			189,549
Operating expenses:
Product segment		116,149			45,693			228,941			139,409
IP Licensing segment		40,020			10,113			70,765			29,859
Unallocated operating expenses (1)		65,591			27,588			170,542			84,121
Total operating expenses		221,760			83,394			470,248			253,389
Operating income (loss):
Product segment		6,403			335			13,677			12,617
IP Licensing segment		40,225			1,726			144,710			7,664
Unallocated operating expenses (1)		(65,591	)		(27,588	)		(170,542	)		(84,121	)
Total operating loss	$	(18,963	)	$	(25,527	)	$	(12,155	)	$	(63,840	)

(1)

Unallocated operating expenses consist primarily of selling, marketing, general and administrative expenses, including administration, human resources, finance, information technology, corporate development and procurement. These expenses are not allocated because these amounts are not considered in evaluating the operating performance of the Company’s business segments.

The revenue and operating income (loss) amounts in this section have been presented on a basis consistent with U.S. GAAP applied at the segment level. Of our $846.9 million in goodwill at September 30, 2020, approximately $524.1 million was allocated to our Product reporting segment and approximately $322.8 million was allocated to our IP Licensing reporting segment.

For the three months ended September 30, 2020, the unallocated operating expenses were $65.6 million compared to $27.6 million for the three months ended September 30, 2019. The increase of $38.0 million was due principally to the inclusion of TiVo expenses, legacy Xperi merger transaction related costs of $1.2 million, post-merger severance and retention costs of $1.4 million, separation costs of $2.1 million, and an increase of $2.2 million in stock-based compensation.

For the nine months ended September 30, 2020, the unallocated operating expenses were $170.5 million compared to $84.1 million for the nine months ended September 30, 2019. The increase of $86.4 million was due principally to the inclusion of

TiVo expenses, legacy Xperi merger transaction related costs of $15.4 million, post-merger severance and retention costs of $3.7 million, separation costs of $2.5 million, and an increase of $2.7 million in stock-based compensation.

Product Segment

	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Total revenue	$	122,552	$	46,028	$	242,618	$	152,026
Operating expenses:
Total cost of revenue		33,881		1,506		45,145		6,241
Research, development and other related costs		48,850		20,172		102,479		61,275
Litigation		936		538		1,674		1,329
Depreciation		4,671		1,295		8,840		4,018
Amortization		27,811		22,182		70,803		66,546
Total operating expenses		116,149		45,693		228,941		139,409
Total operating income	$	6,403	$	335	$	13,677	$	12,617

Product revenue for the three months ended September 30, 2020 was $122.6 million as compared to $46.0 million for the three months ended September 30, 2019, an increase of $76.6 million. Product revenue for the nine months ended September 30, 2020 was $242.6 million as compared to $152.0 million for the nine months ended September 30, 2019, an increase of $90.6 million. The increases were primarily attributable to the inclusion of TiVo product revenue for the three and nine months ended September 30, 2020, respectively, partially offset by a decrease in royalty revenue from existing licensing arrangements. We anticipate Product revenue for 2020 will be higher than revenue for 2019 due principally to the additional product revenue from TiVo following the Mergers.

Operating expenses for the three months ended September 30, 2020 were $116.1 million, as compared to $45.7 million for the three months ended September 30, 2019, an increase of $70.4 million. Operating expenses for the nine months ended September 30, 2020 were $228.9 million, as compared to $139.4 million for the nine months ended September 30, 2019, an increase of $89.5 million. The increases were primarily due to the inclusion of TiVo Product expenses for the three and nine months ended September 30, 2020, respectively, increased headcount and personnel costs in Perceive, partially offset by lower legacy Xperi amortization expense due to certain intangible assets becoming fully amortized over the past twelve months.

Operating income in the three months ended September 30, 2020 was $6.4 million compared to operating income of $0.4 million in the three months ended September 30, 2019, with the variance due to the reasons stated above.

Operating income for the nine months ended September 30, 2020 was $13.7 million compared to operating income of $12.6 million in the nine months ended September 30, 2019, with the variance due to the reasons stated above.

IP Licensing Segment

	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Total revenue	$	80,245	$	11,839	$	215,475	$	37,523
Operating expenses:
Total cost of revenue		189		—		189		—
Research, development and other related costs		8,881		5,826		22,086		16,729
Litigation		7,580		989		12,815		2,719
Depreciation		287		334		1,031		1,038
Amortization		23,083		2,964		34,644		9,373
Total operating expenses		40,020		10,113		70,765		29,859
Total operating income	$	40,225	$	1,726	$	144,710	$	7,664

IP Licensing revenue for the three months ended September 30, 2020 was $80.2 million as compared to $11.8 million for the three months ended September 30, 2019, an increase of $68.4 million. The increase was primarily attributable to the inclusion of TiVo IP Licensing revenue, partially offset by a decrease in revenue from IP Semiconductor licensing revenue.

IP Licensing revenue for the nine months ended September 30, 2020 was $215.5 million as compared to $37.5 million for the nine months ended September 30, 2019, an increase of $178.0 million. The increase was primarily attributable to the inclusion of TiVo IP Licensing revenue since the Mergers and IP Semiconductor agreements executed during the first two quarters of 2020, partially offset by a decrease in revenue from other IP Semiconductor license agreements.

We anticipate IP Licensing revenue for 2020 will be higher than revenue for 2019 due to the Mergers and the IP Semiconductor agreements entered into during the first two quarters of 2020.

Operating expenses for the three months ended September 30, 2020 were $40.0 million, as compared to $10.1 million for the three months ended September 30, 2019, an increase of $29.9 million. Operating expenses for the nine months ended September 30, 2020 were $70.8 million, as compared to $29.9 million for the nine months ended September 30, 2019, an increase of $40.9 million. The increases were primarily due to the inclusion of TiVo IP Licensing expenses for the three and nine months ended September 30, 2020, respectively, partially offset by lower legacy Xperi amortization expense due to certain intangible assets becoming fully amortized over the past twelve months.

In 2019 and in 2020 prior to the Mergers TiVo’s litigation expenses were significantly higher than Xperi’s litigation expenses in the same period. We expect that litigation expense will continue to be a material portion of our operating expenses and, as a result of the Mergers, will increase significantly in future periods. Litigation expense may fluctuate between periods because of planned or ongoing litigation, as described in Part II, Item 1 – Legal Proceedings, and because of litigation planned for or initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights.

Operating income for the three months ended September 30, 2020 was $40.2 million compared to operating income of $1.7 million for the three months ended September 30, 2019, with the variance due to the reasons stated above.

Operating income for the nine months ended September 30, 2020 was $144.7 million compared to operating income of $7.7 million for the nine months ended September 30, 2019, with the variance due to the reasons stated above.

Liquidity and Capital Resources

	As of
(in thousands, except for percentages)	September 30, 2020			December 31, 2019
Cash and cash equivalents	$	115,725		$	74,551
Short-term investments		87,258			46,926
Total cash, cash equivalents and short-term investments	$	202,983		$	121,477
Percentage of total assets		8	%		12	%

	Nine Months Ended
	September 30, 2020			September 30, 2019
Net cash from operating activities	$	129,433		$	104,214
Net cash from investing activities	$	72,536		$	(13,053	)
Net cash from financing activities	$	(161,553	)	$	(129,069	)

Our primary sources of liquidity and capital resources are our operating cash flows and our investment portfolio. Cash, cash equivalents and short-term investments were $203.0 million at September 30, 2020, an increase of $81.5 million from $121.5 million at December 31, 2019. This increase resulted primarily from $129.4 million in cash generated from operations, $1,010.3 million in net long-term debt proceeds received, and $117.4 million in cash acquired from TiVo as a result of the Mergers, which was partially offset by $25.6 million in dividends paid, $59.3 million in repurchases of common stock and $1,091.7 million in repayment of combined legacy indebtedness and the 2020 Term B Loan Facility. Cash and cash equivalents totaled $115.7 million at September 30, 2020, an increase of $41.1 million from $74.6 million at December 31, 2019.

Cash flows provided by operations were $129.4 million for the nine months ended September 30, 2020, primarily due to our net loss of $34.8 million being adjusted for non-cash items of depreciation of $11.8 million, amortization of intangible assets of $105.4 million, stock-based compensation expense of $26.6 million, loss on debt extinguishment of $8.3 million and $31.6 million in changes in operating assets and liabilities. These increases were partially offset by a reduction of $28.2 million in deferred income taxes.

Cash flows provided by operations were $104.2 million for the nine months ended September 30, 2019, primarily due to our net loss of $47.6 million being adjusted for non-cash items of depreciation of $5.1 million, amortization of intangible assets of

$75.9 million, stock-based compensation expense of $22.8 million and $89.6 million in changes in operating assets and liabilities. These increases were partially offset by a reduction of $43.1 million in deferred income taxes.

Net cash provided by investing activities was $72.5 million for the nine months ended September 30, 2020, primarily related to maturities and sales of securities of $26.9 million and net cash acquired in the Mergers of $117.4 million, partially offset by purchases of short-term investments of $68.1 million and capital expenditures of $3.0 million.

Net cash used in investing activities was $13.1 million for the nine months ended September 30, 2019, primarily related to the purchases of short-term available-for-sales securities of $34.5 million and $8.0 million in capital expenditures partially offset by maturities and sales of securities of $29.3 million.

Net cash used in financing activities was $161.6 million for the nine months ended September 30, 2020 principally due to $1,091.7 million in repayment of indebtedness, $25.6 million in dividends paid, and $59.3 million in repurchases of common stock, partially offset by $1,010.3 million in net long-term debt proceeds and $4.8 million in proceeds due to the issuance of common stock under our employee stock option programs and employee stock purchase plans.

Net cash used in financing activities was $129.1 million for the nine months ended September 30, 2019 principally due to $100.0 million in a partial pay-down of debt principal, $29.6 million in dividends paid and $4.3 million in repurchases of common stock, partially offset by $6.0 million in proceeds due to the issuance of common stock under our employee stock option programs and employee stock purchase plans.

The primary objectives of our investment activities are to preserve principal and to maintain liquidity while at the same time capturing a market rate of return. To achieve these objectives, we maintain a diversified portfolio of securities including money market funds and debt securities including corporate bonds and notes, municipal bonds and notes, commercial paper, treasury and agency notes and bills and certificates of deposit. We invest excess cash predominantly in high-quality investment grade debt securities with less than three years to maturity. Our marketable debt securities are classified as available-for-sale (“AFS”) with credit losses recognized as a credit loss expense and non-credit related unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income or loss. The fair values for our securities are determined based on quoted market prices as of the valuation date or observable prices for similar assets.

For AFS debt securities in an unrealized loss position, we first assess whether we intend to sell, or it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in accumulated other comprehensive income or loss. For the three and nine months ended September 30, 2020, we did not recognize a provision for credit loss expense related to our AFS debt securities. For the three and nine months ended September 30, 2019, we did not record any impairment charges related to our AFS debt securities.

On December 1, 2016, we entered into a Credit Agreement with Royal Bank of Canada (“RBC”) which provided for a $600.0 million seven-year term B loan facility. The Term B Loan Facility was scheduled to mature on November 30, 2023. During 2019 we made three voluntary principal payments totaling $150.0 million, and upon consummation of the Mergers on June 1, 2020, we repaid the full remaining balance of $344.0 million under the Credit Agreement. In addition, upon consummation of the Mergers on June 1, 2020, we repaid $734.6 million of assumed TiVo debt with the proceeds from a new borrowing of $1,050 million discussed below.

On June 1, 2020, in connection with the consummation of the Mergers, we entered into a Credit Agreement (the “2020 Credit Agreement”) by and among us, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent. The 2020 Credit Agreement provides for a five-year senior secured term loan B facility in an aggregate principal amount of $1,050 million (the “2020 Term B Loan Facility”). The interest rate applicable to loans outstanding under the 2020 Term B Loan Facility is equal to, at our option, either (i) a base rate plus a margin of 3.00% per annum or (ii) LIBOR plus a margin of 4.00% per annum. Commencing on September 30, 2020, the 2020 Term B Loan Facility will amortize in quarterly installments equal to (i) with respect to repayments occurring on or prior to June 1, 2023, 1.25% of the original principal amount of the 2020 Term B Loan Facility and (ii) with respect to repayments occurring after June 1, 2023 and prior to June 1, 2025, 1.875% of the original principal amount of the 2020 Term B Loan Facility, with the balance payable on the maturity date of the 2020 Term B Loan Facility (in each case subject to adjustment for prepayments). The 2020 Term B Loan Facility will mature on June

1, 2025. Upon the closing of the 2020 Credit Agreement, we borrowed $1,050 million under the 2020 Term B Loan Facility. Net proceeds were used on June 1, 2020, together with cash and cash equivalents, to repay existing indebtedness of the combined Company, including the aforementioned Term B Loan Facility with RBC. On September 30, 2020, we made the first required principal payment of $13.1 million.

At September 30, 2020, $1,036.9 million was outstanding under the 2020 Term B Loan Facility with an interest rate, including amortization of debt issuance costs, of 5.1%. Interest is payable monthly and nominal principal payments are due quarterly effective September 2020. We have future minimum principal payments for our debt of $52.5 million annually through 2022, then $72.2 million and $78.8 million in 2023 and 2024, respectively, with the remaining principal balance due in 2025. We are obligated to pay a portion of excess cash flow on an annual basis beginning March 31, 2022 based on certain ratios and our excess cash flow generated for the immediately preceding fiscal year. The 2020 Term B Loan Facility contains customary covenants, and as of September 30, 2020 we were in full compliance with such covenants.

In August 2007, Xperi’s Board of Directors authorized a plan to repurchase Xperi’s outstanding shares of common stock dependent on market conditions, share price and other factors. This authorization was terminated upon closing of the Mergers. On June 12, 2020, our Board of Directors authorized a new stock repurchase program (the “new plan”) providing for the repurchase of up to $150.0 million of our common stock dependent on market conditions, share price and other factors. Since the inception of the plan, and through September 30, 2020, we have repurchased approximately 3.9 million shares of common stock at a total cost of $50.1 million at an average price of $12.81. During the three months ended September 30, 2020, our repurchases totaled $35.1 million. As of September 30, 2020, the total remaining amount available for repurchase was $99.9 million. We may continue to execute authorized repurchases from time to time under the new plan.

In October 2020, our Board of Directors authorized payment of a quarterly dividend of $0.05 per share, to be paid in December 2020. We anticipate that all quarterly dividends will be paid out of cash, cash equivalents and short-term investments.

From 2017 through the third quarter of 2020, we generated approximately $580 million of cash flows from operating activities. While we expect to continue to generate cash flows from operating activities for the remainder of 2020, the COVID-19 pandemic presents significant uncertainties to the level of such cash flows as compared to prior years and as compared to our previous forecasts. Additionally, one-time costs in connection with the Mergers, subsequent integration of the two legacy businesses and transaction costs relating to the contemplated separation of the two businesses will impact operating cash flow for the duration of 2020. Currently a significant portion of our anticipated revenue for 2020 is derived from fixed-fee and minimum-guarantee arrangements, primarily from large, well-capitalized customers which we believe somewhat mitigates the risks to our business. We have taken actions to manage cash flows by reducing discretionary spending and other variable costs, delaying employee hiring, and closely monitoring receivables and payables.

We believe that based on current levels of operations and anticipated growth, our cash from operations, together with cash, cash equivalents and investments currently available, will be sufficient to fund our operations, debt service, dividends, stock repurchases and acquisition needs for at least the next twelve months. Poor financial results, unanticipated expenses, unanticipated acquisitions of technologies or businesses or unanticipated strategic investments could give rise to additional financing requirements sooner than we expect. There can be no assurance that equity or debt financing will be available when needed or, if available, that such financing will be on terms satisfactory to us and not dilutive to our then-current stockholders.

Contractual Cash Obligations

For information about our contractual obligations, see “Contractual Cash Obligations” in Part I, Item 2 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020. Other than the $13.1 million principal payment on the 2020 Term B Loan Facility in September 2020, our contractual obligations have not changed materially since June 30, 2020.

As of September 30, 2020, we had accrued $99.7 million of unrecognized tax benefits in long-term income taxes payable related to uncertain tax positions, which includes $2.2 million of accrued interest and penalties. At this time, we are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. If we are successful in receiving our South Korean withholding tax refund of $109.7 million, net of interest income and foreign exchange loss, then $62.8 million of unrecognized tax benefit would be payable to the U.S. tax authorities.

See “Note 15 – Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements for additional detail.

Off-Balance Sheet Arrangements

As of September 30, 2020, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

Critical Accounting Policies and Estimates

Our significant accounting policies are detailed in “Note 2 – Summary of Significant Accounting Policies” in the Form 10-K for the year ended December 31, 2019. Certain updates to our revenue recognition policy as a result of the Mergers are provided in “Note 3 – Revenue” of the Notes to Condensed Consolidated Financial Statements. See “Note 2 – Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements for additional detail. For a discussion of our critical accounting policies and estimates, see Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K.

Recent Accounting Pronouncements

See “Note 2 – Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Other than described below, management believes that there have been no significant changes to the quantitative and qualitative disclosures about market risk as compared to those disclosed in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2019.

Interest Rate Risk from Variable Rate Indebtedness

As of September 30, 2020, we had $1,037 million of outstanding indebtedness that was subject to floating interest rates. Changes in economic conditions outside of our control could result in higher interest rates, thereby increasing our interest expense and reducing the funds available for capital investment, operations or other purposes. At September 30, 2020, a 1% increase in the effective interest rate on our outstanding debt throughout a one-year period would result in an annual increase in our interest expense of approximately $10.4 million. Any significant increase in our interest expense could negatively impact our results of operations and cash flows and also our ability to pay dividends in the future. If the U.S. Federal Reserve raises its benchmark interest rate, any increases would likely impact the borrowing rate on our outstanding indebtedness, and increase our interest expense, comparably.

Item 4. Controls and Procedures

Attached as exhibits to this Form 10-Q are certifications of Xperi Holding Corporation’s Chief Executive Officer and Chief Financial Officer, which are required in accordance with Rule 13a-14 of the Exchange Act. This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications and it should be read in conjunction with the certifications, for a more complete understanding of the topics presented.

Evaluation of Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report (the evaluation date). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were effective to provide reasonable assurance that the information relating to Xperi Holding Corporation, including our consolidated subsidiaries, required to be disclosed in our SEC

reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to Xperi Holding Corporation’s management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Change in Internal Control over Financial Reporting

On June 1, 2020, we completed our Mergers with TiVo and have implemented new processes and internal controls to assist us in the preparation and disclosure of financial information. Given the significance of the TiVo acquisition and the complexity of its systems and business processes, we intend to exclude the acquired TiVo business from our assessment and report on internal control over financial reporting for the year ending December 31, 2020. There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, during our most recently completed fiscal quarter that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

In the normal course of our business we are involved in legal proceedings. In the past, we have litigated to enforce our respective patents and other intellectual property rights, to enforce the terms of license agreements, to protect trade secrets, to determine the validity and scope of the proprietary rights of others and to defend ourselves or our customers against claims of infringement or invalidity. We expect to continue to be involved in similar legal proceedings in the future, including proceedings regarding infringement of our patents, and proceedings to ensure proper and full payment of royalties by licensees under the terms of our license agreements.

Other than to the extent the proceedings described below have concluded, we cannot predict the outcome of any of the proceedings described below. An adverse decision in any of these proceedings could significantly harm our business and our consolidated financial position, results of operations, and cash flows.

Merger Litigation

On May 15, 2020, a lawsuit was filed by a purported stockholder of Xperi in connection with the merger between TiVo and Xperi. The lawsuit was brought as a putative class action and is captioned Local 464A United Food and Commercial Workers Union Pension Fund v. Darcy Antonellis, et al., No. 2020-0376-JRS (Del. Ch. filed May 15, 2020). The complaint names as defendants the Xperi Board members. The complaint alleges breaches of fiduciary duty against the Xperi Board members for failing to properly consider and disclose the non-binding proposal from Metis Ventures LLC to acquire all of the outstanding equity of Xperi for cash, violating their continuing fiduciary duty to evaluate the TiVo merger in light of the COVID-19 pandemic, and failing to adequately disclose material facts germane to the vote on the proposed merger between TiVo and Xperi. On June 29, 2020, the Court granted the plaintiff's motion for leave to supplement the complaint; the supplement contained additional allegations regarding the failure to disclose material information. The complaint seeks a judgment declaring that the Xperi Board members breached their fiduciary duties, awarding equitable relief that deprives the Xperi Board members of all benefits they would realize as a result of the merger between TiVo and Xperi, awarding class damages, awarding plaintiff's attorneys’ fees, expenses, and costs, and awarding any further relief the court deems just and proper. On September 11, 2020, the Court granted the plaintiff’s and Xperi’s stipulation to dismiss the complaint.

Patent Infringement Litigation

From time-to-time in the ordinary course of our patent licensing business, we are required to engage in litigation to protect our intellectual property from infringement. While litigation is never our preference and we prefer to reach mutually agreeable commercial licensing arrangements with third parties, it is sometimes a necessary step to effectively protect our investment in patented technology. As a result of these lawsuits, defendants have often filed Inter Partes Review (“IPR”) petitions with the U.S. Patent Office’s Patent Trial and Appeal Board (and other similar post-grant proceedings outside of the U.S.) seeking to invalidate one or more of the patents-in-suit. We are currently engaged in multiple lawsuits with several third parties.

Comcast Patent Infringement Litigation

Since April 1, 2016, TiVo’s subsidiary Rovi Corporation and various of its subsidiaries (collectively, “Rovi”) have been involved in a series of lawsuits against Comcast Corporation (“Comcast”) pending in the United States International Trade Commission (the “ITC”) and United States District Courts. The lawsuits arose when Comcast’s twelve-year patent license with Rovi (and its predecessors) expired on March 31, 2016. After being unable to agree on terms for a renewal before the license expired, Rovi initially filed multiple lawsuits against Comcast, and has since filed additional lawsuits against Comcast in various venues in the United States.

To date, Rovi has filed three ITC investigations (along with four companion district court cases asserting the same patents) and two standalone cases in various United States District Courts involving a total of 37 patents. Comcast has filed IPRs against all of the patents involved in these actions.

In the first ITC investigation, the ITC issued (1) a limited exclusion order prohibiting the unlicensed entry of certain digital video receivers and hardware and software components thereof that infringed two particular Rovi patents and (2) a cease and desist order prohibiting Comcast from conducting in the United States several enumerated activities, including, among others, selling and leasing any infringing set top boxes that it had already imported. In addition, the ITC found certain of Rovi’s asserted patents either not infringed by Comcast or its set top box suppliers, lacking a domestic industry or invalid. All appeals of the first ITC investigation have been exhausted and the ITC’s decision is now final.

In the second ITC investigation, the ITC issued (1) a limited exclusion order prohibiting the entry into the United States of infringing digital video receivers and related hardware and software components that infringed one of Rovi’s asserted patents, and (2) a cease and desist order directed to Comcast. The ITC also found certain of Rovi’s asserted patents either not infringed by Comcast, lacking a domestic industry or invalid. Both Rovi and Comcast have filed appeals of the ITC’s final determination in the second ITC investigation, which appeals are pending.

In the third ITC investigation, the Administrative Law Judge issued her Final Initial Determination in which she found that Comcast’s X1 platform infringes two Rovi patents and recommended the issuance of a limited exclusion order and cease and desist order. On October 13, 2020, the ITC issued its notice of its decision to review in part the Final Initial Determination and requesting written submissions on various issues. The ITC determined to review certain issues. The ITC’s Final Determination is currently due on November 30, 2020.

All of the pending district court cases that Rovi has filed against Comcast are stayed pending either (a) the final outcomes in their corresponding ITC cases, or (b) final rulings (including all available appeals) of pending IPRs, with one exception being that one case is proceeding with respect to a single patent. A trial date has not been set yet in that case.

On November 9, 2020, we announced that we entered into a license agreement with Comcast. In connection with the license agreement, the parties settled all outstanding litigation. This matter is now concluded.

Videotron Patent Infringement Litigation

On June 23, 2017, Rovi Guides, Inc. and TiVo Solutions Inc. (together, “TiVo”) filed a patent infringement complaint against Videotron Ltd. and Videotron G.P. (together, “Videotron”) in Toronto, Canada, alleging infringement of six patents. Videotron was a prior licensee under the Rovi patent portfolio. The first week of trial on four patents was held the week of March 9, 2020. The Federal Court of Canada closed due to COVID-19 on March 16, 2020, and the trial was temporarily stayed. The trial resumed on May 25, 2020, conducted remotely by video, and concluded on June 17, 2020. The parties filed their written closing submissions on September 30, 2020. The closing oral arguments are now scheduled for January 20-22, 2021. There is no set date for the court to issue its verdict.

Bell and Telus Patent Infringement Litigation

On January 19, 2018, TiVo filed a patent infringement complaint against Bell Canada (and four of its affiliates) in Toronto, Canada, alleging infringement of six patents. On February 2, 2018, TiVo filed a patent infringement complaint against Telus Corporation (and two of its affiliates) in Toronto, Canada, alleging infringement of the same six patents. Bell Canada and Telus were previously indirectly licensed to some of Rovi’s patents through a prior agreement between Rovi and one of their suppliers. The Bell and Telus cases are being heard together for purposes of pre-trial and trial proceedings. On August 27, 2019, the court issued an order bifurcating the liability phase from the damages phase of the case. There is no set trial date or procedural schedule for the damages phase of the cases. The liability and injunction trial on four patents was held from July 13 – August 6, 2020. The written closing submissions are due November 30, 2020 and the closing oral arguments are scheduled for January 14 – 15, 2021. There is no set date for the court to issue its verdict.

NVIDIA Patent Infringement Litigation

On May 8, 2019, Invensas Corporation and Tessera Advanced Technologies, Inc. filed a complaint against NVIDIA Corporation (“NVIDIA”) in the United States District Court for the District of Delaware, alleging infringement of five patents, and requesting, among other things, that NVIDIA be ordered to pay compensatory damages in an amount no less than a reasonable royalty. NVIDIA answered the complaint on July 1, 2019 and subsequently moved to transfer the case to the United States District Court for the Northern District of California. The court denied NVIDIA’s motion to transfer on September 17, 2019.

In September 2020, the Patent Trial and Appeal Board (“PTAB”) instituted IPRs of several patents-in-suit. The parties stipulated to an order staying the litigation pending resolution of the IPR proceedings, and to dismissal of claims relating to the two patents. For the remaining IPRs, oral arguments are scheduled for June 2021, and final decisions are expected in September 2021.

Item 1A. Risk Factors

Other than described below, management believes that there have been no significant changes to the risk factors disclosed in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020, which risk factors are incorporated by reference herein.

Our business and results of operations have been, and are expected to continue to be, impacted by the global COVID-19 pandemic.

Our business and results of operations have been adversely affected by the global COVID-19 pandemic and related events and we expect its impact to continue. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our businesses, and there is no guarantee that we will be able to address its adverse impacts fully or effectively. The impact to date has included periods of significant volatility in various markets and industries. The volatility has had, and we anticipate it will continue to have, an adverse effect on our customers and on our business, financial condition and results of operations, and may result in an impairment of our long-lived assets, including goodwill, increased credit losses and impairments of investments in other companies. In particular, the automotive market, as well as the broad consumer electronics industries, have been and we anticipate will continue to be impacted by the pandemic and/or other events beyond our control, and further volatility could have an additional negative impact on these industries, customers, and our business. For example, we anticipate approximately a 20% decline in our royalty revenue in 2020 from our products sold to the automotive market, such as HD Radio, as compared to the prior year. In addition, the COVID-19 pandemic may impact the financial conditions of our customers who may not be able to satisfy their obligations under our agreements timely or at all. For example, we recorded, in the first quarter of 2020, an incremental provision for credit losses of approximately $2.0 million due to heightened risk of nonpayment on existing accounts receivable as a result of the impaired financial condition and liquidity positions of certain of our customers.

In addition, actions by United States federal, state and foreign governments to address the COVID-19 pandemic, including travel bans, stay-at-home orders and school, business and entertainment venue closures, also had a significant adverse effect on the markets in which we conduct our businesses. COVID-19 poses the risk that our workforce, suppliers, and other partners may be prevented from conducting normal business activities for an indefinite period of time, including due to shutdowns or stay-at-home orders that may be requested or mandated by governmental authorities. We also implemented policies to allow our employees to work remotely as a result of the pandemic as we reviewed processes related to workplace safety, including social distancing and sanitation practices recommended by the Centers for Disease Control and Prevention. The impacts of the COVID-19 pandemic could also cause delays in obtaining new customers and executing renewals and could also impact our business as consumer behavior changes in response to the slowed economic conditions. Furthermore, our integration effort following the Mergers may be delayed or interrupted due to the operational challenges and various restrictions and limitations imposed on us as result of the COVID-19 pandemic, which may adversely affect the success of the integration and anticipated benefits of the Mergers.

The extent of impacts resulting from the COVID-19 pandemic and other events beyond our control will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the pandemic and actions taken to contain the coronavirus or its impact, among others. While some states and counties, including Santa Clara county where our headquarters is located, have announced a schedule to allow more businesses to reopen, we cannot predict when and to what extent business activities will resume, and there is no guarantee that these states and counties will not re-impose restrictions and closures if the pandemic cannot be brought under control, particularly in light of the recent global upswing in cases as the Northern Hemisphere enters the colder months. Even after the pandemic has subsided and economic activities gradually reopen and increase, we may continue to experience material and adverse impacts to our business, operating results, and financial condition as a result of the pandemic’s lasting global economic impact, including any recession that has occurred or may occur in the future. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our applicable business, operations or the global economy.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Items 2(a) and 2(b) are not applicable.

(Shares in thousands)	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of our share repurchase program		Approximate dollar value of shares that may yet be purchased under our share repurchase program (a)
2020
July		-	$	-		-
August		724		13.82		724
September		2,108		11.90		2,108
Total		2,832	$	12.39		2,832	$99.9 million

(a) Calculated as of September 30, 2020. On June 12, 2020, our Board of Directors authorized a stock repurchase program providing for the repurchase of up to $150 million of the Company's common stock. The timing, price and volume of repurchases will be based on market conditions, relevant securities laws and other factors. The stock repurchases may be made from time to time, through solicited or unsolicited transactions in the open market, in privately negotiated transactions, or pursuant to a Rule 10b5-1 plan. The program may be discontinued or amended at any time and has no specified expiration date. All repurchases in the three months ended September 30, 2020 were made under this plan.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

Exhibit Number		Exhibit Title

10.1		Form of Severance Agreement, dated September 29, 2020, between the Company and each of Robert Andersen, Geir Skaaden, Paul Davis, Matthew Milne, and Michael Hawkey.

10.2		Form of Change in Control Severance Agreement, dated as of September 29, 2020, between the Company and each of Robert Andersen, Geir Skaaden, Paul Davis, Matthew Milne, and Michael Hawkey.

10.3		Amendment to Employment and Severance Agreement between Xperi Corporation and Jon Kirchner dated April 28, 2017, effective as of September 29, 2020.

31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: November 9, 2020

XPERI HOLDING CORPORATION

By:		/s/ Robert Andersen
		Robert Andersen Chief Financial Officer