UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission File Number: 001-37956
XPERI CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
3025 Orchard Parkway, San Jose, California
(Address of Principal Executive Offices)
81-4465732
(I.R.S. Employer
Identification No.)
95134
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Securities registered pursuant to Section 12(g) of the Act: None
(408) 321-6000
(Registrant’s Telephone Number, Including Area Code)
Trading
Symbol(s)
XPER
Name of each exchange on which registered
The Nasdaq Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act. Yes ☐ No ☒
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
Non-accelerated filer
☒
☐
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 Securities Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2019 was $732,852,355 (based on the closing sale price of the registrant’s common stock as
reported on The Nasdaq Global Select Market).
The number of shares outstanding of the registrant’s common stock as of February 7, 2020 was 49,861,846.
None.
DOCUMENTS INCORPORATED BY REFERENCE:
XPERI CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2019
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART III
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
PART IV
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Cautionary Statement Regarding Forward-Looking Statements
This Annual 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 Annual 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, the levels of customer spending or research and development activities, general economic
conditions, and the sufficiency of financial resources to support future operations and capital expenditures.
Although forward-looking statements in this Annual 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 I, Item 1A of this Annual 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 Annual 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 Annual Report. Readers are urged to carefully review
and consider the various disclosures made in this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business,
financial condition, results of operations and prospects.
3
PART I
Item 1. Business
Corporate Information
Our principal executive offices are located at 3025 Orchard Parkway, San Jose, California 95134 USA. Our telephone number is +1 (408) 321-6000. We maintain a
corporate website at www.xperi.com. The reference to our website address does not constitute incorporation by reference of the information contained on this
website. Xperi, the Xperi logo, Tessera, the Tessera logo, DTS, the DTS logo, FotoNation, the FotoNation logo, Invensas, the Invensas logo, BVA, ZiBond, DBI,
DTS‑HD, DTS Audio Processing, DTS:X Ultra, DTS Virtual:X, DTS Headphone:X, DTS Play‑Fi, DTS:X and HD Radio are trademarks or registered trademarks
of Xperi Corporation or its affiliated companies in the U.S. and other countries. All other company, brand and product names may be trademarks or registered
trademarks of their respective companies.
In this Annual Report, the “Company,” “we,” “us” and “our” refer to Xperi Corporation (“Xperi”), which operates its business through its subsidiaries. Unless
specified otherwise, the financial results in this Annual Report are those of the Company and its subsidiaries on a consolidated basis.
Overview
Xperi is a publicly-traded technology company with headquarters in Silicon Valley and operations around the world. Through its operating subsidiaries, Xperi
creates, develops and licenses innovative audio, imaging, semiconductor packaging and interconnect technologies. We have approximately 700 employees and
nearly 30 years of operating experience.
We completed the acquisition of DTS, Inc. (“DTS”), a publicly-traded developer of sound-based technologies, in December 2016. At the time of the acquisition,
Tessera Technologies, Inc. and DTS were combined under the newly-formed Tessera Holding Corporation. During the first quarter of 2017, we introduced our new
corporate name, Xperi Corporation, launched a new corporate logo, and began trading under a new ticker symbol XPER.
On December 18, 2019, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with TiVo Corporation (“TiVo”) to
combine in an all-stock merger of equals transaction (the “Mergers”). The transaction will create a leading consumer and entertainment technology licensing
business and one of the industry’s largest intellectual property (IP) licensing platforms, with a diverse portfolio of entertainment and semiconductor intellectual
property. The Mergers are expected to close and become effective (the “Effective Time”) during the second quarter of 2020, subject to regulatory approvals, the
approval by the shareholders of each company, and other customary closing conditions.
Subject to the terms and conditions of the Merger Agreement, each share of Xperi common stock (“Xperi Common Stock”) issued and outstanding immediately
prior to the Effective Time, excluding any shares of Xperi Common Stock that are held in treasury, will be converted into the right to receive one share of common
stock of the combined company and each share of TiVo common stock (“TiVo Common Stock”) issued and outstanding immediately prior to the Effective Time,
excluding any shares of TiVo Common Stock that are held in treasury, will be converted into the right to receive 0.455 shares of common stock of the combined
company. On a pro forma, fully diluted basis, it is expected that immediately following the Effective Time, Xperi stockholders will own approximately 46.5% of
the combined company and TiVo stockholders will own approximately 53.5% of the combined company.
In connection with the Merger Agreement, Xperi and TiVo obtained a debt commitment letter from Bank of America, N.A., Royal Bank of Canada, and Barclays
Bank PLC to provide a senior secured first lien term loan B facility in an aggregate principal amount of $1,100 million (the “Debt Financing”), subject to the terms
and conditions set forth therein. The proceeds from the Debt Financing may be used (i) to pay fees and expenses incurred in connection with the Mergers and the
related transactions, (ii) to accomplish the refinancing of existing indebtedness of Xperi and TiVo, and (iii) to the extent of any remaining amounts, for working
capital and other general corporate purposes. For further discussion of the planned merger with TiVo, refer to “Item 1A. Risk Factors,” and “Note 9 – Acquisitions,
Goodwill and Identified Intangible Assets” in the Notes to Consolidated Financial Statements.
Xperi’s portfolio of products and technologies uniquely positions us to deliver innovative audio, imaging and semiconductor solutions for the home, automotive
and mobile markets. Our products and technologies also enable entertainment media ecosystem connectivity and new products in emerging markets such as
Internet of Things (IoT) and Augmented Reality/Virtual Reality (AR/VR). Our team of more than 400 world-class engineers is focused on creating core
technologies that enable intelligent, immersive, and personalized experiences.
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We license our innovative products, technologies and inventions to global electronics and media companies which, in turn, integrate these solutions into their own
consumer electronics and semiconductor products. Our technologies and inventions are widely adopted and used every day by millions of people. Our audio and
imaging technologies have shipped in billions of devices for the home, automotive, and mobile markets. Our semiconductor packaging and interconnect
technologies have been licensed to more than 100 customers and have shipped in over a hundred billion semiconductor chips.
Xperi operates in two segments. The Product Licensing segment is comprised of our Audio and Imaging businesses, which we license through the DTS, HD Radio,
and IMAX Enhanced brands. These licenses typically include the delivery of software and/or hardware-based solutions to our customers or to their suppliers.
Product Licensing revenue is derived primarily from sales into the home, automotive and mobile markets.
The Semiconductor and IP Licensing segment includes our Tessera, Invensas and Invensas Bonding Technologies subsidiaries, which license semiconductor
packaging and interconnect technologies and associated intellectual property. Semiconductor and IP Licensing revenue is derived from technology and IP licenses
to semiconductor companies, foundries and packaging companies. We have a long history of developing and monetizing next-generation technologies, including
chip-scale and multi-chip packaging solutions as well as low-temperature wafer and die bonding solutions. Today, we are actively developing and licensing 3D
semiconductor packaging, interconnect and bonding solutions for semiconductors that are used in every day products such as smartphones, tablets, and laptops as
well as servers used in datacenters. We also provide engineering services to our customers to assist them in their evaluation and adoption of our technologies
including the transition into high volume production.
Product Licensing Segment
Overview of Solutions
The Product Licensing segment is comprised of solutions from our audio and imaging businesses.
Audio Solutions: Our audio business is a premier audio technology solutions provider for high definition entertainment experiences. The DTS codec is designed to
enable recording, delivery and playback of immersive high definition audio and is incorporated by hundreds of customers around the world into an array of
consumer electronics devices for use anywhere, at home, in the car, or on the go. We provide products and services to entertainment media ecosystem partners such
as motion picture studios, radio and TV broadcasters, game developers and other content creators to facilitate the inclusion of compelling, realistic DTS-encoded
audio within their content. This in turn allows consumers to experience immersive and compelling audio wherever they choose to enjoy it. Devices that incorporate
DTS audio codec technology include televisions (TVs), personal computers (PCs), smartphones, tablets, automotive entertainment systems, set top boxes (STBs),
video game consoles, Blu-ray Disc players, audio/video receivers (AVRs), soundbars, wireless speakers and home theater systems. We also offer DTS post-
processing audio solutions designed to enhance the entertainment experience for users of consumer electronics devices, particularly those subject to the physical
limitations of smaller speakers, such as TVs, PCs and mobile devices. In addition, our DTS PlayFi technology leverages our audio and technology expertise to
enable a variety of high-quality audio playback options across wireless speakers, set top boxes, TVs and mobile devices.
Digital Radio Solutions: Our digital radio solutions, HD Radio and DTS Connected Radio, are a key part of our automotive audio business. HD Radio is the only
digital terrestrial broadcast system approved by the Federal Communications Commission (FCC) for AM/FM radio in the U.S., offering additional channels,
crystal-clear sound and advanced data services with no subscription fees. HD Radio enables a high quality in-vehicle radio experience with innovative features and
digital capabilities. DTS Connected Radio is a global system that enables car makers to utilize a single platform to deliver an enhanced radio experience across
different analog and digital broadcast systems deployed regionally. Utilizing an IP connection installed in a vehicle, DTS Connected Radio delivers an innovative
analog AM/FM and digital (DAB and HD Radio) experience by pairing broadcast programming with IP-delivered content.
Imaging Solutions: Our subsidiary, FotoNation, a pioneer in computer vision and computational imaging solutions, provides critical imaging technologies that
enable millions of consumers to take incredible pictures with their smartphones. Our FotoNation imaging products were rebranded to DTS in January 2020. These
technologies underpin many of the features today’s digital users enjoy every day such as advanced portrait modes, face detection and tracking, and automatic
effects such as face beautification. Our imaging technologies have become must-have capabilities for mobile device manufacturers and are key to enabling our in-
cabin monitoring solutions in the car.
5
Innovative Technology
Within our audio product line, we have a complete range of end‑to‑end solutions from content creation / mastering, through distribution and playback. We continue
to expand our offerings through ongoing research and development, and strategic partnerships with content creators, chip makers, consumer electronics
manufacturers, and others within the digital media ecosystem. Our innovative solution offerings are tailored specifically for each market.
Some of the audio technologies we license include:
•
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•
•
•
•
•
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DTS:X® is our flagship object-based audio decoder. The technology includes object-based audio decoding, full backward compatibility with all DTS-
encoded formats, and Neural:X, the latest spatial remapping technology that translates legacy bitstreams and PCM content to virtually any speaker
layout.
DTS‑HD® Master Audio is our advanced surround sound decoder that utilizes variable bit‑rate technology to deliver ultimate audio quality while
conserving file size and bandwidth, allowing for an uncompromised audio experience.
HD RadioTM technology enables digital AM/FM broadcast radio, creating significant benefits to all participants in the radio broadcasting ecosystem. In
particular, radio listeners enjoy upgraded audio quality, expanded content choices, and new digital services.
DTS:X Ultra™ is designed for gaming and XR experiences with support for static, multi-channel and object-based audio. The technology is now
supported in the Windows Spatial Sound PC Gaming platform.
DTS Headphone:X® includes our integrated surround sound technology and DTS decoder, coupled with user‑driven, headphone-specific tuning and
personalization features for an enhanced listening experience over headphones.
DTS Clear Voice is an advanced audio input processing technology that delivers real-time voice filters to reduce noise and make one’s voice
sound richer, cleaner, and more professional for streaming or online live game play.
DTS Play‑Fi® is a smart audio platform that enables high-quality, multi-room, synchronized streaming of music directly from a variety of sources to
speakers over Wi-Fi. Play‑Fi is currently embedded in wireless speakers from many of the industry’s leading brands, in leading set top boxes, smart
TVs and for mobile devices that use the Android, Kindle Fire or iOS operating systems, as well as the Windows PC platform.
IMAX Enhanced program, which Xperi manages and licenses to CE customers worldwide, delivers the ultimate home cinema experience with unique
IMAX cinematic content that leverages the DTS:X audio format to flawlessly deliver signature IMAX audio mixes.
The proliferation of connected devices that can support streaming and downloadable content has made our active participation within the digital ecosystem
increasingly important, as the availability of DTS-encoded content helps drive consumer demand for electronics that support DTS technologies.
Our immersive audio solutions, such as DTS-HD and DTS:X, empower content creators and are supported by all the major Hollywood studios, many cinema
operators in the U.S. and Asia, and leading streaming service providers in the U.S., Europe and Asia. On the radio front, our HD Radio broadcast technology
provides compelling advantages to consumers over traditional radio and is accordingly supported by more than 2,300 radio stations, including 98 of the top 100
stations in the top 10 U.S. radio markets.
Our imaging business licenses software solutions and technologies for the automotive and mobile imaging markets. Some of the solutions we license include:
•
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•
DTS In-Cabin Monitoring (ICM) System includes driver monitoring systems (DMS) and occupant monitoring systems (OMS) to enable a full suite of
detection and analysis products for automakers. These technologies enable state-of-the-art attentiveness assessment and fatigue detection for the driver
as well as in-cabin monitoring and customization options, based on occupant detection and analysis.
DTS FaceSafe is a 3D face recognition solution for mobile devices. It features a cohesive set of convolutional neural network (CNN) technologies that
enable full face detection and tracking, accurate feature detection, face modeling, texture and depth-based recognition, and liveliness detection.
DTS 3D Portrait is the next evolution of our portrait enhancement suite. Through AI-based 3D relighting technology coupled with background
processing, 3D Portrait enables enhancement of photos and videos created by single and multiple depth sensing cameras. 3D Portrait’s relighting
capacity in video-preview mode showcases how changing the light source position in the frame will affect the outcome in real-time.
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DTS Electronic Image Stabilization (EIS) improves the user experience in smartphones when taking photos or recording video. Our EIS solution
delivers lightning-fast image processing with best-in-class motion estimation, filtering and correction. The product eliminates the effect of hand jitter
and flight navigation vibration correcting for 6 degrees of freedom, including rotation, translation, lens distortion and rolling shutter effects.
DTS IrisXR is a highly effective iris authentication product. The solution enables iris detection and recognition that provides a layer of safety and
security with the potential to become a primary driver for augmented and virtual reality experiences.
DTS Image Processing Unit (IPU) is our unique collection of IP Cores that enable ultra-low power, low memory size, and low bandwidth consumption
when using our or third-party imaging solutions. IPU is multi-use, feature rich, and programmable. These cores are ideal for enabling intelligence on the
edge where power, form factor, privacy, and security are key factors.
Product Delivery
Traditionally, our technologies are delivered as software code on integrated circuit (IC) chips. We license a defined and limited set of rights to incorporate our
technology into these IC chips, and the IC manufacturers deliver these Xperi‑enabled chips to our customers, the consumer electronics products manufacturers. We
also work closely with the world’s leading IC manufacturers to enable support for our technologies on the new programmable architectures that fuel innovation and
flexibility in today’s consumer electronics products. Our partners specialize in key vertical markets and work closely with us to enable our latest technologies for
these programmable parts. Together, we license these solutions to Xperi’s consumer electronics products customers.
We have devoted significant time and resources to develop a broad range of solutions with key partners including Amlogic, Analog Devices, Cadence, Cirrus
Logic, Mediatek, Mstar, NXP, Qualcomm, Realtek, Synaptics, Texas Instruments, and others.
In our automotive business, we engage directly with leading global auto manufacturers as well as their Tier-1 suppliers to get our radio products designed and
delivered into the car. We also work with radio broadcasters to support the adoption and implementation of our HD radio technology.
Our imaging business combines proprietary hardware design with software development to offer advantages in both processing speed and lower power, providing
distinctive features to smartphones, drones, activity cameras and other battery-powered devices. We license our hardware designs to customers who, in turn,
typically embed the hardware as modules within a larger chip. Our software typically runs on a microprocessor with capabilities that are augmented by our
hardware design within a customer’s system.
Customers
We have licensed our audio technologies and related trademarks to substantially all of the major consumer electronics product manufacturers worldwide. These
customers include Denso, Harman, Hisense, LG, Microsoft, Panasonic, Samsung and Sony, among others. Our HD Radio technology is incorporated into a number
of our automotive partners’ products, including vehicles from Acura, Audi, BMW, Ford, GM, Honda, Hyundai, Tesla, and Toyota, among many others.
Our imaging technologies and products have been licensed to mobile phone and digital camera manufacturers worldwide, including to LG, Nikon, Oppo,
Socionext, ZTE and others.
Research & Development
As demonstrated by our portfolio of industry‑recognized, widely-deployed advanced technologies, we have a long track record of innovating in the fields of audio
and imaging. Our audio business was founded nearly 30 years ago on the basis of developing a unique audio solution for cinemas. Today, through a collection of
world-class talent and strong research and development capabilities, we continue to focus on providing unique, cost effective and differentiated audio solutions for
an ever larger universe of addressable markets.
Our imaging business was founded over 20 years ago, with the idea of connecting digital imaging devices to other computing platforms and enhancing the imaging
experience for consumers. Starting with imaging research and advanced algorithm development, FotoNation pioneered a hybrid hardware-software delivery
mechanism that has enabled the industry’s foremost low-power, high performance imaging capabilities on hand-held and edge devices. We have ongoing
investment in world-class R&D supported by strong relationships with key OEMs and platform providers in consumer electronics.
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Intellectual Property Portfolio
As of December 31, 2019, our subsidiaries comprising the Product Licensing segment owned approximately 1,224 United States patents and patent applications, as
well as approximately 1,619 foreign patents and patent applications. The last of the issued patents to expire is in 2039.
Strategy
Our product licensing business is primarily focused on three markets: home, automotive and mobile devices. In addition to the market specific strategies discussed
below, we have also funded a new subsidiary focused on delivering a new machine learning-based hardware and software platform. This new platform combines
work on advanced machine learning with our unique experience in imaging, audio and semiconductor technologies. We intend to initially target the smart
consumer electronics market with this new platform. This market is expected to be comprised of billions of devices across IoT, in home, mobile and automotive
applications. We believe the new platform will enable us to provide advanced imaging and audio applications, as well as a range of new applications that utilize
other types of sensing capabilities. Importantly, we believe this platform will allow us to bring a more complete solution to customers, migrating us further up the
value chain, increasing both addressable market size and average selling prices of our products.
Home Market Strategy
The Home market consists of TVs, Blu-ray stand-alone players, Audio/Video Receivers, sound bars, wireless speakers, game consoles, set-top-boxes, and smart
home cameras and sensors.
Our business strategy in the home market is focused on the following drivers:
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Driving the proliferation of DTS-encoded content among Hollywood studios and digital distribution partners,
Investing in and broadening the OEM and IC footprints that support DTS technologies,
Expanding the DTS:X and IMAX Enhanced programs from AVRs and sound bars to source devices - TVs and OTT/STB (Over-The-Top
Streaming/Set-Top-Box), and
Developing and bringing to market a strong pipeline of innovative technology solutions including AI applications related to voice and image sensors.
Automotive Market Strategy
In the Automotive market, we serve automotive OEMs and tier one automotive suppliers who deliver in dash infotainment clusters and in-cabin monitoring
solutions enabling personalized infotainment, comfort and safety solutions.
Our business strategy in the Automotive market is focused on the following drivers:
•
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Proliferating digital radio and auxiliary data services such as traffic, local weather and enhanced content,
Globalizing advanced digital radio solutions, including DTS Connected Radio, and
Developing and bringing to market integrated In Cabin Monitoring Solutions, such as driver monitoring (DMS) and occupant monitoring (OMS) based
on our industry-leading knowledge of computer vision, embedded machine learning design capability and automotive connectivity technologies.
Mobile Market Strategy
The Mobile market consists of smartphones, tablets, PCs and gaming headsets, as well as emerging opportunities such as Augmented Reality, Virtual Reality and
Mixed Reality (AR/VR/MR).
Our business strategy in the Mobile market is focused on the following drivers:
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Licensing DTS Headphone:X, DTS:X Ultra and DTS Clear Voice audio solutions embedded in industry leading game platforms for immersive and
engaging gaming experience on laptops, PCs, smart phones and gaming headsets,
Leveraging our long-time industry leadership in computer vision technology focused on human subjects to develop integrated solutions for image
capture to enhance photo and 5G videography,
Developing and delivering integrated imaging solutions for biometrics and user authentication,
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•
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Further enhancing our imaging solutions with the application of artificial intelligence-based machine learning to our industry-leading database of 20
million real life images, and
Delivering premium content and DTS-branded entertainment experiences for applications such as movies, gaming, AR/VR/MR.
Competition
Our product licensing business faces competition from other third-party providers of similar solutions as well as internal engineering and design groups among
industry IC provider and consumer electronic manufacturers.
In the audio market, our primary competitor is Dolby Laboratories, which develops and markets, among other things, high‑definition audio products and services.
Dolby’s long‑standing market position, brand, business relationships, resources and inclusion in various industry standards provide it with a strong competitive
position.
In addition to Dolby, we compete in specific product markets with companies such as Fraunhofer IIS and various other consumer electronics product
manufacturers. Many of these competitors have a wide variety of strengths that afford them competitive advantages, such as longer operating histories, greater
resources, greater name recognition, or the ability to offer their technologies for a lower price or for free. We have historically competed effectively against these
competitors due in part to our ability to position our brand as a premium offering that contains superior proprietary technology, the quality of our customer service,
our inclusion in industry standards and our industry relationships.
Our HD Radio and DTS Connected Radio solutions face competition from subscription-based digital service providers such as Sirius/XM, Pandora, Gracenote, and
other digital audio and data service providers.
Our image processing technologies broadly compete with other image processing software vendors such as ArcSoft, Inc., as well as engineering and design groups
of mobile phone and digital camera manufacturers that seek to provide similar technologies by employing different approaches. Over time, we expect to see new
competitors and other competing technologies emerge.
Semiconductor and IP Licensing Segment
The Semiconductor and IP Licensing Segment licenses semiconductor packaging and interconnect technologies and related IP. These technology and IP assets are
licensed primarily through our subsidiaries, Tessera, Invensas and Invensas Bonding Technologies. Tessera’s research and development led to significant
innovations in semiconductor packaging technology. We patented these innovations, often referred to as chip-scale and multi-chip packaging, which have been
widely adopted in the electronics industry. The wave of adoption was initially led by Intel Corporation, and over time, many semiconductor companies and
outsourced assembly and test (OSAT) companies entered into technology and patent license agreements with Tessera, Inc.
Invensas Corporation develops next generation semiconductor packaging and interconnect technologies for memory, mobile, computing and automotive
applications. For these applications, Invensas innovates in four primary areas: (i) memory, including DRAM and NAND, (ii) sensing, including imaging and time-
of-flights sensors, (iii) RF, including switches and filters, and (iv) 2.5D and three-dimensional integrated circuit (3D-IC) assemblies. Invensas engineering teams
develop and prototype these technologies in advanced processing and assembly laboratories, as well as perform reliability and acceptance testing. Invensas builds
collaborative partnerships with world-class manufacturing companies and high-volume equipment and materials suppliers and licenses its technology solutions to
original equipment manufacturers (OEMs), original design manufacturers (ODMs), integrated device manufacturers (IDMs), fabless device suppliers, foundries,
and outsourced assembly and test (OSATs) providers. Invensas also transfers its technologies to customer-designated manufacturing sites to support technology
bring-up and product commercialization.
Within each of these areas of innovation (memory, sensing, RF and 2.5D/3D-IC), Invensas has created specific product solutions that address critical needs in the
market. For example, Invensas innovates in the 3D-IC space. 3D-IC, which typically includes Through-Silicon Vias (TSVs), is widely expected to be the next
major trend in the semiconductor industry and is applicable to multiple markets, including mobile, computing, data storage, and networking. In August of 2015, we
augmented our 3D-IC portfolio with the acquisition of Ziptronix, Inc. (now known as Invensas Bonding Technologies, Inc.), a leading developer of low
temperature wafer bonding technologies, which are targeted at the image sensor, DRAM, NAND, RF, MEMS, and 2.5D and 3D-IC markets. Wafer and die
bonding technologies have become increasingly important as the industry continues to look toward 3D-IC solutions to drive performance, functionality and cost
gains beyond conventional Moore’s Law scaling.
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Our ZiBond® technology is a low temperature homogenous (e.g. oxide-to-oxide) direct bonding solution that forms strong bonds between wafers or die with the
same or different coefficients of thermal expansion (CTE). ZiBond offers multiple benefits over conventional bonding techniques such as adhesives, anodic
bonding, eutectic bonding and glass frit. Bonding is performed at room temperature, which enhances overall yield and reliability by eliminating the negative effects
associated with CTE mismatch, warpage and distortion. Higher throughput and lower cost-of-ownership are realized by using industry-standard manufacturing
equipment, such as wafer aligners and bonders.
Our DBI® and DBI® Ultra technologies are low temperature hybrid direct bonding solutions that allow wafers or die to be bonded with exceptionally fine pitch 3D
electrical interconnect. Like ZiBond, the DBI and DBI Ultra alignment and bonding processes are performed at room temperature. These technologies also leverage
industry-standard manufacturing equipment, such as wafer and die bonders, enabling high-throughput, low cost-of-ownership fabrication processes required for
high volume market applications. DBI and DBI Ultra can minimize the need for TSVs by allowing interconnection to occur at the bonding surface, thereby
improving electrical performance and reducing cost. By incorporating dielectric bonding, DBI and DBI Ultra eliminate the need for under-fill while providing
excellent thermal performance, reliability, and hermeticity, and maintaining an ultra-low profile.
Customers
Our semiconductor packaging, interconnect and other related technologies have been licensed to more than 100 companies. These customers include Samsung, SK
hynix, UMC, OmniVision and Broadcom, among others.
Research & Development
As demonstrated by our industry‑recognized and widely-deployed advanced technologies, we have a long history of developing, licensing and delivering
innovative semiconductor packaging and interconnect solutions worldwide. Many of our longstanding innovations have enabled core function and performance
gains in a wide range of semiconductor devices and electronics products over the years.
As we have grown, we continue to develop new technologies internally as well as seek to acquire best-in-class technologies from outside sources. Our combination
of experienced research and development engineers, our base of technologies, and our constant efforts to innovate new industry-leading solutions, provides a strong
foundation for the development and commercialization of new and unique semiconductor packaging and interconnect solutions to meet the industry’s ongoing
demand for higher performance, higher functionality and lower cost for years to come.
Intellectual Property Portfolio
As of December 31, 2019, our subsidiaries comprising the Semiconductor and IP Licensing segment owned approximately 1,958 United States patents and patent
applications, as well as approximately 1,084 foreign patents and patent applications. The last of the issued patents to expire is in 2038.
From time to time, we acquire complementary IP portfolios from other leading companies in the semiconductor industry. Our criteria for patent acquisitions
include: the fit with our existing portfolios, the number and jurisdiction of patent assets, the technical and legal strength of the patents, the actual or likely adoption
by industry, and the economic value of the inventions. See Part I, Item 1A- Risk Factors.
Strategy
We are focused on the development of advanced semiconductor packaging and interconnect technologies to enable the next generation of mobile, consumer, and
computing products. Leveraging our extensive design, simulation and prototyping capabilities, we partner with leaders across the semiconductor ecosystem to
develop and commercialize our technologies. As an integral component of our commercialization effort, we transfer our technologies to customer-selected
manufacturing sites, foundries and OSATs to enable our customers to manufacture semiconductor products in high volume.
Although we are engaged with and have successfully licensed and transferred our technologies to many semiconductor companies, some of the companies that use
our patented technologies have nonetheless chosen not to enter into license agreements with us. Consequently, we have, at times, initiated litigation to enforce our
IP rights. We view litigation as an instrument of last resort and we use it only when our efforts to reach negotiated licenses have stalled or failed. If we are unable to
secure license agreements on favorable terms through negotiations, or if licensees do not comply with the terms of their licenses, we might have to file new
litigation to enforce our rights. See Part 1, Item 3-Legal Proceedings.
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Competition
We compete primarily with internal technology development groups at semiconductor manufacturers, foundries, assemblers, and electronic component and system
manufacturers, who may create their own solutions that compete with technologies that we license. In general, there may be several ways to solve a particular
technical problem and there can be no assurance that our inventions and approaches will be the ones generally adopted by the industry. We also compete with other
firms in acquiring patent portfolios. The most significant impediments to our semiconductor and IP licensing business are (1) the time it takes for new technologies
to be adopted in high volume production, and (2) the tendency for companies to use our inventions and intellectual property without first obtaining a license from
us.
Customer Concentration
Nearly all of our revenue is denominated in U.S. dollars. The following table sets forth revenue generated from customers comprising 10% or more of total revenue
for the periods indicated:
SK hynix Inc.
Intel Corporation
Samsung Electronics, Co. Ltd.
Micron Technology, Inc.
Amkor Technologies, Inc.
* denotes less than 10% of total revenue.
Available Information
2019
Years Ended December 31,
2018
2017
17%
11%
*
*
*
12%
*
38%
*
*
*
*
*
11%
10%
Our Internet address is www.xperi.com where we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our
SEC reports can be accessed through the investor relations section of our website. The information found on our website is not incorporated into this or any other
report we file with or furnish to the SEC.
Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business,
financial condition, results of operations, cash flows, and the trading price of our common stock.
Risks Relating to the Mergers
As described in Item 1, Part 1 Business, on December 18, 2019, Xperi and TiVo agreed, subject to the terms and conditions of the Merger Agreement, to effect a
strategic combination of our respective businesses by: (i) forming XRAY-TWOLF HoldCo Corporation, a corporation, organized under the laws of the State of
Delaware and jointly owned by Xperi and TiVo (“HoldCo”), (ii) Xperi merging with a newly formed, wholly owned direct subsidiary of HoldCo, with Xperi
surviving such merger as a direct wholly owned subsidiary of HoldCo (the “Xperi Merger”), and (iii) TiVo merging with a newly formed, wholly owned direct
subsidiary of HoldCo, with TiVo surviving such merger as a direct, wholly owned subsidiary of HoldCo (the “TiVo Merger” and together with the Xperi Merger,
the “Mergers”).
The risk factors below should be read in conjunction with the risk factors related to the company’s operations set forth below and other information contained in
this report. HoldCo will file a registration statement on Form S-4 with the SEC that will include a joint proxy statement/prospectus relating to the Mergers. We urge
you to read the registration statement on Form S-4 because it will contain important information about the Mergers, including relevant risk factors.
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We may not be able to consummate our merger with TiVo, the consummation of such transaction may be delayed, or the parties may elect to terminate
the merger agreement, which may disable or delay the business plans relating to the Mergers.
The consummation of the Mergers is subject to the satisfaction of a number of customary closing conditions, including (i) the adoption of the Merger Agreement by
the stockholders of each of Xperi and TiVo; (ii) the absence of governmental restraints or prohibitions preventing the consummation of the Mergers; (iii) subject to
certain materiality exceptions, the accuracy of certain representations and warranties of each of Xperi and TiVo contained in the Merger Agreement and the
compliance by each party with the covenants contained in the Merger Agreement; (iv) the receipt of certain opinions from legal counsel regarding the intended tax
treatment of the Mergers; and (v) the absence of a material adverse effect with respect to each of Xperi and TiVo. We or TiVo may not be able to obtain such
stockholder approval or satisfy such other conditions, in which case the consummation of the Mergers may be delayed or terminated. Moreover, the board of
directors of either company may change its recommendation that stockholders approve the transaction, and the agreement may be terminated in certain
circumstances if a competing offer for an alternative transaction is made, in which case the transaction would not close and termination fees may be payable. Upon
termination of the merger agreement under certain circumstances, we may be obligated to pay TiVo a termination fee of $44,000,000. Additionally, under
specified circumstances, we or TiVo may be required to pay an expense reimbursement amount of $10,000,000. If the Mergers are not consummated or are
materially delayed for these or any other reason, the execution of the announced business plans for the Mergers, including the goal to create a unique entertainment
platform for the discovery, delivery, and monetization of content, as well as an intellectual property licensing platform that spans a number of the largest
addressable markets in entertainment content, consumer electronics, and semiconductors, would be disabled or delayed. In such event, our business and operations,
and our stock price, may be adversely affected.
There can be no assurance that the expected benefits of the Mergers will occur or be fully or timely realized.
The success of the Mergers will depend, in part, on the combined company’s ability to successfully combine our business with the business of TiVo. The
combination of two independent businesses is a complex, costly and time consuming process, and the management of the combined company may face significant
challenges in implementing such integration, including, without limitation:
•
•
•
•
•
•
•
•
•
difficulties integrating TiVo’s product technologies with our product technologies in a manner that creates technical synergies or that yields new or
improved product applications in targeted markets;
failure to timely realize the projected cost savings or operating synergies as a result of the Mergers;
costs and strain on resources arising from attempts at integrating the businesses;
difficulties integrating the operations and personnel of the two companies into unified operations, organization, and human resources programs, and the
risk that key employees could be lost;
failure to accurately forecast and communicate the long-term value or profitability of either business, including as a result of any failure to implement
the business strategy for the Mergers;
adverse pricing trends or inability to achieve economies of scale as a result of the Mergers;
failure to maintain relationships with existing customers of the two companies, including customers who may be unfamiliar with Xperi or see
themselves as being in conflict with the Xperi intellectual property business;
failure of the market to adopt new products or technologies developed as a result of the integration of Xperi’s and TiVo’s businesses; and
inability to manage growth resulting from the Mergers, including a failure to improve and expand management, systems, financial controls, a failure to
expand, train and manage the combined employee base, or a failure to meet demand and quality standards required by Xperi’s and TiVo’s existing and
potential customers and licensees.
Some of these factors will be outside of the control of management and any one of them could result in increased costs and diversion of management’s time and
energy, as well as decreases in the amount of expected revenues which could materially impact the company’s business, financial conditions and results of
operations. If the combined company is not able to adequately address integration challenges, the combined company may be unable to integrate successfully our
and TiVo’s operations or to realize the anticipated benefits of the transactions. In addition, the actual integration may result in additional and unforeseen expenses,
and the anticipated benefits of the integration plan may not be realized. Actual growth and cost savings, if achieved, may be lower and may take longer to achieve
than anticipated.
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We will be subject to business uncertainties and contractual restrictions until the Mergers are consummated.
Uncertainty about the effect of the Mergers on employees, suppliers, customers, distributors, licensors and licensees as well as licenses, contracts and other
agreements, particularly for which the Mergers could be deemed a “change-in-control” under the applicable terms and conditions may have an adverse effect on
Xperi, TiVo, and consequently the combined company. Changes to existing business relationships, including termination or modification, could negatively affect
Xperi and/or TiVo’s revenues, earnings and cash flow, as well as the market price of Xperi Common Stock. These uncertainties may impair each party’s ability to
attract, retain and motivate key personnel until the consummation of the Mergers, and could cause suppliers, customers and others that deal with the parties to seek
to change existing business relationships with them. Retention of employees could be challenging during the pendency of the Mergers due to uncertainty about
their future roles. If key employees depart because of issues related to the uncertainty and difficulty of integration or a desire not to remain with the businesses, the
combined company’s business following the consummation of the Mergers could be negatively impacted. Further, no assurance can be given that the combined
company will be able to attract or retain key management personnel and other key employees of Xperi and TiVo to the same extent that Xperi and TiVo have
previously been able to attract or retain their employees.
We expect to incur substantial transaction-related costs in connection with the Mergers.
We expect to incur significant costs, expenses, and fees for professional services and other transaction costs in connection with the transaction. The substantial
majority of these costs will be non-recurring expenses relating to the Mergers, including costs relating to integration. These costs could adversely affect our
financial condition and results of operations prior to the Mergers and of the combined company following the Mergers.
The Mergers could expose the combined company to liabilities and claims that we or TiVo have not previously experienced.
Upon closing of the Mergers, our combination with TiVo could increase the risk that the combined company becomes subject to claims of infringement of third-
party intellectual property rights. We do not have prior experience in content aggregation and discovery technologies in which third parties may hold a substantial
body of patents and other intellectual property rights. Moreover, the risks of third-party infringement claims could be heightened by the combined company’s need
to engage in enforcement activities with respect to Xperi’s existing patents, as Xperi’s existing or potential licensees may seek to assert infringement claims against
the TiVo business in response to enforcement activities relating to Xperi’s existing patents. Competitors of TiVo would not be subject to such heightened risk of
third-party claims, and such claims could adversely affect the combined company’s business as well as impair its enforcement ability and licensing revenues.
The Mergers may not help to rationalize Xperi’s and TiVo’s disparate business operations. The combined company may dispose of or discontinue product
lines, technologies, assets or operations, whether existing or acquired, if they do not fit into the strategic vision or meet forecasted results. Moreover, the
potential separation of the combined companies’ product and licensing businesses may not be achieved.
We believe that TiVo’s business includes operations that are complementary to both our audio and imaging product and licensing operations and our
semiconductor packaging, interconnect, and other patent licensing activities. However, future efforts by the combined company to rationalize Xperi’s and TiVo’s
disparate business operations could result in the combined company’s management to refocus on certain business operations while disinvesting in others. We
intend to integrate each company’s respective product and licensing businesses and operate them as separate product and licensing business units in order to
facilitate a potential separation of these units at a later date. Additionally, as business strategy and product markets continue to evolve, the combined company may
dispose, discontinue, or divest product lines or business divisions. Disposing or discontinuing existing product lines or business divisions, or separating business
units, provides no assurance that operating expenses will be reduced or will not cause the combined company to incur material charges associated with such
decision. Furthermore, the disposition or discontinuance of an existing product line or business division, or separation or spinoff of a business unit, entails various
risks, including the risk of not being able to obtain a purchaser, or, if obtained, the purchase price may not be equal to at least the net asset book value for the
product line or business unit, or the value that investors place on it as reflected in Xperi’s stock price or the stock price of the combined company. The combined
company may not be able to achieve any separation of the combined companies’ product and licensing businesses despite our current consideration of such a
separation. Other risks of such actions include adversely affecting employee morale, managing the expectations of, and maintaining good relations with, customers
of disposed or discontinued product lines or business divisions, which could prevent selling other products to them. The combined company may also incur other
significant liabilities and costs associated with disposal or discontinuance of product lines or business divisions, or separation of business units, including employee
severance costs, relocation expenses, and impairment of lease obligations and long-lived assets. The effects of such actions may adversely impact business
operations and the financial condition of the combined company.
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Litigation challenging the Merger Agreement may prevent the Mergers from being consummated at all or within the expected timeframe.
We anticipate that a putative class action lawsuit may be filed against us and TiVo, challenging our merger with TiVo. If such lawsuit is filed, we anticipate that it
will seek, among other things, to enjoin consummation of the Mergers. One of the conditions to the consummation of the Mergers is the absence of any injunctions
prohibiting or restraining the Mergers. If any plaintiff is successful in its efforts, then the combination of our business with TiVo may not be consummated at all or
within the expected timeframe.
Risks Relating to Our Business
Our revenue and billings have been concentrated and we anticipate that our revenue and billings will continue to be concentrated in a limited number of
customers. If we lose any of these customers, or these customers do not pay us, our revenue and billings could decrease substantially.
We have earned a significant amount of our revenue from a limited number of customers. For the year ended December 31, 2019, there were two customers that
accounted for 10% or more of total revenue. For the year ended December 31, 2019, there were two customers that accounted for 10% or more of total billings. We
expect that a significant portion of our billings and revenue will continue to come from a limited number of customers for the foreseeable future. If we lose any of
these customers, or these customers do not pay us, our billings and revenue could decrease substantially. In addition, historically a significant portion of our
recurring billings were the result of structured payment terms in connection with the settlement of litigation matters. If we are unable to replace the billings from an
expiring license or at the end of structured payment terms of a settlement agreement with similar billings from other customers, our revenue and billings could be
adversely impacted as compared to periods prior to such expiration or the end of such payment terms.
We enter into license agreements that have fixed expiration dates and if, upon expiration or termination, we are unable to renew or replace such license
agreements on terms favorable to us, our results of operations could be harmed.
We enter into license agreements that have fixed expiration dates. Upon expiration of such agreements we need to renew or replace these agreements in order to
maintain our royalty base. If we are unable to replace the royalties from an expiring license, either through a renewal or with similar royalties from other customers,
our results of operations could be adversely impacted as compared to periods prior to such expiration.
Furthermore, we may not be able to continue licensing customers on terms favorable to us, under the existing terms or at all, which would harm our results of
operations. While we have expanded our licensable technology portfolio through internal development and patents purchased from third parties, there is no
guarantee that these measures will lead to continued royalties. If we fail to continue to do business with our current licensees, our business would be materially
adversely affected.
The success of our patent licensing business is dependent on the quality of our patent assets and our ability to create and implement new technologies or
expand our licensable technology through acquisitions.
We derive a significant portion of our billings from patent licenses and royalties, including structured settlement payments. The success of our patent licensing
business depends on our ability to continue to develop and acquire high quality patents. We devote significant resources to developing new technologies and to
sourcing and acquiring patents to address the evolving needs of the semiconductor and the consumer and communication electronics industries, and we must
continue to do so in the future to remain competitive. Developments in our technologies are inherently complex and require long development cycles and a
substantial investment before we can determine their commercial viability. Moreover, competition for acquiring high quality patents is intense and there is no
assurance that we can continue to acquire such patents on favorable terms. We may not be able to develop and market new or improved technologies, or to develop
or acquire high quality patents, in a timely or commercially acceptable fashion. Furthermore, our acquired and developed patents will expire in the future. Our
current U.S. issued patents expire at various times through 2038. We need to develop or acquire successful innovations and obtain royalty-generating patents on
those innovations before our current patents expire, and our failure to do so would significantly harm our business, financial position, results of operations and cash
flows.
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Our use of cash and substantial long-term borrowing to finance the DTS acquisition, and the refinancing of our indebtedness and that of TiVo’s in
connection with the Mergers, could limit future opportunities for our business, and could materially adversely affect our financial condition if we are
unable to pay principal or interest on, or to refinance, such indebtedness.
The DTS acquisition was financed with existing cash balances and a $600 million secured term loan, with $344 million remaining outstanding under the loan as of
December 31, 2019. We have obtained a bank commitment letter for an aggregate principal amount of $1,100 million in debt financing in order to pay transaction
expenses in connection with the planned merger with TiVo and to refinance the existing indebtedness of the Company and TiVo. As a result, our debt balance will
increase substantially following the Mergers. The incurrence of this substantial long-term debt could limit our ability to make future acquisitions, investments and
capital expenditures that may be necessary or desirable for the operation or expansion of our business. Moreover, our ability to service the principal and interest
payments on such indebtedness will depend on our continuing ability to generate requisite cash flow from our existing and acquired business operations. The terms
of our existing indebtedness include, and the terms of the refinancing will include, covenants that may limit our operating flexibility and create a risk of default if
we are unable to meet financial ratios and other covenant requirements. While we made voluntary prepayments of $100 and $150 million of principal on our
existing indebtedness in 2018 and 2019, respectively, we may be unable to generate sufficient cash flow to make principal and interest payments on this debt or on
the refinanced debt in future periods, and in any event, we may be required to refinance the remaining indebtedness upon its maturity. We may be unable to
refinance such indebtedness on favorable terms or at all. For example, a downgrade in our credit rating could make any such refinancing more difficult to secure
on favorable terms. A default under, or inability to refinance, our indebtedness could substantially adversely affect our continuing financial viability, and could
lead to insolvency, bankruptcy, and the reduction or elimination of stockholders’ equity.
Our variable rate indebtedness may expose us to interest rate risk, which could cause our debt costs to increase significantly.
As of December 31, 2019, we had $344.0 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 December 31, 2019, 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 $3.4 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.
We are or may become involved in litigation and administrative proceedings involving some of our patents; any adverse decisions, findings of non-
infringement, or invalidation or limitation of the scope of our patents could significantly harm our business.
We are currently involved in litigation involving some of our patents, and may be involved in other such actions in the future. The parties in these legal actions
often challenge the infringement, validity, scope, enforceability and/or ownership of our patents. In addition, in the past requests for reexamination or review have
been filed in the U.S. Patent and Trademark Office (“PTO”) with respect to patent claims at issue in one or more of our litigation proceedings, and oppositions have
been filed against us with respect to our patents in the European Patent Office (“EPO”). During a reexamination or review proceeding and upon completion of the
proceeding, the PTO or EPO may leave a patent in its present form, narrow the scope of the patent, or cancel or find unpatentable some or all of the claims of the
patent. For example, the PTO has issued several Official Actions rejecting or maintaining earlier rejections of many of the claims in some of our patents. From time
to time we assert these patents and patent claims in litigation and administrative proceedings. If the PTO’s adverse rulings are upheld on appeal and some or all of
the claims of the patents that are subject to reexamination are canceled, our business may be significantly harmed. In addition, counterparties to our litigation and
administrative proceedings may seek and obtain orders to stay these proceedings based on rejections of claims in PTO reexaminations or review proceedings, and
other courts or tribunals reviewing our legal actions could make findings adverse to our interests, even if the PTO actions are not final.
15
We cannot predict the outcome of any of these proceedings or the myriad procedural and substantive motions in these proceedings. If there is an adverse ruling in
any legal or administrative proceeding relating to the infringement, validity, enforceability or ownership of any of our patents, or if a court or an administrative
body such as the PTO limits the scope of the claims of any of our patents or concludes that they are unpatentable, we could be prevented from enforcing or earning
future royalties from those patents, and the likelihood that customers will take new licenses and that current licensees will continue to agree to pay under their
existing licenses could be significantly reduced. The resulting reduction in license fees and royalties could significantly harm our business, consolidated financial
position, results of operations and cash flows, as well as the trading price of our common stock.
Regardless of the merits of any claim, the continued maintenance of these legal and administrative proceedings may result in substantial legal expenses and diverts
our management’s time and attention away from our other business operations, which could significantly harm our business. Our enforcement proceedings have
historically been protracted and complex. The time to resolution and complexity of our litigation, its disproportionate importance to our business compared to other
companies, the propensity for delay in civil litigation, and the potential that we may lose particular motions as well as the overall litigation could all cause
significant volatility in our stock price and have a material adverse effect on our business and consolidated financial position, results of operations, and cash flows.
The timing of billings under our license and settlement agreements may cause fluctuations in our quarterly or annual financial results.
From time to time we enter into license and settlement agreements that include pricing or payment terms that result in quarter-to-quarter or year-over-year
fluctuations in our billings and cash flows. The effect of these terms may also cause our aggregate annual billings to grow less rapidly than annual growth in overall
unit shipments in the applicable end market. Additionally, our customers may fail to pay, delay payment of or underpay what they owe to us under our license and
settlement agreements, which may in turn require us to enforce our contractual rights through litigation, resulting in payment amounts and timing different than
expected based on the terms of our license and settlement agreements. This also may cause our revenue, billings and cash flows to fluctuate on a quarter-to-quarter
or year-over-year basis.
We expect to continue to be involved in material legal proceedings to enforce or protect our intellectual property and contract rights, including material
litigation with existing licensees or strategic partners, that could harm our business.
From time to time, our efforts to obtain a reasonable royalty through our sales efforts do not result in the prospective customer agreeing to license our patents or our
technology. In certain cases, we become involved in litigation to enforce our intellectual property rights, enforce the terms of our license agreements, determine the
validity and scope of the proprietary rights of others, and defend against claims of infringement or invalidity. Our current legal actions, as described in Part I, Item
3 - Legal Proceedings, are examples of disputes and litigation that impact our business. If we are not able to reach agreement with customers or potential customers
we may be involved in similar legal proceedings in the future, including proceedings to ensure proper and full payment of royalties by licensees under the terms of
their license agreements.
Existing and any future legal actions may harm our business. For example, legal actions could cause an existing customer or strategic partner to cease making
royalty or other payments to us, or to challenge the validity and enforceability of our patents or the scope of our license agreements, and could significantly damage
our relationship with such customer or strategic partner and, as a result, prevent the adoption of our technologies and intellectual property by such customer or
strategic partner. Litigation could also severely disrupt or shut down the business operations of our customers or strategic partners, which in turn would
significantly harm our ongoing relations with them and cause us to lose royalties. Moreover, the timing and results of any of our legal proceedings are not
predictable and may vary in any individual proceeding. Further, our product licensing business could be subject to greater risk of claims of infringement of third-
party intellectual property rights as a result of our IP licensing business. The risks of third-party infringement claims could be heightened by our need to engage in
enforcement activities with respect to our existing patents, as our existing or potential licensees may seek to assert infringement claims against our DTS or other
product businesses in response to our enforcement activities relating to our existing patents. Competitors of our product licensing business would not be subject to
such heightened risk of third-party claims, and such claims could adversely affect our product licensing business as well as impair our enforcement ability and
licensing royalties.
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The cost of litigation is typically very high and can be difficult to predict, and such high costs and unpredictability may negatively impact our financial
results.
From time to time we identify products that we believe infringe our patents. We seek to license the companies that design, make, use, import, sell, or offer for sale
those products, but sometimes those companies are unwilling to enter into a license agreement. In those circumstances, we may elect to enforce our patent rights
against those companies and products. Litigation stemming from these or other disputes could harm our relationships with those companies or other licensees, or
our ability to gain new customers, who may postpone licensing decisions pending the outcome of the litigation or dispute, or who may, as a result of such litigation,
choose not to adopt our technologies. In addition, these legal proceedings could be very expensive and may significantly reduce our profits.
In addition, from time to time our customers with existing license agreements dispute their obligations under such agreements, or we may dispute their reporting of
royalties due under such agreements. In the past, customers have threatened to initiate litigation against us regarding our licensing royalty rate practices including
our adherence to licensing on fair, reasonable, and non-discriminatory terms and potential antitrust claims.
The costs associated with legal proceedings are typically high, relatively unpredictable, and not completely within our control. These costs may be materially
higher than expected, which could adversely affect our operating results and lead to volatility in the price of our common stock. Whether or not determined in our
favor or ultimately settled, litigation diverts our managerial, technical, legal and financial resources from our business operations. Furthermore, an adverse decision
in any of these legal actions could result in a loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from others, limit the value
of our licensed technology or otherwise negatively impact our stock price or our business and consolidated financial position, results of operations and cash flows.
Even if we prevail in our legal actions, significant contingencies may exist to their settlement and final resolution, including the scope of the liability of each party,
our ability to enforce judgments against the parties, the ability and willingness of the parties to make any payments owed or agreed upon, and the dismissal of the
legal action by the relevant court, none of which are completely within our control. Parties that may be obligated to pay us royalties or damages, or that may
otherwise be subject to a judgment, could become insolvent or decide to alter their business activities or corporate structure, which could affect our ability to collect
royalties or damages from, or enforce a judgment against, such parties.
Recent and proposed changes to U.S. patent laws, rules, and regulations may adversely impact our business.
Our business relies in part on the uniform and historically consistent application of U.S. patent laws, rules, and regulations. There have been numerous recent
administrative, legislative, and judicial changes and proposed changes to patent laws and rules that may have a significant impact on our ability to protect our
technology and enforce our intellectual property rights. For example, there have been and may be bills introduced in the U.S. Congress relating to patent law that
could adversely impact our business depending on the scope of any bills that may ultimately be enacted into law. As another example, the U.S. Supreme Court and
lower courts have in recent years issued decisions that are not favorable to patent owners. Some of these changes or potential changes may not be advantageous for
us and may make it more difficult to obtain adequate patent protection, or to enforce our patents against parties using them without a license or payment of
royalties. These changes or potential changes could increase the costs and uncertainties surrounding the prosecution of our patent applications and the enforcement
of our patent rights and could have a negative effect on our ability to license our patents and, therefore, on the royalties we can collect.
Some of our license agreements may convert to fully paid-up licenses at the expiration of their terms, or upon certain milestones, and we may not receive
royalties after that time.
From time to time we enter into license agreements that automatically convert to fully paid-up licenses upon expiration or upon reaching certain milestones. We
may not receive further royalties from customers for any licensed technology under those agreements if they convert to fully paid-up licenses because such
customers will be entitled to continue using some, if not all, of the relevant intellectual property or technology under the terms of the license agreements without
further payment, even if relevant patents or technologies are still in effect. If we cannot find another source of royalties to replace the royalties from these license
agreements converting to fully paid-up licenses, our results of operations following such conversion would be materially adversely affected.
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A significant amount of our royalty revenue and billings comes from a few end markets and products, and our business could be harmed if demand for
these market segments or products declines.
A significant portion of our royalties comes from the manufacture and sale of packaged semiconductor chips for DRAM, application-specific standard product
semiconductors, application-specific integrated circuits, and memory. In addition, we derive substantial royalties from the incorporation of our technology into
mobile devices, consumer products and computer hardware. If demand for semiconductors in any one or a combination of these market segments or products
declines, our royalties may be reduced significantly and our business would be harmed.
The long-term success of our business is dependent on a royalty-based business model, which is inherently risky.
The long-term success of our business is dependent on future royalties paid to us by customers. Royalty payments under our licenses may be based, among other
things, upon the number of electrical connections to the semiconductor chip in a package covered by our licensed technology, a percent of net sales, a rate per
package, a per unit sold basis or a fixed quarterly amount. We are dependent upon our ability to structure, negotiate and enforce agreements for the determination
and payment of royalties, as well as upon our customers’ compliance with their agreements. We face risks inherent in a royalty-based business model, many of
which are outside of our control, such as the following:
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the rate of adoption and incorporation of our technology by semiconductor manufacturers, assemblers, foundries, manufacturers of consumer and
communication electronics, and the automotive and surveillance industry;
the willingness and ability of materials and equipment suppliers to produce materials and equipment that support our licensed technology, in a quantity
sufficient to enable volume manufacturing;
the ability of our customers to purchase such materials and equipment on a cost-effective and timely basis;
the length of the design cycle and the ability of us and our customers to successfully integrate certain of our imaging technologies into their integrated
circuits;
the demand for products incorporating semiconductors that use our licensed technology;
the cyclicality of supply and demand for products using our licensed technology;
the impact of economic downturns; and
the impact of poor financial performance of our customers.
It is difficult for us to verify royalty amounts owed to us under our licensing agreements, and this may cause us to lose revenue and billings.
The terms of our license agreements often require our customers to document their use of our technology and report related data to us on a quarterly basis.
Although our license terms generally give us the right to audit books and records of our customers to verify this information, audits can be expensive, time
consuming, and may not be cost justified based on our understanding of our customers’ businesses, especially given the international nature of our customers. Our
license compliance program audits certain customers to review the accuracy of the information contained in their royalty reports in an effort to decrease the
likelihood that we will not receive the royalty to which we are entitled under the terms of our license agreements, but we cannot give assurances that such audits
will be effective to that end.
The markets for semiconductors and related products are highly concentrated, and we may have limited opportunities to license our technologies or sell
our products.
The semiconductor industry is highly concentrated in that a small number of semiconductor designers, foundries, and manufacturers account for a substantial
portion of the purchases of semiconductor products generally, including our products and products incorporating our technologies. Continued consolidation in the
semiconductor industry may increase this concentration. Accordingly, we expect that licenses of our technologies and sales of our products will be concentrated
with a limited number of customers for the foreseeable future. As we develop and acquire new technologies and integrate them into our product line, we will need
to establish new relationships to sell these products. Our financial results significantly depend on our success in establishing and maintaining relationships with,
and effecting substantial sales to, these customers. Even if we are successful in establishing and maintaining such relationships, our financial results will be
dependent in large part on these customers’ sales and business results.
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We make significant investments in new products and services that may not achieve technological feasibility or profitability or that may limit our growth.
We have made and will continue to make significant investments in research, development, and marketing of new technologies, products and services, including
audio, imaging, advanced semiconductor packaging, bonding, and interconnect technologies, as well as a new hardware and software solution for high-performance
inference at the edge being developed by a new subsidiary. Investments in new technologies are speculative and technological feasibility may not be achieved.
Commercial success depends on many factors including demand for innovative technology, availability of materials and equipment, selling price the market is
willing to bear, competition and effective licensing or product sales. We may not achieve significant revenue or billings from new product and service investments
for a number of years, if at all. Moreover, new technologies, products and services may not be profitable, and even if they are profitable, operating margins for new
products and businesses may not be as high as the margins we have experienced historically or originally anticipated.
Our substantial research and development investments may not translate into product market success, and could be jeopardized by our lack of relevant
product experience, competition from other innovators with greater resources, dependence on third-party suppliers, and other factors.
We have incurred, and expect to continue to incur, substantial research and development expenses through a new subsidiary focused on delivering a new machine
learning-based hardware and software platform. We do not have prior experience as a company in the development or marketing of a similar hardware or software
platform. We will need to continue to find and hire relevant personnel to advance this new business. This new subsidiary may be unable to develop or market
products that generate material revenue or that recoup our past and ongoing research and development costs. We will be reliant on third parties for chip design and
manufacturing, and we may be unable to obtain sources of supply at a competitive price, or at all. Moreover, the semiconductor industry is highly cyclical, and the
specific product markets targeted by the platform may be cyclical as well. The timing of new product introductions from this new subsidiary may not coincide with
favorable parts of these cycles, increasing our risk of failure. In addition, chip technologies such as what we are developing are subject to extensive competition and
a relentless pace of innovation. These new products could be copied or functionally surpassed by other designers, manufacturers, or innovators, some of whom may
have far greater financial resources than the Company, and who may be able to develop products with greater capabilities or lower cost.
We may not be able to evolve our audio and imaging technologies, products, and services, or develop new technologies, products, and services, that are
acceptable to our customers or the evolving markets, and our customers may use technologies offered at lower cost by others.
The markets for our audio and imaging technologies, products, and services are characterized by:
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rapid technological change and product obsolescence;
new and improved product introductions;
changing consumer demands;
increasingly competitive product landscape; and
evolving industry standards.
Our future success in our product licensing business depends upon our ability to enhance our existing technologies, products, and services and to develop enhanced
and acceptable new technologies, products, and services on a timely basis. The development of enhanced and new audio and imaging technologies, products, and
services is a complex and uncertain process requiring high levels of innovation, highly-skilled engineering and development personnel, and the accurate
anticipation of technological and market trends. We may not be able to accurately identify, develop, market, or support new or enhanced technologies, products, or
services on a timely basis, if at all. Furthermore, our new imaging and audio technologies, products, and services may never gain market acceptance, and we may
not be able to respond effectively to evolving consumer demands, technological changes, product announcements by competitors, or emerging industry standards.
Any failure to respond to these changes or concerns would likely prevent our imaging and audio technologies, products, and services from gaining market
acceptance or maintaining market share and could lead to our imaging and audio technologies, products, and services becoming obsolete.
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Furthermore, the decision by a party dominant in the entertainment value chain to provide audio or imaging technology at very low or no cost could cause our
customers and other manufacturers not to utilize our technologies or services in the future. Our customers may choose to use technologies that their own in-house
audio or imaging engineering teams have developed, or in which they have an interest. Accordingly, our revenue or billings could decline if our customers choose
not to incorporate our audio or imaging technologies in their products, or if they sell fewer products incorporating our audio or imaging technologies.
Competing technologies may harm our business.
We expect that our technologies will continue to compete with technologies of internal design groups at semiconductor manufacturers, assemblers, electronic
component, foundries and system manufacturers. The internal design groups of these companies create their own semiconductor, packaging, audio and imaging
solutions. If these internal design groups design around our patents or introduce unique solutions superior to our technology, they may not need to license our
technology. These groups may design technology that is less expensive to implement or that enables products with higher performance or additional features. Many
of these groups have substantially greater resources, greater financial strength and lower cost structures which may allow them to undercut our price. They also
have the inherent advantage of access to internal corporate strategies, technology roadmaps and technical information. As a result, they may be able to bring
alternative solutions to market more easily and quickly.
DTS audio technologies compete with other providers of audio products and services, with Dolby Laboratories as the primary competitor in high-definition audio
processing. Dolby Laboratories enjoys certain competitive advantages in selling its digital multi-channel audio technology, having introduced such technology
before we did, and having achieved mandatory standard status in product categories that we have not, including terrestrial digital TV broadcasts in the United
States.
For our embedded image processing technologies such as Face Detection and our other products, our offerings compete with other image processing software
vendors such as ArcSoft, Inc. as well as internal design groups of mobile phone and digital camera manufacturers providing similar technologies by employing
different approaches.
In the future, our licensed technologies may also compete with other technologies that emerge. These other technologies may be less expensive and provide higher
performance than our solutions. Companies with these competing technologies may also have greater resources. Technological change could render our
technologies obsolete, and new, competitive technologies could emerge that achieve broad adoption and adversely affect the use of our technologies and
intellectual property.
If we do not successfully further develop and commercialize the technologies we acquire, or cultivate strategic relationships that expand our licensable
portfolio, our competitive position could be harmed and our operating results adversely affected.
We attempt to expand our licensable technology portfolio and technical expertise by further developing and acquiring new technologies or developing strategic
relationships with others. These strategic relationships may include the right for us to sublicense technology and intellectual property to others. We may not be able
to acquire or obtain rights to licensable technology and intellectual property in a timely manner or upon commercially reasonable terms. Even if we do acquire such
rights, some of the technologies we invest in may be commercially unproven and may not be adopted or accepted by the industry. Moreover, our research and
development efforts, and acquisitions and strategic relationships, may be futile if we do not accurately predict the future needs of the semiconductor, consumer and
communication electronics, and consumer imaging and audio processing industries. Our failure to acquire new technologies that are commercially viable in the
semiconductor, consumer and communication electronics, and consumer imaging and audio processing industries could significantly harm our business, financial
position, results of operations and cash flows.
The way we integrate internally developed and acquired technologies into our products and licensing programs may not be accepted by customers.
We have devoted, and expect to continue to devote, considerable time and resources to developing, acquiring and integrating new and existing technologies into our
products and licensing programs. However, if customers do not accept the way we have integrated our technologies, they may adopt competing solutions. In
addition, as we introduce new products or licensing programs, we cannot predict with certainty if and when our customers will transition to those new products or
licensing programs. Moreover, with respect to certain of our imaging technologies, even after we have signed a license agreement with a customer, we will often
not see significant royalties from that customer until after such technologies have been successfully designed into the customer's integrated circuits, which can take
18 months or longer. If customers fail to accept new or upgraded products or licensing programs incorporating our technologies, our financial position, results of
operations and cash flows could be adversely impacted.
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If we fail to protect and enforce our intellectual property rights, contract rights, and our confidential information, our business will suffer.
We rely primarily on a combination of license, development and nondisclosure agreements and other contractual provisions, as well as patent, trademark, trade
secret and copyright laws, to protect our technology and intellectual property. If we fail to protect our technology, intellectual property, or contract rights, our
customers and others may seek to use our technology and intellectual property without the payment of license fees and royalties, which could weaken our
competitive position, reduce our operating results and increase the likelihood of costly litigation. The growth of our business depends in large part on our ability to
secure intellectual property rights in a timely manner, our ability to convince third parties of the applicability of our intellectual property rights to their products,
and our ability to enforce our intellectual property rights.
In certain instances, we attempt to obtain patent protection for portions of our technology, and our license agreements typically include both issued patents and
pending patent applications. If we fail to obtain patents in a timely manner or if the patents issued to us do not cover all of the inventions disclosed in our patent
applications, others could use portions of our technology and intellectual property without the payment of license fees and royalties. For example, our business may
suffer if we are unable to obtain patent protection in a timely manner from the PTO due to processing delays resulting from examiner turnover and a continuing
backlog of patent applications.
We also rely on trade secret laws rather than patent laws to protect other portions of our proprietary technology. Trade secrets can be difficult to protect. The
misappropriation of our trade secrets or other proprietary information could seriously harm our business. We protect our proprietary technology and processes, in
part, through confidentiality agreements with our employees, consultants, suppliers and customers. We cannot be certain that these contracts have not been and will
not be breached, that we will be able to timely detect unauthorized use or transfer of our technology and intellectual property, that we will have adequate remedies
for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors. If we fail to use adequate mechanisms to
protect our technology and intellectual property, or if a court fails to enforce our intellectual property rights, our business will suffer. We cannot be certain that
these protection mechanisms can be successfully asserted in the future or will not be invalidated or challenged.
Further, the laws and enforcement regimes of certain countries may not protect our technology and intellectual property to the same extent as do the laws and
enforcement regimes of the U.S. In certain jurisdictions we may be unable to protect our technology and intellectual property adequately against unauthorized use,
which could adversely affect our business.
Our business may suffer if third parties assert that we violate their intellectual property rights.
Third parties may claim that either we or our customers are infringing upon their intellectual property rights. Even if we believe that such claims are without merit,
they can be time-consuming and costly to defend against and will divert management’s attention and resources away from our business. Furthermore, third parties
making such claims may be able to obtain injunctive or other equitable relief that could block our ability to further develop or commercialize some or all of our
products or services in the U.S. and abroad. Claims of intellectual property infringement also might require us to enter into costly settlement or license agreements,
pay costly damage awards, or defend or indemnify our customers against judgments, damages, or other losses. Even if we have an agreement that provides for a
third party to indemnify us against such costs, the indemnifying party may be unable to perform its contractual obligations under the agreement. If we cannot or do
not license the allegedly infringed intellectual property on reasonable terms, or need to substitute similar technology from another source, our business, financial
position, results of operations and cash flows could suffer.
Our licensing cycle is lengthy and costly, and our marketing, legal and sales efforts may be unsuccessful.
We generally incur significant marketing, legal and sales expenses prior to entering into our license agreements, generating a license fee and establishing a royalty
stream from each licensee. The length of time it takes to establish a new licensing relationship, and/or for our customers to incorporate certain of our technologies
in their integrated circuits, can be 18 months or longer. As such, we may incur significant expenses in any particular period before any associated royalty or cash
flow stream begins.
Our business incurs significant reverse engineering expenditures on products of potential licensees in order to prepare sales and marketing collateral. We employ
intensive marketing and sales efforts to educate licensees, potential licensees and original equipment manufacturers about the benefits of our technologies. In
addition, even if these companies adopt our technologies, they must devote significant resources to integrate fully our technologies into their operations. If our
marketing and sales efforts are unsuccessful, then we may not be able to achieve widespread acceptance of our technology. In addition, ongoing litigation could
impact our ability to gain new licensees which could have an adverse effect on our financial condition, results of operations and cash flows.
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If our licensees delay, refuse to or are unable to make payments to us due to financial difficulties or otherwise, or shift their licensed products to other
companies to lower their royalties to us, our operating results and cash flows could be adversely affected.
A number of companies in the semiconductor and consumer electronics industries face severe financial difficulties from time to time. As a result, there have been
bankruptcies and restructuring of companies in these industries. Customers may face financial difficulties which may result in their inability to make payments to
us in a timely manner, or at all. In addition, we have had a history of, and we may in the future experience, customers that delay or refuse to make payments owed
to us under license or settlement agreements. Our customers may also merge with or may shift the manufacture of licensed products to companies that are not
currently licensees to us. This could make the collection process complex and difficult, which could adversely impact our business, financial condition, results of
operations and cash flows.
Failure by the semiconductor industry to adopt our technology for the next generation high performance chips used in consumer electronics would
significantly harm our business.
To date, our technology has been used by several companies in high performance semiconductor chips, including DRAM. For example, semiconductor packaging,
circuitry and processing using our technology is used for DDR3 and DDR4 DRAM and we currently have customers who are paying royalties for DRAM chips in
advanced packages.
We anticipate that royalties from shipments of next-generation semiconductor chips using our technology may account for a significant percentage of our future
royalties. If semiconductor manufacturers do not continue to use our technology for the next-generation chips and find viable alternative technologies for use with
next-generation chips, or if we do not receive royalties from the next-generation chips that use our technology, our future financial performance and cash flows
could be adversely affected.
Our technology may be too expensive for certain next-generation semiconductor manufacturers, which could significantly reduce the adoption rate of our
technology in next-generation chips. Even if our technology is selected for at least some of these next-generation chips, there could be delays in the introduction of
products utilizing these chips that could materially affect the amount and timing of any royalty payments that we receive. Other factors that could affect adoption of
our technology for next-generation semiconductor products include delays or shortages of materials and equipment and the availability of testing services.
Similarly, our audio licensing royalties from consumer electronics product manufacturers depend, in large part, upon the availability of ICs that implement our
technologies. IC manufacturers incorporate our audio technologies into these ICs, which are then incorporated into consumer electronics products. We do not
manufacture these ICs, but rather depend upon IC manufacturers to develop, produce and then sell them to licensed consumer electronics product manufacturers.
We do not control the IC manufacturers’ decisions whether or not to incorporate our technologies into their ICs, and we do not control their product development or
commercialization efforts. If these IC manufacturers are unable or unwilling to implement our technologies into their ICs, production is delayed, or if they sell
fewer ICs incorporating our technologies, our operating results and cash flows could be adversely affected.
The investment of our cash, cash equivalents and investments in marketable debt and equity securities is subject to risks which may cause losses and
affect the liquidity of these investments.
At December 31, 2019, we held approximately $74.6 million in cash and cash equivalents and $46.9 million in short-term investments. These investments include
various financial securities such as corporate bonds and notes, municipal bonds and notes, commercial paper, treasury and agency notes and bills, and money
market funds. Although we invest in high quality securities, ongoing financial events have at times adversely impacted the general credit, liquidity, market and
interest rates for these and other types of debt securities. Changes in monetary policy by the Federal Reserve, government fiscal policies, and global economic and
market conditions may adversely affect the value of our investment portfolio. While we have historically held our debt investments to maturity, we may in the
future have a need to sell investments before their maturity dates, which could result in losses on the sale of those investments. For example, the DTS acquisition
resulted in us liquidating a significant portion of our investments. In the third quarter of 2018, we initiated an equity position in Onkyo Corporation, a publicly
traded company listed on the JASDAQ market of the Tokyo Stock Exchange. Upon making the investment, we held a 6.3% ownership interest in Onkyo, and as of
December 31, 2019, we held an approximately 2.2% ownership interest. As of December 31, 2019, the market value of our remaining equity investment in Onkyo
had decreased by approximately $2.3 million since our initial investment. The financial market and monetary risks associated with our investment portfolio have
and may in the future have a material adverse effect on our financial condition, results of operations or cash flows.
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Our intellectual property business operates in a highly cyclical industry, which is subject to significant downturns.
The semiconductor and electronics industries in which our intellectual property business primarily operates have historically been cyclical and are characterized by
wide fluctuations in product supply and demand. From time to time, these industries have experienced significant downturns, often in connection with, or in
anticipation of, declining economic conditions, maturing product and technology cycles, and excess inventories. This cyclicality could cause our operating results
to decline from one period to the next. Our business depends, in part, upon the volume of production by our customers, which, in turn, depends upon the current
and anticipated market demand for semiconductors and products that use semiconductors. Semiconductor manufacturers, foundries, and package assembly
companies generally sharply curtail their spending during industry downturns, and historically have lowered their spending more than the decline in their revenue.
As a result, our financial results have been, and will continue to be, impacted by the cyclicality of the electronics industry. If we are unable to control our expenses
adequately in response to lower royalties from our customers in such downturns, our results of operations and cash flows will be materially and adversely impacted.
If we are unable to maintain a sufficient amount of content released in the DTS audio format, demand for the technologies, products, and services that we
offer to consumer electronics product manufacturers may significantly decline, which would adversely impact our business and prospects.
We expect to derive a significant percentage of our billings from the technologies, products, and services that we offer to manufacturers of consumer electronics
products. We believe that demand for our audio technologies in growing markets for multi-channel and/or high resolution audio, including TVs, tablets, mobile
phones, video game consoles, automobiles, and soundbars, will be based on the amount, quality, and popularity of content (such as movies, TV shows, music, and
games) either released in the DTS audio format or capable of being coded and played in the DTS format. In particular, our ability to penetrate the growing markets
in the network-connected space depends on the presence of streaming and downloadable content released in the DTS audio format. We generally do not have
contracts that require providers of streaming and downloadable content to develop and release such content in a DTS audio format. Accordingly, our billings could
decline if these providers elect not to incorporate DTS audio into their content or if they sell less content that incorporates DTS audio.
In addition, we may not be successful in maintaining existing relationships or developing new relationships with other existing or new content providers. As a
result, we cannot assure you that a sufficient amount of content will be released in a DTS audio format to ensure that manufacturers continue offering DTS
decoders in the consumer electronics products that they sell.
Demand for our HD Radio technology may be insufficient to sustain projected growth.
Demand for and adoption of HD Radio technology may not be sufficient for us to continue to increase the number of customers of our HD Radio system, which
include IC manufacturers, manufacturers of broadcast transmission equipment, consumer electronics products manufacturers, component manufacturers, data
service providers, manufacturers of specialized and test equipment and radio broadcasters.
Among other things, continuing and increased consumer acceptance of HD Radio technology will depend upon:
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the number of radio stations broadcasting digitally using HD Radio technology;
the willingness of automobile manufacturers to include HD Radio receivers in their vehicles;
the willingness of manufacturers to incorporate HD Radio technology into their products;
the cost and availability of HD Radio enabled products; and
the marketing and pricing strategies that we employ and that are employed by our customers and retailers.
Demand for HD Radio also may be impacted by declines in the automotive industry which historically has been cyclical and experienced downturns during
declining economic conditions.
If demand for HD Radio technology does not continue to increase as expected, we may not be able to increase our DTS royalties as projected.
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Our HD Radio technology may not remain competitive if we do not respond to changes in technology, standards and services that affect the radio
broadcasting industry.
The radio broadcasting industry is subject to technological change, evolving industry standards, regulatory restrictions and the emergence of other media
technologies and services. Our HD Radio technology may not gain market acceptance over these other technologies. Various other audio technologies and services
that have been developed and introduced include:
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internet streaming, cable-based audio programming and other digital audio broadcast formats;
satellite delivered digital audio radio services that offer numerous programming channels;
other digital radio competitors, such as Digital Radio Mondiale, or DAB; and
growth in use of portable devices for storage and playback of audio content.
Competition arising from these or other technologies or potential regulatory change may have an adverse effect on the radio broadcasting industry or on our
company and our financial condition and results of operations.
If we are unable to further penetrate the streaming and downloadable content delivery markets and adapt our technologies for those markets, our
royalties and ability to grow our audio business could be adversely impacted.
Until recently, video and audio content was purchased and consumed primarily via optical disc-based media. The growth of the internet and network-connected
device usage, along with the rapid advancement of online and mobile content delivery, has resulted in download and streaming services becoming mainstream with
consumers in various parts of the world. We expect the shift away from optical disc-based media to streaming and downloadable content consumption to continue.
If we fail to continue to penetrate the streaming and downloadable content delivery market, our audio business could suffer.
The services that provide content from the cloud are not generally governed by international or national standards and are thus free to choose any media format(s)
to deliver their products and services. This freedom of choice on the part of online content providers could limit our ability to grow if such content providers do not
incorporate our technologies into their services, which could affect demand for our technologies.
Furthermore, our inclusion in mobile and other network-connected devices may be less profitable for us than optical disc players. The online and mobile markets
are characterized by intense competition, evolving industry standards and business and distribution models, disruptive software and hardware technology
developments, frequent new product and service introductions, short product and service life cycles, and price sensitivity on the part of consumers, all of which
may result in downward pressure on pricing. If we are unable to adequately and timely respond to the foregoing, our business and operating results could be
adversely affected.
Changes in financial accounting or taxation standards, rules, practices or interpretations may cause adverse unexpected revenue and expense fluctuations
which may impact our reported results of operations.
We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP). These principles are subject to
interpretations by the SEC and various accounting bodies. In addition, we are subject to various taxation rules in many jurisdictions. The existing taxation rules are
generally complex, frequently changing and subject to interpretation. Changes to taxation rules, changes to financial accounting standards, or any changes to the
interpretations of these standards or rules may adversely affect our reported financial results or the way in which we conduct business. Recent accounting
pronouncements and their estimated potential impact on our business are addressed in Note 3 - “Recent Accounting Pronouncements” in the Notes to Consolidated
Financial Statements.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), and since
May 2014 the FASB has issued amendments to this new guidance, which collectively provide guidance for revenue recognition. ASU 2014-09 became effective for
us beginning January 1, 2018 and we adopted the new standard under the modified retrospective approach. Under the new standard, the historical practice of many
licensing companies of reporting revenue from per-unit royalty-based agreements one quarter in arrears is no longer accepted and instead companies must now
estimate royalty-based revenue. This guidance significantly impacts our revenue recognition. First, we are no longer allowed to follow our past practice of
recording per unit license revenue on a quarter lag basis, a practice precipitated by the lack of reliable estimates for such revenue. Estimating per unit royalty
revenue prior to receiving the licensee’s royalty report requires us to make significant assumptions and judgments and could cause significant fluctuations of
royalty revenue on a quarterly basis. Second, we are now required to record all or a significant majority of revenue under our fixed fee and minimum guarantee
license agreements when such agreements are effective rather than recording them over time as was our past practice and which generally aligned revenue more
closely with the billing cycle and cash flows from such agreements. While the changes in revenue recognition do not impact our cash flows, the impact on our
Statement of Operations under the new accounting standard may impact how investors perceive our business which could materially impact the value of our
common stock.
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On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act introduced a broad range of tax reform measures that
significantly changed the federal income tax laws. Many provisions in the Tax Act are generally effective in tax years beginning after December 31, 2017. The
prospects of supplemental legislation or regulatory processes to address uncertainties that arise because of the Tax Act, or evolving technical interpretations of the
tax law, may cause our financial statements to be impacted in the future. We will continue to analyze the effects of the Tax Act as subsequent guidance continues to
emerge.
Our future effective tax rate may be affected by such factors as changes in tax laws, changing interpretation and new guidance related to the Tax Act, withholding
tax determinations by foreign tax authorities, the impact of accounting for stock-based compensation, the impact of accounting for business combinations, changes
in the composition of global earnings, the expiration of statute of limitations, settlements of audits, changes in our domestic and international organization and
changes in overall levels of income before tax.
In order to measure our financial performance, we place greater emphasis on billings and operating cash flows rather than revenue and net operating
results, and this emphasis may be misunderstood by investors or create a conflict with the financial measures typically used by investors.
The adoption of ASU 2014-09 had a material impact on the timing of revenue recognition in our business. However, it had no impact on customer billings or the
cash flow from our contracts with customers. Our management places greater emphasis on billings and operating cash flows rather than revenue and net operating
results to evaluate our financial performance. Our financial performance may appear significantly different when measured by operating cash flows rather than net
operating results. Because performance bonuses are earned based on billings based metrics, such bonuses may be higher in years with lower net operating results,
or lower in years with higher net operating results, which may confuse investors and analysts. Investors and analysts may place greater emphasis on measures of
revenue and net operating results in evaluating the Company’s financial performance, notwithstanding management’s focus on billings and operating cash
flows. Differences in perception of the Company’s financial performance could materially impact the price and volatility in the price of our common stock.
Our effective tax rate depends on our ability to secure the tax benefits of our international corporate structure, on the application of the tax laws of
various jurisdictions and on how we operate our business.
Our international corporate structure and intercompany arrangements, including the manner in which we market, develop, use and license our intellectual property,
fund our operations and structure transactions with our international subsidiaries, may result in the increase or reduction of our worldwide effective tax rate. Such
international corporate structure and intercompany arrangements are subject to examination by the tax authorities of the jurisdictions in which we operate,
including the United States. The application of the tax laws of these jurisdictions to our international business activities is subject to interpretation and depends on
our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. Moreover, such tax laws are subject to
change. Tax authorities may disagree with our intercompany transfer pricing arrangements, including our transfer of intangibles, or determine that the manner in
which we operate our business does not achieve the intended tax consequences. Additionally, current and future changes in the tax laws or interpretations may have
an adverse effect on our international corporate structure and operations. For example, various levels of government and international organizations, such as the
Organization for Economic Co-operation and Development (“OECD”) and the European Union (“EU”), increasingly focus on future tax reform and any result from
this development may result in changes to long-standing tax principles. Also, changes in the Korean tax law on royalties subject to withholding taxes from our
Korean licensees may impact our financial results. The result of an adverse determination of any of the above items could increase our worldwide effective tax rate
and harm our financial position and results of operations.
We have in the past recorded, and may in the future record, significant valuation allowances on our deferred tax assets, and the recording and release of
such allowances may have a material impact on our results of operations.
The need for a valuation allowance requires an assessment of both positive and negative evidence on a jurisdiction-by-jurisdiction basis when determining whether
it is more likely than not that deferred tax assets are recoverable. In making such assessment, significant weight is given to evidence that can be objectively
verified. New facts and circumstances, future financial results, and new guidance related to the Tax Act may require us to reevaluate our valuation allowance
positions which could potentially affect our effective tax rate.
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 in future periods enabling us to fully realize our deferred tax assets. The timing of recording a valuation allowance
or the reversal of such valuation allowance is
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subject to objective factors that cannot be readily predicted in advance. Both the establishment of a valuation allowance and the reversal of a previously recorded
valuation allowance may have a material impact on our financial results.
The international nature of our business exposes us to financial and regulatory risks that may have a negative impact on our consolidated financial
position, results of operations and cash flows, and we may have difficulty protecting our intellectual property in some foreign countries.
We derive a significant portion of our royalties from licensees headquartered outside of the U.S. We also have operations outside of the U.S., including our
research and development facilities in Ireland, Romania and the United Kingdom, to design, develop, test or market certain technologies. International operations
are subject to a number of risks, including but not limited to the following:
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changes in trade protection laws, policies and measures, and other regulatory requirements affecting trade and investment;
regulatory requirements and prohibitions that differ between jurisdictions;
laws and business practices favoring local companies;
withholding tax obligations on license royalties that we may not be able to offset fully against our U.S. tax obligations, including the further risk that
foreign tax authorities may re-characterize license fees or increase tax rates, which could result in increased tax withholdings and penalties;
security concerns, including crime, political instability, terrorist activity, armed conflict and civil or military unrest;
differing employment practices, labor issues and business and cultural factors;
less effective protection of intellectual property than is afforded to us in the U.S. or other developed countries; and
limited infrastructure and disruptions, such as large-scale outages or interruptions of service from utilities or telecommunications providers.
Our intellectual property is also used in a large number of foreign countries. There are many countries in which we currently have no issued patents. In addition,
effective intellectual property enforcement may be unavailable or limited in some foreign countries. It may be difficult for us to protect our intellectual property
from misuse or infringement by other companies in these countries. We expect this to become a greater problem for us as our licensees increase their
manufacturing and sales in countries which provide less protection for intellectual property. Our inability to enforce our intellectual property rights in some
countries may harm our business, financial position, results of operations and cash flows.
Deteriorating trade relations between the United States and China, other trade conflicts and barriers, economic sanctions, and national security
protection policies could limit or prevent us from licensing our technology to certain existing or potential customers, or prevent such customers from
doing business with us.
The increased trade conflicts between the United States and its major trading partners, evidenced by trade restrictions such as tariffs, taxes, export controls,
economic sanctions, and enhanced policies designed to protect national security, could adversely impact our revenue and billings. In particular, we have seen
impacts on our business due to the increase in trade conflicts between the United States and China, although to date this impact has not been material. In the future,
trade restrictions could limit or prevent us from licensing our technology to existing or potential customers. In May 2019, the United States Department of
Commerce designated Huawei Technologies, a current customer of ours, to its “entity list,” which limits the ability of U.S. companies to export products and
license technologies to Huawei. These export controls, as well as retaliatory controls and tariffs that China has imposed and is considering, could restrict our ability
to do business with Huawei and other Chinese customers. Further United States government actions to protect domestic economic and security interests could lead
to further restrictions. Moreover, growing trade conflicts and uncertainties can be expected to lead to decreased use of foreign-owned technologies in China and
other countries, due to efforts by foreign governments and enterprises to find alternative sources of supply, to develop proprietary domestic technologies, and
otherwise to reduce reliance on foreign technology sources. These trends could have a material adverse impact on our revenue and billings.
Our business may be adversely affected by the recent coronavirus outbreak.
In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. In January 2020, this coronavirus spread to other countries,
including the United States, and efforts to contain the spread of this coronavirus intensified. At this time, we have temporarily closed our offices in China, Taiwan
and Hong Kong and asked our employees to work from home. We continue to monitor our operations and government recommendations, and may in the future
elect to keep our facilities in affected areas closed, or otherwise protect our properties. The outbreak and any preventative or protective actions that we may take in
respect of this coronavirus may result in a period of business disruption and reduced operations. Our customers’ businesses could be disrupted, and our revenues
and billings could be negatively affected. Any resulting
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financial impact cannot be reasonably estimated at this time but may materially affect our business, financial condition and results of operations. The extent to
which the coronavirus impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information
which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.
Our business and operating results may be harmed if we are unable to manage growth in our business, if we undertake any restructuring activities or if
we dispose of a business division or dispose of or discontinue any product lines.
We have in the past expanded our operations, domestically and internationally, and may continue to do so through both internal growth and acquisitions. In
December 2019, we announced plans to merge with TiVo, and we currently anticipate this merger being completed in the second quarter of 2020. In December
2016, we acquired DTS, resulting in our headcount more than doubling year over year. If our growth continues, it may place a significant strain on our
management team and on our operational and financial systems, procedures, and controls. Our future success will depend, in part, upon the ability of our
management team to manage any growth effectively, requiring our management to:
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recruit, hire, and train additional personnel;
implement and improve our operational and financial systems, procedures, and controls;
maintain our cost structure at an appropriate level based on the royalties, billings and cash we forecast and generate;
manage multiple concurrent development projects; and
manage operations in multiple time zones with different cultures and languages.
If we are unable to effectively manage our growth or we are unsuccessful in recruiting and retaining personnel, our business and operating results will be
harmed. Moreover, if our planned merger with TiVo, acquisitions or other growth initiatives do not prove to be profitable, we may undertake to restructure our
business, including the disposition of a business division, or the disposition or discontinuance of a product line. Any restructuring, disposition or discontinuance
would require substantial management time and attention and may divert management from other important work, and may result in significant liabilities and costs
as described earlier.
Disputes regarding our intellectual property may require us to defend or indemnify certain customers or licensees, the cost of which could adversely affect
our business operations and financial condition.
While we generally do not defend or indemnify our customers, some of our license agreements in our imaging and audio businesses provide limited defense and
indemnities for certain actions brought by third parties against our customers, and some require us to provide technical support and information to a customer that
is involved in litigation for using our technology. Our defense, indemnity and support obligations could result in substantial expenses. In addition to the time and
expense required for us to defend, indemnify or supply such support to our customers, a customer’s development, marketing and sales of licensed image or audio
products could be severely disrupted or shut down as a result of litigation, which in turn could have a material adverse effect on our business operations,
consolidated financial position, results of operations and cash flows.
If we lose any of our key personnel or are unable to attract, train and retain qualified personnel, we may not be able to execute our business strategy
effectively.
Our success depends, in large part, on the continued contributions of our key management, engineering, sales, marketing, intellectual property, legal and finance
personnel, many of whom are highly skilled and would be difficult to replace. None of our senior management, key technical personnel or key sales personnel are
bound by written employment contracts to remain with us for a specified period. In addition, we do not currently maintain key-person life insurance covering our
key personnel or have restrictions on their post-employment ability to solicit our employees, contractors or customers if key personnel voluntarily terminate their
employment. The loss of any of our senior management or other key personnel could harm our ability to implement our business strategy and respond to the rapidly
changing market conditions in which we operate. Our future success will depend to a significant extent on the ability of these executives to effectively drive
execution of our business strategy, and on the ability of our management team to work together effectively.
Our success also depends on our ability to attract, train and retain highly skilled managerial, engineering, sales, marketing, legal and finance personnel and on the
abilities of new personnel to function effectively, both individually and as a group. Competition for qualified senior employees can be intense. We have also
experienced difficulty in hiring and retaining highly skilled engineers with appropriate qualifications to support our growth and expansion. Further, we must train
our new personnel, especially our technical support personnel, to respond to and support our licensees and customers. If we fail to do this, it could lead to
dissatisfaction among our licensees or customers, which could slow our growth or result in a loss of business.
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Our business operations could suffer in the event of information technology system failures or security breaches.
Despite system redundancy and the implementation of security measures within our internal and external information technology and networking systems,
our information technology systems may be subject to security breaches, unauthorized access (malicious or accidental), misuse of information by authorized users,
data leaks or unintentional exposure of information, failed process, loss of data, damages from computer viruses or malware, natural disasters, terrorism,
telecommunication failures or disruption of service. Any system failure or security breach could cause interruptions in our operations in addition to the possibility
of losing proprietary information and trade secrets. To the extent that any disruption or security breach results in inappropriate disclosure of our confidential
information, we may incur liability or additional costs to remedy the damages caused by these disruptions or security breaches.
Decreased effectiveness of share-based compensation could adversely affect our ability to attract and retain employees.
We have historically used stock options, restricted stock grants and other forms of stock-based compensation as key components of employee compensation in
order to align employees’ interests with the interests of our stockholders, encourage employee retention and provide competitive compensation and benefit
packages. We incur significant compensation costs associated with our stock-based compensation programs. Failure to obtain stockholder approval of equity
compensation plans or changes to the plans could make it harder or more expensive for us to grant stock-based compensation to employees in the future. As a
result, we may find it difficult to attract, retain and motivate employees, and any such difficulty could have a materially adverse impact on our business.
Failure to comply with environmental regulations could harm our business.
We use hazardous substances in the manufacturing and testing of prototype products and in the development of technologies in our research and development
laboratories. We are subject to a variety of local, state and federal regulations relating to the storage, discharge, handling, emission, generation, manufacture and
disposal of toxic or other hazardous substances. Our past, present or future failure to comply with environmental regulations could result in the imposition of
substantial fines, suspension of production, and alteration of our manufacturing processes or cessation of operations. Compliance with such regulations could
require us to acquire expensive remediation equipment or to incur other substantial expenses. Any failure to control the use, disposal, removal or storage of, or to
adequately restrict the discharge of, or assist in the cleanup of, hazardous or toxic substances, could subject us to significant liabilities, including joint and several
liabilities under certain statutes. The imposition of such liabilities could significantly harm our business, financial position, results of operations and cash flows.
We have business operations located in places that are subject to natural disasters.
Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel. Our corporate headquarters are located in the
San Francisco Bay Area and we have engineering activities in several locations throughout California, which in the past have experienced severe earthquakes. We
do not carry earthquake insurance for any of our facilities except for our office in Calabasas, California. Earthquakes or other natural disasters could severely
disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects.
We have made and may continue to make or to pursue acquisitions and other business combinations which could divert management’s attention, cause
ownership dilution to our stockholders, or be difficult to integrate, which may adversely affect our financial results.
We have made several acquisitions, and it is our current plan to continue to acquire assets, patents, technologies or companies that we believe are strategic to our
future business. For example, in December 2019 we announced the planned merger with TiVo, and we currently expect that merger to be completed in the second
quarter of 2020. In the fourth quarter of 2016, we acquired DTS, Inc., for approximately $955 million. Investigating businesses, assets, patents or technologies and
integrating newly acquired or merged businesses, assets, patents or technologies could put a strain on our resources, could be costly and time consuming, and might
not be successful. Such activities divert our management’s attention from other business concerns. In addition, we might lose key employees while integrating new
organizations or operations. Mergers and acquisitions could also result in customer dissatisfaction, performance problems with an acquired or merged company or
technology, potentially dilutive issuances of equity securities or the incurrence of debt, the assumption or incurrence of contingent liabilities, impairment charges
related to goodwill and possible impairment charges related to other intangible assets or other unanticipated events or circumstances, any of which could harm our
business.
Our plans to integrate and expand upon research and development programs and technologies obtained through acquisitions or mergers may result in products or
technologies that are not adopted by the market. The market may adopt competitive solutions to our products or technologies. Consequently, we might not be
successful in integrating any acquired or merged businesses, assets, products or technologies, and might not achieve anticipated revenue and cost benefits.
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There are numerous risks associated with our acquisitions or mergers of businesses, technologies and patents.
We have made a number of acquisitions of businesses, technologies and patents in recent years, and expect to complete the planned merger with TiVo in the second
quarter of 2020. These acquisitions and the planned merger are subject to a number of risks, including but not limited to the following:
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these transactions could fail to produce anticipated benefits or could have other adverse effects that we currently do not foresee. As a result, these
transactions could result in a reduction of net income per share as compared to the net income per share we would have achieved if these transactions
had not occurred. We may also be required to recognize impairment charges of acquired assets or goodwill, and if we decide to restructure acquired or
merged businesses, we may incur other restructuring charges;
the purchase price for each transaction is determined based on significant judgment on factors such as projected cash flow, quality and availability of
the business, technology or patent. In addition, if other companies have similar interests in the same business, technology or patent, our ability to
negotiate these transactions at favorable terms may be limited and the transaction price may be artificially inflated;
following completion of these transactions, we may uncover additional liabilities, patent validity, infringement or enforcement issues or unforeseen
expenses not discovered during our diligence process;
any such additional liabilities, patent validity, infringement or enforcement issues or expenses could result in significant unanticipated costs not
originally estimated, such as impairment charges of acquired assets and goodwill, and may harm our financial results;
the integration of technologies, patent assets and personnel, if any, will be a time consuming and expensive process that may disrupt our operations if it
is not completed in a timely and efficient manner. If our integration efforts are not successful, our results of operations could be harmed, employee
morale could decline, key employees could leave, and customer relations could be damaged. In addition, we may not achieve anticipated synergies or
other benefits from any of these transactions;
we have incurred substantial direct transaction and integration costs as a result of past transactions, and we expect to incur substantial costs as a result of
the planned merger with TiVo. In future acquisitions, the total direct transaction costs and the costs of integration may exceed our expectations;
sales by the acquired and merged businesses may be subject to different accounting treatment than our existing businesses, especially related to the
recognition of revenue. This may lead to the loss or deferral of revenue under current and emerging accounting standards, or confusion by investors and
analysts based on the differences in revenue recognition in different parts of our business;
there may be a significant time lag between acquiring patent assets and recognizing royalties from those patent assets. During that time lag, material
costs are likely to be incurred in preparing licensing or litigation efforts and amortization of acquired patent assets that would have a negative effect on
our results of operations, cash flows and financial position;
we may require external financing that is dilutive or presents risks of debt; and
we are required to estimate and record fair values of contingent assets, liabilities, deferred tax assets and liabilities at the time of a transaction. Even
though these estimates are based on management’s best judgment, the actual results may differ. Under the current accounting guidance, differences
between actual results and management’s estimates could cause our operating results to fluctuate or could adversely affect our results of operations.
If our amortizable intangible assets (such as acquired patents) become impaired, we may be required to record a significant charge to earnings.
In addition to internal development, we intend to broaden our intellectual property portfolio through strategic relationships and transactions such as the acquisitions
of DTS, Inc. in the fourth quarter of 2016 and the planned merger with TiVo that we expect to close in the second quarter of 2020. We believe these strategic
relationships and transactions will enhance the competitiveness and size of our current businesses and provide diversification into markets and technologies that
complement our current businesses. Future transactions could be in the form of asset purchases, equity investments, or business combinations. As a result, we may
have intangible assets which are amortized over their estimated useful lives. We review our amortizable intangible assets (such as our patent portfolio) for
impairment when events or changes in circumstances indicate the carrying value may not be recoverable or the useful life is shorter than originally estimated.
Factors that may be considered a change in circumstances indicating that the carrying value of our amortizable or other intangible assets may not be recoverable
include a decline in future cash flows, fluctuations in market capitalization, slower growth rates in our industry or
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slower than anticipated adoption of our products by our customers. As we continue to review for factors that may affect our business which may not be in our
control, we may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our amortizable
intangible assets or equity investments is determined, resulting in an adverse impact on our business, financial position, or results of operations.
Current and future governmental and industry standards may significantly limit our business opportunities.
Technology standards are important in the audio and video industry as they help to assure compatibility across a system or series of products. Generally, standards
adoption occurs on either a mandatory basis, requiring a particular technology to be available in a particular product or medium, or an optional basis, meaning that
a particular technology may be, but is not required to be, utilized. If standards are re-examined or a new standard is developed in which we are not included, our
growth in that area of our business could be significantly lower than expected.
As new technologies and entertainment media emerge, new standards relating to these technologies or media may develop. New standards may also emerge in
existing markets that are currently characterized by competing formats, such as the market for PCs. We may not be successful in our efforts to include our
technology in any such standards.
Changes in or failure to comply with FCC requirements could adversely impact our HD Radio revenue and royalties.
In October 2002, the Federal Communications Commission, or the FCC, selected our “In-Band, On-Channel” (“IBOC”) technology, also known as “HD Radio
technology,” as the exclusive technology for introduction of terrestrial digital operations by AM and FM radio stations. In the United States, the FCC regulates the
broadcast radio industry, interprets laws enacted by Congress and establishes and enforces regulations governing radio broadcasting. It is unclear what rules and
regulations the FCC may adopt regarding digital audio broadcasting and what effect, if any, such rules and regulations will have on our Product Licensing segment,
the operations of stations using our HD Radio technology or consumer electronics manufacturers. Any additional rules and regulations imposed on digital audio
broadcasting could adversely impact the attractiveness of HD Radio technology and negatively impact our business. Also, non-compliance by us, or by radio
stations offering HD Radio broadcasts, with any FCC requirements or conditions could result in fines, additional license conditions, license revocation or other
detrimental FCC actions.
Our licensing of industry standard technologies can be subject to limitations that could adversely affect our business and prospects.
When a standards-setting body adopts our technologies as explicit industry standards, we generally must agree to license such technologies on a fair, reasonable
and non-discriminatory basis, which we believe means that we treat similarly situated customers similarly. In these situations, we may be required to limit the
royalty rates we charge for these technologies, which could adversely affect our business. Furthermore, we may have limited control over whom we license such
technologies to and may be unable to restrict many terms of the license. From time to time, we may be subject to claims that our licenses of our industry standard
technologies may not conform to the requirements of the standards-setting body. Claimants in such cases could seek to restrict or change our licensing practices or
our ability to license our technologies in ways that could harm our reputation and otherwise materially and adversely affect our business, operating results and
prospects.
Our financial and operating results may vary, which may cause the price of our common stock to decline.
Our quarterly operating results have fluctuated in the past and are likely to do so in the future. Because our operating results are difficult to predict, one should not
rely on quarterly or annual comparisons of our results of operations as an indication of our future performance. Factors that could cause our operating results to
fluctuate during any period or that could adversely affect our ability to achieve our strategic objectives include those listed in this “Risk Factors” section of this
report and the following:
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the timing of, and compliance with license or service agreements and the terms and conditions for payment to us of license or service fees under these
agreements;
fluctuations in our royalties caused by the pricing terms of certain of our license agreements;
the amount of our product and service revenue;
changes in the level of our operating expenses;
the substantial research and development expenses that we have made and will continue to make on new products, as well as the uncertainty that such
products will generate material revenue for the Company;
delays in our introduction of new technologies or market acceptance of these new technologies through new license agreements;
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our ability to protect or enforce our intellectual property rights or the terms of our agreements;
legal proceedings affecting our patents, patent applications or license agreements;
the timing of the introduction by others of competing technologies;
changes in demand for semiconductor chips in the specific end markets in which we concentrate;
changes in demand for camera-enabled devices including cell phones, security systems and personal computers;
the timing of the conclusion of license agreements;
the length of time it takes to establish new licensing arrangements;
meeting the requirements for revenue recognition under generally accepted accounting principles;
changes in generally accepted accounting principles including new accounting standards which may materially affect our revenue recognition and the
comparability between revenue recognition and cash flow from customer royalties; and
cyclical fluctuations in semiconductor and consumer electronics markets generally.
Due to fluctuations in our operating results, reports from market and security analysts, litigation-related developments, and other factors, the price at which our
common stock will trade is likely to continue to be highly volatile. In future periods, if our revenue, royalties, billings, cash flows or operating results are below the
estimates or expectations of public market analysts and investors, our stock price could decline.
We may not continue to pay dividends at the same rate we are currently paying them, or at all, and any decrease in or suspension of the dividend could
cause our stock price to decline.
We currently pay a quarterly dividend of $0.20 per share. We also have returned capital to shareholders through stock repurchases. We anticipate that all quarterly
dividends and stock repurchases will be paid out of cash, cash equivalents and short-term investments. The payment of future cash dividends is subject to the final
determination each quarter by our Board of Directors that the dividend remains in our best interests, which determination will be based on a number of factors,
including our earnings, financial condition, actual and forecasted cash flows, capital resources and capital requirements, alternative uses of capital including
business combinations, economic condition and other factors considered relevant by management and the Board of Directors. Any decrease in the amount of the
dividend, or suspension or discontinuance of payment of a dividend, could cause our stock price to decline.
Our stock repurchase program could increase the volatility of the price of our common stock, and the program may be suspended or terminated at any
time, which may cause the trading price of our common stock to decline.
In August 2007, we authorized a plan to repurchase our outstanding shares of common stock dependent on market conditions, share price and other factors. As of
December 31, 2019, the total amount available for repurchase under the plan was $101.4 million.
The amount of repurchases under our stock repurchase program will vary. In 2016, we repurchased approximately 2,300,000 shares for an aggregate amount of
$67.7 million. In 2017, we repurchased approximately 654,000 shares for an aggregate amount of $15.3 million. In 2018, we repurchased approximately 2,137,000
shares for an aggregate amount of $41.4 million. We did not repurchase any shares in 2019. Additionally, the timing of repurchases is at our discretion and the
program may be suspended or discontinued at any time. Any suspension or discontinuation could cause the market price of our stock to decline. The timing of
repurchases pursuant to our stock repurchase program could affect our stock price and increase its volatility. There can be no assurance that any stock repurchases
will enhance stockholder value because the market price of our common stock may decline below the levels at which we effected repurchases. Furthermore, we
may engage in mergers, acquisitions, or other activity that could result in us reducing or discontinuing share repurchases for a period of time. For example, the DTS
acquisition resulted in a significant decrease in cash, cash equivalents and short-term investments, as well as the issuance of approximately $600 million in debt.
The terms of our current or future debt agreements could limit our ability to repurchase shares.
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Provisions of our certificate of incorporation and bylaws or Delaware law might delay or prevent a change of control transaction and depress the market
price of our stock.
Various provisions of our certificate of incorporation and bylaws might have the effect of making it more difficult for a third party to acquire, or discouraging a
third party from attempting to acquire, control of our company. These provisions could limit the price that certain investors might be willing to pay in the future for
shares of our common stock. Certain of these provisions eliminate cumulative voting in the election of directors, authorize the board to issue “blank check”
preferred stock, prohibit stockholder action by written consent, eliminate the right of stockholders to call special meetings, and establish advance notice procedures
for director nominations by stockholders and the submission of other proposals for consideration at stockholder meetings. We are also subject to provisions of
Delaware law that could delay or make more difficult a merger, tender offer or proxy contest involving our company. In particular, Section 203 of the Delaware
General Corporation Law prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years
unless specific conditions are met. Any of these provisions could have the effect of delaying, deferring or preventing a change in control, including without
limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our principal corporate headquarters, which house administrative, sales, marketing and research and development facilities, are located in San Jose, California, and
are held under an operating lease. We own an office building in Calabasas, California that provides approximately 89,000 square feet to house additional
administrative, sales, marketing, research and development personnel. We lease smaller facilities in other locations including the United States, Republic of Ireland,
Romania, Hong Kong, China, the United Kingdom, Japan, South Korea, Taiwan, Singapore and Mexico. We believe that our existing space is adequate for our
current operations. We believe that suitable replacement and additional space, to the extent needed, will be available in the future on commercially reasonable
terms.
Item 3. Legal Proceedings
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.
Tessera, Inc. v. Toshiba Corporation, Civil Action No. 5:15-cv-02543-BLF (N.D. Cal.)
On May 12, 2015, Tessera, Inc. filed a complaint against Toshiba Corporation (“Toshiba”) in California Superior Court. Tessera, Inc.’s complaint alleges causes of
action for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief, generally alleging that Toshiba underpaid
royalties and failed to cooperate with audits conducted pursuant to the parties’ license agreement.
On June 8, 2015, Toshiba removed the action to the U.S. District Court for the Northern District of California. On June 18, 2015, Toshiba filed its answer,
affirmative defenses, and counterclaims to Tessera, Inc.’s complaint. Toshiba alleges counterclaims for declaratory judgment and breach of the implied warranty of
good faith and fair dealing. The counterclaims seek, among other things, judicial determinations about the interpretation of the parties’ agreement, termination of
the agreement, an accounting of the amount of alleged overpayments by Toshiba, restitution, and damages. On July 10, 2015, Tessera, Inc. filed its answer and
affirmative defenses to Toshiba’s counterclaims. On March 17, 2016, Tessera, Inc. filed an amended complaint adding a claim for declaratory relief regarding a
February 12, 2016 letter sent by Toshiba to Tessera, Inc. purporting to terminate the parties’ license agreement. On March 18, 2016, Toshiba filed its amended
answer, affirmative defenses, and counterclaims. On April 4, 2016, Tessera, Inc. filed an answer to Toshiba’s amended counterclaims.
An initial summary judgment hearing on contract issues took place on September 22, 2016. On November 7, 2016, the Court entered an order granting Toshiba’s
motion regarding the definition of “TCC,” and denying summary judgment on the other issues raised by the parties’ cross-motions. On December 6, 2016, Tessera,
Inc. filed a motion pursuant to Federal Rule of Civil Procedure 54(b) seeking authorization to appeal the order and for a stay. On March 6, 2017, the Court granted
the Rule 54(b) motion. The Court subsequently vacated the trial date and stayed the remainder of the district court proceedings.
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On April 4, 2017, Tessera, Inc. filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit. On November 21, 2018, the Ninth Circuit dismissed the
appeal for lack of appellate jurisdiction and remanded the case to the district court for further proceedings.
On remand, the parties filed second round motions for summary judgment, and Toshiba filed a motion to strike two of Tessera’s expert reports. On October 8,
2019, the Court granted Tessera’s motion for summary judgment on Toshiba’s counterclaim for a royalty refund. That counterclaim is now dismissed from the
case. The Court also denied Toshiba’s motion for summary judgment on all of Tessera’s claims, and denied Toshiba’s motion to strike Tessera’s expert reports
except to the extent that the reports contain legal opinions and expert testimony as to intent, motive, and state of mind. Trial is scheduled for October 19, 2020.
Invensas Corp., et al. v. NVIDIA Corp., Case No. 1:19-cv-00861-RGA (D. Del.)
On May 8, 2019, Invensas Corporation and Tessera Advanced Technologies, Inc. filed a complaint against NVIDIA Corporation (“NVIDIA”) in the U.S. District
Court for the District of Delaware. The complaint alleges that NVIDIA infringes U.S. Patent Nos. 6,232,231, 6,849,946, 7,064,005, 6,317,333, and 5,666,046 and
requests, 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 U.S. District Court for the Northern District of California. The Court denied
NVIDIA’s motion to transfer on September 17, 2019. A Markman hearing is scheduled for September 14, 2020, and a jury trial is scheduled to begin on
September 20, 2021.
Confidential ICC Arbitration
On January 9, 2020, FotoNation Ltd. and Tessera Technologies, Inc. filed a Request for Arbitration against a FotoNation customer in the International Court of
Arbitration of the International Chamber of Commerce. The Request generally alleges that the respondent breached an agreement to pay royalties under a
technology agreement, and seeks damages and declaratory relief.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Since February 23, 2017, our common stock has traded publicly on The Nasdaq Global Select Market under the symbol “XPER.” Prior to February 23, 2017, our
common stock traded publicly on The Nasdaq Global Select Market under the symbol “TSRA”. As of February 7, 2020, there were 49,861,846 outstanding shares
of common stock held by 36 stockholders of record. In addition, a substantially greater number of stockholders may be "street name" or beneficial holders, whose
shares are held of record by banks, brokers and other financial institutions.
We also have historically returned capital to shareholders through stock repurchases. We anticipate that all quarterly dividends and stock repurchases will be paid
out of cash, cash equivalents and short-term investments.
We made no stock repurchases during the fourth quarter of 2019. At December 31, 2019, the total amount available for repurchase under our stock repurchase
program was $101.4 million.
STOCK REPURCHASES
34
The following graph shows a comparison of total stockholder return for holders of our common stock, the Nasdaq Composite Index and the Russell 2000 Index
from December 31, 2014 through December 31, 2019. The graph and table assume that $100 was invested on December 31, 2014 in each of our common stock, the
Nasdaq Composite Index and the Russell 2000 Index, and that all dividends were reinvested. This graphic comparison is presented pursuant to the rules of the SEC.
PERFORMANCE GRAPH
Xperi Corporation
Nasdaq Composite
Russell 2000 Index
12/14
12/15
12/16
12/17
12/18
12/19
$
$
$
100.00 $
100.00 $
100.00 $
85.82 $
106.96 $
95.59 $
129.58 $
116.45 $
115.95 $
73.66 $
150.96 $
132.94 $
58.11 $
146.67 $
118.30 $
60.75
200.49
148.49
This section is not “soliciting material,” is not deemed “filed” with the SEC and is not incorporated by reference in any filing of the Company under the Securities
Act of 1933 or the Securities Exchange Act of 1934 (“Exchange Act”), whether made before or after the date hereof and irrespective of any general incorporation
language in any such filing.
35
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this Annual Report.
Consolidated statements of operations data
Revenue
Total operating expenses
Operating income (loss)
Net income (loss)
Net income (loss) attributable to Xperi (3)
Income (loss) per share attributable to Xperi:
Basic (4)
Diluted (4)
Cash dividends declared per share
Weighted average number of shares used in per share calculation-basic
(4)
Weighted average number of shares used in per share calculation-diluted
(4)
2019
2018 (2)
Years Ended December 31,
2017
(in thousands, except per share data)
2016 (1)
$
$
$
$
$
$
$
$
$
280,067
348,775
$
(68,708) $
(64,033) $
(62,530) $
$
406,133
$
382,153
23,980
$
(1,763) $
(289) $
$
373,732
405,232
$
(31,500) $
(56,558) $
(56,558) $
(1.27) $
(1.27) $
$
0.80
(0.01) $
(0.01) $
$
0.80
(1.15) $
(1.15) $
$
0.80
259,565
170,177
89,388
56,089
56,089
1.14
1.12
0.80
$
$
$
$
$
$
$
$
2015
273,300
111,098
162,202
117,016
117,016
2.26
2.23
0.80
49,120
48,823
49,251
49,187
51,802
49,120
48,823
49,251
50,190
52,586
2019
2018
Years Ended December 31,
2017
(in thousands)
2016
2015
Consolidated statements of cash flows data:
Net cash provided by operating activities (5)
$
169,253
$
135,133
$
147,265
$
153,860
$
147,276
Consolidated balance sheets data:
Cash, cash equivalents and short-term investments
Working capital
Total assets
Debt (6)
Total Xperi stockholders’ equity
2019
2018
December 31,
2017
(in thousands)
2016
2015
$
$
$
$
$
121,477
233,096
1,047,945
344,000
547,911
$
$
$
$
$
154,364
343,378
1,235,107
494,000
619,442
$
$
$
$
$
200,692
148,695
1,110,024
594,000
435,576
$
$
$
$
$
113,005
148,924
1,186,436
600,000
507,785
$
$
$
$
$
381,744
390,880
539,352
—
515,157
(1) 2016 includes one month of financial results from DTS as well as one-time acquisition related expenses. All periods subsequent to 2016 include financial results
from DTS post-acquisition.
(2) We adopted ASU No. 2014-09 (Topic 606) “Revenue from Contracts with Customers” effective January 1, 2018, which had a material impact on the financial
reporting of our operating results. We followed the modified retrospective transition method upon adoption, and under this method the comparative information for
prior fiscal years has not been restated and continues to be reported under the accounting standards in effect for those periods.
(3) Excludes net income (loss) attributable to noncontrolling interest. See Note 1 of the Notes to Consolidated Financial Statements for further detail.
(4) See Note 11 of the Notes to Consolidated Financial Statements for an explanation of the methods used to determine the number of shares used to compute per
share amounts.
(5) As a result of the adoption of ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), we retrospectively adjusted our Consolidated Statements of
Cash Flows to reclassify excess tax benefits of $8.2 million and $0.7 million from financing activities to operating activities in 2016 and 2015, respectively.
(6) Includes both the short-term and long-term portions of debt principal and excludes approximately $9.3 million, $11.8 million and $14.3 million in debt issuance
costs as of December 31, 2019, 2018 and 2017, respectively.
36
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion (presented in thousands, except for percentages) should be read in conjunction with our consolidated financial statements and notes
thereto.
This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and
year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February
20, 2019, which is available free of charge on the SEC’s website at www.sec.gov and our Investor Relations website at investor.xperi.com.
Business Overview
Xperi is a publicly-traded technology company with headquarters in Silicon Valley and operations around the world. Through its operating subsidiaries, Xperi
creates, develops and licenses innovative audio, imaging, semiconductor packaging and interconnect technologies. We have approximately 700 employees and
nearly 30 years of operating experience.
We license our innovative products, technologies and inventions to global electronics companies which, in turn, integrate the technologies into their own consumer
electronics and semiconductor products. Our technologies and inventions are widely adopted and used every day by millions of people. Our audio technologies
have shipped in billions of devices for the home, mobile and automotive markets. Our imaging technologies have been embedded in billions of smartphones and
other mobile devices. Our semiconductor packaging and interconnect technologies have been licensed to more than 100 customers and have shipped in over 100
billion semiconductor chips.
On December 18, 2019, we entered into a definitive agreement with TiVo to combine in an all-stock merger of equals transaction. The transaction will create a
leading consumer and entertainment technology licensing business and one of the industry’s largest intellectual property (IP) licensing platforms with a diverse
portfolio of entertainment and semiconductor intellectual property. The transaction is expected to close and become effective during the second quarter of 2020,
subject to regulatory approvals, the approval by the shareholders of each company, and other customary closing conditions. For further discussion on the planned
merger with TiVo, refer to “Item 1A. Risk Factors,” and “Note 9 – Acquisitions, Goodwill and Identifiable Intangible Assets” in the Notes to Consolidated
Financial Statements.
The planned merger with TiVo will result in material changes to the combined companies’ balance sheet, results of operations and cash flows. Xperi and TiVo
intend to refinance their existing indebtedness on a combined basis. We have obtained a bank commitment letter for an aggregate principal amount of $1,100
million in debt financing in order to pay transaction expenses in connection with the planned merger and to refinance the existing indebtedness of the Company and
TiVo. As a result, the combined company’s debt balance will increase substantially following the planned merger. Additionally, our combined revenue, operating
expenses, and cash from operations should all increase, resulting in the trends noted below in our “Results of Operations” to be altered going forward.
Results of Operations
Significant events occurred over the past three years that affect the comparability of our financial statements. Key events and their financial impacts include the
following:
•
•
On December 10, 2018, we entered into an agreement with Samsung Electronics, Co., Ltd. (“Samsung”) to settle and dismiss all pending litigation
matters. In conjunction with the settlement, Samsung entered into a new patent license agreement with us. The settlement had a material impact on our
financial results in 2018.
On December 18, 2017, we entered into agreements with Broadcom Ltd. and certain of its affiliates (“Broadcom”), customers, and suppliers to settle
and dismiss all pending litigation matters. In conjunction with the settlement, Broadcom entered into a new multi-year patent license agreement with
us. The settlement had a material impact on our financial results in 2017.
We adopted the new accounting standard, ASU No. 2014-09 (Topic 606) “Revenue from Contracts with Customers” effective January 1, 2018, which had a
material impact on the financial reporting of our operating results as described below. We followed the modified retrospective transition method upon adoption,
and under this method the comparative information for prior fiscal years has not been restated and continues to be reported under the accounting standards in effect
for those periods. Refer to “Note 4 – Revenue” in the Notes to Consolidated Financial Statements for detailed information.
37
The adoption of Topic 606 does not impact customer billings or the cash flow from our contracts with customers. We expect to experience greater variability in
quarterly and annual revenue as a result of Topic 606 being applied to minimum guarantee and fixed fee licensing contracts. We place greater emphasis on billings
and operating cash flows rather than revenue and net operating results to evaluate our financial performance in current and future periods.
Revenue
Our revenue is generated primarily from royalty and license fees. Revenue is recognized upon transfer of control of promised products, services or intellectual
property and technologies (“IP”) rights to customers in an amount that reflects the consideration that we expect to receive in exchange for those products, services
or licensing of the IP rights.
Certain licensees have entered into 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. For these agreements, we recognize the
full fixed fee amount 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 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 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. As payments are
received from the licensee, we recognize a portion of the financing component through interest income.
For certain licensees, royalty revenue is generated based on a licensee’s production or shipment of licensed products incorporating our IP, technologies or software.
Licensees with a per-unit arrangement pay a per-unit royalty for each product manufactured or sold, as set forth in its license agreement. Licensees generally report
manufacturing or sales information in the quarter subsequent to when such activity takes place. Under Topic 606, we estimate the royalties earned each quarter
based on our forecast of manufacturing and sales activity incurred by our licensees in that quarter. Any differences between actual royalties owed by a licensee and
our quarterly estimates are recognized in the following quarter, when the licensee’s royalty report is received. 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.
The timing of revenue recognition and the amount of revenue actually recognized for each type of revenue depends upon a variety of factors, including the specific
terms of each arrangement, our ability to determine and allocate the transaction price to each separate performance obligation, and the nature of our deliverables
and obligations. In addition, our royalty revenue will fluctuate based on a number of factors such as: (a) the rate of adoption and incorporation of our technology by
licensees; (b) the demand for products incorporating semiconductors that use our licensed technology; (c) the cyclicality of supply and demand for products using
our licensed technology; (d) volume incentive pricing terms in licensing agreements that may result in significant variability in quarterly revenue recognition from
customers, and (e) the impact of economic downturns.
From time to time we enter into license agreements that have fixed expiration dates. Upon expiration of such agreements, we need to renew or replace these
agreements in order to maintain our revenue base. We may not be able to continue licensing customers on terms favorable to us, under the existing terms or at all,
which would in turn harm our results of operations.
In the past, we have engaged in litigation, arbitration proceedings, and royalty audits to directly or indirectly enforce our intellectual property rights and the terms
of our license agreements, including proceedings to ensure proper and full payment of royalties by our current licensees and by third parties whose products
incorporate our intellectual property rights.
38
The following table presents our historical operating results for the periods indicated as a percentage of revenue:
2019
Years ended December 31,
2018
2017
Revenue:
Royalty and license fees
Total revenue
Operating expenses:
Cost of revenue
Research, development and other related costs
Selling, general and administrative
Amortization expense
Litigation expense
Total operating expenses
Operating income (loss) from continuing operations
Interest expense
Other income and expense, net
Income (loss) before taxes
Provision for (benefit from) income taxes
Net loss
100%
100
3
40
44
36
2
125
(25)
(8)
3
(30)
(7)
(23)%
The following table sets forth our revenue by year (in thousands, except for percentages):
Years Ended December 31,
2018
2019
2017
100%
100
1
28
39
30
10
108
(8)
(8)
—
(16)
(1)
(15)%
100%
100
3
26
32
27
6
94
6
(6)
2
2
2
(0)%
2019 vs. 2018
Royalty and license fees
$
280,067
$
406,133 $
373,732 $
Increase/(Decrease) % Change
(126,066)
(31)%
The $126.1 million or 31% decrease in revenue resulted primarily from revenue recorded in 2018 attributable to the Samsung settlement and license agreement
executed in December 2018, partially offset by a one-time payment in connection with a new license agreement signed in December of 2019.
The following table sets forth our billings by year (in thousands, except for percentages):
Total billings
$
413,921
$
447,347
$
422,476 $
Years Ended December 31,
2018
2019
2017
2019 vs. 2018
Increase/(Decrease) % Change
(33,426)
(7)%
The $33.4 million or 7% decrease in billings was primarily driven by the declines in Semiconductor and IP Licensing billings resulting from certain settlement and
license agreements expiring at the end of 2018 and declines in payments from existing settlement and license agreements, and secondarily by a decline of $11.6
million in billings in the mobile market principally due to an ongoing contract interpretation issue with a customer. The decline was partially offset by increased
billings in 2019 from the Samsung settlement and license agreement executed in December 2018 and a one-time payment from a new license agreement signed in
December 2019.
With changes in revenue recognition due to the adoption of Topic 606 in 2018, we anticipate our revenue for 2020 will continue to be significantly impacted by our
inability to record future billings as revenue in 2020 and later periods from minimum guarantee and fixed fee licensing contracts in place prior to adoption of Topic
606 on January 1, 2018 and from significant fixed fee contracts taken to revenue prior to 2020. This accounting change will not impact billings or the cash flow
from these contracts. Furthermore, we may experience greater variability in quarterly and annual revenue in future periods as a result of the revenue accounting
treatment applied to future minimum guarantee and fixed fee licensing contracts. Management places greater emphasis on billings and cash flows, rather than
revenue and net operating results, to internally evaluate our financial performance.
Cost of Revenue
Cost of revenue consists of royalties paid to third parties and direct compensation and related expenses to provide NRE services.
39
Cost of revenue for the year ended December 31, 2019 was $8.5 million, as compared to $13.3 million for the year ended December 31, 2018. The decrease was
primarily due to lower royalties accrued and paid to a third party in connection with a Product Licensing segment contract.
Research, Development and Other Related Costs
Research and development (“R&D”) is conducted primarily in-house and targets development of audio and image enhancement technologies, chip-scale, multi-
chip and wafer level packaging, circuitry, 3D-IC architectures, wafer and die bonding technologies and new machine learning based hardware and software
solutions, including semiconductor chip design and fabrication costs. Research, development and other related costs include expenses associated with applications
engineering necessary to port and integrate our technologies and products on third party silicon and into end devices. These costs consist primarily of compensation
and related costs for personnel, 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 and
equipment depreciation. All research, development and other related costs are expensed as incurred.
Research, development and other related costs for the year ended December 31, 2019 were $112.3 million, as compared to $106.4 million for the year ended
December 31, 2018, an increase of $5.9 million or 6%. The increase was primarily driven by an increase of $1.9 million in facility related expense, an increase of
$1.5 million in personnel related expenses associated with higher headcount in a new subsidiary focused on a new hardware and software platform that delivers
machine learning-based technology, an increase of $1.5 million in stock-based compensation resulting from higher stock unit grants provided to employees for
reaching specific product development milestones in the fourth quarter of 2019, and an increase of $1.0 million in software and licensing subscriptions.
We believe that a significant level of research and development expenses will be required for us to remain competitive in the future, and we expect total R&D
expense will continue to increase in 2020 as compared to 2019.
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 year ended December 31, 2019 were $122.9 million, as compared to $127.9 million for the year ended
December 31, 2018, a decrease of $5.0 million or 4%. The decrease was primarily due to a $6.8 million decrease in personnel and retention bonus expenses, a $0.9
million decrease in stock-based compensation, and a $1.1 million decrease in bank fees due to debt modification and repricing activities in the first quarter of 2018,
partially offset by $4.6 million in transaction costs related to the planned TiVo merger in 2019.
Amortization Expense
Amortization expense for the year ended December 31, 2019 was $99.9 million, as compared to $108.5 million for the year ended December 31, 2018, a decrease
of $8.6 million. The decrease was primarily attributable to certain intangible assets becoming fully amortized over the past twelve months.
We anticipate that amortization expenses will continue to be a significant expense since we acquired approximately $479 million in intangible assets from the
acquisition of DTS and other acquisition activity in 2016, which will be amortized over the next several years. See Note 9 – “Acquisitions, Goodwill and
Identifiable Intangible Assets” in Notes to Consolidated Financial Statements for additional information.
Litigation Expense
Litigation expense for the year ended December 31, 2019 was $5.1 million, as compared to $26.1 million for the year ended December 31, 2018, a decrease of
$21.0 million. The decrease was primarily related to our settlement with Samsung in the fourth quarter of 2018, partially offset by an increase in NVIDIA related
litigation expenditure during 2019.
40
We expect that litigation expense may continue to be a material portion of our operating expenses in future periods, and may fluctuate between periods, because of
planned or ongoing litigation, as described in Part I, Item 3 – 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. We currently expect litigation expense to increase in 2020 as compared to 2019 based on
expected case activity on matters currently outstanding and the initiation of an arbitration matter in the first quarter of 2020.
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 years ended December 31, 2019, 2018 and 2017 (in thousands):
Research, development and other related costs
Selling, general and administrative
Total stock-based compensation expense
2019
Years Ended December 31,
2018
2017
$
$
14,643
16,911
31,554
$
$
13,168 $
17,843
31,011 $
13,277
20,185
33,462
Stock-based compensation awards include employee stock options, restricted stock awards and units, and employee stock purchases. For the year ended
December 31, 2019, stock-based compensation expense was $31.6 million, of which $0.2 million related to employee stock options, $29.1 million related to
restricted stock awards and units and $2.3 million related to employee stock purchases. For the year ended December 31, 2018, stock-based compensation expense
was $31.0 million, of which $0.4 million related to employee stock options, $28.0 million related to restricted stock awards and units and $2.6 million related to
employee stock purchases. The increase in stock-based compensation expense in 2019 compared to 2018 was due primarily to a higher volume of restricted stock
unit grants.
Interest Expense
Interest expense for the year ended December 31, 2019 was $23.4 million, as compared to $25.7 million for the year ended December 31, 2018. The decrease in
interest expense in 2019 was primarily a result of a lower average debt balance as compared to 2018 as we continued making voluntary principal payments in 2019,
partially offset by higher LIBOR rates through mid-2019 impacting the variable rate included in our debt. Interest expense may increase in future periods if interest
rates increase during 2020 and in future years.
Other Income and Expense, Net
Other income and expense, net, for the year ended December 31, 2019 was $9.0 million, as compared to $8.6 million for the year ended December 31, 2018. Other
income was higher in the current year principally due to recognition of an unrealized loss of $2.2 million on our equity investment in Onkyo stock in 2018, partially
offset by $1.9 million lower interest income earned from financing components under Topic 606 in 2019 as compared to 2018.
Provision for (benefit from) Income Taxes
For the year ended December 31, 2019, we recorded an income tax benefit of $19.0 million on a pretax loss of $83.1 million, which resulted in an effective tax rate
of 22.9%. The income tax benefit for the year ended December 31, 2019 was primarily related to tax benefit from operating losses, tax credits, the release of
valuation allowance on certain deferred tax assets related to tax credits, and deduction for foreign-derived intangible income (“FDII”), offset by an increase in
valuation allowance against deferred tax assets primarily related to capitalized research expenses, foreign withholding taxes, non-deductible stock-based
compensation and certain non-deductible expenses.
For the year ended December 31, 2018, we recorded an income tax expense of $8.7 million on pretax income of $6.9 million, which resulted in an effective tax rate
of 125.5%. The income tax expense for the year ended December 31, 2018 was primarily related to foreign withholding taxes, certain non-deductible permanent
differences, valuation allowance recorded against our unutilized tax credits, and shortfalls from stock-based compensation offset by tax benefit from the utilization
of foreign tax credits and a deduction for foreign-derived income.
41
The change from income tax expense to income tax benefit for the year ended December 31, 2019 as compared to the prior year is largely attributable to operating
losses and the release of valuation allowance on certain U.S. federal deferred taxes recognized in the current year.
During the fourth quarter of 2019, we filed a refund claim for foreign taxes previously withheld by licensees in Korea, based on recent court rulings in Korea and
other business factors. These withheld foreign taxes were claimed as a foreign tax credit in the U.S. As a result of the refund claim, we recorded a non-current
income tax receivable of $65.2 million in other long-term assets, an unrecognized tax benefit of $48.2 million recorded in other long-term liabilities, and a
reduction in deferred tax assets of $17.0 million. At December 31, 2019, we recorded a foreign exchange loss of $0.7 million.
We released valuation allowance against certain U.S. federal deferred tax assets as a result of filing a foreign tax refund claim that is expected to reduce U.S. tax
credits (see discussion above). We also increased our valuation allowance against certain U.S. federal, U.S. state, and foreign deferred tax assets. 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 such as recent earnings (or loss) history, carryback of certain tax attributes and reversals of existing taxable temporary differences. Lesser
weight is given to subjective evidence such as tax-planning strategies and projected future income based on management’s assumptions. After considering both
positive and negative evidence, we released valuation allowance on U.S. federal tax credits since it was more likely than not that these tax attributes would be
utilized as a result of the foreign tax refund filing. Additionally, we increased our valuation allowance on deferred tax assets primarily related to U.S. federal
capitalized research expenses, U.S. state deferred tax assets, and certain foreign deferred tax assets based on our recent financial results and having insufficient
objectively verifiable future sources of income.
In the future, we may release valuation allowance and recognize certain deferred tax assets depending on achievement of future profitability in relevant
jurisdictions or implementation of tax planning strategies that enable us to utilize deferred tax assets that would otherwise be unused. Any release of valuation
allowance could have the effect of decreasing the income tax provision in the period the valuation allowance is released. 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 valuation allowance or the
reversal of such valuation allowance is subject to objective factors that cannot be readily predicted in advance. Adjustments could be required in the future if we
conclude that it is more likely than not that deferred tax assets are not recoverable. A provision for a valuation allowance could have the effect of increasing the
income tax provision in the period the valuation allowance is recorded.
Segment Operating Results
We operate in two reportable segments: (1) Product Licensing and (2) Semiconductor and 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.
The Chief Executive Officer is also the Chief Operating Decision Maker (“CODM”) as defined by the authoritative guidance on segment reporting.
The Product Licensing segment is comprised of our Audio and Imaging businesses, which we license through the DTS, HD Radio, and IMAX Enhanced brands.
These licenses typically include the delivery of software and/or hardware-based solutions to our customers or to their suppliers. Product Licensing revenue is
derived primarily from sales into the home, automotive and mobile markets.
The Semiconductor and IP Licensing segment includes our Tessera, Invensas and Invensas Bonding Technologies subsidiaries, which license semiconductor
packaging and interconnect technologies and associated intellectual property. Semiconductor and IP Licensing revenue is derived from technology and IP licenses
to semiconductor companies, foundries and packaging companies. We have a long history of developing and monetizing next-generation technologies, including
chip-scale and multi-chip packaging solutions as well as low-temperature wafer and die bonding solutions. Today, we are actively developing and licensing 3D
semiconductor packaging, interconnect and bonding solutions for semiconductors that are used in every day products such as smartphones, tablets, and laptops as
well as servers used in datacenters. We also provide engineering services to our customers to assist them in their evaluation and adoption of our technologies
including the transition into high volume production.
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
42
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 segment revenue, operating expenses and operating income for the years ended December 31, 2019, 2018 and 2017 (in
thousands):
Revenue:
Product licensing segment
Semiconductor and IP licensing segment
Total revenue
Operating expenses:
Product licensing segment
Semiconductor and IP licensing segment
Unallocated operating expenses (1)
Total operating expenses
Operating income (loss):
Product licensing segment
Semiconductor and IP licensing segment
Unallocated operating expenses (1)
Total operating income (loss)
2019
Years Ended December 31,
2018
2017
$
$
198,124 $
81,943
280,067
181,804
44,074
122,897
348,775
16,320
37,869
(122,897)
(68,708) $
$
219,708
186,425
406,133
180,727
73,519
127,907
382,153
38,981
112,906
(127,907)
23,980
$
167,923
205,809
373,732
172,745
87,838
144,649
405,232
(4,822)
117,971
(144,649)
(31,500)
(1) Unallocated operating expenses consist primarily of selling, 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 our business segments.
For the year ended December 31, 2019, the unallocated expenses were $122.9 million compared to $127.9 million for the year ended December 31, 2018. The
decrease of $5.0 million was primarily attributable to a $6.8 million decrease in personnel and retention bonus expenses, a $1.1 million decrease in stock-based
compensation, and a $1.1 million decrease in bank fees due to debt modification and repricing activities in the first quarter of 2018, partially offset by $4.6 million
transaction costs related to the planned TiVo merger in 2019.
The revenue and operating income amounts in this section have been presented on a basis consistent with GAAP applied at the segment level. Of our $385.8
million in goodwill at December 31, 2019, approximately $378.1 million is allocated to our Product Licensing segment and approximately $7.7 million is allocated
to our Semiconductor and IP Licensing segment.
Product Licensing Segment
Revenue:
Royalty and license fees
Total revenue
Operating expenses:
Cost of revenues
Research, development and other related costs
Litigation
Amortization
Total operating expenses (1)
Total operating income (loss)
2019
Years Ended December 31,
2018
(in thousands)
2017
$
$
198,124
198,124
$
8,460
83,613
1,656
88,075
181,804
16,320
$
219,708 $
219,708
13,291
78,892
—
88,544
180,727
38,981 $
167,923
167,923
6,308
75,809
288
90,340
172,745
(4,822)
(1) Excludes operating expenses which are not allocated on a segment basis.
Product Licensing revenue for the year ended December 31, 2019 was $198.1 million as compared to $219.7 million for the year ended December 31, 2018, a
decrease of $21.6 million. The decrease in revenue was primarily due to the timing and
43
duration of minimum guarantee contracts up for renewal and executed, decreased NRE services revenue, as well as a decrease in per-unit royalty revenue in 2019
as compared to 2018.
The following table sets forth our billings by year (in thousands, except for percentages):
Product licensing billings
$
210,285
$
221,043 $
215,822 $
Years Ended December 31,
2018
2019
2017
2019 vs. 2018
Increase/(Decrease) % Change
(10,758)
(5)%
The decrease in billings was primarily driven by a decline in billings in the mobile market, due principally to an ongoing contract interpretation issue with a
customer, and secondarily by decreased NRE billings from the automotive market.
Due to adoption of Topic 606, we continue to expect greater variability in quarterly and annual revenue in our Product Licensing segment in future periods as a
result of the revenue accounting treatment applied to minimum guarantee and fixed fee licensing contracts.
The increase of $1.1 million in total operating expenses in 2019 as compared to 2018 was primarily driven by an increase in R&D expense due to higher headcount
and stock-based compensation, partially offset by lower cost of revenue from royalties accrued and paid to a third party.
We expect R&D expense will continue to be significant in this segment as we develop new products and solutions.
Operating income for the years ended December 31, 2019 and 2018 was $16.3 million and $39.0 million, respectively, which represented a decrease of $22.7
million, for the reasons stated above.
Semiconductor and IP Licensing Segment
Revenue:
Royalty and license fees
Total revenue
Operating expenses:
Research, development and other related costs
Litigation
Amortization
Total operating expenses (1)
Total operating income
2019
Years Ended December 31,
2018
(in thousands)
2017
$
$
81,943
81,943
$
28,732
3,471
11,871
44,074
37,869
$
186,425 $
186,425
27,514
26,099
19,906
73,519
112,906 $
205,809
205,809
30,039
36,209
21,590
87,838
117,971
(1) Excludes operating expenses which are not allocated on a segment basis.
Semiconductor and IP Licensing segment revenue for the year ended December 31, 2019 was $81.9 million as compared to $186.4 million for the year ended
December 31, 2018, a decrease of $104.5 million. The decrease in revenue was due principally to revenue recorded in 2018 related to the Samsung settlement and
license agreement executed in December 2018, partially offset by a one-time payment from a new license agreement signed in December 2019.
The following table sets forth our billings by year (in thousands, except for percentages):
Semiconductor and IP licensing billings
$
203,636
$
226,304 $
206,654 $
Years Ended December 31,
2018
2017
2019
2019 vs. 2018
Increase/(Decrease)
(22,668)
Change
(10)%
The decrease in billings was due principally to certain settlement and license agreements expiring at the end of 2018 and declines in payments from existing
settlement and license agreements, partially offset by increased billings in 2019 from the Samsung settlement and license agreement executed in December 2018
and a one-time payment from a new license agreement signed in December 2019.
44
Due to adoption of Topic 606, we anticipate Semiconductor and IP Licensing revenue for 2020 will continue to be significantly impacted due principally to our
inability to record further billings as revenue in 2020 and later periods from minimum guarantee and fixed fee licensing contracts in place prior to the start of 2018.
Further, we expect greater variability in quarterly and annual revenue in our Semiconductor and IP Licensing segment in future periods as a result of the revenue
accounting treatment applied to minimum guarantee and fixed fee licensing contracts, which will necessitate recognizing revenue in the quarter a contract first
becomes effective.
The decrease of $29.4 million in total operating expenses in 2019 as compared to 2018 resulted primarily from lower litigation costs as a result of concluding the
legal proceedings against Samsung in December 2018, and secondarily from lower R&D costs driven principally by lower personnel and bonus expenses, and
lower amortization. The lower amortization was attributable to certain intangible assets becoming fully amortized over the past twelve months.
We expect that litigation expense will continue to be a material portion of the Semiconductor and IP Licensing segment’s operating expenses in future periods, and
may fluctuate significantly in some periods, because of our ongoing legal actions, as described in Part I, Item 3 - Legal Proceedings, and because we may become
involved in other litigation from time to time in the future in order to enforce and protect our intellectual property and contract rights.
Operating income for the years ended December 31, 2019 and 2018 was $37.9 million and $112.9 million, respectively, which represented a decrease of $75.0
million, for the reasons stated above.
Liquidity and Capital Resources
(in thousands, except for percentages)
Cash and cash equivalents
Short-term investments
Total cash, cash equivalents and short-term investments
Percentage of total assets
Net cash from operating activities
Net cash from investing activities
Net cash from financing activities
$
$
2019
74,551
46,926
121,477
$
$
12%
December 31,
2018
113,625
40,739
154,364
$
$
12%
2017
138,260
62,432
200,692
18%
2019
Years Ended December 31,
2018
2017
$
$
$
169,253 $
(19,143) $
(189,184) $
135,133 $
11,432 $
(171,200) $
147,265
(18,844)
(55,787)
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 $121.5 million at December 31, 2019, a decrease of $32.9 million from $154.4 million at December 31, 2018. The decrease resulted primarily from $150.0
million in voluntary pay-down of debt principal, $39.5 million in dividends paid, and $8.8 million of capital expenditures, partially offset by $169.3 million in cash
from operations.
Cash flows provided by operations were $169.3 million for the year ended December 31, 2019, primarily due to our net loss of $64.0 million being adjusted for
non-cash items of depreciation of $6.7 million, amortization of intangible assets of $99.9 million, stock-based compensation expense of $31.6 million and $131.0
million in changes in operating assets and liabilities. These increases were partially offset by a reduction of $38.6 million in deferred income taxes.
Cash flows provided by operations were $135.1 million for the year ended December 31, 2018, primarily due to the net loss of $1.8 million being adjusted for the
non-cash items of depreciation of $6.7 million, amortization of intangible assets of $108.5 million, stock-based compensation expense of $31.0 million, and $2.7
million in amortization of total debt issuance costs. These increases were partially offset by a reduction of $15.6 million in deferred income taxes.
Net cash used in investing activities was $19.1 million for the year ended December 31, 2019, primarily related to the purchases of short-term available-for-sales
securities of $40.0 million, $8.8 million in capital expenditures and patent acquisition of $4.5 million, partially offset by maturities and sales of securities of $34.1
million.
Net cash provided by investing activities was $11.4 million for the year ended December 31, 2018, primarily related to maturities and sales of securities of $39.5
million, partially offset by purchases of securities of $20.1 million, purchases of intangible assets of $4.1 million and capital expenditures of $3.3 million.
45
Net cash used in financing activities was $189.2 million for the year ended December 31, 2019 principally due to $150.0 million in partial pay-down of debt
principal, $39.5 million in dividends paid and $4.5 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.
Net cash used in financing activities was $171.2 million for the year ended December 31, 2018 principally due to $100.0 million in voluntary pay-down of debt
principal, $39.2 million in dividends paid and $44.8 million in repurchases of common stock, partially offset by $13.2 million in proceeds from the exercise of
stock options and employee stock purchases 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 and are reported at fair
value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income. The fair values for our securities are determined based on
quoted market prices as of the valuation date and observable prices for similar assets. In the third quarter of 2018, we initiated an equity position in Onkyo
Corporation, a publicly traded company listed on the JASDAQ market of the Tokyo Stock Exchange. Under Topic 321, we measure equity securities with readily
determinable market value at fair value and recognize any changes in fair value in net income (loss). We recorded an unrealized loss of approximately $0.9 million
on this investment in 2019, and we have recorded cumulative unrealized losses of $2.3 million since we made this investment. On July 5, 2019, we sold
approximately 2.8 million shares of Onkyo stock (out of a total holding of 7.0 million shares), and we intend to sell the remaining shares over time depending on
market conditions.
We evaluate our debt securities periodically for possible other-than-temporary impairment and review factors such as the length of time and extent to which fair
value has been below cost basis, the financial condition of the issuer, and our ability and intent to hold the security until maturity on a more likely than not basis. If
declines in the fair value of those investments are determined to be other-than-temporary, we report the credit loss portion of such decline in other income and
expense, on a net basis, and the remaining noncredit loss portion in accumulated other comprehensive income. For the years ended December 31, 2019, 2018 and
2017, no impairment charges were recorded with respect to our investments in debt securities.
On December 1, 2016, we entered into a Credit Agreement which provided for a $600.0 million seven-year Term Loan B facility. The Term B Loan facility
matures on November 30, 2023. Upon the closing of the Credit Agreement, we borrowed $600.0 million under the Term B Loan facility. These proceeds were used
on December 1, 2016, together with cash and cash equivalents, to finance the acquisition of DTS. The obligations under the Credit Agreement are guaranteed by
substantially all of our assets pursuant to the Security Agreement, dated December 1, 2016, among us, Royal Bank of Canada, as collateral agent, and the other
pledgors party thereto. On January 23, 2018, we completed a repricing of our debt, reducing the borrowing rate by 75 basis points, and paid down $100.0 million in
principal balance. During 2019, we made three voluntary principal payments totaling $150.0 million.
At December 31, 2019, $344.0 million was outstanding under this loan facility with an interest rate, including amortization of debt issuance costs, of 5.4%. Interest
is payable monthly. As the cumulative $250.0 million prepayments of debt principal we made during 2018 and 2019 exceeded the minimum principal payment
requirements, we expect to have no further principal payment requirements until maturity of the loan, subject to our expected achievement of a net leverage ratio,
as defined in the loan agreement, below 2.0 at the end of each fiscal year end. Because the interest rate on the loan facility is variable, we are subject to variations in
our cash flows based on changes in market interest rates.
In connection with the planned merger with TiVo, Xperi and TiVo intend to refinance each company’s debt on a combined basis upon closing of the transaction,
which is currently expected in the second quarter of 2020. To meet this objective, we have secured $1.1 billion of committed financing pursuant to a debt
commitment letter (the “Commitment Letter”) dated December 18, 2019, from Bank of America and Royal Bank of Canada. On January 3, 2020, Barclays Bank
PLC (“Barclays”) was added as an additional initial lender and an additional joint lead arranger and joint bookrunner and was reallocated a portion of the debt
commitments of Bank of America and Royal Bank of Canada under the Commitment Letter.
46
In August 2007, our Board of Directors (the “Board”) authorized a plan to repurchase our outstanding shares of common stock dependent on market conditions,
share price and other factors. In January 2016, the Board authorized an additional $200 million in future repurchases under the plan, and as of December 31, 2019,
the total amount available for repurchase under the plan was $101.4 million. No expiration has been specified for this plan. Since the inception of the plan, and
through December 31, 2019, we have repurchased approximately 13.3 million shares of common stock at a total cost of $348.6 million at an average price of
$26.25.
In 2019, 2018 and 2017, we paid quarterly dividends of $0.20 per share in each of March, June, September and December.
We believe that based on current levels of operations and anticipated growth, our cash from operations, together with cash, cash equivalents and short-term
investments currently available, will be sufficient to fund our operations, debt service, dividends and 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
Debt (1)
Operating lease obligations (2)
Total
Less than
1 Year
Payments Due by Period
1-3
Years
(In thousands)
4-5
Years
Thereafter
$
$
344,000 $
22,035 $
— $
6,387 $
— $
7,817 $
344,000 $
5,854 $
—
1,977
(1) Under our debt agreement, our debt bears a variable interest rate. See “Note 10 – Debt” for additional detail.
(2) Refer to “Note 8 – Leases” for additional detail
The amounts reflected in the table above for operating lease obligations represent aggregate future minimum lease payments under non-cancelable facility and
equipment operating leases. For our facilities leases, rent expense charged to operations differs from rent paid because of scheduled rent increases. Rent expense is
calculated by amortizing total rental payments on a straight-line basis over the lease term.
As of December 31, 2019, we have accrued $76.8 million of unrecognized tax benefits in long term income taxes payable related to uncertain tax positions, which
includes $1.2 million of accrued interest. 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 Korean withholding tax refund of $64.6 million, net of foreign exchange, then
$48.2 million of unrecognized tax benefit would be payable to the U.S. tax authorities. These amounts, which are included in our financial statements, have not
been included in the table above.
Under certain contractual agreements, we may be obligated to pay up to approximately $10.7 million over an estimated period of approximately five years if certain
milestones are achieved.
See “Note 15 – Commitments and Contingencies” of the Notes to Consolidated Financial Statements for additional detail.
Off-Balance Sheet Arrangements
As of December 31, 2019, 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
Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These financial
statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States which requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. By their nature,
these estimates and judgments are subject to an inherent degree of uncertainty. We evaluate our estimates based on our historical experience and various other
assumptions that are believed to be reasonable under the circumstances. These estimates relate to revenue recognition, the assessment of recoverability of goodwill
and intangible assets, the valuation and recognition of stock-based compensation expense, the valuation of investments, business combinations, recognition and
measurement of deferred
47
income tax assets and liabilities, the assessment of unrecognized tax benefits, and others. Actual results could differ from those estimates, and material effects on
our operating results and financial position may result.
We believe the following accounting policies and estimates are most critical to the understanding of our consolidated financial statements. See “Note 2 - Summary
of Significant Accounting Policies” and “Note 4 - Revenue” of the Notes to Consolidated Financial Statements for a full description of our accounting policies.
Revenue recognition
Our revenue is generated primarily from royalty and license fees. Revenue is recognized upon transfer of control of promised products, services or intellectual
property and technologies (“IP”) rights to customers in an amount that reflects the consideration that we expect to receive in exchange for those products, services
or licensing of the IP rights.
Certain licensees have entered into 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. For both fixed fee and minimum
guarantee agreements, 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 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 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. As payments are
received from the licensee, we recognize a portion of the financing component through interest income.
For certain licensees, royalty revenue is generated based on a licensee’s production or shipment of licensed products incorporating our IP, technologies or software.
Licensees with a per-unit arrangement pay a per-unit royalty for each product manufactured or sold, as set forth in its license agreement. Licensees generally report
manufacturing or sales information in the quarter subsequent to when such activity takes place. Under Topic 606, we estimate the royalties earned each quarter
based on our forecast of manufacturing and sales activity incurred by our licensees in that quarter. Any differences between actual royalties owed by a licensee and
our quarterly estimates are recognized in the following quarter, when the licensee’s royalty report is received. Estimating licensees’ quarterly royalties prior to
receiving the royalty reports requires us to make significant assumptions and judgments that could have a material impact on the amount of revenue we report on a
quarterly basis.
Valuation of goodwill and intangible assets
We make judgments about the recoverability of intangible assets whenever events or changes in circumstances indicate that impairment may exist. If such facts and
circumstances exist, we assess recoverability by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their
remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If
the useful life is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life.
Such changes could result in impairment charges or higher amortization expense in future periods, which could have a significant impact on our operating results
and financial condition.
We perform an annual review of the valuation of goodwill in the fourth quarter, or more often if indicators of impairment exist. Triggering events for impairment
reviews may be indicators such as adverse industry or economic trends, restructuring actions, lower projections of profitability, or a sustained decline in our market
capitalization. Evaluations of possible impairment and, if applicable, adjustments to carrying values require us to estimate, among other factors, future cash flows,
useful lives, and fair market values of our reporting units and assets. When we conduct our evaluation of goodwill, the fair value of goodwill is assessed using
valuation techniques that require significant management estimates and judgment. Should conditions be different from management’s last assessment, significant
impairments of goodwill may be required, which would adversely affect our operating results.
48
Stock-based compensation expense
Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the expected life of the options, stock price volatility,
dividends and the pre-vesting option forfeiture rate. We estimate the expected life of options granted based on historical exercise patterns, which we believe are
representative of future behavior. We estimate the volatility of our common stock on the date of grant based on our stock’s market-based historical volatility. The
assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the
application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially
different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We
estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised and canceled. If our actual forfeiture rate is
materially different from our estimate, stock-based compensation expense could be significantly different from what we have recorded in the current period. See
“Note 13 - Stock-Based Compensation Expense” of the Notes to Consolidated Financial Statements for additional detail.
Accounting for income taxes
We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments are used in the
calculation of tax credits, tax benefits and deductions, and in the calculation of tax assets and liabilities. Significant changes to these estimates may result in an
increase or decrease to our tax provision in a subsequent period.
We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely on a more-likely-than-not basis, we must increase our
provision for income taxes by recording a valuation allowance against our deferred tax assets. Should there be a change in our ability to recover our deferred tax
assets, our provision for income taxes would fluctuate in the period of the change.
We account for uncertain tax positions in accordance with authoritative guidance related to income taxes. The calculation of our unrecognized tax benefits
involves dealing with uncertainties in the application of complex tax regulations. As such, we are required to make many subjective assumptions and judgments
regarding our income tax exposures. We record unrecognized tax benefits for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our
estimate of whether, and the extent to which, additional tax liabilities are more-likely-than-not assuming the tax authorities have full knowledge of all relevant
information. If we ultimately determine that the tax liabilities are unnecessary, we reverse the liabilities and recognize a tax benefit during the period in which it
occurs. This may occur for a variety of reasons, such as the expiration of the statute of limitations on a particular tax return or the completion of an examination by
the relevant tax authority. We record an additional charge in our provision for taxes in the period in which we determine that the recorded unrecognized tax benefits
are less than the expected ultimate settlement.
Our policy is to classify accrued interest and penalties related to the accrued liability for unrecognized tax benefits in the provision for income taxes. For the years
ended December 31, 2019, 2018 and 2017, we did not recognize any significant penalties or interest related to unrecognized tax benefits. See “Note 14 - Income
Taxes” of the Notes to Consolidated Financial Statements for additional detail.
Recent Accounting Pronouncements
See “Note 3 – Recent Accounting Pronouncements” of the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements
including the respective expected dates of adoption.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The primary objectives of our investment activities are to preserve principal and maintain liquidity while at the same time capturing a market rate of return. To
achieve these objectives, we maintain our portfolio of cash, cash equivalents and investments in a variety of securities, which are subject to risks including:
Interest Rate Risk
Our interest rate risk relates primarily to interest expense on our debt and interest income from investments. As of December 31, 2019, a one percentage point
change in interest rates on our debt throughout a one-year period would have an annual effect of approximately $3.4 million on our income before income taxes.
Our interest income is sensitive to changes in the general level of US interest rates, particularly since a significant portion of our investments were, and may in the
future be, in short-term marketable securities, U.S. government securities and corporate bonds. As of December 31, 2019, a one percentage point change in interest
rates for our cash and investments throughout a one-year period would have an annual effect of approximately $1.0 million on our income before income taxes.
49
Investment Risk
We are exposed to market risk as it relates to changes in the market value of our investments in addition to the liquidity and credit worthiness of the underlying
issuers of our investments. In the third quarter of 2018, we purchased equity of Onkyo Corporation, a publicly traded company listed on the JASDAQ market of the
Tokyo Stock Exchange, which further subjects us to significant risks associated with individual securities. Our investments are subject to fluctuations in fair value
due to the volatility of the credit markets and prevailing interest rates for such securities. Our marketable debt securities, consisting primarily of municipal bonds
and notes, corporate bonds and notes, commercial paper, treasury and agency notes and bills and certificates of deposit, are classified as available-for-sale securities
with fair values of $45.8 million and $37.3 million as of December 31, 2019 and 2018, respectively. Unrealized losses, net of tax, on these investments were
approximately $0.1 million and $0.3 million as of December 31, 2019 and 2018, respectively. In addition, unrealized loss on the Onkyo equity investment, which
was recognized in other income and expense, net, on our Consolidated Statement of Operations, amounted to $2.3 million through December 31, 2019. We did not
hold any derivatives, derivative commodity instruments or other similar financial instruments in our portfolio as of December 31, 2019.
Bank Liquidity Risk
As of December 31, 2019, we have approximately $72.0 million of cash in operating accounts that are held with both domestic and international financial
institutions, the majority held with domestic financial institutions. These cash balances could be lost or become inaccessible if the underlying financial institutions
fail or if they are unable to meet the liquidity requirements of their depositors and they are not supported by the federal government. We have not incurred any
losses and have had full access to our operating accounts to date. We believe any failures of domestic and international financial institutions could impact our
ability to fund our operations in the short term.
Exchange Rate Risk
During the year ended December 31, 2019, we derived approximately 74% of our revenue from sales outside the U.S. and we maintain research and development,
sales, marketing, and business development offices in many foreign countries. Our results could be negatively affected by factors such as changes in foreign
currency exchange rates, trade protection measures, longer accounts receivable collection patterns, and changes in regional or worldwide economic or political
conditions. The risks from our international operations are mitigated in part by the extent to which our revenue is denominated in US dollars and, accordingly, we
are not exposed to significant foreign currency risk on these items. Revenue denominated in foreign currencies was not material during 2019. On the other hand, we
have a greater amount of foreign currency risk on certain operating expenses such as salaries and overhead costs of our foreign operations and cash maintained by
these operations. In 2019, approximately $44.5 million of operating expenses for our foreign subsidiaries were denominated in foreign currencies; as such a 10%
fluctuation in exchange rates would impact our business by approximately $4.5 million.
Our international business is subject to risks, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility when compared to the U.S. dollar. Accordingly, our future results could be materially impacted by
changes in these or other factors.
We are also affected by exchange rate fluctuations as the financial statements of our foreign subsidiaries are translated into U.S. dollars in consolidation. As
exchange rates vary, these results, when translated, may vary from expectations and could adversely or positively impact overall profitability. During 2019, the
impact of foreign exchange rate fluctuations related to translation of our foreign subsidiaries’ financial statements was immaterial to our consolidated financial
statements.
Item 8. Financial Statements and Supplementary Data
Our consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated statements of operations, equity, comprehensive loss and cash
flows for each of the years in the three-year period ended December 31, 2019 are set forth in this Annual Report at Item 15(a)(1).
50
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents our unaudited quarterly results of operations for the eight quarters in the periods ended December 31, 2019 and 2018.
The following table should be read in conjunction with the consolidated financial statements and related notes contained elsewhere in this Annual Report. We have
prepared the unaudited information on the same basis as our audited consolidated financial statements. This table includes all adjustments, consisting only of
normal recurring adjustments, that we consider necessary for fair statement of our financial position and operating results for the quarters presented. Operating
results for any quarter are not necessarily indicative of results for any future quarters or for a full year. We employ a calendar month-end reporting period for our
quarterly reporting.
Revenue:
Royalty and license fees
Total Revenue
Operating expenses:
Cost of revenue
Research, development and other related costs
Selling, general and administrative
Amortization expense
Litigation expense
Total operating expenses
Operating income (loss)
Interest expense
Other income and expense, net
Income (loss) before taxes
Provision for (benefit from) income taxes
Net income (loss)
Less: Net income (loss) attributable to noncontrolling
interest
Net income (loss) attributable to Xperi
Income (loss) per share attributable to Xperi:
Mar 31,
2018
Jun 30,
2018
Sep 30,
2018
Dec 31,
2018
Mar 31,
2019
Jun 30,
2019
Sep 30,
2019
Dec 31,
2019
(in thousands, except per share amounts)
Three Months Ended (1)
$
65,532 $
65,532
63,954 $
63,954
72,365 $ 204,282 $
204,282
72,365
56,567 $
56,567
75,115 $
75,115
57,867 $
57,867
90,518
90,518
2,324
26,515
34,702
27,166
7,316
98,023
(32,491)
(6,318)
3,154
(35,655)
(2,638)
5,003
24,189
28,084
27,208
7,642
92,126
(19,761)
(6,343)
1,737
(24,367)
(2,591)
$ (33,017) $ (28,256) $ (21,776) $
2,080
25,170
30,476
27,199
6,635
91,560
(27,606)
(6,200)
2,229
(31,577)
(3,321)
—
—
$ (33,017) $ (28,256) $ (21,776) $
—
2,207
3,884
27,039
30,532
30,569
34,645
25,459
26,877
1,290
4,506
86,564
100,444
(29,997)
103,838
(6,685)
(6,804)
2,302
1,475
(34,380)
98,509
17,223
(8,950)
81,286 $ (25,430) $
2,529
25,704
28,653
25,314
1,231
83,431
(8,316)
(6,199)
4,806
(9,709)
(3,547)
(6,162) $
1,505
26,369
28,847
25,146
1,527
83,394
(25,527)
(5,506)
429
(30,604)
(14,583)
(16,021) $
2,219
33,233
34,828
24,027
1,079
95,386
(4,868)
(4,987)
1,491
(8,364)
8,056
(16,420)
(347)
(1,474)
82,760 $ (25,083) $
(341)
(5,821) $
(407)
(15,614) $
(408)
(16,012)
Basic
Diluted
$
$
(0.67) $
(0.67) $
(0.58) $
(0.58) $
(0.44) $
(0.44) $
1.71 $
1.70 $
(0.51) $
(0.51) $
(0.12) $
(0.12) $
(0.32) $
(0.32) $
(0.32)
(0.32)
Weighted average number of shares used in per share
calculations-basic
Weighted average number of shares used in per share
calculations-diluted
49,302
49,060
48,958
48,445
48,721
49,259
49,459
49,566
49,302
49,060
48,958
48,559
48,721
49,259
49,459
49,566
(1) The sum of quarterly amounts, including per share amounts, may not equal amounts reported for year-to-date periods. This is due to the effects of rounding and
changes in the number of weighted-average shares outstanding for each period.
51
Other Supplementary Data
The following tables present our quarterly unaudited non-GAAP financial measures for the eight quarters in the periods ended December 31, 2019 and 2018. The
non-GAAP financial measures adjust for non-cash acquired intangibles, amortization charges, merger-related costs, all forms of stock-based compensation expense,
restructuring, impairment of long-lived assets, interest income from significant financing components under Topic 606 and realized and unrealized gains or losses
on marketable equity securities. We believe that the non-GAAP measures used in this report provide investors with important perspectives into our ongoing
business performance. Our management uses these non-GAAP financial measures when evaluating our operating performance. The non-GAAP financial measures
disclosed by us should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results
calculated in accordance with GAAP and reconciliations to those financial statements should be carefully evaluated. The non-GAAP financial measures used by us
may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies.
Mar 31,
2018
Jun 30,
2018
Sep 30,
2018
Three Months Ended
Mar 31,
Dec 31,
2019
2018
(in thousands)
Jun 30,
2019
Sep 30,
2019
Dec 31,
2019
$
98,023 $
91,560 $
92,126 $ 100,444 $
86,564 $
83,431 $
83,394 $
95,386
(3,094)
(4,314)
(27,166)
—
(3,344)
(3,875)
(27,199)
—
(3,252)
(4,201)
(27,208)
—
(3,478)
(5,453)
(26,877)
—
(3,603)
(4,020)
(25,459)
—
(3,146)
(4,075)
(25,314)
—
(3,544)
(4,444)
(25,146)
—
(4,350)
(4,372)
(24,027)
(4,636)
(41)
(1,439)
61,969 $
(18)
(1,013)
56,111 $
—
—
57,465 $
—
—
64,636 $
—
—
53,482 $
—
—
50,896 $
—
—
50,260 $
—
—
58,001
$
Mar 31,
2018
Jun 30,
2018
Sep 30,
2018
$
3,154 $
2,229 $
1,737 $
Three Months Ended
Mar 31,
Dec 31,
2019
2018
(in thousands)
1,475 $
2,302 $
Jun 30,
2019
Sep 30,
2019
Dec 31,
2019
4,806 $
429 $
1,491
(2,151)
(2,148)
(1,576)
(1,797)
(1,866)
(1,854)
(906)
(1,136)
—
1,003 $
$
—
81 $
566
727 $
1,651
1,329 $
410
846 $
(2,032)
920 $
1,060
583 $
552
907
GAAP operating expenses
Adjustments to non-GAAP operating expenses:
Stock-based compensation expense:
Research, development and other related costs
Selling, general and administrative
Amortization of acquired intangibles
M&A transaction costs
Post acquisition retention bonus to DTS employees:
Research, development and other related costs
Selling, general and administrative
Non-GAAP operating expenses
GAAP other income and expense, net
Adjustments to non-GAAP other income and expense, net:
Interest income from significant financing components
under Topic 606
Realized and unrealized loss (gain) on marketable
equity securities
Non-GAAP other income and expense, net
Additional Financial Data
The following table presents our total billings (in thousands):
Total Billings
Mar 31,
2018
$ 104,268
Jun 30,
2018
$ 100,694
Sep 30,
2018
$ 100,587
Three Months Ended
Dec 31,
2018
Mar 31,
2019
$ 141,798 $ 104,302 $
Jun 30,
2019
92,302 $
Sep 30,
2019
90,629 $ 126,688
Dec 31,
2019
52
We define billings as amounts in an accounting period invoiced to customers, less any credits issued to or paid to customers, plus amounts due under certain
licensing-related contractual arrangements that may not be subject to an invoice. Management evaluates the Company’s financial performance in part based on
billings due to the close alignment between billings and cash receipts from licensing activity, and believes billings is an important metric to provide to readers of
our financial results. Billings may vary materially from revenue recorded under U.S. GAAP.
The following table presents our cash tax payments (in thousands):
Cash Tax Payments
Mar 31,
2018
Jun 30,
2018
Sep 30,
2018
$
3,963 $
4,343 $
4,462 $
Three Months Ended
Mar 31,
Dec 31,
2018
2019
10,911 $
5,599 $
Jun 30,
2019
Sep 30,
2019
Dec 31,
2019
858 $
5,917 $
2,627
Cash tax payments are defined as total income taxes paid, net of refunds, and are derived from supplemental cash flow disclosure information appearing on the
Consolidated Statements of Cash Flows.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Attached as exhibits to this Form 10-K are certifications of Xperi Corporation’s Chief Executive Officer and Chief Financial Officer, which are required in
accordance with Rules 13a-15(e) and 15d-15(e) 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
Xperi Corporation maintains disclosure controls and procedures that are designed to ensure 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 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 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
There has been no change in Xperi Corporation’s internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), during Xperi
Corporation’s most recent quarter that has materially affected, or is reasonably likely to materially affect, Xperi Corporation’s internal control over financial
reporting.
53
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for Xperi Corporation. Our internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally accepted accounting principles. Xperi Corporation’s internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of Xperi Corporation; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of Xperi Corporation are being made only in accordance with
authorizations of management and directors of Xperi Corporation; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of Xperi Corporation’s assets that could have a material effect on the financial statements.
Xperi Corporation’s management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019, utilizing the criteria set forth
in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on the assessment
by Xperi Corporation’s management, we determined that Xperi Corporation’s internal control over financial reporting was effective as of December 31, 2019. The
effectiveness of Xperi Corporation’s internal control over financial reporting as of December 31, 2019 has been audited by PricewaterhouseCoopers LLP, Xperi
Corporation’s independent registered public accounting firm, as stated in their attestation report which appears on page F-1 of this Annual Report on Form 10-K.
Item 9B. Other Information
Not applicable.
54
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information About Our Board of Directors
Set forth below are the name, age and position of each member of our board of directors.
Name
Darcy Antonellis
David C. Habiger
Richard S. Hill
Jon E. Kirchner
V. Sue Molina
George A. Riedel
Christopher A. Seams
Age
57
51
68
52
71
62
57
Position(s)
Director
Director
Chairman of the Board of Directors
Chief Executive Officer and Director
Director
Director
Director
The following are biographical summaries of our board members.
Darcy Antonellis has served on the Board since December 2018. Since January 2014, Ms. Antonellis has been the Chief Executive Officer of Vubiquity, Inc., a
wholly owned subsidiary of Amdocs Limited since February 22, 2018, the largest global provider of premium content services and technical solutions serving
clients in 120 countries and in 80 languages. From June 1998 until December 2013, Ms. Antonellis held numerous positions at Warner Bros. Entertainment Inc., a
Time Warner company, including President, Technical Operations and Chief Technology Officer. Ms. Antonellis has also served as a member of the Board of
Directors of Cinemark Holdings, Inc. since July 7, 2015. Ms, Antonellis received a B.S. in electrical engineering from Temple University and an M.B.A. from
Fordham University. The Board believes Ms. Antonellis brings her extensive expertise in executive management, operations and engineering and her in-depth
understanding of content services, media and entertainment industry to her role as a member of the Board.
David C. Habiger has served on the Board since December 2016. Mr. Habiger currently serves as the Chief Executive Officer of JD Power, a privately held
company. Mr. Habiger served as a director of DTS from March 2014 until its acquisition by the Company in December 2016. Mr. Habiger serves as a director of
the Chicago Federal Reserve Board. He is on the SABOR (Systems Activities, Bank Operations and Risk) Committee and the Governance & HR Committee for the
Federal Reserve. Mr. Habiger served as the CEO at Textura Corporation, a software company focused on construction management, from May 2015 until its sale to
Oracle in June 2016. From May 2011 to August 2012, he served as the Chief Executive Officer of NDS Group Ltd., a provider of video software and content
security solutions. Mr. Habiger worked with the founding members of Sonic Solutions (“Sonic”), a computer software company, from 1992 to 2011 and served as
President and Chief Executive Officer of Sonic from 2005 to 2011. He serves as a director for Echo Global Logistics, Inc., GrubHub Inc., and Stamps.com Inc., and
previously served as a director for Control4 Corporation, Enova International, Inc., Immersion Corporation, RealD Inc., Textura Corporation, DTS, and Sonic
Solutions. He is a member of the National Association of Corporate Directors and is on the Advisory Board of the University of Chicago Center for
Entrepreneurship. Mr. Habiger received a bachelor’s degree in business administration from St. Norbert College and an M.B.A. from the University of Chicago.
The Board believes that Mr. Habiger brings extensive experience in the digital media and entertainment industries and his in-depth knowledge and understanding of
the consumer electronics industry to his role as a member of the Board.
Richard S. Hill has served as a member of the Board since August 2012 and as Chairman of the Board since March 2013. Mr. Hill also served as the Company’s
Interim Chief Executive Officer from April 15, 2013 until May 29, 2013. Mr. Hill previously served as the Chief Executive Officer and member of the board of
directors of Novellus Systems Inc., until its acquisition by Lam Research Corporation in June 2012. During his nearly 20 years leading Novellus Systems, a
designer, manufacturer, and marketer of semiconductor equipment used in fabricating integrated circuits, Mr. Hill grew annual revenues from approximately
$100 million to over $1 billion. Presently, Mr. Hill is Chairman of Marvell Technology Group Ltd. (“Marvell”), a producer of storage, communications and
consumer semiconductor products, and a member of its board of directors. Mr. Hill served as Interim Chief Executive Officer of Marvell from May 2016 until July
2016. Mr. Hill is a member of the boards of directors of Arrow Electronics, Inc., a global provider of products and services to industrial and commercial users of
electronic components and enterprise computing, and Cabot Microelectronics Corporation, the leading global supplier of chemical mechanical planarization (CMP)
slurries and a growing CMP pad supplier to the semiconductor industry. Mr. Hill previously served on the board of directors of Symantec Corporation, LSI
Corporation, Planar Systems, Autodesk, Inc. and Yahoo Inc. Mr. Hill received a B.S. in Bioengineering from the University of Illinois in Chicago and an M.B.A.
from Syracuse University. The Board believes that Mr. Hill brings extensive expertise in executive management and engineering for technology and defense-
related companies to his role as Chairman of the Board.
55
Jon E. Kirchner has served on the Board and as Chief Executive Officer since June 2017. Previously he was president of Xperi following the completion of the
acquisition of DTS in December 2016. He served as DTS’s Chairman of the board of directors and Chief Executive Officer from 2010 to December 2016 and had
been a member of DTS’s board of directors from 2002 to December 2016. From 2001 to 2010, he served as DTS’s Chief Executive Officer. Prior to his tenure as
Chief Executive Officer, Mr. Kirchner served at DTS from 1993 to 2001 in a number of senior leadership roles including President, Chief Operating Officer and
Chief Financial Officer. Prior to joining DTS, Mr. Kirchner worked for the consulting and audit groups at Price Waterhouse LLP (now PricewaterhouseCoopers
LLP), an international accounting firm. In 2012, Mr. Kirchner received the Ernst & Young Technology Entrepreneur of the Year Award for Greater Los Angeles.
In 2011, Mr. Kirchner was honored by the Producers Guild of America, receiving the “Digital 25: Leaders in Emerging Entertainment” award for being among the
visionaries that have made significant contributions to the advancement of digital entertainment and storytelling. Mr. Kirchner currently serves on the board of
directors of Free Stream Media Corporation (Samba TV), a leader in developing cross platform TV experiences for consumers and advertisers. Mr. Kirchner is a
Certified Public Accountant and received a B.A. in Economics, cum laude, from Claremont McKenna College. The Board believes that Mr. Kirchner brings his
experience in the senior management of public companies, including service as chairman, president, Chief Executive Officer, Chief Operating Officer and Chief
Financial Officer, his extensive experience in the digital media and entertainment industries, as well as his knowledge of the Company as its Chief Executive
Officer, to his role as a member of the Board.
V. Sue Molina has served on the Board since February 2018. Most recently she served on the Board of Directors of DTS from January 2008 until December 2016,
and served as Chair of the Audit Committee and Nominating and Corporate Governance Committee. From November 1997 until her retirement in May 2004,
Ms. Molina was a tax partner at Deloitte & Touche LLP, an international accounting firm, serving from 2000 until May 2004 as the national partner in charge of
Deloitte’s Initiative for the Retention and Advancement of Women. Prior to that, she spent twenty years with Ernst & Young LLP, an international accounting firm,
the last ten years as a partner. Ms. Molina has prior board experience serving on the Board of Directors, chair of the Compensation Committee and member of the
Audit Committee of Sucampo Pharmaceuticals, Inc., and on the Board of Directors, chair of the Audit Committee and a member of the Compensation Committee
of Royal Neighbors of America. She received a B.S.B.A. and a Masters of Accounting degree from the University of Arizona. The Board believes that Ms. Molina
brings her extensive accounting and financial expertise, her experience in advising boards and her past service on boards of public companies, to her role as a
member of the Board.
George A. Riedel has served on the Board since May 2013. He also has served on the board of Cerner Corporation, a leading supplier of health care information
technology solutions and tech-enabled services, since May 2019. Since January 2018, Mr. Riedel has been a Senior Lecturer at Harvard Business School. Prior to
that, he was the Chairman of the Board of Montreal-based Accedian Networks, where he had served as a director since 2010. Until January 2017, Mr. Riedel also
served as Chairman and CEO of Cloudmark, Inc., a private network security company. Mr. Riedel joined the board at Cloudmark in June 2013, became Chairman
in January 2014 and CEO in December 2014. Mr. Riedel also served on the board of directors of PeerApp from 2011 until 2014 and on the board of directors of
Blade Network Technologies from 2009 until its sale to IBM in 2010. In March 2006, Mr. Riedel joined Nortel Networks Corporation, a publicly-traded,
multinational, telecommunications equipment manufacturer (“Nortel”), as part of the turnaround team as the Chief Strategy Officer. His role changed after Nortel
initiated creditor protection under the respective restructuring regimes of Canada under the Companies’ Creditors Arrangement Act, in the U.S. under the
Bankruptcy Code, the United Kingdom under the Insolvency Act 1986, on January 14, 2009, and subsequently, Israel, to lead the sale/restructuring of various
carrier and enterprise business units through a series of transactions to leading industry players such as Ericsson, Avaya and Ciena. Mr. Riedel led the efforts to
create stand-alone business units, carve out the relevant P&L and balance sheet elements and assign patents to enable sales of the assets. In 2010, Mr. Riedel’s role
changed to President of Business Units and CSO as he took leadership of the effort to monetize the remaining 6,500 patents and applications patents as well as
manage the P&L for several business units that were held for sale. The 2011 patent sale led to an unprecedented transaction of $4.5 billion to a consortium of
Apple, Ericsson, RIM, Microsoft and EMC. Prior to Nortel, Mr. Riedel was the Vice President of Strategy and Corporate Development of Juniper Networks, Inc., a
publicly-traded designer, developer and manufacturer of networking products, from 2003 until 2006. Previously, Mr. Riedel was also a Director at McKinsey &
Company, a global management consulting firm, where he spent 15 years serving clients in the telecom and technology sectors in Asia and North America on a
range of strategy and growth issues. Mr. Riedel received a B.S. with Distinction in Mechanical Engineering from the University of Virginia and his M.B.A. from
Harvard Business School. Mr. Riedel holds a Stanford Directors’ College certification based on completion of its corporate directors training. The Board believes
that Mr. Riedel brings his experience from his direct involvement in the restructuring of Nortel, including the sale of Nortel’s patent portfolio for $4.5 billion, as
well as his knowledge of the technology industry and leadership experience, to his role as a member of the Board.
56
Christopher A. Seams has served on the Board since March 2013. Mr. Seams served as the Chief Executive Officer and a director of Deca Technologies Inc., a
subsidiary of Cypress Semiconductor Corporation, a global semiconductor company, from May 2013 until August 2016. Mr. Seams previously was an Executive
Vice President of Sales & Marketing at Cypress Semiconductor Corporation, from July 2005 until June 2013. He previously served as an Executive Vice President
of Worldwide Manufacturing & Research and Development of Cypress Semiconductor Corporation. Mr. Seams joined Cypress in 1990 and held a variety of
positions in process and assembly technology research and development and manufacturing operations. Prior to joining Cypress in 1990, he worked as a process
development Engineer or Manager for Advanced Micro Devices and Philips Research Laboratories. Mr. Seams currently serves as the Chairman of the Board of
Directors of Onto Innovation Inc. (formerly Nanometrics Inc.). Mr. Seams is a senior member of IEEE, a member of NACD and ACCD, served on the Engineering
Advisory Council for Texas A&M University and was a board member of Joint Venture Silicon Valley. Mr. Seams received a B.S. in Electrical Engineering from
Texas A&M University and a M.S. in Electrical and Computer Engineering from the University of Texas at Austin. Mr. Seams has a Professional Certificate in
Advanced Computer Security from Stanford University. Mr. Seams also holds a National Association of Corporate Directors certification which was awarded to
him based on NACD training and examination standards. The Board believes that Mr. Seams brings extensive management, sales and marketing, and engineering
experience in the semiconductor industry to his role as a member of the Board.
Director Independence
The Board of Directors currently consists of seven (7) persons. Mr. Kirchner is CEO of Xperi. Mr. Hill was interim CEO of Xperi’s predecessor corporation for six
weeks in 2013. Messrs. Habiger, Riedel and Seams and Mses. Antonellis and Molina are not, and have never been, employees of our Company or any of our
subsidiaries.
The Board of Directors has determined that all of the Company’s directors, other than Mr. Kirchner, are each “independent directors” as such term is defined in
Nasdaq Marketplace Rule 5605(a)(2).
The Board of Directors has a standing Audit Committee, Compensation Committee and Nominating and Governance Committee. The Audit Committee has been
established in accordance with Section 3(a)(58)(A) of the Exchange Act. Each of our Audit Committee, Compensation Committee and Nominating and Governance
Committee is composed entirely of independent directors in accordance with current Nasdaq listing standards. Furthermore, each member of our Audit Committee
meets the enhanced independence standards established by the Sarbanes-Oxley Act of 2002 and related rulemaking of the Securities and Exchange Commission
(the “SEC”). The Board of Directors has further determined that, Ms. Sue Molina, Chair of the Audit Committee of the Board of Directors, is an “Audit Committee
Financial Expert,” as such term is defined in Item 407(d)(5) of Regulation S-K promulgated by the SEC, by virtue of her relevant experience listed in her
biographical summary provided above. Copies of our Audit Committee, Nominating and Governance Committee and Compensation Committee charters and our
corporate governance guidelines are available, free of charge, on our website at http://www.xperi.com. The Board of Directors from time to time constitutes such
other committees as it deems appropriate to further the purposes of the Board.
Information About Our Executive Officers
Set forth below are the name, age and position of each of our executive officers.
Name
Jon Kirchner
Robert Andersen
Paul Davis
Murali Dharan
Geir Skaaden
Age
52
56
44
58
53
Position(s)
Chief Executive Officer, Director
Chief Financial Officer
General Counsel and Corporate Secretary
President of Tessera Intellectual Property Corp.
Chief Products and Services Officer
The following are biographical summaries of our executive officers other than Mr. Kirchner, for whom a biographical summary is set forth under “Information
about Our Board of Directors.”
Robert Andersen is executive vice president and chief financial officer of Xperi Corporation. He became executive vice president and chief financial officer of
Xperi Corporation in January 2014. Prior to joining Xperi Corporation, he served as executive vice president and CFO of G2 Holdings Corp. d/b/a Components
Direct. Mr. Andersen previously served as CFO at Phoenix Technologies Ltd. and held senior financial roles at Wind River Systems, Inc. and NextOffice, Inc. His
finance career began at Hewlett-Packard Company, where he served in various controller, treasury and technology finance management roles. Mr. Andersen served
on the board of directors of publicly traded Quantum Corporation through March 2017. He currently serves on the board of directors of the Alameda County
Community Food Bank in the role of vice chair. Mr. Andersen holds a
57
B.A. in economics from the University of California, Davis, and an M.B.A. from the Anderson School of Management at the University of California, Los Angeles.
Paul Davis is general counsel and corporate secretary of Xperi Corporation. He joined Xperi Corporation in August 2011, and became general counsel and
corporate secretary in July 2013. Before joining Xperi Corporation, he was an attorney at Skadden, Arps, Slate, Meagher & Flom LLP, where his practice focused
on mergers and acquisitions, corporate securities matters and corporate governance. Mr. Davis holds a Juris Doctor from the University of California, Hastings
College of the Law and B.A. degrees in history and political science from the University of California, San Diego. While at Hastings, he was magna cum laude, an
Order of the Coif member and a managing editor on the Hastings Law Journal.
Murali Dharan has served as president of Tessera Intellectual Property Corp. (“Tessera”) since October of 2017 and is responsible for the strategic direction,
management and growth of the Tessera intellectual property licensing business. He has extensive leadership experience, most recently as CEO of IPVALUE,
guiding the company from a start-up to an industry leader and helping partners to generate more than $1.6 billion in IP revenue. Prior to joining IPVALUE in 2002,
Mr. Dharan held executive roles at various technology companies, including executive vice president at Preview Systems, vice president and general manager at
Silicon Graphics, and vice president and general manager at NEC. Mr. Dharan holds an electrical engineering degree from Anna University in India, a master’s
degree in computer science from Indiana University, and an MBA from Stanford University.
Geir Skaaden has served as our chief products and services officer since December 2016 and leads global sales, business development and product management for
our portfolio of imaging and audio solutions. He served as DTS’s Executive Vice President, Products, Platforms and Solutions from October 2015 until its
acquisition by the Company in December 2016, having previously served as DTS’s Senior Vice President, Corporate Business Development, Digital Content and
Media Solutions since December 2013. Prior to that, Mr. Skaaden served as DTS’s Senior Vice President, Products & Platforms from April 2012 to December
2013. From 2008 to 2012, Mr. Skaaden served in a number of positions overseeing numerous aspects including strategic sales, licensing operations, and business
development. Prior to joining DTS in 2008, Mr. Skaaden served as the Chief Executive Officer at Neural Audio Corporation from 2004 to 2008, where he
previously served as Vice President, Corporate Development from 2002 to 2004. Mr. Skaaden holds a B.A. in Finance from the University of Oregon, a Business
degree from the Norwegian School of Management and an M.B.A. from the University of Washington.
We have adopted a written code of business conduct and ethics that applies to our principal executive officer, principal financial officer, principal accounting
officer or controller, or persons serving similar functions. The text of our code of business conduct and ethics has been posted on our website at
http://www.xperi.com. and is included as an exhibit to our Current Report on Form 8-K filed with the SEC on December 1, 2016.
Item 11. Executive Compensation
Compensation of Directors
We currently pay each of our non-employee directors an annual retainer of $50,000. We currently pay our non-executive Chairman an additional annual retainer of
$50,000. In addition, we pay each of our non-employee directors the following annual retainers for their service as a member, or chair, as applicable, of our Board
committees.
Annual Retainers for Committee Members:
Audit Committee
Compensation Committee
Nominating and Governance Committee
Annual Retainers for Committee Chairs:
Audit Committee
Compensation Committee
Nominating and Governance Committee
$
$
$
$
$
$
12,000
8,000
6,000
25,000
20,000
15,000
All Board and committee retainers are paid in equal quarterly installments over the course of each year of a director’s service on the Board or applicable committee.
We also reimburse all non-employee directors for reasonable expenses related to our Board or committee meetings.
58
Each of our non-employee directors receives restricted stock units and options to purchase shares of our common stock on the terms and conditions set forth in our
stockholder-approved equity plan. A non-employee director receives a combination of options and/or restricted stock unit awards on the date of each annual
meeting of our stockholders, as follows:
•
•
•
The number of shares of common stock in the restricted stock unit award is determined by dividing (1) a dollar value to be paid in the form of restricted
stock units (“Restricted Stock Unit Amount”) by (2) the fair market value per share of our common stock on the date of grant.
The number of shares that may be purchased pursuant to the option award is determined by dividing (1) a dollar amount to be paid in the form of option
grants (“Option Amount”) by (2) the quotient of (A) the fair market value per share of our common stock on the date of grant divided by (B) two (2).
The total of the Restricted Stock Unit Amount plus the Option Amount received by each non-employee director at each annual meeting of stockholders
is equal to $150,000. The Compensation Committee will determine the allocation between restricted stock units and option amounts annually.
A non-employee director who is initially appointed after any annual meeting of stockholders will receive a restricted stock unit award or option grant on the date of
his or her initial appointment to the Board of Directors equal to the pro-rated amount of the annual grant.
Annual option grants and restricted stock unit awards (or any pro-rated grants for directors initially appointed between annual meetings) vest on the earlier to occur
of the first anniversary of the date of grant or the next annual meeting of stockholders. No portion of an option automatically granted to a director is exercisable
after the tenth anniversary after the date of option grant. Additionally, an option automatically granted to a director may be exercisable after the termination of the
director’s services as described in the option agreement, generally ending three months after such termination.
The following table shows compensation information for our non-employee directors for fiscal year 2019.
2019 Director Compensation Table
Name
Richard S. Hill
Darcy Antonellis
David C. Habiger
V. Sue Molina
George A. Riedel
Christopher A. Seams
Fees Earned
or Paid in
Cash ($)
Stock Awards
($)(1)
Option
Awards
($)
$
$
$
$
$
$
106,000 $
55,333 $
70,000 $
81,000 $
68,333 $
82,000 $
149,987
149,987
149,987
149,987
149,987
149,987
— $
— $
— $
— $
— $
— $
Total($)
255,987
205,320
219,987
230,987
218,320
231,987
(1) The amounts reflected in this column represent the aggregate grant date fair value for stock awards granted to our non-employee directors in 2019, measured
in accordance with ASC 718, excluding the effect of estimated forfeitures, and do not reflect whether the recipient has actually realized a financial benefit from
these awards. For the methodology of how the aggregate grant date fair value amount is calculated, please see Note 13 of the Notes to Consolidated Financial
Statements included in this Form 10-K. The aggregate number of shares subject to unvested restricted stock unit awards outstanding for each non-employee
director at December 31, 2019 was: Mr. Hill: 5,889; Ms. Antonellis: 5,889; Mr. Habiger: 5,889; Ms. Molina: 5,889; Mr. Riedel: 5,889 and Mr. Seams: 5,889.
None of the non-employee directors held any stock options as of December 31, 2019.
Executive Compensation and Related Information
Compensation Discussion And Analysis
Introduction
The following discussion and analysis contains statements regarding company performance targets and goals used in setting compensation for our named
executive officers. These targets and goals are disclosed in the limited context of the Company’s compensation programs and should not be understood to be
statements of management’s future expectations or estimates of future results or other guidance. The Company specifically cautions investors not to apply these
statements to other contexts.
59
This Compensation Discussion and Analysis (CD&A) describes the Company’s executive compensation philosophy, objectives and programs, as well as the
compensation-related actions taken in 2019. Our named executive officers, or NEOs, for fiscal year 2019 are identified as follows:
•
•
•
•
•
Jon Kirchner – Chief Executive Officer (CEO)
Robert Andersen – Chief Financial Officer (CFO)
Paul Davis – General Counsel & Corporate Secretary
Murali Dharan – President, Tessera Intellectual Property Corporation (Tessera)
Geir Skaaden – Chief Product and Services Officer
The titles above reflect positions held by the NEOs as of the end of 2019. These titles remain unchanged as of the date of this Form 10-K.
Compensation Philosophy and Guiding Principles
We have designed our executive compensation program to reward our executive officers, including the NEOs, to be in alignment with the overall strategic and
financial performance of the Company with the ultimate goal of building long-term stockholder value. Our approach to short-term compensation is to pay for
current results and strategic actions taken that are expected to translate into improved future financial performance. Combined with our emphasis on long-term
equity compensation, we believe this approach appropriately motivates, rewards and retains our executives, while providing strong alignment with our
shareholders. We hold our executives to stringent performance standards and, as a result, our executive compensation plans are designed to pay competitively if
strategic and financial performance objectives are met and less so if variable pay metrics are missed. We construct our compensation packages to provide
remuneration sufficient to attract, retain and motivate our executives to exert their best efforts in the highly competitive consumer electronics and intellectual
property licensing environments in which we operate. We believe that competitive compensation packages consisting of a combination of base salaries, short-term
performance-based cash incentives, and long-term incentives delivered in the form of equity compensation that is earned over a multi-year period enable us to
attract top talent, satisfy our retention objectives and align the compensation of our executive officers with our performance and stockholder value creation.
The Compensation Committee periodically reviews and analyzes market trends and the prevalence of various compensation delivery vehicles and adjusts the
design and operation of our executive compensation program from time to time as it deems necessary and appropriate. In designing and implementing the various
components of our executive compensation program, the Compensation Committee considers market and industry practices, as well as the impact of our
compensation program on our financial results. While the Compensation Committee considers all factors in its deliberations, it places no formal weighting on any
one factor.
Our executive compensation program emphasizes performance-based compensation and the amount of compensation paid to our executive officers varies
significantly based on overall strategic and financial performance.
2019 Executive & Compensation Highlights
For our fiscal year ended December 31, 2019, the key highlights of our executive compensation program included:
•
Shareholder Outreach During 2019; Response to 2019 Say on Pay Vote. In May 2019, we held our annual say-on-pay vote. The compensation of our
NEOs received support from approximately 40.8% of the votes cast on the say-on-pay proposal (excluding abstentions and broker non-votes). We were
disappointed with the level of stockholder support for our 2019 say-on-pay vote. Following the 2019 annual meeting of stockholders, we sought to
better understand the views of our stockholders and address their concerns. At the direction of the Compensation Committee we reached out to our
largest stockholders constituting approximately 72% of our outstanding shares to request feedback on our governance profile and specifically our
compensation structure. Members of our management team and Compensation Committee engaged with holders owning approximately 43% of our
outstanding stock. During these sessions, we shared our plans to implement a new performance-based equity structure for all executives in early
2020. The responses to the proposed equity grant structure, which includes heavily weighted, multi-year performance targets, were favorable
overall. Due to the pending merger announced in December 2019, we have postponed our annual executive compensation review until after the merger
is complete, at which time we will conduct a full review against a new peer group that is appropriate for the new combined company. We will take our
learnings and feedback from the 2019 stockholder sessions and apply them to our practices in 2020. In addition to our annual outreach, our CEO, CFO
and investor relations officers meet frequently with stockholders and the investment community regarding our overall strategy and performance.
60
•
No Changes to CEO Compensation. Our CEO’s base salary and annual incentive target remained unchanged for 2019. There were no equity awards
granted to Mr. Kirchner in 2019 in light of his promotional equity awards that were granted in connection with his appointment as CEO in 2017, which
were intended by the Compensation Committee to represent his long-term incentive opportunities for the duration of the initial three-year term of his
employment agreement as CEO. Thus, the Compensation Committee did not intend to, and did not in fact, grant Mr. Kirchner additional equity awards
during that period. As illustrated in the graphic below, the annual total target compensation for our CEO in 2019 was heavily weighted towards at-risk
pay incentives (comprised of annual cash incentive compensation and performance-based equity eligible to vest based on 2019 performance).
(1) The calculation in the graphic above includes the CEO annualized base salary, annual target bonus, and the grant date fair value of that portion of the time-
based RSUs and performance-based RSUs that were eligible to vest during 2019 or to be earned based on 2019 performance at target.
•
•
•
•
Executive Pay Targeted at Competitive Market Levels. The Compensation Committee believes that the current NEOs should be paid at competitive
market levels and took steps to better align the target total direct compensation of certain of our NEOs with the market median. The Committee
increased the base salaries for Messrs. Andersen, Davis and Skaaden by 4%, 6% and 6% respectively. The adjustments were to better align their target
total cash compensation with market practice relative to our compensation peer group, as described below.
Annual Incentive Bonus Targets. The annual cash incentive bonus target for Mr. Skaaden was changed from 65% to 75% of base salary. These changes
were made by the Compensation Committee as mentioned above to better align his target total cash compensation with market practice relative to our
compensation peer group, as described below.
Equity Award Grants. In fiscal year 2019, we granted time-based restricted stock units to Messrs. Andersen, Davis, Dharan and Skaaden as part of our
annual executive compensation review. No other equity awards were granted to our NEOs during 2019.
Pay-for-Performance – Annual Incentive Bonus Payments. Our annual cash incentive program is structured to only pay when rigorous goals are
achieved. We did not reach our target financial goals established for fiscal year 2019 and therefore bonuses were paid below target levels based on the
fiscal year 2019 financial results and performance against our other corporate goals. Payouts to our NEOs were on average 56% of their target
bonuses. Detail regarding the annual incentive bonus payments is provided in the Annual Performance-Based Cash Incentive Bonuses section.
61
Summary of Certain Executive Compensation Practices
We endeavor to maintain sound corporate governance standards consistent with our executive compensation policies and practices. During 2019, the following
policies and practices were in effect:
WHAT WE DO
WHAT WE DON’T DO
Pay for Performance: We link pay to performance and stockholder interests by
heavily weighting total direct compensation to the achievement of strong
financial performance and a balanced mix of performance metrics established in
advance by the Compensation Committee.
Independent Compensation Advisor: The Compensation Committee selects
and engages its own independent advisor.
Thoughtful Peer Group Analysis: The Compensation Committee reviews
external market data when making compensation decisions and annually reviews
our peer group with its independent compensation consultant.
Thorough Compensation Risk Assessment: The Compensation Committee
conducts an annual assessment of the Company’s executive and broad- based
compensation programs to ensure prudent risk management.
Compensation Committee Independence and Experience: The Compensation
Committee is comprised solely of independent directors who have extensive
experience.
Stock Ownership Guidelines: Executives and directors are subject to stock
ownership guidelines equal to a multiple of their respective annual base salaries
(3x for the CEO and 1x for other executives) or Board retainers (3x for
directors).
”Clawback” Policy: Our clawback policy provides that our Board of Directors
may require the forfeiture, recovery or reimbursement of incentive compensation
from an executive officer in the event the officer’s wrongdoing later is
determined by our Board of Directors to have resulted in a material negative
restatement of the Company’s financial results.
Negative Discretion: The Compensation Committee has the right to exercise
negative discretion over executive incentive plan payments.
No Tax Gross-Ups: We do not provide tax gross-ups to our NEOs for excess
parachute payments or other benefits.
No “Single Trigger” Severance Payments: We do not generally have “single
trigger” severance payments payable solely on account of the occurrence of a
change of control event.
No Special Perquisites: We do not provide special perquisites for executives,
such as club memberships, supplemental executive retirement plans or
supplemental executive health benefits.
No Hedging in Company Securities: Our employees, including our executives
and directors are prohibited from engaging in any hedging transaction with
respect to Company equity securities (vested or unvested).
No Pledging of Company Securities: Our executives and directors are
prohibited from pledging Company securities.
No Guaranteed Bonuses: We do not provide guaranteed minimum bonuses or
uncapped incentives under our annual bonus plan.
No Re-Pricing or Discounted Options / SARs: We do not re-price underwater
awards and do not provide discount stock options or stock appreciation rights.
Further the Restated Plan prohibits repricing of stock options or stock
appreciation rights without stockholder approval.
No Dividends Paid or Accrued on Awards Prior to Vesting
Compensation-Setting Process
The Compensation Committee has the primary authority to approve the compensation provided to our executive officers. Consistent with prior years for 2019,
Compensia, a national compensation consulting firm, was retained by the Compensation Committee to assist it in the determination of the key elements of our
executive compensation programs. Compensia reports to and is accountable to the Compensation Committee, and may not conduct any other work for us without
the authorization of the Compensation Committee. Compensia did not provide any services to us in 2019 beyond its engagement as an advisor to the Compensation
Committee on executive and Board compensation matters. After review and consultation with Compensia, the Compensation Committee has determined that
Compensia is independent and there is no conflict of interest resulting from retaining Compensia currently or during the year ended December 31, 2019. In
reaching these conclusions, the Compensation Committee considered the factors set forth in Exchange Act Rule 10C-1 and Nasdaq listing standards.
In 2019, Compensia provided advice to the Compensation Committee with respect to competitive practices and the amounts and nature of compensation paid to
executive officers in similar organizations. Compensia also advised on, among other things, structuring our various compensation programs and determining the
appropriate levels of base salary, bonus and other long-term incentive compensation payable to our executive officers.
To aid the Compensation Committee in making its compensation determinations, our CEO provides recommendations annually to the Compensation Committee
regarding the compensation of all executive officers, excluding himself. Each NEO other than our CEO, in turn, participates in an annual performance review with
our CEO to provide input about their contributions to our success for the period being assessed. The Compensation Committee gathers data on our CEO’s
performance through several channels, including qualitative and quantitative assessments of the Company’s performance, discussions with other members of
62
the management team and discussions with other members of our Board of Directors. Each Compensation Committee meeting ordinarily includes an executive
session without members of our management team present.
For purposes of our annual and long-term incentive compensation programs, corporate performance goals are established at the beginning of the year. The
Company’s annual financial plan is formulated by our executive management team and is submitted for review and approval by our Board of Directors. Our CEO,
after discussions with the management team, then typically recommends a subset of these goals to the Compensation Committee as the corporate performance goals
underlying our annual cash incentive bonus plan and performance-based equity awards. We believe that the achievement of these performance goals is based on the
successful efforts and contributions of our NEOs. As described below, the Compensation Committee retains the authority under our annual cash incentive plan to
authorize bonus payments to our NEOs that are less than the bonus payments that would otherwise be awarded based on our achievement of the performance goals
established for the plan. The Compensation Committee also has the authority to make discretionary bonus awards to our NEOs, but it did not do so in 2019.
Setting Executive Compensation
The Compensation Committee reviews competitive compensation practices and the financial performance of comparable companies at least annually. This analysis
provides the necessary background to the Compensation Committee to ensure that compensation opportunities for our executive officers are competitive with
compensation practices among comparable companies and that actual compensation paid to our executive officers is appropriately aligned with our performance in
the past year.
Each year Compensia works with the Compensation Committee to confirm one or more peer groups of companies to be used in the competitive assessment. The
companies comprising the peer group are selected because the Compensation Committee, management and Compensia believe they are representative of the type
of companies which we currently, and may in the future, compete with for executive talent. In selecting peer companies, we used a number of targeted criteria
designed to reflect our unique business structure. Given the limited number of directly comparable companies from a business perspective, the criteria were
expanded in some cases to include companies that the Compensation Committee considered to be a close fit in terms of business focus and/or with whom we might
compete for executive talent. As a result, some companies may not satisfy all of the selection criteria. Our peer group is based on the following criteria:
•
•
•
•
Industry: Companies in the semiconductor, semiconductor equipment, audio and imaging technology, IP licensing, and other technology hardware
sectors.
Revenue: Companies with revenues that were 0.5x to 2.0x our revenue and we also reviewed revenue as compared to our annual billings.
Market Capitalization: For Companies with market capitalizations that reflect the differences in our business model as a technology licensing company,
which would not be accurately reflected if we selected peer companies based solely on annual revenue. We selected companies with a market
capitalization that was generally within a range of 0.3x to 3.0x our market capitalization.
Geographic Location: Companies based in the U.S. with an emphasis on firms headquartered in the San Francisco Bay Area.
Ambarella, Inc. (AMBA)
Box, Inc. (BOX)
Cabot Microelectronics Corporation (CCMP)
Dolby Laboratories (DLB)
FireEye Inc. (FEYE)
FormFactor, Inc. (FORM)
Inphi Corporation (IPHI)
Integrated Device Technology, Inc. (IDTI)
InterDigital, Inc. (IDCC)
j2 Global, Inc. (JCOM)
2019 PEER GROUP
M/A-COM Technology Solutions Holdings, Inc. (MTSI)
MaxLinear, Inc. (MXL)
Monolithic Power Systems, Inc. (MPWR)
Plantronics Inc. (PLT)
Power Integrations, Inc. (POWI)
Rambus Inc. (RMBS)
Semtech Corporation (SMTC)
Silicon Laboratories (SLAB)
TiVo Inc. (TIVO)
63
The peer group was used in early 2019 for purposes of evaluating whether compensation adjustments for our NEOs for 2019 were appropriate. The peer group was
unchanged from the peer group used for our NEOs for 2018. The details of our standings relative to our peer groups with respect to revenue and market
capitalization are below:
Each year, Compensia surveys the compensation practices of the peer group to assess the competitiveness of our compensation programs. Although we maintain
the peer group for executive compensation and performance reference purposes, the peer group compensation data is limited to publicly available information and
therefore does not necessarily provide comparisons for all officers. By contrast, survey data has the advantage of including data on executive positions beyond what
is available in public filings, but may not be specific to the selected companies in the peer group. In light of this, in early 2019 the Compensation Committee also
reviewed data from the Radford Executive Survey, which consists of approximately 600 companies throughout the United States primarily from technology
industries. We look at multiple cuts of data from the surveys, including national data across industries, location data across industries and specific industry cuts, and
within those industry and geographic groups we align revenues to be consistent with the peer group. With respect to the survey data presented to the Compensation
Committee, the identities of the individual companies included in the survey were not provided to the Compensation Committee, and the Compensation Committee
did not refer to individual compensation information for such companies.
We believe that by utilizing both publicly available peer group data and the survey data from the published surveys in which we participate, we are able to develop
the best set of robust competitive data reasonably available for use in making compensation decisions. The Compensation Committee, when making compensation
adjustments to the NEOs, reviews the publicly available peer group data and the survey data to ensure that, following any compensation adjustment, the total
compensation of NEOs falls within the Company’s guidelines.
Based on the objectives outlined above, the Compensation Committee strives to set target total direct compensation opportunity levels at competitive levels for the
markets in which we compete for executive talent and that are appropriate for the skills, experience and performance of each individual. However, the
Compensation Committee does not establish compensation levels based solely on benchmarking. The Compensation Committee instead relies on the judgment of
its members in making compensation decisions regarding base salaries, target bonus opportunity and long-term equity incentive awards after reviewing our
performance and carefully evaluating each NEO’s performance during the year, leadership qualities, business responsibilities, career with the Company, current
compensation arrangements and long-term potential to enhance stockholder value. The Compensation Committee does not guarantee that any NEO will receive a
specific market-derived compensation level.
64
In addition, the Compensation Committee has taken the approach of determining the mix of compensation elements, such as base salary, target bonus opportunity
and equity awards, on an individual basis. The Compensation Committee allocates target total direct compensation between cash and equity compensation based on
a number of objective and subjective factors, including competitive practices among the comparable companies, the role and responsibilities of the individual
executive, and the nature of the behaviors the incentives are intended to motivate. The Compensation Committee’s philosophy is to balance compensation between
long-term and short-term compensation, cash and non-cash compensation, and to take into account the roles and responsibilities of the individual executive.
Executive Compensation Components
The Compensation Committee oversees our executive compensation program. Our executive compensation program is designed to attract, motivate and retain
talented executives that will drive our financial performance, growth and operational excellence objectives while creating long-term stockholder value. The
Compensation Committee has established the following set of objectives for our executive compensation program:
•
•
•
Compensation should be market competitive: Our compensation program is designed to provide competitive total compensation relative to the relevant
labor markets for our NEOs while maintaining fiscal responsibility for our stockholders, allowing us to attract and retain individuals of appropriate
ability and managerial talent;
Compensation should reward performance and support our business strategy: A majority of our NEOs’ total compensation opportunities is variable or
dependent upon the achievement of key business results and is intended to link incentive award opportunities to the achievement of company and
functional performance goals or appreciation in our stock price; and
Compensation should be aligned with stockholders’ interests: Our compensation program also seeks to reward our executive officers for increasing our
stock price over the long-term and maximizing stockholder value by providing a significant portion of total compensation opportunities for our
executive officers in the form of direct ownership in our company through long-term equity incentive awards.
The principal elements of our executive compensation program are base salary, annual cash incentive bonus awards and long-term incentive compensation in the
form of equity awards. Base salary is intended to provide a baseline level of compensation for our NEOs. The remaining types of compensation, which in the
aggregate represent the majority of our NEOs’ total compensation opportunities, tie compensation directly to the achievement of corporate and/or functional
objectives. Each element of our executive compensation program is discussed in greater detail below.
65
Base Salary
The base salary for each executive officer is initially established through negotiation at the time the executive is hired, taking into account the executive’s
qualifications, experience, competitive market data, overall compensation arrangements, internal equity and relevant survey data. In determining whether to make
subsequent adjustments to the base salaries of our executive officers, the Compensation Committee reviews information regarding compensation paid to individuals
holding comparable positions at our peer group companies as well as relevant market data from the applicable Radford Executive Compensation survey. In
addition, each year the Compensation Committee determines whether to approve increases to our executive officers’ base salaries based upon the Company’s
performance, their individual performance in accomplishing functional or team goals, changes in duties and responsibilities and the recommendations of our CEO
(except with respect to his own base salary). No formulaic or guaranteed base salary increases are provided to the NEOs. In general, while the Compensation
Committee does not attempt to set the various components of executive compensation at a certain target percentile within our peer group, executive base salaries
fall generally between the 25th and 60th percentiles of the relevant comparable compensation data.
As part of the annual executive compensation review, on March 1, 2019, base salaries for Messrs. Andersen, Skaaden and Davis were increased to $380,000,
$380,000 and $364,000, respectively.
The annual base salaries of the NEOs for 2019, were as follows:
Named Executive Officer
Jon Kirchner
Robert Andersen
Paul Davis
Murali Dharan
Geir Skaaden
2019 Base
Salary
2018 Base
Salary
%
Adjustment
$
$
$
$
$
600,000 $
380,000 $
364,000 $
400,000 $
380,000 $
600,000
365,000
342,000
400,000
360,000
—
4%
6%
—
6%
The actual base salaries paid to the NEOs during 2019 are set forth in the “2019 Summary Compensation Table.”
Annual Performance-Based Cash Incentive Bonuses
Our NEOs are eligible to receive an annual cash incentive bonus under our annual bonus plan, which we refer to as our MBO Plan.
Annual Cash Incentive Bonus Targets
At the beginning of each year, the Compensation Committee approves the target and maximum annual cash incentive bonus opportunities for each NEO in the
MBO Plan. These target and maximum bonus opportunities are expressed as a percentage of base salary as follows:
Named Executive Officer
Jon Kirchner
Robert Andersen
Paul Davis
Murali Dharan
Geir Skaaden (1)
Target
Maximum
100%
75%
55%
100%
75%
200%
150%
110%
200%
150%
(1) As part of the annual executive compensation review, on March 1, 2019, the target bonus level for Mr. Skaaden was increased to 75%.
These target bonus levels are reviewed annually in consultation with Compensia as part of the compensation review process. Participants may receive a smaller
award (or no award) if we do not achieve a target level of performance and a larger award (capped at a level that provides executives an opportunity to earn larger
awards by exceeding performance objectives, but that does not create excessive risk by providing unlimited upside opportunities) if we exceed the target level of
performance. Payments of above-target bonuses may be made only if we exceed our corporate financial objectives.
66
Performance Goals
Bonuses paid to our NEOs under our MBO Plan are based on our achievement of specific pre-established corporate performance goals and upon an evaluation of
the individual officer’s performance for their efforts tied to the corporate and strategic goals for the year. The Compensation Committee also selects one or more
corporate performance goals applicable to the annual bonuses for that year and sets the target performance level for each such goal and a threshold performance
level below which no annual bonus will be paid. Achievement levels up to 100% may be awarded for each corporate performance goal based on actual performance
for the year relative to that goal. The corporate performance goals for 2019 were a combination of financial goals, innovation and key market penetration goals and
operational excellence goals that are all directly supportive of our short-term and long-term strategic plans. The weighted goal categories for each NEO are set forth
below.
Financial Goals
MBO Plan
Billings
Growth (1)
Non-GAAP
Operating
Profit (1)
Define,
develop,
market and
successfully
commercialize
world class
products and
technologies
Secure
multi- year
recurring
billing IP
licensing
agreements
60%
60%
30%
40%
30%
40%
40%
30%
30%
30%
—
—
10%
—
30%
Operational
Excellence
—
—
10%
—
10%
—
—
20%
30%
—
Named Executive Officer
Jon Kirchner
Robert Andersen
Paul Davis
Murali Dharan (2)
Geir Skaaden
(1) MBO Plan Billings and non-GAAP operating profit are described below.
(2) For measuring Mr. Dharan’s performance against financial goals, 40% was weighted on MBO Plan Billings from IP licensing and 30% was weighted on the full
company non-GAAP operating profit.
Annual Performance Goals and Achievement
For purposes of the MBO Plan, the Compensation Committee set a threshold financial goal or “gate” that had to be achieved before any annual bonuses were paid.
For purposes of the 2019 MBO Plan, this financial goal was for the Company to achieve positive non-GAAP operating profit for 2019 (the “Threshold Goal”). The
Threshold Goal was achieved for 2019 and the actual bonuses for the NEOs were then determined based on the corporate goal achievement as described below.
For purposes of the 2019 MBO Plan, the threshold and target performance goals selected and set by the Compensation Committee (as well as the Company’s actual
results for each such goal) were as follows (with the achievement percentage for performance between threshold and target determined by linear interpolation):
Target
Financial Goals (1)
Threshold
$441.7 million in total MBO Plan Billings (2)
$353.4 million in total MBO Plan Billings
$207.3 million in non-GAAP operating profit (3)
$165.8 million in non-GAAP operating profit
Achievement
93.7% achieved with $413.9 million in MBO Plan
Billings
97.1% achieved with $201.3 million in non-GAAP
operating profit
67
Target
Outcome
Goal: Define, develop, market and successfully commercialize world class products and technologies
Performance Goals
Drive new ecosystem creation and development across the business including IMAX
Enhanced, DTS Connected Radio, FotoNation DMS and ZiBond/DBI. Accelerate ML
development efforts across audio and imaging.
- Expanded the IMAX Enhanced ecosystem now available with 4 streaming services,
17 device manufacturers and in 14 countries.
- Signed our first connected radio and our first occupancy monitoring licenses.
- In mobile, we advanced our leadership position in gaming through the launch of
Sound Unbound and continued to add motherboard, PC, mobile and gaming
headset partners in this space.
- Significantly progressed an initiative to develop an advanced machine learning
hardware and software platform that we expect will drive meaningful future
growth and expansion.
- Completed the critical technology validation steps in 2019 to enable new hybrid
bonding licenses including a new patent and technology license agreement with
SK Hynix signed in early 2020.
Secure key license agreements and deepen strategic partnerships with at least 2 key
customers; improve closing ratio of Salesforce opportunities by >15% in both deal
volume and dollar value.
- Closed a strategic license agreement with a major European automotive
manufacturer for occupancy monitoring systems.
- Secured key licensing agreement with a global automotive manufacturer for launch
and support of Connected Radio.
- Improved the closing ratio of Salesforce opportunity pipeline by more than 20% in
both deal volume and dollar value.
Continue to develop and acquire at least three, qualified IP assets in support of our
ongoing semiconductor licensing strategy.
- Acquired high value semiconductor assets covering more than 150 patent families
and greater than 450 patents to support long term strength of semiconductor patent
portfolio.
Goal: Secure multi-year recurring billing IP licensing agreements
Close at least one IP licensing agreement with multi-year revenue; add at least $40M of
potential license value to our license pipeline.
- Closed one new IP license agreement of significant value from our IP pipeline.
- We exceeded our pipeline development goals, with several engagements with new
customers currently underway.
Goal: Operational Excellence
Non-quantifiable goals for Messrs. Skaaden and Davis were established by our CEO.
Overall performance against these objectives was assessed by the CEO at year-end.
- 100% achievement for Messrs. Davis and Skaaden.
(1) For measuring Mr. Dharan's performance against financial goals, the target performance level for MBO Plan Billings from IP licensing was set at $196.6
million. Billings for our IP business is calculated consistent with MBO Plan Billings as described in footnote (2) below.
(2) Billings for purposes of the MBO Plan (MBO Plan Billings) are the same as billings described under Additional Financial Data under Item 8. Financial
Statements and Supplementary Data contained in this Form 10-K.
(3) For purposes of calculating non-GAAP operating profit, we use the calculation of MBO Plan Billings as described in footnote (2) above, and exclude stock-
based compensation expenses, acquisition-related expenses and amortization of intangibles from our GAAP operating expenses. For further information regarding
our non-GAAP operating expenses, please see Other Supplementary Data under Item 8. Financial Statements and Supplementary Data contained in this Form 10-
K.
Multiplier
The bonuses to be paid to our NEOs who participated in the 2019 MBO Plan were able to be increased or decreased based on the matrix set forth below. The matrix
(“2019 MBO Matrix”) was structured as a combination of year over year MBO Plan Billings growth for the Company and annual non-GAAP operating profit
achievement (expressed as a percentage of MBO Plan Billings). For 2019, year over year MBO Plan Billings were down by 7.5% and non-GAAP operating profit
was 48.6% of MBO Plan Billings. Therefore, the multiplier for 2019 was 58.6% and the portion of bonuses tied to the financial metrics were multiplied by 58.6%.
The maximum multiplier under the MBO Plan is 2.0. The Compensation Committee also has the right to exercise its discretion to reduce any bonus payment, but it
did not choose to exercise that discretion with respect to the 2019 bonus payouts.
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2019 MBO Matrix
2019 Annual Cash Incentive Bonuses
Based on the above 2019 MBO Matrix, the annual cash incentive bonuses under the 2019 MBO Plan paid to Messrs. Kirchner, Andersen, Davis, Dharan and
Skaaden were calculated as follows:
Financial Goals
Performance Goals
Achievement
of MBO
Plan Billings
Growth Goal
(A) (1)
56.2% of 60%
56.2% of 60%
28.1% of 30%
40% of 40%
28.1% of 30%
Company
Achievement of
Non-GAAP
Operating
Profit Goal
(B) (2)
38.4% of 40%
38.4% of 40%
29.3% of 30%
29.3% of 30%
29.3% of 30%
Define,
develop,
market and
successfully
commercialize world
class
products and
technologies
(D)
Secure
multi-year
recurring
billing IP
licensing
agreements
(D)
MBO
Multiplier
(C)
Operational
Excellence
Goals (D)
58.6%
58.6%
58.6%
58.6%
58.6%
—
—
—
—
9% of 10%
—
27% of 30%
20% of 20%
30% of 30%
—
— $
— $
10% of 10% $
— $
10% of 10% $
Bonus
Target $
(E)
600,000 $
285,012 $
200,204 $
400,000 $
285,012 $
Bonus Achieved
[(A+B+D)*C]*E
334,231
158,766
112,908
232,361
157,397
Jon Kirchner
Robert Andersen
Paul Davis
Murali Dharan
Geir Skaaden
(1) Represents (a) 93.7% achievement relative to the full Company MBO Plan Billings objective (with $413.9 million in MBO Plan Billings), and (b) 100%%
achievement relative to the IP business MBO Plan Billings objective (with $203.6 million in IP business MBO Plan Billings), which achievement results were
weighted for the NEOs as described above. 100% is the maximum achievement level awarded under our MBO Plan above, provided that the MBO payment can
exceed 100% as a result of the multiplier.
(2) Represents 97.1% achievement relative to the full Company non-GAAP operating profit goal (with $201.3 million in non-GAAP operating profit), which
achievement results were weighted for the NEOs as described above. 100% is the maximum achievement level awarded under our MBO Plan, provided that the
MBO payment can exceed 100% as a result of the multiplier.
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Long-Term Compensation
Our long-term equity incentive compensation program is intended to provide our executive officers with opportunities to participate in the appreciation of our stock
price and to create unvested equity award value that will provide a financial incentive for executives to remain with and work for the continued success of the
organization. Our long-term equity incentive award program is generally comprised of three equity award vehicles, although the mix of such awards granted by the
Compensation Committee to our NEOs varies from year to year based on the Compensation Committee's determinations regarding the appropriate incentives for
such year:
•
•
•
Stock Option Awards: Stock options form a basis of our long-term equity incentive award program. Stock options align the interests of management and
stockholders by rewarding increases in stockholder value.
Restricted Stock Unit Awards (“RSU”): RSUs are used primarily in new hire executive packages and as part of our annual compensation review
process. RSUs increase or decrease in value just as a traded share of common stock will, aligning executives’ interests with stockholders’ interest.
Performance-Based Restricted Stock Unit Awards: Performance-based RSUs are provided to our CEO and select NEOs. These awards are earned upon
the achievement of certain strategic pre-established milestones and / or specific annual financial goals and are intended to align a significant portion of
these executives’ compensation to company performance.
Stock Option Awards
Generally, stock options have a four-year vesting schedule in order to provide an incentive for continued employment and expire ten years from the date of the
grant, subject to earlier forfeiture in the event of termination of employment. This provides a reasonable time frame in which to align the executive officer with the
price appreciation of our shares. The exercise price of stock options granted under the stock plans is 100% of the fair market value of the underlying common stock
on the date of grant. Under our equity plan, the fair market value of our common stock is equal to the last closing sales price per share on the Nasdaq Global Select
Market on the date of grant. Executives do not realize value from our stock options unless our stock price appreciates following the date of grant.
There were no stock option grants to our NEOs in 2019.
Time-Based Restricted Stock Unit Awards
We typically grant RSUs to selected new hires and other employees as part of the annual award program. The Compensation Committee believes that RSUs are an
effective tool for adding an immediate financial incentive to remain with and work for us that will mitigate potential attempts by labor market competitors to recruit
critical employees. In March 2019, as a result of our annual executive compensation review, the Compensation Committee granted Messrs. Andersen, Davis,
Dharan and Skaaden awards for 63,550, 39,720, 39,720 and 39,720 RSUs, respectively. The foregoing RSUs have a four-year vesting schedule from the grant date
in order to provide an incentive for continued employment. With respect to the RSU awards granted to our NEOs, the Compensation Committee determined the
size of such awards by targeting the median level of our peer group.
Mr. Kirchner did not receive RSU grants in 2019 as a result of his previous grants received in 2017.
Performance-Based Restricted Stock Unit Awards
The Compensation Committee grants performance-based RSUs to selected new hires and, on certain occasions, as part of the annual award program. The
Compensation Committee believes that performance-based RSUs are an important component of the NEOs’ compensation program and strives to establish an
incentive award mix for our CEO and other NEOs that includes performance-based awards, as appropriate. Historically, the Compensation Committee has granted
performance-based RSUs that are typically tied to a series of multi-year or annual performance measurement periods, with up to 200% of the “target” RSUs
eligible to be earned at the “maximum” performance level. The performance objectives are generally to be determined by mutual agreement of the NEO and the
Compensation Committee and vesting of such awards requires continued employment until the certification of the applicable performance requirements by the
Compensation Committee. Any performance-based RSUs that do not vest in a given performance period will be forfeited.
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The Compensation Committee believes that successive annual objectives are an effective incentive mechanism for the NEOs and our Company, as such a design
allows the Compensation Committee to more carefully tailor the performance objectives and set rigorous goals to incentivize performance as we refine and evolve
our strategic plan. This was particularly the case with the awards granted to Mr. Kirchner in 2017 given the Company’s ongoing transformation following the
acquisition of DTS and the formation of the long-term strategic plan. The annual objectives for 2019 for Mr. Kirchner were tied to the Company’s financial goals
in the 2019 MBO Plan. These profitability and growth objectives were used by the Compensation Committee for both annual bonus purposes and vesting of the
performance-based RSUs for 2019 as they are measurements that our Compensation Committee believes to be critical since they are directly aligned with
stockholder value creation.
The Compensation Committee also believes that performance-based RSUs with multiyear performance periods are another critical element of the compensation
program since it allows for longer term goals and incentives. As described below, in 2017, Mr. Dharan was granted a performance-based RSU award tied to a
three-year performance period.
No performance-based awards were granted to the NEOs during 2019. The performance-based RSUs granted to Messrs. Kirchner and Dharan during previous
years but eligible to be earned based on 2019 performance, are described below. Messrs. Kirchner and Dharan were the only NEOs who held performance-based
RSUs that were eligible to be earned based on 2019 performance.
The performance-based RSUs eligible to vest based on 2019 performance will be released in March 2020. The following table summarizes the performance-based
RSUs granted to our NEOs that were eligible to vest during 2019 and the number of RSUs that ultimately vested based on 2019 performance, as described below:
Number of
RSUs
Available for
Release at
Target
Based on
2019
Number of
RSUs
Available for
Release at
Maximum
Based on
2019
NEO
Jon Kirchner
Grant Date
performance
performance
3/1/17
8,750
17,500
6/1/17
77,718
155,436
Murali Dharan
10/16/17
10,500
21,000
Release Conditions
Based on financial targets for MBO Plan Billings growth
and non-GAAP operating profit in accordance with 2019
MBO multiplier matrix
Based on financial targets for MBO Plan Billings growth
and non-GAAP operating profit in accordance with 2019
MBO multiplier matrix
Based on four goals equally weighted in the following
areas: Long-term IP strategy, completion of Invensas
license and resolution of litigation, Expand the deal
pipeline by >$40m, acquisition of high-quality IP assets,
multi-year recurring IP licensing agreement and the
addition of significant deal value for future years.
Performance
Achieved
Shares
Released
58.6 %
5,128
58.6 %
45,543
95.0 %
9,975
•
Mr. Kirchner. Mr. Kirchner received two grants of performance-based RSUs in 2017, a portion of which were eligible to be earned based on 2019
performance. One of these awards was granted as part of our 2017 annual award process and his equity awards granted in June 2017 were made in
connection with his appointment as CEO. The June 2017 awards, including the performance-based RSUs, were intended by the Compensation
Committee to represent his long-term incentive opportunities for the duration of the initial three-year term of his employment agreement as CEO. Thus,
the Compensation Committee did not intend to, and did not in fact, grant Mr. Kirchner additional equity awards during this period.
At the time of grant, the Compensation Committee determined Mr. Kirchner’s promotional awards by reference to the market median level for a new
hire award and annual awards covering a total of three years in total target long-term incentive award value. The award was divided into 70%
performance-based RSUs and 30% time-based RSUs. The Compensation Committee believed it was important to establish a long-term incentive award
mix heavily weighted towards performance awards. The vesting of all of Mr. Kirchner’s performance-based RSUs is tied to a series of four one-year
performance measurement periods.
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In March 2017, Mr. Kirchner received 35,000 “target” performance-based RSUs. Of these performance-based RSUs, 8,750 may vest each calendar year
(commencing in 2017) at target performance and up to 17,500 may vest each year at maximum performance. These performance-based RSUs are
eligible to be earned based on annual performance objectives to be determined as described above.
In June 2017, Mr. Kirchner also received 310,873 “target” performance-based RSUs in connection with his appointment as our Chief Executive
Officer. Of these performance-based RSUs, 77,718 may be earned each calendar year (commencing in 2017) at the target performance level and up to
155,436 may be earned each year at maximum performance. These performance-based RSUs are eligible to be earned based on annual performance
objectives to be determined as described above.
For each of these awards, the portion eligible to vest based on 2019 performance was tied to the Company’s financial goals for MBO Plan Billings
growth and non-GAAP operating profit under the 2019 MBO Matrix, as described above.
•
Mr. Dharan. In October 2017, in connection with his commencement of employment Mr. Dharan received 42,000 “target” performance-based RSUs.
Of these performance-based RSUs, 10,500 may vest each calendar year (commencing in 2019) at target performance and up to 21,000 may vest each
year at maximum performance. These performance-based RSUs will be eligible to be earned based on annual performance objectives to be determined
as described above. The number of RSUs that actually vested with respect to this award is summarized in the table above. The portion of these awards
eligible to vest based on 2019 performance was tied to the goals for Mr. Dharan.
Mr. Dharan also received 60,000 performance-based RSUs that are eligible to vest based on achievement of deal performance goals over a three-year
performance period. The deal performance goals are the closing of two new revenue opportunities, with 50% of the RSUs eligible for vesting upon
achieving each of two deals. None of these deal performance-based RSUs vested during 2019.
Other Compensation
Employee Benefits
We maintain a Section 401(k) Savings/Retirement Plan (the “401(k) Plan”) to cover eligible employees of the Company and any designated affiliate in the United
States. The 401(k) Plan permits eligible employees to defer up to the maximum dollar amount allowed by law. The employees’ elective deferrals are immediately
vested and non-forfeitable upon contribution to the 401(k) Plan. We currently make discretionary matching contributions to the 401(k) Plan in an amount equal to
100% of deferrals up to a maximum of 4% of the participant’s eligible annual compensation and subject to certain other limits. Employer contributions to the Plan
are vested as follows: 50% after one year of service, and 100% after two years of service.
Perquisites and Other Personal Benefits
Executive officers are eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life and disability insurance, in each case on
the same basis as other employees, subject to applicable law. We also provide vacation and other paid holidays to all employees, including our executive officers.
Other than as described in this section, we generally do not provide any special perquisites or health or welfare benefits to our NEOs that are not available to all of
our employees.
Post-Employment Compensation Arrangements
We have entered into change in control severance agreements and severance agreements with our NEOs to provide appropriate post-employment compensation
arrangements in the event of certain terminations of employment, including in connection with a change in control of the Company. The Compensation Committee
believes these types of agreements are essential in order to attract and retain qualified executives and promote stability and continuity in our senior management
team. We believe that the stability and continuity provided by these agreements are in the best interests of our stockholders. For details, see “Employment
Contracts, Termination of Employment Arrangements and Change in Control Arrangements” below.
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Other Compensation Related Policies
Stock Ownership Guidelines
We maintain stock ownership guidelines that apply to our CEO, each other executive officer of the Company within the meaning of Exchange Act Rule 16a-1(f)
under the Securities Exchange Act of 1934, as amended, and each other employee that reports directly to our CEO (each, an “Executive”). Each Executive will be
expected to own shares of common stock of the Company with a market value equal to the following amounts for as long as he or she remains an Executive:
Chief Executive Officer
Other Executives
Title
Ownership Threshold
Three times (3x) base salary
One times (1x) base salary
Each Executive must hold 50% of all “Net Settled Shares” (as defined below) received from the vesting, delivery or exercise of equity awards granted under our
equity award plans until the Executive’s ownership equals or exceeds the applicable ownership threshold, as set forth above. In no event shall shares of common
stock purchased under our employee stock purchase plan be considered granted under our equity award plans for purposes of this share retention requirement. This
share retention requirement applies to an Executive only if such Executive has not achieved his or her applicable ownership threshold. For purposes of the
guidelines, “Net Settled Shares” means those shares of common stock that remain after payment of (a) the exercise price of stock options or purchase price of other
awards and all applicable withholding taxes, including shares sold or netted with respect thereto, and (b) all applicable transaction costs.
Insider Trading Policy
Our insider trading policy prohibits directors, executive officers, employees and all persons living in their households from trading any type of security, whether
issued by the Company or other companies with which we do business, while aware of material non-public information relating to the issuer of the security or from
providing such material non-public information to any person who may trade while aware of such information. Additionally, we restrict trading by our directors
and executive officers, as well as other categories of employees who may be expected in the ordinary course of performing their duties to have access to material
non-public information, to quarterly trading windows that begin one full trading day following the public disclosure of our quarterly or annual financial results and
that ends at 5:00 pm Eastern Time on the 15th day of the last month in each calendar quarter (or if the 15th day falls on a non-trading day, then on the trading day
immediately prior to the 15th day of the last month in each calendar quarter). Furthermore, our insider trading policy requires that certain specified individuals meet
with representatives of our legal department to confirm that they are not in possession of material non-public information prior to trading any security of the
Company during open window periods. Our insider trading policy also prohibits directors, executive officers, employees and all persons living in their households
from purchasing Company stock on margin, pledging Company stock to secure margin or other loans, short selling Company stock or buying or selling put or call
options on Company stock, or entering into other derivative contracts or hedging contracts.
Clawback Policy
We have adopted an incentive compensation “clawback” policy under which the Compensation Committee or the Board of Directors may require the
reimbursement or forfeiture of incentive compensation from an executive officer in the event of restatement of the company’s financial results due to its material
noncompliance with any financial reporting requirement under United States securities laws. We believe that by providing the Company with the appropriate power
to recover incentive compensation paid to an executive officer in this situation, the Company demonstrates its commitment to strong corporate governance. Under
our clawback policy, the Compensation Committee or the Board of Directors may require reimbursement from the executive officer for incentive compensation.
The amount of incentive compensation that may be recovered is the portion of any bonus paid to, and any performance-based equity awards earned by, the
executive officer that the executive officer would not have received if the Company’s financial results had been reported properly. The right to cause a forfeiture or
recovery of incentive compensation applies to incentive compensation during the three year period prior to the date on which the Company is required to prepare an
accounting restatement.
Derivatives Trading and Hedging Policy
Our insider trading policy prohibits the pledging, trading of derivatives or the hedging of our equity securities by our employees, including our executive officers,
and directors. Specifically, they may not, at any time:
•
trade in any puts, calls, covered calls or other derivative products involving company securities;
73
•
•
engage in any hedging or monetization transactions in a way that mitigates the full risk or rewards of ownership of the Company’s securities; or
hold company securities in a margin account or pledge company securities as collateral for a loan.
Compensation Risk Assessment
In early 2020, management assessed our compensation policies and programs for all employees for purposes of determining the relationship of such policies and
programs and the enterprise risks faced by the Company and presented its assessment to our Compensation Committee. Based on its assessment, management
recommended, and the Compensation Committee concluded, that none of our compensation policies or programs create risks that are reasonably likely to have a
material adverse effect on the Company. In connection with their review, management and the Compensation Committee noted certain key attributes of our
compensation policies and programs that help to reduce the likelihood of excessive risk taking, including:
•
•
•
•
•
•
The program design provides a balanced mix of cash and equity compensation, fixed and variable compensation and annual and long-term incentives.
Corporate performance objectives are designed to be consistent with the Company’s overall business plan and strategy, as approved by the Board of
Directors.
The determination of executive incentive awards is based on a review of a variety of indicators of performance, including both financial and non-
financial goals, reducing the risk associated with any single indicator of performance.
Incentive payments are capped at no more than 200% of target.
The Company’s equity awards generally vest over four year periods or based upon the achievement of performance objectives.
The Compensation Committee has the right to exercise negative discretion over executive incentive plan payments.
Tax and Accounting Considerations
Deduction Limitation
Section 162(m) of the Code generally disallows a tax deduction to a publicly-held company for compensation in excess of $1 million paid to its “covered
employees.” Prior to the Tax Cuts and Jobs Act of 2017 (“TCJA”), covered employees generally consisted of a company’s chief executive officer and its three most
highly compensated executive officers serving at the end of the taxable year (other than its chief financial officer), and compensation that qualified as
“performance-based” under Section 162(m) was exempt from this $1 million deduction limitation. As part of the TCJA, the ability to rely on this exemption was,
with certain limited exceptions, eliminated; in addition, the definition of covered employees was expanded to generally include all NEOs. Although we historically
maintained plans that were intended to permit the payment of deductible compensation under Section 162(m) of the Code if the requirements of Section 162(m)
were satisfied, subject to the limited transition relief rules in the TCJA, we may no longer be able to take a deduction for any compensation in excess of $1 million
that is paid to a covered employee. While the Compensation Committee considers the tax deductibility of each element of executive compensation as a factor in our
overall compensation program, the Compensation Committee retains the discretion to approve compensation that may not qualify for the compensation deduction.
We account for stock-based awards to our employees under the rules of FASB ASC Topic 718, which requires us to record the compensation expense over the
service period of the award. Accounting rules also require us to record cash compensation as an expense at the time the obligation is accrued.
Employment Contracts, Termination of Employment Arrangements and Change of Control Arrangements
The Company provides for certain severance payments and benefits if an executive officer’s employment is involuntarily or constructively terminated. In addition,
the Company provides enhanced severance payments and benefits if such a termination of employment occurs in connection with a change in control of the
Company. Such severance payments and benefits are designed to alleviate the financial impact of an involuntary termination of employment through salary, bonus
and health benefit continuation and with the intent of providing for a stable work environment. The Company believes that reasonable severance payments and
benefits for those NEOs with whom we have entered into severance agreements are important because it may be difficult for these NEOs to find comparable
employment within a short period of time following certain qualifying terminations of employment. The Company also believes these payments and benefits are a
means of reinforcing and encouraging the continued attention and dedication of key executives of the Company to their duties of employment without personal
distraction or a conflict of interest in circumstances which could arise from the occurrence of a change in control of the Company. We believe that the interests of
stockholders will be best served if the interests of our senior management are aligned with them, and providing change in control payments and benefits should
eliminate, or at least reduce, the reluctance of senior management to pursue potential change in control transactions that may be in the best interests of stockholders.
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The Company extends change in control payments and benefits because they are essential to help the Company fulfill its objectives of attracting and retaining key
managerial talent. These arrangements are intended to be competitive within our industry and company size and are necessary to attract highly qualified individuals
and encourage them to remain employed with the Company. In making the decision to extend the benefits, the Compensation Committee relied on the assurances
of its independent advisor that the programs are representative of market practice, both in terms of design and cost.
Employment Agreement with Jon Kirchner
The Company entered into an employment and severance agreement with Mr. Kirchner (the “Employment Agreement”) in connection with his appointment as our
CEO. The Employment Agreement superseded his then-existing severance and change in control severance arrangements.
The Compensation Committee believes that the Employment Agreement provides the Company with reasonable contractual protections and that making severance
commitments to the Company’s CEO leads to stronger retention than if such payments and benefits were not offered.
The Employment Agreement provides the Company a balance of contractual protections in exchange for severance for Mr. Kirchner in the event of his termination
of employment without cause and resignation for good reason, each as defined below. The Employment Agreement does not contain a single trigger provision that
would generally allow him to terminate his employment because of a change of control of the Company, nor does it entitle him to payments and benefits under the
Employment Agreement solely as a result of change of control of the Company. The Compensation Committee structured the Employment Agreement in this
fashion because it believes he should not be eligible to such payments and benefits absent other factors, such as a termination of employment without cause or
resignation for good reason.
The Employment Agreement provides that, if Mr. Kirchner’s employment is terminated by the Company without cause or if he resigns for good reason, he will be
entitled to receive the following severance payments and benefits:
•
•
•
•
•
•
a lump sum cash payment equal to 200% of his annual base salary;
200% multiplied by his target annual bonus for the calendar year in which termination occurs (which bonus shall be prorated for the portion of the
calendar year that has elapsed prior to the date of termination if such termination occurs more than 60 days prior to or more than 18 months following a
change in control of the Company);
continuation of health benefits for a period of up to 24 months following the date of termination;
immediate acceleration of vesting of his outstanding equity awards that would have vested over the 12-month period following the date of his separation
from service had he remained continuously employed during such period (with any performance awards that are eligible to be earned vesting based on
performance for the fiscal year in which his termination occurs vesting at the target) (provided that if such termination occurs within 60 days prior to or
within 18 months following a change in control of the Company, all of Mr. Kirchner’s unvested equity awards will vest (with performance awards
vesting at target) on the later of the date of his termination or the date of the change in control);
a post-termination exercise period for his outstanding stock options of 12 months from the date of termination, or, if earlier, the remaining life of the
equity grants; and
his full bonus amount under the Retention Plan.
The post-employment payments benefits described above will be paid upon Mr. Kirchner’s execution of a general release of claims in favor of the Company and
subject to his continued compliance with the confidentiality and proprietary rights covenant set forth in the Employment Agreement.
In addition, the Employment Agreement provided Mr. Kirchner with the right to receive up to a maximum of $30,000 for reimbursement of legal fees and expenses
incurred in connection with negotiating and executing the Employment Agreement.
The Employment Agreement has an initial term that expires on June 1, 2020, subject to automatic renewal for an additional year unless either party gives 90 days’
notice of nonrenewal. Nonrenewal of the initial three-year term by the Company will be deemed a termination of employment without cause and will result in the
payments and benefits described above, while expiration of the term under any other circumstances will not be deemed a termination of employment without cause
and will not give rise to any payments or benefits. The term of the Employment Agreement will automatically be extended for 18 months following a change in
control of the Company if the term would otherwise have expired during such 18-month period.
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Severance Agreements with Messrs. Andersen, Davis, Dharan and Skaaden
The Company has entered into severance agreements with each of Messrs. Andersen, Davis, Dharan and Skaaden. The terms of the agreements with Messrs.
Andersen, Davis and Skaaden are through February 2021, and Mr. Dharan’s agreement expires in October, 2021, or, if earlier, the date on which all payments or
benefits required thereunder have been paid or provided in their entirety. Each term may be renewed by mutual agreement between the Company and the NEO.
Each of the severance agreements provides that if the executive’s employment is terminated by us without cause or if the executive resigns for good reason, the
executive will be entitled to receive the following payments and benefits:
•
•
•
•
his fully earned but unpaid base salary and his earned but unpaid vacation through the date of termination;
a lump sum cash payment equal to 100% of his annual base salary;
continuation of health benefits for a period of 12 months following the date of termination; and
his target annual bonus for the calendar year in which termination occurs (which bonus shall be prorated for the portion of the calendar year that has
elapsed prior to the date of termination).
The severance payments and benefits described above will be paid upon the NEO’s execution of a general release of claims in favor of the Company.
Change in Control Severance Agreements with Messrs. Andersen, Davis, Dharan and Skaaden
The Company has entered into change in control severance agreements with Messrs. Andersen, Davis, Dharan and Skaaden. The terms of the agreements with
Messrs. Andersen, Davis and Skaaden are through February 2021, and Mr. Dharan’s agreement expires on October 16, 2021, or, if earlier, the date on which all
payments or benefits required thereunder have been paid or provided in their entirety; provided, that the term of each agreement will automatically be extended for
18 months following a change in control of the Company if the term would otherwise have expired during such period. The change in control severance agreements
also provide that, if an executive’s employment is terminated by us without cause or if the executive resigns for good reason, in either case, within 60 days prior to
or within 18 months following a change in control, the executive will be entitled to receive the following payments:
•
•
•
•
•
his fully earned but unpaid base salary and his earned but unpaid vacation through the date of termination;
a lump sum cash payment equal to 100% of his annual base salary;
his target annual bonus for the calendar year in which termination occurs;
continuation of health benefits for a period of up to 12 months following the date of termination; and
immediate acceleration of vesting of his outstanding equity awards (with any performance-based awards vesting at target, except to the extent
alternative acceleration is specifically provided for pursuant to the grant documents) as of the later of the date of termination or the date of such change
in control.
The severance benefits described above will be reduced by any severance benefits payable to Messrs. Andersen, Dharan and Skaaden under their severance
agreements and will be paid upon the executive’s execution of a general release of claims in favor of the Company and subject to their continued compliance with
the confidentiality and proprietary rights covenant set forth in the change in control severance agreement.
Defined Terms
For purposes of the Employment Agreement and the severance agreements and the change in control severance agreements, “cause” means, generally, an
executive’s gross negligence or willful misconduct in the performance of his duties, the executive’s willful and habitual neglect of or failure to perform his duties,
the executive’s commission of any material act of fraud, dishonesty or financial or accounting impropriety with respect to our Company which results in a personal
benefit to the executive, the executive’s failure to cooperate with us in any investigation or formal proceeding initiated by a governmental authority or otherwise
approved by our Board of Directors or the Audit Committee of the Board of Directors, the executive’s conviction of or plea of guilty or nolo contender to felony
criminal conduct (other than moving vehicle violations), the executive’s material violation of our confidentiality and proprietary rights agreement or any similar
agreement with the Company, or the executive’s material breach of any obligation or duty under the agreement or any written employment or other written policies
of our Company.
76
For purposes of the Employment Agreement and the severance agreements and the change in control severance agreements, “good reason” means, generally, a
material diminution in the executive’s authority, duties or responsibilities, a material diminution in the executive’s base compensation or target bonus opportunity,
unless such a reduction is imposed across-the-board to senior management, a material change in the geographic location at which the executive must perform his
duties, or any other action that constitutes our material breach of the agreement.
For purposes of the Employment Agreement and the severance agreements and the change in control severance agreements, “change in control” is generally
defined as:
•
•
a merger or consolidation in which the Company is a party, other than a merger or consolidation which results in our outstanding voting securities
immediately before the transaction continuing to represent a majority of the voting power of the acquiring company’s outstanding voting securities; or
the sale of all or substantially all of our assets.
2003 Equity Plan
We routinely grant our executive officers stock awards pursuant to our 2003 Equity Plan. In the event of a change of control, the vesting of each outstanding award
shall be subject to accelerated vesting such that 100% of the awards will become vested and exercisable or payable, as applicable, if the successor corporation
refuses to assume the awards, or to substitute substantially equivalent awards.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors (the “Compensation Committee”) has furnished this report on executive compensation.
This report, filed in accordance with Item 407(e)(5) of Regulation S-K, should be read in conjunction with the other information relating to executive compensation
which is contained elsewhere in this proxy statement and is not repeated here.
In this context, the Compensation Committee hereby reports as follows:
1. The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis section contained herein with management.
2. Based on the review and discussions referred to in paragraph (1) above, the Compensation Committee recommended to our Board of Directors,
and our Board of Directors has approved, that the Compensation Discussion and Analysis be included in this annual report on Form 10-K.
February 14, 2020
COMPENSATION COMMITTEE
CHRISTOPHER SEAMS, CHAIR
DAVID HABIGER
DARCY ANTONELLIS
77
Compensation of Named Executive Officers
2019 Summary Compensation of NEOs
Summary Compensation Table
The table below sets forth, for the fiscal years ended December 31, 2019, 2018 and 2017, the salary and bonus earned by and other compensation paid to our NEOs.
Option
Awards
($)(2)
Non-Equity
Incentive Plan
Compensation
($)(3)
All Other
Compensation
($)(4)
Name and Principal
Position
Jon Kirchner
Chief Executive Officer
Robert Andersen
Chief Financial Officer
Paul Davis
General Counsel and
Corporate Secretary
Murali Dharan
President of Tessera
Intellectual Property Corp.
Geir Skaaden
Chief Products and Services
Officer
Stock
Awards
($)(2)
2,729,764
2,729,764
7,409,373
1,444,428
887,960
1,483,584
902,796
665,970
1,138,511
Year
2019
2018
2017
2019
2018
2017
2019
Salary
($)
600,000
600,000
586,194
377,512
362,668
348,357
360,340
Bonus
($) (1)
—
5,049,366
—
—
—
—
—
2018
2019
340,008
400,000
2018
2017
2019
400,000
84,872
376,680
—
—
—
235,715
404,082
902,796
323,652
—
—
—
—
—
—
—
—
—
2018
2017
354,168
336,580
1,275,576
—
887,960
714,980
—
—
334,231
655,800
371,520
158,766
299,202
115,477
112,908
198,596
232,361
422,320
—
157,397
247,057
96,849
11,720
11,720
55,406
11,717
11,306
8,805
11,523
Total($)
3,675,715
9,046,650
8,422,493
1,992,423
1,561,136
1,956,223
1,387,567
10,557
11,720
1,215,131
1,782,592
11,720
1,060
11,715
1,069,755
813,666
1,448,588
11,680
11,020
2,776,441
1,159,429
(1) The amounts reflected in this column represent the retention bonuses paid to Messrs. Kirchner and Skaaden under the DTS, Inc. 2016 Executive Retention Bonus Plan.
(2) The amounts reflected in this column represent the grant date fair value for service-based stock and option awards granted to the NEOs in the relevant fiscal year and performance-based
stock awards scheduled to vest with respect to performance for the relevant fiscal year, measured in accordance with ASC 718, excluding the effect of estimated forfeitures, and do not reflect
whether the recipient has actually realized a financial benefit from these awards.
With respect to stock awards granted to Mr. Kirchner and Mr. Dharan during 2017 the vesting of which is performance-based, the vesting is tied to a series of four one-year performance
measurement periods and may be earned over four years, with 25% of the total “target” award eligible to be earned each year (commencing with 2017 for Mr. Kirchner and 2018 for Mr. Dharan)
at the “target” performance level based on the Company’s performance for such year, with up to 200% of the “target” award for each year eligible to be earned at the “maximum” performance
level. The performance objectives for each year are to be determined by mutual agreement of Mr. Kirchner and Mr. Dharan, respectively, and the Compensation Committee.
For 2019, the grant date fair value for the portion of the performance-based RSUs granted to Mr. Kirchner in 2017 that was eligible to be earned for 2019 performance was (a) with respect to the
March 1, 2017 award, $312,804 at “target” performance for 2019 (with the full grant date fair value of such award, assuming “maximum” performance, equal to $625,608), and (b) with respect
to the June 1, 2017 award, $2,416,960 at “target” performance for 2019 (with the full grant date fair value of such award, assuming “maximum” performance, equal to $4,833,920). Because the
portion of the performance-based RSUs eligible to be earned for 2019 were deemed probable of achievement at “target” levels for purposes of establishing the grant date fair value of such
awards under ASC 718, the grant date fair value of such awards at “target” performance is included in the column above.
For 2019, the grant date fair value for the portion of the performance-based RSUs granted to Mr. Dharan in 2017 that was eligible to be earned for 2019 performance was $235,715 at “target”
performance for 2019 (with the full grant date fair value of such award, assuming “maximum” performance, equal to $471,430). Because the portion of the performance-based RSUs eligible to
be earned for 2019 were deemed probable of achievement at “target” levels for purposes of establishing the grant date fair value of such awards under ASC 718, the grant date fair value of such
awards at “target” performance is included in the column above.
In March 2019, Messrs. Andersen, Davis, Dharan and Skaaden were granted 63,550, 39,720, 39,720 and 39,720 time-based RSUs, respectively. For the methodology of how the grant date fair
value is calculated for the stock awards, please see Note 13 of the Notes to Consolidated Financial Statements included in this Form 10-K.
(3) Includes compensation under the MBO Plan.
(4) For each of the NEOs, includes Company 401(k) contributions and life insurance premiums paid by the Company on behalf of the NEOs.
78
Grants of Plan-Based Awards
The table below sets forth information concerning grants of plan-based awards in 2019 to our NEOs.
All
Other
Stock
Estimated Future Payouts Under
Non-Equity Incentive Plan
Awards (2)
Estimated Future Payouts Under-
Equity Incentive Plan Awards (2)
Target
(#)
Maximum
(#)
Awards:
Number
of Shares
of Stock
or Units
(#) (3)
Grant
Date
Date
($)
Approval
Threshold Target
Maximum Threshold
Name
Jon Kirchner
Robert Andersen
Paul Davis
Murali Dharan
Geir Skaaden
03/01/2019 01/30/2019
03/01/2017 01/25/2017
06/01/2017 04/28/2017
03/01/2019 01/30/2019
03/01/2019 01/30/2019
03/01/2019 01/30/2019
10/16/2017 010/3/2017
03/01/2019 01/30/2019
(#)
($)
600,000
—
—
285,012
200,204
400,000
—
285,012
—
—
—
—
—
—
—
—
($)
1,200,000
—
—
570,024
400,409
800,000
—
570,024
—
—
—
—
—
—
—
—
—
8,750
77,718
—
—
—
10,500
—
—
17,500
155,436
—
—
—
21,000
—
—
—
—
63,550
39,720
39,720
—
39,720
—
—
—
—
—
—
—
—
All
Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)
Exercise
or Base
Price
of Option
Awards
($)
Grant
Date
Fair
Value
of Stock
and
Option
Awards
($) (4)
—
—
—
—
—
—
—
—
—
312,804
2,416,960
1,444,428
902,796
902,796
235,715
902,796
(1) These awards were granted under the Company’s MBO Plan. See further details in the “2019 Annual Cash Incentive Bonuses” section of the Compensation Discussion and Analysis section
above.
(2) Represents the portion of the performance-based RSUs granted to Messrs. Kirchner and Dharan in 2017 that was eligible to be earned based on 2019 performance. The goals and objectives
set by the Compensation Committee for the release of these RSUs are described in the “Equity Incentive Awards” section of the Compensation Discussion and Analysis section above. The
performance-based RSUs are subject to acceleration of vesting pursuant to agreements entered into with the NEOs as described in the “Employment Contracts, Termination of Employment
Arrangements and Change in Control Arrangements” section of the Compensation Discussion and Analysis section above. With respect to the performance-based RSUs granted to Mr. Kirchner
in 2017, amounts shown at “target” represent one-fourth of the total “target” number of performance-based RSUs granted on March 1, 2017 and June 1, 2017, representing that portion of the
total award that was eligible to be earned based on 2019 performance at “target” levels. With respect to stock awards granted to Mr. Kirchner during 2017 the vesting of which is performance-
based, the vesting is tied to a series of four one-year performance measurement periods and may be earned over four years, with 25% of the total “target” award eligible to be earned each year
(commencing with 2017) at the “target” level based on the Company’s performance for such year, with up to 200% of the “target” award for each year eligible to be earned at the “maximum”
performance level. The performance objectives for each year are to be determined by mutual agreement of Mr. Kirchner and the Compensation Committee. The maximum amounts shown reflect
one-fourth of the maximum number of performance-based RSUs (200% of the “target” performance-based RSUs granted) that can be earned presuming maximum performance under the 2019
performance goals. With respect to the performance-based RSUs granted to Mr. Dharan on October 16, 2017, amounts shown at “target” represent one-fourth of the total “target” number of
performance-based RSUs granted, representing that portion of the total award that was eligible to be earned based on 2019 performance at “target” levels. The vesting is tied to a series of four
one-year performance measurement periods and may be earned over four years, with 25% of the total “target” award eligible to be earned each year (commencing with 2018) at the “target” level
based on the Company’s performance for such year, with up to 200% of the “target” award for each year eligible to be earned at the “maximum” performance level. The performance objectives
for each year are to be determined by mutual agreement of Mr. Dharan and the Compensation Committee. The maximum amounts shown reflect one-fourth of the maximum number of
performance-based RSUs (200% of the “target” performance-based RSUs granted) that can be earned presuming maximum performance under the 2019 performance goals.
(3) The time-based RSU awards vest as follows: 25% of the shares subject to the equity awards will vest annually following the grant date of the award, to the extent the executive is employed
with or retained as a consultant by the Company on the vesting dates. The RSU awards are subject to acceleration of vesting pursuant to agreements entered into with the NEOs as described and
referenced under “Employment, Severance and Change in Control Arrangements".
(4) The amounts reflected in this column represent the grant date fair value for the stock awards reflected in the table above, measured in accordance with ASC 718, excluding the effect of
estimated forfeitures, and do not reflect whether the recipient has actually realized a financial benefit from these awards. For the methodology of how the grant date fair value is calculated for the
stock and option awards, please see Note 13 of the Notes to Consolidated Financial Statements included in this Form 10-K.
79
Outstanding Equity Awards at Fiscal Year-End
The table below sets forth information concerning the number and value of unexercised stock options and unvested stock awards held by the NEOs at December
31, 2019:
Option Awards (1)
Stock Awards (2)
Equity
Incentive
Plan Awards:
Number of
Unearned
Shares or
Units or
Other Rights
That Have
Not Vested
Market Value
of Shares or
Units of
Stock That
Have Not
Vested ($)
(3)
Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
($) (3)
Number of
Securities
Number of
Securities
Underlying Underlying
Unexercised Unexercised
Options
Exercisable Unexercisable Exercise Expiration
Option
Options
Option
Number of
Shares or
Units of
Stock That
Have Not
Vested (#)
Name
Grant Date
Jon
Kirchner(5)
Robert
Andersen
Paul
Davis
Murali
Dharan
Geir
Skaaden(5)
2/16/2011
2/14/2013
3/13/2014
2/11/2016
3/1/2017
3/1/2017
6/1/2017
6/1/2017
1/2/2014
3/1/2016
3/1/2017
4/27/2018
3/1/2019
10/14/2013
3/1/2016
3/1/2017
4/27/2018
3/1/2019
10/16/2017
10/16/2017
10/16/2017
3/1/2019
2/16/2011
2/13/2013
3/13/2014
2/11/2016
3/1/2017
4/27/2018
3/1/2019
(#)
57,773
39,716
31,518
—
—
—
—
—
39,000
—
—
—
—
13,800
—
—
—
—
35,000
—
—
—
4,850
3,142
8,917
—
—
—
—
(#)
Price ($)
— $ 43.77
— $ 19.34
— $ 19.24
—
—
—
—
—
—
—
—
—
—
— $ 19.73
—
—
—
—
—
—
—
—
— $ 20.43
—
—
—
—
—
—
—
—
35,000 $ 22.45
—
—
—
—
—
—
— $ 43.77
— $ 18.65
— $ 19.24
—
—
—
—
—
—
—
—
Date
2/16/2021
2/14/2023
3/13/2024
—
—
—
—
—
1/1/2024
—
—
—
—
10/13/2023
—
—
—
—
10/15/2027
—
—
—
2/16/2021
2/13/2023
3/13/2024
—
—
—
—
(2)
—
—
—
13,238
7,500
5,128 (4)
66,615
45,543 (4)
—
3,500
15,000
30,000
63,550
—
4,500
10,000
22,500
39,720
9,000
9,975 (4)
—
39,720
—
—
—
3,482
10,000
30,000
39,720
—
—
—
244,903
138,750
94,868
1,232,378
842,546
—
64,750
277,500
555,000
1,175,675
—
83,250
185,000
416,250
734,820
166,500
184,538
—
734,820
—
—
—
64,417
185,000
555,000
734,820
(#)
—
—
—
—
—
8,750 (4)
—
77,718 (4)
—
—
—
—
—
—
—
—
—
—
—
21,000 (4)
60,000 (6)
—
—
—
—
—
—
—
—
—
—
—
—
—
161,875
—
1,437,783
—
—
—
—
—
—
—
—
—
—
—
388,500
1,110,000
—
—
—
—
—
—
—
—
(1) Stock option awards have a ten-year term from the grant date and vest as follows: 1/4th of the shares subject to the equity awards will vest annually following the grant date, to the extent the
NEO is employed with or retained as a consultant by the Company on the vesting dates. All stock option awards are subject to acceleration of vesting pursuant to agreements entered into with
the respective executive officers as described and referenced under “Employment Contracts, Termination of Employment Arrangements and Change in Control Arrangements” below.
(2) The RSU awards vest as follows: 25% of the shares subject to the equity awards will vest annually following the grant date, to the extent the executive is employed with or retained as a
consultant by the Company on the vesting dates. For RSU awards granted on April 27, 2018, 25% of the shares vest on the first anniversary of the grant date, then on each of March 1, 2020-
2022 thereafter. All time-based restricted stock are subject to acceleration of vesting pursuant to agreements entered into with the respective executive officers as described and referenced under
“Employment, Severance and Change in Control Arrangements” below.
80
(3) This value is based on the December 31, 2019 closing price of our common stock of $18.50 as reported by the Nasdaq Global Select Market.
(4) Represents performance-based RSUs granted to the NEOs. The goals and objectives set by the Compensation Committee for the release of these RSUs are described in the “Equity Incentive
Awards” section of the Compensation Discussion and Analysis section above. The performance-based RSUs are subject to acceleration of vesting pursuant to agreements entered into with the
NEOs as described in the “Employment Contracts, Termination of Employment Arrangements and Change in Control Arrangements” section of the Compensation Discussion and Analysis
section above. With respect to the performance-based RSUs granted to Mr. Kirchner in 2017, amounts shown represent the total number of performance- based RSUs granted on March 1, 2017
and June 1, 2017 to Mr. Kirchner that were unvested as of December 31, 2019 and which will be eligible to be earned over the remainder of the four-year performance cycle, of which one-half
of such remaining awards were eligible to be earned based on 2019 performance. With respect to these performance-based RSUs, the vesting is tied to a series of four one-year performance
measurement periods and may be earned over four years, with 25% of the total “target” award eligible to be earned each year (commencing with 2017) at the “target” level based on the
Company’s performance for such year, with up to 200% of the “target” award for each year eligible to be earned at the “maximum” performance level. The performance objectives for each year
are determined by mutual agreement of Mr. Kirchner and the Compensation Committee. The performance-based RSUs that remain eligible to vest based on 2020 performance are reflected at
“target” levels in the table above and show what would be earned by Mr. Kirchner if “target” performance levels are achieved for 2020, the final remaining year in the four-year performance
cycle under the award. In January 2020, the Compensation Committee determined that the 2019 performance objectives were achieved at 58.6%. As a result, 50,671 of Mr. Kirchner’s RSUs will
vest in March 2020 (5,128 RSUs from the March 1, 2017 RSU award and 45,543 RSUs from the June 1, 2017 RSU award). The portion of these awards that will vest based on 2019 performance
is reflected in the table above based on actual performance and are shown in the “Number of Shares or Units of Stock That Have Not Vested” column since, as of December 31, 2019, the
performance conditions had been satisfied and only Mr. Kirchner’s continued employment through the vesting date was required.
With respect to the performance-based RSUs granted to Mr. Dharan in 2017, amounts shown represent the total number of performance-based RSUs granted on October 16, 2017 which will be
eligible to be earned over the four-year performance cycle commencing on January 1, 2018. With respect to these performance-based RSUs, the vesting is tied to a series of four one-year
performance measurement periods and may be earned over four years, with 25% of the total “target” award eligible to be earned each year (commencing with 2018) at the “target” level based on
the Company’s performance for such year, with up to 200% of the “target” award for each year eligible to be earned at the “maximum” performance level. The performance objectives for each
year are determined by mutual agreement of Mr. Dharan and the Compensation Committee. The performance-based RSUs that remain eligible to vest based on 2020 and 2021 performance are
reflected at “target” levels in the column above and show what would be earned by Mr. Dharan if “target” performance levels are achieved for each of the these remaining years in the four-year
performance cycle under the award. In January 2020, the Compensation Committee determined that the 2019 performance objectives were achieved at 95%. As a result, 9,975 of Mr. Dharan’s
RSUs will vest in March 2020. The portion of this award that will vest based on 2019 performance is reflected in the table above based on actual performance and is shown in the “Number of
Shares or Units of Stock That Have Not Vested” column since, as of December 31, 2019, the performance conditions had been satisfied and only Mr. Dharan’s continued employment through
the vesting date was required.
(5) Equity awards listed for Messrs. Kirchner and Skaaden for periods prior to December 1, 2016 are in connection with our assumption and conversion of certain of their equity awards in
connection with our acquisition of DTS on December 1, 2016.
(6) Reflects the number of RSUs that may vest pursuant to such award. These performance-based RSUs are eligible to vest based on achievement of deal performance goals over a three year
performance period. The deal performance goals are the closing of two revenue opportunities with 50% of the RSUs eligible for vesting upon achieving each of two deals. The performance-
based RSUs are subject to acceleration of vesting pursuant to agreements entered into with Mr. Dharan as described in the “Employment Contracts, Termination of Employment and Change in
Control Arrangements” section of the Compensation Discussion and Analysis section above.
Option Exercises and Stock Vested
The table below sets forth information concerning the number of shares acquired on exercise of option awards and vesting of stock awards in 2019 and the value
realized upon vesting by such officers.
Name
Jon Kirchner
Robert Andersen
Paul Davis
Murali Dharan
Geir Skaaden
Option Awards
Stock Awards
Number of
Shares
Acquired on
Exercise (#)
Value
Realized
on Exercise ($)
—
—
—
—
—
—
—
—
—
—
Number of
Shares
Acquired
on Vesting
(#)
153,090
24,500
20,500
15,000
21,100
Value
Realized
on Vesting
($) (1)
3,428,285
578,806
482,680
330,120
500,804
(1) Amounts realized from the vesting of stock awards are calculated by multiplying the number of shares that vested by the fair market value of a share of our
common stock on the vesting date.
Pension Benefits
We do not offer any plans that provide for specified retirement payments and benefits other than a tax-qualified 401(k) plan generally available to all employees.
81
Nonqualified Deferred Compensation
We do not offer nonqualified deferred compensation.
Potential Payments Upon Change In Control Termination
The following table summarizes potential change in control and severance payments benefits to be received by each NEO in the event of (1) a termination of
employment as a result of the NEO’s resignation for good reason or termination of employment by us other than for cause, and (2) such a termination within 60
days prior or 18 months following a change in control of the Company. The table assumes that the termination and change in control, if applicable, occurred on
December 31, 2019. For purposes of estimating the value of amounts of equity compensation to be received in the event of a termination of employment or change
in control, we have assumed a price per share of our common stock of $18.50, which represents the closing market price of our common stock as reported by the
Nasdaq Global Select Market on December 31, 2019, the last trading day of 2019. The following table reflects the payments and benefits that would have arisen
under the Employment Agreement and the severance and change in control severance agreements in effect with the NEOs on December 31, 2019.
Payment in
the Case of
a Resignation for
Good Reason or
a Termination
Other Than
for Cause, if
Within 60
Days Prior or
18 Months
Following a
Change in
Control ($)
Payment in the
Case of a
Resignation
for Good
Reason or
a Termination
Other Than for
Cause ($)
2,400,000(1)
2,400,000(1)
2,530,125(2)
75,009(4)
665,028(5)
—
24,569(6)
564,212(5)
—
28,888(6)
800,000(5)
—
36,830(6)
665,028(5)
—
36,830(6)
4,815,347(3)
75,009(4)
665,028(5)
2,072,925(3)
24,569(6)
564,212(5)
1,419,320(3)
28,888(6)
800,000(5)
2,594,070(3)
36,830(6)
665,028(5)
1,539,237(3)
36,830(6)
Benefit Type
Cash Payments
Value of Stock Award
Acceleration
Value of Health Benefits
Cash Payments
Value of Stock Award
Acceleration
Value of Health Benefits
Cash Payments
Value of Stock Award
Acceleration
Value of Health Benefits
Cash Payments
Value of Stock Award
Acceleration
Value of Health Benefits
Cash Payments
Value of Stock Award
Acceleration
Value of Health Benefits
Name
Jon Kirchner
Robert Andersen
Paul Davis
Murali Dharan
Geir Skaaden
(1) Cash payment is payable in a lump sum amount equal to 200% multiplied by the sum of (A) executive’s base salary at the time of termination, plus (B) Executive’s target annual bonus for the calendar year provided that in the event
termination occurs more than 60 days prior to the Change in Control or more than 18 months following a Change in Control, such bonus shall be prorated for the portion of the calendar year that has elapsed prior to the date of
termination. Because the termination is deemed to occur on December 31, 2019, the full target bonus is reflected in the table and no proration has been applied.
82
(2) Represents the value of those stock awards that would vest over the 12-month period following December 31, 2019 and stock awards with performance-based vesting scheduled to be measured with respect to the fiscal year ending
December 31, 2019 being deemed satisfied at target based on the difference between the exercise or purchase price, if any, and $18.50, which was the closing price of our common stock as reported by the Nasdaq Global Select Market on
December 31, 2019.
(3) Represents the value of all stock awards and all stock awards with performance-based vesting being deemed satisfied at target that would vest upon such termination based on the difference between the exercise or purchase price, if
any, and $18.50, which was the closing price of our common stock as reported by the Nasdaq Global Select Market on December 31, 2019. For purposes of the table above, the value of the performance-based equity awards is presumed
to be at target and not at maximum.
(4) Represents the estimated cost of 24 months of continued health coverage.
(5) Cash payment is payable in a lump sum equal to 100% of the sum of (A) executive’s base salary plus (B) the executive’s target annual bonus for the calendar year provided that in the event termination occurs more than 60 days prior
to the Change in Control or more than 18 months following a Change in Control, such bonus shall be prorated for the portion of the calendar year that has elapsed prior to the date of termination. Because the termination is deemed to
occur on December 31, 2019, the full target bonus is reflected in the table and no proration has been applied.
(6) Represents the estimated cost of 12 months of continued health coverage.
CEO Pay Ratio Disclosure
Rules adopted under the Dodd-Frank Wall Street Reform and Consumer Protection Act (as subsequently defined by the SEC under Item 402(c)(2)(x) of Regulation
S-K) require us to disclose the ratio of our CEO’s annual total compensation to the annual total compensation of the “median compensated” employee of all our
employees other than our CEO. This pay ratio is a reasonable estimate calculated in a manner consistent with SEC rules based on our payroll records and the
methodology described below. Because SEC rules for identifying the median of the annual total compensation of all employees allow companies to adopt a variety
of methodologies, apply certain exclusions, and make reasonable estimates and assumptions, the pay ratio reported by other companies may not be comparable to
our pay ratio, as other companies have different employee populations and compensation practices and may have used different methodologies, exclusions,
estimates and assumptions in calculating their pay ratios.
As permitted under SEC rules, we are using the same median employee identified for purposes of our fiscal 2018 CEO pay ratio, as we believe there have been no
changes to our employee population and compensation or the median employee's circumstances that would significantly impact our pay ratio disclosure.
To identify our median employee from our employee population in 2018, we compared the base pay and annual incentive awards of our employees as reflected in
our records for 2018. This compensation measure was consistently applied to all our employees included in the calculation. For simplicity, we calculated annual
base pay using a reasonable estimate of the hours worked during 2018 for hourly employees and actual salary paid for our remaining employees. We also
annualized the compensation of any permanent employees who were hired during 2018 and were working for us on December 1, 2018. Base pay and annual
incentive amounts for our employees outside the U.S. were converted to U.S. dollars using the average currency exchange rates for the year in each country. We
determined that, as of December 1, 2018 our employee population consisted of approximately 700 individuals, with 393 employees in the United States and 319
employees outside the United States. In determining our employee population, we excluded our employees in Australia (3 employees), France (2 employees),
Germany (4 employees), Japan (11 employees), Mexico (2 employees), and Singapore (8 employees) (a total of 30 individuals) pursuant to the de minimis
exemption provided under SEC rules.
The fiscal 2019 annual total compensation for the median employee was calculated at $141,716, and the annual total compensation of our CEO, Jon Kirchner, was
$3,675,715. Therefore, the ratio of annual total compensation of our Chief Executive Officer to our median employee for fiscal 2019 was 26 to 1.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to the beneficial ownership of shares of our common stock by (i) each current director and each nominee to
become a director, (ii) each named executive officer, (iii) all current directors, nominees and current executive officers as a group, and (iv) each person who we
know beneficially owns more than 5% of our common stock as of February 7, 2020.
83
Number of Shares
Percentage Ownership
The number of shares of common stock outstanding used in calculating the percentage for each listed person or entity includes common stock underlying options
held by the person or entity that are exercisable within 60 days of February 7, 2020, and common stock underlying RSUs held by the person or entity that will vest
within 60 days of February 7, 2020, but excludes common stock underlying options and RSUs held by any other person or entity. Percentage of beneficial
ownership is based on 49,861,846 shares of common stock outstanding as of February 7, 2020.
Name of Beneficial Owner
Five Percent Stockholders
BlackRock, Inc. (1)
Entities affiliated with Vanguard Group, Inc. (2)
Ameriprise Financial, Inc. (3)
Dimensional Fund Advisors LP (4)
Directors and Executive Officers
Jon Kirchner (5)
Robert Andersen (6)
Geir Skaaden (7)
Murali Dharan (8)
Paul Davis (9)
Richard S. Hill
Christopher Seams
George A. Riedel
David Habiger
Sue Molina
Darcy Antonellis
All directors and executive officers as a group (11 persons) (10)
511,848
120,329
73,751
68,651
67,914
67,610
39,758
31,283
14,060
8,314
3,315
1,006,833
1.0%
*
*
*
*
*
*
*
*
*
*
2.0%
7,487,487
5,693,549
4,042,990
2,509,867
15.0%
11.4%
8.1%
5.0%
* Represents beneficial ownership of less than 1% of the outstanding shares of our Common Stock.
(1) The address for BlackRock, Inc. is 55 East 52nd Street, New York, NY 10055. Black Rock, Inc. has sole voting power as to 7,375,813 shares and sole dispositive power as to
7,487,487 shares. The information in this table and footnote is based on solely on information contained in Schedule 13G filed with the SEC on February 4, 2020 by Black Rock,
Inc.
(2) The address for Vanguard Group, Inc. is 100 Vanguard Blvd., Malvern, PA, 19355. Vanguard Group, Inc. has sole voting power as to 59,977 shares, shared voting power as
to 14,214 shares, sole dispositive power as to 5,626,332 shares and shared dispositive power as to 67,217 shares. The information in this table and footnote is based on solely on
information contained in Schedule 13G filed with the SEC on February 12, 2020 by Vanguard Group, Inc.
(3) The address for Ameriprise Financial, Inc. is 145 Ameriprise Financial Center, Minneapolis, MN 55474. Ameriprise Financial, Inc. has shared voting power as to 3,872,172
shares and shared dispositive power as to 4,042,990 shares. The information in this table and footnote is based solely on information contained in Schedule 13G filed with the
SEC on February 14, 2020 by Ameriprise Financial, Inc.
(4) The address for Dimensional Fund Advisors LP is 6300 Bee Cave Road, Austin, TX 78746. Dimensional Fund Advisors LP has sole voting power as to 2,395,893 shares
and sole dispositive power as to 2,509,867 shares. The information in this table and footnote is based on solely on information contained in Schedule 13G filed with the SEC on
February 12, 2020 by Dimensional Fund Advisors LP.
(5) Includes 129,007 shares issuable upon exercise of outstanding options held by Mr. Kirchner, exercisable within 60 days of February 7, 2020 and 67,559 shares subject to
RSUs/PSUs that will vest and settle within 60 days of February 7, 2020.
(6) Includes 39,000 shares issuable upon exercise of outstanding options held by Mr. Andersen, exercisable within 60 days of February 7, 2020 and 36,888 shares subject to
RSUs that will vest and settle within 60 days of February 7, 2020.
(7) Includes 16,909 shares issuable upon exercise of outstanding options held by Mr. Skaaden, exercisable within 60 days of February 7, 2020 and 28,412 shares subject to
RSUs that will vest and settle within 60 days of February 7, 2020.
(8) Includes 35,000 shares issuable upon exercise of outstanding options held by Mr. Dharan, exercisable within 60 days of February 7, 2020 and 19,905 shares subject to
RSUs/PSUs that will vest and settle within 60 days of February 7, 2020.
(9) Includes 13,800 shares issuable upon exercise of outstanding options held by Mr. Davis, exercisable within 60 days of February 7, 2020 and 26,930 shares subject to RSUs
that will vest and settle within 60 days of February 7, 2020.
(10) Includes 233,716 shares issuable upon exercise of outstanding options held by current officers and directors as a group, exercisable within 60 days of February 7, 2020 and
179,694 shares subject to RSUs/PSUs that will vest and settle within 60 days of February 7, 2020.
Equity Compensation Plan Information
We have three equity compensation plans that have been approved by our stockholders: the Seventh Amended and Restated 2003 Equity Incentive Plan, the
Amended and Restated 2003 Employee Stock Purchase Plan (the “ESPP”) and the Second Amended and Restated International Employee Stock Purchase Plan (the
“IESPP”). The following table sets forth the number and weighted-average exercise price of securities to be issued upon exercise of outstanding options, warrants
and rights, and the number of securities remaining available for future issuance under all of our equity compensation plans, at December 31, 2019:
84
Number of
Securities to
be Issued
upon
Exercise of
Outstanding
Options,
Warrants and
Rights (a)
Weighted-Average
Exercise
Price of
Outstanding
Options,
Warrants
and Rights
(b)
Number of
Securities
Remaining
Available
for Future
Issuance
under
Equity
Compensation Plans
(Excluding
Securities
Reflected in
Column (a))
(c)
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security
holders
Totals
2,953,098(1)
$
23.70(2)
3,184,706(3)
0
2,953,098
0
0
3,184,706
(1) The number under column (a) includes 303,971 shares issuable upon the exercise of outstanding options with a weighted average exercise price of $23.70 and 2,649,127 shares issuable upon the vesting of outstanding restricted stock
unit awards and performance-based restricted stock unit awards at “target” levels under our Seventh Amended and Restated 2003 Equity Incentive Plan. This number does not include awards assumed by us in connection with our
acquisition of DTS on December 1, 2016. In connection with our acquisition of DTS, each then outstanding, out-of-the-money, vested or unvested option and each then outstanding, in-the-money, unvested option to purchase shares of
DTS common stock was assumed by the Company and converted into an option to purchase shares of the Company’s common stock pursuant to the exchange ratio set forth in the merger agreement, and each then outstanding unvested
DTS restricted stock unit award was assumed by the Company and converted into a restricted stock unit award of the Company pursuant to the exchange ratio set forth in the merger agreement, in each case with substantially the same
terms and conditions as applied to such DTS equity award immediately prior to the effective time of the acquisition. As a result, we assumed awards under the DTS, Inc. 2014 New Employee Incentive Plan, the SRS Labs, Inc. 2006
Stock Incentive Plan, DTS, Inc. 2008 DLL Share Option Plan, DTS, Inc. 2003 Equity Incentive Plan and the DTS, Inc. 2012 Equity Incentive Plan. While the plans will continue to govern the existing awards granted thereunder, they
were terminated in connection with the acquisition as to any future awards. As of December 31, 2019, (i) options for 5,157 shares of our common stock were outstanding under the DTS, Inc. 2014 New Employee Incentive Plan with a
weighted-average exercise price of $31.63 and 7,220 shares underlying awards of restricted stock units were outstanding under the DTS, Inc. 2014 New Employee Incentive Plan; (ii) options for 37,539 shares of our common stock were
outstanding under the SRS Labs, Inc. 2006 Stock Incentive Plan with a weighted- average exercise price of $21.67 and 8,241 shares underlying awards of restricted stock units were outstanding under the SRS Labs, Inc. 2006 Stock
Incentive Plan; (iii) options for 121,201 shares of our common stock were outstanding under the DTS, Inc. 2003 Equity Incentive Plan with a weighted-average exercise price of $43.63; (iv) options for 137,427 shares of our common
stock were outstanding under the DTS, Inc. 2012 Equity Incentive Plan with a weighted-average exercise price of $19.51 and 55,905 shares underlying awards of restricted stock units were outstanding under the DTS, Inc. 2012 Equity
Incentive Plan.
(2) Represents the weighted-average exercise price of outstanding options under our Seventh Amended and Restated 2003 Equity Incentive Plan.
(3) Includes 2,132,967 shares remaining available for future issuance under the Seventh Amended and Restated 2003 Equity Incentive Plan, 749,417 shares remaining available for future issuance under the ESPP, of which 749,417 shares
were eligible to be purchased during the offering periods in effect on December 31, 2019, and 302,322 shares remaining available for future issuance under the Existing IESPP, of which 302,322 shares were eligible to be purchased
during the offering periods in effect on December 31, 2019, each as of December 31, 2019.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
Since January 1, 2019, there has not been, nor is there currently planned, any transaction or series of similar transactions to which we were or are a party in which
the amount involved exceeds $120,000 and in which any director, nominee for director, executive officer or holder of more than 5% of our capital stock or any
member of their immediate families had or will have a direct or indirect material interest other than the compensatory transactions described above and the
agreements and transactions described below.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors and officers. As permitted by the Delaware General Corporation Law, we have adopted
provisions in our restated certificate of incorporation that limit or eliminate the personal liability of our directors to us for monetary damages for a breach of their
fiduciary duty as a director, except for liability for:
•
•
•
•
any breach of the director’s duty of loyalty to us or our stockholders;
any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
any unlawful payments related to dividends or unlawful stock repurchases, redemptions or other distributions; or
any transaction from which the director derived an improper personal benefit.
85
Pursuant to our restated certificate of incorporation and bylaws, we are obligated, to the maximum extent permitted by Delaware law, to indemnify each of our
directors and officers against expenses (including attorneys’ fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. A “director” or “officer” includes any person who is or was
a director or officer of us, is or was serving at our request as a director or officer of another enterprise or was a director or officer of a corporation which was a
predecessor corporation of us or of another enterprise at the request of the predecessor corporation. Pursuant to our restated certificate of incorporation and bylaws,
we also have the power to indemnify our employees to the extent permitted under Delaware law. Our restated certificate of incorporation and bylaws provide that
our Board of Directors may authorize the advancement of expenses for the defense of any action for which indemnification is required or permitted. Our restated
certificate of incorporation and bylaws permit us to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of
us or, at our request, served in such a capacity for another enterprise.
We have entered into indemnification agreements with each of our directors and officers that are, in some cases, broader than the specific indemnification
provisions permitted by Delaware law, and that may provide additional procedural protection. The indemnification agreements require us, among other things, to:
•
•
indemnify officers and directors against certain liabilities that may arise because of their status as officers or directors; and
advance expenses, as incurred, to officers and directors in connection with a legal proceeding, subject to limited exceptions.
At present, there is no pending litigation or proceeding involving any of our directors, officers or employees in which indemnification is sought, nor are we aware
of any threatened litigation or proceeding that may result in claims for indemnification.
Procedures For Approval Of Related Person Transactions
As provided by the Company’s written Audit Committee Charter, the Audit Committee must review all related party transactions on an ongoing basis, and approve
any related party transaction. The Company’s written Code of Business Conduct and Ethics Policy requires that all directors, officers and employees make
appropriate disclosure of any situation that could give rise to a conflict of interest to the Company’s General Counsel.
Compensation Committee Interlocks And Insider Participation
During the year ended December 31, 2019, Messrs. Seams, Habiger and Ms. Antonellis served as members of the Compensation Committee. Ms. Antonellis was
appointed to the Compensation Committee in May 2019. None of such Compensation Committee members has ever been an officer or employee of the Company
or any of its subsidiaries during their appointment on the Compensation Committee. In addition, during the year ended December 31, 2019, none of our executive
officers served as a member of the Board of Directors or Compensation Committee of an entity that has one or more executive officers serving as members of our
Board of Directors or our Compensation Committee.
Item 14. Principal Accountant Fees and Services
Fees For Professional Audit Services
The following is a summary of fees billed by the Company’s independent registered public accountants, PricewaterhouseCoopers LLP, for the years ended
December 31, 2019 and 2018:
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees(3)
All Other Fees(4)
Total Fees
Fiscal Year
Fiscal Year
2019
1,925,000 $
—
—
222,000
2,147,000 $
2018
1,956,000
14,000
—
157,000
2,127,000
$
$
(1) Represents the aggregate fees billed for the audit of the Company’s financial statements, review of the financial statements included in
86
the Company’s quarterly reports and services in connection with the statutory and regulatory filings or engagements for those years.
(2) Represents the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial
statements and are not reported under “audit fees.”
(3) Represents the aggregate fees billed for tax compliance, advice and planning.
(4) Represents the aggregate fees billed for all products and services provided that are not included under “audit fees,” “audit-related fees” or “tax fees.”
Audit Committee Pre-Approval Policies
Before an independent registered public accountant is engaged by the Company or its subsidiaries to render audit or non-audit services, the Audit Committee shall
pre-approve the engagement. Audit Committee pre-approval of audit and non-audit services will not be required if the engagement for the services is entered into
pursuant to pre-approval policies and procedures established by the Audit Committee regarding the Company’s engagement of the independent registered public
accountants, provided the policies and procedures are detailed as to the particular service, the Audit Committee is informed of each service provided and such
policies and procedures do not include delegation of the Audit Committee’s responsibilities under the Exchange Act to the Company’s management. The Audit
Committee may delegate to one or more designated members of the Audit Committee the authority to grant pre-approvals, provided such approvals are presented to
the Audit Committee at a subsequent meeting. If the Audit Committee elects to establish pre-approval policies and procedures regarding non-audit services, the
Audit Committee must be informed of each non-audit service provided by the independent registered public accountants. Audit Committee pre-approval of non-
audit services (other than review and attest services) also will not be required if such services fall within available exceptions established by the SEC. All non-audit
services provided by PricewaterhouseCoopers LLP during years 2019 and 2018 were pre-approved by the Audit Committee in accordance with the pre-approval
policy described above.
87
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
(1) Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Cash Flows
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive loss
Consolidated Statements of Equity
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
Valuation and Qualifying Accounts
(3) Exhibits
The exhibits listed on the Exhibit Index preceding the signature page to this Annual Report are filed as part of this Annual Report.
88
Page
Number
F-1
F-3
F-4
F-5
F-6
F-7
F-8
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Xperi Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Xperi Corporation and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and
the related consolidated statements of operations, of comprehensive loss, of equity and of cash flows for each of the three years in the period ended December 31,
2019, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2019 appearing
under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial
reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December
31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which
it accounts for revenue in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting
appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over
financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
F-1
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or
required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical
audit matter or on the accounts or disclosures to which it relates.
Revenue recognition – Per-Unit Royalty Revenue - A Component of Royalty and License Fees Revenue
As described in Note 4 to the consolidated financial statements, for certain licensees, royalty revenues are 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 arrangement pay a per-unit royalty for
each product manufactured or sold, as set forth in its license agreement. Revenue from per-unit royalty is a component of royalty and license fees revenue which
was $280.1 million for the year ended December 31, 2019. Management estimates the royalties earned each quarter based on its forecast of manufacturing and sales
activity incurred by licensees in that quarter. Estimating licensees’ quarterly royalties prior to receiving the royalty reports requires management to make significant
assumptions and judgments related to forecasted trends and growth rates used to estimate quantities shipped by customers.
The principal considerations for our determination that performing procedures relating to revenue recognition – per-unit royalty revenue – a component of royalty
and license fees revenue is a critical audit matter are there was significant judgment made by management to determine the estimate of licensees’ royalties earned
each quarter. This in turn led to significant auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to estimated
licensees’ quarterly royalties, including the significant assumptions and judgments related to forecasted trends and growth rates.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial
statements. These procedures included testing the effectiveness of controls relating to the per-unit royalty revenue recognition process, including controls over
estimating licensees’ quarterly royalties. These procedures also included, among others, for estimated licensees’ quarterly royalties where the royalty reports were
not yet received, testing management’s process for estimating royalties earned, including evaluating the appropriateness of the method testing the completeness,
accuracy, and relevance of underlying data used in the estimate and evaluating the reasonableness of significant assumptions used by management, including
forecasted trends and growth rates used to estimate quantities shipped by customers. Evaluating the reasonableness of the forecasted trends and growth rates
assumptions involved considering i) the accuracy of historical forecasting, ii) historical sales trends, and iii) market conditions and industry trends.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 18, 2020
We have served as the Company’s auditor since 1999.
F-2
XPERI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation of property and equipment
Amortization of intangible assets
Stock-based compensation expense
Deferred income tax
Other
Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable
Unbilled contracts receivable, net
Other assets
Accounts payable
Accrued and other liabilities
Deferred revenue
Net cash from operating activities
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from sale of property and equipment
Purchases of short-term investments
Proceeds from sales of short-term investments
Proceeds from maturities of short-term investments
Acquisition of business, net of cash acquired
Purchases of intangible assets
Net cash from investing activities
Cash flows from financing activities:
Repayment of debt
Contingent consideration payments after acquisition
Dividend paid
Proceeds from exercise of stock options
Proceeds from employee stock purchase program
Repurchases of common stock
Net cash from financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Interest paid
Income taxes paid, net of refunds
2019
Years Ended December 31,
2018
2017
$
(64,033) $
(1,763) $
(56,558)
6,721
99,946
31,554
(38,611)
2,654
6,191
130,359
3,675
1,886
(8,679)
(2,410)
169,253
(8,813)
55
(40,008)
6,833
27,290
—
(4,500)
(19,143)
(150,000)
(1,200)
(39,502)
695
5,329
(4,506)
(189,184)
(39,074)
113,625
$
74,551 $
6,676
108,450
31,011
(15,578)
5,322
(14,381)
25,503
(950)
(1,469)
(8,915)
1,227
135,133
(3,338)
—
(20,095)
8,540
30,925
(500)
(4,100)
11,432
(100,000)
(419)
(39,187)
8,008
5,196
(44,798)
(171,200)
(24,635)
138,260
113,625 $
7,201
111,930
33,462
(18,294)
3,786
(3,551)
48,168
3,458
(3,298)
19,170
1,791
147,265
(3,323)
235
(33,102)
1,035
16,487
—
(176)
(18,844)
(6,000)
—
(39,509)
4,873
4,132
(19,283)
(55,787)
72,634
65,626
138,260
$
$
20,891 $
15,001 $
23,134 $
23,679 $
28,068
15,678
The accompanying notes are an integral part of these consolidated financial statements.
F-3
XPERI CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except for par value)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance for doubtful accounts of $566 and $779 respectively
Unbilled contracts receivable
Other current assets
Total current assets
Long-term unbilled contracts receivable
Property and equipment, net
Operating lease right-of-use assets
Intangible assets, net
Long-term deferred tax assets
Goodwill
Other assets
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
Accrued legal fees
Accrued liabilities
Current portion of long-term debt
Deferred revenue
Total current liabilities
Long-term deferred tax liabilities
Long-term debt, net
Noncurrent operating lease liabilities
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 15)
Xperi stockholders’ equity:
Preferred stock: $0.001 par value; 10,000 shares authorized and no shares issued and outstanding
Common stock: $0.001 par value; 150,000 shares authorized; 63,622 and 62,212 shares issued,
respectively, and 49,620 and 48,408 shares outstanding, respectively
Additional paid-in capital
Treasury stock at cost; 14,002 and 13,804 shares of common stock at each period end, respectively
Accumulated other comprehensive loss
Retained earnings
Total Xperi stockholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
December 31,
2019
2018
74,551 $
46,926
24,177
121,826
13,735
281,215
26,672
32,877
17,786
232,275
3,660
385,784
67,676
1,047,945 $
4,650 $
1,316
41,433
—
720
48,119
29,735
334,679
13,414
76,898
502,845
113,625
40,739
30,294
195,436
17,434
397,528
86,280
31,037
—
327,720
3,677
385,784
3,081
1,235,107
2,764
2,920
45,336
—
3,130
54,150
64,994
482,193
—
15,623
616,960
—
—
64
768,284
(368,701)
(53)
148,317
547,911
(2,811)
545,100
1,047,945 $
62
730,695
(364,195)
(328)
253,208
619,442
(1,295)
618,147
1,235,107
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-4
XPERI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Revenue:
Royalty and license fees
Total revenue
Operating expenses:
Cost of revenue
Research, development and other related costs
Selling, general and administrative
Amortization expense
Litigation expense
Total operating expenses
Operating income (loss)
Interest expense
Other income and expense, net
Income (loss) before taxes
Provision for (benefit from) income taxes
Net loss
Less: Net loss attributable to noncontrolling interest
Net loss attributable to Xperi
Loss per share attributable to Xperi:
Basic
Diluted
Weighted average number of shares used in per share calculations-basic
Weighted average number of shares used in per share calculations-diluted
$
$
$
$
$
2019
Years Ended December 31,
2018
2017
280,067 $
280,067
8,460
112,345
122,897
99,946
5,127
348,775
(68,708)
(23,377)
9,028
(83,057)
(19,024)
(64,033) $
(1,503)
(62,530) $
406,133 $
406,133
13,291
106,406
127,907
108,450
26,099
382,153
23,980
(25,665)
8,595
6,910
8,673
(1,763) $
(1,474)
(289) $
(1.27) $
(1.27) $
(0.01) $
(0.01) $
49,120
49,120
48,823
48,823
373,732
373,732
6,308
105,849
144,649
111,930
36,496
405,232
(31,500)
(28,292)
1,449
(58,343)
(1,785)
(56,558)
—
(56,558)
(1.15)
(1.15)
49,251
49,251
The accompanying notes are an integral part of these consolidated financial statements.
F-5
XPERI CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Net loss
Other comprehensive income (loss):
Net unrealized gains (losses) on available-for-sale debt securities, net of tax
Other comprehensive income (loss)
Comprehensive loss
Less: Comprehensive loss attributable to noncontrolling interest
Comprehensive loss attributable to Xperi
$
2019
Years Ended December 31,
2018
2017
$
(64,033) $
(1,763) $
(56,558)
275
275
(63,758)
(1,503)
(62,255) $
(25)
(25)
(1,788)
(1,474)
(314) $
(155)
(155)
(56,713)
—
(56,713)
The accompanying notes are an integral part of these consolidated financial statements.
F-6
XPERI CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
Total Xperi Stockholders' Equity
Common Stock
Shares
Amount
Additional
Paid-In
Capital
48,854
$
59
$
644,194
10,742
Treasury Stock
Shares
Amount
$
(300,114 ) $
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Noncontrolling
Interest
Total Equity
507,785
$
Balance at December 31, 2016
Cumulative-effect adjustment from adoption of
ASU 2016-09
Net loss
Other comprehensive loss, net of tax
Cash dividends paid on common stock ($0.80
per share)
Issuance of common stock in connection with
exercise of stock options
Issuance of common stock in connection with
employee stock purchase plan
Issuance of restricted stock, net of shares
canceled
Repurchases of common stock, shares
exchanged
Repurchases of common stock
Stock-based compensation expense
Balance at December 31, 2017
Cumulative-effect adjustment from adoption of
ASU 2014-09
Issuance of subsidiary shares to noncontrolling
interest
Net loss
Other comprehensive loss, net of tax
Cash dividends paid on common stock ($0.80
per share)
Issuance of common stock in connection with
exercise of stock options
Issuance of common stock in connection with
employee stock purchase plan
Issuance of restricted stock, net of shares
canceled
Repurchases of common stock, shares
exchanged
Repurchases of common stock
Stock-based compensation expense
Balance at December 31, 2018
Issuance of subsidiary shares to noncontrolling
interest
Net loss
Other comprehensive income, net of tax
Other (1)
Cash dividends paid on common stock ($0.80
per share)
Issuance of common stock in connection with
exercise of stock options
Issuance of common stock in connection with
employee stock purchase plan
Issuance of restricted stock, net of shares
canceled
Repurchases of common stock, shares
exchanged
Stock-based compensation expense
Balance at December 31, 2019
—
—
—
-
4,872
4,132
—
—
-
33,462
686,660
—
(179 )
—
—
-
8,007
5,196
—
—
—
—
—
—
-
-
—
—
—
—
—
-
-
109
654
—
11,505
$
(3,944 )
(15,339 )
—
(319,397 ) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
—
—
31,011
730,695
$
162
2,137
—
13,804
$
(3,429 )
(41,369 )
—
(364,195 ) $
13
—
—
—
—
694
5,328
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
-
180
164
668
(109 )
(654 )
—
49,103
$
—
—
—
—
-
427
306
871
(162 )
(2,137 )
—
48,408
$
—
—
—
—
—
42
386
982
(198 )
—
49,620
$
—
—
—
—
—
—
1
—
—
—
60
—
—
—
—
—
1
—
1
—
—
—
62
—
—
—
—
—
—
1
1
—
—
64
(148 ) $
163,794
$
—
-
(155 )
—
—
—
—
829
(56,558 )
-
(39,509 )
—
—
—
—
—
—
(303 ) $
—
—
—
68,556
$
—
224,128
—
—
(25 )
—
—
—
—
—
—
—
(328 ) $
—
—
275
—
—
—
—
—
—
(289 )
—
(39,187 )
—
—
—
—
—
—
253,208
—
(62,530 )
—
(2,859 )
(39,502 )
—
—
—
$
—
—
—
—
—
—
—
—
—
—
—
—
—
$
179
(1,474 )
—
—
—
—
—
—
—
—
(1,295 ) $
(13 )
(1,503 )
—
—
—
—
—
—
829
(56,558 )
(155 )
(39,509 )
4,872
4,132
1
(3,944 )
(15,339 )
33,462
435,576
224,128
-
(1,763 )
(25 )
(39,187 )
8,008
5,196
1
(3,429 )
(41,369 )
31,011
618,147
—
(64,033 )
275
(2,859 )
(39,502 )
694
5,329
1
—
31,554
768,284
$
198
—
14,002
$
(4,506 )
—
(368,701 ) $
—
—
(53 ) $
—
—
148,317
$
—
—
(2,811 ) $
(4,506 )
31,554
545,100
(1) Refer to “Note 1 – The Company and Basis of Presentation.”
The accompanying notes are an integral part of these consolidated financial statements.
F-7
NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION
XPERI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Xperi Corporation (the “Company”) licenses its innovative products, technologies and inventions to global electronics companies which, in turn, integrate the
technologies into their own consumer electronics and semiconductor products. The Company’s technologies and inventions are widely adopted and used every day
by millions of people. The Company’s audio technologies have shipped in billions of devices for the home, mobile and automotive markets. The Company's
imaging technologies have been embedded in billions of smartphones and other mobile devices. The Company's semiconductor packaging and interconnect
technologies have been licensed to more than 100 customers and have shipped in over 100 billion semiconductor chips.
The consolidated financial statements include the accounts of Xperi Corporation, its wholly owned subsidiaries, and a majority-owned subsidiary. In the fourth
quarter of 2018, the Company funded a new subsidiary focused on delivering a new machine learning-based hardware and software platform, and issued shares to
non-controlling interests in such subsidiary. At the end of the fourth quarter of 2018, this subsidiary was approximately 85% owned by the Company. As a result of
issuing new shares in such entity to noncontrolling interests during 2019, the Company’s ownership interest in such entity decreased to approximately 83% as of
December 31, 2019. The operating results of such entity have been consolidated in the Company’s consolidated financial statements since the fourth quarter of
2018. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the
United States (“U.S.”). All significant intercompany balances and transactions are eliminated in consolidation.
The Company’s fiscal year ends on December 31. The Company employs a calendar month-end reporting period for its quarterly reporting.
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
correcting it is not considered to be material to the financial statements for the year ended December 31, 2019.
On December 18, 2019, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with TiVo Corporation
(“TiVo”) to combine in an all-stock merger of equals transaction (the “Mergers”). The Mergers are expected to close and become effective (the “Effective Time”)
during the second quarter of 2020, subject to regulatory approvals, the approval by the shareholders of each company, and other customary closing conditions.
Subject to the terms and conditions of the Merger Agreement, each share of Company common stock (“Xperi Common Stock”) issued and outstanding
immediately prior to the Effective Time, excluding any shares of Xperi Common Stock that are held in treasury, will be converted into the right to receive one
share of common stock of the combined company and each share of TiVo common stock (“TiVo Common Stock”) issued and outstanding immediately prior to the
Effective Time, excluding any shares of TiVo Common Stock that are held in treasury, will be converted into the right to receive 0.455 shares of common stock of
the combined company. On a pro forma, fully diluted basis, it is expected that immediately following the Effective Time, Xperi stockholders will own
approximately 46.5% of the combined company and TiVo stockholders will own approximately 53.5% of the combined company.
In connection with the Merger Agreement, the Company and TiVo obtained a debt commitment letter from Bank of America, N.A., Royal Bank of Canada, and
Barclays Bank PLC to provide a senior secured first lien term loan B facility in an aggregate principal amount of $1,100 million (the “Debt Financing”), subject to
the terms and conditions set forth therein. The proceeds from the Debt Financing may be used (i) to pay fees and expenses incurred in connection with the Mergers
and the related transactions, (ii) to accomplish the refinancing of existing indebtedness of the Company and TiVo, and (iii) to the extent of any remaining amounts,
for working capital and other general corporate purposes.
Reclassification
Certain reclassifications have been made to prior period balances in order to conform to the current period’s presentation.
F-8
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, difficult, and subjective
judgment include the estimation of licensees’ quarterly royalties prior to receiving the royalty reports, the collectability of accounts receivable, the fair value
measurements of goodwill, 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 the valuation and recognition of stock-based compensation expense, and business combinations, among others. Actual results
experienced by the Company may differ from management’s estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents.
Cash and cash equivalents are maintained with various financial institutions.
Short-term Investments
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 and common equity securities of publicly traded companies. The Company classifies all
investments as current as the securities are available for use, if needed, for current operations.
Marketable Debt Securities
The Company classifies its debt securities as available-for-sale, which are accounted for at fair value with unrealized gains and losses recognized in accumulated
other comprehensive income or loss, net of tax, on the Consolidated Balance Sheets. The Company evaluates its debt securities periodically for possible other-than-
temporary impairment and reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer,
and the Company’s ability and intent to hold the security until maturity on a more-likely-than-not basis. If the declines in the fair value of the investments are
determined to be other-than-temporary, the Company reports the credit loss portion of such decline in other income and expense, net, and the remaining noncredit
loss portion in accumulated other comprehensive income. The cost of securities sold is based on the specific identification method. Interest and dividend income
and realized gains or losses are included in other income and expense, net.
Marketable Equity Securities
Marketable equity securities are measured at fair value with unrealized gains and losses recognized in other income and expense, net, on the Consolidated
Statements of Operations.
Fair Value of Financial Instruments
The carrying amount of cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short-term nature of these
instruments. Long-term debt is carried at historical cost and measured at fair value on a quarterly basis for disclosure purposes. See “Note 7 – Fair Value” for
further information.
Concentration of Credit and Other Risks
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents, short-term
investments and accounts receivable. The Company follows a corporate investment policy which sets credit, maturity and concentration limits and regularly
monitors the composition, market risk and maturities of these investments. The Company believes that any concentration of credit risk in its accounts receivable is
substantially mitigated by the Company’s evaluation process, relatively short collection terms and the high level of credit worthiness of its customers. The
Company performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended when deemed necessary but generally
requires no collateral.
F-9
At December 31, 2019, the Company had three customers representing 17%, 14% and 11% of aggregate trade receivables, respectively. At December 31, 2018, the
Company had two customers representing 17% and 11% of aggregate trade receivables, respectively.
The following table sets forth revenue generated from customers which comprise 10% or more of total revenue for the periods indicated:
SK hynix Inc.
Intel Corporation
Samsung Electronics, Co. Ltd.
Micron Technology, Inc.
Amkor Technologies, Inc.
* denotes less than 10% of total revenue.
Allowance for Doubtful Accounts
2019
Years Ended December 31,
2018
2017
17%
11%
*
*
*
12%
*
38%
*
*
*
*
*
11%
10%
The Company continually monitors customer payments and maintains a reserve for estimated losses resulting from its customers’ inability to make required
payments. In determining the reserve, the Company evaluates the collectibility of its accounts receivable based upon a variety of factors. In cases where the
Company becomes aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, the Company records a specific allowance
against amounts due. For all other customers, the Company recognizes allowances for doubtful accounts based on its historical write-off experience in conjunction
with the length of time the receivables are past due, customer creditworthiness, geographic risk and the current business environment. Actual future losses from
uncollectible accounts may differ from the Company’s estimates. The allowance for doubtful accounts balance was $0.6 million and $0.8 million as of December
31, 2019 and December 31, 2018, respectively.
Goodwill and Identified Intangible Assets
Goodwill. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and
identified intangible assets acquired under a business combination. Goodwill also includes acquired assembled workforce, which does not qualify as an identifiable
intangible asset. The Company reviews impairment of goodwill annually in the fourth quarter, or more frequently if events or circumstances indicate that the
goodwill might be impaired. The Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment
test. If, after assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of a reporting unit is less
than its carrying amount, then the quantitative goodwill impairment test is unnecessary.
If, based on the qualitative assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the
Company proceeds to perform the quantitative goodwill impairment test. The Company first determines the fair value of a reporting unit using weighted results
derived from an income approach and a market approach. The income approach is estimated through the discounted cash flow method based on assumptions about
future conditions such as future revenue growth rates, new product and technology introductions, gross margins, operating expenses, discount rates, future
economic and market conditions, and other assumptions. The market approach estimates the fair value of the Company’s equity by utilizing the market comparable
method which is based on revenue multiples from comparable companies in similar lines of business. The Company then compares the derived fair value of a
reporting unit with its carrying amount. If the carrying value of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to
that excess, limited to the total amount of goodwill allocated to that reporting unit.
F-10
Identified intangible assets. Identified finite-lived intangible assets consist of acquired patents, existing technology, customer relationships, trademarks and trade
names, non-compete agreements resulting from business combinations, and acquired patents under asset purchase agreements. The Company’s identified intangible
assets are amortized on a straight-line basis over their estimated useful lives, ranging from 1 to 15 years. The Company makes judgments about the recoverability
of finite-lived intangible assets whenever facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of
assets may not be recoverable. If such facts and circumstances exist, the Company assesses recoverability by comparing the projected undiscounted net cash flows
associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess
of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, the Company would accelerate the rate of
amortization and amortize the remaining carrying value over the new shorter useful life.
Identified indefinite-lived intangible assets include in-process research and development (IPR&D) resulting from business combinations. The Company evaluates
the carrying value of indefinite-lived intangible assets on an annual basis, and an impairment charge would be recognized to the extent that the carrying amount of
such assets exceeds their estimated fair value.
For further discussion of goodwill and identified intangible assets, see “Note 9 – Acquisitions, Goodwill and Identified Intangible Assets.”
Debt Issuance Costs
Debt issuance costs are presented in the consolidated balance sheet as a deduction from the carrying amount of the long-term debt, and are amortized over the term
of the associated debt to interest expense using the effective interest method. In addition, the Company elects to continue to defer the unamortized debt issuance
costs when it pays down a portion of the debt as the prepayment is factored into the terms agreed to on the debt.
Treasury Stock
The Company accounts for stock repurchases using the cost method. For reissuance of treasury stock, to the extent that the reissuance price is more than the cost,
the excess is recorded as an increase to capital in excess of par value. If the reissuance price is less than the cost, the difference is recorded in capital in excess of
par value to the extent there is a cumulative treasury stock paid-in capital balance. Once the cumulative balance is reduced to zero, any remaining difference
resulting from the sale of treasury stock below cost is recorded as a reduction of retained earnings.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, accrued liabilities,
and noncurrent operating lease liabilities in the Company’s consolidated balance sheets. The ROU assets represent the Company’s right to use an underlying asset
for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities
are recognized at commencement date based on the present value of lease payments over the lease term. As most of the leases do not provide an implicit rate, the
Company generally 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’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company
will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. As a practical expedient, the Company elected,
for all office and facility leases, not to separate nonlease components from lease components and instead to account for each separate lease component and its
associated non-lease components as a single lease component. For additional information regarding the Company's leases, refer to “Note 8 – Leases.”
Revenue Recognition
The Company derives its revenue primarily from royalty and license fees for rights to use the Company’s intellectual property and technologies (“IP”). Revenue is
recognized upon transfer of control of promised products, services or IP rights to customers in an amount that reflects the consideration the Company expects to
receive in exchange for those products, services or licensing of the IP rights. See “Note 4 – Revenue” for a detailed discussion on revenue and revenue recognition.
F-11
Indemnification
The Company provides indemnification of varying scope to certain customers against claims of intellectual property infringement made by third parties arising
from the use of the Company’s technologies. In accordance with authoritative guidance for accounting for guarantees, the Company evaluates estimated losses for
such indemnification. The Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of
the amount of loss. 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.
Research, Development and Other Related Costs
Research and development (“R&D”) is conducted primarily in-house and targets development of audio and image enhancement technologies, chip-scale, multi-
chip and wafer level packaging, circuitry, 3D-IC architectures, wafer and die bonding technologies and new machine learning based hardware and software
solutions, including semiconductor chip design and fabrication costs. Research, development and other related costs include expenses associated with applications
engineering necessary to port and integrate our technologies and products on third party silicon and into end devices. These costs consist primarily of compensation
and related costs for personnel, 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 and
equipment depreciation. All research, development and other related costs are expensed as incurred.
Stock-based Compensation Expense
The Company accounts for stock-based compensation expense in accordance with the authoritative guidance on share-based payments. Under the provisions of the
guidance, stock-based compensation expense is measured at the grant date based on the fair value of the option using a Black-Scholes option pricing model and is
recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.
The authoritative guidance also requires that the Company measure and recognize stock-based compensation expense upon modification of the term of a stock
award. The stock-based compensation expense for such modification is the sum of any unamortized expense of the award before modification and the modification
expense. The modification expense is the incremental amount of the fair value of the award before the modification and the fair value of the award after the
modification, measured on the date of modification. In the event the modification results in a longer requisite period than in the original award, the Company has
elected to apply the pool method where the aggregate of the unamortized expense and the modification expense is amortized over the new requisite period on a
straight-line basis. In addition, any forfeiture will be based on the original requisite period prior to the modification.
Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock-based awards, stock
price volatility, and the pre-vesting option forfeiture rate. The Company estimates the expected life of options granted based on historical exercise patterns, which
are believed to be representative of future behavior. The Company estimates the volatility of the Company’s common stock on the date of grant based on historical
volatility. The assumptions used in calculating the fair value of stock-based awards represent the Company’s best estimates, but these estimates involve inherent
uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, its stock-based
compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize
expense for those shares expected to vest. The Company estimates the forfeiture rate based on historical experience of its stock-based awards that are granted,
exercised and cancelled. If the actual forfeiture rate is materially different from the estimate, stock-based compensation expense could be significantly different
from what was recorded in the current period. The Company also grants performance share units (PSUs) to employees or consultants. PSU awards will vest if
certain employee-specific or company-designated performance targets are achieved. If minimum performance thresholds are achieved, each PSU award will
convert into Xperi common stock at a defined ratio depending on the degree of achievement of the performance target designated by each individual award. If
minimum performance thresholds are not achieved, then no shares will be issued. Based upon the expected levels of achievement, stock-based compensation is
recognized on a straight-line basis over the PSUs’ requisite service periods. The expected levels of achievement are reassessed over the requisite service periods
and, to the extent that the expected levels of achievement change, stock-based compensation is adjusted in the period of change and recorded on the statements of
operations and the remaining unrecognized stock-based compensation is recorded over the remaining requisite service period. See “Note 13 – Stock-based
Compensation Expense” for additional detail.
F-12
Income Taxes
The Company must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments are
used in the calculation of tax credits, tax benefits, tax deductions, and in the calculation of certain deferred taxes and tax liabilities. Significant changes to these
estimates may result in an increase or decrease to the Company’s tax provision in a subsequent period.
The provision for income taxes was comprised of the Company’s current tax liability and changes in deferred income tax assets and liabilities. The calculation of
the current tax liability involves dealing with uncertainties in the application of complex tax laws and regulations and in determining the liability for tax positions,
if any, taken on the Company’s tax returns in accordance with authoritative guidance on accounting for uncertainty in income taxes. Deferred income taxes are
determined based on the differences between the financial reporting and tax basis of assets and liabilities. The Company must assess the likelihood that it will be
able to recover the Company’s deferred tax assets. If recovery is not likely on a more-likely-than-not basis, the Company must increase its provision for income
taxes by recording a valuation allowance against the deferred tax assets that it estimates will not ultimately be recoverable. However, should there be a change in
the Company’s ability to recover its deferred tax assets, the provision for income taxes would fluctuate in the period of such change. See “Note 14 – Income Taxes”
for additional detail.
Contingencies
From time to time, the Company may be involved in legal and administrative proceedings and claims of various types. The Company records a liability in its
consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. Management reviews
these estimates in each accounting period as additional information becomes known and adjusts the loss provision when appropriate. If the loss is not probable or
cannot be reasonably estimated, a liability is not recorded in the consolidated financial statements. If a loss is probable but the amount of loss cannot be reasonably
estimated, the Company discloses the loss contingency and an estimate of possible loss or range of loss (unless such an estimate cannot be made). The Company
does not recognize gain contingencies until they are realized. Legal costs incurred in connection with loss contingencies are expensed as incurred. See “Note 15 –
Commitments and Contingencies,” for further information regarding the Company’s pending litigation.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the related assets’
estimated useful lives:
Equipment, furniture and other
Leasehold improvements
Building and improvements
1 to 5 years
Lesser of related lease term or 5 years
Up to 30 years
Expenditures that materially increase asset life are capitalized, while ordinary maintenance and repairs are expensed as incurred.
Foreign Currency Translation
The functional currency of substantially all of the Company’s subsidiaries is the U.S. dollar. Certain subsidiaries have monetary assets and liabilities that are
denominated in a currency that is different than the functional currency. The gains and losses resulting from the remeasurement and translation of monetary assets
denominated in a currency that is different than the functional currency are reflected in the determination of net income (loss).
F-13
NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09 (Topic 606) “Revenue from Contracts with Customers.” Topic 606
supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenue when control of
goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or
services. On January 1, 2018, the Company adopted the new standard using the modified retrospective method, under which the Company recorded a $224 million
cumulative net of tax adjustment to the opening balance of retained earnings on January 1, 2018. The adjustment was determined by measuring the impact of the
new standard on existing contracts that were not completed as of December 31, 2017. Prior period comparative information has not been restated and continues to
be reported under Topic 605 in effect for those periods. This new standard had a material impact on the Company’s revenue and its consolidated statement of
operations and balance sheet as of and for the year ended December 31, 2018, and is expected to have a material impact on an ongoing basis, with no impact on the
timing of customer billings or on cash flows. See “Note 4 – Revenue” for further discussion.
In June 2018, the FASB issued ASU No. 2018-07, “Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting,” which amends
the existing accounting standards for share-based payments to nonemployees. This ASU aligns much of the guidance on measuring and classifying nonemployee
awards with that of awards to employees. Under the new guidance, the measurement of nonemployee equity awards is fixed on the grant date. The effective date
for the standard is for interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted, but no earlier than the Company's adoption
date of Topic 606. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. The Company
adopted this standard as of January 1, 2019. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,”
which expands strategies that qualify for hedge accounting, changes how many hedging relationships are presented in the financial statements, and simplifies the
application of hedge accounting in certain situations. On January 1, 2019, the Company adopted the amendments to Topic 815. Adoption did not have a material
impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842), which generally requires companies to recognize operating and financing lease
liabilities and corresponding right-of-use (ROU) assets on the balance sheet. Under the standard, disclosures are required to meet the objective of enabling users of
financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. On January 1, 2019, the Company adopted the new standard
using the modified retrospective transition approach and elected the transition option, under which the Company initially applied the transition requirements to all
leases that existed at December 31, 2018, with any residual effects of initially applying Topic 842 recognized as a cumulative effect adjustment to the opening
balance of retained earnings on January 1, 2019.
The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed it to
carry forward the historical lease classification. Under the optional transition method, the Company opted to continue to apply the legacy guidance in ASC 840,
Leases, including its disclosure requirements, in the comparative periods presented in the year it adopted the new leases standard, and therefore did not restate prior
period results.
The most significant impact from adopting Topic 842 was the initial recognition of operating lease ROU assets and operating lease liabilities of $17.6
million and $18.8 million, respectively, as of January 1, 2019. Operating lease liabilities consist of both current and noncurrent portions with the current portion
included in the balance of accrued liabilities. The standard did not materially impact the Company’s Consolidated Statements of Operations and had no impact on
cash flows.
F-14
The cumulative effect of the changes made to the Company's Consolidated Balance Sheet as of January 1, 2019 for the adoption of Topic 842 was as follows (in
thousands):
Assets
Operating lease right-of-use assets
Liabilities
Accrued liabilities
Noncurrent operating lease liabilities
Balance at
December 31,
2018
Adjustments
due to Topic 842
Balance at
January 1,
2019
$
$
$
— $
17,594
$
45,336 $
— $
3,858 (1) $
$
13,736
17,594
49,194
13,736
(1) Consists of a debit adjustment of $1.2 million to deferred rent to eliminate the existing balance and a credit adjustment of $5.1 million to record the current
portion of operating lease liabilities.
Recent Accounting Pronouncements
In September 2016, the 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. It also
modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit
deterioration since their origination. The company will adopt ASU 2016-13 in the first quarter of 2020 by using the modified retrospective approach to record a
cumulative-effect adjustment in retained earnings in the Consolidated Balance Sheet. The Company has completed its initial assessment and currently expects the
cumulative-effect adjustment it records in retained earnings in its Consolidated Balance Sheet as of January 1, 2020 will not be material.
On December 18, 2019, 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 goodwill in non-business combination transactions, intraperiod tax allocation exception to the incremental approach and
interim period accounting for enacted changes in tax law. The effective date of the amendments for public corporations is for fiscal years beginning after December
15, 2020. Although early adoption is permitted, the Company will not early adopt. The Company will continue to analyze the financial impact of ASU 2019-12.
NOTE 4 – REVENUE
Revenue Recognition
The Company derives its revenue primarily from royalty and license fees for rights to use the Company’s intellectual property and technologies (“IP”). Revenue is
recognized upon transfer of control of promised products, services or IP rights to customers in an amount that reflects the consideration the Company expects to
receive in exchange for those products, services or licensing of the IP rights.
Certain licensees have entered into 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, 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. When the payments are expected to be received within one year or less, the
Company does not adjust the promised amount of consideration for the effects of a 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
F-15
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.
For certain licensees, royalty revenues are generated based on a licensee’s production or shipment of licensed products incorporating the Company’s IP,
technologies or software. Licensees with a per-unit arrangement pay a per-unit royalty for each product manufactured or sold, as set forth in its license agreement.
Licensees generally report manufacturing or sales information in the quarter subsequent to when the production or shipment activity takes place. The Company
estimates the royalties earned each quarter based on its forecast of manufacturing and sales activity incurred by its licensees in that quarter. Any differences
between actual royalties owed by a licensee and the Company’s quarterly estimate are recognized in the following quarter, 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 shipped by customers, which could have a material impact on the amount of revenue it
reports on a quarterly basis.
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.
In some instances, the Company may enter into license agreements containing multiple performance obligations that include engineering services in addition to a
technology or software license. For such arrangements where all components are capable of being distinct and accounted for as separate performance obligations,
the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling
prices based on the prices ordinarily charged to customers, or in some cases by applying a reasonable cost-plus margin. The consideration for engineering services
is recognized as the underlying performance obligations are satisfied. Generally, the Company satisfies performance obligations over time and therefore recognizes
revenue over time by measuring the progress toward completion of the performance obligation at each reporting period.
From time to time, the Company enters into arrangements with licensees in which the Company pays consideration to the licensee. Such payments can take the
form of marketing development funds or various rebate incentives. The Company typically accounts for consideration paid to its licensees as a reduction to the
transaction price and revenue, unless the payment to the licensee is in exchange for a distinct good or service that the licensee transfers to the Company. In cases
where the consideration paid to the licensee is variable, the Company estimates the variable consideration based on the terms of the arrangement and expectations
of future outcomes. The Company recognizes the reduction to revenue when it recognizes revenue for transfer of control of promised products, services or IP rights
to the licensee.
Revenue is recognized gross of withholding taxes that are remitted directly by the Company’s licensees to a local tax authority.
For additional detail on the Company’s revenue disaggregated by geographic location, refer to “Note 16 - Segment and Geographic Information.”
Contract Balances
Unbilled Contracts Receivable
Timing of revenue recognition may differ significantly from the timing of invoicing to customers. Accounts receivable, net, includes amounts billed and currently
due from customers. Unbilled contracts receivable represents unbilled amounts 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, and right to payment is
subject to the underlying contractual terms. Unbilled contracts receivable amounts 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.
Deferred Revenue
Deferred revenue includes payments made by licensees for which the corresponding performance obligations have not yet been fully satisfied by the Company and
typically arises where performance obligations are satisfied over time.
F-16
Additional Disclosures Under Topic 606
The following table presents additional revenue and contract disclosures (in thousands):
Years Ended December 31,
2019
2018
Revenue recognized in the period from:
Amounts included in deferred revenue at the beginning of the period
Performance obligations satisfied in previous periods (true ups and licensee reporting adjustments)*
$
$
3,130
2,935
$
$
2,347
1,323
*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.
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 engineering services contracts. The Company’s remaining revenue under contracts with
performance obligations was as follows (in thousands):
Revenue from contracts with performance obligations expected to be satisfied in:
One year or less
More than one year but less than two years
More than two years
Total
Practical Expedients
December 31,
2019
2018
$
$
5,337 $
990
345
6,672 $
3,080
2,289
—
5,369
The Company expenses sales commissions when incurred because the amortization period generally would have been one year or less. In addition, sales
commissions have historically not been a significant expense and are not contemplated to be significant in the future. Sales commissions are recorded in selling,
general and administrative expenses in the Consolidated Statement of Operations.
NOTE 5 – COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
Other current assets consisted of the following (in thousands):
Prepaid income taxes
Prepaid expenses
Other
December 31,
2019
2018
$
$
2,364 $
8,802
2,569
13,735 $
6,768
8,293
2,373
17,434
F-17
Property and equipment, net consisted of the following (in thousands):
Equipment, furniture and other
Building and improvements
Land
Leasehold improvements
Less: Accumulated depreciation and amortization
December 31,
2019
2018
$
$
32,504 $
18,258
5,300
8,103
64,165
(31,288)
32,877 $
28,798
18,258
5,300
6,367
58,723
(27,686)
31,037
Depreciation and amortization expense for the years ended December 31, 2019, 2018 and 2017 amounted to $6.7 million, $6.7 million and $7.2 million,
respectively.
Other assets consisted of the following (in thousands):
Non-current income tax receivable (1)
Other assets
(1)
See “Note 14 - Income Taxes” for detailed information concerning the year-over-year changes.
Accrued liabilities consisted of the following (in thousands):
Employee compensation and benefits
Third-party royalties
Accrued expenses
Current portion of operating lease liabilities
Other
Other long-term liabilities consisted of the following (in thousands):
Long-term income tax payable (1)
Other
(1)
See “Note 14 - Income Taxes” for detailed information concerning the year-over-year changes.
Accumulated other comprehensive loss consisted of the following (in thousands):
Net unrealized loss on available-for-sale debt securities, net of tax
F-18
December 31,
2019
2018
64,570 $
3,106
67,676 $
—
3,081
3,081
December 31,
2019
2018
18,404 $
6,165
7,930
5,845
3,089
41,433 $
26,858
7,140
3,994
—
7,344
45,336
December 31,
2019
2018
76,767 $
131
76,898 $
15,493
130
15,623
December 31,
2019
2018
(53) $
(53) $
(328)
(328)
$
$
$
$
$
$
$
$
Other income and expense, net, consisted of the following (in thousands):
Interest income from significant financing components under Topic 606
Interest income from investments
Realized and unrealized gain (loss) on marketable equity securities
Other income
NOTE 6 – FINANCIAL INSTRUMENTS
Years Ended December 31,
2019
2018
5,762 $
2,359
10
897
9,028 $
7,672
1,074
(2,217)
2,066
8,595
$
$
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 and common equity securities of a publicly traded Japanese company. The Company classifies
its debt securities as available-for-sale, which are accounted for at fair value with unrealized gains and losses recognized in accumulated other comprehensive
income or loss, net of tax, on the 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 Consolidated Statements of Operations.
The following is a summary of marketable securities at December 31, 2019 and December 31, 2018 (in thousands):
Marketable securities
Corporate bonds and notes
Commercial paper
Total debt securities
Money market funds
Marketable equity securities
Total equity securities
Total marketable securities
Reported in:
Cash and cash equivalents
Short-term investments
Total marketable securities
Marketable securities
Corporate bonds and notes
Commercial paper
Treasury and agency notes and bills
Total debt securities
Money market funds
Marketable equity securities
Total marketable securities
Total marketable securities
Reported in:
Cash and cash equivalents
Short-term investments
Total marketable securities
Cost
41,730 $
4,052
45,782
2,601
3,405
6,006
51,788 $
Cost
28,623 $
2,999
6,000
37,622
11,499
5,662
17,161 $
54,783 $
December 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Values
29 $
4
33
—
—
—
33 $
(13) $
—
(13)
—
(2,281)
(2,281)
(2,294) $
$
$
41,746
4,056
45,802
2,601
1,124
3,725
49,527
2,601
46,926
49,527
December 31, 2018
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Values
— $
—
—
—
—
—
— $
— $
(275) $
—
(53)
(328)
—
(2,217)
(2,217) $
(2,545) $
$
$
28,348
2,999
5,947
37,294
11,499
3,445
14,944
52,238
11,499
40,739
52,238
$
$
$
$
$
F-19
At December 31, 2019 and December 31, 2018, the Company had $121.5 million and $154.4 million, respectively, in cash, cash equivalents and short-term
investments. A significant portion of these amounts was held in marketable securities, as shown above. The remaining balance of $72.0 million and $102.1 million
at December 31, 2019 and December 31, 2018, respectively, was cash held in operating accounts not included in the tables above.
Debt Securities
The gross realized gains and losses on sales of marketable debt securities were not significant during the years ended December 31, 2019, 2018 and 2017.
Unrealized losses on marketable debt securities were $0.1 million and $0.3 million, net of tax, as of December 31, 2019 and December 31, 2018, respectively.
These amounts were related to temporary fluctuations in the value of available-for-sale securities and were due primarily to changes in interest rates and market and
credit conditions of the underlying securities. Certain investments with a temporary decline in value are not considered to be other-than-temporarily impaired as of
December 31, 2019 because the Company has the intent and ability to hold these investments to allow for recovery, does not anticipate having to sell these
securities with unrealized losses and continues to receive interest at the maximum contractual rate. For the years ended December 31, 2019, 2018 and 2017,
respectively, the Company did not record any impairment charges related to its marketable securities.
The following table summarizes the fair value and gross unrealized losses related to individual available-for-sale debt securities at December 31, 2019 and 2018,
which have been in a continuous unrealized loss position, aggregated by investment category and length of time (in thousands):
December 31, 2019
Corporate bonds and notes
Total
December 31, 2018
Corporate bonds and notes
Treasury and agency notes and bills
Commercial paper
Total
Less Than 12 Months
Gross
Unrealized
Losses
Fair
Value
12 Months or More
Gross
Unrealized
Losses
Fair
Value
Total
Gross
Unrealized
Losses
Fair
Value
$
$
20,031 $
20,031 $
(10) $
(10) $
8,753 $
8,753 $
(3) $
(3) $
28,784 $
28,784 $
(13)
(13)
Less Than 12 Months
Gross
Unrealized
Losses
Fair
Value
12 Months or More
Gross
Unrealized
Losses
Fair
Value
Total
Fair
Value
Gross
Unrealized
Losses
$
$
5,488 $
—
2,999
8,487 $
(2) $
—
—
(2) $
22,860 $
5,947
—
28,807 $
(273) $
(53)
—
(326) $
28,348 $
5,947
2,999
37,294 $
(275)
(53)
—
(328)
The estimated fair value of marketable debt securities by contractual maturity at December 31, 2019 is shown below (in thousands). Actual maturities may differ
from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.
Due in one year or less
Due in one to two years
Due in two to three years
Total
F-20
Estimated
Fair Value
29,491
16,311
—
45,802
$
$
Equity Securities
On September 19, 2018, the Company purchased seven 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 (“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. On July 5, 2019, the Company sold approximately 2.8 million shares of Onkyo stock, for which a realized gain of $0.9 million
was recognized for the year ended December 31, 2019. There were no sales of the Onkyo investment during 2018. The Company intends to sell the remaining
shares over time depending on market conditions.
The Company recorded unrealized losses on its Onkyo investment of $0.9 million and $2.2 million during the years ended December 31, 2019 and 2018,
respectively, and none for the year ended December 31, 2017. Cumulative unrealized losses on the investment amounted to $2.3 million through December 31,
2019.
Derivatives
In the first quarter of 2019, the Company began to use derivative financial instruments to manage foreign currency exchange rate risk. The Company does not enter
into derivative transactions for trading purposes. Cash flows from the derivative programs are classified as cash flows from operating activities in the Consolidated
Statements of Cash Flows.
The Company’s derivative financial instruments consist of deliverable and non-deliverable foreign currency forward contracts, which are used primarily to hedge
balance sheet and certain expenditure exposures. These instruments are generally short-term in nature, with typical maturities of less than one year, and are subject
to fluctuations in foreign exchange rates. Fair values for derivative financial instruments are based on prices computed using third-party valuation models and are
classified as Level 2 in accordance with the three-level hierarchy of fair value measurements. All significant inputs to the third-party valuation models are
observable in active markets. Inputs include current market-based parameters such as forward rates, yield curves and credit default swap pricing. For additional
information related to the three-level hierarchy of fair value measurements, see “Note 7 – Fair Value.”
Under the Company’s policy election, these derivatives are not designated as hedge instruments, and are measured and reported at fair value. Changes in the fair
value of these undesignated derivatives are reported in other income and expense, net, on the Consolidated Statements of Operations. Realized losses were not
significant in the year ended December 31, 2019. There were no derivative instruments outstanding as of December 31, 2019. The Company did not engage in
derivative contracts in 2018 and 2017.
NOTE 7 – FAIR VALUE
The Company follows the authoritative guidance for fair value measurement and the fair value option for financial assets and financial liabilities. The Company
carries its financial instruments at fair value with the exception of its long-term debt. 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, 2018 and December 31, 2019.
F-21
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):
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$
$
2,601 $
1,124
41,746
4,056
49,527 $
2,601 $
1,124
—
—
3,725 $
— $
—
41,746
4,056
45,802 $
—
—
—
—
—
Assets
Marketable securities
Money market funds - equity securities (1)
Marketable equity securities (2)
Corporate bonds and notes - debt securities (2)
Commercial paper - debt securities (2)
Total Assets
(1) Reported as cash and cash equivalents in the Consolidated Balance Sheet.
(2) Reported as short-term investments in the 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, 2018 (in thousands):
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
Assets
Marketable securities
Money market funds - equity securities (1)
Marketable equity securities (2)
Commercial paper - debt securities (2)
Corporate bonds and notes - debt securities (2)
Treasury and agency notes and bills - debt securities (2)
Total Assets
$
$
11,499 $
3,445
2,999
28,348
5,947
52,238 $
11,499 $
3,445
—
—
—
14,944 $
— $
—
2,999
28,348
5,947
37,294 $
—
—
—
—
—
—
(1) Reported as cash and cash equivalents in the Consolidated Balance Sheet.
(2) Reported as short-term investments in the Consolidated Balance Sheet.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
The Company’s long-term debt is carried at historical 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):
Long-term debt, net (1)
December 31, 2019
December 31, 2018
Carrying
Amount
Estimated Fair
Value
Carrying
Amount
Estimated Fair
Value
$
334,679 $
335,642 $
482,193 $
450,083
(1) Carrying amounts of long-term debt are net of unamortized debt issuance costs of $9.3 million and $11.8 million as of December 31, 2019 and December 31,
2018, respectively. See “Note 10 – Debt” for additional information.
The Company’s long-term debt, net, is classified within Level 2. The fair value of the debt was estimated based on the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the same remaining maturities.
F-22
Non-Recurring Fair Value Measurements
The following table represents the activity in level 3 assets (in thousands):
Balance at December 31, 2017
Assets transferred
Assets sold
Assets received
Balance at December 31, 2018
Assets transferred
Assets sold
Assets received
Balance at December 31, 2019
Assets held for sale
Other
— $
—
—
—
— $
—
—
—
— $
5,944 (1)
—
—
—
5,944
—
—
—
5,944 (2)
$
$
$
(1) This amount represents the value of the patents that were received as part of licensing settlements with customers in 2014, 2016 and 2017. These assets were
valued during the same year using a cost methodology based on an arms-length purchase price of bulk patent assets, with adjustments based on limited pick rights,
the total available market, and remaining average patent life.
(2) The accumulated amortization associated with the patents was $4.0 million and $3.3 million as of December 31, 2019 and 2018, respectively.
NOTE 8 - LEASES
Under Topic 842, a contract is a lease, or contains a lease, if the contract conveys the right to control the use of identified property, plant, or equipment (an
identified asset) for a period of time in exchange for consideration. To determine whether a contract conveys the right to control the use of an identified asset for a
period of time, an entity shall assess whether, throughout the period of use, the entity has both of the following: (a) the right to obtain substantially all of the
economic benefits from use of the identified asset; and (b) the right to direct the use of the identified asset.
The Company leases office and research facilities and office equipment under operating leases which expire at various dates through 2028. 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 one year or less. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company
recognizes lease expense for these leases on a straight-line basis over the lease term. 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. The Company uses its incremental borrowing rate
for purposes of discounting lease payments.
Lease cost is summarized in the table below (in thousands):
Operating lease cost (1)
(1) Includes short-term leases and variable lease costs, which were immaterial.
F-23
2019
Years Ended December 31,
2018
2017
$
7,971 $
7,188 $
6,423
Other information related to leases was as follows (in thousands, except lease term and discount rate):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
ROU assets obtained in exchange for new lease liabilities:
Operating leases
Weighted-average remaining lease term (years):
Operating leases
Weighted-average discount rate:
Operating leases
Future minimum lease payments and related lease liabilities as of December 31, 2019 were as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: imputed interest (1)
Present value of lease liabilities
Less: current obligations under leases (accrued liabilities)
Noncurrent operating lease liabilities
(1) Calculated using the interest rate for each lease.
Year Ended
December 31, 2019
December 31, 2019
Operating Leases
6,183
5,612
4.6
5.7%
6,387
4,558
3,259
3,235
2,619
1,977
22,035
(2,776)
19,259
5,845
13,414
$
$
$
$
$
Note: 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, 2018, future minimum lease payments were as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
$
$
Operating Leases
6,341
5,292
3,441
3,047
3,142
3,518
24,781
NOTE 9 – ACQUISITIONS, GOODWILL AND IDENTIFIED INTANGIBLE ASSETS
On December 18, 2019, the Company entered into a Merger Agreement with TiVo in an all-stock merger of equals transaction. See “Note 1 – The Company and
Basis of Presentation.”
F-24
In 2019, the Company assessed goodwill impairment for its segments by performing a qualitative assessment. No impairment of goodwill was indicated as the
Company concluded that it was more likely than not that the fair value of its reporting units exceeded its carrying amount. In addition, there have been no
significant events or circumstances affecting the valuation of goodwill subsequent to the impairment testing performed in the fourth quarter of the year ended
December 31, 2019.
The changes to the carrying value of goodwill from January 1, 2018 through December 31, 2019 are reflected below (in thousands):
December 31, 2017
Goodwill acquired through a business acquisition
December 31, 2018
December 31, 2019
$
$
$
385,574
210 (1)
385,784
385,784 (2)
(1) Related to the acquisition of an emerging technology company in May 2018.
(2) Of this amount, approximately $378.1 million is allocated to the Company’s Product Licensing reporting segment and approximately $7.7 million is allocated to
its Semiconductor and IP Licensing reporting segment.
Identified intangible assets consisted of the following (in thousands):
December 31, 2019
December 31, 2018
Acquired patents / core technology
Existing technology
Customer contracts and related relationships
Trademarks/trade name
Non-competition agreements
Total intangible assets
Gross
Assets
Accumulated
Amortization
Average
Life
(Years)
3-15
5-10
3-9
4-10
1
$ 151,184 $
206,878
291,769
40,083
2,231
$ 692,145 $
Gross
Assets
Accumulated
Amortization
Net
15,232 $ 146,684 $
206,878
75,988
291,769
117,028
40,083
24,027
2,231
—
(459,870) $ 232,275 $ 687,645 $
(135,952) $
(130,890)
(174,741)
(16,056)
(2,231)
Net
17,993
110,789
169,938
29,000
—
(359,925) $ 327,720
(128,691) $
(96,089)
(121,831)
(11,083)
(2,231)
Amortization expense for the years ended December 31, 2019, 2018, and 2017 amounted to $99.9 million, $108.5 million and $111.9 million, respectively. As of
December 31, 2019, the estimated future amortization expense of intangible assets is as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
NOTE 10 – DEBT
$
$
88,793
81,084
32,645
21,766
5,463
2,524
232,275
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 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 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.
F-25
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 “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 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.
The Company’s obligations under the Credit Agreement, as amended by the Amendment, continue to be guaranteed by substantially all of the Company’s
subsidiaries, and secured by substantially all of the assets of the Company and its subsidiaries. The 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 Credit Agreement
contains customary representations and warranties and affirmative and negative covenants that, among other things, restrict the ability of the Company 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. The
Company was in compliance with all requirements during the year ended December 31, 2019.
At December 31, 2019, $344.0 million was outstanding with an interest rate, including the amortization of debt issuance costs, of 5.4%. Interest is payable monthly.
There were also $9.3 million of unamortized debt issuance costs recorded as a reduction of the long-term portion of the debt. At December 31, 2018, $494 million
was outstanding with unamortized debt issuance costs amounting to $11.8 million. Interest expense was $23.4 million and $25.7 million for the years ended
December 31, 2019 and 2018, respectively. Amortized debt issuance costs, which were included in interest expense, amounted to $2.5 million and $2.5 million for
the years ended December 31, 2019 and 2018, respectively.
As of December 31, 2019, future minimum principal payments for long-term debt, including the current portion, are summarized as follows (in thousands):
2020
2021
2022
2023
Thereafter
Total
$
$
—
—
—
344,000
—
344,000
Additional payments of debt principal must be made in the event of certain working capital conditions as outlined in the Credit Agreement. There are no penalties
for these payments. There were no such additional payments made during the years ended December 31, 2019 and 2018, respectively.
As disclosed in “Note 1 – The Company and Basis of Presentation”, in connection with the planned merger with TiVo, the Company and TiVo intend to refinance
each company’s debt on a combined basis upon closing of the transaction, which is currently expected in the second quarter of 2020. To meet this objective, the
companies have secured $1.1 billion of committed financing as described in “Note 1.”
F-26
NOTE 11 – NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted shares (in thousands):
Denominator:
Weighted average common shares outstanding
Unvested common shares subject to repurchase
Total common shares-basic
Effect of dilutive securities:
Options
Restricted stock awards and units
Total common shares-diluted
2019
Years Ended December 31,
2018
2017
49,120
—
49,120
—
—
49,120
48,823
—
48,823
—
—
48,823
49,253
(2)
49,251
—
—
49,251
Basic net income (loss) per share is computed using the weighted average number of common shares 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 common shares and, if dilutive, potential common shares outstanding during the period. Potential dilutive common shares include unvested
restricted stock awards and units and incremental common shares issuable upon the exercise of stock options, less shares 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 each of the years ended December 31, 2019, 2018 and 2017, there was no difference in the weighted average number of common shares 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 1.3 million, 2.9 million and 3.0 million
shares subject to stock options and restricted stock awards and units were excluded for the years ended December 31, 2019, 2018 and 2017, respectively, from the
computation of diluted net loss per share because including them would have been anti-dilutive.
NOTE 12 – SHAREHOLDERS’ EQUITY
Stock Repurchase Programs
In August 2007, the Company’s Board of Directors (“the Board”) authorized a plan to repurchase the Company’s outstanding shares of common stock dependent
on market conditions, share price and other factors. As of December 31, 2019, the total amount authorized for repurchases is $450.0 million. As of December 31,
2019, the Company had repurchased a total of approximately 13,279,000 shares of common stock, since inception of the plan, at an average price of $26.25 per
share for a total cost of $348.6 million. There were no repurchases during the year ended December 31, 2019. 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 December 31, 2019, the total amount available for
repurchase was $101.4 million.
Stock Option Plans
The 2003 Plan
In February 2003, the Board adopted and the Company’s stockholders approved the 2003 Equity Incentive Plan (“2003 Plan”). Under the 2003 Plan, incentive
stock options may be granted to the Company’s employees at an exercise price of no less than 100% of the fair value on the date of grant, and non-statutory stock
options may be granted to the Company’s employees, non-employee directors and consultants at an exercise price of no less than 85% of the fair value. In both
cases, when the optionees own stock representing more than 10% of the voting power of all classes of stock of the Company, the exercise price shall be no less than
110% of the fair value on the date of grant. Options, restricted stock awards, and restricted stock units granted under this plan generally have a term of ten years
from the date of grant and vest over a four-year period. Restricted stock, performance awards, dividend equivalents, deferred stock, stock payments and stock
appreciation rights may also be granted under the 2003 Plan either alone, in addition to, or in tandem with any options granted thereunder. Restricted stock awards
and units are full-value awards that reduce the number of shares reserved for grant under this plan by one and one-half shares for each share granted. The vesting
criteria for restricted stock awards and units is generally the passage of time or meeting certain performance-based objectives, and continued employment through
the vesting period generally over four years. As of December 31, 2019, there were approximately 2.1 million shares reserved for future grant under this plan.
F-27
A summary of the stock option activity is presented below (in thousands, except per share amounts):
Balance at December 31, 2016
Options granted
Options exercised
Options canceled / forfeited / expired
Balance at December 31, 2017
Options granted
Options exercised
Options canceled / forfeited / expired
Balance at December 31, 2018
Options granted
Options exercised
Options canceled / forfeited / expired
Balance at December 31, 2019
Vested and expected to vest at December 31, 2019
Exercisable at December 31, 2019
Options Outstanding
Weighted
Average
Exercise
Price Per
Share
Weighted
Average
Remaining
Contractual
Life (in years)
Number of
Shares Subject
to Options
Aggregate
Intrinsic Value
24.41
22.45
23.04
34.73
24.06
—
18.75
34.43
26.39
—
16.66
33.61
26.68
1,332 $
70 $
(180) $
(50) $
1,172 $
— $
(427) $
(67) $
678 $
— $
(42) $
(31) $
605 $
601
560
3.78 $
3.77 $
3.49 $
130
130
130
The following table summarizes information about stock options outstanding and exercisable under all of the Company’s plans at December 31, 2019:
Range of Exercise
Prices per Share
$12.52 - $19.24
$19.34 - $20.43
$20.63 - $22.45
$22.52 - $38.65
$43.77 - $43.77
$12.52 - $43.77
Options Outstanding
Weighted
Average
Remaining
Contractual
Life (in years)
Number
Outstanding
(in thousands)
Options Exercisable
Weighted
Average
Exercise Price
per Share
Number
Exercisable
(in thousands)
Weighted
Average
Exercise Price
per Share
127
139
122
97
120
605
3.44 $
3.65 $
5.76 $
5.20 $
1.13 $
3.78 $
17.86
19.92
22.16
32.30
43.77
26.68
127 $
139 $
87 $
87 $
120 $
560 $
17.86
19.92
22.05
33.39
43.77
26.97
F-28
Restricted Stock Awards and Units
Information with respect to outstanding restricted stock awards and units as of December 31, 2019 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
Balance at December 31, 2016
Awards and units granted
Awards and units vested / earned
Awards and units canceled / forfeited
Balance at December 31, 2017
Awards and units granted
Awards and units vested / earned
Awards and units canceled / forfeited
Balance at December 31, 2018
Awards and units granted
Awards and units vested / earned
Awards and units canceled / forfeited
Balance at December 31, 2019
Performance Awards and Units
1,696
1,049
(581)
(150)
2,014
1,087
(695)
(257)
2,149
1,266
(865)
(179)
2,371
384
919
(94)
(90)
1,119
44
(176)
(230)
757
4
(118)
(89)
554
Weighted Average
Grant Date Fair
Value Per Share
33.91
32.60
33.70
31.07
33.35
21.85
34.84
29.35
29.10
22.79
30.62
27.53
25.99
2,080 $
1,968 $
(675) $
(240) $
3,133 $
1,131 $
(871) $
(487) $
2,906 $
1,270 $
(983) $
(268) $
2,925 $
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 other specific performance goals determined by the Company, in each case on a specified date or dates or over any period or periods
determined by the Company, and range from zero to 100 percent of the grant.
Employee Stock Purchase Plans
In August 2003, the Board adopted the 2003 Employee Stock Purchase Plan (the “ESPP”), which was approved by the Company’s stockholders in September 2003
and became effective February 1, 2004. Subsequently, the Board adopted the International Employee Stock Purchase Plan (the “International ESPP”) in June 2008.
The ESPP has a series of consecutive, overlapping 24-month offering periods. The first offering period commenced February 1, 2004, the effective date of the
ESPP, as determined by the Board of Directors.
Individuals who own less than 5% of the Company’s voting stock, are scheduled to work more than 20 hours per week and whose customary employment is for
more than five months in any calendar year may join an offering period on the first day of the offering period or the beginning of any semi-annual purchase period
within that period. Individuals who become eligible employees after the start date of an offering period may join the ESPP at the beginning of any subsequent semi-
annual purchase period.
Participants may contribute up to 20% of their cash earnings through payroll deductions, and the accumulated deductions will apply 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 participant’s entry date into 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 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 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.
F-29
As of December 31, 2019, there were approximately 1,052,000 shares reserved for grant under the ESPP and the International ESPP, collectively.
Dividends
Stockholders of the Company’s common stock are entitled to receive dividends when declared by the Company’s Board of Directors. The Company has paid a
quarterly dividend of $0.20 per share since March 2015. Dividends declared were $0.80 per common share in each of 2019, 2018 and 2017.
Assumed Plans
Certain stock awards plans were assumed in the DTS acquisition during December 2016. The awards outstanding under these plans are included in the tables
above. No future grants will be made under these plans.
NOTE 13 – STOCK-BASED COMPENSATION EXPENSE
The effect of recording stock-based compensation expense for the years ended December 31, 2019, 2018 and 2017 is as follows (in thousands):
Cost of revenue
Research, development and other related costs
Selling, general and administrative
Total stock-based compensation expense
Tax effect on stock-based compensation expense
Net effect on net income
2019
Years Ended December 31,
2018
2017
$
$
— $
14,643
16,911
31,554
(5,051)
26,503 $
— $
13,168
17,843
31,011
(4,869)
26,142 $
—
13,277
20,185
33,462
(5,296)
28,166
Stock-based compensation expense categorized by various equity components for the years ended December 31, 2019, 2018 and 2017 is summarized in the table
below (in thousands):
Employee stock options
Restricted stock awards and units
Employee stock purchase plan
Total stock-based compensation expense
2019
Years Ended December 31,
2018
2017
$
$
219 $
29,031
2,304
31,554 $
438 $
27,974
2,599
31,011 $
1,980
28,909
2,573
33,462
During the years ended December 31, 2019, 2018 and 2017, the Company granted stock options covering zero, zero and 70,000 shares, respectively. The 2017
estimated per share fair value of the grant was $4.62 before estimated forfeitures.
The total fair value of restricted stock awards and units vested during the years ended December 31, 2019, 2018 and 2017 was $30.1 million, $30.4 million and
$22.7 million, respectively.
The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017 was $0.2 million, $1.0 million and $5.5 million,
respectively. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares.
As of December 31, 2019, the unrecognized stock-based compensation balance after estimated forfeitures consisted of $0.1 million related to unvested stock
options, to be recognized over an estimated weighted average amortization period of 1.5 years, and $40.3 million related to restricted stock awards and units,
including performance-based awards and units, to be recognized over an estimated weighted average amortization period of 2.3 years.
F-30
As of December 31, 2018, the unrecognized stock-based compensation balance after estimated forfeitures related to unvested stock options was $0.3 million to be
recognized over an estimated weighted average amortization period of 2.0 years and $40.6 million related to restricted stock awards and units, including
performance-based awards and units, to be recognized over an estimated weighted average amortization period of 2.2 years.
The Company uses the Black-Scholes option pricing model to determine the estimated fair value of options. The fair value of each option grant is determined on
the date of grant and the expense is recorded on a straight-line basis. The assumptions used in the model include expected life, volatility, risk-free interest rate, and
dividend yield. The Company’s determinations of these assumptions are outlined below.
Expected life – The expected life assumption is based on analysis of the Company’s historical employee exercise patterns. The expected life of options granted
under the ESPP represents the offering period of two years.
Volatility – Volatility is calculated using the historical volatility of the Company’s common stock for a term consistent with the expected life. Historical
volatility of the Company’s common stock is also utilized for the ESPP.
Risk-free interest rate – The risk-free interest rate assumption is based on the U.S. Treasury rate for issues with remaining terms similar to the expected life of
the options.
Dividend yield – Expected dividend yield is calculated based on cash dividends declared by the Board for the previous four quarters and dividing that result by
the average closing price of the Company’s common stock for the quarter. Cash dividends are not paid on options, restricted stock units or unvested restricted stock
awards.
In addition, the Company estimates forfeiture rates. Forfeitures are estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from
those estimates. Historical data is used to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are
expected to vest.
The following assumptions were used to value the awards granted:
Expected life (in years)
Risk-free interest rate
Dividend yield
Expected volatility
*There were no options granted during the years ended December 31, 2019 and 2018.
The following assumptions were used to value the ESPP shares:
Expected life (years)
Risk-free interest rate
Dividend yield
Expected volatility
2019*
Years Ended December 31,
2018*
2017
—
—
—
—
—
—
—
—
4.7
1.8%
2.9%
29.8%
2019
Years Ended December 31,
2018
2.0
1.7 - 2.5%
3.5 - 5.4%
51.7 - 53.4%
2.0
2.2 - 2.7%
3.6 - 3.9%
39.4 - 41.7%
2017
2.0
1.2 - 1.3%
2.0 - 2.5%
28.3 - 30.8%
For the years ended December 31, 2019, 2018 and 2017, an aggregate of 386,000, 306,000 and 164,000 common shares, respectively, were purchased pursuant to
the ESPP.
Modifications
From time to time, the Company enters into consulting agreements with its departing employees. Some of these agreements may include continued vesting of the
departing employees’ stock awards and an extension of the exercise period from the standard 90 days from employment termination date to the termination of the
consulting agreement. There were no modifications in 2019 and 2018, respectively. In 2017, there was one modification with the impact on the Company’s
financial statements deemed not to be material.
F-31
NOTE 14 – INCOME TAXES
The components of total income (loss) before taxes from continuing operations are as follows (in thousands):
U.S.
Foreign
Total income (loss) before taxes from continuing operations
The provision for (benefit from) income taxes consisted of the following (in thousands):
Current:
U.S. federal
Foreign
State and local
Total current
Deferred:
U.S. federal
Foreign
State and local
Total deferred
Provision for (benefit from) income taxes
2019
Years Ended December 31,
2018
2017
(53,346) $
(29,711)
(83,057) $
16,684 $
(9,774)
6,910 $
8
(58,351)
(58,343)
2019
Years Ended December 31,
2018
2017
68,772 $
(42,147)
94
26,719
(41,826)
(4,145)
228
(45,743)
(19,024) $
290 $
22,668
10
22,968
(10,766)
(3,191)
(338)
(14,295)
8,673 $
(79)
16,871
77
16,869
(8,390)
(10,463)
199
(18,654)
(1,785)
$
$
$
$
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and
the amounts for income tax purposes.
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
Deferred tax assets
Net operating losses
Research tax credits
Foreign tax credits
Expenses not currently deductible
Basis difference in fixed and intangible assets
Capitalized research expenses
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities
Revenue recognition
Operating leases
Acquired intangible assets, domestic
Acquired intangible assets, foreign
Net deferred tax liabilities
December 31,
2019
2018
$
$
10,142 $
13,475
—
14,640
3,593
23,785
65,635
(37,243)
28,392
(32,466)
(2,665)
(17,165)
(2,171)
(26,075) $
10,368
14,717
27,092
14,623
3,494
8,965
79,259
(41,942)
37,317
(63,367)
—
(27,323)
(7,944)
(61,317)
F-32
At December 31, 2019 and 2018, the Company had a valuation allowance of $37.2 million and $41.9 million, respectively, related to federal, state, and foreign
deferred tax assets that the Company believes will not be realizable on a more-likely-than-not basis. The $4.7 million decrease from the prior year is primarily
comprised of $27.9 million attributable to a decrease in valuation allowance recorded against tax credits, offset by $23.2 million increase in valuation allowance
primarily related to U.S. federal capitalized research expenses.
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 such as recent earnings (or loss) history, carryback of certain tax attributes and reversals of existing taxable temporary
differences. Lesser weight is given to subjective evidence such as tax-planning strategies and projected future income based on management’s assumptions. After
considering both positive and negative evidence, the Company released valuation allowance on U.S. federal tax credits since it was more likely than not that these
tax attributes would be utilized as a result of the foreign tax refund filing. Additionally, the Company increased its valuation allowance on deferred tax assets
primarily related to U.S. federal capitalized research expenses, U.S. state deferred tax assets, and certain foreign deferred tax assets based on its recent financial
results and having insufficient objectively verifiable future sources of income.
In the future, the Company may release valuation allowance and recognize certain deferred tax assets depending on achievement of future profitability in relevant
jurisdictions or implementation of tax planning strategies that enable the Company to utilize deferred tax assets that would otherwise be unused. Any release of
valuation allowance could have the effect of decreasing the income tax provision in the period the valuation allowance is released. The Company continues to
monitor the likelihood that it will be able to recover its deferred tax assets, including those for which a valuation allowance is recorded. There can be no assurance
that the Company will generate profits or implement tax strategies in future periods enabling it to fully realize its deferred tax assets. The timing of recording a
valuation allowance or the reversal of such valuation allowance is subject to objective factors that cannot be readily predicted in advance. Adjustments could be
required in the future if the Company concludes that it is more likely than not that deferred tax assets are not recoverable. A provision for a valuation allowance
could have the effect of increasing the income tax provision in the period the valuation allowance is provided.
As of December 31, 2019, the Company had federal net operating loss carryforwards of approximately $3.1 million and state net operating loss carryforwards of
approximately $66.4 million. Substantially all of the federal net operating loss carryforwards are carried over from the acquired entity, DTS in 2016. The state net
operating loss carryforwards are carried over from acquired entities, DTS in 2016, Ziptronix in 2015, and Siimpel Corporation in 2010. The federal net operating
loss carryforwards, if not utilized, will begin to expire on various dates beginning in 2026. The state net operating loss carryforwards, if not utilized, will begin to
expire on various dates beginning in 2021, and will continue to expire through 2035.
In addition, the Company has research tax credit carryforwards of approximately $1.7 million for federal purposes, which was carried over from prior years. The
federal research tax credit will start to expire in 2034 and will continue to expire through 2035. The Company also has research tax credit carryforwards of
approximately $15.4 million for state purposes and $0.6 million for foreign purposes, which do not expire. Under the provisions of the Internal Revenue Code,
substantial ownership changes may limit the amount of net operating loss and tax credit carryforwards that can be utilized annually in the future to offset taxable
income. In addition, for losses generated after December 31, 2017, the Tax Act modified the maximum deduction of net operating loss, eliminated carryback, and
provided an indefinite carryforward.
F-33
A reconciliation of the statutory U.S. federal income tax rate to the Company’s effective tax rate is as follows:
U.S. federal statutory rate
State, net of federal benefit
Stock-based compensation expense
Executive compensation limitation
Research tax credit
Foreign withholding tax
Transaction costs
Foreign tax rate differential
Foreign tax credit
Change in valuation allowance
U.S. tax reform
Unrecognized tax benefits
Change in estimates
Others
Total
2019
Years Ended December 31,
2018
2017
$
$
(17,442) $
281
2,807
411
(2,038)
10,328
974
1,907
(7,795)
(8,238)
(2,970)
2,994
(1,300)
1,057
(19,024) $
1,451 $
59
3,883
1,538
248
33,063
—
474
(33,554)
7,721
(6,333)
300
(10)
(167)
8,673 $
(20,420)
49
1,706
—
(1,851)
14,719
—
12,112
(13,343)
13,497
(7,868)
108
(608)
114
(1,785)
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law. The Tax Act introduced a broad range of tax reform measures that
significantly changed the federal income tax laws. As of December 31, 2017, the Company recorded a provisional tax expense in the Statement of Operations of
approximately $5.6 million, comprised of approximately $13.5 million tax expense from recording additional valuation allowance against federal tax credits due to
certain provisions of the Tax Act, offset by approximately $7.9 million of tax benefit from the remeasurement of U.S. deferred taxes using the 21% tax rate at
which the Company expects them to reverse in the future. The one-time transition tax on post-1986 foreign unremitted earnings did not have a material impact on
the Company’s effective tax rate. The Company continues to monitor supplemental legislation and technical interpretations of the tax law that may cause the final
impact from the Tax Act to differ from the amounts previously recorded.
At December 31, 2019, the Company asserts that it will not permanently reinvest its foreign earnings outside the U.S. The Company anticipates that the cash from
its foreign earnings may be used domestically to fund operations, settle a portion of the outstanding debt obligation, or used for other business needs. The
accumulated undistributed earnings generated by its foreign subsidiaries was approximately $107.3 million. Substantially all of these earnings will not be taxable
upon repatriation to the United States since under the Tax Act they will be treated as previously taxed income from the one-time transition tax, Global Intangible
Low-Taxed Income or dividends-received deduction. The withholding taxes related to the distributable cash of the Company’s foreign subsidiaries are not expected
to be material.
During the fourth quarter of fiscal 2019, the Company filed a refund claim for foreign taxes previously withheld by licensees in Korea based on recent court rulings
in Korea and other business factors. These withheld foreign taxes were claimed as a foreign tax credit in the U.S. As a result of the refund claim, the Company
recorded a non-current income tax receivable of $65.2 million in other assets, an unrecognized tax benefit of $48.2 million recorded in other long-term liabilities,
and a reduction in deferred tax assets of $17.0 million. At December 31, 2019, the Company recorded a foreign exchange loss of $0.7 million.
As of December 31, 2019, unrecognized tax benefits approximated $87.3 million, of which $82.9 million would affect the effective tax rate if recognized. As of
December 31, 2018, unrecognized tax benefits approximated $33.6 million, of which $21.3 million would affect the effective tax rate if recognized. The Company
believes that its unrecognized tax benefits as of December 31, 2019 will decrease by approximately $4.3 million within the next twelve months due to expiring
statute of limitations. The Company anticipates that the unrecognized tax benefit, related to a future Korean withholding tax refund claim, will continue to increase
in the next twelve months due to additional taxes withheld on royalty payments by Korean licensees. The increase in the unrecognized tax benefit would more-
likely-than-not be offset by the income tax receivable from the future Korean withholding tax refund claim and therefore, do not expect a significant impact on the
Company’s tax provision.
F-34
The reconciliation of the Company’s unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017 is as follows (in thousands):
Total unrecognized tax benefits at January 1
Gross increases and decreases due to tax positions taken in prior periods
Gross increases and decreases due to tax positions taken in the
current period
Gross increases and decreases due to settlements with taxing authorities
Gross increases and decreases due to lapses in applicable statutes
of limitations
Total unrecognized tax benefits at December 31
2019
Years Ended December 31,
2018
2017
$
$
33,552 $
—
54,048
—
(306)
87,294 $
33,506 $
(540)
586
—
—
33,552 $
30,088
2,457
961
—
—
33,506
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 years ended
December 31, 2019, 2018, and 2017, the Company recognized an insignificant amount of interest and penalties related to unrecognized tax benefits. Accrued
interest and penalties were $1.2 million and $0.9 million, for the years ended December 31, 2019 and 2018, respectively.
At December 31, 2019, the Company’s 2014 through 2018 tax years were open and subject to potential examination in one or more jurisdictions. 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 Internal Revenue Service is currently in the process of completing the examination of one of the Company’s domestic subsidiaries
for tax year 2014. The Company estimates that the financial outcome of this examination will not be material to its Statement of Operations. In addition, the
Company has submitted a withholding tax refund claim with the Korean authorities and the final outcome is not anticipated to be settled within the next twelve
months.
NOTE 15 – COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office and research facilities and office equipment under operating leases which expire at various dates through 2028. The terms of some of
the Company’s leases provide for rental payments on a graduated scale. Lease expense is recorded on a straight-line basis over the lease term. For further details,
refer to “Note 8 – Leases.”
Purchase and Other Commitments
Under certain contractual arrangements, the Company may be obligated to pay up to approximately $10.7 million over an estimated period of approximately five
years if certain milestones are achieved.
Contingencies
At each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss 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 loss. 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 themselves or their customers against claims of infringement or invalidity. The Company
expects to be involved, either directly or through its subsidiaries, 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 customers under the terms of its license agreements.
F-35
The existing and any future legal actions may harm the Company’s business. For example, an adverse decision in any of these legal actions could result in a loss of
the Company’s proprietary rights; reduce or limit the value of the Company’s licensed technology; negatively impact the Company’s stock price, its business,
consolidated financial position, results of operations, royalties, billings, or cash flows; subject the Company to significant liabilities; or require the Company to
seek licenses from others. Furthermore, legal actions could cause an existing customer 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, and could significantly damage the Company’s relationship with such customer or strategic partner and, as a result, prevent the adoption of the
Company’s other technologies by such customer or strategic partner. Litigation could also severely disrupt or shut down the business operations of customers 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.
NOTE 16 – SEGMENT AND GEOGRAPHIC INFORMATION
The Company reports its financial results within two reportable segments: (1) Product Licensing and (2) Semiconductor and 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.
The Chief Executive Officer is also the Chief Operating Decision Maker (“CODM”) as defined by the authoritative guidance on segment reporting.
The Product Licensing segment is comprised of the Company’s audio and imaging businesses, which the Company licenses through the DTS, HD Radio, and
IMAX Enhanced brands. These licenses typically include the delivery of software and/or hardware-based solutions to the Company’s customers or to their
suppliers. Product Licensing revenue is derived primarily from sales into the home, automotive and mobile markets.
The Semiconductor and IP Licensing segment includes our Tessera, Invensas and Invensas Bonding Technologies subsidiaries, which license semiconductor
packaging and interconnect technologies and associated IP. Semiconductor and IP Licensing revenue is derived from technology and IP licenses to semiconductor
companies, foundries and packaging companies. The Company has a long history of developing and monetizing next-generation technologies, including chip-scale
and multi-chip packaging solutions as well as low-temperature wafer and die bonding solutions. Today, the Company is actively developing and licensing 3D
semiconductor packaging, interconnect and bonding solutions for semiconductors that are used in every day products such as smartphones, tablets, and laptops as
well as servers used in datacenters. The Company also provides engineering services to its customers to assist them in their evaluation and adoption of the
Company’s technologies including the transition into high volume production.
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.
F-36
The following table sets forth the Company’s segment revenue, operating expenses and operating income (loss) for the years ended December 31, 2019, 2018 and
2017 (in thousands):
Revenue:
Product licensing segment
Semiconductor and IP licensing segment
Total revenue
Operating expenses:
Product licensing segment
Semiconductor and IP licensing segment
Unallocated operating expenses (1)
Total operating expenses
Operating income (loss):
Product licensing segment
Semiconductor and IP licensing segment
Unallocated operating expenses (1)
Total operating income (loss)
2019
Years Ended December 31,
2018
2017
$
198,124 $
81,943
280,067
219,708 $
186,425
406,133
181,804
44,074
122,897
348,775
16,320
37,869
(122,897)
(68,708) $
180,727
73,519
127,907
382,153
38,981
112,906
(127,907)
23,980 $
$
167,923
205,809
373,732
172,745
87,838
144,649
405,232
(4,822)
117,971
(144,649)
(31,500)
(1) Unallocated operating expenses consist primarily of selling, general and administrative expenses and stock-based compensation. These expenses are not
allocated because these amounts are not considered in evaluating the operating performance of the Company’s business segments.
Amortization and depreciation are included in segment operating income (loss) as shown below (in thousands):
Amortization and depreciation:
Product licensing segment
Semiconductor and IP licensing segment
Total amortization and depreciation
2019
Years Ended December 31,
2018
2017
$
$
93,403 $
13,264
106,667 $
93,582 $
21,544
115,126 $
95,823
23,308
119,131
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 revenues in future periods. The table below lists the geographic revenue from continuing operations for the
periods indicated (in thousands):
Japan
Korea
U.S.
Europe and Middle East
Other
2019
85,833
74,790
74,469
19,638
25,337
280,067
$
$
31% $
27
26
7
9
100%
$
Years Ended December 31,
2018
88,513
209,245
53,245
31,864
23,266
406,133
22% $
51
13
8
6
100%
$
2017
81,688
50,155
164,846
13,632
63,411
373,732
22%
13
44
4
17
100%
For the years ended December 31, 2019, 2018, and 2017, two, two and two customers, respectively, each accounted for 10% or more of total revenue.
F-37
As of December 31, 2019, 2018 and 2017 property and equipment, net, by geographical area are presented below (in thousands):
U.S.
Europe
Asia and other
Total
NOTE 17 – BENEFIT PLAN
2019
December 31,
2018
2017
$
$
28,273 $
4,391
213
32,877 $
29,123 $
1,533
381
31,037 $
32,862
1,019
561
34,442
The Company maintains a 401(k) retirement savings plan that allows voluntary contributions by all eligible U.S. employees upon their hire date. Eligible
employees may elect to contribute up to the maximum amount allowed under Internal Revenue Service regulations. The Company can make discretionary
contributions under the 401(k) plan. During the years ended December 31, 2019, 2018 and 2017, the Company contributed approximately $3.0 million, $2.9
million, and $2.4 million, respectively, to the 401(k) plan.
NOTE 18 – SUBSEQUENT EVENTS
Declaration of a Cash Dividend
On January 30, 2020, the Board declared a cash dividend of $0.20 per share of common stock, payable on March 25, 2020, for the stockholders of record at the
close of business on March 4, 2020.
F-38
Schedule II. Valuation and Qualifying Accounts for the Years Ended December 31, 2019, 2018 and 2017
Deferred income tax asset:
Valuation allowance
2017
2018
2019
Accounts receivable:
Allowance for doubtful accounts
2017
2018
2019
Balance at
Beginning of Year
Charged
(Credited) to
Expenses
Charged
(Credited) to
Other Accounts
Balance at End of
Year
$
$
$
12,847
32,032
41,942
$
$
$
$
13,925
$
2,794
(4,699) $
5,260
7,116
—
$
$
$
32,032
41,942
37,243
Balance at
Beginning of Year
Charged
(Credited) to
Expenses
Charged
(Credited) to
Other Accounts
Balance at End of
Year
$
$
$
—
1,181
779
$
$
$
F-39
$
2,404
$
417
(74) $
(1,223) $
(819) $
(139) $
1,181
779
566
EXHIBIT INDEX
Exhibit
Number
2.1*
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
10.1
10.2+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
Exhibit Description
Agreement and Plan of Merger and Reorganization, dated December 18, 2019, by and among the Registrant, TiVo Corporation, XRAY Merger
Sub Corporation, TWOLF Merger Sub Corporation and XRAY-TWOLF HoldCo Corporation (filed as Exhibit 2.1 to the Registrant’s Current
Report on Form 8-K, filed December 24, 2019, and incorporated herein by reference)
Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed December 1, 2016, and
incorporated herein by reference)
Certificate of Amendment of the Restated Certificate of Incorporation dated as of February 22, 2017 (filed as Exhibit 3.1 to the Registrant’s
Current Report on Form 8-K, filed February 27, 2017, and incorporated herein by reference)
Amended and Restated Bylaws, dated December 1, 2016 (filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed December 1,
2016, and incorporated herein by reference)
Amendment to the Amended and Restated Bylaws, dated as of December 6, 2016 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form
8-K, filed December 7, 2016, and incorporated herein by reference)
Amendment to the Amended and Restated Bylaws, dated as of April 27, 2017 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K,
filed May 3, 2017, and incorporated herein by reference)
Amendment to the Amended and Restated Bylaws, effective as of February 1, 2018 (filed as Exhibit 3.1 to the Registrant’s Current Report on
Form 8-K, filed February 7, 2018, and incorporated herein by reference)
Amendment to the Amended and Restated Bylaws, effective as of April 27, 2018 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form
8-K, filed May 3, 2018, and incorporated herein by reference)
Amendment to the Amended and Restated Bylaws, effective as of December 15, 2018 (filed as Exhibit 3.1 to the Registrant’s Current Report on
Form 8-K, filed October 30, 2018, and incorporated herein by reference)
Form of Indemnification Agreement between the Registrant and each of its directors and executive officers (filed as Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, filed December 7, 2016, and incorporated herein by reference)
2017 Performance Bonus Plan for Executive Officers and Key Employees (filed as Appendix A to the Registrant’s Definitive Proxy Statement,
filed on March 15, 2017 and incorporated herein by reference)
Employee Stock Purchase Plan, as amended and restated effective July 31, 2013 (filed as Appendix B to the Definitive Proxy Statement of the
Predecessor Registrant, filed April 16, 2013, and incorporated herein by reference)
Second Amended and Restated International Employee Stock Purchase Plan (filed as Appendix A to the Registrant’s Definitive Proxy Statement,
filed March 20, 2019, and incorporated herein by reference)
Sixth Amended and Restated 2003 Equity Incentive Plan (filed as Appendix A to the Predecessor Registrant’s Definitive Proxy Statement, filed
March 18, 2015, and incorporated herein by reference)
First Amendment to Sixth Amended and Restated 2003 Equity Incentive Plan (filed as Exhibit 10.1 to the Predecessor Registrant’s Quarterly
Report on Form 10-Q, filed May 2, 2016, and incorporated herein by reference)
Form of Stock Option Agreement for the Tessera Technologies, Inc. Fourth Amended and Restated 2003 Equity Incentive Plan (filed as Exhibit
10.2 to the Predecessor Registrant’s Registration Statement on Form S-8, filed June 13, 2008, and incorporated herein by reference)
Form of Stock Option Agreement for the Tessera Technologies, Inc. Fifth Amended and Restated 2003 Equity Incentive Plan (filed as Exhibit 10.2
to the Predecessor Registrant’s Registration Statement on Form S-8, filed August 6, 2010, and incorporated herein by reference)
Form of Stock Option Agreement (Board) for the Tessera Technologies, Inc. Fifth Amended and Restated 2003 Equity Incentive Plan (filed as
Exhibit 10.3 to the Predecessor Registrant’s Registration Statement on Form S-8, filed August 6, 2010, and incorporated herein by reference)
10.10+
Form of Stock Option Agreement (Romania) for the Tessera Technologies, Inc. Fifth Amended and Restated 2003 Equity Incentive Plan (filed as
Exhibit 10.4 to the Predecessor Registrant’s Registration Statement on Form S-8, filed August 6, 2010, and incorporated herein by reference)
127
10.11+
10.12+
10.13+
10.14+
10.15+
10.16+
10.17+
10.18+
10.19+
10.20+
10.21+
10.22+
10.23+
10.24+
10.25+
10.26+
10.27+
10.28+
Form of Stock Option Agreement (International) for the Tessera Technologies, Inc. Fifth Amended and Restated 2003 Equity Incentive Plan (filed
as Exhibit 10.2 to the Predecessor Registrant’s Quarterly Report on Form 10-Q, filed November 4, 2010, and incorporated herein by reference)
Form of Stock Option Agreement for the Tessera Technologies, Inc. Sixth Amended and Restated 2003 Equity Incentive Plan (filed as Exhibit
10.2 to the Predecessor Registrant’s Quarterly Report on Form 10-Q, filed August 5, 2015, and incorporated herein by reference)
Form of Restricted Stock Agreement for the Tessera Technologies, Inc. Fourth Amended and Restated 2003 Equity Incentive Plan (filed as Exhibit
10.3 to the Predecessor Registrant’s Registration Statement on Form S-8, filed June 13, 2008, and incorporated herein by reference)
Form of Restricted Stock Agreement for the Tessera Technologies, Inc. Fifth Amended and Restated 2003 Equity Incentive Plan (filed as Exhibit
10.5 to the Predecessor Registrant’s Registration Statement on Form S-8, filed August 6, 2010, and incorporated herein by reference)
Form of Restricted Stock Agreement (Israel) for the Tessera Technologies, Inc. Fifth Amended and Restated 2003 Equity Incentive Plan (filed as
Exhibit 10.6 to the Predecessor Registrant’s Registration Statement on Form S-8, filed August 6, 2010, and incorporated herein by reference)
Form of Restricted Stock Agreement (Romania) for the Tessera Technologies, Inc. Fifth Amended and Restated 2003 Equity Incentive Plan (filed
as Exhibit 10.7 to the Predecessor Registrant’s Registration Statement on Form S-8, filed August 6, 2010, and incorporated herein by reference)
Form of Restricted Stock Agreement for the Tessera Technologies, Inc. Sixth Amended and Restated 2003 Equity Incentive Plan (filed as Exhibit
10.3 to the Predecessor Registrant’s Quarterly Report on Form 10-Q, filed August 5, 2015, and incorporated herein by reference)
Form of Deferred Stock Agreement for the Tessera Technologies, Inc. Fourth Amended and Restated 2003 Equity Incentive Plan (filed as Exhibit
10.4 to the Predecessor Registrant’s Registration Statement on Form S-8, filed June 13, 2008, and incorporated herein by reference)
Form of Deferred Stock Agreement for the Tessera Technologies, Inc. Fifth Amended and Restated 2003 Equity Incentive Plan (filed as Exhibit
10.8 to the Predecessor Registrant’s Registration Statement on Form S-8, filed August 6, 2010, and incorporated herein by reference)
Form of Deferred Stock Agreement (Performance Vesting) for the Tessera Technologies, Inc. Fifth Amended and Restated 2003 Equity Incentive
Plan (filed as Exhibit 10.9 to the Predecessor Registrant’s Registration Statement on Form S-8, filed August 6, 2010, and incorporated herein by
reference)
Form of Deferred Stock Agreement (Ireland) for the Tessera Technologies, Inc. Fifth Amended and Restated 2003 Equity Incentive Plan (filed as
Exhibit 10.10 to the Predecessor Registrant’s Registration Statement on Form S-8, filed August 6, 2010, and incorporated herein by reference)
Form of Deferred Stock Agreement (Israel) for the Tessera Technologies, Inc. Fifth Amended and Restated 2003 Equity Incentive Plan (filed as
Exhibit 10.11 to the Predecessor Registrant’s Registration Statement on Form S-8, filed August 6, 2010, and incorporated herein by reference)
Form of Deferred Stock Agreement (International) for the Tessera Technologies, Inc. Fifth Amended and Restated 2003 Equity Incentive Plan
(filed as Exhibit 10.1 to the Predecessor Registrant’s Quarterly Report on Form 10-Q, filed November 4, 2010, and incorporated herein by
reference)
Employment and Severance Agreement, dated April 28, 2017, by and between the Registrant and Jon Kirchner (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q, filed August 2, 2017, and incorporated herein by reference)
Form of Severance Agreement, dated February 25, 2019, by and between the Registrant and each of Robert Andersen, Geir Skaaden, and Paul
Davis (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q, filed May 8, 2019 and incorporated herein by reference)
Form of Change in Control Severance Agreement, dated February 25, 2019, by and between the Registrant and each of Robert Andersen, Geir
Skaaden, and Paul Davis (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q, filed May 8, 2019 and incorporated herein by
reference)
Form of Severance Agreement, dated October 16, 2019, by and between the Registrant and Murali Dharan (filed as Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q, filed May 8, 2019 and incorporated herein by reference)
Form of Change in Control Severance Agreement, dated October 16, 2019, by and between the Registrant and Murali Dharan (filed as Exhibit
10.2 to the Registrant’s Quarterly Report on Form 10-Q, filed May 8, 2019 and incorporated herein by reference)
128
10.29+
10.30
10.31
10.32
10.33
10.34
10.35
10.36+
10.37+
10.38+
10.39+
10.40+
10.41+
10.42+
14.1
21.1
23.1
24.1
31.1
31.2
32.1
Non-Employee Director Compensation Policy (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q, filed August 2, 2017, and
incorporated herein by reference)
Credit Agreement, dated as of December 1, 2016, among Tessera Holding Corporation (f/k/a Tempe Holdco Corporation), the lenders party
thereto and Royal Bank of Canada, as administrative agent and collateral agent (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-
K, filed December 1, 2016, and incorporated herein by reference)
Amendment No. 1 to Credit Agreement, dated as of January 23, 2018, among the Registrant, the other loan parties thereto, the participating
lenders, and Royal Bank of Canada, as administrative agent, collateral agent and fronting bank (filed as Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K, filed January 24, 2018, and incorporated herein by reference)
Guaranty, dated December 1, 2016, by the Registrant’s subsidiary guarantors in favor of Royal Bank of Canada, as administrative agent (filed as
Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed December 1, 2016, and incorporated herein by reference)
Security Agreement, dated December 1, 2016, among the Registrant, Royal Bank of Canada, as collateral agent, and the other pledgors party
thereto (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed December 1, 2016, and incorporated herein by reference)
Commitment Letter, dated December 18, 2019, by and among the Registrant, TiVo Corporation, Bank of America, N.A., BofA Securities, Inc. and
Royal Bank of Canada (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed December 24, 2019, and incorporated herein by
reference)
Supplement to Commitment Letter and Fee Letter, dated January 3, 2020, by and among the Registrant, TiVo Corporation, Bank of America,
N.A., Royal Bank of Canada, and Barclays Bank PLC (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed January 7, 2020,
and incorporated herein by reference)
DTS, Inc. 2014 New Employee Incentive Plan (filed as Exhibit 10.1 to the Current Report on Form 8-K of DTS, Inc., filed August 20, 2014, and
incorporated herein by reference)
Amendment No. 1 to DTS, Inc. 2014 New Employee Incentive Plan (filed as Exhibit 99.3 to Registration Statement on Form S-8 of DTS, Inc.,
filed August 10, 2015, and incorporated herein by reference)
Amendment No. 2 to DTS, Inc. 2014 New Employee Incentive Plan (filed as Exhibit 99.3 to Registration Statement on Form S-8 of DTS, Inc.,
filed November 9, 2015, and incorporated herein by reference)
DTS, Inc. 2013 Employee Stock Purchase Plan (filed as Exhibit 99.1 to Registration Statement on Form S-8 of DTS, Inc., filed August 16, 2013,
and incorporated herein by reference)
DTS, Inc. 2013 Foreign Subsidiary Employee Stock Purchase Plan (filed as Exhibit 99.2 to Registration Statement on Form S-8 of DTS, Inc., filed
August 16, 2013, and incorporated herein by reference)
DTS, Inc. 2012 Equity Incentive Plan and Amendment No. 1 (filed as Appendix A to Definitive Proxy Statement on Schedule 14A of DTS, Inc.,
filed April 14, 2015, and incorporated herein by reference)
SRS Labs, Inc. 2006 Stock Incentive Plan, as amended and restated on August 9, 2012 (filed as Exhibit 4.4 to Registration Statement on Form S-8
of DTS, Inc., filed August 13, 2012, and incorporated herein by reference)
Code of Business Conduct and Ethics, dated December 1, 2016 (filed as Exhibit 14.1 to the Registrant’s Current Report on Form 8-K, filed
December 1, 2016, and incorporated herein by reference)
List of subsidiaries
Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
Power of Attorney (see signature page to this Annual Report on Form 10-K)
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
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
129
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
+
*
Indicates a management contract or compensatory plan or arrangement.
The exhibits and schedules to this agreement have been omitted in reliance on Item 601(b)(2) of Regulation S-K promulgated by the SEC, and a
copy thereof will be furnished supplementally to the SEC upon its request. Readers are cautioned that the representations and warranties set forth
in this agreement are qualified by those schedules, and should not be relied upon as accurate or complete without reference to those schedules
130
Item 16. Form 10-K Summary
None.
131
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: February 18, 2020
SIGNATURES
Xperi Corporation
By:
/s/ Jon Kirchner
Jon Kirchner
Chief Executive Officer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Jon Kirchner and Robert Andersen, and each of them, with full power of
substitution and resubstitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to
execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Annual Report on
Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that
said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Title
Date
Signature
/s/ Jon Kirchner
Jon Kirchner
Chief Executive Officer and Director (Principal
Executive Officer)
/s/ Robert J. Andersen
Robert J. Andersen
Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
/s/ Richard S. Hill
Richard S. Hill
/s/ Darcy Antonellis
Darcy Antonellis
/s/ Dave Habiger
Dave Habiger
/s/ V. Sue Molina
V. Sue Molina
/s/ George A. Riedel
George A. Riedel
/s/ Christopher A. Seams
Christopher A. Seams
Chairman of the Board of Directors
Director
Director
Director
Director
Director
132
February 18, 2020
February 18, 2020
February 18, 2020
February 18, 2020
February 18, 2020
February 18, 2020
February 18, 2020
February 18, 2020
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21.1
All In Media Pty Ltd, an Australia corporation
DLLNI LIMITED, a company organized under the laws of England and Wales
DTS Licensing Limited, an Irish limited corporation
DTS, Inc., a Delaware corporation
DTS International Services GmbH (Germany)
FotoNation Limited, an Irish limited corporation
FotoNation SRL, a Romanian limited liability corporation
Guangzhou DTS Digital Theater Systems, Co. Ltd., a company organized under the People’s Republic of China
iBiquity Digital Corporation, a Delaware corporation
Invensas Bonding Technologies Inc. a Delaware corporation
Invensas Corporation, a Delaware corporation
Phorus, Inc., a Delaware corporation
Tessera Advanced Technologies, Inc., a Delaware corporation
Tessera Intellectual Property Corp., a Delaware corporation
Tessera Technologies, Inc., a Delaware corporation
Tessera, Inc., a Delaware corporation
Perceive Corporation, a Delaware Corporation
Xcelsis Corporation, a Delaware Corporation
The names of other subsidiaries are omitted. Such subsidiaries would not, if considered in the aggregate as a single subsidiary, constitute a significant
ubsidiary within the meaning of Item 601(b)(21)(ii) of Regulation S-K.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-231294, 333-224652, 333-219565 and 333-214862) and
Post-Effective Amendments No.1 on Form S-8 (333-137933, 333-112238, 333-151659, 333-168597, 333-116369, 333-190138, 333-115311, 333-131457 and 333-
195948) of Xperi Corporation of our report dated February 18, 2020 relating to the financial statements, financial statement schedule, and the effectiveness of
internal control over financial reporting, which appears in this Form 10‑K.
/s/ PricewaterhouseCoopers LLP
San Jose, CA
February 18, 2020
Certification of the Chief Executive Officer
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
Exhibit 31.1
I, Jon Kirchner, certify that:
1. I have reviewed this annual report on Form 10-K of Xperi Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
February 18, 2020
/s/ Jon Kirchner
Jon Kirchner
Chief Executive Officer
Certification of the Chief Financial Officer
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
Exhibit 31.2
I, Robert Andersen, certify that:
1. I have reviewed this annual report on Form 10-K of Xperi Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: February 18, 2020
/s/ Robert Andersen
Robert Andersen
Executive Vice President and Chief Financial Officer
CERTIFICATION PURSUANT TO
RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350
Exhibit 32.1
In connection with the Annual Report of Xperi Corporation, a Delaware corporation (the “Company”), on Form 10-K for the year ended December 31, 2019 as
filed with the Securities and Exchange Commission (the “Report”), I, Jon Kirchner, Chief Executive Officer, certify, pursuant to Rule 13a-14(b) of the Securities
Exchange Act of 1934 and 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Jon Kirchner
Jon Kirchner
Chief Executive Officer
February 18, 2020
CERTIFICATION PURSUANT TO
RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350
In connection with the Annual Report of Xperi Corporation, a Delaware corporation (the “Company”), on Form 10-K for the year ended December 31, 2019 as
filed with the Securities and Exchange Commission (the “Report”), I, Robert Andersen, Chief Financial Officer of the Company, certify, pursuant to Rule 13a-
14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Robert Andersen
Robert Andersen
Executive Vice President and Chief Financial Officer
February 18, 2020
A signed original of this written statement required by Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 has been provided to the
Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.