What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-09 compared with 2020-08-10 · 190 added, 194 removed, 269 unchanged (59% of the section changed)

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The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking.

All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to our future revenue, product development, demand, acceptance and market share, growth rate, competitiveness, gross margins, levels of research, development and other related costs, expenditures, the outcome or effects of and expenses related to litigation and administrative proceedings related to our patents, our intent to enforce our intellectual property, our ability to license our intellectual property, tax expenses, cash flows, our ability to liquidate and recover the carrying value of our investments, our management's plans and objectives for our current and future operations, our plans for quarterly dividends and stock repurchases, our ability to achieve cost savings through the integration of the legacy businesses, the levels of customer spending or research and development activities, general economic conditions, the impact of COVID-19 pandemic and related events, the impact of the Mergers (as defined below) on our financial condition and results of operations, our plans to separate the combined product and IP licensing businesses, and the sufficiency of financial resources to support future operations and capital expenditures.

All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to our future revenue, product development, demand, acceptance and market share, growth rate, competitiveness, gross margins, levels of research, development and other related costs, expenditures, the outcome or effects of and expenses related to litigation and administrative proceedings related to our patents, our intent to enforce our intellectual property, our ability to license our intellectual property, tax expenses, cash flows, our ability to liquidate and recover the carrying value of our investments, our management's plans and objectives for our current and future operations, our plans for quarterly dividends and stock repurchases, our ability to achieve cost savings through the integration of the legacy businesses, the levels of customer spending or research and development activities, general economic conditions, the impact of COVID-19 (as defined below) pandemic and related events, the impact of the Mergers (as defined below) on our financial condition and results of operations, our plans to separate the combined product and IP licensing businesses, and the sufficiency of financial resources to support future operations and capital expenditures.

Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us.

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Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

In this Quarterly Report, the “Company,” “we,” “us” and “our” refer to Xperi Holding Corporation, (or Xperi Corporation for periods prior to June 1, 2020), which operates its business through its subsidiaries.

As used herein, the “Company,” “we,” “us” and “our” refer to Xperi when referring to periods prior to June 1, 2020 and Xperi Holding Corporation when referring to periods subsequent to June 1, 2020.

Unless specified otherwise, the financial results in this Quarterly Report are those of the Company and its subsidiaries on a consolidated basis.

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As a result, the historical financial statements of Xperi for periods prior to the Mergers are considered to be the historical financial statements of Xperi Holding Corporation.

Our results of operations include the operations of TiVo after June 1, 2020.

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Risk Factors,” and “Note 7 – Business Combination” in the Notes to Condensed Consolidated Financial Statements.

In connection with the Mergers, we incurred significant one-time expenses in the first two quarters of 2020 such as transaction costs (e.g.

bankers fees, legal fees, consultant fees, etc.), severance costs and stock-based compensation expense resulting from the contractually-obligated acceleration of equity instruments for departing executives.

Total transaction costs amounted to $24.4 million and $27.5 million for the three and six months ended June 30, 2020, respectively.

Post-merger severance and

stock-based compensation expense resulting from the contractually-obligated acceleration of equity instruments were $ 6.7 mill io n and $ 1.5 mil l ion, respectively, for each of the three and six months ended June 30, 2020.

We expect to achieve at least $ 50.0 million of annualized run-rate cost savings by year-end 2021 through the integration of the respective product and IP licensing businesses of the legacy companies.

In connection with the Mergers, we incurred significant one-time expenses in the first three quarters of 2020 such as transaction related costs (e.g.

bankers fees, legal fees, consultant fees, etc.), lease impairment charges due to facilities consolidation, severance and retention costs (including stock-based compensation expense resulting from the contractually-required acceleration of equity instruments for departing executives).

Total transaction related costs amounted to $1.2 million and $29.1 million for the three and nine months ended September 30, 2020, respectively.

Lease impairment charges were $0.7 million and $0.7 million for the three and nine months ended September 30, 2020, respectively.

In addition, we incurred post-merger severance and retention costs of $3.6 million and $12.1 million for the three and nine months ended September 30, 2020,

respectively.

We may incur additional expenses for integration, severance and retention, and the impairment of right-of-use assets due to facilities consolidation in future quarters.

We currently expect to achieve at least $50.0 million of annualized run-rate cost savings by year-end 2021 through the integration of the respective product and IP licensing businesses of the legacy companies.

We are a leading consumer and entertainment technology licensing company and one of the industry’s largest intellectual property (IP) licensing platforms, with a diverse portfolio of media and semiconductor intellectual property and more than 11,000 patents and applications.

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Headquartered in Silicon Valley with operations around the world, we have approximately 1,900 employees and over 35 years of operating experience.

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

We are currently evaluating the optimal timing of the contemplated business separation.

On November 9, 2020, we entered into a patent license agreement (the “Agreement”) with Comcast Corporation (“Comcast”) and certain of its affiliates.

In connection with the Agreement, the companies resolved all of the outstanding litigation.

The Agreement is effective as of the expiration of Comcast’s prior agreement in 2016 and its term continues into 2031.

The Agreement also provides for an initial payment by Comcast upon execution and ongoing payments through the remainder of the Agreement.

As the Agreement was entered into after September 30, 2020, we expect to record revenue from the out-of-license settlement in the fourth quarter of 2020 and revenue from the prospective license into 2031.

In addition, we expect to make a substantial principal payment towards the 2020 Term B Loan Facility based on the leverage ratios and excess cash flow metrics as defined in the 2020 Credit Agreement.

COVID-19 Impact

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In an effort to protect the health and safety of our employees, we took proactive, aggressive action from the earliest signs of the outbreak to adopt social distancing policies at our locations around the world, including working from home, limiting the number of employees attending meetings, and suspending employee travel.

In an effort to contain COVID -19 and slow its spread, governments around the world have also enacted various measures, including orders to close all business locations not deemed “essential,” isolate people to their places of residence, and practice social distancing when engaging in essential activities.

We anticipate that these actions and the resulting global economic impacts will negatively impact our consolidated financial results for the remainder of 2020.

In an effort to contain COVID-19 and slow its spread, governments around the world have also enacted various measures, including orders to close business locations, isolate people to their places of residence, and mandate social distancing and other health-related practices.

Such orders or restrictions have resulted in business closures, work stoppages, slowdowns and delays in commercial activities, widespread unemployment, travel restrictions and cancellation of events, among other effects.

While some governments recently have permitted reopening of businesses and approved gradual easing of various restrictions, the pandemic continues to have a significant and negative impact on business and economic activities in the U.S and around the world.

These actions and the resulting global economic downturn have negatively impacted, and are expected to continue to negatively impact, our consolidated financial results for the remainder of 2020.

The impact to date has included significant volatility and a decline in demand in various markets and industries, particularly the automotive market, which has been adversely impacted and is expected to continue to adversely impact our revenue.

For example, we anticipate approximately a 20-30% decline in our royalty revenue in 2020 from our products sold to the automotive market, such as HD Radio, as compared to the prior year.

For example, we anticipate approximately 20% decline in our royalty revenue in 2020 from our products sold to the automotive market, such as HD Radio, as compared to the prior year.

In addition, we recorded, in the first quarter of 2020, an incremental provision for credit losses of approximately $2.0 million due to heightened risk of nonpayment on existing accounts receivable as a result of the impaired financial condition and liquidity positions of certain of our customers.

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Per-unit or per-subscriber royalty licenses

We recognize revenue from per-unit or per-subscriber royalty licenses in the period in which the licensee's sales or production are estimated to have occurred, which results in an adjustment to revenue when actual sales or production are subsequently reported by the licensee, which is generally in the month or quarter following usage or shipment.

reported by the licensee, which is generally in the month or quarter following usage or shipment.

We generally recognize revenue from royalty licenses on a per-subscriber per-month model for licenses with service providers and a per-unit shipped or manufactured model for licenses with CE manufacturers.

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The related cost of such services is capitalized to the extent it is deemed recoverable and amortized to cost of revenue over the same period as the related TiVo service revenue is recognized.

estimate the stand-alone selling prices for training, DVRs, non-DVR STBs and maintenance and support based on the price charged in stand-alone sales of the promised good or service.

We estimate the stand-alone selling prices for training, DVRs, non-DVR STBs and maintenance and support based on the price charged in stand-alone sales of the promised good or service.

The stand-alone selling price for the TiVo service is determined considering the size of the MSO and expected volume of deployment, market conditions, competitive landscape, internal costs and total gross margin objectives.

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Three Months Ended

Six Months Ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Licensing, services and software

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Total operating expenses

Operating income (loss)

Operating loss

Interest expense

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Loss before taxes

Benefit from income taxes

Provision for (benefit from) income taxes

Total Revenue (in thousands, except for percentages):

Three Months Ended

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

Increase/ (Decrease)

Total revenue

The $62.5 million, or 83% increase in total revenue for the three months ended June 30, 2020, compared to the same period in the prior year, was primarily due to the inclusion of $52.8 million of revenue from the results of TiVo operations and a new IP Semiconductor patent and technology license agreement that became effective in the second quarter of 2020.

The increase in revenue was partially offset by a decrease in royalty revenue from existing Product licensing agreements.

Six Months Ended

June 30, 2020

June 30, 2019

The $144.9 million, or 250% increase in total revenue for the three months ended September 30, 2020, compared to the same period in the prior year, was primarily due to the inclusion of revenue from the results of TiVo operations following the Mergers.

Excluding TiVo revenue, legacy Xperi revenue would have decreased due primarily to a decrease in revenue from IP Semiconductor licensing revenue, partially offset by higher minimum guarantee (“MG”) revenue due to the timing and duration of MG contracts up for renewal and executed during the third quarter of 2020.

Nine Months Ended

September 30, 2020

September 30, 2019

Increase/ (Decrease)

Total revenue

The $123.6 million or 94% increase in total revenue for the six months ended June 30, 2020, compared to the same period in the prior year, was primarily due to the inclusion of $52.8 million of revenue from the results of TiVo’s operations, a new IP Semiconductor patent and technology license agreement that became effective in the second quarter of 2020, and an IP Semiconductor litigation settlement reached in March 2020.

The increase in revenue was partially offset by a decrease in royalty revenue from existing Product licensing agreements.

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

These increases in revenue were partially offset by a decrease in royalty revenue from existing licensing agreements.

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

Cost of licensing, services and software revenue, excluding depreciation and amortization of intangible assets, consists primarily of employee-related costs, royalties paid to third parties, maintenance costs and an allocation of facilities costs, as well as service center and other expenses related to providing the TiVo Service, non-recurring engineering (“NRE”) services and our metadata offering.

Cost of licensing, services and software revenue , excluding depreciation and amortization of intangible assets , for the three months ended June 30, 2020 was $ 8.3 million, as compared to $2.

5 million for the three months ended June 30, 2019 , a n increase of $ 5.8 million .

Cost of licensing, services and software revenue , excluding depreciation and amortization of intangible assets, for the six months ended June 30, 2020 was $ 9.8 million, as compared to $4.5 million for the six months ended June 30, 2019 , an increase of $ 5.3 million .

The increases were primarily due to the inclusion of $ 6.8 million of TiVo expenses since the M ergers.

Excluding TiVo expenses, the costs would have decrease d by $1.0 million and $1.5 million, respectively, for the three and six months ended June 30, 20 2 0, as compared to the corresponding periods in 2019, due principally to lower royalties paid to a third party in connection with a Product segment contract in the first two quarter s of 20 20 .

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

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

Cost of licensing, services and software revenue, excluding depreciation and amortization of intangible assets, for the three months ended September 30, 2020 was $21.9 million, as compared to $1.5 million for the three months ended September 30, 2019, an increase of $20.4 million.

Cost of licensing, services and software revenue, excluding depreciation and amortization of intangible assets, for the nine months ended September 30, 2020 was $31.6 million, as compared to $6.0 million for the nine months ended September 30, 2019, an increase of $25.6 million.

The increases were primarily due to the inclusion of $19.8 million and $26.6 million of post-merger TiVo expenses for the three and nine months ended September 30, 2020, respectively.

Excluding TiVo expenses, the costs would have been relatively constant for the three months ended September 30, 2020 and would have decreased by $1.0 million for the nine months ended September 30, 2020, as compared to the corresponding periods in 2019.

The decrease was due principally to lower royalties paid to a third party in connection with a Product segment contract in the first three quarters of 2020.

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

Cost of Hardware Revenue, E xcluding Depreciation and Amortization of Intangible Assets

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

Cost of hardware revenue, excluding depreciation and amortization of intangible assets, for the three months ended June 30, 2020 was $1.4 million, as compared to $0.1 million for the three months ended June 30, 2019, an increase of $1.3 million.

Cost of hardware revenue, excluding depreciation and amortization of intangible assets, for the six months ended June 30, 2020 was $1.5 million, as compared to $0.2 million for the six months ended June 30, 2019, an increase of $1.3 million.

The increases were primarily due to the inclusion of $1.4 million of TiVo expenses since the Mergers.

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

Cost of hardware revenue, excluding depreciation and amortization of intangible assets, for the three months ended September 30, 2020 was $12.2 million, as compared to $0.1 million for the three months ended September 30, 2019, an increase of $12.1 million.

Cost of hardware revenue, excluding depreciation and amortization of intangible assets, for the nine months ended September 30, 2020 was $13.7 million, as compared to $0.3 million for the nine months ended September 30, 2019, an increase of $13.4 million.

The increases were primarily due to the inclusion of $11.8 million and $13.2 million of post-merger TiVo expenses for the three and nine months ended September 30, 2020, respectively.

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

Research, Development and Other Related Costs

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All research, development and other related costs are expensed as incurred.

R&D expense for the three months ended June 30, 2020 was $38.2 million, as compared to $25.3 million for the three months ended June 30, 2019, an increase of $12.9 million.

R&D expense for the six months ended June 30, 2020 was $66.8 million, as compared to $52.0 million for the six months ended June 30, 2019, an increase of $14.8 million.

The increases were due to the inclusion of $9.8 million of TiVo expenses since the Mergers, increased headcount and personnel costs in Perceive which was created to focus on delivering edge inference solutions, and severance charges incurred in connection with consolidating and optimizing post-merger operations.

R&D expense for the three months ended September 30, 2020 was $57.7 million, as compared to $26.0 million for the three months ended September 30, 2019, an increase of $31.7 million.

R&D expense for the nine months ended September 30, 2020 was $124.6 million, as compared to $78.0 million for the nine months ended September 30, 2019, an increase of $46.6 million.

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

We believe that a significant level of R&D expense will be required for us to remain competitive in the future.

We also anticipate that R&D expense will increase significantly in future periods as a result of TiVo R&D expenses being fully included in future periods.

We also anticipate that R&D expense will remain higher than in the prior year due primarily to inclusion of the TiVo R&D operations.

Selling, General and Administrative

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Our general and administrative expenses, other than facilities-related expenses, are not allocated to other expense line items.

Selling, general and administrative expenses for the three months ended June 30, 2020 were $68.2 million, as compared to $27.3 million for the three months ended June 30, 2019, an increase of $40.9 million.

The increase was due principally to the

inclusion of $ 2 9.

4 million of TiVo expenses since the Mergers, legacy Xperi merger transaction costs of $ 11.1 million and legacy Xperi post-merger severance costs of $ 2.3 million , partially offset by a reduction in travel and entertainment expenses.

Selling, general and administrative expenses for the six months ended June 30, 2020 were $104.8 million, as compared to $56.5 million for the six months ended June 30, 2019, an increase of $48.3 million.

The increase was due principally to the inclusion of $29.4 million of TiVo expenses since the Mergers, legacy Xperi merger transaction costs of $14.2 million and legacy Xperi post-merger severance costs of $2.3 million.

Selling, general and administrative expenses for the three months ended September 30 , 2020 were $ 6 3 .

8 million, as compared to $27.

6 million for the three months ended September 30 , 2019 , an increase of $ 3 6.2 million .

The increase was due principally to the inclusion of $ 27.8 million of TiVo expenses, legacy Xperi merger transaction related costs of $ 1.2 million , post-merger severance and retention costs of $ 1.4 million , s e p a ration costs of $2.1 million , and an increase of $2.2 million in stock-based compensation.

Selling, general and administrative expenses for the nine months ended September 30, 2020 were $168.6 million, as compared to $84.1 million for the nine months ended September 30, 2019, an increase of $84.5 million.

The increase was due principally to the inclusion of $57.3 million of TiVo expenses, legacy Xperi merger transaction related costs of $15.4 million, post-merger severance and retention costs of $3.7 million, separation costs of $2.5 million, and an increase of $2.7 million in stock-based compensation.

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

Depreciation Expense

Depreciation expense for the three months ended June 30, 2020 was $3.3 million, as compared to $1.8 million for the three months ended June 30, 2019, an increase of $1.5 million.

Depreciation expense for the six months ended June 30, 2020 was $5.1 million, as compared to $3.4 million for the six months ended June 30, 2019, an increase of $1.7 million.

The increases were primarily attributable to depreciation expense on fixed assets recorded in connection with the Mergers in June 2020.

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

Depreciation expense for the three months ended September 30, 2020 was $6.8 million, as compared to $1.6 million for the three months ended September 30, 2019, an increase of $5.2 million.

Depreciation expense for the nine months ended September 30, 2020 was $11.8 million, as compared to $5.1 million for the nine months ended September 30, 2019, an increase of $6.7 million.

The increases were primarily attributable to depreciation expense on TiVo fixed assets added through the Mergers in June 2020.

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

Amortization Expense

Amortization expense for the three months ended June 30, 2020 was $32.0 million, as compared to $25.3 million for the three months ended June 30, 2019, an increase of $6.7 million.

Amortization expense for the six months ended June 30, 2020 was $54.6 million, as compared to $50.8 million for the six months ended June 30, 2019, an increase of $3.8 million.

Amortization expense for the three months ended September 30, 2020 was $50.9 million, as compared to $25.1 million for the three months ended September 30, 2019, an increase of $25.8 million.

Amortization expense for the nine months ended September 30, 2020 was $105.4 million, as compared to $75.9 million for the nine months ended September 30, 2019, an increase of $29.5 million.

These increases were primarily attributable to amortization of intangible assets recorded in connection with the Mergers in June 2020.

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Litigation Expense

Litigation expense for the three months ended June 30, 2020 was $3.9 million, as compared to $1.2 million for the three months ended June 30, 2019, an increase of $2.7 million.

Litigation expense for the six months ended June 30, 2020 was $6.0 million, as compared to $2.5 million for the six months ended June 30, 2019, an increase of $3.5 million.

These increases were primarily due to inclusion of $2.2 million of TiVo litigation expenses since the Mergers, and increased case activity in the first two quarters of 2020.

Litigation expense for the three months ended September 30, 2020 was $8.5 million, as compared to $1.5 million for the three months ended September 30, 2019, an increase of $7.0 million.

Litigation expense for the nine months ended September 30, 2020 was $14.5 million, as compared to $4.0 million for the nine months ended September 30, 2019, an increase of $10.5 million.

These increases were primarily due to inclusion of post-merger TiVo litigation expenses for the three and nine months ended September 30, 2020, respectively, and increased case activity in the first three quarters of 2020.

In 2019 and in 2020 prior to the Mergers TiVo’s litigation expenses were significantly higher than Xperi’s litigation expenses in the same periods.

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Stock- based Compensation Expense

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

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

Three Months Ended

Six Months Ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Cost of licensing, services and software revenue

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Stock-based compensation awards include employee stock options, restricted stock awards and units, and employee stock plan purchases.

The increases in stock-based compensation for the three and six months ended June 30, 2020, compared to the corresponding periods in 2019, were a result of including incremental $2.2 million from assumed TiVo stock awards, partially offset by lower ongoing expenses driven primarily by a decline in the market price of the awards granted.

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

Interest Expense

Interest expense for the three months ended June 30, 2020 and 2019 was $7.0 million and $6.2 million, respectively.

The increase in interest expense in the three months ended June 30, 2020 was primarily a result of a higher average debt balance as compared to the second quarter of 2019 as we entered into a new term loan of $1,050 million on June 1, 2020 to refinance the indebtedness of the combined companies in connection with the Mergers.

Interest expense for the six months ended June 30, 2020 and 2019 was $11.2 million and $12.9 million, respectively.

The decrease in interest expense in the six months ended June 30, 2020 was primarily a result of a lower average debt balance as compared to the comparable period in 2019, coupled with lower interest rates on our debt in the first two quarters in 2020.

Interest expense for the three months ended September 30, 2020 and 2019 was $13.4 million and $5.5 million, respectively.

Interest expense for the nine months ended September 30, 2020 and 2019 was $24.6 million and $18.4 million, respectively.

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

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

Other Income and Expense, Net

Other income and expense, net, for the three months ended June 30, 2020 was $0.6 million, as compared to $4.8 million for the three months ended June 30, 2019.

Other income and expense, net, for the six months ended June 30, 2020 was $1.1 million, as compared to $7.1 million for the six months ended June 30, 2019.

Other income and expense was lower in the current year due principally to recognition of an unrealized gain of $2.0 million and $1.6 million on our equity investment in Onkyo Corporation common stock for the three and six months ended June 30, 2019, respectively.

Additionally, lower other income and expense, net, in the current year was attributable to a decrease in interest income from financing components under Topic 606.

Other income and expense, net, for the three months ended September 30, 2020 was $2.3 million, as compared to $0.4 million for the three months ended September 30, 2019.

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

Other income and expense, net, for the nine months ended September 30, 2020 was $3.4 million, as compared to $7.5 million for the nine months ended September 30, 2019.

Other income and expense, net, was lower in the first nine months of 2020 as compared to 2019 due principally to a decrease in interest income from financing components under Topic 606.

Additionally, lower other income and expense in the first nine months of 2020 as compared to 2019 was attributable to recognition of a realized loss of $0.7 million in 2020, as compared to an unrealized gain of $0.6 million in the same period in 2019, on the aforementioned Onkyo investment.

Loss on Debt Extinguishment

In connection with the Mergers, we refinanced the indebtedness of the combined companies, and recognized a loss on early debt extinguishment of $8.3 million in each of the three and six months ended June 30, 2020.

We did not incur a loss on early debt extinguishment in 2019.

In connection with the Mergers, we refinanced the indebtedness of the combined Company, and recognized a loss on early debt extinguishment of $8.3 million in second quarter of 2020.

We did not incur a loss on early debt extinguishment in any other quarter in 2020 or the first nine months of 2019.

Provision for Income Taxes

For the three months ended June 30, 2020, we recorded an income tax benefit of $9.3 million on a pretax loss of $32.4 million and for the six months ended June 30, 2020, we recorded an income tax benefit of $7.2 million on a pretax loss of $11.6 million, which resulted in an effective tax rate of 62.7% for the six months ended June 30, 2020.

The tax benefit of $7.2 million is comprised of a $10.5 million tax benefit related to the five month pre-merger period and a tax expense of $3.3 million related to the one month post-merger period.

The five month pre-merger income tax benefit of $10.5 million was primarily related to a net decrease in valuation allowance as a result of the Mergers, deduction from foreign-derived intangible income, and the release of unrecognized tax benefits due to the lapse of applicable statute of limitation offset by tax expense from operating income, shortfalls from stock-based compensation, certain non-deductible expenses, and unrealized foreign exchange losses from the prior period South Korea refund claim.

The one month post-merger income tax expense of $3.3 million was primarily

related to income tax expense from foreign operations, foreign withholding taxes and U.S.

federal minimum tax.

As a result of the M erger s , a valuation allowance was recorded on the net deferred tax assets of the U.S.

federal consolidated group.

For the three months ended June 30, 2019, we recorded an income tax benefit of $3.5 million on a pretax loss of $9.7 million and for the six months ended June 30, 2019, we recorded an income tax benefit of $12.5 million on a pretax loss of $44.1 million, which resulted in an effective tax rate of 28.3% for the six months ended June 30, 2019.

The income tax benefit for the three and six months ended June 30, 2019 was primarily related to tax benefit from operating losses and the realization of certain tax credits, offset by foreign withholding taxes, certain non-deductible expenses, and shortfalls from stock-based compensation.

Our income tax provision is based on our worldwide estimated annualized effective tax rate, except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, and the tax effect of discrete items occurring during the period.

For the three months ended September 30, 2020, we recorded an income tax expense of $0.5 million on a pretax loss of $30.1 million and for the nine months ended September 30, 2020, we recorded an income tax benefit of $6.8 million on a pretax loss of $41.6 million, which resulted in an effective tax rate of 16.3% for the nine months ended September 30, 2020.

The tax benefit of $6.8 million is comprised of a $12.2 million tax benefit related to the five month pre-merger period and a tax expense of $5.4 million related to the four month post-merger period.

The five month pre-merger income tax benefit of $12.2 million was primarily related to a net decrease in valuation allowance as a result of the Mergers, deduction from foreign-derived

intangible income, releases of unrecognized tax benefits due to the lapse of applicable statutes of limitation, deduction from transaction expenses, offset by tax expense from operating income, shortfalls from stock-based compensation, certain non-deductible expenses, and unrealized foreign exchange losses from the prior period South Korea refund claim.

The four month post-merger income tax expense of $5.

4 million was primarily related to income tax expense from foreign operations, foreign withholding taxes and U.S.

federal minimum tax offset by unrealized foreign exchange gains from the current period South Korea refund claim .

For the three months ended September 30, 2019, we recorded an income tax benefit of $14.6 million on a pretax loss of $30.6 million and for the nine months ended September 30, 2019, we recorded an income tax benefit of $27.1 million on a pretax loss of $74.7 million, which resulted in an effective tax rate of 36.3% for the nine months ended September 30, 2019.

The income tax benefit for the three and nine months ended September 30, 2019 was primarily related to tax benefit from operating losses and the realization of certain tax credits, offset by foreign withholding taxes, certain non-deductible expenses, and shortfalls from stock-based compensation.

Our provision for income taxes is based on our worldwide estimated annualized effective tax rate, except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, and the tax effect of discrete items occurring during the period.

We have applied separate effective tax rates to our pre- and post-merger activities;

our post-merger effective tax rate is based on our worldwide estimated tax rate for the seven-month period ended December 31, 2020.

The tax for jurisdictions for which a loss is expected and no benefit can be realized for the year is computed using a separate effective tax rate.

The decrease in income tax benefit for the six months ended June 30, 2020 as compared to the prior year is largely attributable to a decrease in operating losses, increase in valuation allowance in the post-merger period, foreign withholding taxes, U.S.

federal minimum taxes, and unrealized foreign exchange loss from the South Korea refund claim partially offset by tax benefits from the release of unrecognized tax benefits due to the lapse of applicable statute of limitation and a decrease in valuation allowance as a result of the Mergers.

The decrease in income tax benefit for the nine months ended September 30, 2020 as compared to the prior year is largely attributable to a decrease in operating losses, increase in valuation allowance in the post-merger period, foreign withholding taxes, and U.S.

federal minimum taxes, partially offset by tax benefits from the release of unrecognized tax benefits due to the lapse of applicable statute of limitation and a decrease in valuation allowance as a result of the Mergers.

During the fourth quarter of 2019, we filed a refund claim for foreign taxes previously withheld from licensees in South Korea based on recent court rulings in South Korea and other business factors.

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We anticipate filing a refund claim for the 2020 year-to-date South Korean withholding taxes.

During the first six months of 2020, an additional non-current income tax receivable of $8.4 million, an unrecognized tax benefit of $6.2 million in other long-term liabilities, and a reduction in deferred tax assets of $2.2 million were recorded.

As part of our accounting for the acquisition of TiVo, we recorded a non-current income tax receivable of $28.8 million and a reduction in deferred tax assets of $12.5 million with a corresponding offset to valuation allowance, with the residual recorded to goodwill.

At June 30, 2020, we had recorded a cumulative unrealized foreign exchange loss of approximately $4.0 million as a reduction in non-current income tax receivable.

During the first nine months of 2020, an additional non-current income tax receivable of $13.7 million, an unrecognized tax benefit of $8.4 million in other long-term liabilities, and a reduction in deferred tax assets of $5.0 million with an offset to valuation allowance were recorded in connection with the South Korea refund claim matter .

As part of our acquisition of TiVo, we recorded a year-to-date non-current income tax receivable of $31.9 million and a reduction in deferred tax assets of $15.5 million with a corresponding offset to valuation allowance, with the residual recorded to goodwill.

At September 30, 2020, we had recorded a cumulative unrealized foreign exchange loss of approximately $1.2 million as a reduction in non-current income tax receivable.

The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets are recoverable.

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After considering both positive and negative evidence to assess the recoverability of our net deferred tax assets, we determined that it was not more-likely-than-not that we would realize our federal, certain state and certain foreign deferred tax assets given the substantial amount of tax attributes that will remain unutilized to offset forecasted future tax liabilities.

In the future, we may release valuation allowance and recognize certain deferred federal tax assets, deferred state tax assets or deferred tax assets of other foreign subsidiaries depending on achievement of future profitability in relevant jurisdictions, or implementing 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.

In the future, we may release our deferred tax asset valuation allowance associated with our federal, state or foreign deferred tax assets depending on achievement of future profitability in relevant jurisdictions, or implementing tax planning strategies that enable us to utilize deferred tax assets.

Specifically, we will evaluate additional evidence provided by the nonrecognized subsequent event discussed in “Note 17 – Subsequent Events” which could result in the release of a portion of our deferred tax asset valuation allowance.

We continue to monitor the likelihood that we will be able to recover our deferred tax assets, including those for which a valuation allowance is recorded.

There can be no assurance that we will generate profits or implement tax strategies in future periods enabling us to fully realize our deferred tax assets.

The timing of recording a valuation allowance or the reversal of such valuation allowance is subject to objective and subjective 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 provided.

The timing of recording a deferred tax asset valuation allowance or the reversal of such valuation allowance is subject to objective and subjective factors that cannot be known in advance.

Adjustments could be required in the future if we conclude that it is more-likely-than-not that deferred tax assets are recoverable.

The release of a deferred tax asset valuation allowance could have the effect of decreasing the income tax provision in the period the valuation allowance is released.

Segment Operating Results

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Edge based machine learning, audio, digital radio, and imaging solutions include the delivery of software and/or hardware-based solutions to the Company’s consumer electronics (“CE”) customers, automotive manufacturers or their supply chain partners.

UX products and services revenue is primarily

derived from multi-channel video service providers and CE manufacturers, licensing the TiVo service and selling TiVo-enabled devices, Personalized Content Discovery, enriched Metadata, viewership data and advertising .

UX products and services revenue is primarily derived from multi-channel video service providers and CE manufacturers, licensing the TiVo service and selling TiVo-enabled devices, Personalized Content Discovery, enriched Metadata, viewership data and advertising.

The IP Licensing segment consists primarily of licensing our innovations to leading companies in the media and semiconductor industries.

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Three Months Ended

Six Months Ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Product segment

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Unallocated operating expenses (1)

Total operating income (loss)

Unallocated operating expenses consist primarily of selling, general and administrative expenses, including administration, human resources, finance, information technology, corporate development and procurement.

Total operating loss

Unallocated operating expenses consist primarily of selling, marketing, general and administrative expenses, including administration, human resources, finance, information technology, corporate development and procurement.

These expenses are not allocated because these amounts are not considered in evaluating the operating performance of the Company’s business segments.

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GAAP applied at the segment level.

Of our $846.9 million in goodwill at June 30, 2020, approximately $524.1 million was allocated to our Product reporting segment and approximately $322.8 million was allocated to our IP Licensing reporting segment.

For the three months ended June 30, 2020, the unallocated operating expenses were $68.3 million compared to $27.3 million for the three months ended June 30, 2019.

The increase of $41.0 million was due principally to the inclusion of $29.4 million of TiVo expenses since the Mergers, legacy Xperi merger transaction costs of $11.1 million and legacy Xperi post-merger severance costs of $2.3 million, partially offset by a reduction in travel and entertainment expenses.

For the six months ended June 30, 2020, the unallocated operating expenses were $105.0 million compared to $56.3 million for the six months ended June 30, 2019.

The increase of $48.5 million was due principally to the inclusion of $29.4 million of TiVo expenses since the Mergers, legacy Xperi merger transaction costs of $14.2 million and legacy Xperi post-merger severance costs of $2.3 million.

Of our $846.9 million in goodwill at September 30, 2020, approximately $524.1 million was allocated to our Product reporting segment and approximately $322.8 million was allocated to our IP Licensing reporting segment.

For the three months ended September 30, 2020, the unallocated operating expenses were $65.6 million compared to $27.6 million for the three months ended September 30, 2019.

The increase of $38.0 million was due principally to the inclusion of TiVo expenses, legacy Xperi merger transaction related costs of $1.2 million, post-merger severance and retention costs of $1.4 million, separation costs of $2.1 million, and an increase of $2.2 million in stock-based compensation.

For the nine months ended September 30, 2020, the unallocated operating expenses were $170.5 million compared to $84.1 million for the nine months ended September 30, 2019.

The increase of $86.4 million was due principally to the inclusion of

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

Product Segment

Three Months Ended

Six Months Ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Total revenue

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Total operating expenses

Total operating income (loss)

Product revenue for the three months ended June 30, 2020 was $64.1 million as compared to $61.4 million for the three months ended June 30, 2019, an increase of $2.7 million.

Product revenue for the six months ended June 30, 2020 was $120.1 million as compared to $106.0 million for the six months ended June 30, 2019, an increase of $14.1 million.

The increases were primarily attributable to the inclusion of $30.2 million of TiVo product revenue since the Mergers, partially offset by lower minimum guarantee (“MG”) revenue due to the timing and duration of MG contracts up for renewal and executed during the first two quarters of 2020, and a decrease in royalty revenue from existing licensing arrangements.

Total operating income

Product revenue for the three months ended September 30, 2020 was $122.6 million as compared to $46.0 million for the three months ended September 30, 2019, an increase of $76.6 million.

Product revenue for the nine months ended September 30, 2020 was $242.6 million as compared to $152.0 million for the nine months ended September 30, 2019, an increase of $90.6 million.

The increases were primarily attributable to the inclusion of TiVo product revenue for the three and nine months ended September 30, 2020, respectively, partially offset by a decrease in royalty revenue from existing licensing arrangements.

We anticipate Product revenue for 2020 will be higher than revenue for 2019 due principally to the additional product revenue from TiVo following the Mergers.

Operating expenses for the three months ended June 30, 2020 were $66.6 million, as compared to $46.8 million for the three months ended June 30, 2019, an increase of $19.8 million.

Operating expenses for the six months ended June 30, 2020 were $112.8 million, as compared to $93.7 million for the six months ended June 30, 2019, an increase of $19.1.

The increases were primarily due to the inclusion of $20.6 million of TiVo Product expenses since the Mergers and increased headcount and personnel costs in Perceive, partially offset by lower legacy Xperi amortization expense.

The lower legacy Xperi amortization was attributable to certain intangible assets becoming fully amortized over the past twelve months.

Operating loss in the three months ended June 30, 2020 was $2.4 million compared to operating income of $14.6 million in the three months ended June 30, 2019, with the variance due to the reasons stated above.

Operating income for the six months ended June 30, 2020 was $7.3 million compared to operating income of $12.3 million in the six months ended June 30, 2019, with the variance due to the reasons stated above.

Operating expenses for the three months ended September 30, 2020 were $116.1 million, as compared to $45.7 million for the three months ended September 30, 2019, an increase of $70.4 million.

Operating expenses for the nine months ended September 30, 2020 were $228.9 million, as compared to $139.4 million for the nine months ended September 30, 2019, an increase of $89.5 million.

The increases were primarily due to the inclusion of TiVo Product expenses for the three and nine months ended September 30, 2020, respectively, increased headcount and personnel costs in Perceive, partially offset by lower legacy Xperi amortization expense due to certain intangible assets becoming fully amortized over the past twelve months.

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

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

IP Licensing Segment

Three Months Ended

Six Months Ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Total revenue

Operating expenses:

Total cost of revenue

Research, development and other related costs

1 unchanged sentence

Total operating income

IP Licensing revenue for the three months ended June 30, 2020 was $73.5 million as compared to $13.7 million for the three months ended June 30, 2019, an increase of $59.8 million.

IP Licensing revenue for the six months ended June 30, 2020 was $135.2 million as compared to $25.7 million for the six months ended June 30, 2019, an increase of $109.5 million.

The increases were primarily attributable to the inclusion of $22.7 million of TiVo IP Licensing revenue since the Mergers, a new IP Semiconductor patent and technology license agreement becoming effective in the second quarter of 2020, and an IP Semiconductor litigation settlement reached in March 2020.

We anticipate IP Licensing revenue for 2020 will be higher than

revenue for 2019 due to the Merger s , and due to the new IP Semiconductor p atent and technology license agreement and the IP Semiconductor litigation settlement entered into during t he first two quarters of 2020 .

Operating expenses for the three months ended June 30, 2020 were $20.4 million, as compared to $9.4 million for the three months ended June 30, 2019, an increase of $11.0 million.

Operating expenses for the six months ended June 30, 2020 were $30.7 million, as compared to $19.7 million for the six months ended June 30, 2019, an increase of $11.0.

The increases were primarily due to the inclusion of $10.6 million of TiVo IP Licensing expenses since the Mergers.

IP Licensing revenue for the three months ended September 30, 2020 was $80.2 million as compared to $11.8 million for the three months ended September 30, 2019, an increase of $68.4 million.

The increase was primarily attributable to the inclusion of TiVo IP Licensing revenue, partially offset by a decrease in revenue from IP Semiconductor licensing revenue.

IP Licensing revenue for the nine months ended September 30, 2020 was $ 215.5 million as compared to $37.5 million for the nine months ended September 30, 2019, an increase of $17 8.0 million.

The increase was primarily attributable to the inclusion of TiVo IP Licensing revenue since the Mergers and IP Semiconductor agreements executed during the first two quarters of 2020, partially offset by a decrease in revenue from other IP Semiconductor license agreements .

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

Operating expenses for the three months ended September 30, 2020 were $40.0 million, as compared to $10.1 million for the three months ended September 30, 2019, an increase of $29.9 million.

Operating expenses for the nine months ended September 30, 2020 were $70.8 million, as compared to $29.9 million for the nine months ended September 30, 2019, an increase of $40.9 million.

The increases were primarily due to the inclusion of TiVo IP Licensing expenses for the three and nine months ended September 30, 2020, respectively, partially offset by lower legacy Xperi amortization expense due to certain intangible assets becoming fully amortized over the past twelve months.

In 2019 and in 2020 prior to the Mergers TiVo’s litigation expenses were significantly higher than Xperi’s litigation expenses in the same period.

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Litigation expense may fluctuate between periods because of planned or ongoing litigation, as described in Part II, Item 1 – Legal Proceedings, and because of litigation planned for or initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights.

Operating income for the three months ended June 30, 2020 was $53.1 million compared to operating income of $4.3 million for the three months ended June 30, 2019, with the variance due to the reasons stated above.

Operating income for the six months ended June 30, 2020 was $104.5 million compared to operating income of $5.9 million for the six months ended June 30, 2019, with the variance due to the reasons stated above.

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

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

Liquidity and Capital Resources

(in thousands, except for percentages)

June 30, 2020

September 30, 2020

December 31, 2019

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Percentage of total assets

Six Months Ended

June 30, 2020

June 30, 2019

Nine Months Ended

September 30, 2020

September 30, 2019

Net cash from operating activities

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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 $199.6 million at June 30, 2020, an increase of $78.1 million from $121.5 million at December 31, 2019.

This increase resulted primarily from $67.2 million in cash generated from operations, $1,011.3 million in net long-term debt proceeds received, and $117.4 million in cash acquired from TiVo as a result of the Mergers, which was partially offset by $20.2 million in dividends paid, $20.9 million in repurchases of common stock and $1,078.6 million in repayment of the combined legacy indebtedness of the companies.

Cash and cash equivalents was $174.0 million at June 30, 2020, an increase of $99.4 million from $74.6 million at December 31, 2019.

Cash flows provided by operations were $67.2 million for the six months ended June 30, 2020, primarily due to our net loss of $4.3 million being adjusted for non-cash items of depreciation of $5.1 million, amortization of intangible assets of $54.6 million, stock-based compensation expense of $16.5 million, loss on debt extinguishment of $8.3 million and $11.3 million in changes in operating assets and liabilities.

Cash, cash equivalents and short-term investments were $203.0 million at September 30, 2020, an increase of $81.5 million from $121.5 million at December 31, 2019.

This increase resulted primarily from $129.4 million in cash generated from operations, $1,010.3 million in net long-term debt proceeds received, and $117.4 million in cash acquired from TiVo as a result of the Mergers, which was partially offset by $25.6 million in dividends paid, $59.3 million in repurchases of common stock and $1,091.7 million in repayment of combined legacy indebtedness and the 2020 Term B Loan Facility.

Cash and cash equivalents totaled $115.7 million at September 30, 2020, an increase of $41.1 million from $74.6 million at December 31, 2019.

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

These increases were partially offset by a reduction of $28.2 million in deferred income taxes.

Cash flows provided by operations were $68.9 million for the six months ended June 30, 2019, primarily due to our net loss of $31.6 million being adjusted for non-cash items of depreciation of $3.4 million, amortization of intangible assets of $50.8 million, stock-based compensation expense of $14.8 million and $55.9 million in changes in operating assets and liabilities.

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

$75.9 million, stock-based compensation expense of $22.8 million and $89.6 million in changes in operating assets and liabilities.

These increases were partially offset by a reduction of $43.1 million in deferred income taxes .

Net cash provided by investing activities was $135.7 million for the six months ended June 30, 2020, primarily related to maturities and sales of securities of $20.7 million and net cash acquired in the Mergers of $117.4 million, partially offset by $1.9 million in capital expenditures.

Net cash used in investing activities was $11.7 million for the six months ended June 30, 2019, primarily related to the purchases of short-term available-for-sales securities of $22.7 million and $6.5 million in capital expenditures partially offset by maturities and sales of securities of $17.5 million .

Net cash used in financing activities was $103.6 million for the six months ended June 30, 2020 principally due to $1,078.6 million in repayment of indebtedness, $20.2 million in dividends paid, and $20.9 million in repurchases of common stock, partially offset by $1,011.3 million in net long-term debt proceeds and $4.8 million in proceeds due to the issuance of common stock under our employee stock option programs and employee stock purchase plans.

Net cash used in financing activities was $120.3 million for the six months ended June 30, 2019 principally due to $100.0 million in a partial pay-down of debt principal, $19.7 million in dividends paid and $4.3 million in repurchases of common stock, partially offset by $3.6 million in proceeds due to the issuance of common stock under our employee stock option programs and employee stock purchase plans.

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

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

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

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

The primary objectives of our investment activities are to preserve principal and to maintain liquidity while at the same time capturing a market rate of return.

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Our marketable debt securities are classified as available-for-sale (“AFS”) with credit losses recognized as a credit loss expense and non-credit related unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income or loss.

The fair values for our securities are determined based on quoted market prices as of the valuation date and observable prices for similar assets.

In the third quarter of 2018, we initiated an equity position in Onkyo Corporation (“Onkyo”), 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).

On July 5, 2019, we sold approximately 2.8 million shares of Onkyo stock, and in June 2020, we sold the remaining 4.2 million shares of Onkyo stock and realized an insignificant amount of gain and approximately $0.7 million in loss on this investment in the three and six months ended June 30, 2020, respectively.

The fair values for our securities are determined based on quoted market prices as of the valuation date or observable prices for similar assets.

For AFS debt securities in an unrealized loss position, we first assess whether we intend to sell, or it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis.

1 unchanged sentence

For AFS debt securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

1 unchanged sentence

Any impairment that has not been recorded through an allowance for credit losses is recognized in accumulated other comprehensive income or loss.

For the three and six months ended June 30, 2020, we did not recognize a provision for credit loss expense related to our AFS debt securities.

For the three and six months ended June 30, 2019, we did not record any impairment charges related to our AFS debt securities.

For the three and nine months ended September 30, 2020, we did not recognize a provision for credit loss expense related to our AFS debt securities.

For the three and nine months ended September 30, 2019, we did not record any impairment charges related to our AFS debt securities.

On December 1, 2016, we entered into a Credit Agreement with Royal Bank of Canada (“RBC”) which provided for a $600.0 million seven-year term B loan facility.

The Term B Loan Facility was scheduled to mature on November 30, 2023.

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 were guaranteed by substantially all of our assets pursuant to the Security Agreement, dated December 1, 2016, among us, RBC, 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.

Upon consummation of the Mergers on June 1, 2020, we repaid the full remaining balance of $344.0 million under the Credit Agreement.

During 2019 we made three voluntary principal payments totaling $150.0 million, and upon consummation of the Mergers on June 1, 2020, we repaid the full remaining balance of $344.0 million under the Credit Agreement.

In addition, upon consummation of the Mergers on June 1, 2020, we repaid $734.6 million of assumed TiVo debt with the proceeds from a new borrowing of $1,050 million discussed below.

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The interest rate applicable to loans outstanding under the 2020 Term B Loan Facility is equal to, at our option, either (i) a base rate plus a margin of 3.00% per annum or (ii) LIBOR plus a margin of 4.00% per annum.

2020 Term B Loan Facility and (ii) with respect to repayments occurring after June 1, 2023 and prior to June 1, 2025, 1.875% of the original principal amount of the 2020 Term B Loan Facility, with the balance payable on the maturity date of the 2020 Term B Loan Facility (in each case subject to adjustment for prepayments).

Commencing on September 30, 2020, the 2020 Term B Loan Facility will amortize in quarterly installments equal to (i) with respect to repayments occurring on or prior to June 1, 2023, 1.25% of the original principal amount of the 2020 Term B Loan Facility and (ii) with respect to repayments occurring after June 1, 2023 and prior to June 1, 2025, 1.875% of the original principal amount of the 2020 Term B Loan Facility, with the balance payable on the maturity date of the 2020 Term B Loan Facility (in each case subject to adjustment for prepayments).

The 2020 Term B Loan Facility will mature on June

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Net proceeds were used on June 1, 2020, together with cash and cash equivalents, to repay existing indebtedness of the combined Company, including the aforementioned T erm B L oan F acility with RBC.

At June 30, 2020, $1,050.0 million was outstanding under the 2020 Term B Loan Facility with an interest rate, including amortization of debt issuance costs, of 4.8%.

On September 30, 2020, we made the first required principal payment of $ 13.1 million .

At September 30, 2020, $1,036.9 million was outstanding under the 2020 Term B Loan Facility with an interest rate, including amortization of debt issuance costs, of 5.1%.

Interest is payable monthly and nominal principal payments are due quarterly effective September 2020.

1 unchanged sentence

We are obligated to pay a portion of excess cash flow on an annual basis beginning March 31, 2022 based on certain ratios and our excess cash flow generated for the immediately preceding fiscal year.

The 2020 Term B Loan Facility contains customary covenants, and as of June 30, 2020 we were in full compliance with such covenants.

The 2020 Term B Loan Facility contains customary covenants, and as of September 30, 2020 we were in full compliance with such covenants.

In August 2007, Xperi’s Board of Directors authorized a plan to repurchase Xperi’s outstanding shares of common stock dependent on market conditions, share price and other factors.

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On June 12, 2020, our Board of Directors authorized a new stock repurchase program (the “new plan”) providing for the repurchase of up to $150.0 million of our common stock dependent on market conditions, share price and other factors.

In June 2020, we repurchased a total of approximately 1.1 million shares of common stock at an average price of $13.92 per share for a total cost of $15.0 million.

As of June 30, 2020, the total remaining amount available for repurchase was $135.0 million.

Since the inception of the plan, and through September 30, 2020, we have repurchased approximately 3.9 million shares of common stock at a total cost of $50.1 million at an average price of $12.81.

During the three months ended September 30, 2020, our repurchases totaled $35.1 million.

As of September 30, 2020, the total remaining amount available for repurchase was $99.9 million.

We may continue to execute authorized repurchases from time to time under the new plan.

In July 2020, our Board of Directors reviewed the Company’s expected capital allocation priorities and consequently authorized payment of a quarterly dividend of $0.05 per share.

In October 2020, our Board of Directors authorized payment of a quarterly dividend of $0.05 per share, to be paid in December 2020.

We anticipate that all quarterly dividends will be paid out of cash, cash equivalents and short-term investments.

From 2017 through the second quarter of 2020, we generated approximately $519 million of cash flows from operating activities.

From 2017 through the third quarter of 2020, we generated approximately $580 million of cash flows from operating activities.

While we expect to continue to generate cash flows from operating activities for the remainder of 2020, the COVID-19 pandemic presents significant uncertainties to the level of such cash flows as compared to prior years and as compared to our previous forecasts.

Additionally, one-time costs in connection with the Mergers and subsequent integration of the two legacy businesses will impact operating cash flow for the duration of 2020.

Additionally, one-time costs in connection with the Mergers, subsequent integration of the two legacy businesses and transaction costs relating to the contemplated separation of the two businesses will impact operating cash flow for the duration of 2020.

Currently a significant portion of our anticipated revenue for 2020 is derived from fixed-fee and minimum-guarantee arrangements, primarily from large, well-capitalized customers which we believe somewhat mitigates the risks to our business.

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Contractual Cash Obligations

Our contractual obligations as of June 30, 2020 were as follows (in thousands):

Payments due by period

Long-term debt (1)

Purchase obligations

Operating lease commitments (2)

(1) Under our debt agreement, our debt bears a variable interest rate.

See “Note 9 – Debt” of the Notes to Condensed Consolidated Financial Statements for additional detail.

(2) Refer to “Note 14 – Leases” of the Notes to Condensed Consolidated Financial Statements for additional detail.

Our 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.

See “Note 1 4 – Leases ” of the Notes to Condensed Consolidated Financial Statements for additional information .

As of June 30, 2020, we had accrued $101.5 million of unrecognized tax benefits in long-term income taxes payable related to uncertain tax positions, which includes $1.9 million of accrued interest and penalties.

For information about our contractual obligations, see “ Contractual Cash Obligations ” in Part I, Item 2 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.

Other than the $13.1 million principal payment on the 2020 Term B Loan Facility in September 2020, our contractual obligations have not changed materially since June 30, 2020.

As of September 30, 2020, we had accrued $99.7 million of unrecognized tax benefits in long-term income taxes payable related to uncertain tax positions, which includes $2.2 million of accrued interest and penalties.

At this time, we are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time.

If we are successful in receiving our South Korean withholding tax refund of $98.4 million, net of foreign exchange loss, then $75.1 million of unrecognized tax benefit would be payable to the U.S.

If we are successful in receiving our South Korean withholding tax refund of $109.7 million, net of interest income and foreign exchange loss, then $62.8 million of unrecognized tax benefit would be payable to the U.S.

tax authorities.

These amounts, which are included in our financial statements, have not been included in the table above.

Under certain other contractual arrangements, the Company may be obligated to pay up to approximately $10.9 million over an estimated period of approximately four years if certain milestones are achieved.

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

Off-Balance Sheet Arrangements

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

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

Critical Accounting Policies and Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis