Adeia Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited financial statements and notes thereto for the year ended December 31, 2019 found in the Form 10-K filed by Xperi Corporation on February 18, 2020 (the “Form 10-K”). This Quarterly Report contains forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “could,” “would,” “may,” “intends,” “targets” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report. The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to our future revenue, product development, demand, acceptance and market share, growth rate, competitiveness, gross margins, levels of research, development and other related costs, expenditures, the outcome or effects of and expenses related to litigation and administrative proceedings related to our patents, our intent to enforce our intellectual property, our ability to license our intellectual property, tax expenses, cash flows, our ability to liquidate and recover the carrying value of our investments, our management's plans and objectives for our current and future operations, our plans for quarterly dividends and stock repurchases, our ability to achieve cost savings through the integration of the legacy businesses, the levels of customer spending or research and development activities, general economic conditions, the impact of COVID-19 (as defined below) pandemic and related events, the impact of the Mergers (as defined below) on our financial condition and results of operations, our plans to separate the combined product and IP licensing businesses, and the sufficiency of financial resources to support future operations and capital expenditures. Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks, uncertainties, and changes in condition, significance, value and effect, including those discussed below under the heading “Risk Factors” within Part II, Item 1A of this Quarterly Report and other documents we file from time to time with the Securities and Exchange Commission (the “SEC”), such as our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report and are based on information currently and reasonably known to us. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report, other than as required by law. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects. As used herein, the “Company,” “we,” “us” and “our” refer to Xperi when referring to periods prior to June 1, 2020 and Xperi Holding Corporation when referring to periods subsequent to June 1, 2020. Unless specified otherwise, the financial results in this Quarterly Report are those of the Company and its subsidiaries on a consolidated basis. Business Overview On December 18, 2019, Xperi Corporation (“Xperi”) entered into a definitive agreement with TiVo Corporation (“TiVo”), to combine in an all-stock merger of equals transaction (the “Mergers”). Following consummation of the Mergers on June 1, 2020, Xperi Holding Corporation became the parent company of both Xperi and TiVo. The common stock of both Xperi and TiVo were de-registered after completion of the Mergers. On June 2, 2020, Xperi Holding Corporation’s common stock, par value $0.001 per share, commenced trading on the Nasdaq Global Select Market (“Nasdaq”) under the ticker symbol “XPER.” Xperi was determined to be the accounting acquirer in the Mergers. As a result, the historical financial statements of Xperi for periods prior to the Mergers are considered to be the historical financial statements of Xperi Holding Corporation. Our results of operations include the operations of TiVo after June 1, 2020. For further discussion on the Mergers, refer to “Item 1A. Risk Factors,” and “Note 7 – Business Combination” in the Notes to Condensed Consolidated Financial Statements. In connection with the Mergers, we incurred significant one-time expenses in the first three quarters of 2020 such as transaction related costs (e.g. bankers fees, legal fees, consultant fees, etc.), lease impairment charges due to facilities consolidation, severance and retention costs (including stock-based compensation expense resulting from the contractually-required acceleration of equity instruments for departing executives). Total transaction related costs amounted to $1.2 million and $29.1 million for the three and nine months ended September 30, 2020, respectively. Lease impairment charges were $0.7 million and $0.7 million for the three and nine months ended September 30, 2020, respectively. In addition, we incurred post-merger severance and retention costs of $3.6 million and $12.1 million for the three and nine months ended September 30, 2020, 41 respectively. We may incur additional expenses for integration, severance and retention, and the impairment of right-of-use assets due to facilities consolidation in future quarters. We currently expect to achieve at least $50.0 million of annualized run-rate cost savings by year-end 2021 through the integration of the respective product and IP licensing businesses of the legacy companies. We are a leading consumer and entertainment technology licensing company and one of the industry’s largest intellectual property (IP) licensing platforms, with a diverse portfolio of media and semiconductor intellectual property and more than 11,000 patents and applications. We invent, develop, and deliver technologies that enable extraordinary experiences. Xperi technologies, delivered via our brands (DTS, HD Radio, IMAX Enhanced, Invensas, TiVo), and by our subsidiary, Perceive Corporation (“Perceive”), make entertainment more entertaining, and smart devices smarter. Our technologies are integrated into billions of consumer devices, media platforms, and semiconductors worldwide, driving increased value for partners, customers and consumers. We shape how millions of consumers access and experience entertainment content, and our innovations are found in billions of devices and hundreds of millions of interfaces around the globe. Headquartered in Silicon Valley with operations around the world, we have approximately 1,900 employees and over 35 years of operating experience. We are currently contemplating and may pursue, subject to the receipt of approval by our board and any required regulatory approvals, a separation of our product business and IP licensing business through a tax-efficient transaction, resulting in two independent, publicly traded companies. We are currently evaluating the optimal timing of the contemplated business separation. On November 9, 2020, we entered into a patent license agreement (the “Agreement”) with Comcast Corporation (“Comcast”) and certain of its affiliates. In connection with the Agreement, the companies resolved all of the outstanding litigation. The Agreement is effective as of the expiration of Comcast’s prior agreement in 2016 and its term continues into 2031. The Agreement also provides for an initial payment by Comcast upon execution and ongoing payments through the remainder of the Agreement. As the Agreement was entered into after September 30, 2020, we expect to record revenue from the out-of-license settlement in the fourth quarter of 2020 and revenue from the prospective license into 2031. In addition, we expect to make a substantial principal payment towards the 2020 Term B Loan Facility based on the leverage ratios and excess cash flow metrics as defined in the 2020 Credit Agreement. COVID-19 Impact In December 2019, a novel strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China, and has since spread throughout the world. In March 2020, the World Health Organization declared COVID-19 a pandemic. In an effort to protect the health and safety of our employees, we took proactive, aggressive action from the earliest signs of the outbreak to adopt social distancing policies at our locations around the world, including working from home, limiting the number of employees attending meetings, and suspending employee travel. In an effort to contain COVID-19 and slow its spread, governments around the world have also enacted various measures, including orders to close business locations, isolate people to their places of residence, and mandate social distancing and other health-related practices. Such orders or restrictions have resulted in business closures, work stoppages, slowdowns and delays in commercial activities, widespread unemployment, travel restrictions and cancellation of events, among other effects. While some governments recently have permitted reopening of businesses and approved gradual easing of various restrictions, the pandemic continues to have a significant and negative impact on business and economic activities in the U.S and around the world. These actions and the resulting global economic downturn have negatively impacted, and are expected to continue to negatively impact, our consolidated financial results for the remainder of 2020. The impact to date has included significant volatility and a decline in demand in various markets and industries, particularly the automotive market, which has been adversely impacted and is expected to continue to adversely impact our revenue. For example, we anticipate approximately 20% decline in our royalty revenue in 2020 from our products sold to the automotive market, such as HD Radio, as compared to the prior year. In addition, we recorded, in the first quarter of 2020, an incremental provision for credit losses of approximately $2.0 million due to heightened risk of nonpayment on existing accounts receivable as a result of the impaired financial condition and liquidity positions of certain of our customers. We have been closely monitoring the COVID-19 pandemic and its impact on our business, including legislation to mitigate the impact of COVID-19 such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act which was enacted on March 27, 2020. A significant portion of our anticipated revenue for 2020 is derived from fixed-fee and minimum-guarantee arrangements, primarily from large, well-capitalized customers which we believe somewhat mitigates the risks to our business. Although we are unable to predict the full impact and duration of COVID-19 on our business, we are actively managing our financial expenditures in response to the current uncertainty. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided under Part II, Item 1A – Risk Factors . 42 Results of Operations Revenue We generate our revenue from the following principal activities. License Agreements We operate in two business segments. In our Product segment, we license our audio, imaging, edge-based machine learning and multi-channel video user experience (“UX”) solutions. In our IP Licensing segment, we license (i) our media patent portfolios (“IP Media licensing”) to pay television providers, consumer electronics manufacturers and other providers of video experiences across various platforms and (ii) our semiconductor technologies and associated patent portfolios (“IP Semiconductor licensing”) to semiconductor manufacturers, fabless companies, foundries and packaging companies. We license our technologies and portfolios under three revenue models: (i) fixed-fee IP Media licensing, (ii) fixed-fee or minimum guarantee IP Semiconductor or Product licensing, and (iii) per-unit or per-subscriber royalty licenses. Fixed-fee IP Media licensing Our long-term fixed-fee IP Media licensing agreements provide our customers with the rights to future patented technologies over the term of the agreement that are highly interdependent or highly interrelated to the patented technologies provided at the inception of the agreement. We treat these rights as a single performance obligation with revenue recognized on a straight-line basis over the term of the fixed-fee license agreement. At times, we enter into license agreements in which a licensee is released from past patent infringement claims and is granted a license to ship an unlimited number of units or for an unlimited number of subscribers over a future period for a fixed fee. In these arrangements, we allocate the transaction price between the release for past patent infringement claims and the future license. As the release from past patent infringement claims is generally satisfied at execution of the agreement, the transaction price allocated to the release from past patent infringement claims is generally recognized in the period the agreement is executed and the amount of transaction price allocated to the future license is recognized ratably over the future license term. Fixed-fee or minimum guarantee IP Semiconductor or Product licensing We enter into Product or IP Semiconductor licenses that have fixed fee or minimum guarantee arrangements, whereby licensees pay a fixed fee for the right to incorporate our technology in the licensee's products over the license term. In arrangements with a minimum guarantee, the fixed fee component corresponds to a minimum number of units or dollars that the customer must produce or pay, with additional per-unit fees for any units or dollars exceeding the minimum. In most cases, the customer pays the fixed license fee in specified installments over the license term. For both fixed fee and minimum guarantee agreements for IP Semiconductor or Product licensing, we recognize the full fixed fee as revenue at the beginning of the license term, when the licensee has the right to use the IP and begins to benefit from the license. If the contract term of a fixed fee or minimum guarantee arrangement is longer than one year, we also consider the scheduled payment arrangements to determine whether a significant financing component exists. In general, if the payment arrangements extend beyond the initial twelve months of the contract, we treat a portion of the payments as a significant financing component. The discount rate used for each arrangement reflects the rate that would be used in a separate financing transaction between us and the licensee at contract inception and takes into account the credit characteristics of the licensee and market interest rates as of the date of the agreement. As such, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component. We actively monitor and enforce our IP, including seeking appropriate compensation from customers that have under-reported royalties owed under a license agreement and from third parties that utilize our intellectual property without a license. As a result of these activities, we may, from time to time, recognize revenue from payments resulting from periodic compliance audits of licensees for underreporting royalties incurred in prior periods, as part of a settlement of a patent infringement dispute, or from legal judgments in a license dispute. These recoveries and settlements may cause revenue to be higher than expected during a particular reporting period and such recoveries may not occur in subsequent periods. We recognize revenue from recoveries when a binding agreement has been executed and we conclude collection under that agreement is likely. Per-unit or per-subscriber royalty licenses We recognize revenue from per-unit or per-subscriber royalty licenses in the period in which the licensee's sales or production are estimated to have occurred, which results in an adjustment to revenue when actual sales or production are subsequently 43 reported by the licensee, which is generally in the month or quarter following usage or shipment. We generally recognize revenue from royalty licenses on a per-subscriber per-month model for licenses with service providers and a per-unit shipped or manufactured model for licenses with CE manufacturers. Estimating licensees’ quarterly royalties prior to receiving the royalty reports requires us to make significant assumptions and judgments related to forecasted trends and growth rates used to estimate quantities shipped by customers, which could have a material impact on the amount of revenue we report on a quarterly basis. Arrangements with Multiple System Operators for the TiVo Service Our arrangements with multiple system operators (“MSOs”) typically include software customization and set-up services, associated maintenance and support, limited training, post-contract support, TiVo-enabled DVRs, non-DVR STBs and the TiVo service. We have two types of arrangements with MSOs that include technology deployment and engineering services. In instances where we host the TiVo service, non-refundable payments received for customization and set-up services are deferred and recognized as revenue ratably over the hosting term. The related cost of such services is capitalized to the extent it is deemed recoverable and amortized to cost of revenue over the same period as the related TiVo service revenue is recognized. We estimate the stand-alone selling prices for training, DVRs, non-DVR STBs and maintenance and support based on the price charged in stand-alone sales of the promised good or service. The stand-alone selling price for the TiVo service is determined considering the size of the MSO and expected volume of deployment, market conditions, competitive landscape, internal costs and total gross margin objectives. For a term license to the TiVo service, we receive license fees for the hosted TiVo service on either a per-subscriber per-month basis or a fixed fee. We recognize revenue from per-subscriber per-month licenses during the month the TiVo service is provided to the customer and recognize revenue from fixed fee licenses ratably over the license period. In arrangements where we do not host the TiVo service and that include engineering services that are essential to the functionality of the licensed technology or involve significant customization or modification of the software, we recognize revenue as progress toward completion is made using an input method based on the ratio of costs incurred to date to total estimated costs of the project. Estimating project costs requires forecasting costs, tracking progress toward completion and projecting the remaining effort to complete the project. These estimates are reassessed throughout the term of the arrangement, and revisions to estimates are recognized on a cumulative catch-up basis when the changed conditions become known. We generally recognize revenue from license fees for the TiVo service that the Company does not host on a per-subscriber per-month basis due to the recognition constraint on intellectual property usage-based royalties. Subscription Services Subscription services revenue primarily consists of fees to provide customers with access to one or more of our hosted products such as the iGuide IPG, advanced search and recommendations, metadata and analytics products, including routine customer support. We generally receive per-subscriber per-month fees for the iGuide IPG and search and recommendations service and revenue is recorded in the month the customer uses the service. We generally receive a monthly or quarterly fee from our metadata or analytics licenses for the right to use the metadata or access our analytics platform and to receive regular updates. Revenue from our metadata and analytics service is recognized ratably over the subscription period. TiVo-enabled DVRs and TiVo Service We sell TiVo-enabled DVRs and the related service directly to customers through sales programs via the TiVo.com website and license the sale of TiVo-enabled DVRs through a limited number of retailers. After the initial subscription period, all customers have various pricing options when they renew their subscription. The transaction price allocated to the DVR is recognized as revenue upon shipment to the customer and the transaction price allocated to the TiVo service is recognized as revenue ratably over the service period. Subscription revenue from lifetime subscriptions is recognized ratably over the estimated useful life of the DVR associated with the subscription. The estimated useful life for a DVR depends on a number of assumptions, including, but not limited to, customer retention rates, the timing of new product introductions and historical experience. We periodically reassess the estimated useful life of a DVR. When the actual useful life of the DVR materially differs from our estimates, the estimated useful life of the DVR is adjusted, which could result in the recognition of revenue over a longer or shorter period of time. 44 The following table presents our historical operating results for the periods indicated as a percentage of revenue: Three Months Ended Nine Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Revenue: Licensing, services and software 96 % 100 % 98 % 100 % Hardware 4 — 2 — Total revenue 100 100 100 100 Operating expenses: Cost of licensing, services and software revenue, excluding depreciation and amortization of intangible assets 11 2 7 3 Cost of hardware revenue, excluding depreciation and amortization of intangible assets 6 — 3 — Research, development and other related costs 28 45 27 41 Selling, general and administrative 32 48 37 45 Depreciation expense 3 3 3 3 Amortization expense 25 43 23 40 Litigation expense 4 3 3 2 Total operating expenses 109 144 103 134 Operating loss (9 ) (44 ) (3 ) (34 ) Interest expense 7 10 5 9 Other income and expense, net (1 ) (1 ) (1 ) (4 ) Loss on debt extinguishment — — 2 — Loss before taxes (15 ) (53 ) (9 ) (39 ) Provision for (benefit from) income taxes — (25 ) (1 ) (14 ) Net loss (15 )% (28 )% (8 )% (25 )% Total Revenue (in thousands, except for percentages): Three Months Ended September 30, 2020 September 30, 2019 Increase/ (Decrease) % Change Total revenue $ 202,797 $ 57,867 $ 144,930 250 % The $144.9 million, or 250% increase in total revenue for the three months ended September 30, 2020, compared to the same period in the prior year, was primarily due to the inclusion of revenue from the results of TiVo operations following the Mergers. Excluding TiVo revenue, legacy Xperi revenue would have decreased due primarily to a decrease in revenue from IP Semiconductor licensing revenue, partially offset by higher minimum guarantee (“MG”) revenue due to the timing and duration of MG contracts up for renewal and executed during the third quarter of 2020. Nine Months Ended September 30, 2020 September 30, 2019 Increase/ (Decrease) % Change Total revenue $ 458,093 $ 189,549 $ 268,544 142 % The $268.5 million or 142% increase in total revenue for the nine months ended September 30, 2020, compared to the same period in the prior year, was primarily due to the inclusion of revenue from the results of TiVo’s operations following the Mergers and IP Semiconductor agreements executed during the first two quarters of 2020. These increases in revenue were partially offset by a decrease in royalty revenue from existing licensing agreements. Cost of Licensing, Services and Software Revenue, 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 45 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 September 30, 2020 was $12.2 million, as compared to $0.1 million for the three months ended September 30, 2019, an increase of $12.1 million. Cost of hardware revenue, excluding depreciation and amortization of intangible assets, for the nine months ended September 30, 2020 was $13.7 million, as compared to $0.3 million for the nine months ended September 30, 2019, an increase of $13.4 million. The increases were primarily due to the inclusion of $11.8 million and $13.2 million of post-merger TiVo expenses for the three and nine months ended September 30, 2020, respectively. We anticipate cost of hardware revenue, excluding depreciation and amortization of intangible assets, will continue to increase in 2020 when compared to 2019 primarily due to incremental expenses from the TiVo operations. Research, Development and Other Related Costs Research, development and other related costs (“R&D expense”) are comprised primarily of employee-related costs, stock-based compensation expense, engineering consulting expenses associated with new product and technology development, product commercialization, quality assurance and testing costs, as well as costs related to patent applications and examinations, product "tear downs" and reverse engineering, materials, supplies, equipment depreciation and an allocation of facilities costs. All research, development and other related costs are expensed as incurred. R&D expense for the three months ended September 30, 2020 was $57.7 million, as compared to $26.0 million for the three months ended September 30, 2019, an increase of $31.7 million. R&D expense for the nine months ended September 30, 2020 was $124.6 million, as compared to $78.0 million for the nine months ended September 30, 2019, an increase of $46.6 million. The increases were due to the inclusion of $30.2 million and $40.0 million of post-merger TiVo R&D expenses for the three and nine months ended September 30, 2020, respectively, increased headcount and personnel costs in Perceive which was created to focus on delivering edge inference solutions, and severance charges incurred in connection with consolidating and optimizing post-merger operations. We believe that a significant level of R&D expense will be required for us to remain competitive in the future. We also anticipate that R&D expense will remain higher than in the prior year due primarily to inclusion of the TiVo R&D operations. Selling, General and Administrative Selling expenses consist primarily of compensation and related costs for sales and marketing personnel engaged in sales and licensee support, reverse engineering personnel and services, marketing programs, public relations, promotional materials, travel, trade show expenses, and stock-based compensation expense. General and administrative expenses consist primarily of compensation and related costs for general management, information technology, finance personnel, legal fees and expenses, facilities costs, stock-based compensation expense, and professional services. Our general and administrative expenses, other than facilities-related expenses, are not allocated to other expense line items. 46 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 September 30, 2020 was $6.8 million, as compared to $1.6 million for the three months ended September 30, 2019, an increase of $5.2 million. Depreciation expense for the nine months ended September 30, 2020 was $11.8 million, as compared to $5.1 million for the nine months ended September 30, 2019, an increase of $6.7 million. The increases were primarily attributable to depreciation expense on TiVo fixed assets added through the Mergers in June 2020. We anticipate depreciation expense will continue to increase in 2020 as compared to 2019 as a result of the Mergers. Amortization Expense Amortization expense for the three months ended September 30, 2020 was $50.9 million, as compared to $25.1 million for the three months ended September 30, 2019, an increase of $25.8 million. Amortization expense for the nine months ended September 30, 2020 was $105.4 million, as compared to $75.9 million for the nine months ended September 30, 2019, an increase of $29.5 million. These increases were primarily attributable to amortization of intangible assets recorded in connection with the Mergers in June 2020. With the Mergers, we anticipate that amortization expenses will continue to be a significant expense since we acquired approximately $878 million in intangible assets which will be amortized over the next several years. See “Note 8 – Goodwill and Identified Intangible Assets” in the Notes to Condensed Consolidated Financial Statements for additional information. Litigation Expense Litigation expense for the three months ended September 30, 2020 was $8.5 million, as compared to $1.5 million for the three months ended September 30, 2019, an increase of $7.0 million. Litigation expense for the nine months ended September 30, 2020 was $14.5 million, as compared to $4.0 million for the nine months ended September 30, 2019, an increase of $10.5 million. These increases were primarily due to inclusion of post-merger TiVo litigation expenses for the three and nine months ended September 30, 2020, respectively, and increased case activity in the first three quarters of 2020. In 2019 and in 2020 prior to the Mergers TiVo’s litigation expenses were significantly higher than Xperi’s litigation expenses in the same periods. We expect that litigation expense will continue to be a material portion of our operating expenses and, as a result of the Mergers, will increase significantly in future periods. Litigation expense may fluctuate between periods because of planned or ongoing litigation, as described in Part II, Item 1 – Legal Proceedings , and because of litigation planned for or initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights. Upon expiration of our customers’ licenses, if those licenses are not renewed, litigation may become necessary to secure payment of reasonable royalties for the use of our patented technology. If we plan for or initiate such litigation, our future litigation expenses may increase. 47 Stock- based Compensation Expense The following table sets forth our stock-based compensation expense for the three and nine months ended September 30, 2020 and 2019 (in thousands): Three Months Ended Nine Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Cost of licensing, services and software revenue $ 258 $ — $ 332 $ — Research, development and other related costs 3,580 3,544 9,454 10,293 Selling, general and administrative 6,319 4,444 16,828 12,539 Total stock-based compensation expense $ 10,157 $ 7,988 $ 26,614 $ 22,832 Stock-based compensation awards include employee stock options, restricted stock awards and units, and employee stock plan purchases. The increases in stock-based compensation for the three and nine months ended September 30, 2020, compared to the corresponding periods in 2019, were primarily a result of including incremental expense of $1.9 million and $4.1 million from assumed TiVo stock awards and acceleration of equity instruments for departing executives for the three and nine months ended September 30, 2020, respectively. Interest Expense Interest expense for the three months ended September 30, 2020 and 2019 was $13.4 million and $5.5 million, respectively. Interest expense for the nine months ended September 30, 2020 and 2019 was $24.6 million and $18.4 million, respectively. The increases in interest expense were primarily a result of a higher average debt balance as compared to the corresponding periods in 2019, primarily due to the new $1,050 million term loan that was executed on June 1, 2020 to refinance the indebtedness of the combined Company in connection with the Mergers, which was partially offset by lower interest rates on our debt for the nine months ended September 30, 2020. We anticipate interest expense to increase in 2020 when compared to 2019 as a result of increased borrowings and amortization of debt issuance costs in connection with the Mergers in June 2020. Other Income and Expense, Net Other income and expense, net, for the three months ended September 30, 2020 was $2.3 million, as compared to $0.4 million for the three months ended September 30, 2019. Other income and expense, net, in the third quarter of 2020 was higher than the corresponding period in 2019 due principally to inclusion of post-merger TiVo other income, net, as well as recognition of an unrealized loss of $1.1 million on our equity investment in Onkyo Corporation (“Onkyo”) common stock in 2019. Other income and expense, net, for the nine months ended September 30, 2020 was $3.4 million, as compared to $7.5 million for the nine months ended September 30, 2019. Other income and expense, net, was lower in the first nine months of 2020 as compared to 2019 due principally to a decrease in interest income from financing components under Topic 606. Additionally, lower other income and expense in the first nine months of 2020 as compared to 2019 was attributable to recognition of a realized loss of $0.7 million in 2020, as compared to an unrealized gain of $0.6 million in the same period in 2019, on the aforementioned Onkyo investment. Loss on Debt Extinguishment In connection with the Mergers, we refinanced the indebtedness of the combined Company, and recognized a loss on early debt extinguishment of $8.3 million in second quarter of 2020. We did not incur a loss on early debt extinguishment in any other quarter in 2020 or the first nine months of 2019. Provision for Income Taxes For the three months ended September 30, 2020, we recorded an income tax expense of $0.5 million on a pretax loss of $30.1 million and for the nine months ended September 30, 2020, we recorded an income tax benefit of $6.8 million on a pretax loss of $41.6 million, which resulted in an effective tax rate of 16.3% for the nine months ended September 30, 2020. The tax benefit of $6.8 million is comprised of a $12.2 million tax benefit related to the five month pre-merger period and a tax expense of $5.4 million related to the four month post-merger period. The five month pre-merger income tax benefit of $12.2 million was primarily related to a net decrease in valuation allowance as a result of the Mergers, deduction from foreign-derived 48 intangible income, releases of unrecognized tax benefits due to the lapse of applicable statutes of limitation, deduction from transaction expenses, offset by tax expense from operating income, shortfalls from stock-based compensation, certain non-deductible expenses, and unrealized foreign exchange losses from the prior period South Korea refund claim. The four month post-merger income tax expense of $5. 4 million was primarily related to income tax expense from foreign operations, foreign withholding taxes and U.S. federal minimum tax offset by unrealized foreign exchange gains from the current period South Korea refund claim . For the three months ended September 30, 2019, we recorded an income tax benefit of $14.6 million on a pretax loss of $30.6 million and for the nine months ended September 30, 2019, we recorded an income tax benefit of $27.1 million on a pretax loss of $74.7 million, which resulted in an effective tax rate of 36.3% for the nine months ended September 30, 2019. The income tax benefit for the three and nine months ended September 30, 2019 was primarily related to tax benefit from operating losses and the realization of certain tax credits, offset by foreign withholding taxes, certain non-deductible expenses, and shortfalls from stock-based compensation. Our provision for income taxes is based on our worldwide estimated annualized effective tax rate, except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, and the tax effect of discrete items occurring during the period. We have applied separate effective tax rates to our pre- and post-merger activities; our post-merger effective tax rate is based on our worldwide estimated tax rate for the seven-month period ended December 31, 2020. The tax for jurisdictions for which a loss is expected and no benefit can be realized for the year is computed using a separate effective tax rate. The decrease in income tax benefit for the nine months ended September 30, 2020 as compared to the prior year is largely attributable to a decrease in operating losses, increase in valuation allowance in the post-merger period, foreign withholding taxes, and U.S. federal minimum taxes, partially offset by tax benefits from the release of unrecognized tax benefits due to the lapse of applicable statute of limitation and a decrease in valuation allowance as a result of the Mergers. During the fourth quarter of 2019, we filed a refund claim for foreign taxes previously withheld from licensees in South Korea based on recent court rulings in South Korea and other business factors. These previously withheld foreign taxes were claimed as a foreign tax credit in the U.S. As a result of our refund claim, we recorded a non-current income tax receivable of $65.2 million in income tax receivable, an unrecognized tax benefit of $48.2 million in other long-term liabilities, and a reduction in deferred tax assets of $17.0 million. We anticipate filing a refund claim for the 2020 year-to-date South Korean withholding taxes. During the first nine months of 2020, an additional non-current income tax receivable of $13.7 million, an unrecognized tax benefit of $8.4 million in other long-term liabilities, and a reduction in deferred tax assets of $5.0 million with an offset to valuation allowance were recorded in connection with the South Korea refund claim matter . As part of our acquisition of TiVo, we recorded a year-to-date non-current income tax receivable of $31.9 million and a reduction in deferred tax assets of $15.5 million with a corresponding offset to valuation allowance, with the residual recorded to goodwill. At September 30, 2020, we had recorded a cumulative unrealized foreign exchange loss of approximately $1.2 million as a reduction in non-current income tax receivable. The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. After considering both positive and negative evidence to assess the recoverability of our net deferred tax assets, we determined that it was not more-likely-than-not that we would realize our federal, certain state and certain foreign deferred tax assets given the substantial amount of tax attributes that will remain unutilized to offset forecasted future tax liabilities. In the future, we may release our deferred tax asset valuation allowance associated with our federal, state or foreign deferred tax assets depending on achievement of future profitability in relevant jurisdictions, or implementing tax planning strategies that enable us to utilize deferred tax assets. Specifically, we will evaluate additional evidence provided by the nonrecognized subsequent event discussed in “Note 17 – Subsequent Events” which could result in the release of a portion of our deferred tax asset valuation allowance. We continue to monitor the likelihood that we will be able to recover our deferred tax assets, including those for which a valuation allowance is recorded. There can be no assurance that we will generate profits or implement tax strategies in future periods enabling us to fully realize our deferred tax assets. The timing of recording a deferred tax asset valuation allowance or the reversal of such valuation allowance is subject to objective and subjective factors that cannot be known in advance. Adjustments could be required in the future if we conclude that it is more-likely-than-not that deferred tax assets are recoverable. The release of a deferred tax asset valuation allowance could have the effect of decreasing the income tax provision in the period the valuation allowance is released. Segment Operating Results In connection with the Mergers, we re-evaluated our reportable segments. We concluded that we have two reportable segments: (1) Product and (2) IP Licensing. There are certain corporate overhead costs that are not allocated to these reportable segments because these operating amounts are not considered in evaluating the operating performance of our business segments. 49 Our Chief Executive Officer has been determined to be the Chief Operating Decision Maker (“CODM”) in consideration with the authoritative guidance on segment reporting. The Product segment consists primarily of licensing our internally-developed audio, digital radio, imaging, edge-based machine learning and multi-channel video user experience (“UX”) solutions. Edge based machine learning, audio, digital radio, and imaging solutions include the delivery of software and/or hardware-based solutions to the Company’s consumer electronics (“CE”) customers, automotive manufacturers or their supply chain partners. UX products and services revenue is primarily derived from multi-channel video service providers and CE manufacturers, licensing the TiVo service and selling TiVo-enabled devices, Personalized Content Discovery, enriched Metadata, viewership data and advertising. The IP Licensing segment consists primarily of licensing our innovations to leading companies in the media and semiconductor industries. Licensing arrangements include access to one or more of our foundational patent portfolios and may also include access to some of our industry-leading technologies and proven know-how. In the media industry, our licensees include pay television (“Pay-TV”) providers, both in the United States and internationally, consumer electronics manufacturers and other providers of video experiences across various platforms, including over-the-top (OTT) video. In the semiconductor industry, our licensees include semiconductor manufacturers, fabless companies, foundries and packaging companies. We do not identify or allocate assets by reportable segment, nor does the CODM evaluate reportable segments using discrete asset information. Reportable segments do not record inter-segment revenue and accordingly there are none to report. Although the CODM uses operating income to evaluate reportable segments, operating costs included in one segment may benefit other segments. The following table sets forth our segments’ revenue, operating expenses and operating income (loss) (in thousands): Three Months Ended Nine Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Revenue: Product segment $ 122,552 $ 46,028 $ 242,618 $ 152,026 IP Licensing segment 80,245 11,839 215,475 37,523 Total revenue 202,797 57,867 458,093 189,549 Operating expenses: Product segment 116,149 45,693 228,941 139,409 IP Licensing segment 40,020 10,113 70,765 29,859 Unallocated operating expenses (1) 65,591 27,588 170,542 84,121 Total operating expenses 221,760 83,394 470,248 253,389 Operating income (loss): Product segment 6,403 335 13,677 12,617 IP Licensing segment 40,225 1,726 144,710 7,664 Unallocated operating expenses (1) (65,591 ) (27,588 ) (170,542 ) (84,121 ) Total operating loss $ (18,963 ) $ (25,527 ) $ (12,155 ) $ (63,840 ) (1) Unallocated operating expenses consist primarily of selling, marketing, general and administrative expenses, including administration, human resources, finance, information technology, corporate development and procurement. These expenses are not allocated because these amounts are not considered in evaluating the operating performance of the Company’s business segments. The revenue and operating income (loss) amounts in this section have been presented on a basis consistent with U.S. GAAP applied at the segment level. Of our $846.9 million in goodwill at September 30, 2020, approximately $524.1 million was allocated to our Product reporting segment and approximately $322.8 million was allocated to our IP Licensing reporting segment. For the three months ended September 30, 2020, the unallocated operating expenses were $65.6 million compared to $27.6 million for the three months ended September 30, 2019. The increase of $38.0 million was due principally to the inclusion of TiVo expenses, legacy Xperi merger transaction related costs of $1.2 million, post-merger severance and retention costs of $1.4 million, separation costs of $2.1 million, and an increase of $2.2 million in stock-based compensation. For the nine months ended September 30, 2020, the unallocated operating expenses were $170.5 million compared to $84.1 million for the nine months ended September 30, 2019. The increase of $86.4 million was due principally to the inclusion of 50 TiVo expenses, legacy Xperi merger transaction related costs of $15.4 million, post-merger severance and retention costs of $3.7 million, separation costs of $2.5 million, and an increase of $2.7 million in stock-based compensation . Product Segment Three Months Ended Nine Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Total revenue $ 122,552 $ 46,028 $ 242,618 $ 152,026 Operating expenses: Total cost of revenue 33,881 1,506 45,145 6,241 Research, development and other related costs 48,850 20,172 102,479 61,275 Litigation 936 538 1,674 1,329 Depreciation 4,671 1,295 8,840 4,018 Amortization 27,811 22,182 70,803 66,546 Total operating expenses 116,149 45,693 228,941 139,409 Total operating income $ 6,403 $ 335 $ 13,677 $ 12,617 Product revenue for the three months ended September 30, 2020 was $122.6 million as compared to $46.0 million for the three months ended September 30, 2019, an increase of $76.6 million. Product revenue for the nine months ended September 30, 2020 was $242.6 million as compared to $152.0 million for the nine months ended September 30, 2019, an increase of $90.6 million. The increases were primarily attributable to the inclusion of TiVo product revenue for the three and nine months ended September 30, 2020, respectively, partially offset by a decrease in royalty revenue from existing licensing arrangements. We anticipate Product revenue for 2020 will be higher than revenue for 2019 due principally to the additional product revenue from TiVo following the Mergers. Operating expenses for the three months ended September 30, 2020 were $116.1 million, as compared to $45.7 million for the three months ended September 30, 2019, an increase of $70.4 million. Operating expenses for the nine months ended September 30, 2020 were $228.9 million, as compared to $139.4 million for the nine months ended September 30, 2019, an increase of $89.5 million. The increases were primarily due to the inclusion of TiVo Product expenses for the three and nine months ended September 30, 2020, respectively, increased headcount and personnel costs in Perceive, partially offset by lower legacy Xperi amortization expense due to certain intangible assets becoming fully amortized over the past twelve months. Operating income in the three months ended September 30, 2020 was $6.4 million compared to operating income of $0.4 million in the three months ended September 30, 2019, with the variance due to the reasons stated above. Operating income for the nine months ended September 30, 2020 was $13.7 million compared to operating income of $12.6 million in the nine months ended September 30, 2019, with the variance due to the reasons stated above. IP Licensing Segment Three Months Ended Nine Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Total revenue $ 80,245 $ 11,839 $ 215,475 $ 37,523 Operating expenses: Total cost of revenue 189 — 189 — Research, development and other related costs 8,881 5,826 22,086 16,729 Litigation 7,580 989 12,815 2,719 Depreciation 287 334 1,031 1,038 Amortization 23,083 2,964 34,644 9,373 Total operating expenses 40,020 10,113 70,765 29,859 Total operating income $ 40,225 $ 1,726 $ 144,710 $ 7,664 IP Licensing revenue for the three months ended September 30, 2020 was $80.2 million as compared to $11.8 million for the three months ended September 30, 2019, an increase of $68.4 million. The increase was primarily attributable to the inclusion of TiVo IP Licensing revenue, partially offset by a decrease in revenue from IP Semiconductor licensing revenue. 51 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. We expect that litigation expense will continue to be a material portion of our operating expenses and, as a result of the Mergers, will increase significantly in future periods. Litigation expense may fluctuate between periods because of planned or ongoing litigation, as described in Part II, Item 1 – Legal Proceedings, and because of litigation planned for or initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights. Operating income for the three months ended September 30, 2020 was $40.2 million compared to operating income of $1.7 million for the three months ended September 30, 2019, with the variance due to the reasons stated above. Operating income for the nine months ended September 30, 2020 was $144.7 million compared to operating income of $7.7 million for the nine months ended September 30, 2019, with the variance due to the reasons stated above. Liquidity and Capital Resources As of (in thousands, except for percentages) September 30, 2020 December 31, 2019 Cash and cash equivalents $ 115,725 $ 74,551 Short-term investments 87,258 46,926 Total cash, cash equivalents and short-term investments $ 202,983 $ 121,477 Percentage of total assets 8 % 12 % Nine Months Ended September 30, 2020 September 30, 2019 Net cash from operating activities $ 129,433 $ 104,214 Net cash from investing activities $ 72,536 $ (13,053 ) Net cash from financing activities $ (161,553 ) $ (129,069 ) Our primary sources of liquidity and capital resources are our operating cash flows and our investment portfolio. Cash, cash equivalents and short-term investments were $203.0 million at September 30, 2020, an increase of $81.5 million from $121.5 million at December 31, 2019. This increase resulted primarily from $129.4 million in cash generated from operations, $1,010.3 million in net long-term debt proceeds received, and $117.4 million in cash acquired from TiVo as a result of the Mergers, which was partially offset by $25.6 million in dividends paid, $59.3 million in repurchases of common stock and $1,091.7 million in repayment of combined legacy indebtedness and the 2020 Term B Loan Facility. Cash and cash equivalents totaled $115.7 million at September 30, 2020, an increase of $41.1 million from $74.6 million at December 31, 2019. Cash flows provided by operations were $129.4 million for the nine months ended September 30, 2020, primarily due to our net loss of $34.8 million being adjusted for non-cash items of depreciation of $11.8 million, amortization of intangible assets of $105.4 million, stock-based compensation expense of $26.6 million, loss on debt extinguishment of $8.3 million and $31.6 million in changes in operating assets and liabilities. These increases were partially offset by a reduction of $28.2 million in deferred income taxes. Cash flows provided by operations were $104.2 million for the nine months ended September 30, 2019, primarily due to our net loss of $47.6 million being adjusted for non-cash items of depreciation of $5.1 million, amortization of intangible assets of 52 $75.9 million, stock-based compensation expense of $22.8 million and $89.6 million in changes in operating assets and liabilities. These increases were partially offset by a reduction of $43.1 million in deferred income taxes . Net cash provided by investing activities was $72.5 million for the nine months ended September 30, 2020, primarily related to maturities and sales of securities of $26.9 million and net cash acquired in the Mergers of $117.4 million, partially offset by purchases of short-term investments of $68.1 million and capital expenditures of $3.0 million. Net cash used in investing activities was $13.1 million for the nine months ended September 30, 2019, primarily related to the purchases of short-term available-for-sales securities of $34.5 million and $8.0 million in capital expenditures partially offset by maturities and sales of securities of $29.3 million. Net cash used in financing activities was $161.6 million for the nine months ended September 30, 2020 principally due to $1,091.7 million in repayment of indebtedness, $25.6 million in dividends paid, and $59.3 million in repurchases of common stock, partially offset by $1,010.3 million in net long-term debt proceeds and $4.8 million in proceeds due to the issuance of common stock under our employee stock option programs and employee stock purchase plans. Net cash used in financing activities was $129.1 million for the nine months ended September 30, 2019 principally due to $100.0 million in a partial pay-down of debt principal, $29.6 million in dividends paid and $4.3 million in repurchases of common stock, partially offset by $6.0 million in proceeds due to the issuance of common stock under our employee stock option programs and employee stock purchase plans. The primary objectives of our investment activities are to preserve principal and to maintain liquidity while at the same time capturing a market rate of return. To achieve these objectives, we maintain a diversified portfolio of securities including money market funds and debt securities including corporate bonds and notes, municipal bonds and notes, commercial paper, treasury and agency notes and bills and certificates of deposit. We invest excess cash predominantly in high-quality investment grade debt securities with less than three years to maturity. Our marketable debt securities are classified as available-for-sale (“AFS”) with credit losses recognized as a credit loss expense and non-credit related unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income or loss. The fair values for our securities are determined based on quoted market prices as of the valuation date or observable prices for similar assets. For AFS debt securities in an unrealized loss position, we first assess whether we intend to sell, or it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in accumulated other comprehensive income or loss. For the three and nine months ended September 30, 2020, we did not recognize a provision for credit loss expense related to our AFS debt securities. For the three and nine months ended September 30, 2019, we did not record any impairment charges related to our AFS debt securities. On December 1, 2016, we entered into a Credit Agreement with Royal Bank of Canada (“RBC”) which provided for a $600.0 million seven-year term B loan facility. The Term B Loan Facility was scheduled to mature on November 30, 2023. During 2019 we made three voluntary principal payments totaling $150.0 million, and upon consummation of the Mergers on June 1, 2020, we repaid the full remaining balance of $344.0 million under the Credit Agreement. In addition, upon consummation of the Mergers on June 1, 2020, we repaid $734.6 million of assumed TiVo debt with the proceeds from a new borrowing of $1,050 million discussed below. On June 1, 2020, in connection with the consummation of the Mergers, we entered into a Credit Agreement (the “2020 Credit Agreement”) by and among us, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent. The 2020 Credit Agreement provides for a five-year senior secured term loan B facility in an aggregate principal amount of $1,050 million (the “2020 Term B Loan Facility”). The interest rate applicable to loans outstanding under the 2020 Term B Loan Facility is equal to, at our option, either (i) a base rate plus a margin of 3.00% per annum or (ii) LIBOR plus a margin of 4.00% per annum. Commencing on September 30, 2020, the 2020 Term B Loan Facility will amortize in quarterly installments equal to (i) with respect to repayments occurring on or prior to June 1, 2023, 1.25% of the original principal amount of the 2020 Term B Loan Facility and (ii) with respect to repayments occurring after June 1, 2023 and prior to June 1, 2025, 1.875% of the original principal amount of the 2020 Term B Loan Facility, with the balance payable on the maturity date of the 2020 Term B Loan Facility (in each case subject to adjustment for prepayments). The 2020 Term B Loan Facility will mature on June 53 1, 2025. Upon the closing of the 2020 Credit Agreement, we borrowed $1,050 million under the 2020 Term B Loan Facility. Net proceeds were used on June 1, 2020, together with cash and cash equivalents, to repay existing indebtedness of the combined Company, including the aforementioned T erm B L oan F acility with RBC. On September 30, 2020, we made the first required principal payment of $ 13.1 million . At September 30, 2020, $1,036.9 million was outstanding under the 2020 Term B Loan Facility with an interest rate, including amortization of debt issuance costs, of 5.1%. Interest is payable monthly and nominal principal payments are due quarterly effective September 2020. We have future minimum principal payments for our debt of $52.5 million annually through 2022, then $72.2 million and $78.8 million in 2023 and 2024, respectively, with the remaining principal balance due in 2025. We are obligated to pay a portion of excess cash flow on an annual basis beginning March 31, 2022 based on certain ratios and our excess cash flow generated for the immediately preceding fiscal year. The 2020 Term B Loan Facility contains customary covenants, and as of September 30, 2020 we were in full compliance with such covenants. In August 2007, Xperi’s Board of Directors authorized a plan to repurchase Xperi’s outstanding shares of common stock dependent on market conditions, share price and other factors. This authorization was terminated upon closing of the Mergers. On June 12, 2020, our Board of Directors authorized a new stock repurchase program (the “new plan”) providing for the repurchase of up to $150.0 million of our common stock dependent on market conditions, share price and other factors. Since the inception of the plan, and through September 30, 2020, we have repurchased approximately 3.9 million shares of common stock at a total cost of $50.1 million at an average price of $12.81. During the three months ended September 30, 2020, our repurchases totaled $35.1 million. As of September 30, 2020, the total remaining amount available for repurchase was $99.9 million. We may continue to execute authorized repurchases from time to time under the new plan. In October 2020, our Board of Directors authorized payment of a quarterly dividend of $0.05 per share, to be paid in December 2020. We anticipate that all quarterly dividends will be paid out of cash, cash equivalents and short-term investments. From 2017 through the third quarter of 2020, we generated approximately $580 million of cash flows from operating activities. While we expect to continue to generate cash flows from operating activities for the remainder of 2020, the COVID-19 pandemic presents significant uncertainties to the level of such cash flows as compared to prior years and as compared to our previous forecasts. Additionally, one-time costs in connection with the Mergers, subsequent integration of the two legacy businesses and transaction costs relating to the contemplated separation of the two businesses will impact operating cash flow for the duration of 2020. Currently a significant portion of our anticipated revenue for 2020 is derived from fixed-fee and minimum-guarantee arrangements, primarily from large, well-capitalized customers which we believe somewhat mitigates the risks to our business. We have taken actions to manage cash flows by reducing discretionary spending and other variable costs, delaying employee hiring, and closely monitoring receivables and payables. We believe that based on current levels of operations and anticipated growth, our cash from operations, together with cash, cash equivalents and investments currently available, will be sufficient to fund our operations, debt service, dividends, stock repurchases and acquisition needs for at least the next twelve months. Poor financial results, unanticipated expenses, unanticipated acquisitions of technologies or businesses or unanticipated strategic investments could give rise to additional financing requirements sooner than we expect. There can be no assurance that equity or debt financing will be available when needed or, if available, that such financing will be on terms satisfactory to us and not dilutive to our then-current stockholders. Contractual Cash Obligations For information about our contractual obligations, see “ Contractual Cash Obligations ” in Part I, Item 2 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020. Other than the $13.1 million principal payment on the 2020 Term B Loan Facility in September 2020, our contractual obligations have not changed materially since June 30, 2020. As of September 30, 2020, we had accrued $99.7 million of unrecognized tax benefits in long-term income taxes payable related to uncertain tax positions, which includes $2.2 million of accrued interest and penalties. At this time, we are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. If we are successful in receiving our South Korean withholding tax refund of $109.7 million, net of interest income and foreign exchange loss, then $62.8 million of unrecognized tax benefit would be payable to the U.S. tax authorities. See “Note 15 – Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements for additional detail. 54 Off-Balance Sheet Arrangements As of September 30, 2020, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. Critical Accounting Policies and Estimates Our significant accounting policies are detailed in “Note 2 – Summary of Significant Accounting Policies” in the Form 10-K for the year ended December 31, 2019. Certain updates to our revenue recognition policy as a result of the Mergers are provided in “Note 3 – Revenue” of the Notes to Condensed Consolidated Financial Statements. See “Note 2 – Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements for additional detail. For a discussion of our critical accounting policies and estimates, see Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K. Recent Accounting Pronouncements See “Note 2 – Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.