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Item 2. Management’s Discussion and Analysis

2021-05-05 compared with 2020-11-09 · 180 added, 254 removed, 205 unchanged (68% of the section changed)

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”).

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, 2020 found in the Form 10-K filed by Xperi Holding Corporation on February 26, 2021 (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.

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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 (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.

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 rights, 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 the 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.

Consequently, forward-looking statements are inherently subject to risks, uncertainties, and changes in condition, significance, value and effect, including those discussed under the heading “Risk Factors” in our annual report on Form 10-K and other documents we file from time to time with the Securities and Exchange Commission (the “SEC”), such as 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.

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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.

Following consummation of the mergers between Xperi Corporation (“Xperi”) and TiVo Corporation (“TiVo”) on June 1, 2020 (the “Mergers”), 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.

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

For further discussion on the Mergers, refer to “Item 1A.

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

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

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

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

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

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

respectively.

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

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

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

We are a leading consumer and entertainment product/solutions 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 patent applications worldwide.

We invent, develop, and deliver technologies that enable extraordinary experiences.

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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.

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

Headquartered in Silicon Valley with operations around the world, we have approximately 1,8 0 0 employees and over 30 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.

We are currently contemplating and may pursue, subject to 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 evaluating the optimal timing of the contemplated business separation and currently anticipate that such separation will not be completed earlier than the first half of 2022.

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 .

Our business and results of operations have been adversely affected by the global COVID-19 pandemic and related events and we expect its impact to continue.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our businesses, and there is no guarantee that we will be able to address its adverse impacts fully or effectively.

The impact to date has included periods of significant volatility in various markets and industries.

The volatility has had, and we anticipate it will continue to have, an adverse effect on our customers and on our business, financial condition and results of operations, and may result in an impairment of our long-lived assets, including goodwill, increased credit losses and impairments of investments in other companies.

In particular, the automotive market, as well as the broad consumer electronics industries, have been and may continue to be impacted by the pandemic and/or other events beyond our control, and further volatility could have an additional negative impact on these industries, customers, and our business.

In addition, the COVID-19 pandemic and to a lesser extent, U.S.

restrictions on trade with certain Chinese customers have and may continue to impact the financial conditions of our customers, who may not be able to satisfy their obligations under our agreements timely or at all.

In addition, actions by United States federal, state and foreign governments to address the COVID-19 pandemic, including travel bans, stay-at-home orders and school, business and entertainment venue closures, also had a significant adverse effect on the markets in which we conduct our businesses.

COVID-19 poses the risk that our workforce, suppliers, and other partners may be prevented from conducting normal business activities for an indefinite period of time, including due to shutdowns or stay-at-home orders that may be requested or mandated by governmental authorities.

We also implemented policies to allow our employees to work remotely as a result of the pandemic as we reviewed processes related to workplace safety, including social distancing and sanitation practices recommended by the Centers for Disease Control and Prevention.

The impacts of the COVID-19 pandemic could also cause delays in obtaining new customers and executing renewals and could also impact our business as consumer behavior changes in response to the slowed economic conditions.

Furthermore, our ongoing integration efforts following the Mergers have been and may continue to be delayed or interrupted due to the operational challenges and various restrictions and limitations imposed on us as a result of the COVID-19 pandemic, which may adversely affect the timing and success of the integration and anticipated benefits of the Mergers.

Although a significant portion of our anticipated revenue for 2021 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, our per-unit and variable fees based revenue will continue to be susceptible to the volatility, supply chain disruptions and potential market downturns induced by the COVID-19 pandemic.

Although we are unable to predict the full impact and duration of the COVID-19 pandemic on our business, we are actively managing our financial expenditures in response to continued uncertainty.

Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided under Part I, Item 1A – Risk Factors of the Form 10-K.

Results of Operations

We generate our revenue from the following principal activities.

We generate 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.

In our Product segment, we license our audio, digital radio, 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 (“Media IP licensing”) to multichannel video programming distributors (MVPDs), OTT video service providers, consumer electronics manufacturers, social media, and other new media companies and (ii) our semiconductor technologies and associated patent portfolios (“Semiconductor IP licensing”) to memory, sensors, RF component, and foundry

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.

( i ) fixed-fee Media IP licensing, (ii) fixed-fee or minimum guarantee Semiconductor IP or Product licensing, and (iii) per-unit or per-subscriber royalty licenses .

Fixed-fee Media IP licensing

Our long-term fixed-fee Media IP 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.

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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.

Fixed-fee or minimum guarantee Semiconductor IP or Product licensing

We enter into Product or Semiconductor IP 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.

For both fixed fee and minimum guarantee agreements for Semiconductor IP 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.

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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.

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.

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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.

TiVo-enabled DVRs and non-DVRs and related TiVo Service

We sell TiVo-enabled DVRs and non-DVRs and the related service directly to customers through sales programs via the TiVo.com website and license the sale of TiVo-enabled DVRs and non-DVRs through a limited number of retailers.

After the initial subscription period, all customers have various pricing options when they renew their subscription.

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Three Months Ended

Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

March 31, 2021

March 31, 2020

Licensing, services and software

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Total operating expenses

Operating loss

Operating income

Interest expense

Other income and expense, net

Loss on debt extinguishment

Loss before taxes

Income before taxes

Provision for (benefit from) income taxes

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Three Months Ended

September 30, 2020

September 30, 2019

Increase/ (Decrease)

Total revenue

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

March 31, 2021

March 31, 2020

Increase/ (Decrease)

Total revenue

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.

The $103.9 million, or 88% increase in total revenue for the three months ended March 31, 2021, compared to the same period in the prior year, was primarily due to 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 decline in revenue from the Semiconductor IP licensing business.

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

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 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 March 31, 2021 was $21.4 million, as compared to $1.5 million for the three months ended March 31, 2020, an increase of $19.9 million.

The increase was due to the inclusion of post-merger TiVo expenses in the first quarter of 2021.

We anticipate cost of licensing, services and software revenue, excluding depreciation and amortization of intangible assets, will continue to increase in 2021 when compared to 2020 due to the inclusion of a full year of TiVo operations in our consolidated results.

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.

Cost of hardware revenue, excluding depreciation and amortization of intangible assets, for the three months ended March 31, 2021 was $6.7 million, as compared to $0.1 million for the three months ended March 31, 2020, an increase of $6.6 million.

The increase was due to the inclusion post-merger TiVo expenses in the first quarter of 2021.

We anticipate cost of hardware revenue, excluding depreciation and amortization of intangible assets, will continue to increase in 2021 when compared to 2020 primarily due to the inclusion of a full year of TiVo operations in our consolidated results as well as expected growth in sales of hardware products.

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.

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, 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.

R&D expense for the three months ended March 31, 2021 was $55.2 million, as compared to $28.6 million for the three months ended March 31, 2020, an increase of $26.6 million.

The increase was due to the inclusion of post-merger TiVo R&D expenses in the first quarter of 2021.

Excluding TiVo expenses, R&D expense would have decreased by approximately $2.5 million, due principally to reduced headcount and personnel costs as a result of cost synergies realized, lower travel related costs as well as reduced spending in materials, supplies, facilities and insurance in the first quarter of 2021.

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.

We also anticipate that R&D expense will increase in 2021 when compared to 2020 due primarily to due to the inclusion of a full year of TiVo operations in our consolidated results.

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 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.

Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2021 were $67.4 million, as compared to $36.6 million for the three months ended March 31, 2020, an increase of $30.8 million.

The increase was due principally to the inclusion of TiVo expenses in the first quarter of 2021.

Excluding TiVo expenses, SG&A expenses would have decreased by approximately $1.6 million, driven by a decrease in provision for credit losses, lower sales/marketing promotion expenses and travel and entertainment costs, partially offset by post-merger severance and retention costs recorded in the first quarter of 2021.

We anticipate SG&A expenses will increase in 2021 when compared to 2020 due principally to the inclusion of a full year of TiVo operations in our consolidated results.

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.

Depreciation expense for the three months ended March 31, 2021 was $5.7 million, as compared to $1.7 million for the three months ended March 31, 2020, an increase of $4.0 million.

The increase was 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 2021 as compared to 2020 as a result of the inclusion of the full year effect of TiVo’s assets after 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.

Amortization expense for the three months ended March 31, 2021 was $52.2 million, as compared to $22.5 million for the three months ended March 31, 2020, an increase of $29.7 million.

The increase was primarily attributable to amortization of intangible assets recorded in connection with the Mergers in June 2020, and secondarily due to intangible assets acquired in the fourth quarter of 2020.

With the Mergers, we anticipate that amortization expense 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 N otes 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.

Litigation expense for the three months ended March 31, 2021 was $2.5 million, as compared to $2.1 million for the three months ended March 31, 2020, an increase of $0.4 million.

The increase was primarily due to inclusion of post-merger TiVo litigation expenses, partially offset by reduced case activity.

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 nine months ended September 30, 2020 and 2019 (in thousands):

The following table sets forth our stock-based compensation (“SBC”) expense for the three and nine months ended March 31, 2021 and 2020 (in thousands):

Three Months Ended

Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

March 31, 2021

March 31, 2020

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 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.

The increase in SBC expense for the three months ended March 31, 2021, compared to the corresponding period in 2020, was primarily a result of including incremental expense from assumed TiVo stock awards from the Mergers and increases in stock award grants as a result of the Mergers.

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.

Interest expense for the three months ended March 31, 2021 was $11.3 million, as compared to $4.3 million for the three months ended March 31, 2020.

The increase in interest expense was primarily a result of a higher average debt balance as compared to the first quarter of 2020 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.

We anticipate interest expense will increase in 2021 when compared to 2020 as a result of a full year of the higher debt balance and amortization of debt discount and issuance costs.

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.

Other income and expense, net, for the three months ended March 31, 2021 was $1.4 million, as compared to $0.6 million for the three months ended March 31, 2020.

Other income and expense, net, in the first quarter of 2021 was higher than the corresponding period in 2020 due principally to recognition of an unrealized loss of $0.7 million on our equity investment in Onkyo Corporation common stock in the first quarter of 2020 .

Provision for Income Taxes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

These previously withheld foreign taxes were claimed as a foreign tax credit in the U.S.

As a result of our refund claim, we recorded a non-current income tax receivable of $65.2 million in income tax receivable, an unrecognized tax benefit of $48.2 million in other long-term liabilities, and a reduction in deferred tax assets of $17.0 million.

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

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

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

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

With certain exceptions, our provision for income taxes is based on our worldwide estimated annualized effective tax rate.

For jurisdictions in which a loss is forecast but no benefit can be realized for those losses, the tax is estimated separately.

Additionally, we record certain taxes measured when required.

Due to our significant net operating loss carryforwards and a

valuation allowance applied against a significant portion of our deferred tax assets, foreign withholding taxes are generally the primary driver of income tax expense and the primary reason for cash tax payments of income taxes .

For the three months ended March 31, 2021, our negative effective tax rate is based on the projected 2021 GAAP U.S.

pretax loss and is significantly less than the 21% U.S.

federal tax rate .

The low effective tax rate is the result of the most significant components of income tax expense, primarily driven by foreign withholding taxes and BEAT.

The computed negative effective tax rate is applied to the year-to-date U.S.

profit resulting in an income tax benefit for the quarter ended March 31, 2021 .

For the three months ended March 31, 2021, we recorded an income tax benefit of $4.0 million on pretax income of $0.5 million, which resulted in an effective tax rate of (786.4)%.

The income tax benefit for the three months ended March 31, 2021 was primarily related to foreign withholding taxes, U.S.

federal base erosion and anti-abuse tax, and unrealized foreign exchange loss from prior year South Korea refund claims.

For the three months ended March 31, 2020, we recorded an income tax expense of $2.1 million on pretax income of $20.8 million, which resulted in an effective tax rate of 9.9%.

The income tax expense for the three months ended March 31, 2020 was primarily related to tax expense from operating income, increase in certain non-deductible expenses, shortfalls from stock-based compensation, increase in valuation allowance on certain deferred tax assets, and unrealized foreign exchange losses from the prior year South Korea refund claim, offset by a deduction from foreign-derived intangible income and the release of unrecognized tax benefits due to a lapse in the statute of limitations.

The year-over-year decrease in income tax expense for the quarter ended March 31, 2021 is largely attributable to the application of a negative effective tax rate to year-to-date U.S.

pre-tax income.

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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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.

We intend to continue maintaining a full valuation allowance on our federal deferred tax assets until there is sufficient evidence to support the reversal of all or some of a portion of these allowances.

However, given our current earning and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of our federal valuation allowance will no longer be needed.

Release of the valuation allowance would result in the recognition of certain federal deferred tax assets and a decrease to income tax expense for the period the release is recorded.

Segment Operating Results

In connection with the Mergers, we re-evaluated our reportable segments.

We concluded that we have two reportable segments:

We operate in two reportable segments:

(1) Product and (2) IP Licensing.

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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.

Audio, digital radio, imaging solutions and edge-based machine learning include the delivery of software and/or hardware-based solutions to our 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 like the Stream 4K, 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.

In media, our licensees include multichannel video programming distributors, OTT video service providers, consumer electronics manufacturers, social media and other new media companies.

In semiconductor, our licensees include memory, sensors, RF component, and foundry companies.

We do not identify or allocate assets by reportable segment, nor does the CODM evaluate reportable segments using discrete asset information.

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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):

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

Three Months Ended

Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

March 31, 2021

March 31, 2020

Product segment

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Total operating expenses

Operating income (loss):

Operating income:

Product segment

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Unallocated operating expenses (1)

Total operating loss

Total operating income

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

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

The revenue and operating income (loss) amounts in this section have been presented on a basis consistent with U.S.

GAAP applied at the segment level.

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

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

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

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

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

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

For the three months ended March 31, 2021, the unallocated operating expenses were $69.1 million, compared to $36.6 million for the three months ended March 31, 2020.

The increase of $32.5 million was due principally to the inclusion of TiVo expenses and post-merger severance and retention costs recorded in the first quarter of 2021, partially offset by a decrease in provision for credit losses, lower sales/marketing promotion expenses and travel and entertainment costs.

The revenue and operating income amounts in this section have been presented on a basis consistent with GAAP applied at the segment level.

Of our $847.0 million in goodwill at March 31, 2021, approximately $523.8 million was allocated to our Product segment and approximately $323.2 million was allocated to our IP Licensing segment.

Product Segment

Three Months Ended

Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

March 31, 2021

March 31, 2020

Total revenue

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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 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.

Product revenue for the three months ended March 31, 2021 was $123.6 million as compared to $55.9 million for the three months ended March 31, 2020, an increase of $67.6 million.

The increase was primarily attributable to the inclusion of TiVo product revenue, partially offset by a decrease in revenue from minimum guarantee (“MG”) contracts executed during the first quarter of 2021 as compared to first quarter of 2020.

Operating expenses for the three months ended March 31, 2021 were $108.6 million, as compared to $46.2 million for the three months ended March 31, 2020, an increase of $62.4 million.

The increase was primarily due to the inclusion of TiVo Product expenses, partially offset by merger-related cost synergies.

Operating income in the three months ended March 31, 2021 was $15.0 million compared to operating income of $9.7 million in the three months ended March 31, 2020, 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

March 31, 2021

March 31, 2020

Total revenue

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Total operating income

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.

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.

IP Licensing revenue for the three months ended March 31, 2021 was $98.0 million as compared to $61.7 million for the three months ended March 31, 2020, an increase of $36.3 million.

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

Operating expenses for the three months ended March 31, 2021 were $33.6 million, as compared to $10.3 million for the three months ended March 31, 2020, an increase of $23.3 million.

The increase was primarily due to the inclusion of TiVo IP Licensing expenses, partially offset by merger-related cost synergies.

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 may fluctuate between periods because of planned or ongoing litigation, as described in Part II, Item 1 – Legal Proceedings , in this report, 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 March 31, 2021 was $64.4 million compared to operating income of $51.4 million for the three months ended March 31, 2020, with the variance due to the reasons stated above.

Liquidity and Capital Resources

(in thousands, except for percentages)

September 30, 2020

March 31, 2021

December 31, 2020

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Percentage of total assets

Nine Months Ended

September 30, 2020

September 30, 2019

Three Months Ended

March 31, 2021

March 31, 2020

Net cash from operating activities

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Net cash from financing activities

Our primary sources of liquidity and capital resources are our operating cash flows and our investment portfolio.

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

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

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

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

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

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

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

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

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

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

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

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

Our primary sources of liquidity and capital resources are our operating cash flows and our short-term investments.

Cash, cash equivalents and short-term investments were $236.9 million at March 31, 2021, a decrease of $20.2 million from $257.1 million at December 31, 2020.

This decrease resulted primarily from $5.3 million in dividends paid, $32.4 million in repurchases of common stock and $13.1 million in repayment of the 2020 Term B Loan Facility, which was partially offset by $26.7 million in cash generated from operations and $6.7 million in proceeds from the issuance of common stock under our employee stock grant programs and employee stock purchase plans.

Cash and cash equivalents totaled $134.8 million at March 31, 2021, a decrease of $35.4 million from $170.2 million at December 31, 2020.

Cash flows provided by operations were $26.7 million for the three months ended March 31, 2021, primarily due to our net income of $4.5 million being further adjusted for non-cash items of depreciation of $5.7 million, amortization of intangible assets of $52.2 million and stock-based compensation expense of $13.2 million.

These increases were partially offset by $52.8 million in changes in operating assets and liabilities including payment during the quarter of employee bonuses earned in 2020.

Cash flows provided by operations were $32.6 million for the three months ended March 31, 2020, primarily due to our net income of $18.8 million being further adjusted for non-cash items of depreciation of $1.7 million, amortization of intangible assets of $22.5 million, stock-based compensation expense of $8.0 million and provision for credit loss expense of $2.0 million.

These increases were partially offset by a reduction of $2.1 million in deferred income taxes and $19.6 million in changes in operating assets and liabilities.

Net cash used in investing activities was $17.4 million for the three months ended March 31, 2021, primarily related to purchases of short-term investments of $42.5 million and capital expenditures of $1.8 million, partially offset by maturities and sales of securities of $26.9 million.

Net cash provided by investing activities was $11.2 million for the three months ended March 31, 2020, primarily related to maturities and sales of securities of $11.8 million, partially offset by $0.7 million in capital expenditures.

Net cash used in financing activities was $44.0 million for the three months ended March 31, 2021 principally due to $13.1 million in repayment of indebtedness, $5.3 million in dividends paid, and $32.4 million in repurchases of common stock, partially offset by $6.7 million in proceeds due to the issuance of common stock under our employee stock grant programs and employee stock purchase plans.

Net cash used in financing activities was $9.9 million for the three months ended March 31, 2020 principally due to $10.0 million in dividends paid and $3.1 million in repurchases of common stock, partially offset by $3.2 million in proceeds due to the issuance of common stock under our employee stock grant 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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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.

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.

W e did not recognize a provision for credit loss es related to our AFS debt securities in the three months ended March 31, 2021 and 2020, respectively .

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.

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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.

Net proceeds were used on June 1, 2020, together with cash and cash equivalents, to repay existing indebtedness of the combined Company, including the aforementioned Term B Loan Facility with RBC.

We commenced repaying quarterly installments under the 2020 Term B Loan Facility in the third quarter of 2020.

The agreement permits prepayment of principal without penalty and on December 31, 2020, we elected to make a voluntary principal payment of $150.0 million.

At March 31, 2021, $828.5 million was outstanding under the 2020 Term B Loan Facility with an interest rate, including amortization of debt discount and issuance costs, of 5.2%.

Interest is payable monthly.

Under the existing loan agreements, we have future minimum principal payments for our debt of $39.4 million for the remainder of 2021, $52.5 million, $72.2 million and $78.8 million in 2022, 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 calendar year as well as for any litigation settlements subsequent to the Mergers.

The voluntary principal payment described above may be offset against any obligated payments due as of March 31, 2022.

The 2020 Term B Loan Facility contains customary covenants, and as of March 31, 2021, 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.

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.

Since the inception of the plan, and through March 31, 2021, we have repurchased approximately 6.0 million shares of common stock at a total cost of $95.1 million at an average price of $15.87.

During the three months ended March 31, 2021, our repurchases totaled $25.0 million.

As of March 31, 2021, the total remaining amount available for repurchase was $54.9 million.

On April 22, 2021, our Board of Directors authorized an additional $100.0 million of purchases, increasing the current total available balance to $154.9 million as of such date.

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

In April 2021, our Board of Directors authorized payment of a quarterly dividend of $0.05 per share, to be paid in June 2021.

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.

From 2018 through the first quarter of 2021, we generated approximately $759 million of cash flows from operating activities.

While we expect to continue to generate cash flows from operating activities for the remainder of 2021, the COVID-19 pandemic continues to present uncertainties to the level of such cash flows as compared to prior years.

Additionally, integration of the two legacy businesses post-merger and transaction costs relating to the contemplated separation of the two businesses will impact operating cash flow for 2021.

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.

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.

Contractual Obligations

For information about our contractual obligations, see “Contractual Obligations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.

Other than the principal payment of $13.1 million made by us under the 2020 Term B Loan Facility in March 2021, our contractual obligations have not changed materially since December 31, 2020.

As of March 31, 2021, we had accrued $96.0 million of unrecognized tax benefits in long-term income taxes payable related to uncertain tax positions, which includes $3.1 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.

If we are successful in receiving our South Korean withholding tax refunds of $116.8 million, including interest and foreign exchange gain, then $63.2 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.

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

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.

As of March 31, 2021, 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.

During the three months ended March 31, 2021, there were no significant changes in our critical accounting policies.

See “Note 2 – Summary of Significant Accounting Policies” of Notes to the 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.

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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.

Quantitative and Qualitative Disclosures About Market Risk

For a discussion of the Company’s market risk, see Part II, Item 7A – Quantitative and Qualitative Disclosures About Market Risk in the Form 10-K.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis