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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2020

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

Commission File Number: 001-37956

XPERI CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware		81-4465732
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

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

(408) 321-6000

(Registrant’s Telephone Number, Including Area Code)

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock (par value $0.001 per share)

XPER

Nasdaq Global Select Market

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

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

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


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

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

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

The number of shares outstanding of the registrant’s common stock as of April 28, 2020 was 50,534,837.

XPERI CORPORATION

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTER ENDED MARCH 31, 2020

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2020 and 2019	3
	Condensed Consolidated Balance Sheets – March 31, 2020 and December 31, 2019	4
	Condensed Consolidated Statements of Operations – Three Months Ended March 31, 2020 and 2019	5
	Condensed Consolidated Statements of Comprehensive Income (Loss) – Three Months Ended March 31, 2020 and 2019	6
	Condensed Consolidated Statements of Equity – Three Months Ended March 31, 2020 and 2019	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37

	PART II
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosures	62
Item 5.	Other Information	62
Item 6.	Exhibits	63

Signatures		64

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

XPERI CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended
	March 31, 2020			March 31, 2019
Cash flows from operating activities:
Net income (loss)	$	18,785		$	(25,430	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation of property and equipment		1,729			1,668
Amortization of intangible assets		22,509			25,459
Stock-based compensation expense		7,987			7,623
Deferred income taxes		(2,064	)		(14,689	)
Allowance for credit losses		1,944			(204	)
Other		1,354			1,068
Changes in operating assets and liabilities:
Accounts receivable		(8,318	)		(11,545	)
Unbilled contracts receivable, net		(6,022	)		47,262
Other assets		(739	)		697
Accounts payable		(760	)		(991	)
Accrued and other liabilities		(5,212	)		(16,795	)
Deferred revenue		1,451			(302	)
Net cash from operating activities		32,644			13,821
Cash flows from investing activities:
Purchases of property and equipment		(688	)		(858	)
Proceeds from sales of investments		3,345			—
Proceeds from maturities of investments		8,500			9,490
Net cash from investing activities		11,157			8,632
Cash flows from financing activities:
Dividend paid		(10,036	)		(9,822	)
Repayment of debt		—			(50,000	)
Proceeds from exercise of stock options		1			253
Proceeds from employee stock purchase program		3,232			3,111
Repurchase of common stock		(3,144	)		(3,131	)
Net cash from financing activities		(9,947	)		(59,589	)
Net increase (decrease) in cash and cash equivalents		33,854			(37,136	)
Cash and cash equivalents at beginning of period		74,551			113,625
Cash and cash equivalents at end of period	$	108,405		$	76,489
Supplemental disclosure of cash flow information:
Interest paid	$	3,637		$	6,044
Income taxes paid, net of refunds	$	5,637		$	5,599

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

XPERI CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for par value)

(unaudited)

	March 31, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	108,405		$	74,551
Available-for-sale debt securities, at fair value (amortized cost and allowance for credit losses of $33,932 and $0, respectively, at March 31, 2020)		33,677			45,802
Equity securities		390			1,124
Accounts receivable, net of allowance for credit losses of $2,510 and $566 respectively		30,835			24,177
Unbilled contracts receivable		126,679			121,826
Other current assets		13,507			13,735
Total current assets		313,493			281,215
Long-term unbilled contracts receivable		27,557			26,672
Property and equipment, net		31,836			32,877
Operating lease right-of-use assets		16,455			17,786
Intangible assets, net		209,766			232,275
Long-term deferred tax assets		3,675			3,660
Goodwill		385,784			385,784
Other assets		68,643			67,676
Total assets	$	1,057,209		$	1,047,945
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	3,890		$	4,650
Accrued legal fees		1,917			1,316
Accrued liabilities		35,284			41,433
Deferred revenue		2,171			720
Total current liabilities		43,262			48,119
Long-term deferred tax liabilities		29,585			29,735
Long-term debt, net		335,293			334,679
Noncurrent operating lease liabilities		12,345			13,414
Other long-term liabilities		75,073			76,898
Total liabilities		495,558			502,845
Commitments and contingencies (Note 14)
Xperi stockholders’ equity:
Preferred stock: $0.001 par value; 10,000 shares authorized and no shares issued and outstanding		—			—
Common stock: $0.001 par value; 150,000 shares authorized; 64,716 and 63,622 shares issued, respectively, and 50,530 and 49,620 shares outstanding, respectively		65			64
Additional paid-in capital		779,500			768,284
Treasury stock at cost: 14,186 and 14,002 shares of common stock at each period end, respectively		(371,845	)		(368,701	)
Accumulated other comprehensive loss		(327	)		(53	)
Retained earnings		157,617			148,317
Total Xperi stockholders’ equity		565,010			547,911
Noncontrolling interest		(3,359	)		(2,811	)
Total equity		561,651			545,100
Total liabilities and equity	$	1,057,209		$	1,047,945

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

XPERI CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended
	March 31, 2020			March 31, 2019
Revenue:
Royalty and license fees	$	117,665		$	56,567
Total revenue		117,665			56,567
Operating expenses:
Cost of revenue		1,584			2,207
Research, development and other related costs		29,139			27,039
Selling, general and administrative		37,803			30,569
Amortization expense		22,509			25,459
Litigation expense		2,103			1,290
Total operating expenses		93,138			86,564
Operating income (loss)		24,527			(29,997	)
Interest expense		(4,251	)		(6,685	)
Other income and expense, net		565			2,302
Income (loss) before taxes		20,841			(34,380	)
Provision for (benefit from) income taxes		2,056			(8,950	)
Net income (loss)	$	18,785		$	(25,430	)
Less: net loss attributable to noncontrolling interest		(551	)		(347	)
Net income (loss) attributable to Xperi	$	19,336		$	(25,083	)
Income (loss) per share attributable to Xperi:
Basic	$	0.39		$	(0.51	)
Diluted	$	0.39		$	(0.51	)

Weighted average number of shares used in per share calculations-basic		49,945			48,721
Weighted average number of shares used in per share calculations-diluted		50,199			48,721

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

XPERI CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

	Three Months Ended
	March 31, 2020			March 31, 2019
Net income (loss)	$	18,785		$	(25,430	)
Other comprehensive income (loss):
Net unrealized gains (losses) on available-for-sale debt securities, net of tax		(274	)		178
Other comprehensive income (loss)		(274	)		178
Comprehensive income (loss)		18,511			(25,252	)
Less: comprehensive income (loss) attributable to noncontrolling interest		(551	)		(347	)
Comprehensive income (loss) attributable to Xperi	$	19,062		$	(24,905	)

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

XPERI CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands)

(unaudited)

	Total Xperi Stockholders' Equity
Three Months Ended March 31, 2020	Common Stock					Additional Paid-In			Treasury Stock					Accumulated Other Comprehensive			Retained			Noncontrolling
	Shares			Amount		Capital			Shares		Amount			Income (Loss)			Earnings			Interest			Total Equity
Balance at January 1, 2020		49,620		$	64	$	768,284			14,002	$	(368,701	)	$	(53	)	$	148,317		$	(2,811	)	$	545,100
Issuance of subsidiary shares to noncontrolling interest		—			—		(3	)		—		—			—			—			3			—
Net income (loss)		—			—		—			—		—			—			19,336			(551	)		18,785
Other comprehensive loss		—			—		—			—		—			(274	)		—			—			(274	)
Cash dividends paid on common stock ($0.20 per share)		—			—		—			—		—			—			(10,036	)		—			(10,036	)
Issuance of common stock in connection with employee stock purchase plan		236			—		3,232			—		—			—			—			—			3,232
Issuance of restricted stock, net of shares canceled		858			1		—			—		—			—			—			—			1
Repurchases of common stock, shares exchanged		(184	)		—		—			184		(3,144	)		—			—			—			(3,144	)
Stock-based compensation expense		—			—		7,987			—		—			—			—			—			7,987
Balance at March 31, 2020		50,530		$	65	$	779,500			14,186	$	(371,845	)	$	(327	)	$	157,617		$	(3,359	)	$	561,651

	Total Xperi Stockholders' Equity
Three Months Ended March 31, 2019	Common Stock					Additional Paid-In		Treasury Stock					Accumulated Other Comprehensive			Retained			Noncontrolling
	Shares			Amount		Capital		Shares		Amount			Income (Loss)			Earnings			Interest			Total Equity
Balance at January 1, 2019		48,408		$	62	$	730,695		13,804	$	(364,195	)	$	(328	)	$	253,208		$	(1,295	)	$	618,147
Issuance of subsidiary shares to noncontrolling interest		—			—		22		—		—			—			—			(22	)		—
Net loss		—			—		—		—		—			—			(25,083	)		(347	)		(25,430	)
Other comprehensive income		—			—		—		—		—			178			—			—			178
Other ⁽¹⁾		—			—		—		—		—			—			(2,859	)		—			(2,859	)
Cash dividends paid on common stock ($0.20 per share)		—			—		—		—		—			—			(9,822	)		—			(9,822	)
Issuance of common stock in connection with exercise of stock options		14			—		252		—		—			—			—			—			252
Issuance of common stock in connection with employee stock purchase plan		227			—		3,111		—		—			—			—			—			3,111
Issuance of restricted stock, net of shares canceled		698			1		—		—		—			—			—			—			1
Repurchases of common stock, shares exchanged		(138	)		—		—		138		(3,131	)		—			—			—			(3,131	)
Stock-based compensation expense		—			—		7,623		—		—			—			—			—			7,623
Balance at March 31, 2019		49,209		$	63	$	741,703		13,942	$	(367,326	)	$	(150	)	$	215,444		$	(1,664	)	$	588,070

(1)

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

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

XPERI CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

Xperi Corporation (the “Company”) licenses its innovative products, technologies and inventions to global electronics companies which, in turn, integrate the technologies into their own consumer electronics and semiconductor products. The Company’s technologies and inventions are widely adopted and used every day by millions of people. The Company’s audio technologies have shipped in billions of devices for the home, mobile and automotive markets. The Company's imaging technologies have been embedded in billions of smartphones and other mobile devices. The Company's semiconductor packaging and interconnect technologies have been licensed to more than 100 customers and have shipped in over 100 billion semiconductor chips.

The accompanying interim unaudited condensed consolidated financial statements as of March 31, 2020 and 2019, and for the three months then ended, have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) for interim financial information. The amounts as of December 31, 2019 have been derived from the Company’s annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto as of and for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed on February 18, 2020 (the “Form 10-K”).

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

In the fourth quarter of 2018, the Company funded a new subsidiary, Perceive Corporation (“Perceive”), which was created to focus on delivering edge inference solutions. As a result of issuing new shares in Perceive to noncontrolling interests, the Company’s ownership interest in Perceive decreased to approximately 83% as of March 31, 2020. The operating results of Perceive have been consolidated in the Company’s condensed consolidated financial statements for all periods presented.

In the first quarter of 2019, the Company recorded an out-of-period adjustment to decrease current unbilled receivables and decrease retained earnings by $2.9 million to correct an error that originated in the first quarter of 2018 in connection with its adoption of Accounting Standards Update (“ASU”) No. 2014-09 (Topic 606) “Revenue from Contracts with Customers.” The adjustment relates to an error in the Company’s interpretation of the payment terms of a contract entered into in a prior year. The Company determined that the error was not material to any of its prior annual and interim period financial statements, and the impact of correcting it is not considered to be material to the financial statements for the three months ended March 31, 2019.

On December 18, 2019, the Company entered into an Agreement and Plan of Merger and Reorganization (as amended on January 31, 2020, the “Merger Agreement”) with TiVo Corporation (“TiVo”) to combine in an all-stock merger of equals transaction (the “Mergers”). The Mergers are expected to close and become effective (the “Effective Time”) during the second quarter of 2020, subject to regulatory approvals, the approval by the shareholders of each company, and other customary closing conditions.

Subject to the terms and conditions of the Merger Agreement, each share of Company common stock (“Xperi Common Stock”) issued and outstanding immediately prior to the Effective Time, excluding any shares of Xperi Common Stock that are held in treasury, will be converted into the right to receive one share of common stock of the combined company and each share of TiVo common stock (“TiVo Common Stock”) issued and outstanding immediately prior to the Effective Time, excluding any shares of TiVo Common Stock that are held in treasury, will be converted into the right to receive 0.455 shares of common stock of the combined company. On a pro forma, fully diluted basis, it is expected that immediately following the Effective Time, Xperi stockholders will own approximately 46.5% of the combined company and TiVo stockholders will own approximately 53.5% of the combined company.

In connection with the Merger Agreement, the Company and TiVo obtained a debt commitment letter from Bank of America, N.A., Royal Bank of Canada, and Barclays Bank PLC to provide a senior secured first lien term loan B facility in an aggregate

principal amount of $1,100 million (the “Debt Financing”), subject to the terms and conditions set forth therein. The proceeds from the Debt Financing may be used (i) to pay fees and expenses incurred in connection with the Mergers and the related transactions, (ii) to accomplish the refinancing of existing indebtedness of the Company and TiVo, and (iii) to the extent of any remaining amounts, for working capital and other general corporate purposes.

Reclassification

Certain reclassifications have been made to prior period balances in order to conform to the current period’s presentation.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except as noted below, there have been no significant changes in the Company’s significant accounting policies during the three months ended March 31, 2020, as compared to the significant accounting policies described in the Form 10-K.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates and assumptions that require management’s most significant, difficult, and subjective judgment include the estimation of licensees’ quarterly royalties prior to receiving the royalty reports, the collectability of accounts receivable, the fair value measurements of goodwill, other intangible assets and investments, the assessment of the recoverability of goodwill, the assessment of useful lives and recoverability of other intangible assets and long-lived assets, recognition and measurement of current and deferred income tax assets and liabilities, the assessment of unrecognized tax benefits and the valuation and recognition of stock-based compensation expense, and business combinations, among others. Actual results experienced by the Company may differ from management’s estimates.

The worldwide spread of the COVID-19 virus is expected to result in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, while also disrupting sales channels, marketing activities and supply chains for an unknown period of time until the disease is contained. The Company expects this to have a negative impact on its revenue, billings and results of operations, the size and duration of which it is currently unable to predict. The Company anticipates that the impact of the COVID-19 virus will increase volatility and make the estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes more difficult, however, as of the date of issuance of the financial statements, the Company is not aware of any specific event or circumstance that would require it to update its estimates, judgments or revise the carrying value of its assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the consolidated financial statements as soon as they become known.

Recently Adopted Accounting Pronouncements

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

Recent Accounting Pronouncements

On December 18, 2019, FASB released ASU 2019-12, “Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). The purpose of the update is to reduce the complexity pertaining to certain areas in accounting for income taxes. Key amendments from ASU 2019-12 include, but are not limited to, the accounting for hybrid tax regimes, step-up in tax basis goodwill in non-business combination transactions, intraperiod tax allocation exception to the incremental approach and interim period accounting for enacted changes in tax law. ASU 2019-12 is effective for the Company in the first quarter of the year ending

December 31, 2021. The Company is in the process of evaluating the impact of the adoption of this new standard on its consolidated financial statements.

NOTE 3 – REVENUE

Revenue Recognition

The Company derives its revenue primarily from royalty and license fees for rights to use the Company’s intellectual property and technologies (“IP”). Revenue is recognized upon transfer of control of promised products, services or IP rights to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products, services or licensing of the IP rights.

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

If the contract term of a fixed fee or minimum guarantee arrangement is longer than one year, the Company also considers the scheduled payment arrangements to determine whether a significant financing component exists. In general, if the payment arrangements extend beyond the initial twelve months of the contract, the Company treats a portion of the payments as a significant financing component. When the payments are expected to be received within one year or less, the Company does not adjust the promised amount of consideration for the effects of a financing component. The discount rate used for each arrangement reflects the rate that would be used in a separate financing transaction between the Company and the licensee at contract inception and takes into account the credit characteristics of the licensee and market interest rates as of the date of the agreement. As such, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component. As payments are received from the licensee, the Company recognizes a portion of the financing component as interest income, reported as other income and expense in the Condensed Consolidated Statements of Operations.

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

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

In some instances, the Company may enter into license agreements containing multiple performance obligations that include engineering services in addition to a technology or software license. For such arrangements where all components are capable of being distinct and accounted for as separate performance obligations, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices ordinarily charged to customers, or in some cases by applying a reasonable cost-plus margin. The consideration for engineering services is recognized as the underlying performance obligations are satisfied. Generally, the Company satisfies performance obligations over time and therefore recognizes revenue over time by measuring the progress toward completion of the performance obligation at each reporting period.

From time to time, the Company enters into arrangements with licensees in which the Company pays consideration to the licensee. Such payments can take the form of marketing development funds or various rebate incentives. The Company typically accounts for consideration paid to its licensees as a reduction to the transaction price and revenue, unless the payment to the licensee is in exchange for a distinct good or service that the licensee transfers to the Company. In cases where the consideration paid to the licensee is variable, the Company estimates the variable consideration based on the terms of the arrangement and expectations of future outcomes. The Company recognizes the reduction to revenue when it recognizes revenue for transfer of control of promised products, services or IP rights to the licensee.

Revenue is recognized gross of withholding taxes that are remitted directly by the Company’s licensees to a local tax authority.

For additional detail on the Company's revenue disaggregated by geographic location, refer to Note 15 – “Segment and Geographic Information.”

Contract Balances

Unbilled Contracts Receivable

Timing of revenue recognition may differ significantly from the timing of invoicing to customers. Accounts receivable, net, includes amounts billed and currently due from customers. Unbilled contracts receivable represents unbilled amounts expected to be received from customers in future periods, where the revenue recognized to date (or cumulative adjustments to retained earnings in the initial period of adopting Topic 606) exceeds the amount billed, and right to payment is subject to the underlying contractual terms. Unbilled contracts receivable amounts may not exceed their net realizable value and are classified as long-term assets if the payments are expected to be received more than one year from the reporting date.

Deferred Revenue

Deferred revenue includes payments made by licensees for which the corresponding performance obligations have not yet been fully satisfied by the Company and typically arises where performance obligations are satisfied over time.

Allowance for Credit Losses

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

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

The following table presents the activity in the allowance for credit losses for the three months ended March 31, 2020 (in thousands):

	Three Months Ended March 31, 2020
Beginning balance, prior to adoption of Topic 326	$	566
Impact of adopting Topic 326		—
Provision for credit loss expense (1)		2,213
Recoveries/charged-off		(269	)
Balance at end of period	$	2,510

(1) The increase in provision for credit loss expense was based on assessment of current conditions including the COVID-19 pandemic and anticipation of delayed or delinquent payments on existing accounts receivable as a result of declining financial health and liquidity positions of certain of our customers.

Additional Disclosures Under Topic 606

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

	Three Months Ended March 31,
	2020		2019
Revenue recognized in the period from:
Amounts included in deferred revenue at the beginning of the period	$	50	$	1,043
Performance obligations satisfied in previous periods (true ups, licensee reporting adjustments and settlements)*	$	47,511	$	1,165

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

Remaining revenue under contracts with performance obligations represents the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) under the Company’s engineering services contracts. The Company's remaining revenue under contracts with performance obligations was as follows (in thousands):

	As of
	March 31, 2020		December 31, 2019
Revenue from contracts with performance obligations expected to be satisfied in:
One year or less	$	5,083	$	5,337
More than one year but less than two years		990		990
More than two years		345		345
Total	$	6,418	$	6,672

Practical Expedients

The Company expenses sales commissions when incurred because the amortization period generally would have been one year or less. In addition, sales commissions have historically not been a significant expense and are not contemplated to be significant in the future. Sales commissions are recorded in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

NOTE 4 – COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

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

	March 31, 2020		December 31, 2019
Prepaid income taxes	$	2,711	$	2,364
Prepaid expenses		7,263		8,802
Other		3,533		2,569
	$	13,507	$	13,735

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

	March 31, 2020			December 31, 2019
Equipment, furniture and other	$	32,969		$	32,504
Building and improvements		18,309			18,258
Land		5,300			5,300
Leasehold improvements		8,121			8,103
		64,699			64,165
Less: accumulated depreciation and amortization		(32,863	)		(31,288	)
	$	31,836		$	32,877

Depreciation and amortization expense for the three months ended March 31, 2020 and 2019 amounted to $1.7 million and $1.7 million, respectively.

Other assets consisted of the following (in thousands):

	March 31, 2020		December 31, 2019
Non-current income tax receivable	$	66,137	$	64,570
Other assets		2,506		3,106
	$	68,643	$	67,676

Accrued liabilities consisted of the following (in thousands):

	March 31, 2020		December 31, 2019
Employee compensation and benefits	$	11,885	$	18,404
Third-party royalties		4,523		6,165
Current portion of operating lease liabilities		5,536		5,845
Accrued expenses		8,152		7,930
Other		5,188		3,089
	$	35,284	$	41,433

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

	March 31, 2020		December 31, 2019
Long-term income tax payable	$	74,943	$	76,767
Other		130		131
	$	75,073	$	76,898

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

	March 31, 2020			December 31, 2019
Unrealized loss on available-for-sale debt securities, net of tax	$	(327	)	$	(53	)
	$	(327	)	$	(53	)

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

	Three Months Ended,
	March 31, 2020			March 31, 2019
Interest income from significant financing components under Topic 606	$	975		$	1,866
Interest income from investments		485			600
Unrealized loss on marketable equity securities		(733	)		(410	)
Other income (expense)		(162	)		246
	$	565		$	2,302

NOTE 5 – FINANCIAL INSTRUMENTS

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

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

	March 31, 2020
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Allowance for Credit Losses		Estimated Fair Values
Marketable securities
Corporate bonds and notes	$	32,608	$	16	$	(272	)	$	—	$	32,352
Commercial paper		1,324		1		—			—		1,325
Total debt securities		33,932		17		(272	)		—		33,677
Money market funds		34,791		—		—			—		34,791
Marketable equity securities		3,405		—		(3,015	)		—		390
Total equity securities		38,196		—		(3,015	)		—		35,181
Total marketable securities	$	72,128	$	17	$	(3,287	)	$	—	$	68,858
Reported in:
Cash and cash equivalents										$	34,791
Available-for-sale debt securities											33,677
Equity securities											390
Total marketable securities										$	68,858

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

At March 31, 2020 and December 31, 2019, the Company had $142.5 million and $121.5 million, respectively, in cash, cash equivalents and short-term investments. These balances include $73.6 million and $72.0 million in cash held in operating accounts not included in the tables above at March 31, 2020 and December 31, 2019, respectively.

Debt Securities

The gross realized gains and losses on sales of marketable debt securities were not significant during the three months ended March 31, 2020 and 2019, respectively.

Unrealized losses on marketable debt securities were $0.3 million and $0.1 million, net of tax, as of March 31, 2020 and December 31, 2019, respectively. The Company evaluated whether the decline in fair value has resulted from credit losses or other factors and concluded these amounts were related to temporary fluctuations in value of AFS securities and were due primarily to changes in interest rates and market conditions of the underlying securities. In addition, the contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. The Company does not intend to sell the investments and it is more likely than not that it will not be required to sell the investments before recovery of their amortized cost bases. For the three months ended March 31, 2020, the Company did not recognize a provision for credit loss expense related to its AFS debt securities. For the three months ended March 31, 2019, the Company did not record any impairment charges related to its AFS debt securities.

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

	Less Than 12 Months					12 Months or More					Total
March 31, 2020	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Corporate bonds and notes	$	21,256	$	(265	)	$	3,995	$	(7	)	$	25,251	$	(272	)
Total	$	21,256	$	(265	)	$	3,995	$	(7	)	$	25,251	$	(272	)

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

The estimated fair value of marketable debt securities by contractual maturity at March 31, 2020 is shown below (in thousands). Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.

	Estimated Fair Value
Due in one year or less	$	23,548
Due in one to two years		10,129
Total	$	33,677

Equity Securities

On September 19, 2018, the Company purchased seven million common shares of Onkyo Corporation (“Onkyo”), a publicly traded Japanese company and a long-standing customer of the Company, pursuant to the Capital Alliance Agreement (“Agreement”) entered into between the two parties on September 3, 2018. Upon making the investment, the Company held a 6.3% ownership interest in Onkyo. Due to changes in business expectations, the Company determined not to continue discussions on the business alliance. On July 5, 2019, the Company sold approximately 2.8 million shares of Onkyo stock and realized a gain of $0.9 million. There were no sales of the Onkyo investment during the three months ended March 31, 2020 and 2019. The Company intends to sell the remaining shares over time depending on market conditions.

The Company recorded unrealized losses on its Onkyo investment of $0.7 million and $0.4 million during the three months ended March 31, 2020 and 2019, respectively. Cumulative unrealized losses on the investment amounted to $3.0 million through March 31, 2020.

Derivatives

From time to time, the Company may use derivative financial instruments to manage foreign currency exchange rate risk. The Company does not enter into derivative transactions for trading purposes. Cash flows from the derivative programs are classified as cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows.

The Company’s derivative financial instruments consist of deliverable and non-deliverable foreign currency forward contracts, which are used primarily to hedge balance sheet and certain expenditure exposures. These instruments are generally short-term in nature, with typical maturities of less than one year, and are subject to fluctuations in foreign exchange rates. Fair values for derivative financial instruments are based on prices computed using third-party valuation models and are classified as Level 2 in accordance with the three-level hierarchy of fair value measurements. All significant inputs to the third-party valuation models are observable in active markets. Inputs include current market-based parameters such as forward rates, yield curves and credit default swap pricing. For additional information related to the three-level hierarchy of fair value measurements, see “Note 6 – Fair Value.”

Under the Company’s policy election, these derivatives are not designated as hedge instruments, which are measured and reported at fair value. Changes in the fair value of these undesignated derivatives are reported in other income and expense, net, on the Condensed Consolidated Statements of Operations. Realized losses and changes in the estimated fair value of the derivatives were not significant in the three months ended March 31, 2020 and 2019.

The notional and fair values of all derivative instruments were as follows (in thousands):

Undesignated derivatives (foreign exchange contracts)	March 31, 2020		December 31, 2019
Assets
Other current assets	$	114	$	—
Total fair value	$	114	$	—
Total notional value	$	5,000	$	—

NOTE 6 – FAIR VALUE

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

Level 1

Quoted prices in active markets for identical assets.

Level 2

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

Level 3

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

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

The following sets forth the fair value, and classification within the hierarchy, of the Company’s assets required to be measured at fair value on a recurring basis as of March 31, 2020 (in thousands):

	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Marketable securities
Money market funds - equity securities (1)	$	34,791	$	34,791	$	—	$	—
Marketable equity securities (2)		390		390
Corporate bonds and notes - debt securities (3)		32,352		—		32,352		—
Commercial paper - debt securities (3)		1,325		—		1,325		—
Total Assets	$	68,858	$	35,181	$	33,677	$	—

(1)

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

(2)

Reported as equity securities in the Condensed Consolidated Balance Sheet.

(3)

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

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

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

Xperi Corp 10-Q