10-Q
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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, 2023

OR

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

Commission File Number: 001-39304

 

ADEIA INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

84-4734590

(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) 473-2500

(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)

ADEA

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

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 25, 2023 was 106,335,738.

 

 


 

ADEIA INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2023

TABLE OF CONTENTS

 

 

 

 

Page

 

PART I

 

 

Item 1.

Financial Statements (unaudited)

 

3

 

Condensed Consolidated Statements of Operations – Three Months Ended March 31, 2023 and 2022

 

3

 

Condensed Consolidated Statements of Comprehensive Income (Loss) – Three Months Ended March 31, 2023 and 2022

 

4

 

Condensed Consolidated Balance Sheets – March 31, 2023 and December 31, 2022

 

5

 

Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2023 and 2022

 

6

 

Condensed Consolidated Statements of Equity – Three Months Ended March 31, 2023 and 2022

 

7

 

Notes to Condensed Consolidated Financial Statements

 

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

30

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

39

Item 4.

Controls and Procedures

 

39

 

 

 

 

 

PART II

 

 

Item 1.

Legal Proceedings

 

40

Item 1A.

Risk Factors

 

42

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

Item 3.

Defaults Upon Senior Securities

 

42

Item 4.

Mine Safety Disclosures

 

42

Item 5.

Other Information

 

42

Item 6.

Exhibits

 

43

 

 

 

 

Signatures

 

 

44

 

2


 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

ADEIA INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,
2023

 

 

March 31,
2022

 

Revenue

 

$

117,307

 

 

$

138,532

 

Operating expenses:

 

 

 

 

 

 

Research and development

 

 

13,011

 

 

 

9,650

 

Selling, general and administrative

 

 

22,862

 

 

 

33,824

 

Amortization expense

 

 

23,689

 

 

 

24,526

 

Litigation expense

 

 

2,622

 

 

 

1,078

 

Total operating expenses

 

 

62,184

 

 

 

69,078

 

Operating income from continuing operations

 

 

55,123

 

 

 

69,454

 

Interest expense

 

 

(15,938

)

 

 

(8,429

)

Other income and expense, net

 

 

1,620

 

 

 

337

 

Income from continuing operations before income taxes

 

 

40,805

 

 

 

61,362

 

Provision for income taxes

 

 

11,784

 

 

 

5,517

 

Net income from continuing operations

 

 

29,021

 

 

 

55,845

 

Net loss from discontinued operations, net of tax

 

 

 

 

 

(31,870

)

Net income

 

 

29,021

 

 

 

23,975

 

Less: Net loss attributable to non-controlling interest in
discontinued operations

 

 

 

 

 

(968

)

Net income attributable to the Company

 

$

29,021

 

 

$

24,943

 

Income (loss) per share:

 

 

 

 

 

 

Basic

 

 

 

 

 

 

Continuing operations

 

$

0.27

 

 

$

0.54

 

Discontinued operations

 

 

 

 

 

(0.30

)

Net income

 

$

0.27

 

 

$

0.24

 

Diluted

 

 

 

 

 

 

Continuing operations

 

$

0.26

 

 

$

0.53

 

Discontinued operations

 

 

 

 

 

(0.29

)

Net income

 

$

0.26

 

 

$

0.24

 

Weighted average number of shares used in per share calculations-basic

 

 

105,585

 

 

 

103,679

 

Weighted average number of shares used in per share calculations-diluted

 

 

113,447

 

 

 

105,332

 

 

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

3


 

ADEIA INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,
2023

 

 

March 31,
2022

 

Net income

 

$

29,021

 

 

$

23,975

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

9

 

 

 

(892

)

Net unrealized losses on available-for-sale debt securities

 

 

(5

)

 

 

(122

)

Other comprehensive income (loss), net of tax

 

 

4

 

 

 

(1,014

)

Comprehensive income

 

 

29,025

 

 

 

22,961

 

Less: Comprehensive loss attributable to noncontrolling interest

 

 

 

 

 

(968

)

Comprehensive income attributable to the Company

 

$

29,025

 

 

$

23,929

 

 

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

4


 

ADEIA INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for par value)

(unaudited)

 

 

 

March 31,
2023

 

 

December 31,
2022

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

82,429

 

 

$

114,555

 

Accounts receivable, net of allowance for credit losses of $1,463 and $713, respectively

 

 

36,933

 

 

 

58,480

 

Unbilled contracts receivable, net

 

 

77,948

 

 

 

73,754

 

Other current assets

 

 

11,493

 

 

 

11,924

 

Total current assets

 

 

208,803

 

 

 

258,713

 

Long-term unbilled contracts receivable

 

 

64,124

 

 

 

40,705

 

Property and equipment, net

 

 

4,556

 

 

 

4,550

 

Operating lease right-of-use assets

 

 

5,524

 

 

 

5,993

 

Intangible assets, net

 

 

408,787

 

 

 

432,476

 

Goodwill

 

 

313,660

 

 

 

313,660

 

Long-term income tax receivable

 

 

110,513

 

 

 

113,679

 

Other long-term assets

 

 

37,851

 

 

 

40,750

 

Total assets

 

$

1,153,818

 

 

$

1,210,526

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

4,079

 

 

$

8,546

 

Accrued liabilities

 

 

29,427

 

 

 

31,277

 

Current portion of long-term debt

 

 

36,344

 

 

 

109,813

 

Deferred revenue

 

 

28,708

 

 

 

17,076

 

Total current liabilities

 

 

98,558

 

 

 

166,712

 

Deferred revenue, less current portion

 

 

9,884

 

 

 

10,683

 

Long-term debt, net

 

 

610,594

 

 

 

619,580

 

Noncurrent operating lease liabilities

 

 

4,229

 

 

 

4,794

 

Long-term income tax payable

 

 

87,917

 

 

 

87,302

 

Other long-term liabilities

 

 

20,022

 

 

 

20,043

 

Total liabilities

 

 

831,204

 

 

 

909,114

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock: $0.001 par value; (2023: authorized 15,000 shares; 2022: authorized 15,000 shares and no shares issued and outstanding)

 

 

 

 

 

Common stock: $0.001 par value; (2023: authorized 350,000 shares, issued 119,174 shares, outstanding 106,285 shares; 2022: authorized 350,000 shares, issued 117,392 shares, outstanding 105,167 shares)

 

 

119

 

 

 

117

 

Additional paid-in capital

 

 

635,001

 

 

 

636,266

 

Treasury stock at cost (2023: 12,889 shares; 2022: 12,225 shares)

 

 

(217,783

)

 

 

(211,223

)

Accumulated other comprehensive loss

 

 

(47

)

 

 

(51

)

Accumulated deficit

 

 

(94,676

)

 

 

(123,697

)

Total stockholders’ equity

 

 

322,614

 

 

 

301,412

 

Total liabilities and equity

 

$

1,153,818

 

 

$

1,210,526

 

 

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

5


 

ADEIA INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

29,021

 

 

$

23,975

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

Depreciation of property and equipment

 

 

384

 

 

 

5,866

 

Amortization of intangible assets

 

 

23,689

 

 

 

39,319

 

Stock-based compensation expense

 

 

3,640

 

 

 

16,804

 

Deferred income taxes

 

 

2,373

 

 

 

(911

)

Amortization of debt issuance costs

 

 

1,170

 

 

 

1,123

 

Other

 

 

600

 

 

 

861

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

20,951

 

 

 

43,698

 

Unbilled contracts receivable

 

 

(27,612

)

 

 

(82,995

)

Other assets

 

 

4,592

 

 

 

(8,806

)

Accounts payable

 

 

(4,468

)

 

 

4,024

 

Accrued and other liabilities

 

 

(1,821

)

 

 

(7,483

)

Deferred revenue

 

 

10,833

 

 

 

10,798

 

Net cash from operating activities

 

 

63,352

 

 

 

46,273

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(390

)

 

 

(4,289

)

Purchases of intangible assets

 

 

 

 

 

(180

)

Purchases of short-term investments

 

 

 

 

 

(4,490

)

Proceeds from sales of investments

 

 

 

 

 

2,000

 

Proceeds from maturities of investments

 

 

 

 

 

10,023

 

Net cash from investing activities

 

 

(390

)

 

 

3,064

 

Cash flows from financing activities:

 

 

 

 

 

 

Dividends paid

 

 

(5,314

)

 

 

(5,218

)

Repayment of debt

 

 

(83,625

)

 

 

(10,125

)

Proceeds from employee stock purchase program and exercise of stock options

 

 

411

 

 

 

8,000

 

Repurchases of common stock

 

 

 

 

 

(17,260

)

Repurchases of common stock for tax withholdings on equity awards

 

 

(6,560

)

 

 

(11,068

)

Net cash from financing activities

 

 

(95,088

)

 

 

(35,671

)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

 

 

(692

)

Net increase (decrease) in cash and cash equivalents

 

 

(32,126

)

 

 

12,974

 

Cash and cash equivalents at beginning of period

 

 

114,555

 

 

 

201,121

 

Cash and cash equivalents at end of period

 

$

82,429

 

 

$

214,095

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Interest paid

 

$

14,691

 

 

$

7,188

 

Income taxes paid, net of refunds

 

$

847

 

 

$

3,334

 

 

Cash flows above are presented on a consolidated basis and therefore also include $135.0 million of cash and cash equivalents included in current assets of discontinued operations in the condensed consolidated balance sheet as of March 31, 2022. Refer to "Note 7 – Discontinued Operations" for additional information related to cash flows from discontinued operations.

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

6


 

ADEIA INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands, except per share amount)

(unaudited)

 

Three Months March 31, 2023

 

Common Stock

 

Additional
Paid-In Capital

 

Treasury Stock

 

Accumulated
Other Comprehensive Income (Loss)

 

Accumulated
Deficit

 

Total
Stockholders' Equity

 

 

Shares

 

Amount

 

 

 

Shares

 

Amount

 

 

 

 

 

 

Balance at January 1, 2023

 

105,167

 

$117

 

$636,266

 

12,225

 

$(211,223)

 

$(51)

 

$(123,697)

 

$301,412

Net income

 

 

 

 

 

 

 

29,021

 

29,021

Other comprehensive income

 

 

 

 

 

 

4

 

 

4

Cash dividends paid on common stock ($0.05 per share)

 

 

 

(5,314)

 

 

 

 

 

(5,314)

Issuance of common stock in connection with exercise of stock options

 

38

 

 

409

 

 

 

 

 

409

Issuance of restricted stock, net of shares canceled

 

1,744

 

2

 

 

 

 

 

 

2

Withholding taxes related to net share settlement of restricted awards

 

(664)

 

 

 

664

 

(6,560)

 

 

 

(6,560)

Stock-based compensation expense

 

 

 

3,640

 

 

 

 

 

3,640

Balance at March 31, 2023

 

106,285

 

$119

 

$635,001

 

12,889

 

$(217,783)

 

$(47)

 

$(94,676)

 

$322,614

 

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

 

7


 

ADEIA INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands, except per share amount)

(unaudited)

 

 

 

 

Total Company Stockholders' Equity

 

 

 

 

Three Months Ended March 31, 2022

 

Common Stock

 

Additional
Paid-In

 

Treasury Stock

 

Accumulated
Other
Comprehensive Loss

 

Retained
Earnings

 

Noncontrolling Interest

 

 

 

 

Shares

 

Amount

 

 

 

Shares

 

Amount

 

 

 

 

 

 

 

Total Equity

Balance at January 1, 2022

 

103,260

 

$113

 

$1,340,480

 

10,200

 

$(178,022)

 

$(752)

 

$187,814

 

$(9,205)

 

$1,340,428

Issuance of subsidiary shares to noncontrolling interest

 

 

 

(4)

 

 

 

 

 

4

 

Net income (loss)

 

 

 

 

 

 

 

24,943

 

(968)

 

23,975

Other comprehensive loss

 

 

 

 

 

 

(1,014)

 

 

 

(1,014)

Cash dividends paid on common stock ($0.05 per share)

 

 

 

 

 

 

 

(5,218)

 

 

(5,218)

Issuance of common stock in connection with exercise of stock options

 

1

 

 

4

 

 

 

 

 

 

4

Issuance of common stock in connection with employee stock purchase plan

 

739

 

1

 

7,993

 

 

 

 

 

 

7,994

Issuance of restricted stock, net of shares canceled

 

1,609

 

2

 

 

 

 

 

 

 

2

Repurchases of common stock, shares exchanged

 

(659)

 

 

 

497

 

(11,068)

 

 

 

 

(11,068)

Repurchases of common stock

 

(1,029)

 

 

 

1,029

 

(17,260)

 

 

 

 

(17,260)

Stock-based compensation expense

 

 

 

16,804

 

 

 

 

 

 

16,804

Balance at March 31, 2022

 

103,921

 

$116

 

$1,365,277

 

11,726

 

$(206,350)

 

$(1,766)

 

$207,539

 

$(10,169)

 

$1,354,647

 

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

8


 

ADEIA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

Adeia Inc. (the “Company”), a Delaware corporation, is one of the industry’s largest intellectual property (“IP”) licensing platforms, with a diverse portfolio of media and semiconductor IP and more than 9,950 patents and patent applications worldwide.

On October 1, 2022, the Company completed the previously announced separation (“the Separation”) of its product business into a separate, independent, publicly-traded company, Xperi Inc. (“Xperi Inc.”). The Separation was structured as a spin-off, which was achieved through the Company’s distribution of 100 percent of the outstanding shares of Xperi Inc.’s common stock to holders of the Company’s common stock as of the close of business on the record date of September 21, 2022 (the “Record Date”). Each Company stockholder of record received four shares of Xperi Inc. common stock for every ten shares of Company common stock that it held on the Record Date. Following the Separation, the Company retains no ownership in Xperi Inc., which is now listed under the ticker symbol “XPER” on the New York Stock Exchange. Effective at the open of business on October 3, 2022, the Company’s shares of common stock, par value $0.001 per share, began trading on the Nasdaq Global Select Market under the new ticker symbol “ADEA”.

The accounting requirements for reporting the separation of Xperi Inc. as a discontinued operation were met when the Separation was completed. Accordingly, the historical financial results of Xperi Inc. for periods prior to the Separation are presented as net loss from discontinued operations, net of tax on the Condensed Consolidated Statements of Operations. For further information on discontinued operations, see “Note 7 – Discontinued Operations”. Unless noted otherwise, discussion in the Notes to the Condensed Consolidated Financial Statements pertains to continuing operations.

Additionally, as a result of the Separation, the Company changed its operational structure in the fourth quarter of 2022, resulting in one reportable segment: IP Licensing.

The accompanying interim unaudited Condensed Consolidated Financial Statements have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. The amounts as of December 31, 2022 have been derived from the Company’s annual audited Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2022, filed on March 1, 2023 (the “Form 10-K”). 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 Condensed Consolidated Financial Statements should be read in conjunction with the annual audited Consolidated Financial Statements and notes thereto included in the Form 10-K as of and for the year ended December 31, 2022.

The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2023 or any future period and the Company makes no representations related thereto.

Reclassification

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

9


 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no significant changes in the Company’s significant accounting policies during the three months ended March 31, 2023, 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, challenging and subjective judgment include identifying the performance obligations in the contract, estimating variable consideration, estimating quarterly royalties prior to receiving the royalty reports from the licensees, determining standalone selling prices, allocating consideration in a contract with multiple performance obligations, 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 purchase accounting resulting from business combinations, among others. Actual results experienced by the Company may differ from management’s estimates. 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.

Recent Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in ASU 2020-04 apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides further clarification on the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. ASU 2020-04 became effective upon issuance and may be applied prospectively to contract modifications made on or before December 31, 2022. ASU 2021-01 became effective upon issuance and may be applied on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 or prospectively for contract modifications made on or before December 31, 2022. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 (“ASU 2022-06”), which deferred the application dates of Topic 848 to December 31, 2024.

The Company currently has debt agreements that reference LIBOR and will apply the amendments prospectively through December 31, 2024 as these contracts are modified to reference other rates. The Company does not anticipate the adoption will have a material impact to the Company’s Condensed Consolidated Financial Statements.

NOTE 3 – REVENUE

Revenue Recognition

General

Revenue is recognized when control of the intellectual property (“IP”) rights is transferred to a customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for the licensing of the Company’s IP, which may include various combinations of IP rights and services which are generally capable of being distinct and accounted for as separate performance obligations. In situations where foreign withholding taxes are withheld by the Company’s licensee, revenue is recognized gross of withholding taxes that are remitted directly by the licensee to a local tax authority.

Some of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the individual performance obligations are separately accounted for if they are distinct. In a contract with multiple performance obligations, the transaction price is allocated among the separate performance obligations on a relative standalone selling price basis. The determination of standalone selling price considers market conditions, the size and scope of the contract, customer and geographic information, and other factors. When observable prices are not available, standalone selling price for separate performance obligations is based on the adjusted market assessment approach to estimate the price that a customer in the relevant market would be willing to pay for licensing the Company’s IP rights. The allocation of transaction price among performance obligations in a contract may impact the amount and timing of revenue recognized in the Condensed Consolidated Statements of Operations during a given period.

10


 

When a contract with a customer includes variable consideration, an estimate of the consideration which the Company expects to be entitled to for transferring the promised IP rights or services is made at contract inception and in each subsequent reporting period until the uncertainty associated with the variable consideration is resolved. The amount of variable consideration is estimated by considering all available information (historical, current, and forecast) and is updated as additional information becomes available. The estimate of variable consideration is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Subsequent changes in the transaction price resulting from changes in the estimate of variable consideration are allocated to the performance obligations in the contract on the same basis as at contract inception.

When variable consideration is in the form of a sales-based or usage-based royalty in exchange for a license of IP, revenue is recognized at the later of when the subsequent sale or usage occurs or the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied or partially satisfied.

Description of Revenue-Generating Activities

IP License Arrangements

The Company licenses (i) its media patent portfolios (“Media IP licensing”) to multichannel video programming distributors, over-the-top video service providers, consumer electronics manufacturers, social media and other new media companies and (ii) its semiconductor technologies and associated patent portfolios (“Semiconductor IP licensing”) to memory, logic, sensors, radio frequency component and foundry companies. The Company generally licenses its IP portfolios under three models: (i) fixed-fee Media IP licensing, (ii) fixed-fee or minimum guarantee Semiconductor IP licensing, and (iii) per-unit or per-subscriber Media IP or Semiconductor IP royalty licensing.

Fixed-fee Media IP Licensing

The Company’s long-term, fixed-fee Media IP licensing contracts provide its customers with rights to future patented technologies over the term of the contract that are highly interdependent or highly interrelated to the patented technologies provided at the inception of the contract. The Company treats these rights as a single performance obligation with revenue recognized on a straight-line basis over the term of the fixed-fee license contract.

Fixed-fee or Minimum Guarantee Semiconductor IP Licensing

The Company has entered into Semiconductor IP licenses that have a fixed fee or a minimum guarantee, whereby licensees pay a fixed fee for the right to incorporate the Company’s IP technologies in the licensee’s products over the license term. In contracts 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. The Company generally recognizes the full fixed fee as revenue at the beginning of the license term when the customer has the right to use the IP and begins to benefit from the license, net of the effect of any significant financing components calculated using customer-specific, risk-adjusted lending rates, with the related interest income being recognized over time on an effective rate basis. For minimum guarantee contracts where the customer exceeds the minimum, the Company recognizes revenue relating to any additional per-unit fees in the periods it believes the customer has exceeded the minimum and adjusts the revenue based on actual usage once that is reported by the customer.

11


 

Per-unit or Per-subscriber Media IP or Semiconductor IP Royalty Licensing

The Company recognizes revenue from per-unit or per-subscriber IP 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. Estimating customers’ monthly or 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 or manufactured by customers, which could have a material impact on the amount of revenue it reports on a quarterly basis.

IP License Contracts with Multiple Performance Obligations