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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________ 
FORM 10-Q
(Mark One)
  x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
  o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number: 001-37870
TiVo Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
61-1793262
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
2160 Gold Street, San Jose, CA 95002
(Address of principal executive offices, including zip code)
(408) 519-9100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

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  þ    No  o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  þ    No  o

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 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 þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
 

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.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  þ
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
(in thousands)
Outstanding as of
Class
October 31, 2018
Common Stock
123,927



Table of Contents


TIVO CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1.
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
PART II. OTHER INFORMATION
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
 




1

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TIVO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

September 30, 2018
 
December 31, 2017
ASSETS
(Unaudited)


Current assets:



Cash and cash equivalents
$
149,655


$
128,965

Short-term marketable securities
162,073


140,866

Accounts receivable, net
173,749


180,768

Inventory
7,963

 
11,581

Prepaid expenses and other current assets
36,012


40,719

Total current assets
529,452

 
502,899

Long-term marketable securities
70,296


82,711

Property and equipment, net
50,689


55,244

Intangible assets, net
524,057


643,924

Goodwill
1,813,183


1,813,227

Other long-term assets
57,104


65,673

Total assets
$
3,044,781

 
$
3,163,678





LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Accounts payable and accrued expenses
$
92,557


$
135,852

Unearned revenue
49,667


55,393

Current portion of long-term debt
7,000


7,000

Total current liabilities
149,224

 
198,245

Taxes payable, less current portion
4,694


3,947

Unearned revenue, less current portion
50,356


58,283

Long-term debt, less current portion
982,801


976,095

Deferred tax liabilities, net
51,150


50,356

Other long-term liabilities
14,982


23,736

Total liabilities
1,253,207

 
1,310,662

Commitments and contingencies (Note 11)





Stockholders' equity:



Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued or outstanding



Common stock, $0.001 par value, 250,000 shares authorized; 125,629 shares issued and 123,875 shares outstanding as of September 30, 2018; and 123,385 shares issued and 122,116 shares outstanding as of December 31, 2017
126


123

Treasury stock, 1,754 shares and 1,269 shares as of September 30, 2018 and December 31, 2017, respectively, at cost
(31,495
)

(24,740
)
Additional paid-in capital
3,249,615


3,273,022

Accumulated other comprehensive loss
(4,297
)

(2,738
)
Accumulated deficit
(1,422,375
)

(1,392,651
)
Total stockholders’ equity
1,791,574

 
1,853,016

Total liabilities and stockholders’ equity
$
3,044,781

 
$
3,163,678


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

2

Table of Contents


TIVO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues, net:
 
 
 
 
 
 
 
Licensing, services and software
$
160,783

 
$
188,031

 
$
516,495

 
$
577,545

Hardware
3,926

 
9,867

 
10,911

 
34,675

Total Revenues, net
164,709

 
197,898

 
527,406

 
612,220

Costs and expenses:
 
 
 
 
 
 
 
Cost of licensing, services and software revenues, excluding depreciation and amortization of intangible assets
40,749

 
42,811

 
126,547

 
124,398

Cost of hardware revenues, excluding depreciation and amortization of intangible assets
4,220

 
9,889

 
14,260

 
35,877

Research and development
42,053

 
48,872

 
133,894

 
144,386

Selling, general and administrative
39,867

 
47,431

 
133,906

 
147,121

Depreciation
5,338

 
5,015

 
16,252

 
15,869

Amortization of intangible assets
37,242

 
41,722

 
119,463

 
125,100

Restructuring and asset impairment charges
2,921

 
3,710

 
8,568

 
17,623

Total costs and expenses
172,390

 
199,450

 
552,890

 
610,374

Operating (loss) income
(7,681
)
 
(1,552
)
 
(25,484
)
 
1,846

Interest expense
(12,436
)
 
(10,990
)
 
(36,241
)
 
(31,827
)
Interest income and other, net
861

 
1,059

 
2,971

 
3,819

Gain (loss) on interest rate swaps
1,033

 
(39
)
 
7,185

 
(1,374
)
TiVo Acquisition litigation

 
(1,100
)
 

 
(14,006
)
Loss on debt extinguishment

 

 

 
(108
)
Loss on debt modification

 

 

 
(929
)
Loss from continuing operations before income taxes
(18,223
)
 
(12,622
)
 
(51,569
)
 
(42,579
)
Income tax expense
4,769

 
4,341

 
13,305

 
13,816

Loss from continuing operations, net of tax
(22,992
)
 
(16,963
)
 
(64,874
)
 
(56,395
)
Income from discontinued operations, net of tax
143

 

 
3,738

 

Net loss
$
(22,849
)
 
$
(16,963
)
 
$
(61,136
)
 
$
(56,395
)
 
 
 
 
 
 
 
 
Basic loss per share:
 
 
 
 
 
 
 
Continuing operations
$
(0.19
)
 
$
(0.14
)
 
$
(0.53
)
 
$
(0.47
)
Discontinued operations

 

 
0.03

 

Basic loss per share
$
(0.19
)
 
$
(0.14
)
 
$
(0.50
)
 
$
(0.47
)
Weighted average shares used in computing basic per share amounts
123,459

 
120,935

 
122,756

 
119,994

 
 
 
 
 
 
 
 
Diluted loss per share:
 
 
 
 
 
 
 
Continuing operations
$
(0.19
)
 
$
(0.14
)
 
$
(0.53
)
 
$
(0.47
)
Discontinued operations

 

 
0.03

 

Diluted loss per share
$
(0.19
)
 
$
(0.14
)
 
$
(0.50
)
 
$
(0.47
)
Weighted average shares used in computing diluted per share amounts
123,459

 
120,935

 
122,756

 
119,994

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.18

 
$
0.18

 
$
0.54

 
$
0.54


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3

Table of Contents

TIVO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(22,849
)
 
$
(16,963
)
 
$
(61,136
)
 
$
(56,395
)
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
(286
)
 
267

 
(1,889
)
 
3,394

Unrealized gains on marketable securities
 
 
 
 
 
 
 
Change in unrealized gains on marketable securities
222

 
82

 
114

 
351

Less: Reclassification adjustment on sale

 

 
216

 

Other comprehensive (loss) income, net of tax
(64
)
 
349

 
(1,559
)
 
3,745

Comprehensive loss
$
(22,913
)
 
$
(16,614
)
 
$
(62,695
)
 
$
(52,650
)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


4

Table of Contents

TIVO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(61,136
)
 
$
(56,395
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Income from discontinued operations, net of tax
(3,738
)
 

Depreciation
16,252

 
15,869

Amortization of intangible assets
119,463

 
125,100

Amortization of convertible note discount and note issuance costs
11,586

 
11,016

Restructuring and asset impairment charges
8,568

 
17,623

Equity-based compensation
28,226

 
38,781

Change in fair value of interest rate swaps
(10,245
)
 
(5,102
)
TiVo Acquisition litigation

 
14,006

Loss on debt extinguishment

 
108

Loss on debt modification

 
929

Deferred income taxes
(447
)
 
1,035

Other operating, net
1,819

 
(3,358
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
30,548

 
(42,155
)
Inventory
3,618

 
1,476

Prepaid expenses and other current assets and other long-term assets
7,377

 
(58,411
)
Accounts payable and accrued expenses and other long-term liabilities
(35,237
)
 
(29,680
)
Taxes payable
(474
)
 
2,141

Unearned revenue
(2,445
)
 
18,276

Net cash provided by operating activities of continuing operations
113,735

 
51,259

Net cash provided by operating activities of discontinued operations

 

Net cash provided by operating activities
113,735

 
51,259

Cash flows from investing activities:
 
 
 
Payments for purchase of short- and long-term marketable securities
(150,583
)
 
(121,979
)
Proceeds from sales or maturities of short- and long-term marketable securities
142,753

 
150,261

Return of cash paid for TiVo Acquisition

 
25,143

Payment to Dissenting Holders in TiVo Acquisition

 
(117,030
)
Payments for purchase of property and equipment
(17,053
)
 
(22,534
)
Payments for purchase of patents

 
(2,000
)
Other investing, net
15

 
(67
)
Net cash used in investing activities
(24,868
)
 
(88,206
)
Cash flows used in financing activities:
 
 
 
Proceeds from issuance of long-term debt, net of issuance costs

 
681,552

Principal payments on long-term debt
(5,250
)
 
(687,750
)
Payments for dividends
(66,687
)
 
(65,238
)
Payments for contingent consideration and deferred holdback
(1,874
)
 
(2,650
)
Payments for withholding taxes related to net settlement of restricted awards
(6,755
)
 
(12,784
)
Proceeds from employee stock purchase plan and exercise of employee stock options
12,854

 
22,364

Net cash used in financing activities
(67,712
)
 
(64,506
)
Effect of exchange rate changes on cash and cash equivalents
(465
)
 
1,613

Net increase (decrease) in cash and cash equivalents
20,690

 
(99,840
)
Cash and cash equivalents at beginning of period
128,965

 
192,627

Cash and cash equivalents at end of period
$
149,655

 
$
92,787


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

5

Table of Contents

TIVO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation and Summary of Significant Accounting Policies

Description of Business

On April 28, 2016, Rovi Corporation ("Rovi") and TiVo Inc. (renamed TiVo Solutions Inc. ("TiVo Solutions")) entered into an Agreement and Plan of Merger (the “Merger Agreement”) for Rovi to acquire TiVo Solutions in a cash and stock transaction (the "TiVo Acquisition"). Following consummation of the TiVo Acquisition on September 7, 2016 (the "TiVo Acquisition Date"), TiVo Corporation (the "Company"), a Delaware corporation founded in April 2016 as Titan Technologies Corporation and then a wholly-owned subsidiary of Rovi, owns both Rovi and TiVo Solutions.

The Company is a global leader in media and entertainment products that power consumer entertainment experiences and enable its customers to deepen and further monetize their audience relationships. The Company provides a broad set of intellectual property, cloud-based services and set-top box ("STB") solutions that enable people to find and enjoy online video, television ("TV"), movies and music entertainment, including content discovery through device-embedded and cloud-based user experience ("UX"), including interactive program guides (“IPGs”), digital video recorders ("DVRs"), natural language voice and text search, cloud-based recommendations services and the Company's extensive entertainment metadata (i.e., descriptive information, promotional images or other content that describes or relates to television shows, videos, movies, sports, music, books, games or other entertainment content). The Company's integrated platform includes software and cloud-based services that provide an all-in-one approach for navigating a fragmented universe of content by seamlessly combining live, recorded, video-on-demand ("VOD") and over-the-top ("OTT") content into one intuitive user interface with simple universal search, discovery, viewing and recording, to create a unified viewing experience. The Company distributes its products through service provider relationships, integrated into third-party devices and directly to retail consumers. The Company also offers data analytics solutions which enable advanced audience targeting and measurement in linear and OTT TV advertising. Solutions are sold globally to cable, satellite, consumer electronics ("CE"), entertainment, media and online distribution companies, and, in the United States, the Company sells a suite of DVR and whole home media products and services directly to retail consumers.
    
Basis of Presentation and Principles of Consolidation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted in accordance with such rules and regulations. However, the Company believes the disclosures made are adequate to make the information not misleading. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management, are considered necessary to present fairly the results for the periods presented.

The information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto and other disclosures contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Loss and the Condensed Consolidated Statements of Cash Flows for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2018, for any future year, or for any other future interim period.

The accompanying Condensed Consolidated Financial Statements include the accounts of TiVo Corporation and subsidiaries and affiliates in which the Company has a controlling financial interest after the elimination of intercompany accounts and transactions.
    
Use of Estimates

The preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and related disclosures as of the date of the financial statements and the results of operations for the reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, long-lived asset impairment, including goodwill and intangible assets, equity-based compensation and income taxes. Actual results may differ from those estimates.

6

Table of Contents


Concentrations of Risk

The TiVo service is enabled using a DVR manufactured by a third-party. The Company also relies on third parties with whom it outsources supply-chain activities related to inventory warehousing, order fulfillment, distribution and other direct sales logistics. The Company cannot be sure that these parties will perform their obligations as expected or that any revenue, cost savings or other benefits will be derived from the efforts of these parties. If any of these parties breaches or terminates their agreement with the Company or otherwise fails to perform their obligations in a timely manner, the Company may be delayed or prevented from commercializing its products and services.

Accounts Receivable

The timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a receivable when revenue is recognized prior to cash collection. A receivable related to revenue recognized for multi-year licenses is recognized when the Company has an unconditional right to invoice and receive payment in the future related to those licenses.

Payment terms and conditions vary by contract type, location of customer and the products or services offered, although terms generally require payment from a customer within 30 to 60 days. When the timing of revenue recognition differs from the timing of cash collection, an evaluation is performed to determine whether the contract includes a significant financing component. As the primary purpose of the Company's invoicing terms is to provide customers with simplified and predictable ways of purchasing products and services, significant financing components are generally not identified in the Company’s contracts with customers.

The Company performs ongoing credit evaluations of its customers. The Company reviews its accounts receivable to identify potential collection issues. A specific allowance for doubtful accounts is recorded when warranted by specific customer circumstances, such as in the case of a bankruptcy filing, a deterioration in the customer's operating results or financial position or the past due status of a receivable based on its contractual payment terms. For customers for which a specific allowance for doubtful accounts was recorded, adjustments to recoverability estimates are recorded when there are subsequent changes in the specific customer's circumstances. For accounts receivable not specifically reserved, an allowance for doubtful accounts is recorded based on historical loss experience and other currently available evidence. Accounts receivable deemed uncollectible are charged off when collection efforts have been exhausted.

Contract Assets

Contract assets primarily consist of revenue recognized in excess of the amount billed to the customer, limited to net realizable value and deferred engineering costs for significant software customization or modification and set-up services to the extent deemed recoverable. Contract assets for unbilled receivables are reclassified to Accounts receivable, net when the right to payment becomes unconditional.
    
Contract assets also include the incremental costs of obtaining a contract with a customer, principally sales commissions when the renewal commission is not commensurate with the initial commission. The incremental costs of obtaining a contract with a customer are recognized as an asset when the expected period of benefit is greater than one year. The incremental costs of obtaining a contract with a customer are amortized on a straight-line basis over a period of time commensurate with the period of benefit, generally three to five years, which considers the transfer of goods or services to which the assets relate, technological developments during the period of benefit, customer history and other factors. The period of benefit is generally the estimated life of the customer relationship if renewals are expected, and may exceed the contract term. Amortization of the capitalized incremental costs of obtaining a contract with a customer is included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

Contract assets are classified as current or noncurrent in the Condensed Consolidated Balance Sheets based on when the asset is expected to be realized. Contract assets are subject to periodic impairment reviews.


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Contract Liabilities, including Unearned Revenue

Contract liabilities are mainly comprised of unearned revenue related to consumer lifetime subscriptions to the TiVo service and multi-period licensing or cloud-based services and other offerings for which the Company is paid in advance of when control of the good or service is transferred to the customer. Unearned revenue also includes amounts related to professional services to be performed in the future. Unearned revenue arises when cash payments are received or due, including amounts which are refundable, in advance of performance. Contract liabilities exclude amounts expected to be refunded. Payment terms and conditions vary by contract type, location of customer and the products or services offered. For certain products or services and customer types, payment before the products or services are delivered to the customer is required.

Revenue Recognition

General
    
Revenue is recognized when control of the promised goods or services is transferred to a customer in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services, which may include various combinations of goods and services which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of taxes collected from customers which are subsequently remitted to governmental authorities.

Depending on the terms of the contract, a portion of the consideration received may be deferred because of a requirement to satisfy a future obligation. Stand-alone selling price for separate performance obligations is based on observable prices charged to customers for goods or services sold separately or the cost-plus-a-margin approach when observable prices are not available, considering overall pricing objectives.

Arrangements with Multiple Performance Obligations

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 an arrangement with multiple performance obligations, the transaction price is allocated among the separate performance obligations on a relative stand-alone selling price basis. The determination of stand-alone selling price considers market conditions, the size and scope of the contract, customer and geographic information, and other factors. 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.

Contract Modifications

Contracts may be modified due to changes in contract specifications or customer requirements. Contract modifications occur when the change in terms either creates new enforceable rights and obligations or changes existing enforceable rights and obligations. The effect of a contract modification for goods and services that are not distinct in the context of the contract on the transaction price is recognized as an adjustment to revenue on a cumulative catch-up basis. Contract modifications that result in goods or services that are distinct from the previously existing contract are accounted for prospectively.

Variable Consideration

When a contract with a customer includes a variable transaction price, an estimate of the consideration to which the Company expects to be entitled to for transferring the promised goods or services is made at contract inception. Depending on the terms of the contract, variable consideration is estimated using either the expected value approach or the most likely value approach. Under either approach to estimating variable consideration, the estimate considers all information (historical, current and forecast) that is reasonably available at contract inception. The amount of variable consideration is estimated at contract inception and 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.


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Certain payments to retailers and distributors, such as market development funds and revenue shares, are treated as a reduction of the transaction price, and therefore revenue, rather than Selling, general and administrative expense. The reduction of revenue is recognized at the later of when revenue is recognized for the transfer of the related goods or services to the customer or when the Company pays or promises to pay the consideration.

When variable consideration is in the form of a sales-based or usage-based royalty in exchange for a license of intellectual property, or when a license of intellectual property is the predominant item to which the variable consideration relates, 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.

Significant Judgments

Determining whether promises to transfer multiple goods and services in contracts with customers are considered distinct performance obligations that should be accounted for separately requires significant judgment, including related to the level of integration and interdependency between the performance obligations. In addition, judgment is necessary to allocate the transaction price to the distinct performance obligations, including whether there is a discount or significant financing component to be allocated based on the relative stand-alone selling price of the various performance obligations.

Significant judgment is required to determine the stand-alone selling price for each distinct performance obligation when an observable price is not available. In instances where stand-alone selling price is not directly observable, such as when the Company does not sell the good or service separately, the stand-alone selling price is determined using a range of inputs that includes market conditions and other observable inputs. More than one stand-alone selling price may exist for individual goods and services due to the stratification of those goods and services, considering attributes such as the size of the customer and geographic region.

Due to the nature of the work required to be performed on some performance obligations, significant judgment may be required to determine the transaction price. It is common for the Company's license agreements to contain provisions that can either increase or decrease the transaction price. These variable amounts are generally estimated based on usage or the achievement of performance metrics. In addition to estimating variable consideration, significant judgment is necessary to identify forms of variable consideration, determine whether the variable consideration relates to a sales-based or usage-based royalty of intellectual property and the determination of whether and when to include estimates of variable consideration in the transaction price.

Some hardware products are sold with a right of return and in other circumstances, other credits or incentives may be provided such as consideration (sales incentives) given to customers or resellers, which are accounted for as variable consideration and recognized as a reduction to the revenue recognized. Estimates of returns, credits and incentives are made at contract inception and updated each reporting period.

In contracts where the Company does not host the TiVo service and that include engineering services that are essential to the functionality of the licensed technology or involve significant customization or modification of software, the Company recognizes revenue as progress toward completion occurs using an input method based on the ratio of costs incurred to date to total estimated costs of the project. Significant judgment is required to estimate the remaining effort to complete the project. These estimates are reassessed throughout the term of the arrangement.

On an ongoing basis, management evaluates its estimates, inputs and assumptions related to revenue recognition. Using different estimates, inputs or assumptions may materially affect the reported amounts of assets and liabilities as of the date of the financial statements and the results of operations for the reporting period.

Nature of goods and services

The following is a discussion of the principal activities from which the Company generates its revenue.

Patent Licensing Agreements

The Company licenses its discovery patent portfolio to traditional pay TV providers, virtual service providers, OTT video providers, CE manufacturers and others. The Company licenses its patented technology portfolio under two revenue models: (i) fixed-fee licenses and (ii) per-unit royalty licenses.


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The Company's long-term fixed-fee license agreements provide 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. 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 agreement.

At times, the Company enters into license agreements in which a licensee is released from past patent infringement claims and is granted a license to ship an unlimited number of units over a future period for a fixed fee. In these arrangements, the Company allocates the transaction price between the release for past patent infringement claims and the future license. In determining the stand-alone selling price of the release for past patent infringement claims and the future license, the Company considers such factors as the number of units shipped in the past and in what geographies these units were shipped, the number of units expected to be shipped in the future and in what geographies these units are expected to be shipped, as well as the licensing rate the Company generally receives for units shipped in the same geographies. 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.

The Company recognizes revenue from per-unit royalty licenses in the period in which the licensee's sales are estimated to have occurred, which results in an adjustment to revenue when actual sales are subsequently reported by the licensees, which is generally in the month or quarter following usage or shipment. The Company generally recognizes revenue from per-unit royalty licenses on a per-subscriber per-month model for licenses with service providers and a per-unit shipped model for licenses with CE manufacturers.

Arrangements with Multiple System Operators for the TiVo Service

The Company's arrangements with multiple system operators ("MSOs") typically include software customization and set-up services, associated maintenance and support, limited training, post-contract support, TiVo-enabled DVRs, non-DVR STBs and the TiVo service.

The Company has two types of arrangements with MSOs that include technology deployment and engineering services. In instances where the Company hosts the TiVo service, non-refundable payments received for customization and set-up services are deferred and recognized as revenue over the contractual term. The related cost of such services is capitalized to the extent it is deemed recoverable and amortized to cost of revenues over the same period as the related TiVo service revenue is recognized. The Company estimates the stand-alone selling prices for training, DVRs, non-DVR STBs and maintenance and support based on the price charged in stand-alone sales of the promised good or service. The stand-alone selling price for the TiVo service is determined considering the size of the MSO and expected volume of deployment, market conditions, competitive landscape, internal costs and total gross margin objectives. For a term license to the TiVo service, the Company receives license fees for the hosted TiVo service on either a per-subscriber per-month basis or a fixed fee. The Company recognizes revenue from per-subscriber per-month licenses during the month the TiVo service is provided to the customer and recognizes revenue from fixed fee licenses ratably over the license period.

In arrangements where the Company does not host the TiVo service and that include engineering services that are essential to the functionality of the licensed technology or involve significant customization or modification of the software, the Company recognizes revenue as progress toward completion is made using an input method based on the ratio of costs incurred to date to total estimated costs of the project. Project costs are primarily labor related to the specific activities required for the project. Costs related to general infrastructure or uncommitted platform development are not included in the project cost estimates and are expensed as incurred. Estimating project costs requires forecasting costs, tracking progress toward completion and projecting the remaining effort to complete the project. These estimates are reassessed throughout the term of the arrangement, and revisions to estimates are recognized on a cumulative catch-up basis when the changed conditions become known. Provisions for losses are recorded when estimates indicate it is probable that a loss will be incurred for the contract. The Company generally recognizes revenue from license fees for the TiVo service that it does not host on a per-subscriber per-month basis due to the recognition constraint on intellectual property usage-based royalties.
    

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Subscription Services

Subscription services revenues primarily consist of fees to provide customers with access to one or more of the Company's hosted products such as its i-Guide IPG, advanced search and recommendations, metadata and analytics products, including routine customer support. The Company generally receives per-subscriber per-month fees for its i-Guide IPG and search and recommendations service and revenue is recorded in the month the customer uses the service. The Company generally receives a monthly or quarterly fee from its metadata or analytics licenses for the right to use its metadata or access its analytics platform and to receive regular updates. Revenue from the Company's metadata and analytics service is recognized ratably over the subscription period.

Passport Software

               The Company licenses its Passport IPG software to pay TV providers in North and South America. The Company generally receives per-subscriber per-month fees for licenses to its Passport IPG software and support. Due to the usage-based royalty provisions of the revenue recognition guidance, revenue is generally recognized in the month the customer uses the software.

Advertising

The Company generates advertising revenue through its IPGs. Advertising revenue is recognized when the related advertisement is provided. Advertising revenue is recorded net of agency commissions and revenue shares with service providers and CE manufacturers.

TiVo-enabled DVRs and TiVo Service

The Company sells TiVo-enabled DVRs and the related service directly to customers through sales programs via the TiVo.com website and licenses the sale of TiVo-enabled DVRs through a limited number of retailers. For sales through the TiVo.com website, the customer receives a DVR and commits to either a minimum subscription period of one year or for the lifetime of the DVR. After the initial subscription period, customers have various pricing options when they renew their subscription. Customers have the right to return the DVR within 30 days of purchase. Customers have the right to cancel their subscription to the TiVo service within 30 days of subscription activation for a full refund. For licensed sales of TiVo-enabled DVRs through retailers, the customer commits to either a minimum subscription period of one year or for the lifetime of the DVR.
    
The stand-alone selling price for the TiVo service is established based on stand-alone sales of the service and varies by the length of the service period. The stand-alone selling price of the DVR is determined based on the price for which the Company would sell the DVR without any service commitment from the customer.

The transaction price allocated to the DVR is recognized as revenue on delivery and the transaction price allocated to the TiVo service is recognized as revenue ratably over the service period. Subscription revenues from lifetime subscriptions are recognized ratably over the estimated useful life of the DVR associated with the subscription. The estimated useful life for a DVR depends on a number of assumptions, including, but not limited to, customer retention rates, the timing of new product introductions and historical experience. As of September 30, 2018, the Company recognizes revenue for lifetime subscriptions over a 66-month period. The Company periodically reassesses the estimated useful life of a DVR. When the actual useful life of the DVR materially differs from the Company's estimate, the estimated useful life of the DVR is adjusted, which could result in the recognition of revenue over a longer or shorter period of time.
    
Shipping and handling costs associated with outbound freight after control of a DVR has transferred to a customer are accounted for as a fulfillment cost and are included in Cost of hardware revenues, excluding depreciation and amortization of intangible assets as incurred.

Recent Accounting Pronouncements

Standards Recently Adopted

In January 2017, the Financial Accounting Standards ("FASB") clarified the definition of a business. The clarified guidance provides a more defined framework to use in determining when a set of assets and activities constitute a business. The clarified definition was effective for the Company on January 1, 2018 and was applied using a prospective transition approach. Application of this guidance did not have an effect on the Condensed Consolidated Financial Statements.

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In October 2016, the FASB amended its guidance on the tax effects of intra-entity transfers of assets other than inventory. The amended guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendment was effective for the Company on January 1, 2018 and was applied using a modified retrospective transition approach. Application of this guidance did not have an effect on the Condensed Consolidated Financial Statements.

In August 2016, the FASB issued clarifying guidance on the presentation of eight specific cash flow issues for which previous guidance was either unclear or not specific. The clarified guidance was effective for the Company on January 1, 2018 and was applied using a retrospective transition approach. Application of this guidance did not have an effect on the Condensed Consolidated Financial Statements.

In March 2016, the FASB provided guidance for the derecognition of prepaid stored-value product liabilities, such as gift cards. Pursuant to this guidance, among other criteria, prepaid stored-value product liabilities are eligible to be derecognized when the likelihood of redemption becomes remote. The guidance was effective for the Company on January 1, 2018 and was applied using a modified retrospective transition approach. On adoption, the Company recorded a cumulative effect adjustment, net of tax effects, of $2.2 million that reduced Accumulated deficit for prepaid stored-value product liabilities where the likelihood of redemption was deemed to be remote at the adoption date.

In May 2014, the FASB issued an amended accounting standard for revenue recognition. The core principle of the amended revenue recognition guidance is for an entity to recognize revenue to depict the transfer of promised goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments also require enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. In addition, the FASB amended its guidance related to the capitalization and amortization of the incremental costs of obtaining a contract with a customer. The Company adopted the amended revenue and cost recognition guidance on January 1, 2018 using the modified retrospective transition approach. On adoption, the Company recorded a cumulative effect adjustment, net of tax effects, that reduced Accumulated deficit by $27.9 million for the effects of the amended revenue recognition guidance and reduced Accumulated deficit by $1.3 million for the effects of capitalizing incremental costs to obtain contracts with customers. The significant differences giving rise to the cumulative effect adjustments are described in Note 5. Results for periods beginning after December 31, 2017 are presented under the amended revenue and cost recognition guidance, while prior period amounts were not restated and continue to be reported in accordance with the Company's previous revenue and cost recognition policies.

Standards Pending Adoption

In August 2018, the FASB modified the requirements for capitalizing costs incurred to implement a hosting arrangement that is a service contract. The modified requirements were intended to align the cost capitalization requirements for hosting arrangements with the cost capitalization requirements for internal-use software. The modified guidance is effective for the Company beginning on January 1, 2020, with early adoption permitted. The guidance can be applied prospectively to all arrangements entered into or materially modified after the effective date or using a retrospective transition approach. The Company does not expect application of the modified requirements for capitalizing costs incurred to implement a hosting arrangement to have a material effect on its Condensed Consolidated Financial Statements.
    
In March 2017, the FASB shortened the amortization period for certain investments in callable debt securities held at a premium to the earliest call date. Application of the shortened amortization period is effective for the Company beginning on January 1, 2019 on a modified retrospective basis, with early application permitted. The Company does not expect application of the shortened amortization period to have a material effect on its Condensed Consolidated Financial Statements

In June 2016, the FASB issued updated guidance that requires entities to use a current expected credit loss model to measure credit-related impairments for financial instruments held at amortized cost. 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. The updated guidance is effective for the Company beginning on January 1, 2020 and is effective 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

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securities. Early application is permitted. The Company is evaluating the effect of application on its Condensed Consolidated Financial Statements.

In February 2016, the FASB issued a new accounting standard for leases. The new lease accounting standard generally requires the recognition of operating and financing lease liabilities and corresponding right-of-use assets on the statement of financial position. For operating leases, a lessee recognizes its total lease expense as an operating expense over the lease term. For financing leases, a lessee recognizes amortization of the right-of-use asset as an operating expense over the lease term separately from interest on the lease liability. On transition, the difference between the right-of-use asset and lease liabilities, net of any previously recognized lease-related assets and liabilities and any resulting deferred tax impact, is recognized as an adjustment to retained earnings.

The new lease accounting standard is effective for the Company beginning on January 1, 2019 using a modified retrospective transition approach, with early application permitted. The Company is evaluating the effect of application on its Condensed Consolidated Financial Statements and expects to apply the package of practical expedients permitted under the transition guidance within the new lease accounting standard, which among other things, permits the historical lease classification to carryforward. The Company also expects to apply a practical expedient to combine lease and non-lease components within a lease and to apply the transition alternative to record the cumulative effect of adoption on the date of initial application (i.e., January 1, 2019). Adoption of the new lease accounting standard is expected to result in the recognition of the present value of the Company's existing minimum lease payments as lease liabilities and a corresponding right-of-use asset, which may be material to the Condensed Consolidated Balance Sheets. The new lease accounting standard is not expected to materially affect the Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Loss or the Condensed Consolidated Statements of Cash Flows.

(2) Acquisitions

TiVo Acquisition

On September 7, 2016, Rovi completed its acquisition of TiVo Solutions, a global leader in next-generation video technology and innovative cloud-based software-as-a-service solutions. TiVo Solutions' results of operations and cash flows have been included in the Condensed Consolidated Financial Statements for periods subsequent to September 7, 2016.

In November 2016, holders of 9.1 million shares of TiVo Solutions common stock outstanding at the TiVo Acquisition Date who did not vote to approve the TiVo Acquisition ("Dissenting Holders") filed a petition for appraisal pursuant to Section 262 of the Delaware General Corporation Law in the Court of Chancery of the State of Delaware (In re Appraisal of TiVo, Inc., C.A. No. 12909-CB (Del. Ch.)). On March 27, 2017, TiVo Corporation executed a settlement agreement with the Dissenting Holders to settle their claims for $117.0 million, which was paid in cash in April 2017. In connection with the settlement, in March 2017, the exchange agent in the TiVo Acquisition returned $25.1 million in cash related to the Dissenting Holders to TiVo Corporation. As the amount paid to Dissenting Holders resulted from a settlement other than a judgment from the Delaware Court of Chancery, a TiVo Acquisition litigation loss of $12.9 million was recognized in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2017.

(3) Discontinued Operations

In the three and nine months ended September 30, 2018, the Company recognized Income from discontinued operations, net of tax of $0.1 million and $3.7 million, respectively, as a result of the expiration of certain indemnification obligations and the execution of settlement agreements during the period associated with previous business disposals, partially offset by an increase in legal defense costs.

(4) Financial Statement Details

Inventory (in thousands):
 
September 30, 2018
 
December 31, 2017
Raw materials
$
1,042

 
$
1,846

Finished goods
6,921

 
9,735

Inventory
$
7,963

 
$
11,581


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Property and equipment, net (in thousands):
 
September 30, 2018
 
December 31, 2017
Computer software and equipment
$
158,490

 
$
150,098

Leasehold improvements
45,303

 
44,981

Furniture and fixtures
9,971

 
9,137

Property and equipment, gross
213,764

 
204,216

Less: Accumulated depreciation and amortization
(163,075
)
 
(148,972
)
Property and equipment, net
$
50,689

 
$
55,244


Accounts payable and accrued expenses (in thousands):
 
September 30, 2018
 
December 31, 2017
Accounts payable
$
10,828

 
$
10,517

Accrued compensation and benefits
33,566

 
47,886

Other accrued liabilities
48,163

 
77,449

Accounts payable and accrued expenses
$
92,557

 
$
135,852


(5) Revenues

Adoption of Amended Revenue and Cost Recognition Guidance

The Company adopted the provisions of the amended revenue recognition guidance described in Note 1 using the modified retrospective transition approach on January 1, 2018. As such, the amended revenue recognition guidance was applied to those contracts which were not completed as of December 31, 2017. Results for periods beginning after December 31, 2017 are presented under the amended revenue recognition guidance, while prior period amounts were not restated and continue to be reported in accordance with the previous revenue recognition guidance.

In addition, the Company adopted amended guidance related to the capitalization and amortization of incremental costs to obtain a contract with a customer and guidance for the de-recognition of prepaid stored-value product liabilities, such as gift cards, each as described in Note 1 using the modified retrospective transition approach on January 1, 2018.

The cumulative effect of these changes on the Condensed Consolidated Balance Sheets on adoption was as follows (in thousands):    
 
 
 
Contracts with Customers
 
Costs to Obtain Contracts with Customers
 
De-recognition of Prepaid Stored Value Product Liabilities
 
 
 
December 31, 2017
 
 
 
 
January 1, 2018
Accounts receivable, net
$
180,768

 
$
24,177

 
$

 
$

 
$
204,945

Prepaid expenses and other current assets
40,719

 
(2,705
)
 
525

 

 
38,539

Other long-term assets
65,673

 
(4,419
)
 
819

 

 
62,073

Accounts payable and accrued expenses
(135,852
)
 

 

 
2,155

 
(133,697
)
Unearned revenue
(55,393
)
 
11,208

 

 

 
(44,185
)
Deferred tax liabilities, net
(50,356
)
 
(348
)
 

 

 
(50,704
)
Accumulated deficit
1,392,651

 
(27,913
)
 
(1,344
)
 
(2,155
)
 
1,361,239



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The most significant impact of the amended revenue recognition guidance relates to the accounting for software arrangements. Under prior industry-specific software revenue recognition guidance, when the Company concluded it did not have vendor-specific objective evidence ("VSOE") of fair value for the undelivered elements of an arrangement, revenue was deferred until the last element without VSOE was delivered. The amended revenue recognition guidance eliminated the concept of VSOE of fair value. The amended revenue recognition guidance requires an evaluation of whether the undelivered elements are distinct performance obligations and, therefore, should each be recognized separately when delivered. On adoption of the amended revenue recognition guidance, the Company accounted for the software and support elements of the TiVo Solutions international MSO agreements as two distinct performance obligations. These agreements contain minimum guarantees, and on adoption of the amended revenue recognition guidance, $34.4 million of these minimums were recorded as an increase in Accounts receivable, net and a reduction to Accumulated deficit as the software was delivered prior to the date of adoption.

The amended revenue recognition guidance also requires the Company to record revenue related to fixed-fee patent licensing agreements that do not provide the right to future patented technologies acquired by the Company during the term of the license when access to the existing patented technology is granted to the licensee. Under prior revenue recognition guidance, the Company recognized revenue from this type of fixed-fee license agreement on a straight-line basis over the term of the agreement. On adoption of the amended revenue recognition guidance, the Company recorded a $10.2 million reduction in Unearned revenue and Accumulated deficit for this type of fixed-fee license agreement.

The amended revenue recognition guidance includes specific guidance for contract modifications. Based on the nature of the modification, the revenue recognized for the contract may be updated on a cumulative catch-up basis on execution of the modification or updated prospectively as a result of the modification. For certain contract modifications, this accounting treatment differs from the accounting treatment in accordance with previous revenue recognition guidance.

Prior to the adoption of the amended revenue recognition guidance, the Company recognized revenue from per-unit royalty licenses with certain CE manufacturers and third party IPG providers in the period the licensee reported its sales to the Company, which was generally in the month or quarter after the underlying sales by the licensee occurred. On adoption of the amended revenue recognition guidance, revenue from per-unit royalty licenses is recognized in the period in which the licensee's sales are estimated to have occurred, limited to the amount of revenue that is not subject to a significant risk of reversal, which results in an adjustment to revenue when actual amounts are subsequently reported by the Company's licensees.

Pursuant to the amended cost capitalization guidance, incremental costs to obtain a contract with a customer are capitalized and amortized over a period of time commensurate with the expected period of benefit, which may exceed the contract term. Prior to the adoption of the amended cost capitalization guidance, the Company expensed incremental costs to obtain a contract with a customer as incurred.


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Table of Contents

The impact of adoption of the amended revenue and cost recognition guidance on the Condensed Consolidated Statements of Operations was as follows (in thousands):
 
Three Months Ended September 30, 2018
 
As Reported
 
As If Applying Prior Guidance
 
Effect of Change 
Higher/(Lower)
Total Revenues, net
$
164,709

 
$
170,868

 
$
(6,159
)
Cost of licensing, services and software revenues, excluding depreciation and amortization of intangible assets
40,749

 
41,512

 
(763
)
Selling, general and administrative
39,867

 
40,195

 
(328
)
Loss from continuing operations before income taxes
(18,223
)
 
(13,155
)
 
(5,068
)
Income tax expense
4,769

 
5,143

 
(374
)
Loss from continuing operations, net of tax
(22,992
)
 
(18,298
)
 
(4,694
)
 
Nine Months Ended September 30, 2018
 
As Reported
 
As If Applying Prior Guidance
 
Effect of Change 
Higher/(Lower)
Total Revenues, net
$
527,406

 
$
543,871

 
$
(16,465
)
Cost of licensing, services and software revenues, excluding depreciation and amortization of intangible assets
126,547

 
128,458

 
(1,911
)
Selling, general and administrative
133,906

 
134,232

 
(326
)
Loss from continuing operations before income taxes
(51,569
)
 
(37,341
)
 
(14,228
)
Income tax expense
13,305

 
14,460

 
(1,155
)
Loss from continuing operations, net of tax
(64,874
)
 
(51,801
)
 
(13,073
)

Practical Expedients and Exemptions

The Company applies a practical expedient to not perform an evaluation of whether a contract includes a significant financing component when the timing of revenue recognition differs from the timing of cash collection by one year or less.

The Company applies a practical expedient to expense costs to obtain a contract with a customer as incurred as a component of Selling, general and administrative expenses when the amortization period would have been one year or less.

The Company applies a practical expedient when disclosing revenue expected to be recognized from unsatisfied performance obligations to exclude contracts with customers with an original duration of less than one year, contracts for which revenue is recognized based on the amount which the Company has the right to invoice for services performed and amounts attributable to variable consideration arising from (i) a sales-based or usage-based royalty of an intellectual property license or (ii) when variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation.

Revenue Details

The following tables depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors by disaggregating revenue by product offering (in Note 15), significant customer, contract-type and geographic area. These tables include revenue recognized from contracts with customers and revenue from other sources, including out-of-license settlements. As noted above, amounts for the three and nine months ended September 30, 2017 have not been adjusted to reflect adoption of the amended revenue recognition guidance.

Customers representing 10% or more of Total Revenues, net were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
AT&T Inc. ("AT&T")
11
%
 
14
%
 
10
%
 
14
%

Substantially all revenue from AT&T is reported in the Intellectual Property Licensing segment.


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By segment, the pattern of revenue recognition was as follows (in thousands):
 
Three Months Ended September 30, 2018
 
Product
 
Intellectual Property Licensing
 
Total Revenues, net
Goods and services transferred at a point in time
$
22,093

 
$
26,528

 
$
48,621

Goods and services transferred over time
72,519

 
39,768

 
112,287

Out-of-license settlements

 
3,801

 
3,801

Total Revenues, net
$
94,612

 
$
70,097

 
$
164,709

 
Nine Months Ended September 30, 2018
 
Product
 
Intellectual Property Licensing
 
Total Revenues, net
Goods and services transferred at a point in time
$
79,569

 
$
81,977

 
$
161,546

Goods and services transferred over time
224,682

 
125,212

 
349,894

Out-of-license settlements

 
15,966

 
15,966

Total Revenues, net
$
304,251

 
$
223,155

 
$
527,406


Total Revenues, net by geographic area was as follows (in thousands):
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
United States
$
115,312

 
$
351,423

United Kingdom
9,131

 
56,361

Rest of the world
40,266

 
119,622

Total Revenues, net
$
164,709

 
$
527,406


Revenue by geography is predominately based on the end user's location. Other than the United States, no country accounted for more than 10% of revenue for the three months ended September 30, 2018. Other than the United States and the United Kingdom, no country accounted for more than 10% of revenue for the nine months ended September 30, 2018.

Accounts receivable, net (in thousands):
 
September 30, 2018
 
December 31, 2017
Accounts receivable, gross
$
176,499

 
$
183,343

Less: Allowance for doubtful accounts
(2,750
)
 
(2,575
)
Accounts receivable, net
$
173,749

 
$
180,768


Customers representing 10% or more of Accounts receivable, net were as follows.
 
September 30, 2018
 
December 31, 2017
AT&T
16
%
 
28
%
Virgin Media
11
%
 
(a)


(a) Customer below 10% of Accounts receivable, net as of the date presented.

Contract Balances

Contract assets primarily consist of revenue recognized in excess of the amount billed to the customer, limited to net realizable value and deferred engineering costs for significant software customization or modification and set-up services to the extent deemed recoverable. Contract assets also include the incremental costs of obtaining a contract with a customer, principally sales commissions when the renewal commission is not commensurate with the initial commission. Following adoption of the amended revenue recognition guidance, contract assets were recorded in the Condensed Consolidated Balance Sheets as follows (in thousands):

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September 30, 2018
 
January 1, 2018
Accounts receivable, net
$
46,154

 
$
68,858

Prepaid expenses and other current assets
1,527

 
1,167

Other long-term assets
7,988

 
6,783

Total contract assets, net
$
55,669

 
$
76,808


No impairment losses were recognized with respect to contract assets for the three and nine months ended September 30, 2018.

Contract liabilities are mainly comprised of unearned revenue related to consumer lifetime subscriptions for the TiVo service and multi-period licensing or cloud-based services and other offerings for which the Company is paid in advance of when control of the promised good or service is transferred to the customer. Unearned revenue also includes amounts related to professional services to be performed in the future. For the three and nine months ended September 30, 2018, the Company recognized $10.3 million and $33.3 million, respectively, of revenue that had been included in Unearned revenue as of December 31, 2017.

As of September 30, 2018, approximately $818.6 million of revenue is expected to be recognized from remaining performance obligations that are primarily related to fixed-fee intellectual property and software-as-a-service agreements, which is expected to be recognized as follows: 7.2% in the remainder of 2018, 25.6% in 2019, 18.5% in 2020, 13.0% in 2021, 9.5% in 2022, and 26.1% thereafter.

(6) Investments

The amortized cost and fair value of cash, cash equivalents and marketable securities by significant investment category were as follows (in thousands):
 
September 30, 2018
 
Amortized Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
45,530

 
$

 
$

 
$
45,530

Cash equivalents - Money market funds
104,125

 

 

 
104,125

Cash and cash equivalents
$
149,655

 
$

 
$

 
$
149,655

 
 
 
 
 
 
 
 
Corporate debt securities
$
115,765

 
$
4

 
$
(420
)
 
$
115,349

U.S. Treasuries / Agencies
117,298

 

 
(278
)
 
117,020

Marketable securities
$
233,063

 
$
4

 
$
(698
)
 
$
232,369

Cash, cash equivalents and marketable securities
 
 
 
 
 
 
$
382,024

 
December 31, 2017
 
Amortized Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
38,996

 
$

 
$

 
$
38,996

Cash equivalents - Money market funds
89,969

 

 

 
89,969

Cash and cash equivalents
$
128,965

 
$

 
$

 
$
128,965

 
 
 
 
 
 
 
 
Auction rate securities
$
10,800

 
$

 
$
(216
)
 
$
10,584

Corporate debt securities
102,794

 

 
(397
)
 
102,397

Foreign government obligations
2,249

 

 
(4
)
 
2,245

U.S. Treasuries / Agencies
108,781

 

 
(430
)
 
108,351

Marketable securities
$
224,624

 
$

 
$
(1,047
)
 
$
223,577

Cash, cash equivalents and marketable securities
 
 
 
 
 
 
$
352,542



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As of September 30, 2018, the amortized cost and fair value of marketable securities, by contractual maturity, were as follows (in thousands): 
 
Amortized Cost
 
Fair Value
Due in less than 1 year
$
162,530

 
$
162,073

Due in 1-2 years
70,533

 
70,296

Total
$
233,063

 
$
232,369


As of September 30, 2018 and December 31, 2017, the Condensed Consolidated Balance Sheets include equity securities accounted for under the equity method with a carrying amount of $1.7 million and $1.1 million, respectively, and equity securities without a readily determinable fair value with a carrying amount of $1.5 million and $1.5 million, respectively. The carrying amount of the Company's equity securities without a readily determinable fair value is measured as cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical, or a similar, security of the same issuer. No impairments or adjustments to the carrying amount of the Company's equity securities without a readily determinable fair value were recognized for the three and nine months ended September 30, 2018 and 2017.

(7) Fair Value Measurements

Fair Value Hierarchy

The Company uses valuation techniques that are based on observable and unobservable inputs to measure fair value. Observable inputs are developed using publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use. Fair value measurements are classified in a hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Inputs other than Level 1 inputs that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or market-corroborated inputs.
Level 3. Unobservable inputs for the asset or liability.

The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. For the three and nine months ended September 30, 2018 and 2017, there were no transfers between levels of the fair value hierarchy.


19

Table of Contents

Recurring Fair Value Measurements
Assets and liabilities reported at fair value on a recurring basis in the Condensed Consolidated Balance Sheets were classified in the fair value hierarchy as follows (in thousands):
 
September 30, 2018
 
Total
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Money market funds
$
104,125

 
$
104,125

 
$

 
$

Short-term marketable securities
 
 
 
 
 
 
 
Corporate debt securities
85,785

 

 
85,785

 

U.S. Treasuries / Agencies
76,288

 

 
76,288

 

Prepaid expenses and other current assets
 
 
 
 
 
 
 
Interest rate swaps
231

 

 
231

 

Long-term marketable securities
 
 
 
 
 
 
 
Corporate debt securities
29,564

 

 
29,564

 

U.S. Treasuries / Agencies
40,732

 

 
40,732

 

Other long-term assets
 
 
 
 
 
 
 
Interest rate swaps
440

 

 
440

 

Total Assets
$
337,165

 
$
104,125

 
$
233,040

 
$

Liabilities
 
 
 
 
 
 
 
Other long-term liabilities
 
 
 
 
 
 
 
Interest rate swaps
$
(145
)
 
$

 
$
(145
)
 
$

Total Liabilities
$
(145
)
 
$

 
$
(145
)
 
$


The Company's interest rate swaps are subject to master netting arrangements and have been presented on a net basis in the Condensed Consolidated Balance Sheets where applicable. As of September 30, 2018, interest rate swaps in an asset position with a fair value of $0.7 million that mature in 2021 were netted against interest rate swaps in a liability position with a fair value of $0.2 million that mature in 2021 in the Condensed Consolidated Balance Sheets and in the table above.

20

Table of Contents


 
December 31, 2017
 
Total
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Money market funds
$
89,969

 
$
89,969

 
$

 
$

Short-term marketable securities
 
 
 
 
 
 
 
Corporate debt securities
49,396

 

 
49,396

 

Foreign government obligations
2,245

 

 
2,245

 

U.S. Treasuries / Agencies
89,225

 

 
89,225

 

Long-term marketable securities
 
 

 

 

Auction rate securities
10,584

 

 

 
10,584

Corporate debt securities
53,001

 

 
53,001

 

U.S. Treasuries / Agencies
19,126

 

 
19,126

 

Total Assets
$
313,546

 
$
89,969

 
$
212,993

 
$
10,584

Liabilities
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
 
 
 
 
 
 
Cubiware contingent consideration
$
(2,234
)
 
$

 
$

 
$
(2,234
)
Other long-term liabilities
 
 
 
 
 
 
 
Interest rate swaps
(9,735
)
 

 
(9,735
)
 

Total Liabilities
$
(11,969
)
 
$

 
$
(9,735
)
 
$
(2,234
)
Rollforward of Level 3 Fair Value Measurements

Changes in the fair value of assets and liabilities classified in Level 3 of the fair value hierarchy were as follows (in thousands): 
 
Three Months Ended September 30,
 
2018
 
2017
 
Cubiware Contingent Consideration
 
Auction Rate Securities
 
Cubiware Contingent Consideration
Balance at beginning of period
$
(3,599
)
 
$
10,584

 
$
(5,715
)
Settlements
1,874

 

 
2,650

Transfers out (a)
1,700

 

 

Gain (loss) included in earnings
25

 

 
(386
)
Balance at end of period
$

 
$
10,584

 
$
(3,451
)

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Table of Contents

 
Nine Months Ended September 30,
 
2018
 
2017
 
Auction Rate Securities
 
Cubiware Contingent Consideration
 
Auction Rate Securities
 
Cubiware Contingent Consideration
Balance at beginning of period
$
10,584

 
$
(2,234
)
 
$
10,368

 
$
(5,273
)
Sales
(10,715
)
 

 

 

Settlements

 
1,874

 

 
2,650

Transfers out (a)

 
1,700

 

 

Gain (loss) included in earnings
(85
)
 
(1,340
)
 

 
(828
)
Unrealized loss reclassified on sale
216

 

 

 

Unrealized gains included in other comprehensive income

 

 
216

 

Balance at end of period
$

 
$

 
$
10,584

 
$
(3,451
)

(a)
During the three and nine months ended September 30, 2018, $1.7 million related to the Cubiware contingent consideration was reclassified to a contingent liability that is not measured at fair value.

For the three and nine months ended September 30, 2018, the Gain (loss) included in earnings related to the Cubiware contingent consideration liability is included in Selling, general and administrative expense related to remeasurement of the liability as a $0.1 million gain and a $1.1 million loss, respectively, and in Interest expense related to accretion of the liability to future value of less than $0.1 million and $0.2 million, respectively. For the three and nine months ended September 30, 2017, the Gain (loss) included in earnings related to the Cubiware contingent consideration liability is included in Selling, general and administrative expense related to remeasurement of the liability as a $0.2 million and $0.3 million loss, respectively, and in Interest expense related to accretion of the liability to future value of $0.1 million and $0.5 million, respectively.

Valuation Techniques

The fair value of marketable securities, other than auction rate securities, is estimated using observable market-corroborated inputs, such as quoted prices in active markets for similar assets or independent pricing vendors, obtained from a third-party pricing service.

The fair value of contingent consideration liabilities related to acquisitions is estimated utilizing a probability-weighted discounted cash flow analysis based on the terms of the underlying purchase agreement. The significant unobservable inputs used in calculating the fair value of contingent consideration liabilities related to acquisitions include financial performance scenarios, the probability of achieving those scenarios and the risk-adjusted discount rate.

The fair value of interest rate swaps is estimated using a discounted cash flow analysis that considers the expected future cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swap, including the remaining period to maturity, and uses market-corroborated inputs, including forward interest rate curves and implied interest rate volatilities. The fair value of an interest rate swap is estimated by netting the discounted future fixed cash payments against the discounted expected variable cash receipts. The variable cash receipts are estimated based on an expectation of future interest rates derived from forward interest rate curves. The fair value of an interest rate swap also incorporates credit valuation adjustments to reflect the nonperformance risk of the Company and the respective counterparty. In adjusting the fair value of its interest rate swaps for the effect of nonperformance risk, the Company considers the effect of its master netting agreements.
Other Fair Value Disclosures
The carrying amount and fair value of debt issued or assumed by the Company were as follows (in thousands): 
 
September 30, 2018
 
December 31, 2017
 
Carrying Amount
 
Fair Value (a)
 
Carrying Amount
 
Fair Value (a)
2020 Convertible Notes
$
322,849

 
$
328,412

 
$
311,766

 
$
326,888

2021 Convertible Notes
48

 
48

 
48

 
48

Term Loan Facility B
666,904

 
668,574

 
671,281

 
679,722

Total Long-term debt
$
989,801

 
$
997,034

 
$
983,095

 
$
1,006,658



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Table of Contents

(a)
The fair value of debt issued or assumed by the Company is estimated using quoted prices for the identical instrument in a market that is not active and considers interest rates currently available to companies of similar credit standing for similar terms and remaining maturities and considers the nonperformance risk of the Company. If reported at fair value in the Condensed Consolidated Balance Sheets, debt issued or assumed by the Company would be classified in Level 2 of the fair value hierarchy.

(8) Goodwill and Intangible Assets, Net

Goodwill

Goodwill allocated to the reportable segments and changes in the carrying amount of goodwill by reportable segment were as follows (in thousands):
 
Product
 
Intellectual Property Licensing
 
Total
December 31, 2017
$
521,895

 
$
1,291,332

 
$
1,813,227

Foreign currency translation
(44
)
 

 
(44
)
September 30, 2018
$
521,851

 
$
1,291,332

 
$
1,813,183


Goodwill at each reporting unit is evaluated for potential impairment annually, as of the beginning of the fourth quarter, and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable.

Intangible Assets, Net

Intangible assets, net consisted of the following (in thousands): 
 
September 30, 2018
 
Gross
 
Accumulated
Amortization
 
Net
Finite-lived intangible assets
 
 
 
 
 
Developed technology and patents
$
1,034,085

 
$
(742,956
)
 
$
291,129

Existing contracts and customer relationships
402,896

 
(190,692
)
 
212,204

Content databases and other
57,157

 
(50,433
)
 
6,724

Trademarks / Tradenames
8,300

 
(8,300
)
 

Total finite-lived intangible assets
1,502,438

 
(992,381
)
 
510,057

Indefinite-lived intangible assets
 
 
 
 
 
TiVo Tradename
14,000

 

 
14,000

Total intangible assets
$
1,516,438

 
$
(992,381
)
 
$
524,057

 
December 31, 2017
 
Gross
 
Accumulated
Amortization
 
Net
Finite-lived intangible assets
 
 
 
 
 
Developed technology and patents
$
1,034,458

 
$
(676,465
)
 
$
357,993

Existing contracts and customer relationships
403,244

 
(139,289
)
 
263,955

Content databases and other
57,053

 
(49,077
)
 
7,976

Trademarks / Tradenames
8,300

 
(8,300
)
 

Total finite-lived intangible assets
1,503,055

 
(873,131
)
 
629,924

Indefinite-lived intangible assets
 
 
 
 
 
TiVo Tradename
14,000

 

 
14,000

Total intangible assets
$
1,517,055

 
$
(873,131
)
 
$
643,924



23

Table of Contents

Patent Acquisition

In the nine months ended September 30, 2017, the Company purchased a portfolio of patents for $2.0 million in cash. The Company accounted for the patent portfolio purchase as an asset acquisition and is amortizing the purchase price over a weighted average period of five years.

Future Amortization of Finite-Lived Intangible Assets

As of September 30, 2018, future estimated amortization expense for finite-lived intangible assets was as follows (in thousands): 
Remainder of 2018
$
27,763

2019
109,855

2020
109,109

2021
66,341

2022
38,602

Thereafter
158,387

Total
$
510,057


(9) Restructuring and Asset Impairment Charges

Components of Restructuring and asset impairment charges were as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Facility-related costs
$
99

 
$
3,034

 
$
387

 
$
4,244

Severance costs
2,822

 
220

 
5,606

 
4,260

Share-based payments

 
456

 
2,575

 
2,374

Contract termination costs

 

 

 
4

Asset impairment

 

 

 
6,741

Restructuring and asset impairment charges
$
2,921

 
$
3,710

 
$
8,568

 
$
17,623


Components of accrued restructuring costs were as follows (in thousands):
 
September 30, 2018
 
December 31, 2017
Facility-related costs
$
459

 
$
693

Severance costs
3,337

 
584

Contract termination costs

 
37

Accrued restructuring costs
$
3,796

 
$
1,314


The Company expects a substantial portion of the accrued restructuring costs to be paid by the end of 2018.

Profit Improvement Plan

In February 2018, the Company announced its intention to explore strategic alternatives. In connection with exploring strategic alternatives, the Company initiated certain cost saving actions (the "Profit Improvement Plan"). As a result of the Profit Improvement Plan, the Company expects to move certain positions to lower cost locations, eliminate layers of management and rationalize facilities resulting in severance costs and the termination of certain leases and other contracts. Restructuring activities for the Profit Improvement Plan for the nine months ended September 30, 2018 were as follows (in thousands): 

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Table of Contents

 
Balance at Beginning of Period
 
Restructuring Expense
 
Cash Settlements
 
Non-Cash Settlements
 
Other
 
Balance at End of Period
Facility-related costs
$

 
$
47

 
$
(47
)
 
$

 
$

 
$

Severance costs

 
5,478

 
(2,276
)
 

 
(11
)
 
3,191

Share-based payments

 
2,575

 

 
(2,575
)
 

 

Total
$

 
$
8,100

 
$
(2,323
)
 
$
(2,575
)
 
$
(11
)
 
$
3,191


The Company expects to incur material restructuring costs in connection with the Profit Improvement Plan through the middle of 2019.

TiVo Integration Restructuring Plan

Following completion of the TiVo Acquisition, TiVo Corporation began implementing integration plans that were intended to realize operational synergies between Rovi and TiVo Solutions (the "TiVo Integration Restructuring Plan"). As a result of these integration plans, the Company eliminated duplicative positions resulting in severance costs and the termination of certain leases and other contracts. Restructuring activities related to the TiVo Integration Restructuring Plan for the nine months ended September 30, 2018 were as follows (in thousands): 
 
Balance at Beginning of Period
 
Restructuring Expense
 
Cash Settlements
 
Other
 
Balance at End of Period
Facility-related costs
$
111

 
$
280

 
$
(165
)
 
$
(39
)
 
$
187

Severance costs
448

 
127

 
(564
)
 
1

 
12

Total
$
559

 
$
407

 
$
(729
)
 
$
(38
)
 
$
199


As of September 30, 2018, the TiVo Integration Restructuring Plan is substantially complete.

Legacy Rovi and TiVo Solutions Restructuring Plans

Prior to the TiVo Acquisition, Rovi and TiVo Solutions had each initiated restructuring plans. As of September 30, 2018, the Legacy Rovi Restructuring Plan and the Legacy TiVo Solutions Restructuring Plan are complete. For the nine months ended September 30, 2018, Restructuring and asset impairment charges of $0.1 million were recognized in the Condensed Consolidated Statements of Operations related to these plans. As of September 30, 2018, accrued restructuring costs of $0.4 million are included in the Condensed Consolidated Balance Sheets related to the Legacy Rovi Restructuring Plan.

(10) Debt and Interest Rate Swaps

A summary of debt issued by or assumed by the Company was as follows (dollars in thousands):
 
 
 
 
September 30, 2018
 
December 31, 2017
 
Stated Interest Rate
Issue Date
Maturity Date
Outstanding Principal
Carrying Amount
 
Outstanding Principal
Carrying Amount
2020 Convertible Notes
0.500%
March 4, 2015
March 1, 2020
$
345,000

$
322,849

 
$
345,000

$
311,766

2021 Convertible Notes
2.000%
September 22, 2014
October 1, 2021
48

48

 
48

48

Term Loan Facility B
Variable
July 2, 2014
July 2, 2021
670,250

666,904

 
675,500

671,281

Total Long-term debt
 
 
 
$
1,015,298

989,801

 
$
1,020,548

983,095

Less: Current portion of long-term debt
 
 
 
 
7,000

 
 
7,000

Long-term debt, less current portion
 
 
 
 
$
982,801

 
 
$
976,095



25


2020 Convertible Notes

Rovi issued $345.0 million in aggregate principal of 0.500% Convertible Senior Notes that mature March 1, 2020 (the “2020 Convertible Notes”) at par pursuant to an Indenture dated March 4, 2015 (as supplemented, the "2015 Indenture"). The 2020 Convertible Notes were sold in a private placement and bear interest at an annual rate of 0.500% payable semi-annually in arrears on March 1 and September 1 of each year, commencing September 1, 2015. In connection with the TiVo Acquisition, TiVo Corporation and Rovi entered into a supplemental indenture under which TiVo Corporation became a guarantor of the 2020 Convertible Notes and the notes became convertible into TiVo Corporation common stock.

The 2020 Convertible Notes were convertible at an initial conversion rate of 34.5968 shares of TiVo Corporation common stock per $1,000 of principal of notes, which was equivalent to an initial conversion price of $28.9044 per share of TiVo Corporation common stock. The conversion rate and conversion price are subject to adjustment pursuant to the 2015 Indenture, including as a result of dividends paid by TiVo Corporation. As of September 30, 2018, the 2020 Convertible Notes are convertible at a conversion rate of 37.4422 shares of TiVo Corporation common stock per $1,000 principal of notes, which is equivalent to a conversion price of $26.7078 per share of TiVo Corporation common stock.

Holders may convert the 2020 Convertible Notes, prior to the close of business on the business day immediately preceding December 1, 2019, in multiples of $1,000 of principal under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only during such calendar quarter), if the last reported sale price of TiVo Corporation's common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 of principal of 2020 Convertible Notes for each trading day was less than 98% of the product of the last reported sale price of TiVo Corporation’s common stock and the conversion rate on each such trading day; or
on the occurrence of specified corporate events.
    
On or after December 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert the 2020 Convertible Notes, in multiples of $1,000 of principal, at any time. In addition, during the 35-day trading period following a Merger Event, as defined in the 2015 Indenture, holders may convert the 2020 Convertible Notes, in multiples of $1,000 of principal.

On conversion, a holder will receive the conversion value of the 2020 Convertible Notes converted based on the conversion rate multiplied by the volume-weighted average price of TiVo Corporation’s common stock over a specified observation period. On conversion, Rovi will pay cash up to the aggregate principal of the 2020 Convertible Notes converted and deliver shares of TiVo Corporation’s common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal of the 2020 Convertible Notes being converted.

The conversion rate is subject to adjustment in certain events, including certain events that constitute a "Make-Whole Fundamental Change" (as defined in the 2015 Indenture). In addition, if Rovi undergoes a "Fundamental Change" (as defined in the 2015 Indenture) prior to March 1, 2020, holders may require Rovi to repurchase for cash all or a portion of the 2020 Convertible Notes at a repurchase price equal to 100% of the principal of the repurchased 2020 Convertible Notes, plus accrued and unpaid interest. The conversion rate is also subject to customary anti-dilution adjustments.

The 2020 Convertible Notes are not redeemable prior to maturity by Rovi and no sinking fund is provided. The 2020 Convertible Notes are unsecured and do not contain financial covenants or restrictions on the payment of dividends, the incurrence of indebtedness or the repurchase of other securities by Rovi. The 2015 Indenture includes customary terms and covenants, including certain events of default after which the 2020 Convertible Notes may be due and payable immediately.

TiVo Corporation has separately accounted for the liability and equity components of the 2020 Convertible Notes. The initial carrying amount of the liability component was calculated by estimating the value of the 2020 Convertible Notes using TiVo Corporation’s estimated non-convertible borrowing rate of 4.75% at the time the instrument was issued. The carrying amount of the equity component, representing the value of the conversion option, was determined by deducting the liability component from the principal of the 2020 Convertible Notes. The difference between the principal of the 2020 Convertible Notes and the liability component is considered a debt discount which is being amortized to interest expense using the effective interest method over the expected term of the 2020 Convertible Notes. The equity component of the 2020 Convertible Notes was recorded as a component of Additional paid-in capital in the Condensed Consolidated Balance Sheets

26


and will not be remeasured as long as it continues to meet the conditions for equity classification. Related to the 2020 Convertible Notes, the Condensed Consolidated Balance Sheets included the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Liability component
 
 
 
Principal outstanding
$
345,000

 
$
345,000

Less: Unamortized debt discount
(19,622
)
 
(29,499
)
Less: Unamortized debt issuance costs
(2,529
)
 
(3,735
)
Carrying amount
$
322,849

 
$
311,766

 
 
 
 
Equity component
$
63,854

 
$
63,854


Components of interest expense related to the 2020 Convertible Notes included in the Condensed Consolidated Statements of Operations were as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Stated interest
$
431

 
$
431

 
$
1,294

 
$
1,294

Amortization of debt discount
3,331

 
3,179

 
9,877

 
9,428

Amortization of debt issuance costs
412

 
374

 
1,206

 
1,093

Total interest expense
$
4,174

 
$
3,984

 
$
12,377

 
$
11,815


Rovi incurred $9.3 million in transaction costs related to the issuance of the 2020 Convertible Notes which were allocated to liability and equity components based on the relative amounts calculated for the 2020 Convertible Notes at the date of issuance. Transaction costs of $7.6 million attributable to the liability component were recorded in Long-term debt, less current portion in the Condensed Consolidated Balance Sheets and are being amortized to interest expense using the effective interest method over the expected term of the 2020 Convertible Notes. Transaction costs of $1.7 million attributable to the equity component were recorded as a component of Additional paid-in capital in the Condensed Consolidated Balance Sheets.

Purchased Call Options and Sold Warrants related to the 2020 Convertible Notes

Concurrent with the issuance of the 2020 Convertible Notes in 2015, Rovi paid $64.8 million to purchase call options with respect to its common stock. The call options gave TiVo Corporation the right, but not the obligation, to purchase up to 11.9 million shares of TiVo Corporation's common stock at an exercise price of $28.9044 per share, which corresponds to the initial conversion price of the 2020 Convertible Notes, and are exercisable by TiVo Corporation on conversion of the 2020 Convertible Notes. The exercise price is subject to adjustment, including as a result of dividends paid by TiVo Corporation. As of September 30, 2018, the call options give TiVo Corporation the right, but not the obligation, to purchase up to 12.9 million shares of TiVo Corporation's common stock at an exercise price of $26.7078 per share. The call options are intended to reduce the potential dilution from conversion of the 2020 Convertible Notes. The purchased call options are separate transactions from the 2020 Convertible Notes and holders of the 2020 Convertible Notes do not have any rights with respect to the purchased call options.

Concurrent with the issuance of the 2020 Convertible Notes in 2015, Rovi received $31.3 million from the sale of warrants that provide the holder of the warrant the right, but not the obligation, to purchase up to 11.9 million shares of TiVo Corporation common stock at an exercise price of $40.1450 per share. The exercise price is subject to adjustment, including as a result of dividends paid by TiVo Corporation. As of September 30, 2018, 12.5 million warrants were outstanding with an exercise price of $37.0942 per share. The warrants are exercisable beginning June 1, 2020 and can be settled in cash or shares at TiVo Corporation's election. The warrants were entered into to offset the cost of the purchased call options. The warrants are separate transactions from the 2020 Convertible Notes and holders of the 2020 Convertible Notes do not have any rights with respect to the warrants.

The amounts paid to purchase the call options and received to sell the warrants were recorded in Additional paid-in capital in the Condensed Consolidated Balance Sheets.


27


2021 Convertible Notes

TiVo Solutions issued $230.0 million in aggregate principal of 2.0% Convertible Senior Notes that mature October 1, 2021 (the "2021 Convertible Notes") at par pursuant to an Indenture dated September 22, 2014 (as supplemented, "the 2014 Indenture"). The 2021 Convertible Notes bear interest at an annual rate of 2.0%, payable semi-annually in arrears on April 1 and October 1 of each year, commencing April 2015. On October 12, 2016, TiVo Solutions repaid $229.95 million of the par value of the 2021 Convertible Notes.

The 2021 Convertible Notes were convertible at an initial conversion rate of 56.1073 shares of TiVo Solutions common stock per $1,000 principal of notes, which was equivalent to an initial conversion price of $17.8230 per share of TiVo Solutions common stock. Following the TiVo Acquisition, the 2021 Convertible Notes were convertible at a conversion rate of 21.6181 shares of TiVo Corporation common stock per $1,000 principal of notes and $154.30 per $1,000 principal of notes, which was equivalent to a conversion price of $39.12 per share of TiVo Corporation common stock. The conversion rate and conversion price are subject to adjustment pursuant to the 2014 Indenture, including as a result of dividends paid by TiVo Corporation. As of September 30, 2018, the 2021 Convertible Notes are convertible at a conversion rate of 23.4025 shares of TiVo Corporation common stock per $1,000 principal of notes and $154.30 per $1,000 principal of notes, which is equivalent to a conversion price of $36.1372 per share of TiVo Corporation common stock.

TiVo Solutions can settle the 2021 Convertible Notes in cash, shares of common stock, or any combination thereof pursuant to the 2014 Indenture. Subject to certain exceptions, holders may require TiVo Solutions to repurchase, for cash, all or part of their 2021 Convertible Notes upon a “Fundamental Change” (as defined in the 2014 Indenture) at a price equal to 100% of the principal amount of the 2021 Convertible Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the “Fundamental Change Repurchase Date” (as defined in the 2014 Indenture). In addition, on a “Make-Whole Fundamental Change” (as defined in the 2014 Indenture) prior to the maturity date of the 2021 Convertible Notes, TiVo Solutions will, in some cases, increase the conversion rate for a holder that elects to convert its 2021 Convertible Notes in connection with such Make-Whole Fundamental Change.
    
Senior Secured Credit Facility

On July 2, 2014, Rovi Corporation, as parent guarantor, and two of its wholly-owned subsidiaries, Rovi Solutions Corporation and Rovi Guides, Inc., as borrowers, and certain of its other subsidiaries, as subsidiary guarantors, entered into a Credit Agreement (the “Credit Agreement”). After the completion of the TiVo Acquisition, TiVo Corporation became a guarantor under the Credit Agreement. The Credit Agreement provided for a (i) five-year $125.0 million term loan A facility (“Term Loan Facility A”), (ii) seven-year $700.0 million term loan B facility (“Term Loan Facility B” and together with Term Loan Facility A, the “Term Loan Facility”) and (iii) five-year $175.0 million revolving credit facility (including a letter of credit sub-facility) (the "Revolving Facility” and together with the Term Loan Facility, the “Senior Secured Credit Facility”). In September 2015, Rovi made a voluntary principal prepayment to extinguish Term Loan Facility A and elected to terminate the Revolving Facility.

Prior to the refinancing described below, loans under Term Loan Facility B bore interest, at the Company's option, at a rate equal to either LIBOR, plus an applicable margin equal to 3.00% per annum (subject to a 0.75% LIBOR floor) or the prime lending rate, plus an applicable margin equal to 2.00% per annum.

On January 26, 2017, TiVo Corporation, as parent guarantor, two of its wholly-owned subsidiaries, Rovi Solutions Corporation and Rovi Guides, Inc., as borrowers, and certain of TiVo Corporation’s other subsidiaries, as subsidiary guarantors, entered into Refinancing Agreement No. 1 with respect to Term Loan Facility B. The $682.5 million in proceeds from Refinancing Agreement No. 1 was used to repay existing loans under Term Loan Facility B