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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)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
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
,
California
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share
 
TIVO
 
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

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

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

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

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

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
July 26, 2019
Common Stock
125,779


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)

June 30, 2019
 
December 31, 2018
ASSETS
(unaudited)


Current assets:



Cash and cash equivalents
$
147,334


$
161,955

Short-term marketable securities
114,183


158,956

Accounts receivable, net
177,813


152,866

Inventory
3,777

 
7,449

Prepaid expenses and other current assets
33,772


30,806

Total current assets
476,879

 
512,032

Long-term marketable securities
25,766


73,207

Property and equipment, net
50,971


53,586

Intangible assets, net
464,367


513,770

Goodwill
1,544,439


1,544,343

Right-of-use assets
62,645

 

Other long-term assets
61,440


63,365

Total assets
$
2,686,507

 
$
2,760,303





LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Accounts payable and accrued expenses
$
110,716


$
104,981

Unearned revenue
51,269


46,072

Current portion of long-term debt
285,914


373,361

Total current liabilities
447,899

 
524,414

Unearned revenue, less current portion
51,896


54,495

Long-term debt, less current portion
619,670


618,776

Deferred tax liabilities, net
43,959


45,030

Long-term lease liabilities
63,898

 

Other long-term liabilities
13,318


24,647

Total liabilities
1,240,640

 
1,267,362

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; 127,313 shares issued and 125,156 shares outstanding as of June 30, 2019; and 125,781 shares issued and 123,975 shares outstanding as of December 31, 2018
127


126

Treasury stock, 2,157 shares and 1,806 shares as of June 30, 2019 and December 31, 2018, respectively, at cost
(35,219
)

(32,124
)
Additional paid-in capital
3,230,303


3,239,395

Accumulated other comprehensive loss
(2,573
)

(3,869
)
Accumulated deficit
(1,746,771
)

(1,710,587
)
Total stockholders’ equity
1,445,867

 
1,492,941

Total liabilities and stockholders’ equity
$
2,686,507

 
$
2,760,303


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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues, net:
 
 
 
 
 
 
 
Licensing, services and software
$
174,496

 
$
169,554

 
$
330,657

 
$
355,712

Hardware
1,676

 
3,306

 
3,750

 
6,985

Total Revenues, net
176,172

 
172,860

 
334,407

 
362,697

Costs and expenses:
 
 
 
 
 
 
 
Cost of licensing, services and software revenues, excluding depreciation and amortization of intangible assets
35,786

 
42,583

 
75,219

 
85,798

Cost of hardware revenues, excluding depreciation and amortization of intangible assets
5,768

 
4,989

 
9,861

 
10,040

Research and development
38,202

 
43,411

 
79,583

 
91,841

Selling, general and administrative
47,600

 
42,957

 
93,593

 
94,039

Depreciation
5,327

 
5,773

 
10,691

 
10,914

Amortization of intangible assets
28,184

 
40,809

 
56,362

 
82,221

Restructuring and asset impairment charges
2,676

 
1,101

 
4,489

 
5,647

Total costs and expenses
163,543

 
181,623

 
329,798

 
380,500

Operating income (loss)
12,629

 
(8,763
)
 
4,609

 
(17,803
)
Interest expense
(12,475
)
 
(12,171
)
 
(24,636
)
 
(23,805
)
Interest income and other, net
1,515

 
544

 
3,290

 
2,110

(Loss) gain on interest rate swaps
(3,364
)
 
1,841

 
(5,085
)
 
6,152

Loss on debt extinguishment
(101
)
 

 
(300
)
 

Loss from continuing operations before income taxes
(1,796
)
 
(18,549
)
 
(22,122
)
 
(33,346
)
Income tax expense
7,744

 
4,319

 
14,062

 
8,536

Loss from continuing operations, net of tax
(9,540
)
 
(22,868
)
 
(36,184
)
 
(41,882
)
Income from discontinued operations, net of tax

 
2,298

 

 
3,595

Net loss
$
(9,540
)
 
$
(20,570
)
 
$
(36,184
)
 
$
(38,287
)
 
 
 
 
 
 
 
 
Basic loss per share:
 
 
 
 
 
 
 
Continuing operations
$
(0.08
)
 
$
(0.19
)
 
$
(0.29
)
 
$
(0.34
)
Discontinued operations

 
0.02

 

 
0.03

Basic loss per share
$
(0.08
)
 
$
(0.17
)
 
$
(0.29
)
 
$
(0.31
)
Weighted average shares used in computing basic per share amounts
124,960

 
122,713

 
124,692

 
122,399

 
 
 
 
 
 
 
 
Diluted loss per share:
 
 
 
 
 
 
 
Continuing operations
$
(0.08
)
 
$
(0.19
)
 
$
(0.29
)
 
$
(0.34
)
Discontinued operations

 
0.02

 

 
0.03

Diluted loss per share
$
(0.08
)
 
$
(0.17
)
 
$
(0.29
)
 
$
(0.31
)
Weighted average shares used in computing diluted per share amounts
124,960

 
122,713

 
124,692

 
122,399

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.08

 
$
0.18

 
$
0.26

 
$
0.36


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

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Table of Contents

TIVO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(9,540
)
 
$
(20,570
)
 
$
(36,184
)
 
$
(38,287
)
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
691

 
(2,712
)
 
404

 
(1,603
)
Unrealized gains (losses) on marketable securities
 
 
 
 
 
 
 
Change in unrealized gains (losses) on marketable securities
391

 
225

 
892

 
(108
)
Less: Reclassification adjustment on sale

 

 

 
216

Other comprehensive income (loss), net of tax
1,082

 
(2,487
)
 
1,296

 
(1,495
)
Comprehensive loss
$
(8,458
)
 
$
(23,057
)
 
$
(34,888
)
 
$
(39,782
)

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


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Table of Contents

TIVO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)

 
Common stock
Treasury stock
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
 
Shares
Amount
Shares
Amount
Balance as of March 31, 2018
124,389

$
124

(1,465
)
$
(27,634
)
$
3,272,119

$
(1,746
)
$
(1,378,956
)
$
1,863,907

Net loss
 
 
 
 
 
 
(20,570
)
(20,570
)
Other comprehensive loss, net of tax
 
 
 
 
 
(2,487
)
 
(2,487
)
Issuance of restricted stock, net
139

1

 
 

 
 
1

Equity-based compensation
 
 
 
 
7,092

 
 
7,092

Dividends
 
 
 
 
(22,118
)
 
 
(22,118
)
Withholding taxes related to net share settlement of restricted awards
 
 
(92
)
(1,291
)
 
 
 
(1,291
)
Balance as of June 30, 2018
124,528

$
125

(1,557
)
$
(28,925
)
$
3,257,093

$
(4,233
)
$
(1,399,526
)
$
1,824,534

 
Common stock
Treasury stock
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
 
Shares
Amount
Shares
Amount
Balance as of March 31, 2019
126,841

$
127

(1,946
)
$
(33,521
)
$
3,232,310

$
(3,655
)
$
(1,737,231
)
$
1,458,030

Net loss
 
 
 
 
 
 
(9,540
)
(9,540
)
Other comprehensive income, net of tax
 
 
 
 
 
1,082

 
1,082

Issuance of restricted stock, net
472


 
 

 
 

Equity-based compensation
 
 
 
 
8,987

 
 
8,987

Dividends
 
 
 
 
(9,998
)
 
 
(9,998
)
Equity component related to repurchase of 2020 Convertible Notes
 
 
 
 
(996
)
 
 
(996
)
Withholding taxes related to net share settlement of restricted awards
 
 
(211
)
(1,698
)
 
 
 
(1,698
)
Balance as of June 30, 2019
127,313

$
127

(2,157
)
$
(35,219
)
$
3,230,303

$
(2,573
)
$
(1,746,771
)
$
1,445,867



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Table of Contents

 
Common stock
Treasury stock
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
 
Shares
Amount
Shares
Amount
Balance as of December 31, 2017
123,385

$
123

(1,269
)
$
(24,740
)
$
3,273,022

$
(2,738
)
$
(1,392,651
)
$
1,853,016

Cumulative effect adjustment
 
 
 
 
 
 
31,412

31,412

Net loss
 
 
 
 
 
 
(38,287
)
(38,287
)
Other comprehensive loss, net of tax
 
 
 
 
 
(1,495
)
 
(1,495
)
Issuance of common stock under employee stock purchase plan
639

1

 
 
7,574

 
 
7,575

Issuance of restricted stock, net
504

1

 
 

 
 
1

Equity-based compensation
 
 
 
 
20,726

 
 
20,726

Dividends
 
 
 
 
(44,229
)
 
 
(44,229
)
Withholding taxes related to net share settlement of restricted awards
 
 
(288
)
(4,185
)
 
 
 
(4,185
)
Balance as of June 30, 2018
124,528

$
125

(1,557
)
$
(28,925
)
$
3,257,093

$
(4,233
)
$
(1,399,526
)
$
1,824,534


 
Common stock
Treasury stock
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
 
Shares
Amount
Shares
Amount
Balance as of December 31, 2018
125,781

$
126

(1,806
)
$
(32,124
)
$
3,239,395

$
(3,869
)
$
(1,710,587
)
$
1,492,941

Net loss
 
 
 
 
 
 
(36,184
)
(36,184
)
Other comprehensive income, net of tax
 
 
 
 
 
1,296

 
1,296

Issuance of common stock under employee stock purchase plan
735

1

 
 
6,951

 
 
6,952

Issuance of restricted stock, net
797


 
 

 
 

Equity-based compensation
 
 
 
 
17,420

 
 
17,420

Dividends
 
 
 
 
(32,467
)
 
 
(32,467
)
Equity component related to repurchase of 2020 Convertible Notes
 
 
 
 
(996
)
 
 
(996
)
Withholding taxes related to net share settlement of restricted awards
 
 
(351
)
(3,095
)
 
 
 
(3,095
)
Balance as of June 30, 2019
127,313

$
127

(2,157
)
$
(35,219
)
$
3,230,303

$
(2,573
)
$
(1,746,771
)
$
1,445,867


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

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Table of Contents

TIVO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Operating activities:
 
 
 
Net loss
$
(36,184
)
 
$
(38,287
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Income from discontinued operations, net of tax

 
(3,595
)
Depreciation
10,691

 
10,914

Amortization of intangible assets
56,362

 
82,221

Amortization of convertible note discount and note issuance costs
8,000

 
7,674

Restructuring and asset impairment charges
4,489

 
5,647

Equity-based compensation
17,311

 
18,755

Change in fair value of interest rate swaps
4,709

 
(8,505
)
Loss on debt extinguishment
300

 

Deferred income taxes
(1,307
)
 
(298
)
Other operating, net
3,943

 
2,248

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(25,615
)
 
14,335

Inventory
1,280

 
1,347

Prepaid expenses and other current assets and other long-term assets
(3,794
)
 
2,942

Right-of-use assets, net of lease liabilities
9,004

 

Accounts payable and accrued expenses and other long-term liabilities
(17,882
)
 
(28,976
)
Taxes payable
(2,055
)
 
(1,178
)
Unearned revenue
2,598

 
(3,452
)
Net cash provided by operating activities
31,850

 
61,792

Investing activities:
 
 
 
Payments for purchase of short- and long-term marketable securities
(51,615
)
 
(89,012
)
Proceeds from sales or maturities of short- and long-term marketable securities
145,298

 
89,583

Payments for purchase of property and equipment
(8,863
)
 
(14,165
)
Payments for acquisition of patents
(6,850
)
 

Other investing, net
3

 
15

Net cash provided by (used in) investing activities
77,973

 
(13,579
)
Financing activities:
 
 
 
Principal payments on long-term debt
(95,963
)
 
(3,500
)
Payments for dividends
(32,545
)
 
(44,348
)
Payments for withholding taxes related to net settlement of restricted awards
(3,095
)
 
(4,185
)
Proceeds from employee stock purchase plan
6,952

 
7,575

Net cash used in financing activities
(124,651
)
 
(44,458
)
Effect of exchange rate changes on cash and cash equivalents
207

 
(530
)
Net (decrease) increase in cash and cash equivalents
(14,621
)
 
3,225

Cash and cash equivalents at beginning of period
161,955

 
128,965

Cash and cash equivalents at end of period
$
147,334

 
$
132,190


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


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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 advanced media and advertising solutions, including viewership data, sponsored discovery and in-guide advertising, 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.

On May 9, 2019, the Company announced that its Board of Directors unanimously approved a plan to separate the Product and Intellectual Property Licensing businesses (the “Separation”) into separately traded public companies. The Separation is expected to be completed through a dividend of newly issued shares of the common stock of a Company subsidiary that will hold the Product business (“ProductCo”). The Company intends that the Separation will be completed in a manner generally intended to qualify as tax-free to TiVo Corporation’s stockholders for U.S. federal income tax purposes. The Separation, expected to be completed in the first half of 2020, is subject to certain conditions, including, among others, obtaining final approval from TiVo Corporation's Board of Directors, receipt of a favorable opinion and/or rulings with respect to the tax-free nature of the transaction for federal income tax purposes and the U.S. Securities and Exchange Commission declaring ProductCo's Registration Statement effective.
    
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, 2018. The Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Loss, Condensed Consolidated Statements of Stockholders' Equity 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 ended December 31, 2019, for any future year, or for any other future interim period.


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Table of Contents

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.

Certain prior year amounts have been reclassified to conform to the current year presentation.

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.

Right-of-Use Assets and Lease Liabilities

At inception of an agreement, the agreement is reviewed to determine if it is or contains a lease. If an agreement is or contains a lease, the Company recognizes a Right-of-use asset, representing the right to use an underlying asset for the lease term, and a Lease liability, representing the obligation to make lease payments arising from a lease.

Right-of-use assets and Lease liabilities are measured based on the present value of the lease payments over the lease term. The lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The present value of future lease payments is calculated utilizing the discount rate implicit in the lease. If the discount rate implicit in the lease is not readily determinable, the present value of future lease payments is calculated utilizing the Company’s incremental borrowing rate. Right-of-use assets and Lease liabilities are subject to adjustment in the event of modifications to lease terms, changes in the probability that an option to extend or terminate a lease would be exercised and other factors. In addition, Right-of-use assets are periodically reviewed for impairment.

Certain of the Company’s lease agreements require variable payments, such as inflation-indexed measures. When a lease requires an indexed payment, Right-of-use assets and Lease liabilities are measured based on the variable rate in effect at the measurement date. All other variable fees, such as increases in lessor operating costs and usage-based fees, are excluded from the calculation of the Right-of-use assets and Lease liabilities and are expensed as incurred.

The Company has lease agreements that contain both lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) and non-lease components (e.g., common-area maintenance costs). The Company applies a practical expedient to combine lease components and non-lease components into a single lease component for recognition and measurement purposes.

Lease expense includes amortization of the Right-of-use assets and accretion of the Lease liabilities. Amortization of the Right-of-use assets is calculated as the periodic lease cost less accretion of the lease liability. The amortization period for Right-of-use assets is limited to the expected lease term. For operating leases, lease expense is recognized in the Condensed Consolidated Statements of Operations as an operating expense over the lease term on a straight-line basis. For financing leases, amortization of the Right-of-use asset is recognized as an operating expense in the Condensed Consolidated Statements of Operations over the lease term separately from accretion of the Lease liability.
    
The Company applies a practical expedient to not measure or recognize Right-of-use assets or Lease liabilities for leases with a lease term of 12 months or less and lease expense for these leases is recognized as incurred.


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Table of Contents

Recent Accounting Pronouncements

Standards Recently Adopted

In February 2016, the Financial Accounting Standards Board ("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. The Company adopted the provisions of the new lease accounting standard on January 1, 2019 using the modified retrospective transition approach and certain practical expedients as described in Note 10. On adoption, the Company recognized the present value of its existing minimum lease payments as a $66.7 million Right-of-use asset and an $81.9 million Lease liability. The difference between the Right-of-use asset and the Lease liability on adoption primarily arises from previously recorded deferred rent, which was effectively reclassified to the Right-of-use asset on adoption. As a result, there was no impact on Accumulated deficit. Results for periods beginning after December 31, 2018 are presented in accordance with the new lease accounting standard, while prior period amounts were not restated and continue to be reported in accordance with the Company's previous lease accounting policies.
    
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 was effective for the Company beginning on January 1, 2019 on a modified retrospective basis. The application of the shortened amortization period did not have a material effect on the Company's Condensed Consolidated Financial Statements

In February 2018, the FASB issued guidance on the reclassification of certain income tax effects from accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 (the "Tax Act of 2017"). Application of the reclassification guidance was effective for the Company beginning on January 1, 2019. On adoption, the Company made an accounting policy election to use the specific identification method to release income tax effects from Accumulated other comprehensive loss. The Company also made an accounting policy election not to reclassify the stranded tax effects of the Tax Act of 2017 from Accumulated other comprehensive loss to Accumulated deficit. The application of the reclassification guidance did not have a material effect on the Company's Condensed Consolidated Financial Statements

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

(2) Discontinued Operations

In the three and six months ended June 30, 2018, the Company recognized Income from discontinued operations, net of tax, of $2.3 million and $3.6 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.


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Table of Contents

(3) Financial Statement Details

Inventory

Components of Inventory were as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
Raw materials
$
641

 
$
864

Finished goods
3,136

 
6,585

Inventory
$
3,777

 
$
7,449



Property and equipment, net

Components of Property and equipment, net were as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
Computer software and equipment
$
152,863

 
$
148,935

Leasehold improvements
50,377

 
47,431

Furniture and fixtures
9,736

 
9,494

Property and equipment, gross
212,976

 
205,860

Less: Accumulated depreciation and amortization
(162,005
)
 
(152,274
)
Property and equipment, net
$
50,971

 
$
53,586


    
Accounts payable and accrued expenses

Components of Accounts payable and accrued expenses were as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
Accounts payable
$
15,155

 
$
2,180

Accrued compensation and benefits
33,539

 
46,466

Other accrued liabilities
62,022

 
56,335

Accounts payable and accrued expenses
$
110,716

 
$
104,981


(4) Revenues

Revenue Details

The following information depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors by disaggregating revenue by product offering (presented in Note 15), significant customer, contract-type and geographic area. This information includes revenue recognized from contracts with customers and revenue from other sources, including out-of-license settlements.
    
Customers representing 10% or more of Total Revenues, net were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Shaw Communications
15
%
 
(a)

 
(a)

 
(a)

AT&T Inc. ("AT&T")
10
%
 
10
%
 
11
%
 
10
%
Virgin Media
(a)

 
(a)

 
(a)

 
10
%


(a) Customer below 10% of Total Revenues, net for the period.

Substantially all revenue from Shaw Communications and AT&T is reported in the Intellectual Property Licensing segment. Substantially all revenue from Virgin Media is reported in the Product segment.


11

Table of Contents

By segment, the pattern of revenue recognition was as follows (in thousands):
 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
 
Product
 
Intellectual Property Licensing
 
Total Revenues, net
 
Product
 
Intellectual Property Licensing
 
Total Revenues, net
Goods and services transferred at a point in time
$
17,353

 
$
30,303

 
$
47,656

 
$
20,675

 
$
27,330

 
$
48,005

Goods and services transferred over time
67,854

 
36,179

 
104,033

 
72,112

 
42,594

 
114,706

Out-of-license settlements

 
24,483

 
24,483

 

 
10,149

 
10,149

Total Revenues, net
$
85,207

 
$
90,965

 
$
176,172

 
$
92,787

 
$
80,073

 
$
172,860

 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
 
Product
 
Intellectual Property Licensing
 
Total Revenues, net
 
Product
 
Intellectual Property Licensing
 
Product
Goods and services transferred at a point in time
$
38,347

 
$
58,431

 
$
96,778

 
$
57,476

 
$
55,449

 
$
112,925

Goods and services transferred over time
138,163

 
72,879

 
211,042

 
152,163

 
85,444

 
237,607

Out-of-license settlements

 
26,587

 
26,587

 

 
12,165

 
12,165

Total Revenues, net
$
176,510

 
$
157,897

 
$
334,407

 
$
209,639

 
$
153,058

 
$
362,697



Revenue by geographic area was as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
United States
$
106,836

 
$
117,176

 
$
214,674

 
$
236,111

Canada
32,488

 
11,283

 
42,547

 
20,376

United Kingdom
7,390

 
13,718

 
13,586

 
47,230

Rest of the world