Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 June 30, 2017
OR
 
o      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-37956
  _______________________________________________________________

  XPERI CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
  _______________________________________________________________
 
Delaware
 
81-4465732
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
3025 Orchard Parkway, San Jose, California
 
95134
(Address of Principal Executive Offices)
 
(Zip Code)
(408) 321-6000
(Registrant’s Telephone Number, Including Area Code)
  _______________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common stock, par value $0.001 per share
 
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:    None
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  ý No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  ý Accelerated filer  ¨ Non-accelerated filer  ¨ (Do not check if a smaller reporting company) 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  ý
The number of shares outstanding of the registrant’s common stock as of July 27, 2017 was 49,519,088 .



Table of Contents

XPERI CORPORATION
FORM 10-Q — QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 2017
TABLE OF CONTENTS
 

   
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
Table of Contents


XPERI CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for par value)
 (unaudited)

 
June 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
74,415

 
$
65,626

Short-term investments
53,533

 
47,379

Accounts receivable, net
32,603

 
15,863

Unbilled contract receivable
15,516

 
51,923

Other current assets
15,961

 
19,150

Total current assets
192,028

 
199,941

Restricted cash
8,469

 
—

Property and equipment, net
37,172

 
38,855

Intangible assets, net
485,174

 
541,879

Goodwill
386,413

 
382,963

Other assets
16,150

 
22,798

Total assets
$
1,125,406

 
$
1,186,436

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
6,580

 
$
7,531

Accrued legal fees
6,164

 
7,505

Accrued liabilities
36,723

 
29,086

Current portion of long-term debt
6,000

 
6,000

Deferred revenue
3,968

 
895

Total current liabilities
59,435

 
51,017

Long-term deferred tax liabilities
15,972

 
32,565

Long-term debt, net
575,451

 
577,239

Other long-term liabilities
17,697

 
17,830

Commitments and contingencies (Note 13)


 


Stockholders’ equity:
 
 
 
Preferred stock: $0.001 par value; 10,000 shares authorized and no shares issued and outstanding
—

 
—

Common stock: $0.001 par value; 150,000 shares authorized; 60,341 and 59,596 shares issued, respectively, and 49,511 and 48,854 shares outstanding, respectively
60

 
59

Additional paid-in capital
665,633

 
644,194

Treasury stock at cost: 10,830 and 10,742 shares of common stock at each period end, respectively
(303,525
)
 
(300,114
)
Accumulated other comprehensive loss
(94
)
 
(148
)
Retained earnings
94,777

 
163,794

Total stockholders’ equity
456,851

 
507,785

Total liabilities and stockholders’ equity
$
1,125,406

 
$
1,186,436


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

3

XPERI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
  (unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Revenue:
 
 
 
 
 
 
 
Royalty and license fees
$
91,322

 
$
67,020

 
$
158,577

 
$
126,997

Total revenue
91,322

 
67,020

 
158,577

 
126,997

Operating expenses:
 
 
 
 
 
 
 
Cost of revenue
1,303

 
52

 
2,703

 
139

Research, development and other related costs
26,313

 
10,306

 
52,325

 
20,376

Selling, general and administrative
33,003

 
11,166

 
74,208

 
22,259

Amortization expense
28,151

 
6,052

 
56,706

 
12,074

Litigation expense
8,226

 
5,292

 
18,204

 
11,842

Total operating expenses
96,996

 
32,868

 
204,146

 
66,690

Operating income (loss)
(5,674
)
 
34,152

 
(45,569
)
 
60,307

Interest expense
(7,046
)
 
—

 
(13,505
)
 
—

Other income and expense, net
220

 
802

 
266

 
1,609

Income (loss) before taxes
(12,500
)
 
34,954

 
(58,808
)
 
61,916

Provision for (benefit from) income taxes
26,557

 
11,471

 
(8,722
)
 
20,343

Net income (loss)
$
(39,057
)
 
$
23,483

 
$
(50,086
)
 
$
41,573

Basic and diluted net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.79
)
 
$
0.48

 
$
(1.02
)
 
$
0.84

Diluted
$
(0.79
)
 
$
0.48

 
$
(1.02
)
 
$
0.83

Cash dividends declared per share
$
0.20

 
$
0.20

 
$
0.40

 
$
0.40

Weighted average number of shares used in per share calculations-basic
49,475

 
48,836

 
49,261

 
49,392

Weighted average number of shares used in per share calculations-diluted
49,475

 
49,420

 
49,261

 
49,993

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


4

 
XPERI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
 (unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Net income (loss)
$
(39,057
)
 
$
23,483

 
$
(50,086
)
 
$
41,573

Other comprehensive income:
 
 
 
 
 
 
 
Net unrealized gains on available-for-sale securities, net of tax
16

 
367

 
54

 
1,830

Other comprehensive income
16

 
367

 
54

 
1,830

Comprehensive income (loss)
$
(39,041
)
 
$
23,850

 
$
(50,032
)
 
$
43,403


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


5

XPERI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(50,086
)
 
$
41,573

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization of property and equipment
3,614

 
810

Amortization of intangible assets
56,706

 
12,074

Stock-based compensation expense
15,585

 
7,568

Deferred income tax and other, net
(16,676
)
 
7,069

Amortization of debt issuance costs
1,212

 
—

Amortization of premium or discount on investments
190

 
1,789

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(16,740
)
 
163

Unbilled contract receivable, net
32,430

 
—

Other assets
11,282

 
4,321

Accounts payable
(951
)
 
131

Accrued legal fees
(1,341
)
 
2,595

Accrued and other liabilities
7,504

 
(1,231
)
Deferred revenue
3,073

 
(4,088
)
Net cash from operating activities
45,802

 
72,774

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(1,938
)
 
(2,487
)
Purchases of short-term investments
(11,975
)
 
(77,612
)
Proceeds from sales of short-term investments
1,035

 
24,285

Proceeds from maturities of short-term investments
4,650

 
84,182

Net cash from investing activities
(8,228
)
 
28,368

Cash flows from financing activities:
 
 
 
Dividend paid
(19,740
)
 
(19,747
)
Repayment of debt
(3,000
)
 
—

Proceeds from exercise of stock options
4,680

 
2,208

Proceeds from employee stock purchase program
1,155

 
1,081

Repurchase of common stock
(3,411
)
 
(63,856
)
Net cash from financing activities
(20,316
)
 
(80,314
)
Net increase in cash, cash equivalents and restricted cash
17,258

 
20,828

Cash, cash equivalents and restricted cash at beginning of period
65,626

 
22,599

Cash, cash equivalents and restricted cash at end of period
$
82,884

 
$
43,427

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
14,493

 
$
—

Income taxes paid, net of refunds
$
7,209

 
$
9,358

 
 
 
 

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


6

XPERI CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

Xperi Corporation (the "Company") completed the acquisition of DTS, Inc. ("DTS"), a publicly-traded developer of sound-based technologies, in December 2016. At the time of the acquisition, Tessera Technologies, Inc. and DTS were combined under the newly-formed Tessera Holding Corporation and shares of the combined company traded on the NASDAQ market under Tessera’s ticker symbol TSRA. During the first quarter of 2017, the Company introduced its new corporate name, Xperi Corporation, launched a new corporate logo, and began trading under the new stock ticker, XPER.

Xperi Corporation licenses its innovative technologies and inventions to global electronic device and manufacturing companies which, in turn, integrate the technologies into their own enterprise, consumer electronics and semiconductor products. The Company's technologies and solutions are widely proliferated. The Company's audio technologies have shipped in billions of devices for the home, mobile and automotive markets. The Company's imaging technologies are embedded in more than 25% of smartphones on the market today. The Company's semiconductor packaging and interconnect technologies have been licensed to more than 100 customers and have shipped in over 100 billion semiconductor chips. Key end-markets enabled by the Company's technology solutions include mobile, home, datacenter, and automotive.
The accompanying interim unaudited condensed consolidated financial statements as of June 30, 2017 and 2016, and for the three and six months then ended, have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) for interim financial information. The amounts as of December 31, 2016 have been derived from the Company’s annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to state fairly the financial position of the Company and its results of operations and cash flows as of and for the periods presented. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto as of and for the year ended December 31, 2016, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed on February 27, 2017 (the “Form 10-K”).
The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2017 or any future period and the Company makes no representations related thereto.
Reclassification
Certain reclassifications have been made to prior period balances in order to conform to the current period’s presentation.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have not been notable changes in the Company’s significant accounting policies during the six months ended June 30, 2017, as compared to the significant accounting policies described in the Form 10-K.

Recently Adopted Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-01, "Classifying the Definition of a Business." This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted for transactions for which the acquisition date occurs before the effective date of the ASU only when the transaction has not been reported in financial statements that have been issued. The Company chose to early adopt this standard effective for the year ended December 31, 2016.

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows - Restricted Cash." This ASU provides guidance on the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. The Company chose to early adopt this standard effective January 1, 2017. The Company had an $8.5 million increase in

7

restricted cash during the six months ended June 30, 2017 which would have been shown as a use of cash and cash equivalents under previous guidance.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718) (“ASU 2016-09”). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The Company adopted this update effective January 1, 2017. The cumulative impact of this update was an adjustment of $0.8 million to retained earnings.

Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” The core principle of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The FASB has further clarified this new guidance for revenue recognition by issuing ASU No. 2016-08 (principal versus agent considerations), ASU No. 2016-10 (identifying performance obligations and licensing), ASU No. 2016-12 (narrow-scope improvements and practical expedients), and ASU No. 2016-20 (technical corrections and improvements to Topic 606). The new standard is effective for the Company beginning January 1, 2018. The Company expects the standard to have a material impact on the timing of revenue recognition and expects that the standard will cause volatility in its quarterly revenue trends. Under the new standard, the current practice of many licensing companies of reporting revenue from per-unit royalty based arrangements one quarter in arrears would no longer be accepted and instead the Company will be expected to estimate per-unit royalty-based revenue. The Company also expects the standard to have a significant impact on the timing of revenue recognition associated with its fixed fee arrangements, as a majority of such revenue is expected to be recognized at the initiation of the license term. The Company is currently reviewing the accounting for its minimum guarantee contracts under the new standard to determine whether revenue recognition is recorded at the initiation of the license term or over the life of the agreement. In addition, the Company currently expects to adopt this standard using the modified retrospective method, under which the Company would record a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2018 determined on the basis of the impact of the new standard on contracts that are not completed as of January 1, 2018. The Company is currently evaluating and finalizing the full impact of this new standard on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02 "Leases (Topic 842)." The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases while the accounting by a lessor is largely unchanged from that applied under previous GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this new standard.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for the Company in the first quarter of the year ending December 31, 2020. The Company is in the process of evaluating the impact of the adoption of this new standard on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal

8

years, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the effect this standard will have on its consolidated statement of cash flows.
In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory." This ASU requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements have not been issued. The Company does not expect that the adoption of this standard will have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04 to simplify the measurement of goodwill by eliminating the Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The new guidance requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new guidance becomes effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, though early adoption is permitted.

NOTE 3 – COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

Other current assets consisted of the following (in thousands):
 
June 30, 2017
 
December 31, 2016
Prepaid income taxes
$
528

 
$
6,645

Income tax receivable
6,499

 
3,109

Interest receivable
304

 
310

Other
8,630

 
9,086

 
$
15,961

 
$
19,150


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

 
June 30, 2017
 
December 31, 2016
Equipment, furniture and other
$
29,810

 
$
28,071

Building and improvements
18,196

 
18,153

Land
5,300

 
5,300

Leasehold improvements
6,482

 
6,346

 
59,788

 
57,870

Less: accumulated depreciation and amortization
(22,616
)
 
(19,015
)
 
$
37,172

 
$
38,855


Depreciation and amortization expense for the three months ended June 30, 2017 and 2016 amounted to $1.8 million and $0.4 million , respectively.

Depreciation and amortization expense for the six months ended June 30, 2017 and 2016 amounted to $3.6 million and $0.8 million , respectively.

Accrued liabilities consisted of the following (in thousands):

9

 
June 30, 2017
 
December 31, 2016
Employee compensation and benefits
$
24,825

 
$
18,584

Accrued interest
—

 
2,200

Other
11,898

 
8,302

 
$
36,723

 
$
29,086


Accumulated other comprehensive income (loss) consisted of the following (in thousands):
 
June 30, 2017
 
December 31, 2016
Unrealized loss on available-for-sale securities, net of tax
$
(94
)
 
$
(148
)
 
$
(94
)
 
$
(148
)
NOTE 4 – FINANCIAL INSTRUMENTS
The following is a summary of marketable securities at June 30, 2017 and December 31, 2016 (in thousands):
 
 
June 30, 2017
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Values
Available-for-sale securities
 
 
 
 
 
 
 
Corporate bonds and notes
$
43,883

 
$
9

 
$
(57
)
 
$
43,835

Commercial paper
3,744

 
—

 
—

 
3,744

Treasury and agency notes and bills
6,000

 
—

 
(46
)
 
5,954

Money market funds
14,936

 
—

 
—

 
14,936

Total available-for-sale securities
$
68,563

 
$
9

 
$
(103
)
 
$
68,469

Reported in:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
$
14,936

Short-term investments
 
 
 
 
 
 
53,533

Total marketable securities
 
 
 
 
 
 
$
68,469

 
December 31, 2016
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Values
Available-for-sale securities
 
 
 
 
 
 
 
Corporate bonds and notes
$
36,590

 
$
7

 
$
(95
)
 
$
36,502

Commercial paper
5,220

 
—

 
(4
)
 
5,216

Treasury and agency notes and bills
6,029

 
—

 
(57
)
 
5,972

Money market funds
14,146

 
—

 
—

 
14,146

Total available-for-sale securities
$
61,985

 
$
7

 
$
(156
)
 
$
61,836

Reported in:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
$
14,457

Short-term investments
 
 
 
 
 
 
47,379

Total marketable securities
 
 
 
 
 
 
$
61,836

At June 30, 2017 and December 31, 2016 , the Company had $127.9 million and $113.0 million , respectively, in cash, cash equivalents and short-term investments. These balances include $59.5 million and $51.2 million in cash held in operating accounts not included in the tables above at June 30, 2017 and December 31, 2016 , respectively. The Company has $8.5 million in restricted cash which is required to secure bonds against potential damages Broadcom may face as a result of the Company enforcing the injunction granted by the court in Germany. If the injunction is reversed or vacated, all or a portion of the restricted cash could be at risk.  The Company currently estimates this cash will be restricted for longer than 12 months. See Part II, Item 1 " legal Proceedings" for additional information.

10

The gross realized gains and losses on sales of marketable securities were not significant during the three and six months ended June 30, 2017 and 2016 .
Unrealized losses (net of unrealized gains) were $0.1 million , net of tax, as of June 30, 2017 and December 31, 2016. These amounts were related to temporary fluctuations in value of the remaining available-for-sale securities and were due primarily to changes in interest rates and market and credit conditions of the underlying securities. Certain investments with a temporary decline in value are not considered to be other-than-temporarily impaired as of June 30, 2017 because the Company has the ability to hold these investments to allow for recovery, does not anticipate having to sell these securities with unrealized losses and continues to receive interest at the maximum contractual rate. For the three and six months ended June 30, 2017 and 2016 , respectively, the Company did not record any impairment charges related to its marketable securities.
The following table summarizes the fair value and gross unrealized losses related to individual available-for-sale securities at June 30, 2017 and December 31, 2016, which have been in a continuous unrealized loss position, aggregated by investment category and length of time (in thousands):
 
June 30, 2017
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Corporate bonds and notes
$
28,755

 
$
(43
)
 
$
3,810

 
$
(14
)
 
$
32,565

 
$
(57
)
Treasury and agency notes and bills
5,954

 
(46
)
 
—

 
—

 
5,954

 
(46
)
Total
$
34,709

 
$
(89
)
 
$
3,810

 
$
(14
)
 
$
38,519

 
$
(103
)
 
December 31, 2016
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Corporate bonds and notes
$
14,678

 
$
(44
)
 
$
13,230

 
$
(51
)
 
$
27,908

 
$
(95
)
Commercial paper
5,216

 
(4
)
 
—

 
—

 
5,216

 
(4
)
Treasury and agency notes and bills
5,972

 
(57
)
 
—

 
—

 
5,972

 
(57
)
Total
$
25,866

 
$
(105
)
 
$
13,230

 
$
(51
)
 
$
39,096

 
$
(156
)

The estimated fair value of marketable securities by contractual maturity at June 30, 2017 is shown below (in thousands). Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.
 
 
Estimated
Fair Value
Due in one year or less
$
38,741

Due in one to two years
15,244

Due in two to three years
14,484

Total
$
68,469

NOTE 5 – FAIR VALUE

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

11

Level 1
 
Quoted prices in active markets for identical assets.
Level 2
 
Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3
 
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
When applying fair value principles in the valuation of assets, we are required to maximize the use of quoted market prices and minimize the use of unobservable inputs. We use the fair value of our Level 1 and calculate Level 2 instruments based on the exchange traded price of similar or identical instruments, where available, or based on other observable inputs. There were no significant transfers into or out of Level 1 or Level 2 that occurred between December 31, 2016 and June 30, 2017.
The following is a list of the Company’s assets required to be measured at fair value on a recurring basis and where they were classified within the hierarchy as of June 30, 2017 (in thousands):
 
 
Fair Value
 
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
Money market funds (1)
$
14,936

 
$
14,936

 
$
—

 
$
—

Corporate bonds and notes (2)
43,835

 
—

 
43,835

 
—

Treasury and agency notes and bills (2)
5,954

 
—

 
5,954

 
—

Commercial paper (2)
3,744

 
—

 
3,744

 
—

Total Assets
$
68,469

 
$
14,936

 
$
53,533

 
$
—

The following footnotes indicate where the noted items were recorded in the Condensed Consolidated Balance Sheet at June 30, 2017 :
(1)
Reported as cash and cash equivalents.
(2)
Reported as short-term investments.

The Company also has outstanding debt at June 30, 2017 and December 31, 2016 that is considered a level 2 liability and is measured at fair value on a recurring basis. See Note 8 “ Debt ” for additional information. At June 30, 2017 and December 31, 2016, the fair value of our debt is not materially different than the outstanding principal amount.
The following is a list of the Company’s assets required to be measured at fair value on a recurring basis and where they were classified within the hierarchy as of December 31, 2016 (in thousands):
 
 
Fair Value
 
Quoted
Prices in
Active Markets
for Identical
Assets
(Level  1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
Money market funds (1)
$
14,146

 
$
14,146

 
$
—

 
$
—

Corporate bonds and notes (2)
36,502

 
—

 
36,502

 
—

Treasury and agency notes and bills (2)
5,972

 
—

 
5,972

 
—

Commercial paper (2)
5,216

 
—

 
5,216

 
—

Total Assets
$
61,836

 
$
14,146

 
$
47,690

 
$
—

 

12

The following footnotes indicate where the noted items were recorded in the Consolidated Balance Sheet at December 31, 2016 :
(1)
Reported as cash and cash equivalents.
(2)
Reported as short-term investments.

NOTE 6 - BUSINESS COMBINATION

On December 1, 2016, the Company completed its acquisition of DTS, pursuant to the Agreement and Plan of Merger, dated as of September 19, 2016. The acquisition was accounted for under the acquisition method of accounting.
Certain amounts of assets and liabilities recorded in the preliminary purchase price allocation are provisional and are subject to certain working capital and other adjustments, which could potentially be material. The Company has not yet obtained all available information necessary to finalize the measurement of all assets and liabilities acquired. In the six months ended June 30, 2017, based on additional information, the Company revised its estimates of unbilled contracts receivable relating to products licensed by DTS prior to the acquisition date of December 1, 2016 which resulted in $3.5 million , net of tax, increase to goodwill.
The Company is still waiting for additional information to finalize the measurement of unbilled contracts receivable. The measurement of acquired deferred income taxes has not been finalized as the Company is currently in the process of obtaining the necessary information to complete the analysis related to certain acquired tax attributes. In addition, the Company is waiting on information related to certain pre-acquisition income tax filing positions of DTS that will assist the Company in finalizing the amounts to record for the acquired deferred income taxes. The Company is also waiting on information to assist the Company in finalizing the recording of any assumed uncertain income tax positions. The final allocation of the purchase price is expected to be completed as soon as practicable, but no later than one year from the date of acquisition.

NOTE 7 – GOODWILL AND IDENTIFIED INTANGIBLE ASSETS

The changes to the carrying value of goodwill from January 1, 2017 through June 30, 2017 are reflected below (in thousands):

December 31, 2016
$
382,963

 
 
Purchase price adjustment related to the acquisition of DTS (1)
3,450

 
 
June 30, 2017
$
386,413

 
(2)
(1) This adjustment related to the measurement of unbilled contract receivables which were estimated at the time of acquisition, see Note 6 - " Business Combinations."
(2) Of this amount, approximately $378.7 million is allocated to our Product Licensing reporting unit and approximately $7.7 million is allocated to our Semiconductor and IP Licensing reporting unit.
Identified intangible assets consisted of the following (in thousands):
 

13

 
 
 
June 30, 2017
 
December 31, 2016
 
Average
Life
(Years)
 
Gross
Assets
 
Accumulated
Amortization
 
Net
 
Gross
Assets
 
Accumulated
Amortization
 
Net
Acquired patents / core technology
3-15
 
$
140,744

 
$
(105,589
)
 
$
35,155

 
$
140,744

 
$
(96,896
)
 
$
43,848

Existing technology
5-10
 
204,394

 
(44,385
)
 
160,009

 
203,442

 
(27,315
)
 
176,127

Customer contracts and related relationships
3-9
 
291,769

 
(41,352
)
 
250,417

 
291,769

 
(14,011
)
 
277,758

Trademarks/trade name
4-10
 
40,083

 
(3,624
)
 
36,459

 
40,083

 
(1,138
)
 
38,945

Non-competition agreements
1
 
2,231

 
(1,301
)
 
930

 
2,231

 
(186
)
 
2,045

Total amortizable intangible assets
 
 
679,221

 
(196,251
)
 
482,970

 
678,269

 
(139,546
)
 
538,723

In-process research and development
 
 
2,204

 
—

 
2,204

 
3,156

 
—

 
3,156

Total intangible assets
 
 
$
681,425

 
$
(196,251
)
 
$
485,174

 
$
681,425

 
$
(139,546
)
 
$
541,879

Amortization expense for the three months ended June 30, 2017 and 2016 amounted to $28.2 million and $6.1 million , respectively.
Amortization expense for the six months ended June 30, 2017 and 2016 amounted to $56.7 million and $12.1 million , respectively.
As of June 30, 2017 , the estimated future amortization expense of total (amortizable) intangible assets is as follows (in thousands):
2017 (remaining 6 months)
$
55,218

2018
107,586

2019
98,500

2020
86,785

2021
79,123

Thereafter
55,758

 
$
482,970

NOTE 8 - DEBT

On December 1, 2016, in connection with the consummation of the acquisition of DTS, the Company entered into a Credit Agreement (the “Credit Agreement”) by and among the Company, Royal Bank of Canada, as administrative agent and collateral agent, and the lenders party thereto.
The Credit Agreement provides for a $600 million seven-year term B loan facility (the “Term B Loan Facility”). The interest rates applicable to loans outstanding under the Credit Agreement with respect to the Term B Loan Facility are (i) until the delivery of financial statements for the first full fiscal quarter ending after December 1, 2016 equal to, at the Company's option, either a base rate plus a margin of 2.25% per annum or LIBOR plus a margin of 3.25% per annum (the “Effective Date Margin”) and (ii) thereafter, (x) the Effective Date Margin or (y) so long as the ratio of consolidated indebtedness of the Company (minus all unrestricted cash and cash equivalents) to consolidated EBITDA (subject to other customary adjustments) is equal to or less than 1.50 to 1.00 , equal to, at the Company's option either a base rate plus a margin of 2.00% per annum or LIBOR plus a margin of 3.00% per annum. Commencing March 31, 2017, the Term B Loan Facility will amortize in equal quarterly installments in aggregate quarterly amounts equal to 0.25% of the original principal amount of the Term B Loan Facility, with the balance payable on the maturity date of the Term B Loan Facility (in each case subject to adjustment for prepayments). The Term B Loan Facility matures on November 30, 2023 .
Upon the closing of the Credit Agreement, the Company borrowed $600 million under the Term B Loan facility. Net proceeds were used on December 1, 2016, together with cash and cash equivalents, to finance the acquisition of DTS.
The obligations under the Credit Agreement are guaranteed by the Company pursuant to the Guaranty (the “Guaranty”), dated December 1, 2016, among the Company, Royal Bank of Canada, as administrative agent, and the other subsidiary guarantors party thereto. The obligations under the Credit Agreement are guaranteed by substantially all of the assets of the Company

14

pursuant to the Security Agreement (the “Security Agreement”), dated December 1, 2016, among the Company, Royal Bank of Canada, as collateral agent, and the other pledgors party thereto.
The Credit Agreement contains customary events of default, upon the occurrence of which, after any applicable grace period, the lenders will have the ability to accelerate all outstanding loans thereunder.
The Credit Agreement contains customary representations and warranties and affirmative and negative covenants that, among other things, restrict the ability of the Company to create or incur certain liens, incur or guarantee additional indebtedness, merge or consolidate with other companies, transfer or sell assets and make restricted payments. These covenants are subject to a number of limitations and exceptions set forth in the Credit Agreement. The Company was in compliance with all requirements as of June 30, 2017.
At June 30, 2017, $597 million was outstanding with an interest rate, including the amortization of debt issuance costs, of 4.7% . Interest is payable quarterly. There were also $15.5 million of unamortized debt issuance costs recorded as a reduction of the long-term portion of the debt. Interest expense for the three and six months ended June 30, 2017 was $7.0 million and $ 13.5 million , respectively. Amortized debt issuance costs, which were included in the interest expense, amounted to $0.6 million and $1.2 million for the three and six months ended June 30, 2017, respectively. There were debt principal payments of $1.5 million and $3.0 million during the three and six months ended June 30, 2017, respectively. There were no interest costs in the three and six months ended June 30, 2016 since the debt was incurred in December 2016.
As of June 30, 2017, future minimum principal payments for long-term debt, including the current portion, are summarized as follows (in thousands):
2017 (remaining six months)
$
3,000

2018
6,000

2019
6,000

2020
6,000

2021
6,000

Thereafter
570,000

Total
$
597,000

Additional payments of debt principal must be made in the event of certain working capital conditions as outlined in the Credit Agreement. There are no penalties for these payments. There were no such additional payments made during the three and six months ended June 30, 2017.

NOTE 9 – NET INCOME (LOSS) PER SHARE
The Company has a share-based compensation plan under which employees may be granted share-based awards including shares of restricted stock and restricted stock units ("RSUs"). Non-forfeitable dividends are paid on unvested shares of restricted stock. No dividends are accrued or paid on unvested RSUs. As such, shares of restricted stock are considered participating securities under the two-class method of calculating earnings per share. The two-class method of calculating earnings per share did not have a material impact on the Company’s earnings per share calculation for the three and six months ended June 30, 2017 and 2016.

15

The following table sets forth the computation of basic and diluted shares (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Denominator:
 
 
 
 
 
 
 
     Weighted average common shares outstanding
49,477

 
48,853

 
49,264

 
49,412

      Less: shares of restricted stock subject to repurchase
(2
)
 
(17
)
 
(3
)
 
(20
)
Total common shares-basic
49,475

 
48,836

 
49,261

 
49,392

Effect of dilutive securities:
 
 
 
 
 
 
 
     Options


 
234

 


 
222

     Restricted stock awards and units


 
350

 


 
379

Total common shares-diluted
49,475


49,420

 
49,261

 
49,993

 
Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period, excluding any unvested restricted stock awards that are subject to repurchase. Diluted net income (loss) per share is computed using the treasury stock method to calculate the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential dilutive common shares include unvested restricted stock awards and units and incremental common shares issuable upon the exercise of stock options, less shares from assumed proceeds. The assumed proceeds calculation includes actual proceeds to be received from the employee upon exercise and the average unrecognized stock compensation cost during the period.
For the three and six months ended June 30, 2017, there was no difference in the weighted average number of common shares used for the calculation of basic and diluted loss per share as the effect of all potentially dilutive shares outstanding was anti-dilutive. A total 0.7 million and 1.1 million shares subject to stock options and restricted stock awards and units were excluded from the computation of diluted net loss per share for the three and six months ended June 30, 2017, respectively, because including them would have been anti-dilutive.
For the three and six months ended June 30, 2016, in the calculation of net income per share, 0.4 million and 0.1 million shares, respectively, subject to stock options and restricted stock awards and units were excluded from the computation of diluted net income per share as they were anti-dilutive.
NOTE 10 – STOCKHOLDERS’ EQUITY
Stock Repurchase Programs
In August 2007, the Company’s Board of Directors (“the Board”) authorized a plan to repurchase the Company’s outstanding shares of common stock dependent on market conditions, share price and other factors. There were no repurchases during the six months ended June 30, 2017 . The Company has repurchased a total of approximately 10,488,000 shares of common stock, since inception of the plan, at an average price of $27.83 per share for a total cost of $291.8 million . The shares repurchased are recorded as treasury stock and are accounted for under the cost method. No expiration date has been specified for this plan. As of June 30, 2017 , the total remaining amount available for repurchase was $158.2 million . The Company plans to continue to execute authorized repurchases from time to time under the plan.

Stock Option Plans
The 2003 Plan
As of June 30, 2017 , there were approximately 1.1 million shares reserved for future grant under the Company’s 2003 Equity Incentive Plan (the “2003 Plan”).
A summary of the stock option activity is presented below (in thousands, except per share amounts):

16

 
Options Outstanding
 
Number of
Shares Subject to Options
 
Weighted
Average
Exercise
Price Per
Share
Balance at December 31, 2016
1,332

 
$24.41
Options granted
—

 
—
Options exercised
(171
)
 
$23.22
Options canceled / forfeited / expired
(40
)
 
$36.49
Balance at June 30, 2017
1,121

 
$24.16
 
 
 
 

Restricted Stock Awards and Units
Information with respect to outstanding restricted stock awards and units as of June 30, 2017 is as follows (in thousands, except per share amounts):
 
Restricted Stock and Restricted Stock Units
 
Number of Shares
Subject to Time-
based Vesting
 
Number of Shares
Subject to
Performance-
based Vesting
 
Total Number
of Shares
 
Weighted Average
Grant Date Fair
Value Per Share
Balance at December 31, 2016
1,696

 
384

 
2,080

 
$
33.91

Awards and units granted
968

 
772

 
1,740

 
$
33.87

Awards and units vested / earned
(459
)
 
(77
)
 
(536
)
 
$
34.17

Awards and units canceled / forfeited
(97
)
 
(89
)
 
(186
)
 
$
29.39

Balance at June 30, 2017
2,108

 
990

 
3,098

 
$
34.11


Performance Awards and Units
Performance awards and units may be granted to employees or consultants based upon, among other things, the contributions, responsibilities and other compensation of the particular employee or consultant. The value and the vesting of such performance awards and units are generally linked to one or more performance goals or other specific performance goals determined by the Company, in each case on a specified date or dates or over any period or periods determined by the Company, and range from zero to 100 percent of the grant.
Employee Stock Purchase Plans
As of June 30, 2017 , there were approximately 563,002 shares reserved for grant under the Company’s 2003 Employee Stock Purchase Plan (the “ESPP”) and the International Employee Stock Purchase Plan (the “International ESPP”), collectively.
NOTE 11 – STOCK-BASED COMPENSATION EXPENSE
The effect of recording stock-based compensation expense for the three and six months ended June 30, 2017 and 2016 is as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Research, development and other related costs
$
3,437

 
$
1,487

 
$
6,134

 
$
2,870

Selling, general and administrative
5,087

 
2,441

 
9,451

 
4,698

Total stock-based compensation expense
8,524

 
3,928

 
15,585

 
7,568

Tax effect on stock-based compensation expense
(2,359
)
 
(1,106
)
 
(4,379
)
 
(2,116
)
Net effect on net income (loss)
$
6,165

 
$
2,822

 
$
11,206

 
$
5,452



17

Stock-based compensation expense categorized by various equity components for the three and six months ended June 30, 2017 and 2016 is summarized in the table below (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Employee stock options
$
586

 
$
501

 
$
1,231

 
$
1,010

Restricted stock awards and units
7,301

 
3,220

 
13,287

 
6,152

Employee stock purchase plan
637

 
207

 
1,067

 
406

Total stock-based compensation expense
$
8,524

 
$
3,928

 
$
15,585

 
$
7,568

There were no options granted in the three and six months ended June 30, 2017 and 2016.
ESPP grants occur in February and August. The following assumptions were used to value the ESPP shares for these grants:
 
 
 
 
 
 
February 2017
 
February 2016
 
Expected life (years)
 
2.0

 
2.0

 
Risk-free interest rate
 
1.2
%
 
0.8
%
 
Dividend yield
 
2.0
%
 
2.4
%
 
Expected volatility
 
28.3
%
 
30.0
%
 

NOTE 12 – INCOME TAXES

For the three months ended June 30, 2017, the Company recorded an income tax provision of $26.6 million , and for the six months ended June 30, 2017, the Company recorded an income tax benefit of $8.7 million . The income tax provision of $26.6 million for the three months ended June 30, 2017 was primarily related to a decrease in our estimated annual effective tax rate applied to actual year-to-date losses incurred that resulted in a reduction of actual tax benefit as compared to the prior quarter. The decrease in the annual effective tax rate, as compared to the prior quarter, is due to a change in the jurisdictional mix of income and level of forecasted profitability. The income tax benefit of $8.7 million for the six months ended June 30, 2017 was primarily related to losses generated in the U.S. and foreign operations offset by foreign withholding tax liability. The provision for income taxes for the three months and six months ended June 30, 2016 was $11.5 million and $20.3 million , respectively. The provision for income taxes for the three months and six months ended June 30, 2016 was primarily related to foreign withholding taxes and tax liability generated from U.S. and foreign operations. The income tax benefit for the six months ended June 30, 2017 as compared to the income tax provision during the same period in the prior year is largely attributable to losses generated from U.S. and foreign operations. The Company's provision for income taxes is based on its worldwide estimated annualized effective tax rate, except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, and the tax effect of discrete items occurring during the period. The tax for jurisdictions for which a loss is expected and no benefit can be realized for the year is based on actual taxes and tax reserves for the quarter.

As of June 30, 2017, unrecognized tax benefits were $30.5 million (which is included in long-term deferred tax and other long-term liabilities on the Condensed Consolidated Balance Sheet), of which $24.0 million would affect the effective tax rate if recognized. As of June 30, 2016, unrecognized tax benefits were $3.2 million (which is included in long-term deferred tax and other liabilities on the Condensed Consolidated Balance Sheet), of which $2.4 million would affect the effective tax rate if recognized. At this time, the Company is unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. The increase in unrecognized tax benefits as compared to the same period in the prior year is largely due to the acquisition of DTS in 2016.

It is the Company's policy to classify accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. For the three and six months ended June 30, 2017 and June 30, 2016 the Company recognized an insignificant amount of interest and penalties related to unrecognized tax benefits. As of June 30, 2017 and December 31, 2016, the Company had accrued $0.5 million and $0.5 million , respectively, of interest and penalties related to unrecognized tax benefits.
At June 30, 2017, the Company's 2012 through 2016 tax years were open and subject to potential examination in one, or more, material jurisdictions. In addition, in the U.S., any net operating losses or credits that were generated in prior years but not yet

18

utilized in a year that is closed under the statute of limitations may also be subject to examination. The Company is currently under examination by the Internal Revenue Service for tax year 2014. The Company does not have any information as a result of the ongoing examination that would give rise to a change in position around any new or existing unrecognized tax benefits. The Company completed the California Franchise Tax Board examination related to its 2011 and 2012 tax returns which resulted in minimal changes to its statement of operations. The Company is not currently under foreign income tax examination.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases office and research facilities and office equipment under operating leases which expire at various dates through 2029. Under lease agreements that contain escalating rent provisions, lease expense is recorded on a straight-line basis over the lease term. There were no material changes to our future minimum lease payments during the three and six months ended June 30, 2017. Rent expense for the three months ended June 30, 2017 and 2016 amounted to $1.5 million and $0.5 million , respectively. Rent expense for the six months ended June 30, 2017 and 2016 amounted to $3.1 million and $1.1 million , respectively.
Contingencies
At each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company is currently unable to predict the final outcome of lawsuits to which it is a party and therefore cannot determine the likelihood of loss nor estimate a range of possible loss. An adverse decision in any of these proceedings could significantly harm the Company’s business and consolidated financial position, results of operations or cash flows.

Tessera, Inc. v. Toshiba Corporation, Civil Action No. 5:15-cv-02543-BLF (N.D. Cal.)
On May 12, 2015, Tessera, Inc. filed a complaint against Toshiba Corporation (“Toshiba”) in California Superior Court. Tessera, Inc.’s complaint alleges causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief, generally alleging that Toshiba underpaid royalties and failed to cooperate with audits conducted pursuant to the parties’ license agreement.
On June 8, 2015, Toshiba removed the action to the U.S. District Court for the Northern District of California. On June 18, 2015, Toshiba filed its answer, affirmative defenses, and counterclaims to Tessera, Inc.’s complaint. Toshiba alleges counterclaims for declaratory judgment and breach of the implied warranty of good faith and fair dealing. The counterclaims seek, among other things, judicial determinations about the interpretation of the parties’ agreement, termination of the agreement, an accounting of the amount of alleged overpayments by Toshiba, restitution, and damages. On July 10, 2015, Tessera, Inc. filed its answer and affirmative defenses to Toshiba’s counterclaims. On March 17, 2016, Tessera, Inc. filed an amended complaint adding a claim for declaratory relief regarding a February 12, 2016 letter sent by Toshiba to Tessera, Inc. purporting to terminate the parties’ license agreement. On March 18, 2016, Toshiba filed its amended answer, affirmative defenses, and counterclaims. On April 4, 2016, Tessera, Inc. filed an answer to Toshiba’s amended counterclaims.
An initial summary judgment hearing on contract issues took place on September 22, 2016. On November 7, 2016, the Court entered an order granting Toshiba’s motion regarding the definition of “TCC,” and denying summary judgment on the other issues raised by the parties’ cross-motions. On December 6, 2016, Tessera, Inc. filed a motion pursuant to Federal Rule of Civil Procedure 54(b) seeking authorization to appeal the order and for a stay. On March 6, 2017, the Court granted the Rule 54(b) motion. The Court subsequently vacated the trial date and stayed the remainder of the district court proceedings.
On April 4, 2017, Tessera, Inc. filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit. Tessera, Inc.’s opening brief is due August 14, 2017, and Toshiba’s answering brief is due September 13, 2017. A hearing for oral argument has not yet been scheduled.

Other Litigation Matters
The Company and its subsidiaries are involved in litigation matters and claims in the normal course of business. In the past, the Company and its subsidiaries have litigated to enforce their respective patents and other intellectual property rights, to enforce the terms of license agreements, to protect trade secrets, to determine the validity and scope of the proprietary rights of others and to defend itself or its customers against claims of infringement or invalidity. The Company expects it or its subsidiaries will be involved in similar legal proceedings in the future, including proceedings regarding infringement of its patents, and proceedings to ensure proper and full payment of royalties by licensees under the terms of its license agreements.

19

The existing and any future legal actions may harm the Company’s business. For example, legal actions could cause an existing licensee or strategic partner to cease making royalty or other payments to the Company, or to challenge the validity and enforceability of patents owned by the Company’s subsidiaries or the scope of license agreements with the Company’s subsidiaries, and could significantly damage the Company’s relationship with such licensee or strategic partner and, as a result, prevent the adoption of the Company’s other technologies by such licensee or strategic partner. Litigation could also severely disrupt or shut down the business operations of licensees or strategic partners of the Company’s subsidiaries, which in turn would significantly harm ongoing relations with them and cause the Company to lose royalty revenue.

The costs associated with legal proceedings are typically high, relatively unpredictable, and not completely within the Company’s control. These costs may be materially higher than expected, which could adversely affect the Company’s operating results and lead to volatility in the price of its common stock. Whether or not determined in the Company’s favor or ultimately settled, litigation diverts managerial, technical, legal, and financial resources from the Company’s business operations. Furthermore, an adverse decision in any of these legal actions could result in a loss of the Company’s proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from others, limit the value of the Company’s licensed technology or otherwise negatively impact the Company’s stock price or its business and consolidated financial position, results of operations or cash flows.
NOTE 14 – SEGMENT AND GEOGRAPHIC INFORMATION
In connection with the acquisition of DTS, the Company re-evaluated its reportable segments. The Company concluded that it has two reportable segments: (1) Product Licensing and (2) Semiconductor and IP Licensing. There are certain corporate overhead costs that are not allocated to these reportable segments because these operating amounts are not considered in evaluating the operating performance of the Company’s business segments.
The Chief Executive Officer is also the Chief Operating Decision Maker (“CODM”) as defined by the authoritative guidance on segment reporting.
The Product Licensing segment, including the Company's DTS and FotoNation subsidiaries, licenses its technologies and intellectual property related to audio, digital radio and imaging solutions under the brands DTS, HD Radio and FotoNation. The Product Licensing solutions typically include the delivery of software or hardware based solutions, combined with various other intellectual property, including know how, patents, trademarks, and copyrights. Product Licensing represents revenue derived primarily from the consumer electronics market and related applications servicing the home, automotive and mobile segments.

The Semiconductor and IP Licensing segment develops and licenses semiconductor technologies and IP to manufacturers, foundries, subcontract assemblers and others.  The segment includes revenue generated from the technology and IP portfolios of Tessera, Inc. Invensas and Invensas Bonding Technologies, Inc. (formally Ziptronix, Inc.). Tessera, Inc. pioneered chip-scale packaging solutions. Invensas develops advanced semiconductor packaging and 3D interconnect solutions, including wafer bonding solutions, for applications such as smartphones, tablets, laptops, PCs, data centers and automobiles. The Company expands its technology and IP offerings in this segment through a combination of internal R&D and acquisitions.  The Company also provides engineering services to customers in the form of technology demonstrations and technology transfers to assist their evaluation and adoption of the Company's technologies.

The Company does not identify or allocate assets by reportable segment, nor does the CODM evaluate reportable segments using discrete asset information. Reportable segments do not record inter-segment revenue and accordingly there is none to report. The Company does not allocate other income and expense to reportable segments. Although the CODM uses operating income to evaluate reportable segments, operating costs included in one segment may benefit other segments.
The following table sets forth the Company’s segment revenue, operating expenses and operating income (loss) for the three and six months ended June 30, 2017 and 2016 (in thousands):


20

 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Revenue:
 
 
 
 
 
 
 
Semiconductor and IP licensing segment
$
44,960

 
$
57,648

 
$
84,514

 
$
107,782

Product licensing segment
46,362

 
9,372

 
74,063

 
19,215

Total revenue
91,322

 
67,020

 
158,577

 
126,997

Operating expenses:
 
 
 
 
 
 
 
Semiconductor and IP licensing segment
21,374

 
18,922

 
44,137

 
38,399

Product licensing segment
42,619

 
2,780

 
85,801

 
6,031

Unallocated operating expenses (1)
39,829

 
10,364

 
87,447

 
20,651

Total operating expenses
103,822

 
32,066

 
217,385

 
65,081

Operating income (loss):

 
 
 
 
 
 
Semiconductor and IP licensing segment
23,586

 
38,726

 
40,377

 
69,383

Product licensing segment
3,743

 
6,592

 
(11,738
)
 
13,184

Unallocated operating expenses (1)
(39,829
)
 
(10,364
)
 
(87,447
)
 
(20,651
)
Total operating income (loss)
$
(12,500
)
 
$
34,954

 
$
(58,808
)
 
$
61,916


(1) Unallocated operating expenses consist primarily of general and administrative expenses, such as administration, human resources, finance, information technology, corporation development and procurement. These expenses are not allocated because it is not practical to do so.
A significant portion of the Company’s revenue is derived from licensees headquartered outside of the U.S., principally in Asia, and it is expected that this revenue will continue to account for a significant portion of total revenue in future periods. The table below lists the geographic revenue for the periods indicated (in thousands):
 
 
Three Months Ended,
 
Six Months Ended,
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
U.S.
$
33,680

 
37
%
 
$
26,148

 
39
%
 
$
67,086

 
42
%
 
$
54,809

 
43
%
Korea
14,103

 
15

 
23,600

 
35

 
20,990

 
13

 
37,421

 
30

Taiwan
8,226

 
9

 
13,192

 
20

 
16,217

 
10

 
20,391

 
16

Japan
20,169

 
22

 
834

 
1

 
34,059

 
22

 
4,511

 
4

Other
15,144

 
17

 
3,246

 
5

 
20,225

 
13

 
9,865

 
7

 
$
91,322

 
100
%
 
$
67,020

 
100
%
 
$
158,577

 
100
%
 
$
126,997

 
100
%
For the three months ended June 30, 2017 and 2016, there were three and four customers, respectively, in each period that each accounted for 10% or more of total revenue. For the six months ended June 30, 2017 and 2016, there were three customers in each period that each accounted for 10% or more of total revenue.
NOTE 15 - SUBSEQUENT EVENTS

On July 21, 2017, the Board declared a cash dividend of $0.20 per share of common stock, payable on September 8, 2017 for the stockholders of record at the close of business on August 18, 2017.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited financial statements and notes thereto for the year ended December 31, 2016 found in the Form 10-K.

This Quarterly Report contains forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “could,” “would,” “may,” “intends,” “targets” and similar expressions or variations of such words are intended

21

to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report. The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to our future revenue, product development, demand, acceptance and market share, growth rate, competitiveness, gross margins, levels of research, development and other related costs, expenditures, the outcome or effects of and expenses related to litigation and administrative proceedings related to our patents, our integration of the DTS business, our intent to enforce our intellectual property, our ability to license our intellectual property, tax expenses, cash flows, our ability to liquidate and recover the carrying value of our investments, our management's plans and objectives for our current and future operations, our plans for quarterly dividends and stock repurchases, the levels of customer spending or research and development activities, general economic conditions, and the sufficiency of financial resources to support future operations and capital expenditures.

Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks, uncertainties, and changes in condition, significance, value and effect, including those discussed below under the heading “Risk Factors” within Part II, Item 1A of this Quarterly Report and other documents we file from time to time with the Securities and Exchange Commission (the “SEC”), such as our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report and are based on information currently and reasonably known to us. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

Corporate Information

Our principal executive offices are located at 3025 Orchard Parkway, San Jose, California 95134. Our telephone number is (408) 321-6000. We maintain a website at www.xperi.com. The reference to our website address does not constitute incorporation by reference of the information contained on this website.

Xperi Corporation, the Xperi Corporation logo, Tessera, the Tessera logo, DTS, the DTS logo, FotoNation, the FotoNation logo, Invensas, the Invensas logo, DigitalAperture, FaceTools, FacePower, FotoSavvy, IrisCam, LifeFocus, xFD, FD, DFD, TFD, QFD, BVA, ZiBond, DBI, DTS‑ HD , DTS Sound, DTS Studio Sound, DTS Virtual:X, DTS Neural Surround, DTS Headphone:X, DTS Play‑Fi, DTS:X and HD Radio are trademarks or registered trademarks of Xperi Corporation or its affiliated companies in the U.S. and other countries. All other company, brand and product names may be trademarks or registered trademarks of their respective companies.

In this Quarterly Report, the “Company,” “we,” “us” and “our” refer to Xperi Corporation, which operates its business through its subsidiaries. Unless specified otherwise, the financial results in this Quarterly Report are those of the Company and its subsidiaries on a consolidated basis.
Business Overview

Xperi is a publicly-traded technology company based in Silicon Valley with operations around the world. Along with its operating subsidiaries, Xperi creates, develops and licenses innovative audio, computational imaging, computer vision and semiconductor packaging and interconnect technologies. We have approximately 700 employees and over 25 years of operating experience.

We license our innovative technologies and inventions to global electronic device manufacturing companies who, in turn, integrate the technologies into their own enterprise, consumer electronics and semiconductor products. Our technologies and solutions are widely proliferated. Our audio technologies have shipped in billions of devices for the home, mobile and automotive markets. Our imaging technologies are embedded in more than 25% of the current smartphone market. Our semiconductor packaging and interconnect technologies have been licensed to more than 100 customers and have shipped in over 100 billion semiconductor chips. Key end-markets enabled by Xperi's technology solutions include mobile, home, datacenter and automotive.


22

We completed the acquisition of DTS, Inc. ("DTS"), a publicly-traded developer of sound-based technologies, in December 2016. At the time of the acquisition, Tessera Technologies, Inc. and DTS were combined under the newly-formed Tessera Holding Corporation and shares of the combined company traded on the NASDAQ market under Tessera’s ticker symbol TSRA. During the first quarter of 2017, we introduced our new corporate name, Xperi Corporation, launched a new corporate logo, and began trading under a new ticker symbol XPER.

Results of Operations
Under the generally accepted accounting principles regarding business combinations, we were unable to record $7.3 million and $38.6 million in revenue in the three and six months ended June 30, 2017, that would have been recognized by DTS if not for the acquisition. If allowed, this revenue would have had a significant impact on the operating results as described below.
Revenue
Our revenue is generated primarily from royalty and license fees. Royalty and license fees are generated from licensing the right to use our technologies or intellectual property. Licensees generally report shipment information 30 to 60 days after the end of the quarter in which such activity takes place. Since there is no reliable basis on which we can estimate our royalty revenue prior to obtaining these reports from the licensees, we generally recognize royalty revenue on a one quarter lag. The timing of revenue recognition and the amount of revenue actually recognized for each type of revenue depends upon a variety of factors, including the specific terms of each arrangement, our ability to derive fair value of each element and the nature of our deliverables and obligations. In addition, our royalty revenue will fluctuate based on a number of factors such as: (a) the timing of receipt of royalty reports; (b) the rate of adoption and incorporation of our technology by licensees; (c) the demand for products incorporating semiconductors that use our licensed technology; (d) the cyclicality of supply and demand for products using our licensed technology; (e) volume incentive pricing terms in licensing agreements that may result in significant variability in quarterly revenue recognition from customers and (f) the impact of economic downturns.
From time to time we enter into license agreements that have fixed expiration dates. Upon expiration of such agreements, we need to renew or replace these agreements in order to maintain our revenue base. We may not be able to continue licensing customers on terms favorable to us, under the existing terms or at all, which would harm our results of operations.

In the past, we have engaged in litigation and arbitration proceedings to directly or indirectly enforce our intellectual property rights and the terms of our license agreements, including proceedings to ensure proper and full payment of royalties by our current licensees and by third parties whose products incorporate our intellectual property rights.
The following table presents our historical operating results for the periods indicated as a percentage of revenue:

 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
 
Revenue:
 
 
 
 
 
 
 
 
Royalty and license fees
100
 %
 
100
%
 
100
 %
 
100
%
 
Total revenue
100

 
100

 
100

 
100

 
Operating expenses:
 
 
 
 
 
 
 
 
Cost of revenue
1

 
—

 
2

 
—

 
Research, development and other related costs
29

 
15

 
33

 
16

 
Selling, general and administrative
36

 
17

 
47

 
18

 
Amortization expense
31

 
9

 
36

 
9

 
Litigation expense
9

 
8

 
11

 
9

 
Total operating expenses
106

 
49

 
129

 
52

 
Operating income (loss)
(6
)
 
51

 
(29
)
 
48

 
Interest expense
8

 
—

 
9

 
—

 
Other income and expense, net
—

 
1

 
—

 
1

 
Income (loss) before taxes
(14
)
 
52

 
(38
)
 
49

 
Provision for (benefit from) income taxes
29

 
17

 
(6
)
 
16

 
Net income (loss)
(43
)%
 
35
%
 
(32
)%
 
33
%
 

23


Our royalty and license fees were as follows (in thousands, except for percentages):
 
 
Three Months Ended
 
 
 
 
 
June 30, 2017
 
June 30, 2016
 
Increase/
(Decrease)
 
%
Change
Royalty and license fees
$
91,322

 
$
67,020

 
$
24,302

 
36
%
 
 
 
 
 
 
 
 

The $24.3 million or 36% increase in revenue was due to our acquisition of DTS in December 2016, offset by reductions in licensing revenue from a significant expired agreement as well as seasonality in revenue timing from certain licenses. Minimum guarantee fees from DTS licensees for contracts entered into prior to the December 1, 2016 acquisition were not recorded as revenue during the three months ended June 30, 2017, as under business combination accounting guidance the earnings process was deemed to have been completed prior to the acquisition.
 
 
Six Months Ended
 
 
 
 
 
June 30, 2017
 
June 30, 2016
 
Increase/
(Decrease)
 
%
Change
Royalty and license fees
$
158,577

 
$
126,997

 
$
31,580

 
25
%
 
 
 
 
 
 
 
 

The $31.6 million or 25% increase in revenue was due to our acquisition of DTS in December 2016, offset by reductions in licensing revenue from a significant expired agreement as well as seasonality in revenue timing from certain licenses. The majority of per-unit royalties reported by DTS licensees in the first quarter of 2017, which are associated with fourth quarter 2016 shipments by these licensees, as well as minimum guarantee fees from DTS licensees for contracts entered into prior to the December 1, 2016 acquisition, were not recorded as revenue during the six months ended June 30, 2017, as under business combination accounting guidance the earnings process was deemed to have been completed prior to the acquisition.

Cost of Revenue

Cost of revenue consists of royalties paid to third parties and direct compensation and related expenses to provide non-recurring engineering services ("NRE").

Cost of revenue for the three months ended June 30, 2017 was $1.3 million, as compared to $0.1 million for the three months ended June 30, 2016. Cost of revenue for the six months ended June 30, 2017 was $2.7 million, as compared to $0.1 million for the six months ended June 30, 2016. The increases were a result of royalties paid to third parties in connection with audio revenue from the acquired DTS business in the first and second quarters of 2017.

We anticipate these expenses will continue to increase when compared to 2016 due to royalties paid to third-parties in connection with audio revenue from the acquired DTS business.

Research, Development and Other Related Costs

Research, development and other related costs consist primarily of compensation and related costs for personnel, as well as costs related to patent applications and examinations, product "tear downs" and reverse engineering, materials, supplies and equipment depreciation. Research and development is conducted primarily in-house and targets development of audio and image enhancement technologies, chip-scale and multi-chip packaging, circuitry design, 3D-IC architectures, wafer-level packaging technology, bonding technologies and machine learning. All research, development and other related costs are expensed as incurred.
Research, development and other related costs for the three months ended June 30, 2017 were $26.3 million, as compared to $10.3 million for the three months ended June 30, 2016 , an increase of $16.0 million or 155%. The increase was primarily related to a $10.8 million increase in personnel related expenses, a $2.0 million increase in stock based compensation and a

24

$1.3 million increase in outside services. These increases are a direct result of adding over 230 engineers as part of the acquisition of DTS in December 2016.
Research, development and other related costs for the six months ended June 30, 2017 were $52.3 million, as compared to $20.4 million for the six months ended June 30, 2016 , an increase of $31.9 million or 157%. The increase was primarily related to a $22.1 million increase in personnel related expenses, a $3.3 million increase in stock based compensation and a $2.5 million increase in outside services. These increases are a direct result of adding over 230 engineers as part of the acquisition of DTS in December 2016.
We believe that a significant level of research and development expenses will be required for us to remain competitive in the future.
Selling, General and Administrative

Selling expenses consist primarily of compensation and related costs for sales and marketing personnel engaged in sales and licensee support, reverse engineering personnel and services, marketing programs, public relations, promotional materials, travel, trade show expenses, and stock-based compensation expense. General and administrative expenses consist primarily of compensation and related costs for general management, information technology, finance personnel, legal fees and expenses, facilities costs, stock-based compensation expense, and professional services. Our general and administrative expenses, other than facilities related expenses, are not allocated to other expense line items.
Selling, general and administrative expenses for the three months ended June 30, 2017 were $33.0 million, as compared to $11.2 million for the three months ended June 30, 2016 , an increase of $21.8 million or 196%. The increase was primarily attributable to an increase of $11.0 million in personnel related expenses, a $3.3 million increase in outside services, a $2.6 million increase in stock based compensation and a $1.2 million increase in depreciation. These increases are a direct result of adding over 185 selling, general and administrative personnel as part of the acquisition of DTS in December 2016. Additionally, marketing expenses increased $1.9 million due primarily to expenditures associated with a trade show and marketing initiatives in Q2 2017.
Selling, general and administrative expenses for the six months ended June 30, 2017 were $74.2 million, as compared to $22.3 million for the six months ended June 30, 2016 , an increase of $51.9 million or 233%. The increase was primarily attributable to an increase of $23.4 million in personnel related expenses, an $8.5 million increase in outside services, a $4.8 million increase in stock based compensation, a $3.0 million increase in facilities and a $2.5 million increase in depreciation. These increases are a direct result of adding over 185 selling, general and administrative personnel as part of the acquisition of DTS in December 2016. Additionally, marketing expenses increased $6.6 million due primarily to two product marketing conferences related to the acquired DTS audio business, one-time expenses related to the branding of our new company name, and marketing initiatives and campaigns we undertook in the first half of 2017.

We anticipate selling, general and administrative expenses will remain higher than in the prior year due to the acquisition of DTS. While marketing expenses will remain higher in 2017 compared to 2016, we anticipate marketing expenses will decrease during the remainder of 2017 since the remaining conferences will have lower costs than those attended in the first and second quarters and the additional branding expenses are non-recurring.
Amortization Expense
Amortization expense for the three months ended June 30, 2017 was $28.2 million, as compared to $6.1 million for the three months ended June 30, 2016 , an increase of $22.1 million. This increase was primarily attributable to intangible assets recorded in connection with the DTS acquisition and the purchase of certain other intangible assets in the fourth quarter of 2016.
Amortization expense for the six months ended June 30, 2017 was $56.7 million, as compared to $12.1 million for the six months ended June 30, 2016 , an increase of $44.6 million. This increase was primarily attributable to intangible assets recorded in connection with the DTS acquisition and the purchase of certain other intangible assets in the fourth quarter of 2016.

With the acquisition of DTS, we anticipate that amortization expenses will continue to be a significant expense since we acquired approximately $479 million in intangible assets which will be amortized over the next several years. See Note 7 " Goodwill and Identified Intangible Assets" in the notes to the financial statements for additional information.
Litigation Expense

25

Litigation expense for the three months ended June 30, 2017 was $8.2 million, as compared to $5.3 million for the three months ended June 30, 2016 , an increase of $2.9 million, or 57%. This increase is primarily related to our ongoing legal proceedings with Broadcom and planning activities for potential future litigation.
Litigation expense for the six months ended June 30, 2017 was $18.2 million, as compared to $11.8 million for the six months ended June 30, 2016 , an increase of $6.4 million, or 54%. This increase is primarily related to our ongoing legal proceedings with Broadcom and planning activities for potential future litigation.
We expect that litigation expense may continue to be a material portion of our operating expenses in future periods, and may fluctuate between periods, because of planned or ongoing litigation, as described in Part II, Item 1 – Legal Proceeding s, and because of litigation planned for or initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights.
Upon expiration of our customers’ licenses, if those licenses are not renewed, litigation may become necessary to secure payment of reasonable royalties for the use of our patented technology. If we plan for or initiate such litigation, our future litigation expenses may increase.
Stock-based Compensation Expense
The following table sets forth our stock-based compensation expense for the three and six months ended June 30, 2017 and 2016 (in thousands):
 
 
Three Months Ended,
Six Months Ended,
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Research, development and other related costs
$
3,437

 
$
1,487

 
$
6,134

 
$
2,870

Selling, general and administrative
5,087

 
2,441

 
9,451

 
4,698

Total stock-based compensation expense
$
8,524

 
$
3,928

 
$
15,585

 
$
7,568

Stock-based compensation awards include employee stock options, restricted stock awards and units, and employee stock plan purchases. For the three months ended June 30, 2017, stock-based compensation expense was $8.5 million, of which $0.6 million related to employee stock options, $7.3 million related to restricted stock awards and units and $0.6 million related to employee stock plan purchases. For the three months ended June 30, 2016, stock-based compensation expense was $3.9 million, of which $0.5 million related to employee stock options, $3.2 million related to restricted stock awards and units and $0.2 million related to employee stock plan purchases. The increase in stock-based compensation for the three months ended June 30, 2017, resulted primarily from increased awards issued and headcount due to our acquisition of DTS.
For the six months ended June 30, 2017, stock-based compensation expense was $15.6 million, of which $1.2 million related to employee stock options, $13.3 million related to restricted stock awards and units and $1.1 million related to employee stock plan purchases. For the six months ended June 30, 2016, stock-based compensation expense was $7.6 million, of which $1.0 million related to employee stock options, $6.2 million related to restricted stock awards and units and $0.4 million related to employee stock plan purchases. The increase in stock-based compensation for the six months ended June 30, 2017, resulted primarily from increased awards issued and headcount due to our acquisition of DTS.
Interest Expense
Interest expense for the three and six months ended June 30, 2017 was $7.0 million and $13.5 million, respectively. There was no interest expense in the three and six months ended June 30, 2016 since the related debt was incurred in December 2016.
Other Income and Expense, Net
Other income and expense, net for the three months ended June 30, 2017 was $0.2 million, as compared to $0.8 million for the three months ended June 30, 2016 . Other income and expense, net for the six months ended June 30, 2017 was $0.3 million, as compared to $1.6 million for the six months ended June 30, 2016 . Other income was higher in the prior year due to interest income earned on higher cash and investment balances.

26

Provision for (benefit from) Income Taxes

For the three months ended June 30, 2017, the Company recorded an income tax provision of $26.6 million, and for the six months ended June 30, 2017, the Company recorded an income tax benefit of $8.7 million. The income tax provision of $26.6 million for the three months ended June 30, 2017 was primarily related to a decrease in our estimated annual effective tax rate applied to actual year-to-date losses incurred that resulted in a reduction of actual tax benefit as compared to the prior quarter. The income tax benefit of $8.7 million for the six months ended June 30, 2017 was primarily related to losses generated in the U.S. and foreign operations offset by foreign withholding tax liability. The provision for income taxes for the three months and six months ended June 30, 2016 was $11.5 million and $20.3 million, respectively. The provision for income taxes for the three months and six months ended June 30, 2016 was primarily related to foreign withholding taxes and tax liability generated from U.S. and foreign operations. The income tax benefit for the six months ended June 30, 2017 as compared to the income tax provision during the same period in the prior year is largely attributable to losses generated from U.S. and foreign operations. The Company's provision for income taxes is based on its worldwide estimated annualized effective tax rate, except for jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, and the tax effect of discrete items occurring during the period. The tax for jurisdictions for which a loss is expected and no benefit can be realized for the year is based on actual taxes and tax reserves for the quarter.

The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. As such, we determined that no valuation allowance is required on the majority of our U.S. federal deferred tax assets. In the future, we may release valuation allowance and recognize deferred state tax assets or deferred tax assets of other foreign subsidiaries depending on achieving profitability in relevant jurisdictions. We continue to monitor the likelihood that we will be able to recover our deferred tax assets, including those for which a valuation allowance is still recorded. There can be no assurance that we will generate profits in future periods enabling us to fully realize our deferred tax assets. The timing of recording a valuation allowance or the reversal of such valuation allowance is subject to objective and subjective factors that cannot be readily predicted in advance. Adjustments could be required in the future if we conclude that it is more likely than not that deferred tax assets are not recoverable. A provision for a valuation allowance could have the effect of increasing the income tax provision in the statement of operations in the period the valuation allowance is provided.

Segment Operating Results
In connection with the acquisition of DTS, we re-evaluated our reportable segments. We concluded that we have two reportable segments: (1) Semiconductor and IP Licensing and (2) Product Licensing. Quarterly results for the first and second quarters of 2016 have been recast to conform with this segment presentation. There are certain corporate overhead costs that are not allocated to these reportable segments because these operating amounts are not considered in evaluating the operating performance of the Company’s business segments.
The Chief Executive Officer is also the Chief Operating Decision Maker (“CODM”) as defined by the authoritative guidance on segment reporting.

The Product Licensing segment licenses technologies related to audio, digital radio, and imaging solutions under the brands DTS, HD Radio and FotoNation. Our Product Licensing solutions typically include the delivery of software and/or hardware based solutions to our customers or to their suppliers. Product Licensing revenue is derived primarily from the consumer electronics market and related applications servicing the home, automotive and mobile segments.
The Semiconductor and IP Licensing segment develops and licenses semiconductor technologies and intellectual property (IP) to semiconductor manufacturers, foundries, subcontract assemblers and others.  This segment includes revenue generated from technology transfer agreements and licenses to our IP. We have a deep history of developing and monetizing next-generation technologies, including chip-scale packaging solutions and low-temperature wafer bonding solutions. Today, we are actively developing 3D semiconductor packaging, interconnect and bonding solutions for products such as smartphones, tablets, laptops, PCs, and data centers. We expand technology and IP offerings through a combination of internal R&D and acquisitions.  We also provide engineering services to our customers in the form of technology demonstrations and technology transfers to assist their evaluation and adoption of our technologies.

We do not identify or allocate assets by reportable segment, nor does the CODM evaluate reportable segments using discrete asset information. Reportable segments do not record inter-segment revenue and accordingly there are none to report. Although

27

the CODM uses operating income to evaluate reportable segments, operating costs included in one segment may benefit other segments.

The following table sets forth our segments’ revenue, operating expenses and operating income (loss) (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Revenue:
 
 
 
 
 
 
 
Semiconductor and IP licensing segment
$
44,960

 
$
57,648

 
$
84,514

 
$
107,782

Product licensing segment
46,362

 
9,372

 
74,063

 
19,215

Total revenue
91,322

 
67,020

 
158,577

 
126,997

Operating expenses:
 
 
 
 
 
 
 
Semiconductor and IP licensing segment
21,374

 
18,922

 
44,137

 
38,399

Product licensing segment
42,619

 
2,780

 
85,801

 
6,031

Unallocated operating expenses (1)
39,829

 
10,364

 
87,447

 
20,651

Total operating expenses
103,822

 
32,066

 
217,385

 
65,081

Operating income (loss):
 
 
 
 

 
 
Semiconductor and IP licensing segment
23,586

 
38,726

 
40,377

 
69,383

Product licensing segment
3,743

 
6,592

 
(11,738
)
 
13,184

Unallocated operating expenses (1)
(39,829
)
 
(10,364
)
 
(87,447
)
 
(20,651
)
Total operating income (loss)
$
(12,500
)
 
$
34,954

 
$
(58,808
)
 
$
61,916


(1) Unallocated operating expenses consist primarily of general and administrative expenses, such as administration, human resources, finance, information technology, corporation development and procurement. These expenses are not allocated because it is not practical to do so.
The revenue and operating income amounts in this section have been presented on a basis consistent with GAAP applied at the segment level. Of our $386.4 million in goodwill at June 30, 2017, approximately $378.7 million is allocated to our Product Licensing reporting unit and approximately $7.7 million is allocated to our Semiconductor and IP Licensing reporting unit.
For the three months ended June 30, 2017, the unallocated expenses were $39.8 million compared to $10.4 million for the three months ended June 30, 2016. The increase of $29.4 million was primarily attributable to higher general and administrative personnel expenses that resulted from the acquisition of DTS.
For the six months ended June 30, 2017, the unallocated expenses were $87.4 million compared to $20.7 million for the six months ended June 30, 2016. The increase of $66.7 million was primarily attributable to higher general and administrative personnel expenses that resulted from the acquisition of DTS.

Product Licensing Segment
 

28


 
Three Months Ended
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
 
Revenue:
 
 
 
 
 
 
 
 
Royalty and license fees
$
46,362

 
$
9,372

 
$
74,063

 
$
19,215

 
Total revenue
46,362

 
9,372

 
74,063

 
19,215

 
Operating expenses:
 
 
 
 
 
 
 
 
Cost of revenue
1,303

 
52

 
2,703

 
139

 
Research, development and other related costs
18,710

 
2,479

 
37,757

 
5,423

 
Litigation
30

 
—

 
30

 
—

 
Amortization
22,576

 
249

 
45,311

 
469

 
Total operating expenses
42,619

 
2,780

 
85,801

 
6,031

 
Total operating income (loss)
$
3,743

 
$
6,592

 
$
(11,738
)
 
$
13,184

 


Under generally accepted accounting principles regarding business combinations, we were unable to record customer billings totaling $7.3 million and $38.6 million as revenue in the Product Licensing segment during the three and six months ended June 30, 2017, respectively. If allowed, this revenue would have had a significant impact on the operating results as described below.
Product Licensing revenue for the three months ended June 30, 2017 was $46.4 million as compared to $9.4 million for the three months ended June 30, 2016, an increase of $37.0 million. Product Licensing revenue for the six months ended June 30, 2017 was $74.1 million as compared to $19.2 million for the six months ended June 30, 2016, an increase of $54.9 million. The increase was due to revenue from licenses added through the DTS acquisition. We anticipate Product Licensing revenue for the remainder of 2017 to be higher than revenue for 2016 due principally to the DTS acquisition.
Operating expenses for the three months ended June 30, 2017 were $42.6 million and consisted of cost of revenue of $1.3 million, research, development and other related costs of $18.7 million and amortization costs of $22.6 million. The increase of $39.8 million in total operating expenses as compared to $2.8 million for the three months ended June 30, 2016 was due to the acquisition of DTS. Operating expenses for the six months ended June 30, 2017 were $85.8 million and consisted of cost of revenue of $2.7 million, research, development and other related costs of $37.8 million and amortization costs of $45.3 million. The increase of $79.8 million in total operating expenses as compared to $6.0 million for the six months ended June 30, 2016 was due to the acquisition of DTS. The increases were largely related to personnel-related costs including salary and benefits and stock based compensation from the increased headcount, as well as amortization due to the $479 million of intangible assets acquired in December 2016. We anticipate remaining 2017 operating expenses will continue to be significantly higher than 2016 as the audio business expenses and higher intangible asset amortization will be incurred for the full year.
The operating income in the three months ended June 30, 2017 was $3.7 million compared to operating income of $6.6 million in the three months ended June 30, 2016, which represented a decrease of $2.8 million, for the reasons stated above, in particular the amortization of intangible assets recorded in connection with the DTS acquisition.
The operating loss for the six months ended June 30, 2017 was $11.7 million compared to operating income of $13.2 million in the six months ended June 30, 2016, due to the reasons stated above, in particular the amortization of intangible assets recorded in connection with the DTS acquisition.

Semiconductor and IP Licensing Segment

29


 
Three Months Ended
Six Months Ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
 
Revenue:
 
 
 
 
 
 
 
 
Royalty and license fees
$
44,960

 
$
57,648

 
$
84,514

 
$
107,782

 
Total revenue
44,960

 
57,648

 
84,514

 
107,782

 
Operating expenses:
 
 
 
 
 
 
 
 
Research, development and other related costs
7,603

 
7,827

 
14,568

 
14,951

 
Litigation
8,196

 
5,292

 
18,174

 
11,842

 
Amortization
5,575

 
5,803

 
11,395

 
11,606

 
Total operating expenses
21,374

 
18,922

 
44,137

 
38,399

 
Total operating income
$
23,586

 
$
38,726

 
$
40,377

 
$
69,383

 

Semiconductor and IP Licensing segment revenue for the three months ended June 30, 2017 was $45.0 million as compared to $57.6 million for the three months ended June 30, 2016, a decrease of $12.6 million. The decrease was related to the expiration of a significant agreement.
Semiconductor and IP Licensing segment revenue for the six months ended June 30, 2017 was $84.5 million as compared to $107.8 million for the six months ended June 30, 2016, a decrease of $23.3 million. The decrease was related to the expiration of a significant agreement.
Operating expenses for the three months ended June 30, 2017 were $21.4 million and consisted of research, development and other related costs of $7.6 million, litigation costs of $8.2 million and amortization costs of $5.6 million. The increase of $2.5 million in total operating expenses as compared to $18.9 million for the three months ended June 30, 2016, resulted primarily from higher litigation costs as a result of the filing of the legal proceedings against Broadcom and planning activities for potential future litigation.
Operating expenses for the six months ended June 30, 2017 were $44.1 million and consisted of research, development and other related costs of $14.6 million, litigation costs of $18.2 million and amortization costs of $11.4 million. The increase of $5.7 million in total operating expenses as compared to $38.4 million for the six months ended June 30, 2016, resulted primarily from higher litigation costs as a result of the filing of the legal proceedings against Broadcom and planning activities for potential future litigation.
We expect that litigation expense will continue to be a material portion of the Semiconductor and IP Licensing segment’s operating expenses in future periods, and may fluctuate significantly in some periods, because of our ongoing legal actions, as described in Part II, Item 1 -Legal Proceedings , and because we may become involved in other litigation from time to time in the future in order to enforce and protect our intellectual property and contract rights.

Operating income for the three months ended June 30, 2017 and 2016 was $23.6 million and $38.7 million, respectively, which represented a decrease of $15.1 million, for the reasons stated above.

Operating income for the six months ended June 30, 2017 and 2016 was $40.4 million and $69.4 million, respectively, which represented a decrease of $29.0 million, for the reasons stated above.

Liquidity and Capital Resources
 

30

 
As of
(in thousands, except for percentages)
June 30, 2017
 
December 31, 2016
Cash and cash equivalents
$
74,415

 
$
65,626

Short-term investments
53,533

 
47,379

Total cash, cash equivalents and short-term investments
$
127,948

 
$
113,005

Percentage of total assets
11
%
 
10
%
 
 
 
 
 
Six Months Ended
 
June 30, 2017
 
June 30, 2016
Net cash from operating activities
$
45,802

 
$
72,774

Net cash from investing activities
$
(8,228
)
 
$
28,368

Net cash from financing activities
$
(20,316
)
 
$
(80,314
)
Our primary sources of liquidity and capital resources are our operating cash flows and our investment portfolio. Cash, cash equivalents and investments were $127.9 million at June 30, 2017 , an increase of $14.9 million from $113.0 million at December 31, 2016 . This increase resulted from $45.8 million in cash from operations and from $5.8 million in proceeds from the exercise of stock options and employee stock purchases. This increase was partially offset by $19.7 million in dividends paid during the first six months of 2017, $8.3 million net investing activities and $8.5 million in cash that is now considered restricted due to its potential use as bond collateral in our ongoing litigation with Broadcom. Cash and cash equivalents were $74.4 million at June 30, 2017 , an increase of $8.8 million from $65.6 million at December 31, 2016 .
Cash flows provided by operations were $45.8 million for the six months ended June 30, 2017 , primarily due to our net loss of $50.1 million being adjusted for non-cash items of depreciation of $3.6 million, amortization of intangible assets of $56.7 million, stock-based compensation expense of $15.6 million and $35.8 million in changes in operating assets and liabilities. These increases were partially offset by $16.7 million in deferred income taxes and other net.

Cash flows provided by operations were $72.8 million for the six months ended June 30, 2016, primarily due to our net income of $41.6 million being adjusted for non-cash items of amortization of intangible assets of $12.1 million, stock-based compensation expense of $7.6 million, $8.9 million in deferred taxes and other and $1.9 million in changes in operating assets and liabilities.

Net cash used in investing activities was $8.2 million for the six months ended June 30, 2017 , primarily related to the purchases of available-for-sale securities of $12.0 million and $1.9 million in capital expenditures offset by maturities and sales of short-term investments of $5.7 million.

Net cash provided by investing activities was $28.4 million for the six months ended June 30, 2016, resulting from maturities and sales of short-term investments of $108.5 million, partially offset by the purchases of available-for-sale securities of $77.6 million and the purchase of $2.5 million in property and equipment.
Net cash used in financing activities was $20.3 million for the six months ended June 30, 2017 principally due to dividend payments of $19.7 million and $3.0 million in debt repayments, offset by $5.8 million in proceeds due to the issuance of common stock under our employee stock option programs and employee stock purchase plans.
Net cash used in financing activities was $80.3 million for the six months ended June 30, 2016 due to dividend payments of $19.7 million and stock repurchases of $63.9 million, partially offset by $3.3 million in proceeds due to the issuance of common stock under our employee stock option programs and employee stock purchase plans.
The primary objectives of our investment activities are to preserve principal and to maintain liquidity while at the same time capturing a market rate of return. To achieve these objectives, we maintain a diversified portfolio of debt securities including corporate bonds and notes, municipal bonds and notes, commercial paper, treasury and agency notes and bills, certificates of deposit and money market funds. We invest excess cash predominantly in high-quality investment grade debt securities with less than three years to maturity. Our marketable securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income. The fair values for our securities are determined based on quoted market prices as of the valuation date and observable prices for similar assets.

31

We evaluate our investments periodically for possible other-than-temporary impairment and review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, and our ability and intent to hold the security until maturity on a more likely than not basis. If declines in the fair value of the investments are determined to be other-than-temporary, we report the credit loss portion of such decline in other income and expense, on a net basis, and the remaining noncredit loss portion in accumulated other comprehensive income. For the three and six months ended June 30, 2017 and 2016, no impairment charges were recorded with respect to our investments.
On December 1, 2016, we entered into a Credit Agreement which provided for a $600 million seven-year term B loan facility. The Term B Loan Facility matures on November 30, 2023. Upon the closing of the Credit Agreement, we borrowed $600 million under the Term B Loan facility. These proceeds were used on December 1, 2016, together with cash and cash equivalents, to finance the acquisition of DTS. The obligations under the Credit Agreement are guaranteed by substantially all of our assets pursuant to the Security Agreement, dated December 1, 2016, among us, Royal Bank of Canada, as collateral agent, and the other pledgors party thereto. At June 30, 2017, $597 million was outstanding under this loan facility with an interest rate, including amortization of debt issuance costs, of 4.7%. Interest is payable monthly and nominal principal payments are due quarterly. We have future minimum principal payments for our debt of $6.0 million annually through 2022 with the remaining principal balance due in 2023. We currently anticipate making accelerated principal payments commencing in late 2017 or early 2018.
In August 2007, our Board of Directors ("the Board") authorized a plan to repurchase our outstanding shares of common stock dependent on market conditions, share price and other factors. In January 2016, the Board authorized an additional $200 million in future repurchases under the plan, and as of June 30, 2017, the total amount available for repurchase under the plan was $158.2 million. No expiration has been specified for this plan. Since the inception of the plan, and through June 30, 2017, we have repurchased approximately 10.5 million shares of common stock at a total cost of $291.8 million at an average price of $27.83. There were no repurchases of common stock under the plan during the six months ended June 30, 2017.

We plan to continue to execute authorized repurchases from time to time under the plan, although we expect to decrease share repurchases during 2017 as we accumulate cash to pay down the indebtedness incurred to finance the DTS acquisition.

Since March 2015, we have paid a quarterly dividend of $0.20 per share. We anticipate that all quarterly dividends will be paid out of cash, cash equivalents and short-term investments.

We believe that based on current levels of operations and anticipated growth, our cash from operations, together with cash, cash equivalents and short-term investments currently available, will be sufficient to fund our operations, debt service, dividends and stock repurchases and acquisition needs for at least the next twelve months. Poor financial results, unanticipated expenses, unanticipated acquisitions of technologies or businesses or unanticipated strategic investments could give rise to additional financing requirements sooner than we expect. There can be no assurance that equity or debt financing will be available when needed or, if available, that such financing will be on terms satisfactory to us and not dilutive to our then-current stockholders.
Contractual Cash Obligations
 
Our operating lease obligations represent aggregate future minimum lease payments under non-cancelable facility and equipment operating leases. For our facilities leases, rent expense charged to operations differs from rent paid because of scheduled rent increases. Rent expense is calculated by amortizing total rental payments on a straight-line basis over the lease term. There have been no material changes to our future minimum lease payments in the three months ended June 30, 2017.

As of June 30, 2017, we had accrued $15.4 million of unrecognized tax benefits in other long-term liabilities related to uncertain tax positions, which includes approximately $0.5 million of interest. At this time, we are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time.
See Note 13 – " Commitments and Contingencies " of the Notes to the Condensed Consolidated Financial Statements for additional detail.
Off-Balance Sheet Arrangements
As of June 30, 2017 , we did not have any off-balance sheet arrangements as defined in item 303(a)(4)(ii) of Regulation S-K.
Critical Accounting Policies and Estimates
During the three months ended June 30, 2017 there were no significant changes in our critical accounting policies. See Note 2 – “Summary of Significant Accounting Policies ” of the Notes to the Condensed Consolidated Financial Statements for additional

32

detail. For a discussion of our critical accounting policies and estimates, see Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K.
Recent Accounting Pronouncements
See Note 2 – “Summary of Significant Accounting Policies ” of the Notes to the Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a discussion of the Company’s market risk, see Item 7A – Quantitative and Qualitative Disclosures About Market Risk in the Form 10-K.

Item 4. Controls and Procedures
Attached as exhibits to this Form 10-Q are certifications of Xperi Corporation’s Chief Executive Officer and Chief Financial Officer, which are required in accordance with Rule 13a-14 of the Exchange Act. This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications and it should be read in conjunction with the certifications, for a more complete understanding of the topics presented.
Evaluation of Controls and Procedures
Xperi Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report (the evaluation date). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were effective to provide reasonable assurance that the information relating to Xperi Corporation, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to Xperi Corporation’s management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Change in Internal Control over Financial Reporting
There has been no change in Xperi Corporation’s internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), during Xperi Corporation’s most recent quarter that has materially affected, or is reasonably likely to materially affect, Xperi Corporation’s internal control over financial reporting.
 


PART II - OTHER INFORMATION


Item 1. Legal Proceedings
Other than to the extent the proceedings described below have concluded, we cannot predict the outcome of any of the proceedings described below. An adverse decision in any of these proceedings could significantly harm our business and our consolidated financial position, results of operations, and cash flows.

Tessera, Inc. v. Toshiba Corporation, Civil Action No. 5:15-cv-02543-BLF (N.D. Cal.)

33

On May 12, 2015, Tessera, Inc. filed a complaint against Toshiba Corporation (“Toshiba”) in California Superior Court. Tessera, Inc.’s complaint alleges causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief, generally alleging that Toshiba underpaid royalties and failed to cooperate with audits conducted pursuant to the parties’ license agreement.
On June 8, 2015, Toshiba removed the action to the U.S. District Court for the Northern District of California. On June 18, 2015, Toshiba filed its answer, affirmative defenses, and counterclaims to Tessera, Inc.’s complaint. Toshiba alleges counterclaims for declaratory judgment and breach of the implied warranty of good faith and fair dealing. The counterclaims seek, among other things, judicial determinations about the interpretation of the parties’ agreement, termination of the agreement, an accounting of the amount of alleged overpayments by Toshiba, restitution, and damages. On July 10, 2015, Tessera, Inc. filed its answer and affirmative defenses to Toshiba’s counterclaims. On March 17, 2016, Tessera, Inc. filed an amended complaint adding a claim for declaratory relief regarding a February 12, 2016 letter sent by Toshiba to Tessera, Inc. purporting to terminate the parties’ license agreement. On March 18, 2016, Toshiba filed its amended answer, affirmative defenses, and counterclaims. On April 4, 2016, Tessera, Inc. filed an answer to Toshiba’s amended counterclaims.
An initial summary judgment hearing on contract issues took place on September 22, 2016. On November 7, 2016, the Court entered an order granting Toshiba’s motion regarding the definition of “TCC,” and denying summary judgment on the other issues raised by the parties’ cross-motions. On December 6, 2016, Tessera, Inc. filed a motion pursuant to Federal Rule of Civil Procedure 54(b) seeking authorization to appeal the order and for a stay. On March 6, 2017, the Court granted the Rule 54(b) motion. The Court subsequently vacated the trial date and stayed the remainder of the district court proceedings.
On April 4, 2017, Tessera, Inc. filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit. Tessera, Inc.’s opening brief is due August 14, 2017, and Toshiba’s answering brief is due September 13, 2017. A hearing for oral argument has not yet been scheduled.

Certain Semiconductor Devices, Semiconductor Device Packages, and Products Containing Same, Inv. No. 337-TA-1010 (U.S. International Trade Commission, Washington, D.C.)
On May 23, 2016, Tessera Technologies, Inc., Tessera, Inc., and Invensas Corporation (collectively, “Complainants”) filed a complaint at the U.S. International Trade Commission (“the Commission”), requesting that the Commission institute an investigation against Respondents Broadcom Limited, Broadcom Corporation, Avago Technologies Limited, Avago Technologies U.S. Inc., ARRIS International plc, ARRIS Group, Inc., ARRIS Technology, Inc., ARRIS Enterprises LLC, ARRIS Solutions, Inc., Pace Americas, LLC, Pace USA LLC, Pace Ltd., ASUSTeK Computer Inc., ASUS Computer International, HTC Corporation, HTC America, Inc., NETGEAR, Inc., Arista Networks, Inc. Comcast Cable Communications, LLC, Comcast Cable Communications Management, LLC, Comcast Business Communications, LLC, Technicolor S.A., Technicolor USA, Inc., and Technicolor Connected Home USA LLC (collectively, “Respondents”). The complaint alleges that the Respondents infringe U.S. Patent Nos. 6,849,946, 6,133,136, and 6,856,007. The complaint requests that the Commission issue a permanent limited exclusion order excluding from entry into the United States the infringing products of the Respondents. In addition, the complaint requests that the Commission issue a permanent cease and desist order prohibiting the Respondents from, among other things, importing, selling, or distributing the infringing products.

Based on the complaint, the Commission instituted Investigation No. 337-TA-1010 on June 20, 2016. The Respondents filed responses to the complaint on July 26, 2016. On September 19, 2016, the Complainants filed an amended complaint to reflect the issuance of a Certificate of Correction relating to U.S. Patent No. 6,133,136. The Respondents filed responses to the amended complaint on October 11, 2016.

The Administrative Law Judge (“ALJ”) issued a claim construction order on February 6, 2017. Fact discovery closed on December 16, 2016. Complainants and Respondents filed multiple motions for summary determination, which were largely denied with certain exceptions including the following. On February 27, 2017, the ALJ granted Comcast’s motion for summary determination of no violation of section 337 as to certain of Comcast’s rental products, and issued an initial determination in Comcast’s favor to that extent. The Commission declined to review the initial determination. Comcast remains as a Respondent in the investigation, as do products of other Respondents that were the subject of the motion. On February 27, 2017, the ALJ also granted a motion for summary determination of no violation by respondents Avago Technologies Ltd. and Avago Technologies, U.S. Inc. on the basis that the Complainants did not accuse them of any violations. The ALJ noted that because Broadcom Ltd. remains a respondent, the Commission’s remedial orders could likely be enforced against any successor to Broadcom’s allegedly infringing activities. The Complainants elected not to seek review of this order. On March 15, 2017, the ALJ granted-in-part and denied-in-part the Respondents’ motion for summary determination of non-infringement of U.S. Patent No. 6,856,007. The patent remained in the investigation in certain respects, and the Complainants elected not to seek review of this order.

34


The evidentiary hearing took place from March 27 to March 31, 2017. The ALJ issued her final initial determination on June 30, 2017. The ALJ determined that Broadcom and the other Respondents have violated section 337 of the Tariff Act. The ALJ determined that the asserted claims of U.S. Patent No. 6,849,946 are infringed by Broadcom semiconductor devices and products that contain an infringing Broadcom chip. The ALJ also determined that the asserted claims of U.S. Patent No. 6,849,946 have not been shown to be invalid and that a domestic industry has been shown to exist. With regard to U.S. Patent No. 6,133,136, the ALJ determined that the asserted claims are infringed and have not been shown to be invalid, but also determined that a domestic industry has not been shown to exist. For U.S. Patent No. 6,856,007, the ALJ determined that one of the asserted claims is infringed, but that the other two claims are not infringed, all three asserted claims are invalid, and a domestic industry has not been shown to exist. The parties filed petitions for review by the full Commission. The target date for completion of the Investigation is October 30, 2017.
Tessera, Inc., et al. v. Broadcom Corp., Case No. DED-1-16-cv-00379 (D. Del.)
On May 23, 2016, Tessera, Inc. and Invensas Corporation filed a complaint against Broadcom Corporation (“Broadcom”) in the U.S. District Court for the District of Delaware. The complaint alleges that Broadcom infringes U.S. Patent Nos. 6,133,136, 6,849,946, and 6,856,007 and requests, among other things, that Broadcom be ordered to pay compensatory damages in an amount no less than a reasonable royalty. Broadcom filed an answer to the complaint on July 14, 2016. On September 8, 2016, Tessera, Inc. and Invensas Corporation filed an amended complaint to reflect the issuance of a Certificate of Correction relating to U.S. Patent No. 6,133,136.
On July 18, 2016, Broadcom filed a motion to transfer venue and an unopposed motion to stay in light of the pending proceeding in the U.S. International Trade Commission involving the same patents. The Court granted the unopposed motion to stay on September 9, 2016, and the case is currently stayed. The Court denied the motion to transfer venue on March 21, 2017.
Tessera, Inc., et al. v. Broadcom Corp., Case No. DED-1-16-cv-00380 (D. Del.)
On May 23, 2016, Tessera, Inc. and Tessera Advanced Technologies, Inc. (collectively, “Tessera”) filed a complaint against Broadcom Corporation (“Broadcom”) in the U.S. District Court for the District of Delaware, alleging that Broadcom infringes U.S. Patent Nos. 5,666,046, 6,043,699, 6,284,563, and 6,954,001. Tessera filed an amended complaint on June 19, 2016, alleging infringement of three additional patents: U.S. Patent Nos. 6,046,076, 6,080,605, and 6,218,215. The amended complaint requests, among other things, that Broadcom be ordered to pay compensatory damages in an amount no less than a reasonable royalty. On July 14, 2016, Broadcom filed an answer to the amended complaint. On September 8, 2016, Tessera filed a second amended complaint to reflect the issuance of a Certificate of Correction relating to U.S. Patent No. 6,954,001. On September 26, 2016, Broadcom answered the second amended complaint.
On July 18, 2016, Broadcom filed a motion to transfer venue. The Court denied the motion on March 21, 2017. On June 7, 2017, the parties filed a stipulation to coordinate the claim construction process for this action with Tessera, Inc., et al. v. Avago Technologies Limited, et al ., Case No. DED-1-16-cv-1034 (D. Del.), and set a common schedule for exchange of contentions, briefings, and a joint claim construction hearing. The coordinated claim construction hearing is scheduled for February 5, 2018. The fact discovery cutoff date is March 30, 2018. A jury trial is set to begin on January 14, 2019.
Invensas Corp. v. Avago Technologies Limited, et al., Case No. DED-1-16-cv-1033 (D. Del.)
On November 7, 2016, Invensas Corporation filed a complaint against Avago Technologies Limited and Avago Technologies U.S. Inc., Emulex Corporation, LSI Corporation, and PLX Technology, Inc. (collectively “Avago”) in the U.S. District Court for the District of Delaware. The complaint alleges that Avago infringes U.S. Patent Nos. 6,849,946 and 6,133,136 and requests, among other things, that Avago be ordered to pay compensatory damages in an amount no less than a reasonable royalty. On December 6, 2016, Avago filed an unopposed motion to stay in light of the pending proceeding in the U.S. International Trade Commission involving the same patents, Inv. No. 337-TA-1010. The Court granted the unopposed motion to stay on December 7, 2016, and this action is currently stayed.
Tessera, Inc., et al. v. Avago Technologies Limited, et al., Case No. DED-1-16-cv-1034 (D. Del.)
On November 7, 2016, Tessera, Inc. and Invensas Corporation filed a complaint against Avago Technologies Limited, Avago Technologies U.S. Inc. and Avago Technologies Wireless (U.S.A) Manufacturing Inc. (collectively “Avago”) in the U.S. District Court for the District of Delaware. The complaint alleges that Avago infringes U.S. Patent Nos. 6,573,609 and 6,972,480. On January 12, 2017 Avago filed an answer to the complaint. Tessera, Inc. and Invensas Corporation filed an amended complaint on January 31, 2017 against Avago Technologies U.S. Inc., Avago Technologies Wireless (U.S.A) Manufacturing Inc., Emulex Corporation, LSI Corporation, and PLX Technology, Inc. (collectively “Defendants”) alleging

35

infringement of three additional patents, U.S. Patent Nos. 6,046,076, 6,080,605, and 6,218,215. The complaint requests, among other things, that Defendants be ordered to pay compensatory damages in an amount no less than a reasonable royalty. Defendants filed an answer to the amended complaint on March 16, 2017.
On June 7, 2017, the parties filed a stipulation to coordinate the claim construction process for this action with Tessera, Inc., et al. v. Broadcom Corp ., Case No. DED-1-16-cv-00380 (D. Del.), and set a common schedule for exchange of contentions, briefings, and a joint claim construction hearing. The claim construction hearing is scheduled for February 5, 2018. The fact discovery cutoff date is August 3, 2018. A jury trial is set to begin on June 10, 2019.
Invensas Corp. v. Mouser Electronics Inc., et al., Case No. 7 O 97/16 (Regional Court of Mannheim, Germany)
On May 23, 2016, Invensas Corporation (“Invensas”) filed a complaint against Mouser Electronics, Inc. (“Mouser”), EBV Elektronik GmbH & Co. KG, Arrow Central Europe GmbH, and Broadcom Germany GmbH in the Regional Court of Mannheim, Germany. The complaint alleges that the respondents infringe Invensas’s European Patent EP 1 186 034 B1. On August 26, 2016, the respondents filed their answer to the complaint. Invensas filed its reply on November 15, 2016, and the respondents filed a rejoinder on January 13, 2017. A bench trial took place on February 3, 2017.
On March 17, 2017, the Court issued a judgment in Invensas’ favor, finding that the respondents infringe the patent. The Court ordered that the respondents cease offering, distributing, using, or importing (or possessing for said reasons) the infringing products in Germany; recall infringing products from the German market; destroy or have destroyed infringing products in their possession in Germany; and provide an accounting of their infringing activities. The Court further ordered Invensas to post bonds of approximately €3,025,000 as security for damages that may result from the preliminary enforcement of the judgment if it is ultimately overturned. Invensas posted the required bonds.
The respondents appealed to the Higher Regional Court (“Oberlandesgericht”) Karlsruhe, Case No. 6 U 46/17. Invensas filed its response to the merits of the appeal on July 10, 2017. No hearing date has been set on the appeal.
On May 3, 2017, Invensas filed a motion to enforce the judgment and for sanctions against certain distributors, alleging that they violated the injunction. The defendants responded on June 8, 2017, and Invensas filed a reply on June 30, 2017. The defendants filed a further response on July 31, 2017.
On May 19, 2017, Invensas filed a motion to enforce the judgment and for sanctions against Mouser, for failing to adequately render accounts. Mouser responded on June 29, 2017, and Invensas filed a reply on June 30, 2017. Mouser filed a further response on July 31, 2017.
Invensas Corp. v. Broadcom Ltd., et al., Case No. 7 O 98/16 (Regional Court of Mannheim, Germany)
On May 23, 2016, Invensas filed a complaint against Broadcom Ltd. and Broadcom Corporation in the Regional Court of Mannheim, Germany, alleging infringement of Invensas’s European Patent EP 1 186 034 B1. On September 22, 2016, the respondents filed their answer to the complaint. Invensas filed its reply on November 15, 2016, and the respondents filed a rejoinder on January 13, 2017. A bench trial took place on February 3, 2017.
On March 17, 2017, the Court issued a judgment in Invensas’ favor, finding that the respondents infringe the patent. The Court ordered that the respondents cease offering, distributing, using, or importing (or possessing for said reasons) the infringing products in Germany; recall infringing products from the German market; destroy or have destroyed infringing products in their possession in Germany; and provide an accounting of their infringing activities. To make the judgment enforceable, the Court ordered Invensas to post bonds of approximately €3,550,000 as security for damages that may result from the preliminary enforcement of the judgment if it is ultimately overturned. Invensas posted the required bonds.
The respondents appealed to the Higher Regional Court (“Oberlandesgericht”) Karlsruhe, Case No. 6 U 34/17. In addition to appealing the infringement decision on the merits, the respondents filed motions seeking to stay enforcement of the judgment, and to increase the amount of the security bonds to approximately €500 million. Invensas filed its response to the merits of the appeal on May 15, 2017. On May 31, 2017, the appellate court issued an order denying the motion to stay preliminary enforcement of the judgment. On June 14, 2017, Broadcom filed another motion seeking to stay enforcement of the judgment pending the decision on its motion to raise the amount of the security bonds, and Invensas responded on June 22, 2017. A hearing on Broadcom’s motion to increase the security bonds is scheduled for September 13, 2017.
On June 21, 2017, Invensas filed motions to enforce the judgment and for sanctions, alleging that Broadcom violated the injunction, failed to render accounts, and failed to adequately recall products as required in the judgment. Broadcom’s responses are due August 4, 2017.
Avago Technologies GmbH v. Invensas Corp. (German Federal Patent Court, Germany)

36

On August 25, 2016, Avago Technologies GmbH, a German affiliate of Broadcom Ltd., filed a nullity action against the German part of European patent EP 1 186 034 B1 in the German Federal Patent Court. The complaint alleges that the patent was neither new nor inventive over prior art and that certain claims are not disclosed in a way to enable the person skilled in the art to practice the invention. The complaint further alleges that the patent’s priority was invalidly claimed. It requests that the German part of the patent be nullified. Invensas filed the grounds for its opposition on May 30, 2017. The hearing is scheduled for January 25, 2018.
Invensas Corp. v. Broadcom Ltd., et al., Case No. KG/RK 16-912 (District Court of The Hague, Netherlands)
On May 23, 2016, Invensas filed a writ of summons against Broadcom Ltd., Broadcom Corporation, Broadcom Netherlands B.V., Broadcom Communications Netherlands B.V., EBV Elektronik GmbH & Co. KG, Arrow Central Europe GmbH, and Mouser Electronics Netherlands B.V. in the District Court of The Hague, Netherlands. The complaint alleges that the defendants infringe Invensas’s European Patent EP (NL) 1 186 034 B1, and requests, among other things, that the defendants cease and desist any infringement of the patent in suit in the Netherlands; inform all persons/entities to whom the defendants delivered, sold, or offered for sale any infringing products that they will no longer do so; recall allegedly infringing products; and pay damages.

The defendants filed a statement of answer to the writ of summons, and a counterclaim of invalidity, on November 9, 2016. Invensas filed its statement of answer to the defendants’ counterclaim on January 4, 2017. A bench trial is scheduled for November 3, 2017.
Patent Office Proceedings

U.S. Patent No. 5,666,046
On January 30, 2017, Broadcom Corporation filed with the PTAB a petition for inter partes review of U.S. Patent No. 5,666,046 (“the ’046 patent”).  The petition requests a determination that claims 1-22 of the ’046 patent are unpatentable.  Tessera Advanced Technologies, Inc. filed its preliminary response on May 2, 2017. On July 27, 2017, the PTAB issued a decision denying institution of the petition in its entirety.

U.S. Patent No. 6,043,699
On October 31, 2016, Broadcom Corporation filed with the PTAB a petition for inter partes review of U.S. Patent No. 6,043,699 (“the ’699 patent”).  The petition requests a determination that claims 1-19 of the ’699 patent are unpatentable. Tessera Advanced Technologies, Inc. filed its preliminary response on February 10, 2017. On May 5, 2017, the PTAB instituted the petition on Claims 1-19. Tessera Advanced Technologies’ response to the petition is due August 10, 2017. Broadcom’s reply is due November 10, 2017. The oral argument is scheduled for February 8, 2018.
 
U.S. Patent No. 6,046,076
On June 19, 2017, Broadcom Corporation filed with the PTAB a petition for inter partes review of U.S. Patent No. 6,046,076 (“the ’076 patent”). The petition requests a determination that claims 1-4, 6, 10, and 19 of the ’076 patent are unpatentable. Tessera, Inc.’s preliminary response is due October 25, 2017. The PTAB has not instituted the petition or issued a notice of filing date. No hearing date has been set.
 
U.S. Patent No. 6,080,605
On June 19, 2017, Broadcom Corporation filed with the PTAB a petition for inter partes review of U.S. Patent No. 6,080,605 (“the ’605 patent”). The petition requests a determination that claims 1-3 of the ’605 patent are unpatentable. Tessera, Inc.’s preliminary response is due October 20, 2017. The PTAB has not instituted the petition or issued a notice of filing date. No hearing date has been set.
 
U.S. Patent No. 6,218,215
On June 19, 2017, Broadcom Corporation filed with the PTAB a petition for inter partes review of U.S. Patent No. 6,218,215 (“the ’215 patent”). The petition requests a determination that claims 1, 5, 6, 9-10 and 12-13 of the ’215 patent are unpatentable. Tessera, Inc.’s preliminary response is due October 24, 2017. The PTAB has not instituted the petition or issued a notice of filing date. No hearing date has been set.

U.S. Patent No. 6,232,231
On January 31, 2017, Broadcom Ltd. filed with the PTAB a petition for inter partes review of U.S. Patent No. 6,232,231 (“the ’231 patent”).  The petition requests a determination that claims 1-16 of the ’231 patent are unpatentable.  Invensas filed its preliminary response May 2, 2017. On July 25, 2017, the PTAB issued a decision denying institution of the petition in its entirety. This matter is now concluded.

37

U.S. Patent No. 6,849,946
On October 18, 2016, Broadcom Ltd., Broadcom Corporation, Avago Technologies, Ltd., and Avago Technologies U.S. Inc. filed with the Patent Trial and Appeal Board (“PTAB”) of the U.S. Patent and Trademark Office (“PTO”) a petition for inter partes review of U.S Patent No. 6,849,946 (“the ’946 patent”). The petition requested a determination that claims 16-20, and 22 of the ’946 patent are unpatentable. On January 27, 2017, Invensas filed a preliminary response to the petition. On March 15, 2017, the PTAB issued a decision denying institution of the petition in its entirety. On April 14, 2017, Broadcom filed a request for rehearing. On May 3, 2017, the PTAB denied Broadcom's request for rehearing. This matter is now concluded.

U.S. Patent No. 6,278,653
On October 31, 2016, Broadcom Ltd. filed with the PTAB a petition for inter partes review of U.S. Patent No. 6,278,653 (“the ’653 patent”).  The petition requests a determination that claims 1-20 of the ’653 patent are unpatentable. Invensas filed its preliminary response on February 10, 2017. On April 26, 2017, the PTAB instituted the petition on Claims 1-20. Invensas’ response to the petition is due July 11, 2017. Broadcom’s reply is due September 26, 2017. The oral argument is scheduled for December 5, 2017.
U.S. Patent No. 6,465,893
On February 15, 2007, Siliconware Precision Industries Co. Ltd and Siliconware USA Inc. (collectively “SPIL”) filed with the U.S. Patent and Trademark Office (“PTO”) a request for inter partes reexamination relating to U.S Patent No. 6,465,893. On May 4, 2007, the PTO granted the request. On February 15, 2008, the PTO issued an official action, denominated as an action closing prosecution, rejecting a number of patent claims of U.S. Patent No. 6,465,893.
Tessera, Inc. and SPIL appealed. On December 21, 2012, the Patent Trial and Appeal Board (“PTAB”) issued a Decision on Appeal, affirming the Examiner’s previous holding of unpatentability as to some claims, reversing the Examiner’s favorable decision of patentability as to other claims by rejecting those claims on new grounds of rejection, and affirming the Examiner’s favorable decision of patentability as to still other claims. On May 9, 2013, SPIL withdrew from the inter partes reexamination.
On June 25, 2013, the PTAB issued an Order remanding the proceeding to the Examiner for consideration of certain new evidence submitted by Tessera, Inc. On July 17, 2013, the Examiner issued a determination recommending that the PTAB maintain certain grounds of rejection in its December 21, 2012 decision as to certain claims, and recommended that the board withdraw other grounds of rejection as to certain claims.
On November 14, 2014, the PTAB issued a decision affirming the Examiner’s July 17, 2013 determinations, therefore maintaining rejections of certain of the claims subject to reexamination. Tessera, Inc. appealed, and subsequently voluntarily dismissed its appeal. On April 7, 2015, the Court of Appeals issued a mandate to the PTO confirming dismissal of the appeal. On June 14, 2017, the PTAB issued a notice of intent to issue an inter partes reexamination certificate implementing the Court of Appeals’ decision.
U.S. Patent No. 6,847,107
On February 10, 2017, Broadcom Ltd. filed with the PTAB a petition for inter partes review of U.S. Patent No. 6,847,107. The petition requests a determination that claims 1-8 of the ’107 patent are unpatentable.  The '107 Patent has expired and is not the subject of any related proceeding. Accordingly, on June 10, 2017, Tessera, Inc. filed a request to cancel claims 1-8. On June 19, 2017, the PTAB granted Tessera's request and terminated the proceeding. This matter is now concluded.
 
U.S. Patent No. 6,856,007
On May 24, 2017, Broadcom Corporation filed with the PTAB a petition for inter partes review of U.S. Patent No. 6,856,007 (“the ’007 patent”). The petition requests a determination that claims 1, 11-13, 16, 16 and 18 of the ’007 patent are unpatentable. Tessera, Inc.’s preliminary response is due September 7, 2017. The PTAB has not instituted the petition. No hearing date has been set.
 
U.S. Patent No. 6,954,001
On May 24, 2017, Broadcom Corporation filed with the PTAB a petition for inter partes review of U.S. Patent No. 6,954,001 (“the ’001 patent”). The petition requests a determination that claims 1-18 of the ’001 patent are unpatentable. Tessera Advanced Technologies, Inc.’s preliminary response is due September 7, 2017. The PTAB has not instituted the petition.  No hearing date has been set.

U.S. Patent No. 7,671,474
On December 6, 2016, Broadcom Corporation filed with the PTAB a petition for inter partes review of U.S. Patent No. 7,671,474 (“the ’474 patent”).  The petition requests a determination that claims 1-11 of the ’474 patent are unpatentable.  Invensas filed its preliminary response on April 6, 2017. On July 3, 2017, the PTAB issued a decision denying institution of the petition in its entirety. This matter is now concluded.

38


U.S. Patent No. 7,809,393
On January 20, 2017, Broadcom Ltd. filed with the PTAB a petition for inter partes review of U.S. Patent No. 7,809,393 (“the ’393 patent”). The petition requests a determination that claims 1-20 of the ’393 patent are unpatentable.  Tessera Advanced Technologies, Inc. (“TATI”) filed its preliminary response on May 2, 2017. On July 28, 2017, the PTAB instituted the petition on claims 1-3, 5, 6, 8, 10-15, and 17-19.  The PTAB denied the petition with respect to claims 4, 7, 9, 16, and 20. TATI’s response to the petition is due November 1, 2017. Broadcom’s reply is due February 1, 2018. TATI’s reply is due March 6, 2018. The oral argument is scheduled for May 2, 2018. No hearing date has been set.


Item 1A. Risk Factors
Our revenue is concentrated in a limited number of customers and if we lose any of these customers, or these customers do not pay us, our revenue could decrease substantially.
We earn a significant amount of our revenue from a limited number of customers. For the three and six months ended June 30, 2017, there were three customers in each period that each accounted for 10% or more of total revenue. We expect that a significant portion of our revenue will continue to come from a limited number of customers for the foreseeable future. If we lose any of these customers, or these customers do not pay us, our revenue could decrease substantially. For example, in February of 2017 we announced that we were seeking to relicense a significant semiconductor customer whose license had expired at the end of 2016. In addition, a significant portion of our recurring revenue is the result of structured payment terms in connection with the settlement of litigation matters, including our settlements with Amkor Technology, Inc. and Powertech Technology Inc. If we are unable to replace the revenue from an expiring license or at the end of structured payment terms of a settlement agreement with similar revenue from other customers, our royalty revenue could be adversely impacted as compared to periods prior to such expiration or the end of such payment terms.
From time to time we enter into license agreements that have fixed expiration dates and if, upon expiration or termination, we are unable to renew or replace such license agreements on terms favorable to us, our results of operations could be harmed.
From time to time we enter into license agreements that have fixed expiration dates. Upon expiration of such agreements we need to renew or replace these agreements in order to maintain our revenue base. If we are unable to replace the revenue from an expiring license, either through a renewal or with similar revenue from other customers, our royalty revenue could be adversely impacted as compared to periods prior to such expiration.
Furthermore, we may not be able to continue licensing customers on terms favorable to us, under the existing terms or at all, which would harm our results of operations. While we have expanded our licensable technology portfolio through internal development and patents purchased from third parties, there is no guarantee that these measures will lead to continued royalties. If we fail to continue to do business with our current licensees, our business would be materially adversely affected.
The success of our patent licensing business is dependent on the quality of our patent assets and our ability to create and implement new technologies or expand our licensable technology through acquisitions.
We derive a significant portion of our revenue from patent licenses and royalties, including structured settlement payments. The success of our patent licensing business depends on our ability to continue to develop and acquire high quality patents. We devote significant resources to developing new technologies and to sourcing and acquiring patents to address the evolving needs of the semiconductor and the consumer and communication electronics industries, and we must continue to do so in the future to remain competitive. Developments in our technologies are inherently complex, and require long development cycles and a substantial investment before we can determine their commercial viability. Moreover, competition for acquiring high quality patents is intense and there is no assurance that we can continue to acquire such patents on favorable terms. We may not be able to develop and market new or improved technologies, or to develop or acquire high quality patents, in a timely or commercially acceptable fashion. Furthermore, our acquired and developed patents will expire in the future. Our current U.S. issued patents expire at various times through 2035. We need to develop or acquire successful innovations and obtain revenue-generating patents on those innovations before our current patents expire, and our failure to do so would significantly harm our business, financial position, results of operations and cash flows.
The success of the DTS acquisition will depend on our ability to realize the anticipated benefits from integrating the acquired business into our operations.
We may fail to realize the anticipated benefits from our integration of DTS on a timely basis, or at all, for a variety of reasons, including the following:

39

•
difficulties integrating DTS’s audio technologies with FotoNation’s imaging technologies in a manner that creates technical synergies or that yields new or improved product applications in our targeted markets;
•
failure to timely realize our projected cost savings or operating synergies as a result of the DTS acquisition;
•
costs and strain on our resources arising from the process of integrating the businesses;
•
difficulties integrating the operations and personnel of the acquired business into our operations, organization, and human resources programs, and the risk that we could lose key employees;
•
failure to accurately forecast the long-term value or profitability of DTS, including as a result of any failure by us to implement our business strategy for the DTS acquisition;
•
adverse pricing trends or inability to achieve economies of scale as a result of the DTS acquisition;
•
failure to maintain relationships with existing customers of the acquired business, including customers who may be unfamiliar with us or see themselves as being in conflict with our intellectual property business;
•
failure of the market to adopt new products or technologies that we develop as a result of the integration of DTS’s business into our existing business; and
•
inability to manage growth resulting from the DTS acquisition, including a failure to improve and expand our management systems and financial controls, a failure to expand, train and manage our employee base, or a failure to meet demand and quality standards required by our existing and potential customers and licensees.
Our failure to successfully integrate the acquired business and operations with our existing business and operations may delay or undermine our ability to execute on our business plan for the DTS acquisition, which would adversely affect our business and operations.
The DTS acquisition could expose us to liabilities and claims that we have not previously experienced, and DTS’s operations could be subject to litigation risks arising from our patent licensing and enforcement activities.
Our ownership of DTS could increase the risk that DTS becomes subject to claims of infringement of third-party intellectual property rights. We do not have prior experience in audio technologies in which third parties may hold a substantial body of patents and other intellectual property rights. Moreover, the risks of third-party infringement claims could be heightened by our need to engage in enforcement activities with respect to our existing patents, as our existing or potential licensees may seek to assert infringement claims against our DTS or other product businesses in response to our enforcement activities relating to our existing patents. Competitors of DTS would not be subject to such heightened risk of third-party claims, and such claims could adversely affect the DTS business as well as impair our enforcement ability and licensing revenue.
The DTS acquisition could result in a decision by us to refocus on certain business operations. We may dispose of or discontinue product lines, technologies, assets or operations, whether existing or acquired, if they do not fit into our strategic vision or meet forecasted results.
We believe that DTS’s business includes operations that are complementary to both our FotoNation product and licensing operations and our semiconductor packaging, interconnect, and other patent licensing activities. However, our future efforts to rationalize our disparate business operations could result in a decision by us to refocus on certain business operations while disinvesting in others, including certain products, technologies, assets or operations acquired in the DTS acquisition or already existing prior to the DTS acquisition.  As our business strategy and product markets continue to evolve, we therefore may dispose, discontinue, or divest product lines or business divisions. Disposing of or discontinuing existing product lines or business divisions provides no assurance that our costs will be reduced or our operating results improved. Furthermore, the disposition or discontinuance of an existing product line or business division entails various risks, including the risk of not being able to obtain a purchaser, or, if obtained, the purchase price may be less than the net asset book value for the product line, or the value that our investors place on it as reflected in our stock price. Other risks include adversely affecting employee morale, and managing the expectations of, and maintaining good relations with, customers of our disposed or discontinued product lines or business divisions, which could prevent us from selling other products to them. We may also incur other significant liabilities and costs associated with our disposal or discontinuance of product lines or business divisions, including employee severance costs, relocation expenses, and impairment of lease obligations and long-lived assets. The effects of such actions may adversely impact our business operations and financial condition.
Our use of cash and substantial long-term borrowing to finance the DTS acquisition could limit future opportunities for our business, and could materially adversely affect our financial condition if we are unable to pay principal or interest on, or to refinance, such indebtedness.
The DTS acquisition was financed with existing cash balances and a newly-incurred, $600 million secured term loan. The combination of reduced cash balances and the incurrence of substantial long-term debt could limit our ability to make future acquisitions, investments and capital expenditures that may be necessary or desirable for the operation or expansion of our business.  Moreover, our ability to service the principal and interest payments on such indebtedness will depend on our continuing ability to generate requisite cash flow from our existing and acquired business operations.  The terms of the

40

indebtedness include covenants that may limit our operating flexibility and create a risk of default if we are unable to meet financial ratios and other covenant requirements.  We may be unable to generate sufficient cash flow to make principal and interest payments, and in any event we may be required to refinance such indebtedness upon its maturity.  We may be unable to refinance such indebtedness on favorable terms or at all.  A default under, or inability to refinance, our indebtedness could substantially adversely affect the continuing financial viability of the Company, and could lead to insolvency, bankruptcy, and the reduction or elimination of stockholders’ equity.
We are currently involved in litigation and administrative proceedings involving some of our patents, and may be involved in other such actions in the future; any adverse decisions, findings of non-infringement, or invalidation or limitation of the scope of our patents could significantly harm our business.
We are currently involved in litigation involving some of our patents, and may be involved in other such actions in the future. The parties in these legal actions often challenge the infringement, validity, scope, enforceability and/or ownership of our patents. In addition, in the past requests for reexamination or review have been filed in the U.S. Patent and Trademark Office ("PTO") with respect to patent claims at issue in one or more of our litigation proceedings, and oppositions have been filed against us with respect to our patents in the European Patent Office ("EPO"). During a reexamination or review proceeding and upon completion of the proceeding, the PTO or EPO may leave a patent in its present form, narrow the scope of the patent, or cancel or find unpatentable some or all of the claims of the patent. For example, the PTO has issued several Official Actions rejecting or maintaining earlier rejections of many of the claims in some of our patents. From time to time we assert these patents and patent claims in litigation and administrative proceedings. If the PTO's adverse rulings are upheld on appeal and some or all of the claims of the patents that are subject to reexamination are canceled, our business may be significantly harmed. In addition, counterparties to our litigation and administrative proceedings may seek and obtain orders to stay these proceedings based on rejections of claims in PTO reexaminations or review proceedings, and other courts or tribunals reviewing our legal actions could make findings adverse to our interests, even if the PTO actions are not final.
We cannot predict the outcome of any of these proceedings or the myriad procedural and substantive motions in these proceedings. If there is an adverse ruling in any legal or administrative proceeding relating to the infringement, validity, enforceability or ownership of any of our patents, or if a court or an administrative body such as the PTO limits the scope of the claims of any of our patents or concludes that they are unpatentable, we could be prevented from enforcing or earning future revenue from those patents, and the likelihood that customers will take new licenses and that current licensees will continue to agree to pay under their existing licenses could be significantly reduced. The resulting reduction in license fees and royalties could significantly harm our business, consolidated financial position, results of operations and cash flows, as well as the trading price of our common stock.
Furthermore, regardless of the merits of any claim, the continued maintenance of these legal and administrative proceedings may result in substantial legal expenses and diverts our management's time and attention away from our other business operations, which could significantly harm our business. Our enforcement proceedings have historically been protracted and complex. The time to resolution and complexity of our litigation, its disproportionate importance to our business compared to other companies, the propensity for delay in civil litigation, and the potential that we may lose particular motions as well as the overall litigation could all cause significant volatility in our stock price and have a material adverse effect on our business and consolidated financial position, results of operations, and cash flows.
The timing of payments under our license and settlement agreements may cause fluctuations in our quarterly or annual results of operations.
From time to time we enter into license and settlement agreements that include pricing or payment terms that result in quarter-to-quarter or year-over-year fluctuations in our revenue, such as volume pricing adjustments. The effect of these terms may also cause our aggregate annual royalty revenue to grow less rapidly than annual growth in overall unit shipments in the applicable end market. Additionally, our customers may fail to pay, delay payment of or underpay what they owe to us under our license and settlement agreements, which may in turn require us to enforce our contractual rights through litigation, resulting in payment amounts and timing different than expected based on the terms of our license and settlement agreements. This also may cause our revenue and cash flows to fluctuate on a quarter-to-quarter or year-over-year basis.
We expect to continue to be involved in material legal proceedings to enforce or protect our intellectual property and contract rights, including material litigation with existing licensees or strategic partners, that could harm our business.
From time to time, our efforts to obtain a reasonable royalty through our sales efforts do not result in the prospective customer agreeing to license our patents or our technology. In certain cases, we become involved in litigation to enforce our intellectual property rights, enforce the terms of our license agreements, determine the validity and scope of the proprietary rights of others, and defend against claims of infringement or invalidity. For example, on May 23, 2016, we filed legal proceedings against

41

Broadcom Corporation and certain of its affiliates, customers, and distributors, alleging infringement of certain of our patents. Our current legal actions, as described in Part II, Item 1 - Legal Proceedings , are examples of disputes and litigation that impact our business. If we are not able to reach agreement with customers or potential customers we may be involved in similar legal proceedings in the future, including proceedings to ensure proper and full payment of royalties by licensees under the terms of their license agreements.
These existing and any future legal actions may harm our business. For example, in our legal proceedings against Broadcom and certain of its affiliates and distributors in Germany, the court issued judgments against the respondents, including requiring them to recall and destroy infringing products, requiring them to render accounts, and issuing an injunction against them prohibiting the sale and distribution of infringing products in Germany. If the judgments are reversed or vacated, either on appeal or as a result of other legal proceedings, the Company could be liable for any damages that the respondents suffer, and such liability could have a material adverse impact on the Company. Although the Company posted bonds as security against such potential damages, the amount of damages is not limited by and could exceed the amounts of the bonds. As another example, legal actions could cause an existing licensee or strategic partner to cease making royalty or other payments to us, or to challenge the validity and enforceability of our patents or the scope of our license agreements, and could significantly damage our relationship with such licensee or strategic partner and, as a result, prevent the adoption of our technologies and intellectual property by such licensee or strategic partner. Litigation could also severely disrupt or shut down the business operations of our licensees or strategic partners, which in turn would significantly harm our ongoing relations with them and cause us to lose royalty revenue. Moreover, the timing and results of any of our legal proceedings are not predictable and may vary in any individual proceeding.
From time to time we identify products that we believe infringe our patents. We seek to license the companies that design, make, use, import, sell, or offer for sale those products, but sometimes those companies are unwilling to enter into a license agreement. In those circumstances, we may elect to enforce our patent rights against those companies and products. Litigation stemming from these or other disputes could harm our relationships with those companies or other licensees, or our ability to gain new customers, who may postpone licensing decisions pending the outcome of the litigation or dispute, or who may, as a result of such litigation, choose not to adopt our technologies. In addition, these legal proceedings could be very expensive and may significantly reduce our profits.
In addition, from time to time our customers with existing license agreements dispute their obligations under such agreements, or we may dispute their reporting of royalties due under such agreements. In the past, licensees have threatened to initiate litigation against us regarding our licensing royalty rate practices including our adherence to licensing on fair, reasonable, and non-discriminatory terms and potential antitrust claims.
The costs associated with legal proceedings are typically high, relatively unpredictable, and not completely within our control. These costs may be materially higher than expected, which could adversely affect our operating results and lead to volatility in the price of our common stock. Whether or not determined in our favor or ultimately settled, litigation diverts our managerial, technical, legal and financial resources from our business operations. Furthermore, an adverse decision in any of these legal actions could result in a loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from others, limit the value of our licensed technology or otherwise negatively impact our stock price or our business and consolidated financial position, results of operations and cash flows.

Even if we prevail in our legal actions, significant contingencies may exist to their settlement and final resolution, including the scope of the liability of each party, our ability to enforce judgments against the parties, the ability and willingness of the parties to make any payments owed or agreed upon, and the dismissal of the legal action by the relevant court, none of which are completely within our control. Parties that may be obligated to pay us royalties or damages, or that may otherwise be subject to a judgment, could become insolvent or decide to alter their business activities or corporate structure, which could affect our ability to collect royalties or damages from, or enforce a judgment against, such parties.
Recent and proposed changes to U.S. patent laws, rules, and regulations may adversely impact our business.
Our business relies in part on the uniform and historically consistent application of U.S. patent laws, rules, and regulations. There have been numerous recent administrative, legislative, and judicial changes and proposed changes to patent laws and rules that may have a significant impact on our ability to protect our technology and enforce our intellectual property rights. For example, there have been and may be bills introduced in the U.S. Congress relating to patent law that could adversely impact our business depending on the scope of any bills that may ultimately be enacted into law. As another example, the U.S. Supreme Court and lower courts have in recent years issued decisions that are not favorable to patent owners. Some of these changes or potential changes may not be advantageous for us, and may make it more difficult to obtain adequate patent protection, or to enforce our patents against parties using them without a license or payment of royalties. These changes or potential changes could increase the costs and uncertainties surrounding the prosecution of our patent applications and the

42

enforcement of our patent rights, and could have a deleterious effect on our ability to license our patents and, therefore, on the royalties we can collect.
Some of our license agreements may convert to fully paid-up licenses at the expiration of their terms, or upon certain milestones, and we may not receive royalties after that time.
From time to time we enter into license agreements that automatically convert to fully paid-up licenses upon expiration or upon reaching certain milestones. We may not receive further royalties from licensees for any licensed technology under those agreements if they convert to fully paid-up licenses because such licensees will be entitled to continue using some, if not all, of the relevant intellectual property or technology under the terms of the license agreements without further payment, even if relevant patents or technologies are still in effect. If we cannot find another source of revenue to replace the revenue from these license agreements converting to fully paid-up licenses, our results of operations following such conversion would be materially adversely affected.
A significant amount of our royalty revenue comes from a few end markets and products, and our business could be harmed if demand for these market segments or products declines.
A significant portion of our royalty revenue comes from the manufacture and sale of packaged semiconductor chips for DRAM, application-specific standard product semiconductors, application-specific integrated circuits, and memory. In addition, we derive substantial revenue from the incorporation of our technology into mobile devices, consumer products and computer hardware. If demand for semiconductors in any one or a combination of these market segments or products declines, our royalty revenue may be reduced significantly and our business would be harmed.
The long-term success of our business is dependent on a royalty-based business model, which is inherently risky.
The long-term success of our business is dependent on future royalties paid to us by licensees. Royalty payments under our licenses may be based, among other things, upon the number of electrical connections to the semiconductor chip in a package covered by our licensed technology, a percent of net sales, a rate per package, a per unit sold basis or a fixed quarterly amount. We are dependent upon our ability to structure, negotiate and enforce agreements for the determination and payment of royalties, as well as upon our licensees' compliance with their agreements. We face risks inherent in a royalty-based business model, many of which are outside of our control, such as the following:
•
the rate of adoption and incorporation of our technology by semiconductor manufacturers, assemblers, manufacturers of consumer and communication electronics, and the automotive and surveillance industry;
•
the willingness and ability of materials and equipment suppliers to produce materials and equipment that support our licensed technology, in a quantity sufficient to enable volume manufacturing;
•
the ability of our licensees to purchase such materials and equipment on a cost-effective and timely basis;
•
the length of the design cycle and the ability of us and our customers to successfully integrate certain of our FotoNation technologies into their integrated circuits;
•
the demand for products incorporating semiconductors that use our licensed technology;
•
the cyclicality of supply and demand for products using our licensed technology;
•
the impact of economic downturns;
•
the impact of poor financial performance of our licensees; and
•
the timing of receipt of royalty reports may not meet our revenue recognition criteria resulting in fluctuation in our results of operations.
It is difficult for us to verify royalty amounts owed to us under our licensing agreements, and this may cause us to lose revenue.
The terms of our license agreements often require our licensees to document their use of our technology and report related data to us on a quarterly basis. Although our license terms generally give us the right to audit books and records of our licensees to verify this information, audits can be expensive, time consuming, and may not be cost justified based on our understanding of our licensees' businesses, especially given the international nature of our licensees. Our license compliance program audits certain licensees to review the accuracy of the information contained in their royalty reports in an effort to decrease the likelihood that we will not receive the royalty revenue to which we are entitled under the terms of our license agreements, but we cannot give assurances that such audits will be effective to that end.
The markets for semiconductors and related products are highly concentrated, and we may have limited opportunities to license our technologies or sell our products.

43

The semiconductor industry is highly concentrated in that a small number of semiconductor designers and manufacturers account for a substantial portion of the purchases of semiconductor products generally, including our products and products incorporating our technologies. Continued consolidation in the semiconductor industry may increase this concentration. Accordingly, we expect that licenses of our technologies and sales of our products will be concentrated with a limited number of customers for the foreseeable future. As we develop and acquire new technologies and integrate them into our product line, we will need to establish new relationships to sell these products. Our financial results significantly depend on our success in establishing and maintaining relationships with, and effecting substantial sales to, these customers. Even if we are successful in establishing and maintaining such relationships, our financial results will be dependent in large part on these customers' sales and business results.

We make significant investments in new products and services that may not achieve technological feasibility or profitability or that may limit our revenue growth.
We have made and will continue to make significant investments in research, development, and marketing of new technologies, products and services, including audio, imaging, and advanced semiconductor packaging, bonding, and interconnect technologies. Investments in new technologies are speculative and technological feasibility may not be achieved. Commercial success depends on many factors including demand for innovative technology, availability of materials and equipment, selling price the market is willing to bear, competition and effective licensing or product sales. We may not achieve significant revenue from new product and service investments for a number of years, if at all. Moreover, new technologies, products and services may not be profitable, and even if they are profitable, operating margins for new products and businesses may not be as high as the margins we have experienced historically or originally anticipated.
We may not be able to evolve our audio and imaging technologies, products, and services, or develop new technologies, products, and services, that are acceptable to our customers or the evolving markets, and our customers may use technologies offered at lower cost by others.
The markets for our audio and imaging technologies, products, and services are characterized by:
•
rapid technological change and product obsolescence;
•
new and improved product introductions;
•
changing consumer demands;
•
increasingly competitive product landscape; and
•
evolving industry standards.
Our future success in our product licensing business depends upon our ability to enhance our existing technologies, products, and services and to develop enhanced and acceptable new technologies, products, and services on a timely basis. The development of enhanced and new audio and imaging technologies, products, and services is a complex and uncertain process requiring high levels of innovation, highly-skilled engineering and development personnel, and the accurate anticipation of technological and market trends. We may not be able to accurately identify, develop, market, or support new or enhanced technologies, products, or services on a timely basis, if at all. Furthermore, our new imaging and audio technologies, products, and services may never gain market acceptance, and we may not be able to respond effectively to evolving consumer demands, technological changes, product announcements by competitors, or emerging industry standards. Any failure to respond to these changes or concerns would likely prevent our imaging and audio technologies, products, and services from gaining market acceptance or maintaining market share and could lead to our imaging and audio technologies, products, and services becoming obsolete.
Furthermore, the decision by a party dominant in the entertainment value chain to provide audio technology at very low or no cost could cause our customers, licensees and other manufacturers not to utilize our audio technologies or services in the future. Our customers may choose to use technologies that their own in-house audio engineering teams have developed, or in which they have an interest. Accordingly, our revenue could decline if our customers and licensees choose not to incorporate our audio technologies in their products, or if they sell fewer products incorporating our audio technologies.
Competing technologies may harm our business.
We expect that our technologies will continue to compete with technologies of internal design groups at semiconductor manufacturers, assemblers, electronic component and system manufacturers. The internal design groups of these companies create their own packaging and imaging solutions. If these internal design groups design around our patents or introduce unique solutions superior to our technology, they may not need to license our technology. These groups may design technology that is less expensive to implement or that enables products with higher performance or additional features. Many of these groups have substantially greater resources, greater financial strength and lower cost structures which may allow them to undercut our

44

price. They also have the inherent advantage of access to internal corporate strategies, technology roadmaps and technical information. As a result, they may be able to bring alternative solutions to market more easily and quickly.
DTS audio technologies compete with other providers of audio products and services, with Dolby Laboratories as the primary competitor in high-definition audio processing. Dolby Laboratories enjoys certain competitive advantages in selling its digital multi-channel audio technology, having introduced such technology before we did, and having achieved mandatory standard status in product categories that we have not, including terrestrial digital TV broadcasts in the United States.
For our embedded image processing technologies such as Face Detection and our other FaceTools products, our offerings compete with other image processing software vendors such as ArcSoft, Inc. as well as internal design groups of our customers providing similar technologies by employing different approaches.
In the future, our licensed technologies may also compete with other technologies that emerge. These technologies may be less expensive and provide higher or additional performance. Companies with these competing technologies may also have greater resources. Technological change could render our technologies obsolete, and new, competitive technologies could emerge that achieve broad adoption and adversely affect the use of our technologies and intellectual property.
If we do not successfully further develop and commercialize the technologies we acquire, or cultivate strategic relationships that expand our licensable portfolio, our competitive position could be harmed and our operating results adversely affected.
We also attempt to expand our licensable technology portfolio and technical expertise by further developing and acquiring new technologies or developing strategic relationships with others. These strategic relationships may include the right for us to sublicense technology and intellectual property to others. However, we may not be able to acquire or obtain rights to licensable technology and intellectual property in a timely manner or upon commercially reasonable terms. Even if we do acquire such rights, some of the technologies we invest in may be commercially unproven and may not be adopted or accepted by the industry. Moreover, our research and development efforts, and acquisitions and strategic relationships, may be futile if we do not accurately predict the future needs of the semiconductor, consumer and communication electronics, and consumer imaging and audio processing industries. Our failure to acquire new technologies that are commercially viable in the semiconductor, consumer and communication electronics, and consumer imaging and audio processing industries could significantly harm our business, financial position, results of operations and cash flows.
The way we integrate internally developed and acquired technologies into our products and licensing programs may not be accepted by customers.
We have devoted, and expect to continue to devote, considerable time and resources to developing, acquiring and integrating new and existing technologies into our products and licensing programs. However, if customers do not accept the way we have integrated our technologies, they may adopt competing solutions. In addition, as we introduce new products or licensing programs, we cannot predict with certainty if and when our customers will transition to those new products or licensing programs. Moreover, with respect to certain of our imaging technologies, even after we have signed a license agreement with a customer, we will often not see significant revenue from that customer until after such technologies have been successfully designed into the customer's integrated circuits, which can take 18 months or longer. If customers fail to accept new or upgraded products or licensing programs incorporating our technologies, our financial position, results of operations and cash flows could be adversely impacted.
If we fail to protect and enforce our intellectual property rights, contract rights, and our confidential information, our business will suffer.
We rely primarily on a combination of license, development and nondisclosure agreements and other contractual provisions, as well as patent, trademark, trade secret and copyright laws, to protect our technology and intellectual property. If we fail to protect our technology, intellectual property, or contract rights, our licensees and others may seek to use our technology and intellectual property without the payment of license fees and royalties, which could weaken our competitive position, reduce our operating results and increase the likelihood of costly litigation. The growth of our business depends in large part on our ability to secure intellectual property rights in a timely manner, our ability to convince third parties of the applicability of our intellectual property rights to their products, and our ability to enforce our intellectual property rights.
In certain instances, we attempt to obtain patent protection for portions of our technology, and our license agreements typically include both issued patents and pending patent applications. If we fail to obtain patents in a timely manner or if the patents issued to us do not cover all of the inventions disclosed in our patent applications, others could use portions of our technology and intellectual property without the payment of license fees and royalties. For example, our business may suffer if we are

45

unable to obtain patent protection in a timely manner from the PTO due to processing delays resulting from examiner turnover and a continuing backlog of patent applications.
We also rely on trade secret laws rather than patent laws to protect other portions of our proprietary technology. However, trade secrets can be difficult to protect. The misappropriation of our trade secrets or other proprietary information could seriously harm our business. We protect our proprietary technology and processes, in part, through confidentiality agreements with our employees, consultants, suppliers and customers. We cannot be certain that these contracts have not been and will not be breached, that we will be able to timely detect unauthorized use or transfer of our technology and intellectual property, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors. If we fail to use adequate mechanisms to protect our technology and intellectual property, or if a court fails to enforce our intellectual property rights, our business will suffer. We cannot be certain that these protection mechanisms can be successfully asserted in the future or will not be invalidated or challenged.
Further, the laws and enforcement regimes of certain countries do not protect our technology and intellectual property to the same extent as do the laws and enforcement regimes of the U.S. In certain jurisdictions we may be unable to protect our technology and intellectual property adequately against unauthorized use, which could adversely affect our business.
Our business may suffer if third parties assert that we violate their intellectual property rights.
Third parties may claim that either we or our customers are infringing upon their intellectual property rights. Even if we believe that such claims are without merit, they can be time-consuming and costly to defend against and will divert management's attention and resources away from our business. Furthermore, third parties making such claims may be able to obtain injunctive or other equitable relief that could block our ability to further develop or commercialize some or all of our products or services in the U.S. and abroad. Claims of intellectual property infringement also might require us to enter into costly settlement or license agreements, pay costly damage awards, or defend or indemnify our customers against judgments, damages, or other losses. Even if we have an agreement that provides for a third party to indemnify us against such costs, the indemnifying party may be unable to perform its contractual obligations under the agreement. If we cannot or do not license the allegedly infringed intellectual property on reasonable terms, or need to substitute similar technology from another source, our business, financial position, results of operations and cash flows could suffer.
Our licensing cycle is lengthy and costly, and our marketing, legal and sales efforts may be unsuccessful.
We generally incur significant marketing, legal and sales expenses prior to entering into our license agreements, generating a license fee and establishing a royalty stream from each licensee. The length of time it takes to establish a new licensing relationship, and/or for our customers to incorporate certain imaging technologies in their integrated circuits, can be 18 months or longer. As such, we may incur significant losses in any particular period before any associated revenue stream begins.
Our business incurs significant reverse engineering expenditures on products of potential licensees in order to prepare sales and marketing collateral. We employ intensive marketing and sales efforts to educate licensees, potential licensees and original equipment manufacturers about the benefits of our technologies. In addition, even if these companies adopt our technologies, they must devote significant resources to integrate fully our technologies into their operations. If our marketing and sales efforts are unsuccessful, then we may not be able to achieve widespread acceptance of our technology. In addition, ongoing litigation could impact our ability to gain new licensees which could have an adverse effect on our financial condition, results of operations and cash flows.
If our licensees delay, refuse to or are unable to make payments to us due to financial difficulties or otherwise, or shift their licensed products to other companies to lower their royalties to us, our operating results and cash flows could be adversely affected.
A number of companies in the semiconductor and consumer electronics industries face severe financial difficulties from time to time. As a result, there have been bankruptcies and restructuring of companies in these industries. As an example, Toshiba Corporation recently announced financial difficulties that may result in the sale or restructuring of all or parts of its business. Our licensees may face similar financial difficulties which may result in their inability to make payments to us in a timely manner, or at all. In addition, we have had a history of, and we may in the future experience, customers that delay or refuse to make payments owed to us under license or settlement agreements. Our licensees may also merge with or may shift the manufacture of licensed products to companies that are not currently licensees to us. This could make the collection process complex and difficult, which could adversely impact our business, financial condition, results of operations and cash flows.

We have in the past recorded, and may in the future record, significant valuation allowances on our deferred tax assets, and the recording and release of such allowances may have a material impact on our results of operations and cause fluctuations in our stock price.

46

The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. As such, we determined that no valuation allowance is required on the majority of our U.S. federal deferred tax assets. In the future, we may release valuation allowance and recognize deferred state tax assets or deferred tax assets of other foreign subsidiaries depending on achieving profitability in relevant jurisdictions. We continue to monitor the likelihood that we will be able to recover our deferred tax assets, including those for which a valuation allowance is still recorded. There can be no assurance that we will generate profits in future periods enabling us to fully realize our deferred tax assets. The timing of recording a valuation allowance or the reversal of such valuation allowance is subject to objective and subjective factors that cannot be readily predicted in advance. Both the establishment of a valuation allowance and the reversal of a previously recorded valuation allowance may have a material impact on our quarterly financial results, which may lead to fluctuation in the value of our stock.
Failure by the semiconductor industry to adopt our technology for the next generation high performance DRAM chips, and in chips used in consumer electronics, would significantly harm our business.
To date, our technology has been used by several companies for high performance DRAM chips. For example, packaging using our technology is used for DDR3 and DDR4 DRAM and we currently have licensees who are paying royalties for DRAM chips in advanced packages.
DRAM manufacturers are also currently developing next-generation high performance DRAM chips to meet increasing speed and performance requirements of electronic products. We believe that these next-generation, high performance DRAM chips will require advanced technologies.
We anticipate that royalties from shipments of these next-generation, high performance DRAM chips using our technology may account for a significant percentage of our future revenue. If semiconductor manufacturers do not continue to use our technology for the next-generation of high performance DRAM chips and find viable alternative technologies for use with next-generation high performance DRAM chips, or if we do not receive royalties from the next-generation, high performance DRAM chips that use our technology, our future revenue could be adversely affected.
Our technology may be too expensive for certain next-generation high performance DRAM manufacturers, which could significantly reduce the adoption rate of our technology in next-generation high performance DRAM chips. Even if our technology is selected for at least some of these next-generation high performance DRAM chips, there could be delays in the introduction of products utilizing these chips that could materially affect the amount and timing of any royalty payments that we receive. Other factors that could affect adoption of our technology for next-generation high performance DRAM products include delays or shortages of materials and equipment and the availability of testing services.
Similarly, our audio licensing revenue from consumer electronics product manufacturers depends, in large part, upon the availability of ICs that implement our technologies. IC manufacturers incorporate our audio technologies into these ICs, which are then incorporated into consumer electronics products. We do not manufacture these ICs, but rather depend upon IC manufacturers to develop, produce and then sell them to licensed consumer electronics product manufacturers. We do not control the IC manufacturers' decisions whether or not to incorporate our technologies into their ICs, and we do not control their product development or commercialization efforts. If these IC manufacturers are unable or unwilling to implement our technologies into their ICs, production is delayed, or if they sell fewer ICs incorporating our technologies, our operating results could be adversely affected.

The investment of our cash, cash equivalents and investments in marketable debt securities are subject to risks which may cause losses and affect the liquidity of these investments.
At June 30, 2017, we held approximately $74.4 million in cash and cash equivalents and $53.5 million in short-term investments. These investments include various financial securities such as corporate bonds and notes, municipal bonds and notes, commercial paper, treasury and agency notes and bills, and money market funds. Although we invest in high quality securities, ongoing financial events have at times adversely impacted the general credit, liquidity, market and interest rates for these and other types of debt securities. Changes in monetary policy by the Federal Reserve, government fiscal policies, and global economic and market conditions may adversely affect the value of our investment portfolio. While we have historically held our investments to maturity, we may in the future have a need to sell investments before their maturity dates, which could result in losses on the sale of those investments. For example, the DTS acquisition resulted in us liquidating a significant portion of our investments. The financial market and monetary risks associated with our investment portfolio may have a material adverse effect on our financial condition, results of operations and cash flows.

47

Our intellectual property business operates in a highly cyclical industry, which is subject to significant downturns.

The semiconductor industry in which our intellectual property business operates has historically been cyclical and is characterized by wide fluctuations in product supply and demand. From time to time, this industry has experienced significant downturns, often in connection with, or in anticipation of, declining economic conditions, maturing product and technology cycles, and excess inventories. This cyclicality could cause our operating results to decline from one period to the next. Our business depends, in part, upon the volume of production by our licensees, which, in turn, depends upon the current and anticipated market demand for semiconductors and products that use semiconductors. Semiconductor manufacturers and package assembly companies generally sharply curtail their spending during industry downturns, and historically have lowered their spending more than the decline in their revenue. As a result, our financial results have been, and will continue to be, impacted by the cyclicality of the electronics industry. If we are unable to control our expenses adequately in response to lower revenue from our licensees and service customers in such downturns, our results of operations and cash flows will be materially and adversely impacted.

If we are unable to maintain a sufficient amount of content released in the DTS audio format, demand for the technologies, products, and services that we offer to consumer electronics product manufacturers may significantly decline, which would adversely impact our business and prospects.

We expect to derive a significant percentage of our revenue from the technologies, products, and services that we offer to manufacturers of consumer electronics products. We believe that demand for our audio technologies in growing markets for multi-channel and/or high resolution audio, including TVs, tablets, mobile phones, video game consoles, automobiles, and soundbars, will be based on the amount, quality, and popularity of content (such as movies, TV shows, music, and games) either released in the DTS audio format or capable of being coded and played in the DTS format. In particular, our ability to penetrate the growing markets in the network-connected space depends on the presence of streaming and downloadable content released in the DTS audio format. We generally do not have contracts that require providers of streaming and downloadable content to develop and release such content in a DTS audio format. Accordingly, our revenue could decline if these providers elect not to incorporate DTS audio into their content or if they sell less content that incorporates DTS audio.

In addition, we may not be successful in maintaining existing relationships or developing new relationships with other existing or new content providers. As a result, we cannot assure you that a sufficient amount of content will be released in a DTS audio format to ensure that manufacturers continue offering DTS decoders in the consumer electronics products that they sell.

Demand for DTS’s HD Radio technology may be insufficient to sustain projected growth.

Demand for and adoption of HD Radio technology may not be sufficient for us to continue to increase the number of licensees of our HD Radio system, which include IC manufacturers, manufacturers of broadcast transmission equipment, consumer electronics products manufacturers, component manufacturers, data service providers, manufacturers of specialized and test equipment and radio broadcasters.
Among other things, continuing and increased consumer acceptance of HD Radio technology will depend upon:
•
the number of radio stations broadcasting digitally using HD Radio technology;

•
the willingness of automobile manufacturers to include HD Radio receivers in their vehicles;

•
the willingness of manufacturers to incorporate HD Radio technology into their products;

•
the cost and availability of HD Radio enabled products; and

•
the marketing and pricing strategies that we employ and that are employed by our licensees and retailers.

If demand for HD Radio technology does not continue to increase as expected, we may not be able to increase our DTS revenue as projected.

48

DTS’s HD Radio technology may not remain competitive if we do not respond to changes in technology, standards and services that affect the radio broadcasting industry.

The radio broadcasting industry is subject to technological change, evolving industry standards, regulatory restrictions and the emergence of other media technologies and services. Our HD Radio technology may not gain market acceptance over these other technologies. Various other audio technologies and services that have been developed and introduced include:
•
internet streaming, cable-based audio programming and other digital audio broadcast formats;

•
satellite delivered digital audio radio services that offer numerous programming channels;

•
other digital radio competitors, such as Digital Radio Mondiale, or DAB; and

•
growth in use of portable devices for storage and playback of audio content.

Competition arising from these or other technologies or potential regulatory change may have an adverse effect on the radio broadcasting industry or on our company and our financial condition and results of operations.
If we are unable to further penetrate the streaming and downloadable content delivery markets and adapt our technologies for those markets, our revenue and ability to grow our DTS business could be adversely impacted.

Video and audio content has historically been purchased and consumed primarily via optical disc based media. However, the growth of the internet and network-connected device usage, along with the rapid advancement of online and mobile content delivery has resulted in download and streaming services becoming mainstream with consumers in various parts of the world. We expect the shift away from optical disc based media to streaming and downloadable content consumption to continue. If we fail to continue to penetrate the streaming and downloadable content delivery market, our audio business could suffer.

The services that provide content from the cloud are not generally governed by international or national standards and are thus free to choose any media format(s) to deliver their products and services. This freedom of choice on the part of online content providers could limit our ability to grow if such content providers do not incorporate our technologies into their services, which could affect demand for our technologies.

Furthermore, our inclusion in mobile and other network-connected devices may be less profitable for us than optical disc players. The online and mobile markets are characterized by intense competition, evolving industry standards and business and distribution models, disruptive software and hardware technology developments, frequent new product and service introductions, short product and service life cycles, and price sensitivity on the part of consumers, all of which may result in downward pressure on pricing. If we are unable to adequately and timely respond to the foregoing, our business and operating results could be adversely affected.

Changes in financial accounting or taxation standards, rules, practices or interpretations may cause adverse unexpected revenue and expense fluctuations which may impact our reported results of operations.
We prepare our consolidated financial statements in accordance with U.S. GAAP. These principles are subject to interpretations by the SEC and various accounting bodies. In addition, we are subject to various taxation rules in many jurisdictions. The existing taxation rules are generally complex, frequently changing and subject to interpretation. Changes to taxation rules, changes to financial accounting standards, or any changes to the interpretations of these standards or rules may adversely affect our reported financial results or the way in which we conduct business. Recent accounting pronouncements and their estimated potential impact on our business are addressed in Note 2 - “Summary of Significant Accounting Policies” in the Notes to Condensed Consolidated Financial Statements.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), and since May 2014 the FASB has issued amendments to this new guidance, which collectively provides guidance for revenue recognition. ASU 2014-09 is effective for the Company beginning January 1, 2018 and, at that time, we plan to adopt the new standard under the modified retrospective approach. Under the new standard, the current practice of many licensing companies of reporting revenue from per-unit royalty based agreements one quarter in arrears would no longer be accepted and instead companies will be expected to estimate royalty-based revenue. This guidance will significantly impact our revenue recognition. First, we will no longer be allowed to follow our current practice of recording per unit license revenue on a quarter lag basis, a practice precipitated by the lack of reliable estimates for such revenue. Second, we may be required to record all or a significant majority of revenue under our fixed fee and minimum guarantee license agreements when such agreements are entered into rather than recording them over time as is our typical practice today. While

49

the changes in revenue recognition do not impact our cash flows, the impact on our Statement of Operations under the new accounting standard may impact how investors perceive our business which could materially impact the value of our common stock.
Our rate of taxation in foreign jurisdictions is lower than our U.S. tax rate. Our international income is primarily earned by our subsidiaries organized in Ireland, and, as such, our effective tax rate can be impacted by the composition of our earnings in the U.S. and foreign jurisdictions. The Organisation for Economic Cooperation and Development issued guidelines and proposals during October 2015 that may change how our tax obligations are determined in many of the countries in which we do business. These potential changes could also adversely affect our effective tax rate.
Our future effective tax rate may be affected by such factors as changes in tax laws, changing interpretation of existing laws or regulations, the impact of accounting for stock-based compensation, the impact of accounting for business combinations, changes in the composition of global earnings, the expiration of statute of limitations, settlements of audits, changes in our international organization and changes in overall levels of income before tax.
The international nature of our business exposes us to financial and regulatory risks that may have a negative impact on our consolidated financial position, results of operations and cash flows, and we may have difficulty protecting our intellectual property in some foreign countries.
We derive a significant portion of our revenue from licensees headquartered outside of the U.S. We also have operations outside of the U.S., including our research and development facilities in Ireland, Romania and the United Kingdom, to design, develop, test or market certain technologies. International operations are subject to a number of risks, including but not limited to the following:
•
changes in trade protection laws, policies and measures, and other regulatory requirements affecting trade and investment;
•
regulatory requirements and prohibitions that differ between jurisdictions;
•
laws and business practices favoring local companies;
•
withholding tax obligations on license revenue that we may not be able to offset fully against our U.S. tax obligations, including the further risk that foreign tax authorities may re-characterize license fees or increase tax rates, which could result in increased tax withholdings and penalties;
•
security concerns, including crime, political instability, terrorist activity, armed conflict and civil or military unrest;
•
differing employment practices, labor issues and business and cultural factors;
•
less effective protection of intellectual property than is afforded to us in the U.S. or other developed countries; and
•
limited infrastructure and disruptions, such as large-scale outages or interruptions of service from utilities or telecommunications providers.
Our intellectual property is also used in a large number of foreign countries. There are many countries in which we currently have no issued patents. In addition, effective intellectual property enforcement may be unavailable or limited in some foreign countries. It may be difficult for us to protect our intellectual property from misuse or infringement by other companies in these countries. We expect this to become a greater problem for us as our licensees increase their manufacturing and sales in countries which provide less protection for intellectual property. Our inability to enforce our intellectual property rights in some countries may harm our business, financial position, results of operations and cash flows.
Our business and operating results may be harmed if we are unable to manage growth in our business, if we undertake any further restructuring activities or if we dispose of a business division or dispose of or discontinue any product lines.

We have in the past expanded our operations, domestically and internationally, and may continue to do so through both internal growth and acquisitions. In December 2016, we acquired DTS, resulting in our headcount more than doubling year over year. If our growth continues, it may place a significant strain on our management team and on our operational and financial systems, procedures, and controls. Our future success will depend, in part, upon the ability of our management team to manage any growth effectively, requiring our management to:

•
recruit, hire, and train additional personnel;
•
implement and improve our operational and financial systems, procedures, and controls;
•
maintain our cost structure at an appropriate level based on the revenue and cash we forecast and generate;
•
manage multiple concurrent development projects; and
•
manage operations in multiple time zones with different cultures and languages.

50

If we are unable to effectively manage our growth or we are unsuccessful in recruiting and retaining personnel, our business and operating results will be harmed. Moreover, if our acquisitions or other growth initiatives do not prove to be profitable, we may undertake to restructure our business, including the disposition of a business division, or the disposition or discontinuance of a product line, as we have done in previous years. Any restructuring, disposition or discontinuance would require substantial management time and attention and may divert management from other important work, and may result in significant liabilities and costs as described earlier.
Disputes regarding our intellectual property may require us to defend or indemnify certain customers or licensees, the cost of which could adversely affect our business operations and financial condition.
While we generally do not defend or indemnify our licensees, some of our license agreements in our image and audio businesses provide limited defense and indemnities for certain actions brought by third parties against our licensees, and some require us to provide technical support and information to a licensee that is involved in litigation for using our technology. Our defense, indemnity and support obligations could result in substantial expenses. In addition to the time and expense required for us to defend, indemnify or supply such support to our licensees, a licensee's development, marketing and sales of licensed image or audio products could be severely disrupted or shut down as a result of litigation, which in turn could have a material adverse effect on our business operations, consolidated financial position, results of operations and cash flows.
If we lose any of our key personnel or are unable to attract, train and retain qualified personnel, we may not be able to execute our business strategy effectively.

Our success depends, in large part, on the continued contributions of our key management, engineering, sales, marketing, intellectual property, legal and finance personnel, many of whom are highly skilled and would be difficult to replace. None of our senior management, key technical personnel or key sales personnel are bound by written employment contracts to remain with us for a specified period. In addition, we do not currently maintain key-person life insurance covering our key personnel or have restrictions on their post-employment ability to solicit our employees, contractors or customers if key personnel voluntarily terminate their employment. The loss of any of our senior management or other key personnel could harm our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate. Our future success will depend to a significant extent on the ability of these executives to effectively drive execution of our business strategy, and on the ability of our management team to work together effectively.
Our success also depends on our ability to attract, train and retain highly skilled managerial, engineering, sales, marketing, legal and finance personnel and on the abilities of new personnel to function effectively, both individually and as a group. Competition for qualified senior employees can be intense. We have also experienced difficulty in hiring and retaining highly skilled engineers with appropriate qualifications to support our growth and expansion. Further, we must train our new personnel, especially our technical support personnel, to respond to and support our licensees and customers. If we fail to do this, it could lead to dissatisfaction among our licensees or customers, which could slow our growth or result in a loss of business.
Our business operations could suffer in the event of information technology system failures or security breaches.
Despite system redundancy and the implementation of security measures within our internal and external information technology and networking systems, our information technology systems may be subject to security breaches, damages from computer viruses, natural disasters, terrorism, and telecommunication failures. Any system failure or security breach could cause interruptions in our operations in addition to the possibility of losing proprietary information and trade secrets. To the extent that any disruption or security breach results in inappropriate disclosure of our confidential information, we may incur liability or additional costs to remedy the damages caused by these disruptions or security breaches.
Decreased effectiveness of share-based compensation could adversely affect our ability to attract and retain employees.
We have historically used stock options, restricted stock grants and other forms of stock-based compensation as key components of employee compensation in order to align employees' interests with the interests of our stockholders, encourage employee retention and provide competitive compensation and benefit packages. We incur significant compensation costs associated with our stock-based compensation programs. Failure to obtain stockholder approval of equity compensation plans or changes to the plans could make it harder or more expensive for us to grant stock-based compensation to employees in the future. As a result, we may find it difficult to attract, retain and motivate employees, and any such difficulty could have a materially adverse impact on our business.
Failure to comply with environmental regulations could harm our business.

51

We use hazardous substances in the manufacturing and testing of prototype products and in the development of technologies in our research and development laboratories. We are subject to a variety of local, state and federal regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances. Our past, present or future failure to comply with environmental regulations could result in the imposition of substantial fines, suspension of production, and alteration of our manufacturing processes or cessation of operations. Compliance with such regulations could require us to acquire expensive remediation equipment or to incur other substantial expenses. Any failure to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous or toxic substances, could subject us to significant liabilities, including joint and several liabilities under certain statutes. The imposition of such liabilities could significantly harm our business, financial position, results of operations and cash flows.
Our effective tax rate depends on our ability to secure the tax benefits of our international corporate structure, on the application of the tax laws of various jurisdictions and on how we operate our business.
Our international corporate structure and intercompany arrangements, including the manner in which we market, develop, use and license our intellectual property, fund our operations and structure transactions with our international subsidiaries, may result in the increase or reduction of our worldwide effective tax rate. Such international corporate structure and intercompany arrangements are subject to examination by the tax authorities of the jurisdictions in which we operate, including the United States. The application of the tax laws of these jurisdictions to our international business activities is subject to interpretation and depends on our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. Moreover, such tax laws are subject to change. Tax authorities may disagree with our intercompany transfer pricing arrangements, including our transfer of intangibles, or determine that the manner in which we operate our business does not achieve the intended tax consequences. Additionally, future changes in the tax laws (such as proposed legislation to reform U.S. taxation of international business activities) may have an adverse effect on our international corporate structure and operations. The result of an adverse determination of any of the above items could increase our worldwide effective tax rate and harm our financial position and results of operations.
We have business operations located in places that are subject to natural disasters.

Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel. Our corporate headquarters are located in the San Francisco Bay Area and we have engineering activities in several locations throughout California, which in the past have experienced severe earthquakes. We do not carry earthquake insurance for any of our facilities except for our office in Calabasas, California. Earthquakes or other natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects.
We have made and may continue to make or to pursue acquisitions which could divert management's attention, cause ownership dilution to our stockholders, or be difficult to integrate, which may adversely affect our financial results.
We have made several acquisitions, and it is our current plan to continue to acquire companies, assets, patents and technologies that we believe are strategic to our future business. For example, in the fourth quarter of 2016, we acquired DTS, Inc., for approximately $955 million. Previously in the third quarter of 2015, we also acquired Ziptronix, Inc. for approximately $39 million. Investigating businesses, assets, patents or technologies and integrating newly acquired businesses, assets, patents or technologies could put a strain on our resources, could be costly and time consuming, and might not be successful. Such activities divert our management's attention from other business concerns. In addition, we might lose key employees while integrating new organizations or operations. Acquisitions could also result in customer dissatisfaction, performance problems with an acquired company or technology, potentially dilutive issuances of equity securities or the incurrence of debt, the assumption or incurrence of contingent liabilities, impairment charges related to goodwill and possible impairment charges related to other intangible assets or other unanticipated events or circumstances, any of which could harm our business.
Our plans to integrate and expand upon research and development programs and technologies obtained through acquisitions may result in products or technologies that are not adopted by the market. The market may adopt competitive solutions to our products or technologies. Consequently, we might not be successful in integrating any acquired businesses, assets, products or technologies, and might not achieve anticipated revenue and cost benefits.
There are numerous risks associated with our acquisitions of businesses, technologies and patents.
We have made a number of acquisitions of businesses, technologies and patents in recent years. These acquisitions are subject to a number of risks, including but not limited to the following:
•
these acquisitions could fail to produce anticipated benefits, or could have other adverse effects that we currently do not foresee. As a result, these acquisitions could result in a reduction of net income per share as compared to the net

52

income per share we would have achieved if these acquisitions had not occurred. We may also be required to recognize impairment charges of acquired assets or goodwill, and if we decide to restructure acquired businesses, we may incur other restructuring charges;
•
the purchase price for each acquisition is determined based on significant judgment on factors such as projected cash flow, quality and availability of the business, technology or patent. In addition, if other companies have similar interests in the same business, technology or patent, our ability to negotiate these acquisitions at favorable terms may be limited and the purchase price may be artificially inflated;
•
following completion of these acquisitions, we may uncover additional liabilities, patent validity, infringement or enforcement issues or unforeseen expenses not discovered during our diligence process;
•
any such additional liabilities, patent validity, infringement or enforcement issues or expenses could result in significant unanticipated costs not originally estimated, such as impairment charges of acquired assets and goodwill, and may harm our financial results;
•
the integration of technologies, patent assets and personnel, if any, will be a time consuming and expensive process that may disrupt our operations if it is not completed in a timely and efficient manner. If our integration efforts are not successful, our results of operations could be harmed, employee morale could decline, key employees could leave, and customer relations could be damaged. In addition, we may not achieve anticipated synergies or other benefits from any of these acquisitions;
•
we have incurred substantial direct transaction and integration costs as a result of past acquisitions. In future acquisitions, the total direct transaction costs and the costs of integration may exceed our expectations;
•
sales by the acquired businesses may be subject to different accounting treatment than our existing businesses, especially related to the recognition of revenue. This may lead to the loss or deferral of revenue under current and emerging accounting standards;
•
there may be a significant time lag between acquiring patent assets and recognizing revenue from those patent assets. During that time lag, material costs are likely to be incurred in preparing licensing or litigation efforts and amortization of acquired patent assets that would have a negative effect on our results of operations, cash flows and financial position;
•
we may require external financing that is dilutive or presents risks of debt; and
•
we are required to estimate and record fair values of contingent assets, liabilities, deferred tax assets and liabilities at the time of an acquisition. Even though these estimates are based on management's best judgment, the actual results may differ. Under the current accounting guidance, differences between actual results and management's estimate could cause our operating results to fluctuate or could adversely affect our results of operations.
If our amortizable intangible assets (such as acquired patents) become impaired, we may be required to record a significant charge to earnings.
In addition to internal development, we intend to broaden our intellectual property portfolio through strategic relationships and acquisitions such as the acquisitions of DTS, Inc. in the fourth quarter of 2016, and Ziptronix, Inc. in the third quarter of 2015. We believe these strategic relationships and acquisitions will enhance the competitiveness and size of our current businesses and provide diversification into markets and technologies that complement our current businesses. Future acquisitions could be in the form of asset purchases, equity investments, or business combinations. As a result, we may have intangible assets which are amortized over their estimated useful lives. We review our amortizable intangible assets (such as our patent portfolio) for impairment when events or changes in circumstances indicate the carrying value may not be recoverable or the useful life is shorter than originally estimated. Factors that may be considered a change in circumstances indicating that the carrying value of our amortizable or other intangible assets may not be recoverable include a decline in future cash flows, fluctuations in market capitalization, slower growth rates in our industry or slower than anticipated adoption of our products by our customers. As we continue to review for factors that may affect our business which may not be in our control, we may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our amortizable intangible assets or equity investments is determined, resulting in an adverse impact on our business, financial position, or results of operations.
Current and future governmental and industry standards may significantly limit our business opportunities.
Technology standards are important in the audio and video industry as they help to assure compatibility across a system or series of products. Generally, standards adoption occurs on either a mandatory basis, requiring a particular technology to be available in a particular product or medium, or an optional basis, meaning that a particular technology may be, but is not required to be, utilized. If standards are re-examined or a new standard is developed in which we are not included, our revenue growth in that area of our business could be significantly lower than expected.

53

As new technologies and entertainment media emerge, new standards relating to these technologies or media may develop. New standards may also emerge in existing markets that are currently characterized by competing formats, such as the market for PCs. We may not be successful in our efforts to include our technology in any such standards.
Changes in or failure to comply with FCC requirements could adversely impact our HD Radio revenue.
In October 2002, the Federal Communications Commission, or the FCC, selected DTS’s “In-Band, On-Channel (“IBOC”) technology, also known as “HD Radio technology,” as the exclusive technology for introduction of terrestrial digital operations by AM and FM radio stations. In the United States, the FCC regulates the broadcast radio industry, interprets laws enacted by Congress and establishes and enforces regulations governing radio broadcasting. It is unclear what rules and regulations the FCC may adopt regarding digital audio broadcasting and what effect, if any, such rules and regulations will have on our DTS business, the operations of stations using our HD Radio technology or consumer electronics manufacturers. Any additional rules and regulations imposed on digital audio broadcasting could adversely impact the attractiveness of HD Radio technology and negatively impact our business. Also, non-compliance by us, or by radio stations offering HD Radio broadcasts, with any FCC requirements or conditions could result in fines, additional license conditions, license revocation or other detrimental FCC actions.

Our licensing of industry standard technologies can be subject to limitations that could adversely affect our business and prospects.

When a standards-setting body adopts our technologies as explicit industry standards, we generally must agree to license such technologies on a fair, reasonable and non-discriminatory basis, which we believe means that we treat similarly situated licensees similarly. In these situations, we may be required to limit the royalty rates we charge for these technologies, which could adversely affect our business. Furthermore, we may have limited control over whom we license such technologies to, and may be unable to restrict many terms of the license. From time to time, we may be subject to claims that our licenses of our industry standard technologies may not conform to the requirements of the standards-setting body. Claimants in such cases could seek to restrict or change our licensing practices or our ability to license our technologies in ways that could harm our reputation and otherwise materially and adversely affect our business, operating results and prospects.

Our financial and operating results may vary, which may cause the price of our common stock to decline.
Our quarterly operating results have fluctuated in the past and are likely to do so in the future. Because our operating results are difficult to predict, one should not rely on quarterly or annual comparisons of our results of operations as an indication of our future performance. Factors that could cause our operating results to fluctuate during any period or that could adversely affect our ability to achieve our strategic objectives include those listed in this “ Risk Factors " section of this report and the following:
•
the timing of, and compliance with license or service agreements and the terms and conditions for payment to us of license or service fees under these agreements;
•
fluctuations in our royalties caused by the pricing terms of certain of our license agreements;
•
the amount of our product and service revenue;
•
changes in the level of our operating expenses;
•
delays in our introduction of new technologies or market acceptance of these new technologies through new license agreements;
•
our ability to protect or enforce our intellectual property rights or the terms of our agreements;
•
legal proceedings affecting our patents, patent applications or license agreements;
•
the timing of the introduction by others of competing technologies;
•
changes in demand for semiconductor chips in the specific end markets in which we concentrate;
•
changes in demand for camera-enabled devices including cell phones, security systems and personal computers;
•
the timing of the conclusion of license agreements;
•
the length of time it takes to establish new licensing arrangements;
•
meeting the requirements for revenue recognition under generally accepted accounting principles;
•
changes in generally accepted accounting principles including new accounting standards which may materially affect our revenue recognition; and
•
cyclical fluctuations in semiconductor markets generally.
Due to fluctuations in our operating results, reports from market and security analysts, litigation-related developments, and other factors, the price at which our common stock will trade is likely to continue to be highly volatile. In future periods, if our revenue, cash flows or operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline.

54

We may not continue to pay dividends at the same rate we are currently paying them, or at all, and any decrease in or suspension of the dividend could cause our stock price to decline.

In February 2015, we announced a doubling of the current quarterly dividend to $0.20 per share which began in March 2015. We also have returned capital to shareholders through stock repurchases. We anticipate that all quarterly dividends and stock repurchases will be paid out of cash, cash equivalents and short-term investments. The payment of future cash dividends is subject to the final determination each quarter by our Board of Directors that the dividend remains in our best interests, which determination will be based on a number of factors, including our earnings, financial condition, actual and forecasted cash flows, capital resources and capital requirements, alternative uses of capital, economic condition and other factors considered relevant by management and the Board of Directors. Any decrease in the amount of the dividend, or suspension or discontinuance of payment of a dividend, could cause our stock price to decline.
Our stock repurchase program could increase the volatility of the price of our common stock, and the program may be suspended or terminated at any time, which may cause the trading price of our common stock to decline.

In August 2007, we authorized a plan to repurchase our outstanding shares of common stock dependent on market conditions, share price and other factors. As of June 30, 2017, the total amount available for repurchase under the plan was $158.2 million.

The amount of repurchases under our stock repurchase program will vary. During 2014, we repurchased approximately 2,800,000 shares for an aggregate amount of $65.6 million. In 2015, we repurchased approximately 3,300,000 shares for an aggregate amount of $119.2 million. In 2016, we repurchased approximately 2,300,000 shares for an aggregate amount of $67.7 million. Additionally, the timing of repurchases is at our discretion and the program may be suspended or discontinued at any time. Any suspension or discontinuation could cause the market price of our stock to decline. The timing of repurchases pursuant to our stock repurchase program could affect our stock price and increase its volatility. There can be no assurance that any stock repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we effected repurchases. Furthermore, the Company may engage in mergers, acquisitions, or other activity that could result in us reducing or discontinuing share repurchases for a period of time. For example, the DTS acquisition resulted in a significant decrease in cash, cash equivalents and short-term investments, as well as the issuance of approximately $600 million in debt. We made no repurchases during the first six months of 2017 and expect limited or no share repurchases during the remainder of 2017 as we accumulate cash to pay down the debt balance.
Provisions of our certificate of incorporation and bylaws or Delaware law might delay or prevent a change of control transaction and depress the market price of our stock.

Various provisions of our certificate of incorporation and bylaws might have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of our company. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain of these provisions eliminate cumulative voting in the election of directors, authorize the board to issue “blank check” preferred stock, prohibit stockholder action by written consent, eliminate the right of stockholders to call special meetings, and establish advance notice procedures for director nominations by stockholders and the submission of other proposals for consideration at stockholder meetings. We are also subject to provisions of Delaware law which could delay or make more difficult a merger, tender offer or proxy contest involving our company. In particular, Section 203 of the Delaware General Corporation Law prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless specific conditions are met. Any of these provisions could have the effect of delaying, deferring or preventing a change in control, including without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Items 2(a) and 2(b) are not applicable.
(c) Stock Repurchases

In August 2007, the Company’s Board of Directors authorized a plan to repurchase the Company’s outstanding shares of common stock dependent on market conditions, share price and other factors. No expiration date has been specified for this plan. We made no stock repurchases during the first quarter of 2017. At March 31, 2017, the total amount available for repurchase under our stock repurchase program was $158.2 million.


55

Item 3. Defaults Upon Senior Securities
Not applicable.

Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.

Item 6. Exhibits
 
Exhibit
Number
 
Exhibit Title
 
 
 
3.1
 
Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed December 1, 2016, and incorporated herein by reference)
 
 
 
3.2
 
Certificate of Amendment of the Restated Certificate of Incorporation dated as of February 22, 2017 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed February 27, 2017, and incorporated herein by reference)
 
 
 
3.3
 
Amended and Restated Bylaws, dated as of December 1, 2016 (filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed December 1, 2016, and incorporated herein by reference)
 
 
 
3.4
 
Amendment to the Amended and Restated Bylaws, dated as of December 6, 2016 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed December 7, 2016, and incorporated herein by reference)
 
 
 
3.5
 
Amendment to the Amended and Restated Bylaws, dated as of April 27, 2017 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed May 3, 2017, and incorporated herein by reference)
 
 
 
10.1
 
Employment and Severance Agreement, dated April 28, 2017, by and between the Company and Jon Kirchner
 
 
 
10.2
 
Employment Transition and Consulting Agreement, dated May 3, 2017, by and between the Company and Thomas Lacey
 
 
 
10.3
 
Non-Employee Director Compensation Policy, as amended and restated effective July 1, 2017
 
 
 
31.1
 
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
 
 
31.2
 
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
 
 
32.1
 
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 






56

















SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 2, 2017
 
 
 
 
XPERI CORPORATION
 
 
By:
 
/s/    Jon Kirchner
 
 
Jon Kirchner
Chief Executive Officer


57
Table of Contents

EXHIBIT INDEX

 
Exhibit
Number
 
Exhibit Title
 
 
 
3.1
 
Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed December 1, 2016, and incorporated herein by reference)
 
 
 
3.2
 
Certificate of Amendment of the Restated Certificate of Incorporation dated as of February 22, 2017 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed February 27, 2017, and incorporated herein by reference)
 
 
 
3.3
 
Amended and Restated Bylaws, dated as of December 1, 2016 (filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed December 1, 2016, and incorporated herein by reference)
 
 
 
3.4
 
Amendment to the Amended and Restated Bylaws, dated as of December 6, 2016 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed December 7, 2016, and incorporated herein by reference)
 
 
 
3.5
 
Amendment to the Amended and Restated Bylaws, dated as of April 27, 2017 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed May 3, 2017, and incorporated herein by reference)
 
 
 
10.1
 
Employment and Severance Agreement, dated April 28, 2017, by and between the Company and Jon Kirchner
 
 
 
10.2
 
Employment Transition and Consulting Agreement, dated May 3, 2017, by and between the Company and Thomas Lacey
 
 
 
10.3
 
Non-Employee Director Compensation Policy, as amended and restated effective July 1, 2017
 
 
 
31.1
 
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
 
 
31.2
 
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
 
 
32.1
 
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

 


58
Execution Copy

Exhibit 10.1
     
EMPLOYMENT AND SEVERANCE AGREEMENT

This Employment and Severance Agreement (“ Agreement ”) is made by and between Xperi Corporation, a Delaware corporation (the “ Company ”), and Jon Kirchner (“ Executive ”), effective as of April 28, 2017 (such date, the “ Effective Date ”). For purposes of this Agreement (other than Section 1(c) below), the “ Company ” shall mean the Company and its subsidiaries.
The parties agree as follows:
1.     Definitions . For purposes of this Agreement, the following terms shall have the following meanings:
(a)    “ Board ” shall mean the Board of Directors of the Company.
(b)    “ Cause ” shall mean any of the following: (i) Executive’s gross negligence or willful misconduct in the performance of his or her duties to the Company and its affiliates; (ii) Executive’s willful and habitual neglect of or failure to perform Executive’s duties of consulting or employment (which neglect or failure is not caused by Executive’s illness or mental or physical disability), which neglect or failure is not cured within thirty (30) days after written notice thereof is received by Executive (it being agreed that a failure of the Company and its affiliates to meet performance objectives shall not, alone, constitute a failure by Executive to perform his duties); (iii) Executive’s commission of any material act of fraud, dishonesty or financial or accounting impropriety with respect to the Company and its affiliates which results in a personal benefit to Executive; (iv) Executive’s failure to cooperate with the Company and its affiliates in any investigation or formal proceeding initiated by a governmental authority or otherwise approved by the Board or the Audit Committee of the Board (which failure is not caused by Executive’s illness or mental or physical disability), which failure is not cured within thirty (30) days after written notice thereof is received by Executive; (v) Executive’s conviction of or plea of guilty or nolo contendere to felony criminal conduct (other than moving vehicle violations); (vi) Executive’s material violation of the Company’s Confidentiality and Proprietary Rights Agreement (as defined below) or similar agreement that Executive has entered into with the Company and its affiliates; or (vii) Executive’s material breach of any obligation or duty under this Agreement or material violation of any written employment or other Company policies that have previously been furnished to Executive, which breach or violation is not cured within thirty (30) days after written notice thereof is received by Executive, if such breach or violation is capable of being cured.
(c)    “ Change in Control ” shall mean and include each of the following:
    
(i)    A transaction or series of transactions (other than an offering of the Company’s common stock to the general public through a registration statement filed with the Securities and Exchange Commission) whereby any “person” or related “group” of “persons” (as such terms are used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (other than the Company, any of its subsidiaries, an employee benefit plan maintained by the Company or any of its subsidiaries or a “person” that, prior to such transaction, directly or indirectly controls, is controlled by, or is under common control with, the Company) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company possessing more than fifty percent (50%) of the total combined voting power of the Company’s securities outstanding immediately after such acquisition; or

(ii)    The consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more intermediaries) of (x)






US-DOCS\86088549.7


a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of the Company’s assets in any single transaction or series of related transactions or (z) the acquisition of assets or stock of another entity, in each case other than a transaction:

(A)    Which results in the Company’s voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company’s assets or otherwise succeeds to the business of the Company (the Company or such person, the “ Successor Entity ”)) directly or indirectly, at least a majority of the combined voting power of the Successor Entity’s outstanding voting securities immediately after the transaction, and

(B)    After which no person or group beneficially owns voting securities representing fifty percent (50%) or more of the combined voting power of the Successor Entity; provided, however, that no person or group shall be treated for purposes of this Section 1(c)(ii)(B) as beneficially owning fifty percent (50%) or more of combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction.

The Board shall have full and final authority, which shall be exercised in its reasonable discretion, to determine conclusively whether a Change in Control of the Company has occurred pursuant to the above definition, and the date of the occurrence of such Change in Control and any incidental matters relating thereto.
        
Notwithstanding the foregoing, to the extent required by Section 409A of the Code, if a Change in Control would give rise to a payment or benefit event with respect to any payment or benefit hereunder that constitutes “nonqualified deferred compensation,” the transaction or event constituting the Change in Control must also constitute a “change in control event” (as defined in Treasury Regulation §1.409A-3(i)(5)) in order to give rise to the payment or benefit, to the extent required by Section 409A of the Code.

(d)    “ Code ” means the Internal Revenue Code of 1986, as amended, and the Treasury Regulations and other interpretive guidance thereunder.

(e)    “ Good Reason ” shall mean the occurrence of any of the following events or conditions without Executive’s written consent:

(i)    a material diminution in Executive’s authority, duties or responsibilities (it being agreed that Executive not serving as the chief executive officer of a publicly-traded entity is a material diminution in Executive’s authority, duties, and responsibilities for this purpose);
(ii)    a material diminution in Executive’s base compensation or target annual bonus opportunity, unless such reduction is imposed across-the-board to senior management of the Company (and Executive and the Company agree that without limiting any argument that a lesser diminution is material, any diminution of ten percent (10%) or more measured against Executive’s base compensation and target bonus opportunity as in effect on the Effective Date shall be deemed material for purposes of this clause (ii));
(iii)    a material change in the geographic location at which Executive must perform his or her duties (and the Company and Executive acknowledge and agree that a change in the

2





US-DOCS\86088549.7

geographic location at which Executive must perform his or her duties by more than forty-five (45) miles shall constitute a material change for purposes of this Agreement);
(iv)    any other action or inaction that constitutes a material breach by the Company or any successor or affiliate of its obligations to Executive under this Agreement; or

(v)    the failure of the Board to appoint Executive as Chief Executive Officer of the Company on or before June 1, 2017.

Executive must provide written notice to the Company of the occurrence of any of the foregoing events or conditions without Executive’s written consent within ninety (90) days of Executive learning of the occurrence of such event. The Company or any successor or affiliate shall have a period of thirty (30) days to cure such event or condition after receipt of written notice of such event from Executive. Any voluntary Separation from Service for “Good Reason” following such thirty (30) day cure period must occur no later than the date that is six (6) months following the occurrence of one of the foregoing events or conditions without Executive’s written consent.

(f)    “ Permanent Disability ” means Executive’s inability to perform the essential functions of his or her position, with or without reasonable accommodation, for a period of at least one hundred twenty (120) consecutive days because of a physical or mental impairment.

                   (g)     “ Separation from Service ” means a “separation from service” within the meaning of Section 409A of the Code.

(h)    “ Stock Awards ” means all stock options, restricted stock units and such other equity-based awards granted pursuant to the Company’s equity award plans or agreements.

2.     Term .

(a)    The initial term of this Agreement (the “ Term ”) shall continue through June 1, 2020, and shall automatically extend for an additional twelve (12) months (such extension, if it occurs, also considered to be part of the “ Term ”) unless either party provides the other party at least ninety (90) days’ advanced written notice of non-renewal prior to the expiration of the initial three-year Term. In the event the Company chooses not to renew this Agreement so that the Term is not extended for the fourth (4 th ) year, the Executive’s employment will be deemed terminated without Cause as of immediately prior to the expiration of the initial three-year Term. In the event the Term expires at the end of the fourth (4 th ) year, such expiration shall not be deemed a termination without Cause and Executive shall not be entitled to severance hereunder as a result of such expiration.

(b)    Notwithstanding the provisions of Section 2(a), the then-effective Term shall automatically be extended in the event that the Term would otherwise expire during the period commencing upon the first public announcement of a definitive agreement that would result in a Change in Control (even though still subject to approval of the Company’s stockholders and other conditions and contingencies) and ending on the date that is eighteen (18) months following the occurrence of such Change in Control. Such extension shall be upon the terms and conditions of this Agreement as then in effect and shall expire upon the later of (i) the first to occur of (A) the first public announcement of the termination of such definitive agreement or (B) the date that is eighteen (18) months following the occurrence of such Change in Control, or (ii) June 1, 2021. In the event the Term expires pursuant to the preceding sentence, such expiration shall not be deemed a termination without Cause and Executive shall not be entitled to severance hereunder as a result of such expiration.


3





US-DOCS\86088549.7

(c)    Notwithstanding the foregoing, the obligation of the Company to make payments or provide benefits pursuant to this Agreement to which Executive has acquired a right in accordance with the applicable provisions of this Agreement prior to the expiration of the Term shall survive the termination of this Agreement until such payments and benefits have been provided in full.

3.     Duties . Effective as of the Effective Date, the Executive shall continue to serve as the Company’s President. On or before June 1, 2017, the Executive shall be appointed as the Company’s Chief Executive Officer, reporting to the Company’s board of directors (the “ Board ”), and thereafter Executive shall serve in such capacity. Executive shall devote his full business time, efforts, and skill to the performance of his duties to the Company. Notwithstanding the foregoing, Executive shall be permitted to serve on boards of directors (or similar bodies) of non-profit and charitable organizations, and, with the consent of the Board, boards of directors of other for profit entities, so long as such duties do not materially interfere with his ability to perform his duties to the Company. So long as Executive is serving as the Company’s Chief Executive Officer, (i) the Company shall use its best efforts, subject to the Board’s exercise of its fiduciary duties under applicable law, to cause Executive to be recommended and nominated for service on the Board at every appropriate opportunity, and (ii) upon the resignation of any existing member of the Board, Executive shall be appointed to fill the open Board seat if Executive is not already a member of the Board; provided that the Company shall not be so obligated if Cause exists for the removal of Executive from the Board or for the failure to nominate or elect Executive to the Board. Executive shall be subject to and comply with the policies and procedures generally applicable to senior executives of the Company to the extent the same are not inconsistent with any term of this Agreement.

4.     Compensation .

(a)      Cash Compensation . During the Term, Executive shall be entitled to an annual base salary of (i) prior to June 1, 2017, $550,000 per annum, and (ii) from and after June 1, 2017, $600,000 per annum (the “ Base Salary ”), payable in accordance with the Company’s standard payroll practices. Executive shall be entitled to an annual bonus with a target amount of 100% of Base Salary and a maximum payout amount of 200% of Base Salary for over-performance, payable in accordance with the Company’s standard bonus arrangements for executive officers as determined by the Compensation Committee of the Board.

(b)      Equity Compensation . On June 1, 2017 (the “ Grant Date ”), Executive will be granted such number of restricted stock units (the “ RSUs ”) as is determined by dividing (i) $14,500,000 by (ii) the ten (10)-day weighted average volume closing price for the Company’s common stock for the ten (10) trading days commencing on and including May 4, 2017. The RSUs will be granted under the Company’s Sixth Amended and Restated 2003 Equity Incentive Plan (the “ Plan ”). Thirty percent (30%) of the RSUs (the “ Time-Based RSUs ”) shall vest subject to solely to continued employment, with 25% of such Time-Based RSUs vesting on each of the next four anniversaries of the Grant Date. The remaining RSUs (the “ Performance-Based RSUs ”) shall vest based on the Company’s performance for each of 2017, 2018, 2019 and 2020, with up to twenty-five percent (25%) of such Performance-Based RSUs eligible to vest each year at “target” performance based on the Company’s performance, which annual performance targets shall be determined by mutual agreement between Executive and Company’s Compensation Committee and subject to increased settlement for over-performance, and proportional settlement for under-performance, (meaning, for the avoidance of doubt, that Executive may vest in up to 200% of the Performance-Based RSUs each year at “maximum” performance and as few as 0% of the Performance-Based RSUs may vest in the event of underperformance). The RSUs shall otherwise reflect the Company’s standard terms and conditions for RSU awards, provided that the award agreement will allow net settlement of the award at Executive’s election for purposes of satisfying Executive’s tax withholding upon vesting of the RSUs (which net settlement shall be subject to the terms of the Plan and the award agreement).
  

4





US-DOCS\86088549.7


5.     Severance .

(a)    If Executive has a Separation from Service as a result of Executive’s discharge by the Company without Cause or by reason of Executive’s resignation for Good Reason, Executive shall be entitled to receive, in lieu of any severance benefits to which Executive may otherwise be entitled under any severance plan or program of the Company, the benefits provided below, which, with respect to clause (ii) and clause (vii)(B), will be payable in a lump sum on the day that is sixty (60) days following the date of Executive’s Separation from Service:

(i)    The Company shall pay to Executive his or her fully earned but unpaid Base Salary, when due, through the date of Executive’s Separation from Service at the rate then in effect, reimbursement of business expenses incurred prior to the date of Executive’s Separation from Service and properly submitted in accordance with Company policy, plus all other benefits, if any, under any Company group retirement plan, nonqualified deferred compensation plan, equity award plan or agreement, health benefits plan or other Company group benefit plan to which Executive may be entitled pursuant to the terms of such plans or agreements at the time of Executive’s Separation from Service, plus all amounts required to be paid to Executive under applicable law (the “ Accrued Obligations ”);

(ii)    Subject to Section 5(c) and Executive’s continued compliance with Section 6, Executive shall be entitled to receive severance pay in an amount equal to two-hundred percent (200%) multiplied by the sum of (x) Executive’s annual Base Salary as in effect immediately prior to the date of Executive’s Separation from Service (ignoring any reduction in Base Salary in the event a reduction in Base Salary triggered Executive’s resignation for Good Reason), plus (y) Executive’s target annual bonus for the calendar year in which Executive’s Separation from Service occurs (provided that, in the event Executive’s Separation from Service occurs more than sixty (60) days prior to a Change in Control or more than eighteen (18) months following a Change in Control, such bonus shall be prorated for the portion of the calendar year that has elapsed prior to the date of Executive’s Separation from Service);

(iii)     Subject to Section 5(c) and Executive’s continued compliance with Section 6, for the period beginning on the date of Executive’s Separation from Service and ending on the date which is twenty-four (24) full months following the date of Executive’s Separation from Service (or, if earlier, the date on which the applicable continuation period under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA ”) expires) (the “ COBRA Coverage Period ”), the Company shall continue to provide Executive and his or her eligible dependents who were covered under the Company’s health insurance plans as of the date of Executive’s Separation from Service with health (including medical and dental) insurance benefits substantially similar to those provided to Executive and his or her dependents immediately prior to the date of such Separation from Service. If any of the Company’s health benefits are self-funded as of the date of Executive’s Separation from Service, or if the Company cannot provide the foregoing benefits in a manner that is exempt from or otherwise compliant with applicable law or the provision of such benefits may result in the Company incurring penalties under applicable law (including, without limitation, Section 409A of the Code and Section 2716 of the Public Health Service Act), instead of providing continued health insurance benefits as set forth above, the Company shall instead pay to Executive an amount equal to the monthly premium payment for Executive and his or her eligible dependents who were covered under the Company’s health plans as of the date of Executive’s Separation from Service (calculated by reference to the premium as of the date of Separation from Service) as currently taxable compensation, in substantially equal monthly installments over the COBRA Coverage Period (or the remaining portion thereof);
(iv)     Subject to Section 5(c) and Executive’s continued compliance with Section 6, the vesting and/or exercisability of each of Executive’s outstanding Stock Awards shall be accelerated as

5





US-DOCS\86088549.7

to the number of covered shares that would vest over the twelve (12) month period following the date of Executive’s Separation from Service had Executive remained continuously employed by the Company during such period, and vesting of all Stock Awards with performance-based vesting scheduled to be measured with respect to the fiscal year in which the Separation of Service occurs shall vest based on performance being deemed satisfied at target, with such acceleration to be effective as of the date of Executive’s Separation from Service (provided that payment or settlement of such Stock Awards may be delayed as provided in the grant documents to the extent required by Section 409A of the Code); provided, however, that in the event Executive’s Separation from Service occurs within sixty (60) days prior to a Change in Control or within eighteen (18) months following a Change in Control, the vesting and/or exercisability of each of Executive’s outstanding Stock Awards shall be accelerated, and vesting of all Stock Awards with performance-based vesting shall vest based on performance being deemed satisfied at target, with such acceleration to be effective as of the later of (A) the date of Executive’s Separation from Service or (B) the date of the Change in Control (provided that payment or settlement of such Stock Awards may be delayed as provided in the grant documents to the extent required by Section 409A of the Code).  Nothing in this Section 5(a)(iv) shall be construed to limit any more favorable vesting applicable to Executive’s Stock Awards in the Company’s equity plan(s) and/or the stock award agreements under which the Stock Awards were granted.  The foregoing provisions are hereby deemed to be a part of each Stock Award and to supersede any less favorable provision in any agreement or plan regarding such Stock Award; 
(v)     Subject to Section 5(c) and Executive’s continued compliance with Section 6, a post-termination exercise period for outstanding stock options covering shares of Company common stock of twelve (12) months; provided, however, that in no event may an option be exercised after the expiration of its maximum stated term;
(vi)    Subject to Section 5(c) and Executive’s continued compliance with Section 6, to the extent there remains any unpaid amount under the 2016 Executive Retention Bonus Plan as reflected by the Letter Agreement issued to Executive thereunder (the “ Retention Plan ”), any unpaid portion of Executive’s full Bonus Amount (as defined in the Retention Plan) paid less applicable withholdings on the first regularly scheduled payroll date that occurs on or after June 1, 2018 (and in any event, no later than June 30, 2018);
(vii)    Subject to Section 5(c) and Executive’s continued compliance with Section 6, if Executive’s Separation from Service as a result of Executive’s discharge by the Company without Cause or by reason of Executive’s resignation for Good Reason occurs prior to June 1, 2017, or if Executive resigns for Good Reason as a result of the Company’s violation of clause (v) of the definition of Good Reason, then, in addition to the amounts and benefits set forth in clauses (i) through (vi) above, Executive shall be entitled to receive (A) additional severance pay in the amount, if any, by which (1) the amounts that would have been payable to Executive pursuant to Sections 3(c)(ii)(II) and 3(c)(vi) of the Severance Agreement (as defined below) as of the date of Executive’s Separation from Service if such Severance Agreement had remained in effect through such date and such amounts were payable to Executive exceed (2) the amounts payable to Executive pursuant to Section 5(a)(vi) above, which excess (if any) shall be payable in a lump sum on the day that is sixty (60) days following the date of Executive’s Separation from Service; (B) if the RSUs described in Section 4(b) have not been granted to Executive prior to the date of Executive’s Separation from Service, additional severance pay in the amount of $3,625,000, payable in a lump sum on the day that is sixty (60) days following the date of Executive’s Separation from Service; (C) the full acceleration of vesting of Executive’s outstanding stock options and stock appreciation rights that were outstanding as of December 1, 2016 and an extension of the exercise period of Executive’s stock options and stock appreciation rights until the earlier of (1) five (5) years from the date of Executive’s Separation from Service, or (2) the remaining life of the equity grants; and (D) eighteen (18) months outplacement services provided by an outplacement vendor selected by the Company.

6





US-DOCS\86088549.7

(b)     Other Terminations . If Executive’s employment is terminated by the Company for Cause, by Executive without Good Reason, as a result of Executive’s death or Permanent Disability, or as a result of the expiration of the Term (other than as a result of the termination of the Term by reason of the Company choosing not to renew this Agreement so that the Term is not extended for the fourth (4 th ) year), the Company shall not have any other or further obligations to Executive under this Agreement (including any financial obligations) except that Executive shall be entitled to receive the Accrued Obligations. The foregoing shall be in addition to, and not in lieu of, any and all other rights and remedies which may be available to the Company under the circumstances, whether at law or in equity.

(c)     Release . As a condition to Executive’s receipt of any post-termination benefits pursuant to Section 5(a) above (other than the Accrued Obligations), Executive shall execute and not revoke a general release of all claims in favor of the Company (the “ Release ”) in the form substantially similar to that attached hereto as Exhibit A (and any applicable revocation period applicable to such Release shall have expired) within the sixty (60) day period following the date of Executive’s Separation from Service.

(d)     Exclusive Remedy . Except as otherwise expressly required by law (e.g., COBRA) or as specifically provided herein, all of Executive’s rights to salary, severance, benefits, bonuses and other amounts hereunder (if any) accruing after the termination of Executive’s employment shall cease upon such termination. In the event of a termination of Executive’s employment with the Company, and except in the event of violation of applicable law by the Company relating to Executive’s employment or the termination thereof, Executive’s sole remedy shall be to receive the payments and benefits described in this Section 5.
(e)     No Mitigation . Executive shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 5 be reduced by any compensation earned by Executive as the result of employment by another employer or self-employment or by retirement benefits; provided , however , that loans, advances or other amounts owed by Executive to the Company and its affiliates may be offset by the Company against amounts payable to Executive under this Section 5.
(f)     Return of the Company’s Property . If Executive’s employment is terminated for any reason, the Company shall have the right, at its option, to require Executive to vacate his or her offices prior to or on the effective date of termination and to cease all activities on the Company’s behalf. Upon the termination of his or her employment in any manner, as a condition to Executive’s receipt of any post-termination benefits described in this Agreement, Executive shall immediately surrender to the Company all lists, books and records of, or in connection with, the Company’s business, and all other property belonging to the Company and its affiliates, it being distinctly understood that all such lists, books and records, and other documents, are the property of the Company and its affiliates. Executive shall deliver to the Company a signed statement certifying compliance with this Section 5(f) prior to the receipt of any post-termination benefits described in this Agreement.
(g)     Best Pay Provision .

                   (i)     If any payment or benefit Executive would receive under this Agreement, when combined with any other payment or benefit Executive receives pursuant to the termination of Executive’s employment with the Company and its affiliates (“ Payment ”), would (A) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (B) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “ Excise Tax ”), then such Payment shall be either (1) the full amount of such Payment or (2) such lesser amount (with cash payments being reduced before stock option compensation) as would result in no portion of the Payment being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state and local employment taxes,

7





US-DOCS\86088549.7

income taxes, and the Excise Tax, results in Executive’s receipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax.

(ii)     All determinations required to be made under this Section 5(g), including whether and to what extent the Payments shall be reduced and the assumptions to be utilized in arriving at such determination, shall be made by the nationally recognized certified public accounting firm used by the Company immediately prior to the effective date of the Change in Control or, if such firm declines to serve, such other nationally recognized certified public accounting firm as may be designated by the Company (the “ Accounting Firm ”).   The Accounting Firm shall provide detailed supporting calculations both to Executive and the Company at such time as is requested by the Company.  All fees and expenses of the Accounting Firm shall be borne solely by the Company.  Any determination by the Accounting Firm shall be binding upon Executive and the Company.  For purposes of making the calculations required by this Section 5(g), the Accounting Firm may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good-faith interpretations concerning the application of Sections 280G and 4999 of the Code.

6.     Confidentiality and Proprietary Rights . Executive and the Company have executed the Company’s Confidentiality and Proprietary Rights Agreement, a copy of which is attached to this Agreement as Exhibit B and incorporated herein by reference (the “ Confidentiality and Proprietary Rights Agreement ”). The Company shall be entitled to cease all severance payments and benefits to Executive in the event of his or his material breach of this Section 6. Nothing in this Agreement or in the Confidentiality and Proprietary Rights Agreement shall be deemed to restrict Executive’s right to communicate directly with, cooperate with, provide information to, or report possible violations of federal law or regulation to, any governmental agency or entity in accordance with the provisions of and rules promulgated under Section 21F of the Securities Exchange Act of 1934 or Section 806 of the Sarbanes-Oxley Act of 2002, or any other whistleblower protection provisions of state or federal law or regulation, including, but not limited to, the U.S. Securities and Exchange Commission, the U.S. Commodity Futures Trading Commission, or the U.S. Department of Justice.
7.     Agreement to Arbitrate . Any dispute, claim or controversy based on, arising out of or relating to Executive’s employment or this Agreement shall be settled by final and binding arbitration in San Jose, California, before a single neutral arbitrator in accordance with the Employment Arbitration Rules and Procedures (the “ Rules ”) of Judicial Arbitration and Mediation Services (“ JAMS ”), and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction. The Rules may be found online at www.jamsadr.com. Arbitration may be compelled pursuant to the California Arbitration Act (Code of Civil Procedure §§ 1280 et seq .). If the parties are unable to agree upon an arbitrator, one shall be appointed by JAMS in accordance with its Rules. Each party shall pay the fees of its own attorneys, the expenses of its witnesses and all other expenses connected with presenting its case; provided , however , Executive and the Company agree that, to the extent permitted by law, the arbitrator may, in his or her discretion, award reasonable attorneys’ fees to the prevailing party; provided , further , that the prevailing party shall be reimbursed for such fees, costs and expenses within forty-five (45) days following any such award, but in no event later than the last day of Executive’s taxable year following the taxable year in which the fees, costs and expenses were incurred; provided , further , that the parties’ obligations pursuant to this sentence shall terminate on the tenth (10 th ) anniversary of the date of Executive’s termination of employment; provided , however , that Executive shall retain the right to file administrative charges with or seek relief through any government agency of competent jurisdiction, and to participate in any government investigation, including but not limited to (a) claims for workers’ compensation, state disability insurance or unemployment insurance; (b) claims for unpaid wages or waiting time penalties brought before the California Division of Labor Standards Enforcement; provided , however , that any appeal from an award or from denial of an award of wages and/or waiting time penalties shall be arbitrated pursuant to the terms of this Agreement; and (c) claims for administrative relief from the United States Equal Employment Opportunity Commission and/or

8





US-DOCS\86088549.7

the California Department of Fair Employment and Housing (or any similar agency in any applicable jurisdiction other than California); provided , further , that Executive shall not be entitled to obtain any monetary relief through such agencies other than workers’ compensation benefits or unemployment insurance benefits. Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, JAMS’ administrative fees, the fee of the arbitrator, and all other fees and costs, shall be borne by the Company. This Section 7 is intended to be the exclusive method for resolving any and all claims by the parties against each other for payment of damages under this Agreement or relating to Executive’s employment; provided , however , that neither this Agreement nor the submission to arbitration shall limit the parties’ right to seek provisional relief, including without limitation injunctive relief, in any court of competent jurisdiction pursuant to California Code of Civil Procedure § 1281.8 or any similar statute of an applicable jurisdiction. Seeking any such relief shall not be deemed to be a waiver of such party’s right to compel arbitration. Both Executive and the Company expressly waive their right to a jury trial.

8.     At-Will Employment Relationship . Executive’s employment with the Company is at-will and not for any specified period and may be terminated at any time, with or without Cause or advance notice, by either Executive or the Company. Any change to the at-will employment relationship must be by specific, written agreement signed by Executive and an authorized representative of the Company. Nothing in this Agreement is intended to or should be construed to contradict, modify or alter this at-will relationship.
9.     General Provisions .
9.1     Successors and Assigns . The rights of the Company under this Agreement may, without the consent of Executive, be assigned by the Company, in its sole and unfettered discretion, to any person, firm, corporation or other business entity which at any time, whether by purchase, merger or otherwise, directly or indirectly, acquires all or substantially all of the assets or business of the Company. The Company will require any successor (whether direct or indirect, by purchase, merger or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place; provided , however , that no such assumption shall relieve the Company of its obligations hereunder; provided , further , that the failure of any such successor to so assume this Agreement shall constitute a material breach of this Agreement.  As used in this Agreement, the “ Company ” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. Executive shall not be entitled to assign any of Executive’s rights or obligations under this Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.
9.2     Severability . In the event any provision of this Agreement is found to be unenforceable by an arbitrator or court of competent jurisdiction, such provision shall be deemed modified to the extent necessary to allow enforceability of the provision as so limited, it being intended that the parties shall receive the benefit contemplated herein to the fullest extent permitted by law. If a deemed modification is not satisfactory in the judgment of such arbitrator or court, the unenforceable provision shall be deemed deleted, and the validity and enforceability of the remaining provisions shall not be affected thereby.
9.3     Interpretation; Construction . The headings set forth in this Agreement are for convenience only and shall not be used in interpreting this Agreement. This Agreement has been drafted by legal counsel representing the Company, but Executive has participated in the negotiation of its terms. Furthermore, Executive acknowledges that Executive has had an opportunity to review and revise the Agreement and have it reviewed by legal counsel, if desired, and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement. Either party’s failure to enforce any provision of this Agreement shall not

9





US-DOCS\86088549.7

in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Agreement.
9.4     Governing Law and Venue . This Agreement will be governed by and construed in accordance with the laws of the United States and the State of California applicable to contracts made and to be performed wholly within such State, and without regard to the conflicts of laws principles thereof. Any suit brought hereon shall be brought in the state or federal courts sitting in Santa Clara County, California, the Parties hereby waiving any claim or defense that such forum is not convenient or proper. Each party hereby agrees that any such court shall have in personam jurisdiction over it and consents to service of process in any manner authorized by California law.
9.5     Notices. Any notice required or permitted by this Agreement shall be in writing and shall be delivered as follows with notice deemed given as indicated: (a) by personal delivery when delivered personally; (b) by overnight courier upon written verification of receipt; (c) by telecopy or facsimile transmission upon acknowledgment of receipt of electronic transmission; or (d) by certified or registered mail, return receipt requested, upon verification of receipt. Notice shall be sent to Executive at the address set forth in the Company’s personnel records and to the Company at its principal place of business, or such other address as either party may specify in writing.
9.6     Survival . Sections 1 (“Definitions”), 2 (“Term”), 5 (“Severance”), 6 (“Confidentiality and Proprietary Rights”), 7 (“Agreement to Arbitrate”) and 9 (“General Provisions”) of this Agreement shall survive termination of Executive’s employment by the Company.
9.7     Entire Agreement . This Agreement and the Confidentiality and Proprietary Rights Agreement and the Retention Plan incorporated herein by reference together constitute the entire agreement between the parties in respect of the subject matter contained herein and therein and supersede all prior or simultaneous representations, discussions, negotiations, and agreements, whether written or oral, including, without limitation, any employment agreement or offer letter executed by the Company and Executive in effect prior to the Effective Date, that certain Severance Agreement effective as of December 1, 2016 between the Company and Executive (the “ Severance Agreement ”) and that certain Change in Control Severance Agreement made by and between the Company and Executive effective as of December 1, 2016. This Agreement may be amended or modified only with the written consent of Executive and an authorized representative of the Company. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.
9.8     Code Section 409A .
(a)    To the extent applicable, this Agreement shall be interpreted in accordance with Code Section 409A and Department of Treasury regulations and other interpretive guidance issued thereunder. Each series of installment payments made under this Agreement is hereby designated as a series of “separate payments” within the meaning of Section 409A of the Code.
(b)    If Executive is a “specified employee” (as defined in Section 409A of the Code), as determined by the Company in accordance with Section 409A of the Code, on the date of Executive’s Separation from Service, to the extent that the payments or benefits under this Agreement are subject to Section 409A of the Code and the delayed payment or distribution of all or any portion of such amounts to which Executive is entitled under this Agreement is required in order to avoid a prohibited distribution under Section 409A(a)(2)(B)(i) of the Code, then such portion deferred pursuant to this Section 9.8(b) shall be paid or distributed to Executive in a lump sum on the earlier of (i) the date that is six (6)-months following Executive’s Separation from Service, (ii) the date of Executive’s death or (iii) the earliest date as is permitted under Section 409A of the Code. Any remaining payments due under the Agreement shall be paid as otherwise provided herein.

10





US-DOCS\86088549.7

(c)    Notwithstanding anything to the contrary in this Agreement, in-kind benefits and reimbursements provided under this Agreement during any tax year of Executive shall not affect in-kind benefits or reimbursements to be provided in any other tax year of Executive and are not subject to liquidation or exchange for another benefit.  Notwithstanding anything to the contrary in this Agreement, reimbursement requests must be timely submitted by Executive and, if timely submitted, reimbursement payments shall be made to Executive as soon as administratively practicable following such submission, but in no event later than the last day of Executive’s taxable year following the taxable year in which the expense was incurred.  In no event shall Executive be entitled to any reimbursement payments after the last day of Executive’s taxable year following the taxable year in which the expense was incurred.  This section shall only apply to in-kind benefits and reimbursements that would result in taxable compensation income to Executive.
                  9.9     Consultation with Legal and Financial Advisors . By executing this Agreement, Executive acknowledges that this Agreement confers significant legal rights, and may also involve the waiver of rights under other agreements; that the Company has encouraged Executive to consult with Executive’s personal legal and financial advisors; and that Executive has had adequate time to consult with Executive’s advisors before executing this Agreement. The Company shall reimburse Executive’s fees and expenses incurred in connection with negotiating and executing this Agreement up to a maximum of $30,000; provided, however, that all such reimbursement shall be paid no later than the end of the calendar year following the year in which the applicable expense was incurred.

9.10     Counterparts . This Agreement may be executed in multiple counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.
(Signature Page Follows)




11





US-DOCS\86088549.7


THE PARTIES TO THIS AGREEMENT HAVE READ THE FOREGOING AGREEMENT AND FULLY UNDERSTAND EACH AND EVERY PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE DATES SHOWN BELOW.
XPERI CORPORATION


Dated:     April 29, 2017                 By:     /s/ Paul Davis                    
Name:     Paul Davis
Title:    Senior Vice President and General Counsel



EXECUTIVE


Dated:     April 28, 2017                      /s/ Jon Kirchner                    
Jon Kirchner

                        

            



[SIGNATURE PAGE TO EMPLOYMENT AND SEVERANCE AGREEMENT]



        

EXHIBIT A

GENERAL RELEASE OF CLAIMS

[ The language in this Release may change based on legal developments and evolving best practices; provided, however, that no new post-termination covenants shall be imposed on Executive; this form is provided as an example of what will be included in the final Release document. ]
This General Release of Claims (“ Release ”) is entered into as of this _____ day of ________, ____, between Jon Kirchner (“ Executive ”), and Xperi Corporation, a Delaware corporation (the “ Company ”) (collectively referred to herein as the “ Parties ”).
WHEREAS, Executive and the Company are parties to that certain Employment and Severance Agreement dated as of April 28, 2017 (the “ Agreement ”);
WHEREAS, the Parties agree that Executive is entitled to certain severance benefits under the Agreement, subject to Executive’s execution of this Release; and
WHEREAS, the Company and Executive now wish to fully and finally to resolve all matters between them.
NOW, THEREFORE, in consideration of, and subject to, the severance benefits payable to Executive pursuant to the Agreement, the adequacy of which is hereby acknowledged by Executive, and which Executive acknowledges that he or she would not otherwise be entitled to receive, Executive and the Company hereby agree as follows:
1.     General Release of Claims by Executive .
(a)    Executive, on behalf of himself or herself and his or her executors, heirs, administrators, representatives and assigns, hereby agrees to release and forever discharge the Company and all predecessors, successors and their respective parent corporations, affiliates, related, and/or subsidiary entities, and all of their past and present investors, directors, shareholders, officers, general or limited partners, employees, attorneys, agents and representatives, and the employee benefit plans in which Executive is or has been a participant by virtue of his or her employment with or service to the Company (collectively, the “ Company Releasees ”), from any and all claims, debts, demands, accounts, judgments, rights, causes of action, equitable relief, damages, costs, charges, complaints, obligations, promises, agreements, controversies, suits, expenses, compensation, responsibility and liability of every kind and character whatsoever (including attorneys’ fees and costs), whether in law or equity, known or unknown, asserted or unasserted, suspected or unsuspected (collectively, “ Claims ”), which Executive has or may have had against such entities based on any events or circumstances arising or occurring on or prior to the date hereof or on or prior to the date hereof, arising directly or indirectly out of, relating to, or in any other way involving in any manner whatsoever Executive’s employment by or service to the Company or the termination thereof, including any and all claims arising under federal, state, or local laws relating to employment, including without limitation claims of wrongful discharge, breach of express or implied contract, fraud, misrepresentation, defamation, or liability in tort, and claims of any kind that may be brought in any court or administrative agency including, without limitation, claims under Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. Section 2000, et seq .; the Americans with Disabilities Act, as amended, 42 U.S.C. § 12101 et seq .; the Rehabilitation Act of 1973, as amended, 29 U.S.C. § 701 et seq .; the Civil Rights Act of 1866, and the Civil Rights Act of 1991; 42 U.S.C. Section 1981, et seq .; the Age Discrimination

1


in Employment Act, as amended, 29 U.S.C. Section 621, et seq . (the “ ADEA ”); the Equal Pay Act, as amended, 29 U.S.C. Section 206(d); regulations of the Office of Federal Contract Compliance, 41 C.F.R. Section 60, et seq .; the Family and Medical Leave Act, as amended, 29 U.S.C. § 2601 et   seq .; the Fair Labor Standards Act of 1938, as amended, 29 U.S.C. § 201 et seq .; the Employee Retirement Income Security Act, as amended, 29 U.S.C. § 1001 et seq .; and the California Fair Employment and Housing Act, California Government Code Section 12940, et seq .
Notwithstanding the generality of the foregoing, Executive does not release the following claims:
(i)    Claims for unemployment compensation or any state disability insurance benefits pursuant to the terms of applicable state law;
(ii)    Claims for workers’ compensation insurance benefits under the terms of any worker’s compensation insurance policy or fund of the Company;
(iii)    Claims pursuant to the terms and conditions of the federal law known as COBRA;
(iv)    Claims for indemnity under the bylaws of the Company, as provided for by California law or under any applicable insurance policy or indemnification agreement with respect to Executive’s liability as an employee, director or officer of the Company ;
(v)     Claims based on any right Executive may have to enforce the Company’s executory obligations under the Agreement (including, for the avoidance of doubt, Claims to enforce the Company’s obligations to pay or provide payments and benefits that are contingent on the effectiveness of this Release); and
(vi)    Claims Executive may have to vested or earned compensation and benefits.
(b)    EXECUTIVE ACKNOWLEDGES THAT HE OR SHE HAS BEEN ADVISED OF AND IS FAMILIAR WITH THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS:
“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH, IF KNOWN BY HIM OR HER, MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”
BEING AWARE OF SAID CODE SECTION, EXECUTIVE HEREBY EXPRESSLY WAIVES ANY RIGHTS HE OR SHE MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON LAW PRINCIPLES OF SIMILAR EFFECT.
(c)     Executive acknowledges that this Release was presented to him or her on the date indicated above and that Executive is entitled to have twenty-one (21) days’ time in which to consider it. Executive further acknowledges that the Company has advised him or her that he or she is waiving his or her rights under the ADEA, and that Executive should consult with an attorney of his or her choice before signing this Release, and Executive has had sufficient time to consider the terms of this Release. Executive represents and acknowledges that if Executive executes this Release before twenty-one (21) days have elapsed, Executive does so knowingly, voluntarily, and upon the advice and with the approval of Executive’s legal counsel (if any), and that Executive voluntarily waives any remaining consideration period.

2





US-DOCS\86088549.7

(d)     Executive understands that after executing this Release, Executive has the right to revoke it within seven (7) days after his or her execution of it. Executive understands that this Release will not become effective and enforceable unless the seven (7) day revocation period passes and Executive does not revoke the Release in writing. Executive understands that this Release may not be revoked after the seven (7) day revocation period has passed. Executive also understands that any revocation of this Release must be made in writing and delivered to the Company at its principal place of business within the seven (7) day period.
(e)     Executive understands that this Release shall become effective, irrevocable, and binding upon Executive on the eighth (8 th ) day after his or her execution of it, so long as Executive has not revoked it within the time period and in the manner specified in clause (d) above. Executive further understands that Executive will not be given any severance benefits under the Agreement unless this Release is effective on or before the date that is sixty (60) days following the date of Executive’s Separation from Service (as defined in the Agreement).
(f)    Nothing in this Release shall be deemed to restrict Executive’s right to communicate directly with, cooperate with, provide information to, or report possible violations of federal law or regulation to, any governmental agency or entity in accordance with the provisions of and rules promulgated under Section 21F of the Securities Exchange Act of 1934 or Section 806 of the Sarbanes-Oxley Act of 2002, or any other whistleblower protection provisions of state or federal law or regulation, including, but not limited to, the U.S. Securities and Exchange Commission, the U.S. Commodity Futures Trading Commission, or the U.S. Department of Justice.
2.     No Assignment . Executive represents and warrants to the Company Releasees that there has been no assignment or other transfer of any interest in any Claim that Executive may have against the Company Releasees. Executive agrees to indemnify and hold harmless the Company Releasees from any liability, claims, demands, damages, costs, expenses and attorneys’ fees incurred as a result of any such assignment or transfer from Executive.
3.     Severability . In the event any provision of this Release is found to be unenforceable by an arbitrator or court of competent jurisdiction, such provision shall be deemed modified to the extent necessary to allow enforceability of the provision as so limited, it being intended that the parties shall receive the benefit contemplated herein to the fullest extent permitted by law. If a deemed modification is not satisfactory in the judgment of such arbitrator or court, the unenforceable provision shall be deemed deleted, and the validity and enforceability of the remaining provisions shall not be affected thereby.
4.     Interpretation; Construction . The headings set forth in this Release are for convenience only and shall not be used in interpreting this Agreement. This Release has been drafted by legal counsel representing the Company, but Executive has participated in the negotiation of its terms. Furthermore, Executive acknowledges that Executive has had an opportunity to review and revise the Release and have it reviewed by legal counsel, if desired, and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Release. Either party’s failure to enforce any provision of this Release shall not in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Release.
5.     Governing Law and Venue . This Release will be governed by and construed in accordance with the laws of the United States of America and the State of California applicable to contracts made and to be performed wholly within such State, and without regard to the conflicts of laws principles thereof. Any

3





US-DOCS\86088549.7

suit brought hereon shall be brought in the state or federal courts sitting in Santa Clara County, California, the Parties hereby waiving any claim or defense that such forum is not convenient or proper. Each party hereby agrees that any such court shall have in personam jurisdiction over it and consents to service of process in any manner authorized by California law.
6.     Entire Agreement . This Release and the Agreement constitute the entire agreement of the Parties in respect of the subject matter contained herein and therein and supersede all prior or simultaneous representations, discussions, negotiations and agreements, whether written or oral. This Release may be amended or modified only with the written consent of Executive and an authorized representative of the Company. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.
7.     Counterparts . This Release may be executed in multiple counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.
(Signature Page Follows)




4





US-DOCS\86088549.7
        

IN WITNESS WHEREOF, and intending to be legally bound, the Parties have executed the foregoing Release as of the date first written above.

EXECUTIVE                        XPERI CORPORATION
            
By:                         
Print Name:                           Print Name:                     
Title:                         











5





US-DOCS\86088549.7

EXHIBIT B
CONFIDENTIALITY AND PROPRIETARY RIGHTS AGREEMENT

[Attached]





    




US-DOCS\86088549.7

Exhibit 10.2
EMPLOYMENT TRANSITION AND CONSULTING AGREEMENT
This Employment Transition and Consulting Agreement (hereafter “ Agreement ”) is entered into between Thomas Lacey (the “ Executive ”) and Xperi Corporation, a Delaware corporation (the “ Company ”) (collectively referred to herein as the “ Parties ”), effective as of May 3, 2017 (the “ Effective Date ”). For purposes of this Agreement, the “ Company ” shall mean the Company and its subsidiaries.
WHEREAS, Executive is employed pursuant to that certain employment letter dated December 9, 2013, between the Company and Executive (the “ Employment Letter ”);
WHEREAS, Executive has signed the Company’s Confidentiality and Proprietary Rights Agreement in connection with his employment (the “ Confidentiality Agreement ”);
WHEREAS, the Company and Executive entered into various equity award agreements in accordance with the terms of the equity plans pursuant to which such equity awards were issued (collectively the “ Equity Award Agreements ”), which Equity Award Agreements and the outstanding equity awards (“ Equity Awards ”) thereunder are described on Exhibit A attached hereto;
WHEREAS, the Company and Executive entered into a Severance Agreement dated December 9, 2013, and a Change in Control Severance Agreement dated December 9, 2013 (collectively, the “ Severance Agreements ”);
WHEREAS, Executive is further entitled to indemnification and the advancement of expenses pursuant to the Company’s certificate of incorporation and bylaws, as currently in effect (the “ Organizational Documents ”) and is a named beneficiary and indemnitee under various insurance policies, including the Company’s director and officer insurance policy (the “ Insurance Policies ”);
WHEREAS, Executive has indicated his desire to resign his employment with the Company effective June 1, 2017 (the “ Employment Termination Date ”);
WHEREAS, the Company desires to retain Executive to provide consulting services to the Company following the Employment Termination Date and wishes to provide Executive with certain compensation and benefits in return for Executive’s services; and
WHEREAS, the Parties wish to resolve any and all disputes, claims, complaints, grievances, charges, actions, petitions, and demands that Executive may have against the Company, including, but not limited to, any and all claims arising out of or in any way related to Executive’s employment with or separation from the Company;
NOW, THEREFORE, in exchange for the good and valuable consideration set forth herein, the adequacy of which is specifically acknowledged, Executive and the Company hereby agree as follows:
1. Termination of Employment . Executive’s employment with the Company shall terminate effective as of the Employment Termination Date. Executive hereby resigns from his position as Chief Executive Officer (and any other titles or officer positions he may hold) of the Company and any of its subsidiaries and as a member of the Board of Directors of the Company and any of its subsidiaries effective as of the Employment Termination Date. Executive shall execute any additional documentation necessary to effectuate such resignations.

1

US-DOCS\86275921.4

2.      Consulting Services .
(a)      Consulting Period . During the period (the “ Consulting Period ”) commencing on June 2, 2017 and ending on December 31, 2017 (the “ Consulting Termination Date ”), Executive shall provide consulting services to the Company. Executive’s consulting services pursuant to this Section 2(a) shall automatically terminate on the Consulting Termination Date, unless extended by mutual agreement of the Company and Executive pursuant to a written amendment to this Agreement. Executive may terminate the Consulting Period (and his obligation to provide consulting services) upon delivery of written notice to the Company; provided, however, that if Executive terminates the consulting arrangement specified herein prior to the Consulting Termination Date for any reason, he shall forfeit any rights to further compensation pursuant to Section 3(b) of this Agreement and further Equity Award vesting and extended exercisability pursuant to Section 3(c) of this Agreement.
(b)      Scope of Services During Consulting Period . During the Consulting Period, Executive shall use reasonable efforts to devote such percentage of his business time and effort to the performance of his services hereunder as shall be mutually agreed upon by Executive and the Chief Executive Officer of the Company and shall provide such additional information, advice and assistance concerning matters that are within the scope of Executive’s knowledge and expertise; provided, however, that Executive shall not be required to provide services under this Agreement for more than eight (8) days per calendar month. Executive’s advice shall be of an advisory nature and the Company shall not have any obligation to follow such advice. Executive agrees to perform the consulting services and any other obligations or activities hereunder in accordance with (i) the terms of this Agreement, (ii) all applicable laws, and (iii) all Company policies and procedures as are provided in advance and in writing to Executive in connection with Executive’s performance under this Agreement.
(c)      Availability . In connection with Executive’s services to the Company, Executive agrees to: (i) be available for consultation by telephone, fax or e-mail on a regular basis on reasonable prior notice during regular business hours; and (ii) be available to attend meetings with the Company’s executive team or persons designated by any of the members of the Company’s management team, at the Company’s headquarters or other offices, on reasonable prior notice. The Company shall reasonably accommodate Executive’s schedule when requesting Executive’s assistance pursuant to this Section 2. During the Consulting Period, Executive shall be entitled to such technical and administrative support as are reasonably required to perform his obligations under this Agreement, but Executive shall not have an office at the Company’s facilities.
(d)     Status as Independent Contractor . Notwithstanding any provision of this Agreement to the contrary, during the Consulting Period, Executive acknowledges that he is and shall at all times be an independent contractor, he is not an agent or employee of the Company and he is not authorized to bind the Company or otherwise act on behalf of the Company. Nothing herein contained shall be deemed to create an agency, joint venture, partnership or franchise relationship between the parties hereto. After the Employment Termination Date, and subject to Section 3(b)(ii) below, Executive shall have no right under this Agreement, or as a result of his services to the Company, to participate in any employee, retirement, insurance or other benefit program of the Company (except to the extent Executive elects to and is eligible to receive continued healthcare coverage pursuant to the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA ”), for himself and any covered dependents), nor will the Company make any deductions from Executive’s compensation for taxes, the payment of which shall be solely Executive’s responsibility (other than tax withholding arising as a result of the vesting and/or settlement of Executive’s Equity Awards (as defined below)). Executive represents and warrants that neither this

2

US-DOCS\86275921.4

Agreement nor the performance thereof will conflict with or violate any obligation of Executive or right of any third party.
(e)     Other Work Activities . During the Consulting Period, Executive may engage in employment, consulting or other work relationships in addition to his work for the Company, provided that such engagements do not violate the provisions of this Agreement. The Company will not be entitled to any setoff or other reduction in its payments hereunder as a result of such permitted other work activities.
3.      Compensation .
(a)      Payment of Salary and Receipt of All Benefits on Employment Termination Date . On the Employment Termination Date, the Company shall pay Executive his fully earned but unpaid base salary and accrued but unpaid vacation/paid time off through the Employment Termination Date at the rate then in effect, reimbursement of business expenses incurred prior to the Employment Termination Date and properly submitted in accordance with Company policy, to be paid as provided in Section 3(d) below, plus all other benefits, if any, under any Company group retirement plan, equity award plan or agreement, health benefits plan or other Company group benefit plan to which Executive may be entitled pursuant to the terms of such plans or agreements at the Employment Termination Date, plus all amounts required to be paid to Executive under applicable law. Subject to the terms of this Agreement, Executive acknowledges and agrees that with his final check, and the expense reimbursements described above, and other than the consideration set forth in this Agreement, the Company has paid or provided all salary, wages, bonuses, accrued vacation/paid time off, premiums, leaves, housing allowances, relocation costs, interest, outplacement costs, fees, reimbursable expenses, commissions, stock, stock options, vesting, and any and all other benefits and compensation due to Executive. Subject to this Agreement, Executive acknowledges that, following the Employment Termination Date, Executive shall not be eligible to participate in any plan or program which, as a condition of eligibility for such plan or program, requires Executive to be an employee of the Company. Subject to this Agreement, Executive’s participation in all benefits and incidents of employment, including, but not limited to, the accrual of bonuses, vacation, and paid time off, shall cease as of the Employment Termination Date.
(b)      Consulting Compensation . Subject to the occurrence of the Release Effective Date (as defined below) and Executive’s continued compliance with the terms of this Agreement, in consideration of Executive’s services during the Consulting Period, the Company shall provide Executive will the following compensation:
(i)      During the Consulting Period, Executive shall be entitled to receive a consulting fee of $17,900 per month, payable monthly in arrears, with such payments to be paid within ten (10) days following the end of each calendar month during the Consulting Period.
(ii)    For the period beginning on the Employment Termination Date and ending on the date which is eighteen (18) full months following the Employment Termination Date (or, if earlier, the date on which the applicable continuation period under COBRA expires) (the “ COBRA Coverage Period ”), the Company shall arrange to provide Executive and/or his eligible dependents who were covered under the Company’s health insurance plans as of the Employment Termination Date with the same health (including medical and dental) insurance benefits as those provided to Executive and his dependents immediately prior to the Employment Termination Date. If the Company is not reasonably able to continue health insurance benefits coverage under the Company’s insurance plans, the Company shall provide substantially equivalent coverage under other third-party insurance sources.

3

US-DOCS\86275921.4

(c)      Equity . The Parties acknowledge and agree that, following the Employment Termination Date, Executive’s unvested equity awards (the “ Equity Awards ”) will no longer vest under the existing vesting schedules set forth in the Equity Award agreements and will instead vest as described in this Section 3(c). Subject to the occurrence of the Release Effective Date, (i) the vesting of each of Executive’s outstanding equity awards the vesting of which is time-based (the “ Time-Based Awards ”) will continue to vest during the Consulting Period in accordance with their original vesting schedules, subject to Executive’s continued compliance with the terms of this Agreement, and (ii) Executive shall remain eligible to vest in a pro-rated portion (which pro-rated portion shall be five-twelfths (5/12)) of those restricted stock units eligible to vest based on performance during 2017 (the “ 2017 Performance Awards ”) in accordance with the terms of such 2017 Performance Awards (which provide for the vesting of 62,500 restricted stock units for 2017 at “target” performance and 125,000 restricted stock units for 2017 at “maximum” performance, in the aggregate, prior to the pro-ration described above) based on actual performance relative to the performance goals for 2017 established under the terms of such 2017 Performance Awards, which vesting shall be effective on the settlement date provided in the agreement evidencing the 2017 Performance Awards (provided, however, that in no event shall such vesting and settlement occur later than March 15, 2018), subject to Executive’s compliance with the terms of this Agreement and continued service through the Consulting Termination Date. Effective with the Employment Termination Date, Executive’s unvested Equity Awards the vesting of which is performance-based (other than the pro-rated portion of the 2017 Performance Awards eligible to vest as described above) shall terminate and shall be of no further force or effect. Employee’s vested stock options will remain exercisable until June 1, 2018 in accordance with the terms of the Equity Award agreements pursuant to which they were granted and shall continue to be governed by the terms and conditions of the Equity Award Agreements. Executive acknowledges that he is not entitled to any additional grant of Equity Awards.
(d)      Expenses .
(i)      Executive shall submit all out-of-pocket business expenses incurred by him as an employee of the Company no later than two (2) weeks following the Employment Termination Date, in accordance with the Company’s policies. The Company shall promptly reimburse Executive for all reasonable and properly out-of-pocket business expenses that are submitted by him in accordance with the Company’s policies and this Section.
(ii)      During the Consulting Period, the Company shall reimburse Executive for reasonable and pre-approved out-of-pocket business expenses incurred in connection with the performance of his Services hereunder, subject to (A) such policies as the Company may from time to time establish, and (B) Executive furnishing the Company with evidence in the form of receipts satisfactory to the Company substantiating the claimed expenditures.
(iii)      Any amounts payable under this Section 3(d) shall be paid within thirty (30) days of Executive’s submission of the receipts.
(e)      General Release of Claims by Executive . Executive’s right to receive any of the payments or other compensation to be made to Executive pursuant to Section 3(b) or 3(c) shall be contingent on Executive providing to the Company a full and complete general release in the form attached hereto as Exhibit B (the “ Release ”) within twenty-one (21) days following the Employment Termination Date and Executive’s failure to revoke such Release within the time period provided therein. The date on which the Release becomes effective shall be considered the “ Release Effective Date .” Executive understands that Executive will not be given any benefits under Sections 3(b) and (c) of this Agreement unless this Release

4

US-DOCS\86275921.4

Effective Date occurs on or before the date that is thirty (30) days following the Employment Termination Date.
4.      Nondisparagement . Executive agrees that neither he nor anyone acting by, through, under or in concert with him shall disparage or otherwise communicate negative statements or opinions about the Company, its directors, officers, partners, employees, agents or business. The Company agrees that neither its Board members nor officers shall disparage or otherwise communicate negative statements or opinions about Executive.
5.      Cooperation . Executive agrees to give reasonable cooperation, at the Company’s request, in any pending or future litigation or arbitration brought against the Company and in any investigation the Company may conduct, including taking such requested actions as are reasonably necessary to preserve the Company’s attorney-client privilege. The Company agrees to reimburse Executive for his reasonable and pre-approved out-of-pocket expenses incurred in connection with such cooperation within thirty (30) days after receipt of satisfactory evidence from Executive setting forth in reasonable detail such expenses. Notwithstanding the foregoing, the Company shall have no obligation by virtue of this Section 5 to pay Executive for time spent by Executive in any pending or future litigation or arbitration where Executive is a co-defendant or party to the arbitration or litigation.
6.      Confidential Information; Return of Company Property .
(a)      Confidentiality Agreement . Executive and the Company have executed the Confidentiality Agreement. Executive hereby expressly confirms his continuing obligations to the Company pursuant to the Confidentiality Agreement, the terms and provisions of which are hereby incorporated herein by reference. The Company shall be entitled to cease all payments and benefits to Executive under Sections 3(b) and 3(c) in the event of his material breach of this Section 6. Nothing in this Agreement or in the Confidentiality Agreement shall be deemed to restrict Executive’s right to communicate directly with, cooperate with, provide information to, or report possible violations of federal law or regulation to, any governmental agency or entity in accordance with the provisions of and rules promulgated under Section 21F of the Securities Exchange Act of 1934 or Section 806 of the Sarbanes-Oxley Act of 2002, or any other whistleblower protection provisions of state or federal law or regulation, including, but not limited to, the U.S. Securities and Exchange Commission, the U.S. Commodity Futures Trading Commission, or the U.S. Department of Justice.
(b)      Return of Company Property . On the Employment Termination Date, Executive shall surrender to the Company all lists, books and records of, or in connection with, the Company’s business, and all other property belonging to the Company and its affiliates, it being distinctly understood that all such lists, books and records, and other documents, are the property of the Company and its affiliates, other than such items as are necessary for the provision of his services hereunder during the Consulting Period. Upon the request of the Company, Executive shall deliver to the Company a signed statement certifying compliance with this Section 6(b) prior to the receipt of any post-termination benefits described in this Agreement.
7.      Taxes . During the Consulting Period, Executive shall be solely responsible for taxes required to be paid with respect to his performance of services and the receipt of consideration under this Agreement, including, without limitation, United States federal, state and local income taxes, payroll taxes, social security, unemployment or disability insurance, or similar items. Executive acknowledges that the payments and benefits provided in this Agreement may have tax ramifications to him. The Company has provided no tax or other advice to Executive on such matters and Executive is free to consult with an accountant, legal counsel, or other tax advisor regarding the tax consequences he may face.

5

US-DOCS\86275921.4

8.      Indemnification . Notwithstanding Executive’s termination as an employee, officer and Board member of the Company or any provision of this Agreement, Executive and the Company acknowledge and agree that this Agreement shall not eliminate, limit or modify any contractual, common law or statutory duty or obligation by the Company to indemnify Executive from third party claims arising out of his employment or consulting relationship with the Company, including, without limitation, the Organizational Documents; nor shall it eliminate, limit or modify, any rights he may have independent of this Agreement under any of the Company’s insurance policies based on his employment with or consulting for the Company, including, without limitation, the Insurance Policies.
9.     Agreement to Arbitrate . Any dispute, claim or controversy based on, arising out of or relating to Executive’s employment or services or the termination thereof or this Agreement shall be settled by final and binding arbitration in San Jose, California, before a single neutral arbitrator in accordance with the Employment Arbitration Rules and Procedures (the “ Rules ”) of Judicial Arbitration and Mediation Services (“ JAMS ”), and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction. The Rules may be found online at www.jamsadr.com. Arbitration may be compelled pursuant to the California Arbitration Act (Code of Civil Procedure §§ 1280 et seq .). If the parties are unable to agree upon an arbitrator, one shall be appointed by JAMS in accordance with its Rules. Each party shall pay the fees of its own attorneys, the expenses of its witnesses and all other expenses connected with presenting its case; provided, however, Executive and the Company agree that, to the extent permitted by law, the arbitrator may, in his or her discretion, award reasonable attorneys’ fees to the prevailing party; provided, further, that the prevailing party shall be reimbursed for such fees, costs and expenses within forty-five (45) days following any such award, but in no event later than the last day of Executive’s taxable year following the taxable year in which the fees, costs and expenses were incurred; provided, further, that the parties’ obligations pursuant to this sentence shall terminate on the tenth (10 th ) anniversary of the date of Executive’s termination of employment; provided, however, that Executive shall retain the right to file administrative charges with or seek relief through any government agency of competent jurisdiction, and to participate in any government investigation, including but not limited to (a) claims for workers’ compensation, state disability insurance or unemployment insurance; (b) claims for unpaid wages or waiting time penalties brought before the California Division of Labor Standards Enforcement; provided, however, that any appeal from an award or from denial of an award of wages and/or waiting time penalties shall be arbitrated pursuant to the terms of this Agreement; and (c) claims for administrative relief from the United States Equal Employment Opportunity Commission and/or the California Department of Fair Employment and Housing (or any similar agency in any applicable jurisdiction other than California); provided, further, that Executive shall not be entitled to obtain any monetary relief through such agencies other than workers’ compensation benefits or unemployment insurance benefits. Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, JAMS’ administrative fees, the fee of the arbitrator, and all other fees and costs, shall be borne by the Company. This Section 9 is intended to be the exclusive method for resolving any and all claims by the parties against each other for payment of damages under this Agreement or relating to Executive’s employment; provided, however, that neither this Agreement nor the submission to arbitration shall limit the parties’ right to seek provisional relief, including without limitation injunctive relief, in any court of competent jurisdiction pursuant to California Code of Civil Procedure § 1281.8 or any similar statute of an applicable jurisdiction. Seeking any such relief shall not be deemed to be a waiver of such party’s right to compel arbitration. Both Executive and the Company expressly waive their right to a jury trial.
10.     General Provisions .
(a)     Successors and Assigns . The rights of the Company under this Agreement may, without the consent of Executive, be assigned by the Company, in its sole and unfettered discretion, to any person, firm, corporation or other business entity which at any time, whether by purchase, merger or otherwise,

6

US-DOCS\86275921.4

directly or indirectly, acquires all or substantially all of the assets or business of the Company. The Company will require any successor (whether direct or indirect, by purchase, merger or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place; provided, however, that no such assumption shall relieve the Company of its obligations hereunder.  As used in this Agreement, the “ Company ” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. Executive shall not be entitled to assign any of Executive’s rights or obligations under this Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.
(b)     Severability . In the event any provision of this Agreement is found to be unenforceable by an arbitrator or court of competent jurisdiction, such provision shall be deemed modified to the extent necessary to allow enforceability of the provision as so limited, it being intended that the parties shall receive the benefit contemplated herein to the fullest extent permitted by law. If a deemed modification is not satisfactory in the judgment of such arbitrator or court, the unenforceable provision shall be deemed deleted, and the validity and enforceability of the remaining provisions shall not be affected thereby.
(c)     Interpretation; Construction . The headings set forth in this Agreement are for convenience only and shall not be used in interpreting this Agreement. This Agreement has been drafted by legal counsel representing the Company, but Executive has participated in the negotiation of its terms. Furthermore, Executive acknowledges that Executive has had an opportunity to review and revise the Agreement and have it reviewed by legal counsel, if desired, and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement. Either party’s failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Agreement.
(d)     Governing Law and Venue . This Agreement will be governed by and construed in accordance with the laws of the United States and the State of California applicable to contracts made and to be performed wholly within such State, and without regard to the conflicts of laws principles thereof. Any suit brought hereon shall be brought in the state or federal courts sitting in Santa Clara County, California, the Parties hereby waiving any claim or defense that such forum is not convenient or proper. Each party hereby agrees that any such court shall have in personam jurisdiction over it and consents to service of process in any manner authorized by California law.
(e)     Notices. Any notice required or permitted by this Agreement shall be in writing and shall be delivered as follows with notice deemed given as indicated: (i) by personal delivery when delivered personally; (ii) by overnight courier upon written verification of receipt; (iii) by telecopy or facsimile transmission upon acknowledgment of receipt of electronic transmission; or (iv) by certified or registered mail, return receipt requested, upon verification of receipt. Notice shall be sent to Executive at the address set forth in the Company’s personnel records and to the Company at its principal place of business, or such other address as either party may specify in writing.
(f)     Survival . Sections 3(b)(ii) (“Consulting Compensation”), 4 (“Nondisparagement”), 5 (“Cooperation”), 6 (“Confidential Information; Return of Company Property”), 7 (“Taxes”), 8 (“Indemnification”), 9 (“Agreement to Arbitrate”) and 10 (“General Provisions”) of this Agreement shall survive termination of Executive’s employment by or service to the Company.

7

US-DOCS\86275921.4

(g)     Entire Agreement . This Agreement, together with all documents referenced herein, constitutes the entire agreement between the parties in respect of the subject matter contained herein and therein and supersedes all prior or simultaneous representations, discussions, negotiations, and agreements, whether written or oral, including, without limitation, the Letter Agreement and the Severance Agreements; provided, that this Agreement shall not supersede or replace the Insurance Policies, or the Organizational Documents, nor shall it supersede or replace the Equity Awards, except to the extent expressly provided herein. This Agreement may be amended or modified only with the written consent of Executive and an authorized representative of the Company. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.
(h)     Code Section 409A . To the extent applicable, this Agreement shall be interpreted in accordance with Code Section 409A and Department of Treasury regulations and other interpretive guidance issued thereunder. Each series of installment payments made under this Agreement is hereby designated as a series of “separate payments” within the meaning of Section 409A of the Code. Notwithstanding anything to the contrary in this Agreement, in-kind benefits and reimbursements provided under this Agreement during any tax year of Executive shall not affect in-kind benefits or reimbursements to be provided in any other tax year of Executive and are not subject to liquidation or exchange for another benefit.  Notwithstanding anything to the contrary in this Agreement, reimbursement requests must be timely submitted by Executive and, if timely submitted, reimbursement payments shall be made to Executive as soon as administratively practicable following such submission, but in no event later than the last day of Executive’s taxable year following the taxable year in which the expense was incurred.  In no event shall Executive be entitled to any reimbursement payments after the last day of Executive’s taxable year following the taxable year in which the expense was incurred.  This section shall only apply to in-kind benefits and reimbursements that would result in taxable compensation income to Executive.
(i)     Counterparts . This Agreement may be executed in multiple counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.
(Signature Page Follows)

8

US-DOCS\86275921.4

THE PARTIES TO THIS AGREEMENT HAVE READ THE FOREGOING AGREEMENT AND FULLY UNDERSTAND EACH AND EVERY PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE DATES SHOWN BELOW.
XPERI CORPORATION


Dated: May 3, 2017                 By:     /s/ Paul Davis        
Name:     Paul Davis
Title:     Senior Vice President and General Counsel



EXECUTIVE


Dated: May 3, 2017                  /s/ Thomas Lacey        
Thomas Lacey







9

US-DOCS\86275921.4


EXHIBIT A
EQUITY AWARD AGREEMENTS AND EQUITY AWARDS

[Attached]



US-DOCS\86275921.4


EXHIBIT B
RELEASE
This General Release of Claims (“ Release ”) is entered into as of this _____ day of ________, 2017, between Thomas Lacey (“ Executive ”) and Xperi Corporation, a Delaware corporation (the “ Company ”) (collectively referred to herein as the “ Parties ”).
WHEREAS, Executive and the Company are parties to that certain Employment Transition and Consulting Agreement effective as of May 3, 2017 (the “ Agreement ”);
WHEREAS, the Parties agree that Executive is entitled to certain payments and benefits under Sections 3(b) and (c) of the Agreement, subject to Executive’s execution of this Release; and
WHEREAS, the Company and Executive now wish to fully and finally to resolve all matters between them.
NOW, THEREFORE, in consideration of, and subject to, the payments and benefits payable to Executive pursuant to Sections 3(b) and (c) of the Agreement, the adequacy of which is hereby acknowledged by Executive, and which Executive acknowledges that he would not otherwise be entitled to receive, Executive and the Company hereby agree as follows:
1. General Release of Claims by Executive .
(a)    Executive, on behalf of himself and his executors, heirs, administrators, representatives and assigns, hereby agrees to release and forever discharge the Company and all predecessors, successors and their respective parent corporations, affiliates, related, and/or subsidiary entities, and all of their past and present investors, directors, shareholders, officers, general or limited partners, employees, attorneys, agents and representatives, and the employee benefit plans in which Executive is or has been a participant by virtue of his employment with or service to the Company (collectively, the “ Company Releasees ”), from any and all claims, debts, demands, accounts, judgments, rights, causes of action, equitable relief, damages, costs, charges, complaints, obligations, promises, agreements, controversies, suits, expenses, compensation, responsibility and liability of every kind and character whatsoever (including attorneys’ fees and costs), whether in law or equity, known or unknown, asserted or unasserted, suspected or unsuspected (collectively, “ Claims ”), which Executive has or may have had against such entities based on any events or circumstances arising or occurring on or prior to the date hereof or on or prior to the date hereof, arising directly or indirectly out of, relating to, or in any other way involving in any manner whatsoever Executive’s employment by or service to the Company or the termination thereof, including any and all claims arising under federal, state, or local laws relating to employment, including without limitation claims of wrongful discharge, breach of express or implied contract, fraud, misrepresentation, defamation, or liability in tort, and claims of any kind that may be brought in any court or administrative agency including, without limitation, claims under Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. Section 2000, et seq .; the Americans with Disabilities Act, as amended, 42 U.S.C. § 12101 et seq .; the Rehabilitation Act of 1973, as amended, 29 U.S.C. § 701 et seq .; the Civil Rights Act of 1866, and the Civil Rights Act of 1991; 42 U.S.C. Section 1981, et seq .; the Age Discrimination in Employment Act, as amended, 29 U.S.C. Section 621, et seq . (the “ ADEA ”); the Equal Pay Act, as amended, 29 U.S.C. Section 206(d); regulations of the Office of Federal Contract Compliance, 41 C.F.R. Section 60, et seq .; the Family and Medical Leave Act, as amended, 29 U.S.C. § 2601 et   seq .; the Fair Labor Standards Act of 1938, as amended, 29 U.S.C. § 201 et seq .; the Employee Retirement Income Security Act, as amended, 29 U.S.C. § 1001 et seq .; and the California Fair Employment and Housing Act, California Government Code Section 12940, et seq .

1

US-DOCS\86275921.4

(b)    Notwithstanding the generality of the foregoing, Executive does not release the following claims:
(i)    Claims for unemployment compensation or any state disability insurance benefits pursuant to the terms of applicable state law;
(ii)    Claims for workers’ compensation insurance benefits under the terms of any worker’s compensation insurance policy or fund of the Company;
(iii)    Claims pursuant to the terms and conditions of the federal law known as COBRA;
(iv)    Claims for indemnity under the bylaws of the Company, as provided for by California law or under any applicable insurance policy or indemnification agreement with respect to Executive’s liability as an employee, director or officer of the Company;
(v)    Claims based on any right Executive may have to enforce the Company’s executory obligations under the Agreement (including, for the avoidance of doubt, Claims to enforce the Company’s obligations to pay or provide payments and benefits that are contingent on the effectiveness of this Release); and
(vi)    Claims Executive may have to vested or earned compensation and benefits.
(c)    EXECUTIVE ACKNOWLEDGES THAT HE HAS BEEN ADVISED OF AND IS FAMILIAR WITH THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS:
“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH, IF KNOWN BY HIM OR HER, MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”
BEING AWARE OF SAID CODE SECTION, EXECUTIVE HEREBY EXPRESSLY WAIVES ANY RIGHTS HE MAY HAVE THEREUNDER, AS WELL AS UNDER ANY OTHER STATUTES OR COMMON LAW PRINCIPLES OF SIMILAR EFFECT.
(d)     Executive acknowledges that this Release was presented to him on the Effective Date of the Agreement (as such date is defined in the Agreement), and that Executive is entitled to have twenty-one (21) days’ time in which to consider it. Executive further acknowledges that the Company has advised him that he is waiving his rights under the ADEA, and that Executive should consult with an attorney of his choice before signing this Release, and Executive has had sufficient time to consider the terms of this Release. Executive represents and acknowledges that if Executive executes this Release before twenty-one (21) days have elapsed, Executive does so knowingly, voluntarily, and upon the advice and with the approval of Executive’s legal counsel (if any), and that Executive voluntarily waives any remaining consideration period.
(e)     Executive understands that after executing this Release, Executive has the right to revoke it within seven (7) days after his or her execution of it. Executive understands that this Release will not become effective and enforceable unless the seven (7) day revocation period passes and Executive does not revoke the Release in writing. Executive understands that this Release may not be revoked after the

2

US-DOCS\86275921.4

seven (7) day revocation period has passed. Executive also understands that any revocation of this Release must be made in writing and delivered to the Company at its principal place of business within the seven (7) day period.
(f)     Executive understands that this Release shall become effective, irrevocable, and binding upon Executive on the eighth (8 th ) day after his execution of it, so long as Executive has not revoked it within the time period and in the manner specified in clause (d) above. Executive further understands that Executive will not be given any benefits under Sections 3(b) and (c) of the Agreement unless this Release is effective on or before the date that is thirty (30) days following the Employment Termination Date.
(g)    Nothing in this Release shall be deemed to restrict Executive’s right to communicate directly with, cooperate with, provide information to, or report possible violations of federal law or regulation to, any governmental agency or entity in accordance with the provisions of and rules promulgated under Section 21F of the Securities Exchange Act of 1934 or Section 806 of the Sarbanes-Oxley Act of 2002, or any other whistleblower protection provisions of state or federal law or regulation, including, but not limited to, the U.S. Securities and Exchange Commission, the U.S. Commodity Futures Trading Commission, or the U.S. Department of Justice.
2.      No Assignment . Executive represents and warrants to the Company Releasees that there has been no assignment or other transfer of any interest in any Claim that Executive may have against the Company Releasees. Executive agrees to indemnify and hold harmless the Company Releasees from any liability, claims, demands, damages, costs, expenses and attorneys’ fees incurred as a result of any such assignment or transfer from Executive.
3.      Severability . In the event any provision of this Release is found to be unenforceable by an arbitrator or court of competent jurisdiction, such provision shall be deemed modified to the extent necessary to allow enforceability of the provision as so limited, it being intended that the parties shall receive the benefit contemplated herein to the fullest extent permitted by law. If a deemed modification is not satisfactory in the judgment of such arbitrator or court, the unenforceable provision shall be deemed deleted, and the validity and enforceability of the remaining provisions shall not be affected thereby.
4.      Interpretation; Construction . The headings set forth in this Release are for convenience only and shall not be used in interpreting this Agreement. This Release has been drafted by legal counsel representing the Company, but Executive has participated in the negotiation of its terms. Furthermore, Executive acknowledges that Executive has had an opportunity to review and revise the Release and have it reviewed by legal counsel, if desired, and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Release. Either party’s failure to enforce any provision of this Release shall not in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Release.
5.      Governing Law and Venue . This Release will be governed by and construed in accordance with the laws of the United States of America and the State of California applicable to contracts made and to be performed wholly within such State, and without regard to the conflicts of laws principles thereof. Any suit brought hereon shall be brought in the state or federal courts sitting in Santa Clara County, California, the Parties hereby waiving any claim or defense that such forum is not convenient or proper. Each party hereby agrees that any such court shall have in personam jurisdiction over it and consents to service of process in any manner authorized by California law.

3

US-DOCS\86275921.4

6.      Entire Agreement . This Release and the Agreement constitute the entire agreement of the Parties in respect of the subject matter contained herein and therein and supersede all prior or simultaneous representations, discussions, negotiations and agreements, whether written or oral. This Release may be amended or modified only with the written consent of Executive and an authorized representative of the Company. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.
7.      Counterparts . This Release may be executed in multiple counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.
(Signature Page Follows)


4

US-DOCS\86275921.4


IN WITNESS WHEREOF, and intending to be legally bound, the Parties have executed the foregoing Release as of the date first written above.
XPERI CORPORATION


Dated:                          By:                         
Name:     
Title:



EXECUTIVE


Dated:                                                   
Thomas Lacey


5

US-DOCS\86275921.4

Exhibit 10.3
XPERI CORPORATION

NON-EMPLOYEE DIRECTOR COMPENSATION POLICY

(Amended and Restated Effective July 1, 2017)

Non-employee members of the board of directors (the “ Board ”) of Xperi Corporation (the “ Company ”) shall be eligible to receive cash and equity compensation effective as of July 1, 2017 (the “ Effective Date ”), as set forth in this Director Compensation Policy. The cash compensation and equity awards described in this Director Compensation Policy shall be paid or be made, as applicable, automatically and without further action of the Board, to each member of the Board who is not an employee of the Company or any parent or subsidiary of the Company (each, a “ Non-Employee Director ”) who may be eligible to receive such cash compensation or equity awards, unless such Non-Employee Director declines the receipt of such cash compensation or equity awards by written notice to the Chairman of the Board. This Director Compensation Policy shall remain in effect until it is revised or rescinded by further action of the Board. The terms and conditions of this Director Compensation Policy shall supersede any prior cash or equity compensation arrangements between the Company and its directors.
1.     Cash Compensation .
(a)      Annual Board Retainer : Each Non-Employee Director shall be eligible to receive an annual retainer of $50,000 for service on the Board.
(b)     Chairman and Committee Retainers : In addition, a Non-Employee Director serving as:
(i)     Chairman of the Board or Lead Independent Director, as applicable, shall be eligible to receive an additional annual retainer of $50,000 for such service;
(ii)     Chairman of the Audit Committee shall be eligible to receive an additional annual retainer of $25,000 for such service;
(iii)     Members (other than the chairman) of the Audit Committee shall be eligible to receive an additional annual retainer of $12,000 for such service;
(iv)     Chairman of the Compensation Committee shall be eligible to receive an additional annual retainer of $20,000 for such service;
(v)    Members (other than the chairman) of the Compensation Committee shall be eligible to receive an additional annual retainer of $8,000 for such service;
(vi)    Chairman of the Nominating and Governance Committee shall be eligible to receive an additional annual retainer of $15,000 for such service; and
(vii)     Members (other than the chairman) of the Nominating and Governance Committee shall be eligible to receive an additional annual retainer of $6,000 for such service.
The foregoing annual retainer fees shall be paid in cash on a quarterly basis. Non-Employee Directors elected or appointed during a quarter shall receive the full quarterly amount for the annual Board


US-DOCS\86261197.1

retainer for the quarter in which they are elected or appointed. The chairman, committee and committee member retainers shall be prorated for any portion of a quarterly period served by a Non-Employee Director on a committee, as the Chairman of the Board or Lead Independent Director, or as a chairman of a committee of the Board.
2.     Equity Compensation . The Non-Employee Directors shall be automatically granted stock awards as provided in Section 12 of the Company’s Sixth Amended and Restated 2003 Equity Incentive Plan (as amended from time to time, the “ Equity Plan ”). Such stock awards shall be granted under and shall be subject to the terms and provisions of the Equity Plan and shall be granted subject to the execution and delivery of award agreements, including attached exhibits, in substantially the same forms previously approved by the Board.

2

US-DOCS\86261197.1
Exhibit 31.1
Certification of the Chief Executive Officer
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
I, Jon Kirchner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Xperi Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 

 
 
 
Date: August 2, 2017
 
/s/ J on Kirchner
 
 
Jon Kirchner
 
 
Chief Executive Officer


Exhibit 31.2
Certification of the Chief Financial Officer
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
I, Robert Andersen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Xperi Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 

 
 
 
 
Date:
August 2, 2017
 
/s/ Robert Andersen
 
 
 
Robert Andersen
 
 
 
Executive Vice President and Chief Financial Officer


Exhibit 32.1
CERTIFICATION PURSUANT TO
RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Xperi Corporation, a Delaware corporation (the “Company”), on Form 10-Q for the three months ended June 30, 2017 as filed with the Securities and Exchange Commission (the “Report”), I, Jon Kirchner, Chief Executive Officer, certify, pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
/s/ Jon Kirchner
Jon Kirchner
Chief Executive Officer
August 2, 2017

CERTIFICATION PURSUANT TO
RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Xperi Corporation, a Delaware corporation (the “Company”), on Form 10-Q for the three months ended June 30, 2017 as filed with the Securities and Exchange Commission (the “Report”), I, Robert Andersen, Chief Financial Officer of the Company, certify, pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
/s/ Robert Andersen
Robert Andersen
Executive Vice President and Chief Financial Officer
August 2, 2017

A signed original of this written statement required by Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.