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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary should be read in conjunction with the Consolidated Financial Statements and related notes thereto contained in Part IV of this Annual Report on Form 10-K. This discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item IA.,"Risk Factors," included in Part I of this Annual Report on Form 10-K. This section of the Annual Report on Form 10-K generally discusses the years ended December 31, 2019 and 2018 and the respective year-to-year comparisons. Discussions of the year ended December 31, 2017, and year-to-year comparisons between the years ended December 31, 2018 and 2017 that are not included in this Annual Report on Form 10-K can be found in under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part II of the our Annual Report on Form 10-K for the year ended December 31, 2018.
Executive Overview of Results
TiVo Corporation ("TiVo") is a global leader in bringing entertainment together, making entertainment content easy to find, watch and enjoy. TiVo provides a broad set of cloud-based services, embedded software solutions and intellectual property that bring entertainment together for the watchers, creators and advertisers. For the creators and advertisers, TiVo's products deliver a passionate group of watchers to increase viewership and engagement across online video, TV and other entertainment viewing platforms. Our products and innovations are protected by broad portfolios of licensable technology patents. These portfolios cover many aspects of content discovery, digital video recorder ("DVR"), VOD and OTT experiences, multi-screen viewing, mobile device video experiences, entertainment personalization, voice interaction, social and interactive applications, data analytics solutions and advertising.
Our operations are organized into two reportable segments for financial reporting purposes: Product and Intellectual Property Licensing. The Product segment consists primarily of licensing Company-developed user experience ("UX") products and services to multi-channel video service providers and consumer electronics ("CE") manufacturers, licensing the TiVo service and selling TiVo-enabled devices, licensing metadata and advanced search and recommendation and viewership data, as well as sponsored discovery and in-guide advertising. The Intellectual Property Licensing segment consists primarily of licensing our patent portfolio to U.S. and international pay television ("TV") providers (directly and through their suppliers), mobile device manufacturers, CE manufacturers and over-the-top ("OTT") video providers. Our broad portfolio of licensable technology patents covers many aspects of content discovery, digital video recorders, video-on-demand, OTT experiences, multi-screen functionality and personalization, as well as interactive applications and advertising.
Total Revenues, net for the year ended December 31, 2019 decreased by 4% compared to the prior year primarily due to a $49.7 million decrease in Product revenues. The decrease in Product revenues was attributable to $34.5 million in revenue from an international cable operator that exercised a contractual option during the three months ended March 31, 2018 to purchase a fully paid license to its then-current version of the TiVo software and purchasing additional engineering services, as well as a $14.3 million decrease in consumer revenue, which was driven by subscriber erosion, an increase in the amortization period for product lifetime subscriptions and lower hardware sales. Product revenue also declined due to a $6.0 million perpetual license executed in the fourth quarter of 2018 with an international customer. These revenue declines were partially offset by a $10.7 million increase in revenue from an international cable operator exceeding its cumulative contractual minimums in 2019. Intellectual Property Licensing revenues increased $22.0 million due to a $20.5 million increase in catch-up payments intended to make us whole for the pre-license period of use and new licenses and contract amendments executed since the year ago period. These increases were partially offset by a $20.1 million decrease in revenue from TiVo Solutions "Time Warp" agreements that were entered into with AT&T Inc. ("AT&T"), DirecTV, EchoStar Corporation ("EchoStar") and Verizon Communications, Inc. ("Verizon") prior to the TiVo Acquisition Date as a result of contract expirations.
Our Loss from continuing operations, net of tax was $405.3 million, or $3.23 per diluted share, compared to $353.1 million, or $2.87 per diluted share, in the prior year. For the year ended December 31, 2019, we reduced Research and development and Selling, general and administrative compensation costs by $29.6 million, primarily as a result of benefits from our transformation and restructuring activities. We also realized a $34.6 million decrease in Amortization of intangible assets due to certain TiVo Solutions intangible assets reaching the end of their economic life. In addition, our results benefited from an $8.2 million decrease in patent litigation costs, which was primarily related to the timing of costs incurred in the ongoing Comcast litigation, and other benefits from our transformation and restructuring activities. Offsetting these improvements, our Loss from continuing operations, net of tax for the year ended December 31, 2019 reflects a $354.6 million Goodwill impairment charge compared to a $269.0 million Goodwill impairment charge for the year ended December 31, 2018. In
addition, our revenue declined by $27.7 million and we incurred $26.2 million of Merger, separation and transformation costs in the year ended December 31, 2019.
Our intellectual property license with Comcast Corporation ("Comcast") expired on March 31, 2016. Our Product relationship with Comcast, primarily a metadata license, expired on September 30, 2017. The expiration of our intellectual property license with Comcast, as well as litigation initiated against Comcast, reduced revenues and increased litigation costs. While we anticipate Comcast will eventually execute a new intellectual property license, the length of time that Comcast is out of license prior to executing a new license is uncertain.
On May 9, 2019, we announced that our Board of Directors unanimously approved a plan to separate the Product and Intellectual Property Licensing businesses into separately traded public companies (the “Separation”), which was targeted for completion by April 2020. On December 18, 2019, the Company and Xperi Corporation (“Xperi”) entered into an Agreement and Plan of Merger and Reorganization (the “Xperi Merger Agreement”), pursuant to which TiVo and Xperi agreed to effect an all-stock, merger of equals strategic combination of their respective businesses (the "Xperi Combination"). The board of directors of each of TiVo and Xperi have approved the Xperi Merger Agreement and the transactions contemplated thereby. The Xperi Combination is subject to certain customary approvals, including the approval of shareholders of TiVo and Xperi, and is expected to be completed by June 30, 2020.
The Separation process has been and the Xperi Combination process has been and is expected to continue to be time-consuming and involve significant costs and expenses. During the year ended December 31, 2019, we incurred $26.2 million of Merger, separation and transformation costs. The Merger, separation and transformation costs are primarily Selling, general and administrative costs, consisting of employee-related costs, costs to improve information technology systems and other one-time transaction-related costs, including investment banking and consulting fees and other incremental costs directly associated with the Separation and Xperi Combination. In addition, in connection with the May 2019 announcement of our plan to separate the Product and Intellectual Property Licensing businesses, we implemented a cost efficiency program to transform our business operations and to execute the Separation (the "2019 Transformation Plan"). As a result of the 2019 Transformation Plan, we expect to reduce headcount, move certain positions to lower cost locations, rationalize facilities and legal entities and terminate certain leases and other contracts. The 2019 Transformation Plan will continue to be implemented prior to completion of the Xperi Combination. The 2019 Transformation Plan resulted in restructuring charges of $2.3 million during the year ended December 31, 2019, substantially all of which related to severance costs. We expect to spend up to an additional $20.0 million to complete the 2019 Transformation Plan and prepare for the Xperi Combination, excluding spend contingent on completion of the Xperi Combination.
On November 22, 2019, the Company, as borrower, and certain of the Company’s subsidiaries, as guarantors (together with the Company, collectively, the “Loan Parties”), entered into (i) a $715.0 million Credit and Guaranty Agreement (the “2019 Term Loan Facility”), with the lenders party thereto and HPS Investment Partners, LLC, as administrative agent and collateral agent and (ii) a $60.0 million ABL Credit and Guaranty Agreement (the “Revolving Loan Credit Agreement” and, together with the 2019 Term Loan Facility, the “2019 Credit Agreements”), with the lenders party thereto, Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent and Wells Fargo Bank, National Association, as co-collateral agent. In connection with the completion of the 2019 Term Loan Facility, the Company repaid the remaining outstanding principal balance of $621.9 million under the Senior Secured Credit Facility entered into on July 2, 2014.
Comparison of Years Ended December 31, 2019 and 2018
The consolidated results of operations for the year ended December 31, 2019 compared to the prior year were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
Change $
|
|
Change %
|
Revenues, net:
|
|
|
|
|
|
|
|
Licensing, services and software
|
$
|
659,261
|
|
|
$
|
681,130
|
|
|
$
|
(21,869
|
)
|
|
(3
|
)%
|
Hardware
|
8,868
|
|
|
14,735
|
|
|
(5,867
|
)
|
|
(40
|
)%
|
Total Revenues, net
|
668,129
|
|
|
695,865
|
|
|
(27,736
|
)
|
|
(4
|
)%
|
Costs and expenses:
|
|
|
|
|
|
|
|
Cost of licensing, services and software revenues, excluding depreciation and amortization of intangible assets
|
156,533
|
|
|
169,149
|
|
|
(12,616
|
)
|
|
(7
|
)%
|
Cost of hardware revenues, excluding depreciation and amortization of intangible assets
|
18,117
|
|
|
19,491
|
|
|
(1,374
|
)
|
|
(7
|
)%
|
Research and development
|
148,422
|
|
|
177,285
|
|
|
(28,863
|
)
|
|
(16
|
)%
|
Selling, general and administrative
|
191,417
|
|
|
181,047
|
|
|
10,370
|
|
|
6
|
%
|
Depreciation
|
21,247
|
|
|
21,464
|
|
|
(217
|
)
|
|
(1
|
)%
|
Amortization of intangible assets
|
112,727
|
|
|
147,336
|
|
|
(34,609
|
)
|
|
(23
|
)%
|
Restructuring and asset impairment charges
|
7,741
|
|
|
10,061
|
|
|
(2,320
|
)
|
|
(23
|
)%
|
Goodwill impairment
|
354,561
|
|
|
269,000
|
|
|
85,561
|
|
|
32
|
%
|
Total costs and expenses
|
1,010,765
|
|
|
994,833
|
|
|
15,932
|
|
|
2
|
%
|
Operating loss
|
(342,636
|
)
|
|
(298,968
|
)
|
|
(43,668
|
)
|
|
15
|
%
|
Interest expense
|
(49,902
|
)
|
|
(49,150
|
)
|
|
(752
|
)
|
|
2
|
%
|
Interest income and other, net
|
8,526
|
|
|
5,682
|
|
|
2,844
|
|
|
50
|
%
|
(Loss) gain on interest rate swaps
|
(4,966
|
)
|
|
3,425
|
|
|
(8,391
|
)
|
|
(245
|
)%
|
Loss on debt extinguishment
|
(2,152
|
)
|
|
—
|
|
|
(2,152
|
)
|
|
N/a
|
|
Loss from continuing operations before income taxes
|
(391,130
|
)
|
|
(339,011
|
)
|
|
(52,119
|
)
|
|
15
|
%
|
Income tax expense
|
14,144
|
|
|
14,052
|
|
|
92
|
|
|
1
|
%
|
Loss from continuing operations, net of tax
|
(405,274
|
)
|
|
(353,063
|
)
|
|
(52,211
|
)
|
|
15
|
%
|
(Loss) Income from discontinued operations, net of tax
|
(4,793
|
)
|
|
3,715
|
|
|
(8,508
|
)
|
|
(229
|
)%
|
Net loss
|
$
|
(410,067
|
)
|
|
$
|
(349,348
|
)
|
|
$
|
(60,719
|
)
|
|
17
|
%
|
Total Revenues, net
For the year ended December 31, 2019, Total Revenues, net decreased 4% compared to the prior year as Product revenues decreased $49.7 million and Intellectual Property Licensing revenues increased $22.0 million. Product generated 53% and 58% of Total Revenues, net for the years ended December 31, 2019 and 2018, respectively.
For details on the changes in Total Revenues, net, see the discussion of our segment results below.
Cost of licensing, services and software revenues, excluding depreciation and amortization of intangible assets
Cost of licensing, services and software revenues, excluding depreciation and amortization of intangible assets, consists primarily of employee-related costs, patent prosecution, maintenance and litigation costs and an allocation of overhead and facilities costs, as well as service center and other expenses related to providing the TiVo service and our metadata offering.
For the year ended December 31, 2019, Cost of licensing, services and software revenues, excluding depreciation and amortization of intangible assets decreased 7% primarily as a result of an $8.2 million decrease in patent litigation costs, which was primarily related to the timing of costs incurred in the ongoing Comcast litigation, and benefits from our transformation and restructuring activities, including a $2.5 million decrease in compensation costs, a $1.7 million decrease in non-recurring
engineering costs, a $1.4 million reduction in royalty fees and a $1.2 million decrease in costs to acquire data from third parties to support our metadata operations. We expect to continue to incur material expenses related to the Comcast litigation in the future. The decrease in costs was partially offset by $4.3 million of impairment charges recognized in 2019 associated with a prepaid license that is not expected to be recoverable from the net direct revenue resulting from patent license agreements executed with new customers.
Cost of hardware revenues, excluding depreciation and amortization of intangible assets
Cost of hardware revenues, excluding depreciation and amortization of intangible assets includes all product-related costs associated with TiVo-enabled devices, including manufacturing costs, employee-related costs, warranty costs and order fulfillment costs, as well as certain licensing costs and an allocation of overhead and facilities costs. Hardware is sold by the Company primarily as a means to generate revenue from the TiVo service. As a result, generating positive gross margins from hardware sales is not the primary goal of our hardware operations.
For the year ended December 31, 2019, Cost of hardware revenues, excluding depreciation and amortization of intangible assets reflects benefits from our transformation and restructuring activities which were partially offset by a $2.4 million inventory impairment charge during the year ended December 31, 2019 due to a reduced forecast for sales of refurbished units.
Research and development
Research and development expenses are comprised primarily of employee-related costs, consulting costs and an allocation of overhead and facilities costs.
For the year ended December 31, 2019, Research and development expenses decreased 16% compared to the prior year, primarily due to a $21.0 million decrease in compensation costs and a $6.0 million decrease in consulting costs as a result of benefits from our transformation and restructuring activities, as well as a $1.0 million decrease in Transition and integration costs associated with the TiVo Acquisition.
Selling, general and administrative
Selling expenses are comprised primarily of employee-related costs, including travel costs, advertising costs and an allocation of overhead and facilities costs. General and administrative expenses are comprised primarily of employee-related costs, including travel costs, corporate accounting, consulting, legal and tax fees and an allocation of overhead and facilities costs.
Selling, general and administrative expenses increased 6% during the year ended December 31, 2019 as $26.2 million of Merger, separation and transformation costs incurred during the year ended December 31, 2019 were partially offset by an $8.6 million decrease in compensation costs, a $7.5 million decrease in Transition and integration costs associated with the TiVo Acquisition, which was primarily due to a $4.5 million loss associated with a legacy TiVo Solutions legal matter recorded in the second quarter of 2018, and other benefits from our transformation and restructuring activities.
Amortization of intangible assets
The decrease in Amortization of intangible assets during the year ended December 31, 2019 was primarily due to certain intangible assets acquired as part of the TiVo Acquisition reaching the end of their economic life.
Restructuring and asset impairment charges
In connection with the May 2019 announcement of our plan to separate the Product and Intellectual Property Licensing businesses, we initiated certain activities to transform our business operations in order to execute the separation (the "2019 Transformation Plan"). As a result of the 2019 Transformation Plan, we expect to reduce headcount, move certain positions to lower cost locations, rationalize facilities and legal entities and terminate certain leases and other contracts. In connection with the 2019 Transformation Plan, we took actions in the second half of 2019 that are expected to generate in excess of $20 million in annualized cost savings and we expect to incur material restructuring charges through 2020. The 2019 Transformation Plan resulted in Restructuring charges of $2.3 million during the year ended December 31, 2019, substantially all of which related to severance costs.
In February 2018, we announced our intention to explore strategic alternatives. In connection with exploring strategic alternatives, we initiated certain cost saving actions (the "Profit Improvement Plan"). As a result of the Profit Improvement Plan, we moved certain positions to lower cost locations, eliminated layers of management and rationalized facilities, which resulted in severance costs and the termination of certain leases and other contracts, generating over $40 million in annualized cost savings. As a result of actions associated with the Profit Improvement Plan, Restructuring and asset impairment charges of $5.4 million and $9.7 million, primarily for severance-related benefits, were recognized in the years ended December 31, 2019 and 2018, respectively.
Goodwill impairment
Following the Company's announcement of the Xperi Combination in December 2019, management concluded sufficient indicators of potential impairment were identified and that it was more-likely-than-not that goodwill was impaired and that quantitative interim goodwill impairment tests should be performed as of December 31, 2019 for the Product and Intellectual Property Licensing reporting units. Although the long-range forecasts for the Product and Intellectual Property Licensing reporting units did not materially change from those used in performing the quantitative interim goodwill impairment test as of September 30, 2019, the fair value decreased. The decrease in fair value was primarily due to the elimination of an assumed control premium from the fair value estimate following execution of the Xperi Merger Agreement. Based on this decline in fair value, a Goodwill impairment charge of $217.1 million was recognized during the three months ended December 31, 2019, of which $20.5 million related to the Product reporting unit and $196.6 million related to the Intellectual Property Licensing reporting unit.
During September 2019, sufficient indicators of potential impairment were identified that management concluded it was more-likely-than-not that goodwill was impaired and quantitative interim goodwill impairment tests should be performed as of September 30, 2019 for the Product and Intellectual Property Licensing reporting units. Indicators of potential impairment included a significant and sustained decline in the trading price of TiVo's common stock, as well as lower-than-previously forecast revenue and profitability levels for the Product reporting unit and downward revisions to this reporting unit's short- and long-term forecasts. As a result of the quantitative interim goodwill impairment tests performed as of September 30, 2019, a Goodwill impairment charge of $137.5 million was recognized during the three months ended September 30, 2019, of which $79.3 million related to the Product reporting unit and $58.2 million related to the Intellectual Property Licensing reporting unit.
During December 2018, sufficient indicators of potential impairment were identified that management concluded it was more-likely-than-not that goodwill was impaired and a quantitative interim goodwill impairment test should be performed as of December 31, 2018 for the Product and Intellectual Property Licensing reporting units. Indicators of potential impairment included a significant decline in the trading price of TiVo's common stock during the second half of the fourth quarter of 2018 and current market conditions, as well as lower-than-previously forecast revenue and profitability levels over a sustained period of time and downward revisions to management's short- and long-term forecasts. The forecast revisions were identified as part of TiVo's overall long-term forecasting process, which was substantially completed in December 2018. The revised forecast reflected lower expectations for the Company's Platform Solutions products, including changes in both the market and business models internationally, as well as the decision to eliminate certain analytics products. The changes in expectations related to revenue growth rates, current market trends, business mix, cost structure and other expectations about anticipated short- and long-term operating results. As a result of the quantitative interim goodwill impairment test performed as of December 31, 2018, a Goodwill impairment charge of $269.0 million was recognized related to the Product reporting unit. As a result of the quantitative interim goodwill impairment test performed as of December 31, 2018, no Goodwill impairment charge was recognized related to the Intellectual Property Licensing reporting unit.
For further details about the Goodwill impairment charges, refer to Note 6 of the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K, which is incorporated by reference herein.
Interest expense
Interest expense increased by $0.8 million during the year ended December 31, 2019 primarily due to changes in the interest rate associated with Term Loan Facility B and changes in the composition of our outstanding debt during 2019, including a $46.6 million Excess Cash Flow principal payment on Term Loan Facility B made in February 2019, $50.0 million of 2020 Convertible Notes repurchased in June 2019 and the refinancing of Term Loan Facility B in November 2019.
Interest income and other, net
The increase in Interest income and other, net for the year ended December 31, 2019 was primarily due to a $2.0
million gain on sale of a strategic investment, a $0.7 million increase in interest income due to an increase in interest rates and a $0.6 million increase in income from an equity method investment, which was partially offset by $0.6 million of adverse movements in foreign currency exchange rates.
(Loss) gain on interest rate swaps
We have not designated any of our interest rate swaps as hedges for accounting purposes. Therefore, changes in the fair value of our interest rate swaps are not offset by changes in the fair value of the related hedged item in our Consolidated Statements of Operations (see Note 8 to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K, which is incorporated by reference herein). We generally utilize interest rate swaps to convert the interest rate on a portion of our loans with a floating interest rate to a fixed interest rate. Under the terms of our interest rate swaps, we receive a floating rate of interest and pay a fixed rate of interest. When there is an increase in expected future LIBOR, we generally have gains when adjusting our interest rate swaps to fair value. When there is a decrease in expected future LIBOR, we generally have losses when adjusting our interest rate swaps to fair value.
Loss on debt extinguishment
In November 2019, the Company repaid the remaining outstanding principal balance of Term Loan Facility B, which was accounted for as a debt extinguishment. In addition, in February 2019, the Company made an Excess Cash Flow payment of $46.6 million on Term Loan Facility B, which was accounted for as a partial debt extinguishment. During the year ended December 31, 2019, the Company recognized a Loss on debt extinguishment of $2.1 million from writing off unamortized debt discount and issuance costs related to the Excess Cash Flow payment and the final extinguishment of Term Loan Facility B. In addition, in June 2019, the Company repurchased $50.0 million of outstanding principal on its 2020 Convertible Notes, which was accounted for as a partial debt extinguishment. The repurchase of the 2020 Convertible Notes resulted in a Loss on debt extinguishment of $0.1 million in the year ended December 31, 2019.
Income tax expense
Due to our significant net operating loss carryforwards and a valuation allowance applied against a significant portion of our deferred tax assets, foreign withholding taxes are the primary driver of our Income tax expense.
We recorded Income tax expense for the year ended December 31, 2019 of $14.1 million, which primarily consists of $18.2 million of Foreign withholding tax, $4.3 million of U.S. federal Base Erosion and Anti-Abuse Tax ("BEAT") and $2.9 million of Foreign income tax, which was partially offset by a $9.4 million benefit from the Goodwill impairment charge recognized during the year ended December 31, 2019.
We recorded Income tax expense for the year ended December 31, 2018 of $14.1 million, which primarily consists of $14.5 million of Foreign withholding tax, $3.6 million of State income tax, $2.1 million of U.S. federal BEAT and $1.3 million of Foreign income tax, partially offset by the benefit of $7.2 million due to the Goodwill impairment charge recognized in December 2018. The Tax Act of 2017 was signed into law on December 22, 2017 and enacted comprehensive tax reform that made broad and complex changes to the U.S. federal tax code as described in Note 13 of the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K, which is incorporated by reference herein.
The year-over-year increase in Foreign withholding tax was due to a larger portion of license fees received in the year ended December 31, 2019 coming from licensees in countries subject to foreign withholding taxes.
(Loss) Income from discontinued operations, net of tax
In the year ended December 31, 2019, we recognized a Loss from discontinued operations, net of tax, of $4.8 million, as a result of executing a settlement agreement during the period associated with a previous business disposal and associated legal defense costs. In the year ended December 31, 2018, we recognized Income from discontinued operations, net of tax, of $3.7 million, as a result of the expiration of certain indemnification obligations and the execution of settlement agreements during the period associated with previous business disposals, partially offset by an increase in legal defense costs.
Segment Results
We report segment information in the same way management internally organizes the business for assessing performance and making decisions regarding the allocation of resources to the business units. The terms Adjusted Operating Expenses and Adjusted EBITDA in the following discussion use the definitions provided in Note 14 of the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K, which is incorporated by reference herein.
Product
We group our Product segment into three verticals based on the products delivered to our customer: Platform Solutions; Software and Services; and Other. Platform Solutions includes licensing Company-developed UX products, the TiVo service and selling TiVo-enabled devices. Software and Services includes licensing our metadata and advanced media and advertising solutions, including viewership data, sponsored discovery and in-guide advertising. Other includes legacy Analog Content Protection ("ACP"), VCR Plus+ and media recognition products.
The Product segment's results of operations for the year ended December 31, 2019 compared to the prior year were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
Change $
|
|
Change %
|
Platform Solutions
|
$
|
267,441
|
|
|
$
|
315,814
|
|
|
$
|
(48,373
|
)
|
|
(15
|
)%
|
Software and Services
|
80,443
|
|
|
76,249
|
|
|
4,194
|
|
|
6
|
%
|
Other
|
3,097
|
|
|
8,667
|
|
|
(5,570
|
)
|
|
(64
|
)%
|
Product Revenues
|
350,981
|
|
|
400,730
|
|
|
(49,749
|
)
|
|
(12
|
)%
|
Adjusted Operating Expenses
|
302,491
|
|
|
333,720
|
|
|
(31,229
|
)
|
|
(9
|
)%
|
Adjusted EBITDA
|
$
|
48,490
|
|
|
$
|
67,010
|
|
|
$
|
(18,520
|
)
|
|
(28
|
)%
|
Adjusted EBITDA Margin
|
13.8
|
%
|
|
16.7
|
%
|
|
|
|
|
For the year ended December 31, 2019, Product revenue declined 12% due to a decrease in revenues from Platform Solutions and Other, which was partially offset by an increase in revenue from Software and Services.
For the year ended December 31, 2019, the $48.4 million decrease in Platform Solutions revenue was primarily attributable to a decrease of $34.5 million in revenue from an international cable operator that exercised a contractual option during the three months ended March 31, 2018 to purchase a fully paid license to its then-current version of the TiVo software and purchasing additional engineering services. In addition, revenue for the year ended December 31, 2019 decreased $14.3 million due to consumer subscriber erosion, an increase in the amortization period for product lifetime subscriptions and lower hardware sales. Revenue also declined $6.0 million due to a perpetual license executed the fourth quarter of 2018 with an international customer. These revenue declines were partially offset by a $10.7 million revenue increase for the year ended December 31, 2019 from an international software customer exceeding its cumulative contractual minimums in 2019.
For the year ended December 31, 2019, the $4.2 million increase in Software and Services revenue was primarily the result of a $2.8 million increase in TV viewership data revenue and a $1.0 million increase in personalized content discovery revenue.
For the year ended December 31, 2019, other revenue primarily consists of ACP revenue, which is expected to decline in the future.
The 9% decrease in Product Adjusted Operating Expenses for the year ended December 31, 2019 was primarily due to reduced Research and development compensation and consulting costs. Product Adjusted Operating Expenses also reflect benefits from our transformation and restructuring activities, including a $1.7 million decrease in non-recurring engineering costs, a $1.4 million reduction in royalty fees and a $1.2 million decrease in costs to acquire data from third parties to support our metadata operations. A $2.4 million inventory impairment charge during the year ended December 31, 2019 due to a reduced forecast for sales of refurbished units partially offset these benefits.
The decrease in Adjusted EBITDA Margin for the year ended December 31, 2019 reflects the revenue changes and inventory impairment described above, which were partially offset by benefits from reduced Research and development
compensation and consulting costs, benefits from our transformation and restructuring activities and a shift in business mix toward higher margin products due to the planned transition of our customers to deploying the TiVo service on third-party hardware.
Intellectual Property Licensing
We group our Intellectual Property Licensing segment into three verticals based primarily on the business of our customer: US Pay TV Providers; CE Manufacturers; and New Media, International Pay TV Providers and Other. US Pay TV Providers includes direct and indirect licensing of traditional US Pay TV Providers regardless of the particular distribution technology (e.g., cable, satellite or the internet). CE Manufacturers includes the licensing of our patents to traditional CE manufacturers. New Media, International Pay TV Providers and Other includes licensing to international pay TV providers, virtual service providers, mobile device manufacturers and content and new media companies.
The Intellectual Property Licensing segment's results of operations for the year ended December 31, 2019 compared to the prior year were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
Change $
|
|
Change %
|
US Pay TV Providers
|
$
|
173,217
|
|
|
$
|
185,954
|
|
|
$
|
(12,737
|
)
|
|
(7
|
)%
|
CE Manufacturers
|
42,503
|
|
|
35,644
|
|
|
6,859
|
|
|
19
|
%
|
New Media, International Pay TV Providers and Other
|
101,428
|
|
|
73,537
|
|
|
27,891
|
|
|
38
|
%
|
Intellectual Property Licensing Revenues
|
317,148
|
|
|
295,135
|
|
|
22,013
|
|
|
7
|
%
|
Adjusted Operating Expenses
|
95,962
|
|
|
99,532
|
|
|
(3,570
|
)
|
|
(4
|
)%
|
Adjusted EBITDA
|
$
|
221,186
|
|
|
$
|
195,603
|
|
|
$
|
25,583
|
|
|
13
|
%
|
Adjusted EBITDA Margin
|
69.7
|
%
|
|
66.3
|
%
|
|
|
|
|
For the year ended December 31, 2019, Intellectual Property Licensing revenue grew 7% due to an increase in revenues from New Media, International Pay TV Providers and Other and CE Manufacturers, which was partially offset by a decrease in revenue from US Pay TV Providers.
For the year ended December 31, 2019, the decrease in revenue from US Pay TV Providers was primarily due to a decrease of $20.1 million in revenue from TiVo Solutions Time Warp agreements that were entered into with AT&T, DirecTV, EchoStar and Verizon prior to the TiVo Acquisition Date due to the expiration of these contracts by the end of July 2018. In addition, revenue from catch-up payments from US Pay TV Providers intended to make us whole for the pre-license period of use for the year ended December 31, 2019 decreased by $0.7 million. These revenue declines were partially offset by increases in revenue from our existing customers, including $4.0 million in revenue due to a large multiple system operator ("MSO") customer updating its subscription reporting in the three months ended December 31, 2019.
For the year ended December 31, 2019, the increase in revenue from CE Manufacturers was primarily the result of an increase of $7.5 million from catch-up payments from CE Manufacturers intended to make us whole for the pre-license period of use. This increase in revenue was partially offset by a decrease in our licensees' market share, combined with continuing pressures on our licensees' business models. Such declines could continue unless we are able to successfully license new entrants to this market.
For the year ended December 31, 2019, New Media, International Pay TV Providers and Other reflects an increase in revenue compared to the prior period due to an increase of $13.7 million in revenue from catch-up payments intended to make us whole for the pre-license period of use, primarily related to expanding our license with Shaw Communications to include the TiVo Solutions patent portfolio as well as licensing our first social media customers. For the year ended December 31, 2019, New Media, International Pay TV Providers and Other also reflects new licenses and contract amendments executed since the year ago period.
The 4% decrease in Intellectual Property Licensing Adjusted Operating Expenses during the year ended December 31, 2019 reflects an $8.2 million decrease in patent litigation costs, which was primarily related to the timing of costs incurred in ongoing litigation. The decrease in costs was partially offset by $4.3 million of impairment charges recognized in 2019 associated with a prepaid license that is not expected to be recoverable from the net direct revenue resulting from patent license agreements executed with new customers.
The increase in Adjusted EBITDA Margin for the year ended December 31, 2019 is primarily the result of the increase in Intellectual Property Licensing revenue combined with the decrease in patent litigation costs, partially offset by impairment charges associated with the prepaid license described above.
Corporate
Corporate costs primarily include general and administrative costs such as corporate management, finance, legal and human resources.
Corporate costs for the year ended December 31, 2019 compared to the prior year were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
Change $
|
|
Change %
|
Adjusted Operating Expenses
|
$
|
58,383
|
|
|
$
|
62,521
|
|
|
$
|
(4,138
|
)
|
|
(7
|
)%
|
For the year ended December 31, 2019, the decrease in Corporate Adjusted Operating Expenses primarily reflects a decrease in compensation costs and other benefits from our transformation and restructuring activities.
Liquidity and Capital Resources
We finance our business primarily from operating cash flow. We believe our cash position remains strong and our cash, cash equivalents and marketable securities and anticipated operating cash flow, supplemented with access to capital markets as necessary, are generally sufficient to support our operating businesses, capital expenditures, restructuring activities, maturing debt, interest payments and income tax payments, in addition to investments in future growth opportunities and activities related to the Xperi Combination for at least the next twelve months. Our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and economic conditions; however, our use of a variety of funding sources to meet our liquidity needs is designed to facilitate continued access to sufficient capital resources under such conditions.
As of December 31, 2019, we had $373.7 million in Cash and cash equivalents and $51.3 million in Short-term marketable securities. Our cash, cash equivalents and marketable securities are held in numerous locations around the world, with $44.1 million held by our foreign subsidiaries as of December 31, 2019. Due to our net operating loss carryforwards and the effects of the Tax Act of 2017, we could repatriate amounts to the U.S. with minimal income tax effects.
Sources and Uses of Cash
Cash flows for the year ended December 31, 2019 compared to the prior year were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
Change $
|
|
Change %
|
Net cash provided by operating activities - Continuing operations
|
$
|
118,333
|
|
|
$
|
159,072
|
|
|
$
|
(40,739
|
)
|
|
(26
|
)%
|
Net cash provided by (used in) investing activities
|
161,544
|
|
|
(32,598
|
)
|
|
194,142
|
|
|
(596
|
)%
|
Net cash used in financing activities
|
(63,282
|
)
|
|
(92,380
|
)
|
|
29,098
|
|
|
(31
|
)%
|
Net cash used in operating activities - Discontinued operations
|
(4,912
|
)
|
|
(524
|
)
|
|
(4,388
|
)
|
|
837
|
%
|
Effect of exchange rate changes on cash and cash equivalents
|
81
|
|
|
(580
|
)
|
|
661
|
|
|
(114
|
)%
|
Net increase in cash and cash equivalents
|
$
|
211,764
|
|
|
$
|
32,990
|
|
|
$
|
178,774
|
|
|
542
|
%
|
For the year ended December 31, 2019, operating cash flow decreased $40.7 million. The decrease was primarily due to the timing of collections on Accounts receivable, net and payments for Merger, separation and transformation costs. We expect to make material cash payments for Merger, separation and transformation costs through 2020. The availability of cash generated by our operations in the future could be adversely affected by business risks including, but not limited to, the Risk Factors described in Part I, Item 1A. of this Annual Report on Form 10-K, which are incorporated by reference herein.
For the year ended December 31, 2019, investing cash flow increased $194.1 million. Net proceeds from marketable security investment transactions increased by $192.9 million compared to the prior year. The proceeds from the investment transactions were primarily used to repay debt during the year ended December 31, 2019 and are expected to be used to repay the 2020 Convertible Notes at their maturity. The decrease in capital expenditures for the year ended December 31, 2019 was primarily associated with infrastructure projects designed to integrate TiVo Solutions in 2018. We expect 2020 full year capital expenditures of approximately $20 million to $25 million for infrastructure projects designed to support anticipated growth in our business, to strengthen our operations infrastructure and to complete the 2019 Transformation Plan. Partially offsetting these cash flow benefits was $6.9 million of cash paid to acquire patent portfolios during the year ended December 31, 2019.
Financing cash flow for the year ended December 31, 2019 reflects the repurchase of $50.0 million of outstanding principal of the Company's 2020 Convertible Notes for $49.4 million and $668.5 million of principal payments on Term Loan Facility B compared to $7.0 million of principal payments in the year ended December 31, 2018. Financing cash flow for the year ended December 31, 2019 also reflects the net proceeds of the $715.0 million 2019 Term Loan Facility. Net cash used in financing activities for the year ended December 31, 2019 reflects dividend payments of $0.34 per share, resulting in aggregate cash payments of $42.5 million compared to dividend payments of $0.72 per share, resulting in aggregate cash payments of $89.0 million for the year ended December 31, 2018.
On February 14, 2017, TiVo Corporation's Board of Directors approved an increase to the stock repurchase program authorization to $150.0 million, which remains available as of December 31, 2019. The February 2017 authorization includes amounts which were outstanding under previously authorized share repurchase programs. The February 2017 authorization is subject to restrictions included in the Xperi Merger Agreement, and we do not intend to make purchases under the February 2017 authorization during the pendency thereof.
Capital Resources
The outstanding principal and carrying amount of debt we issued or assumed was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Outstanding Principal
|
|
Carrying Amount
|
|
Outstanding Principal
|
|
Carrying Amount
|
2020 Convertible Notes
|
$
|
295,000
|
|
|
$
|
292,699
|
|
|
$
|
345,000
|
|
|
$
|
326,640
|
|
2021 Convertible Notes
|
48
|
|
|
48
|
|
|
48
|
|
|
48
|
|
2019 Term Loan Facility
|
715,000
|
|
|
692,792
|
|
|
—
|
|
|
—
|
|
Term Loan Facility B
|
—
|
|
|
—
|
|
|
668,500
|
|
|
665,449
|
|
Total
|
$
|
1,010,048
|
|
|
$
|
985,539
|
|
|
$
|
1,013,548
|
|
|
$
|
992,137
|
|
For more information on our borrowings, see Note 8 to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K, which is incorporated by reference herein. Our ability to make payments on and to refinance our indebtedness depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions. If our cash flows and capital resources are insufficient to service our debt obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. For additional information about liquidity risk, see the Risk Factors described in Part I, Item 1A. of this Annual Report on Form 10-K, which are incorporated by reference herein.
2020 Convertible Notes
Rovi issued $345.0 million in aggregate principal of 0.500% Convertible Notes that mature on March 1, 2020 at par pursuant to an Indenture dated March 4, 2015 (the "2015 Indenture"). In June 2019, the Company repurchased $50.0 million of outstanding principal of the 2020 Convertible Notes.
The 2020 Convertible Notes were convertible at an initial conversion rate of 34.5968 shares of TiVo Corporation common stock per $1,000 of principal of notes, which was equivalent to an initial conversion price of $28.9044 per share of TiVo Corporation common stock. The conversion rate and conversion price are subject to adjustment pursuant to the 2015 Indenture, including as a result of dividends paid by TiVo Corporation. As of December 31, 2019, the 2020 Convertible Notes are convertible at a conversion rate of 39.7348 shares of TiVo Corporation common stock per $1,000 principal of notes, which is equivalent to a conversion price of $25.1668 per share of TiVo Corporation common stock.
On or after December 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert the 2020 Convertible Notes, in multiples of $1,000 of principal, at any time. In addition, during the 35-day trading period following a Merger Event, as defined in the 2015 Indenture, holders may convert the 2020 Convertible Notes, in multiples of $1,000 of principal.
On conversion, a holder will receive the conversion value of the 2020 Convertible Notes converted based on the conversion rate multiplied by the volume-weighted average price of our common stock over a specified observation period. On conversion, Rovi will pay cash up to the aggregate principal of the 2020 Convertible Notes converted and deliver shares of our common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal of the 2020 Convertible Notes being converted.
The conversion rate is subject to adjustment in certain events, including certain events that constitute a "Make-Whole Fundamental Change" (as defined in the 2015 Indenture). In addition, if we undergo a "Fundamental Change" (as defined in the 2015 Indenture) prior to March 1, 2020, holders may require Rovi to repurchase for cash all or a portion of the 2020 Convertible Notes at a repurchase price equal to 100% of the principal of the repurchased 2020 Convertible Notes, plus accrued and unpaid interest. The conversion rate is also subject to customary anti-dilution adjustments.
The 2020 Convertible Notes are not redeemable prior to maturity by Rovi and no sinking fund is provided. The 2020 Convertible Notes are unsecured and do not contain financial covenants or restrictions on the payment of dividends, the incurrence of indebtedness or the repurchase of other securities by Rovi. The 2015 Indenture includes customary terms and covenants, including certain events of default after which the 2020 Convertible Notes may be due and payable immediately.
2021 Convertible Notes
TiVo Solutions issued $230.0 million in aggregate principal of 2.0% Convertible Senior Notes that mature October 1, 2021 (the "2021 Convertible Notes") at par pursuant to an Indenture dated September 22, 2014 ("the 2014 Indenture"). On October 12, 2016, TiVo Solutions repaid $229.95 million of the par value of the 2021 Convertible Notes.
The 2021 Convertible Notes were convertible at an initial conversion rate of 56.1073 shares of TiVo Solutions common stock per $1,000 principal of notes, which was equivalent to an initial conversion price of $17.8230 per share of TiVo Solutions common stock. The conversion rate and conversion price are subject to adjustment pursuant to the 2014 Indenture, including as a result of dividends paid by TiVo Corporation. As of December 31, 2019, the 2021 Convertible Notes are convertible at a conversion rate of 24.8196 shares of TiVo Corporation common stock per $1,000 principal of notes and $154.30 per $1,000 principal of notes, which is equivalent to a conversion price of $34.0738 per share of TiVo Corporation common stock.
TiVo Solutions can settle the 2021 Convertible Notes in cash, shares of common stock, or any combination thereof pursuant to the 2014 Indenture. Subject to certain exceptions, holders may require TiVo Solutions to repurchase, for cash, all or part of their 2021 Convertible Notes upon a “Fundamental Change” (as defined in the 2014 Indenture) at a price equal to 100% of the principal amount of the 2021 Convertible Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the “Fundamental Change Repurchase Date” (as defined in the 2014 Indenture). In addition, on a “Make-Whole Fundamental Change” (as defined in the 2014 Indenture) prior to the maturity date of the 2021 Convertible Notes, TiVo Solutions will, in some cases, increase the conversion rate for a holder that elects to convert its 2021 Convertible Notes in connection with such Make-Whole Fundamental Change.
2019 Term Loan Facility and Revolving Loan Credit Agreement
On November 22, 2019, the Company, as borrower, and certain of the Company’s subsidiaries, as guarantors (together with the Company, collectively, the “Loan Parties”), entered into (i) a Credit and Guaranty Agreement (the “2019 Term Loan Facility”), with the lenders party thereto and HPS Investment Partners, LLC, as administrative agent and collateral agent and (ii) an ABL Credit and Guaranty Agreement (the “Revolving Loan Credit Agreement” and, together with the 2019 Term Loan Facility, the “2019 Credit Agreements”), with the lenders party thereto, Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent and Wells Fargo Bank, National Association, as co-collateral agent.
Under the 2019 Term Loan Facility, the Company borrowed $715.0 million, which matures on November 22, 2024. Loans under the 2019 Term Loan Facility bear interest, at the Company's option, at an interest rate equal to either (a) the London Interbank Offered Rate ("LIBOR"), plus (i) if TiVo’s Total Leverage Ratio (as defined in the 2019 Term Loan Facility) is greater than or equal to 3.50:1.00, 5.75%, (ii) if TiVo’s Total Leverage Ratio is greater than or equal to 3.00:1.00 but less than 3.50:100, 5.50%, or (iii) if TiVo’s Total Leverage Ratio is less than 3.00:1.00, 5.25%, in each case, subject to a 1.00% LIBOR
floor or (b) the Base Rate (as defined in the 2019 Term Loan Facility), (i) if TiVo’s Total Leverage Ratio is greater than or equal to 3.50:1.00, 4.75%, (ii) if TiVo’s Total Leverage Ratio is greater than or equal to 3.00:1.00 but less than 3.50:100, 4.50%, or (iii) if TiVo’s Total Leverage Ratio is less than 3.00:1.00, 4.25%, in each case, subject to a 2.00% Base Rate floor.
TiVo may voluntarily prepay the 2019 Term Loan Facility at any time subject to (i) a 3.00% prepayment premium if the loans are prepaid on or prior to November 22, 2020 and (ii) a 2.00% prepayment premium if the loans are prepaid on or prior to November 22, 2021. TiVo is required to make mandatory prepayments with (i) net cash proceeds from certain asset sales, (ii) net insurance or condemnation proceeds, (iii) net cash proceeds from issuances of debt (other than permitted debt), (iv) beginning with the fiscal year ending December 31, 2020, 50% of TiVo’s Consolidated Excess Cash Flow (as defined in the 2019 Term Loan Facility), (v) extraordinary receipts and (vi) certain net litigation proceeds, in each case, subject to certain exceptions. In the event the Xperi Combination is completed on or prior to November 22, 2020, TiVo would be required to repay the then-outstanding principal of the 2019 Term Loan Facility at par plus a 3.00% prepayment premium.
On March 31, 2020, TiVo will be required to make a payment equal to 0.25% of the original principal amount of the 2019 Term Loan Facility. Thereafter, quarterly installments in an amount equal to 2.50% of the original principal amount of the 2019 Term Loan Facility are due, with any remaining balance payable on the final maturity date of the 2019 Term Loan Facility.
The Company also entered into a $60.0 million Revolving Loan Credit Facility as part of the 2019 Credit Agreements, which expires on March 31, 2021. Availability of the Revolving Loan Credit Facility is based upon a borrowing base formula and periodic borrowing base certifications valuing certain of the Loan Parties’ accounts receivable as reduced by certain reserves, if any. There were no amounts outstanding under the Revolving Loan Credit Agreement at any time during the year ended December 31, 2019. Loans under the Revolving Loan Credit Facility bear interest, at TiVo’s option, at a rate equal to either (a) LIBOR, plus (i) if the average daily Specified Excess Availability (as defined in the Revolving Loan Credit Agreement) is greater than 66.67%, 1.50%, (ii) if the average daily Specified Excess Availability is greater than 33.33% but less than or equal to 66.66%, 1.75%, or (iii) if the average daily Specified Excess Availability is less than or equal to 33.33%, 2.00%, in each case, subject to a 0.00% LIBOR floor or (b) the Base Rate (as defined in the Revolving Loan Credit Agreement), (i) if the average daily Specified Excess Availability is greater than 66.67%, 0.50%, (ii) if the average daily Specified Excess Availability is greater than 33.33% but less than or equal to 66.66%, 0.75%, or (iii) if the average daily Specified Excess Availability is less than or equal to 33.33%, 1.00%, in each case, subject to a 1.00% Base Rate floor.
Revolving loans may be borrowed, repaid and re-borrowed until March 31, 2021, when all outstanding amounts must be repaid.
The 2019 Credit Agreements contain customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, and dividends and other distributions. The 2019 Credit Agreements are secured by substantially all of the Company's assets.
Financing for the Xperi Combination
In connection with the execution of the Xperi Merger Agreement, TiVo and Xperi obtained a debt commitment letter (the “Commitment Letter”), dated December 18, 2019, with Bank of America, N.A. (“Bank of America”), BofA Securities, Inc. and Royal Bank of Canada (“Royal Bank”), pursuant to which, Bank of America and Royal Bank have committed to provide a senior secured first lien term loan B facility in an aggregate principal amount of $1,100 million (the “Debt Financing”). On January 3, 2020, TiVo, Xperi, Bank of America, Royal Bank and Barclays Bank PLC (“Barclays”) entered into a supplement to the Commitment Letter to add Barclays as an additional initial lender and an additional joint lead arranger and joint bookrunner and to reallocate a portion of the debt commitments of Bank of America and Royal Bank under the Commitment Letter to Barclays. The proceeds from the Debt Financing may be used (i) to pay fees and expenses incurred in connection with the Merger and the related transactions, (ii) to finance the refinancing of certain existing indebtedness of TiVo and Xperi, and (iii) to the extent of any remaining amounts, for working capital and other general corporate purposes.
Critical Accounting Policies and Estimates
The preparation of our Consolidated Financial Statements in accordance with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Our estimates, assumptions and judgments are based on historical experience and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources. Making estimates, assumptions and judgments about
future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Management believes the estimates, assumptions and judgments employed and resulting balances reported in the Consolidated Financial Statements are reasonable; however, actual results could differ materially.
A summary of our significant accounting policies, including a discussion about associated risks and uncertainties, is contained in Note 1 to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K, which is incorporated by reference herein. An accounting policy is deemed critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used or if changes to the estimate that are reasonably possible could materially affect the financial statements. Of our significant accounting policies, the following are considered critical to understanding our Consolidated Financial Statements and evaluating our results as they are inherently uncertain, involve the most subjective or complex judgments, include areas where different estimates reasonably could have been used and the use of an alternative estimate that is reasonably possible could materially affect the financial statements.
Revenue Recognition
General
Revenue is recognized when control of the promised goods or services is transferred to a customer in an amount that reflects the consideration we expect to receive in exchange for those goods or services, which may include various combinations of products and services which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.
Depending on the terms of the contract, a portion of the consideration received may be deferred because of a requirement to satisfy a future obligation. Stand-alone selling price for separate performance obligations is based on observable prices charged to customers for goods or services sold separately or the cost-plus-a-margin approach when observable prices are not available, considering overall pricing objectives.
Arrangements with Multiple Performance Obligations
Some of our contracts with customers contain multiple performance obligations. For these contracts, the individual performance obligations are separately accounted for if they are distinct. In an arrangement with multiple performance obligations, the transaction price is allocated among the separate performance obligations on a relative stand-alone selling price basis. The determination of stand-alone selling price considers market conditions, the size and scope of the contract, customer and geographic information, and other factors. The allocation of transaction price among performance obligations in a contract may impact the amount and timing of revenue recognized in the Consolidated Statements of Operations during a given period.
Contract Modifications
Contracts may be modified due to changes in contract specifications or customer requirements. Contract modifications occur when the change in terms either creates new enforceable rights and obligations or changes existing enforceable rights and obligations. The effect of a contract modification for goods and services that are not distinct in the context of the contract on the transaction price is recognized as an adjustment to revenue on a cumulative catch-up basis. Contract modifications that result in goods or services that are distinct from the existing goods or services are accounted for as separate contracts if they are sold at their stand-alone selling price, or otherwise prospectively.
Variable Consideration
When a contract with a customer includes a variable transaction price, an estimate of the consideration to which we expect to be entitled to for transferring the promised goods or services is made at contract inception. Depending on the terms of the contract, variable consideration is estimated using either the expected value approach or the most likely value approach. Under either approach to estimating variable consideration, the estimate considers all information (historical, current and forecast) that is reasonably available at contract inception. The amount of variable consideration is estimated at contract inception and updated as additional information becomes available. The estimate of variable consideration is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Subsequent changes in the transaction price resulting from changes in the estimate of variable consideration are allocated to the performance obligations in the contract on the same basis as at contract inception. Certain payments to retailers and distributors, such as market development funds and revenue shares,
are treated as a reduction of the transaction price, and therefore revenue, rather than Selling, general and administrative expense.
When variable consideration is in the form of a sales-based or usage-based royalty in exchange for a license of intellectual property, or when a license of intellectual property is the predominant item to which the variable consideration relates, revenue is recognized at the later of when the subsequent sale or usage occurs or the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied or partially satisfied.
Significant Judgments
Determining whether promises to transfer multiple goods and services in contracts with customers are considered distinct performance obligations that should be accounted for separately requires significant judgment, including related to the level of integration and interdependency between the performance obligations. In addition, judgment is necessary to allocate the transaction price to the distinct performance obligations, including whether there is a discount or significant financing component to be allocated based on the relative stand-alone selling price of the various performance obligations.
Significant judgment is required to determine the stand-alone selling price for each distinct performance obligation when an observable price is not available. In instances where stand-alone selling price is not directly observable, such as when we do not sell the good or service separately, the stand-alone selling price is determined using a range of inputs that includes market conditions and other observable inputs. More than one stand-alone selling price may exist for individual goods and services due to the stratification of those goods and services, considering attributes such as the size of the customer and geographic region.
Due to the nature of the work required to be performed on some performance obligations, significant judgment may be required to determine the transaction price. It is common for our license agreements to contain provisions that can either increase or decrease the transaction price. These variable amounts are generally estimated based on usage. In addition to estimating variable consideration, significant judgment is necessary to identify forms of variable consideration, determine whether the variable consideration relates to a sales-based or usage-based royalty of intellectual property and determine whether and when to include estimates of variable consideration in the transaction price.
Some hardware products are sold with a right of return and in other circumstances, other credits or incentives may be provided such as consideration (sales incentives) given to customers or resellers, which are accounted for as variable consideration and recognized as a reduction to the revenue recognized. Estimates of returns, credits and incentives are made at contract inception and updated each reporting period.
In contracts where we do not host the TiVo service and that include engineering services that are essential to the functionality of the licensed technology or involve significant customization or modification of software, we recognize revenue as progress toward completion occurs using an input method based on the ratio of costs incurred to date to total estimated costs of the project. Significant judgment is required to estimate the remaining effort to complete the project. These estimates are reassessed throughout the term of the arrangement.
On an ongoing basis, management evaluates its estimates, inputs and assumptions related to revenue recognition. Using different estimates, inputs or assumptions may materially affect the reported amounts of assets and liabilities as of the date of the financial statements and the results of operations for the reporting period.
Nature of Goods and Services
The following is a discussion of the principal activities from which we generate revenue.
Patent Licensing Agreements
We license our discovery patent portfolio to traditional pay TV providers, virtual service providers, OTT video providers, CE manufacturers and others. We license our patented technology portfolio under two revenue models: (i) fixed fee licenses and (ii) per-unit royalty licenses.
Our long-term fixed-fee license agreements provide rights to future patented technologies over the term of the agreement that are highly interdependent or highly interrelated to the patented technologies provided at the inception of the agreement. We treat these rights as a single performance obligation with revenue recognized on a straight-line basis over the term of the fixed-fee license agreement.
At times, we enter into license agreements in which a licensee is released from past patent infringement claims and is granted a license to ship an unlimited number of units over a future period for a fixed fee. In these arrangements, we allocate the transaction price between the release for past patent infringement claims and the future license. In determining the stand-alone selling price of the release for past patent infringement claims and the future license, we consider such factors as the number of units shipped in the past and in what geographies these units where shipped, the number of units expected to be shipped in the future and in what geographies these units are expected to be shipped, as well as the licensing rate we generally receive for units shipped in the same geographies. As the release from past patent infringement claims is generally satisfied at execution of the agreement, the transaction price allocated to the release from past patent infringement claims is generally recognized in the period the agreement is executed and the amount of transaction price allocated to the future license is recognized ratably over the future license term.
We recognize revenue from per-unit royalty licenses in the period in which the licensee's sales are estimated to have occurred, which results in an adjustment to revenue when actual sales are subsequently reported by the licensees, which is generally in the month or quarter following usage or shipment. We generally recognize revenue from per-unit royalty licenses on a per-subscriber per-month model for licenses with service providers and a per-unit shipped model for licenses with CE manufacturers.
Arrangements with Multiple System Operators for the TiVo Service
Our arrangements with multiple system operators ("MSOs") typically include software customization and set-up services, associated maintenance and support, limited training, post-contract support, TiVo-enabled digital video recorders ("DVRs"), non-DVR STBs and the TiVo service.
We have two types of arrangements with MSOs that include technology deployment and engineering services. In instances where we host the TiVo service, non-refundable payments received for customization and set-up services are deferred and recognized as revenue ratably over the hosting term. The related cost of such services is capitalized to the extent it is deemed recoverable and amortized to cost of revenues over the same period as the related TiVo service revenue is recognized. We estimate the stand-alone selling prices for training, DVRs, non-DVR STBs and maintenance and support based on the price charged in stand-alone sales of the promised good or service. The stand-alone selling price for the TiVo service is determined considering the size of the MSO and expected volume of deployment, market conditions, competitive landscape, internal costs and total gross margin objectives. For a term license to the TiVo service, we receive license fees for the hosted TiVo service on either a per-subscriber per-month basis or a fixed fee. We recognize revenue from per-subscriber per-month licenses during the month the TiVo service is provided to the customer and recognize revenue from fixed fee licenses ratably over the license period.
In arrangements where we do not host the TiVo service and that include engineering services that are essential to the functionality of the licensed technology or involve significant customization or modification of the software, we recognize revenue as progress toward completion is made using an input method based on the ratio of costs incurred to date to total estimated costs of the project. Project costs are primarily labor related to the specific activities required for the project. Costs related to general infrastructure or uncommitted platform development are not included in the project cost estimates and are expensed as incurred. Estimating project costs requires forecasting costs, tracking progress toward completion and projecting the remaining effort to complete the project. These estimates are reassessed throughout the term of the arrangement, and revisions to estimates are recognized on a cumulative catch-up basis when the changed conditions become known. Provisions for losses are recorded when estimates indicate it is probable that a loss will be incurred for the contract. We generally recognize revenue from license fees for the TiVo service that we do not host on a per-subscriber per-month basis due to the recognition constraint on intellectual property usage-based royalties.
Subscription Services
Subscription services revenues primarily consist of fees to provide customers with access to one or more of our hosted products such as our iGuide IPG, advanced search and recommendations, metadata and analytics products, including routine customer support. We generally receive per-subscriber per-month fees for our iGuide IPG and search and recommendations service and revenue is recorded in the month the customer uses the service. We generally receive a monthly or quarterly fee from metadata or analytics licenses for the right to use the metadata or access our analytics platform and to receive regular updates. Revenue from our metadata and analytics service is recognized ratably over the subscription period.
Passport Software
We license our Passport IPG software to pay TV providers in North and South America. We generally receive per-subscriber per-month fees for licenses to the Passport IPG software and support. Due to the usage-based royalty provisions of the revenue recognition guidance, revenue is generally recognized in the month the customer uses the software.
Advertising
We generate advertising revenue through our IPGs. Advertising revenue is recognized when the related advertisement is provided. Advertising revenue is recorded net of agency commissions and revenue shares with service providers and CE manufacturers.
TiVo-enabled DVRs and TiVo Service
We sell TiVo-enabled DVRs and the related service directly to customers through sales programs via the TiVo.com website and license the sale of TiVo-enabled DVRs through a limited number of retailers. For sales through the TiVo.com website, the customer receives a DVR and commits to either a minimum subscription period of one year or for the lifetime of the DVR. Customers who purchase a DVR from TiVo.com have the right to return the DVR within 30 days of purchase for a full refund. For licensed sales of TiVo-enabled DVRs through retailers, the customer commits to either a minimum subscription period of one year or for the lifetime of the DVR. All customers have the right to cancel their subscription to the TiVo service within 30 days of subscription activation for a full refund. After the initial subscription period, all customers have various pricing options when they renew their subscription.
The stand-alone selling price for the TiVo service is established based on stand-alone sales of the service and varies by the length of the service period. The stand-alone selling price of the DVR is determined based on the price for which we would sell the DVR without any service commitment from the customer.
The transaction price allocated to the DVR is recognized as revenue on delivery and the transaction price allocated to the TiVo service is recognized as revenue ratably over the service period. Subscription revenues from lifetime subscriptions are recognized ratably over the estimated useful life of the DVR associated with the subscription. The estimated useful life for a DVR depends on a number of assumptions, including, but not limited to, customer retention rates, the timing of new product introductions and historical experience. As of December 31, 2019, we recognize revenue for lifetime subscriptions over a 72-month period. We periodically reassess the estimated useful life of a DVR. When the actual useful life of the DVR materially differs from our estimate, the estimated useful life of the DVR is adjusted, which could result in the recognition of revenue over a longer or shorter period of time.
Shipping and handling costs associated with outbound freight after control of a DVR has transferred to a customer are accounted for as a fulfillment cost and are included in Cost of hardware revenues, excluding depreciation and amortization of intangible assets as incurred.
Indefinite-Lived Intangible Assets and Goodwill
Indefinite-lived intangible assets and Goodwill are evaluated for potential impairment annually, as of the beginning of the fourth quarter, and whenever events or changes in circumstances indicate their carrying amount may not be recoverable.
Qualitative factors are first assessed to determine whether events or changes in circumstances indicate it is more-likely-than-not that an indefinite-lived intangible asset or the fair value of a reporting unit is less than its carrying amount. Qualitative factors which could trigger an interim impairment review, include, but are not limited to a:
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significant deterioration in actual or expected financial performance or operating results;
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significant adverse changes in legal factors or in the business climate, including adverse regulatory actions or assessments; and
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significant sustained decrease in share price.
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Indefinite-Lived Intangible Assets
If, based on the qualitative assessment, it is considered more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, then a quantitative impairment test is performed. In the quantitative impairment
test for indefinite-lived intangible assets, fair value is compared to the carrying amount of the indefinite-lived intangible asset. When we are required to estimate the fair value of an indefinite-lived intangible asset, we use an income approach, such as a relief-from-royalty technique. If the fair value of an indefinite-lived intangible asset exceeds its carrying amount, the indefinite-lived intangible asset is not impaired. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss equal to the difference is recognized.
The process of evaluating indefinite-lived intangible assets for potential impairment is subjective and requires significant estimates, assumptions and judgments, particularly related to estimating the fair value of the asset. Estimating the fair value of an indefinite-lived intangible asset considers the amount and timing of the future cash flows associated with the asset, the expected long-term growth rate, assumed royalty rates, income tax rates and economic and market conditions, as well as risk-adjusted discount rates.
For reasons similar to those described below related to goodwill, during the fourth quarter of 2018, the third quarter of 2019 and the fourth quarter of 2019, sufficient indicators of potential impairment were identified that management concluded it was more-likely-than-not that the indefinite-lived intangible asset was impaired and that quantitative interim impairment tests should be performed as of December 31, 2018, September 30, 2019 and December 31, 2019.
The quantitative interim impairment test for the indefinite-lived intangible asset performed as of December 31, 2019 and December 31, 2018 indicated that its fair value exceeded its carrying amount by 37% and 57%, respectively. Accordingly, as of December 31, 2019 and December 31, 2018, no impairment charges were recognized for the indefinite-lived intangible asset. As of December 31, 2019, the carrying amount of the indefinite-lived intangible asset was $14.0 million.
Goodwill
Goodwill represents the excess of cost over fair value of the net assets of an acquired business. The recoverability of goodwill is assessed at the reporting unit level, which is either the operating segment or one level below.
If, based on the qualitative assessment, it is considered more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then a quantitative impairment test is performed. In the quantitative impairment test, the fair value of each reporting unit is compared to its carrying amount. In 2019, the fair value of the Product reporting unit and the Intellectual Property Licensing reporting unit was estimated using an income approach. In 2018, the fair value of the Product reporting unit was estimated by weighting the fair values derived from an income approach and a market approach and the fair value of the Intellectual Property Licensing reporting unit was estimated using an income approach.
Under the income approach, the fair value of a reporting unit is estimated based on the present value of estimated future cash flows and considers estimated revenue growth rates, future operating margins and risk-adjusted discount rates. Under the market approach, the fair value of a reporting unit is estimated based on market multiples of revenue or earnings derived from comparable publicly-traded companies. The carrying amount of a reporting unit is determined by assigning the assets and liabilities, including goodwill and intangible assets, to the reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not impaired. If the fair value of a reporting unit is less than its carrying amount, an impairment loss equal to the difference is recognized.
The process of evaluating goodwill for potential impairment is subjective and requires significant estimates, assumptions and judgments particularly related to the identification of reporting units, the assignment of assets and liabilities to reporting units and estimating the fair value of each reporting unit. Estimating the fair value of a reporting unit considers future revenue growth rates, operating margins, income tax rates and economic and market conditions, as well as risk-adjusted discount rates and the identification of appropriate market comparable data.
During December 2018, sufficient indicators of potential impairment were identified that management concluded it was more-likely-than-not that goodwill was impaired and a quantitative interim goodwill impairment test should be performed as of December 31, 2018 for the Product and Intellectual Property Licensing reporting units. Indicators of potential impairment included a significant decline in the trading price of TiVo's common stock during the second half of the fourth quarter of 2018 and current market conditions, as well as lower-than-previously forecast revenue and profitability levels over a sustained period of time and downward revisions to management's short- and long-term forecasts. The forecast revisions were identified as part of TiVo's overall long-term forecasting process, which was substantially completed in December 2018. The revised forecast reflected lower expectations for the Company's Platform Solutions products, including changes in both the market and business models internationally, as well as the decision to eliminate certain analytics products. The changes in expectations related to revenue growth rates, current market trends, business mix, cost structure and other expectations about anticipated short- and long-term operating results. As a result of the quantitative interim goodwill impairment test performed as of December 31,
2018, a Goodwill impairment charge of $269.0 million was recognized related to the Product reporting unit. As a result of the quantitative interim goodwill impairment test performed as of December 31, 2018, no Goodwill impairment charge was recognized related to the Intellectual Property Licensing reporting unit.
During September 2019, sufficient indicators of potential impairment were identified that management concluded it was more-likely-than-not that goodwill was impaired and a quantitative interim goodwill impairment test should be performed as of September 30, 2019, for the Product and Intellectual Property Licensing reporting units. Indicators of potential impairment included a significant and sustained decline in the trading price of TiVo's common stock, as well as lower-than-previously forecast revenue and profitability levels for the Product reporting unit and downward revisions to this reporting unit's short- and long-term forecasts. The forecast revisions for the Product reporting unit were identified as part of TiVo's 2020 budgeting process and reflect lower expectations for its Platform Solutions products, including changes in both the market and business models internationally. The changes in such expectations related to revenue growth rates, current market trends, business mix, cost structure and other expectations about the anticipated short- and long-term operating results. As a result of the quantitative interim goodwill impairment test performed as of September 30, 2019, a Goodwill impairment charge of $137.5 million was recognized, of which $79.3 million relates to the Product reporting unit and $58.2 million relates to the Intellectual Property Licensing reporting unit. The Goodwill impairment charge for the Intellectual Property Licensing reporting unit resulted from an increase in the discount rate used to estimate fair value due to the decline in the trading price of TiVo's common stock.
Following the Company's announcement of the Xperi Combination in December 2019, management concluded sufficient indicators of potential impairment were identified and that it was more-likely-than-not that goodwill was impaired and that quantitative interim goodwill impairment tests should be performed as of December 31, 2019 for the Product and Intellectual Property Licensing reporting units. Although the long-range forecasts for the Product and Intellectual Property Licensing reporting units did not materially change from those used in performing the quantitative interim goodwill impairment test as of September 30, 2019, the fair value decreased. The decrease in fair value was primarily due to the elimination of an assumed control premium from the fair value estimate following execution of the Xperi Merger Agreement. Based on this decline in fair value, a Goodwill impairment charge of $217.1 million was recognized during the three months ended December 31, 2019, of which $20.5 million related to the Product reporting unit and $196.6 million related to the Intellectual Property Licensing reporting unit.
Following the recognition of the Goodwill impairment charge during the three months ended December 31, 2019, the equity fair value of the Product reporting unit equaled its carrying amount of $420.4 million and the equity fair value of the Intellectual Property Licensing reporting unit equaled its carrying amount of $653.3 million, which was net of the Company's debt as of December 31, 2019. A deterioration in conditions or circumstances similar to those described above may result in additional goodwill impairment charges for the Product or Intellectual Property Licensing reporting units in the future. In addition, if we fail to renew licenses, or renew licenses with materially different terms than those assumed, or if there is an adverse outcome with respect to patent infringement claims we have asserted against Comcast, an impairment of goodwill for the Intellectual Property Licensing reporting unit could result, the effect of which could be material.
Long-Lived Assets, including Property and Equipment and Finite-Lived Intangible Assets
Long-lived assets, such as property and equipment and finite-lived intangible assets, are assessed for potential impairment whenever events or changes in circumstances (collectively, “triggering events”) indicate the carrying amount of an asset group may not be recoverable. An asset group is established by identifying the lowest level of cash flows generated by a group of assets that are largely independent of the cash flows of other assets and could include assets used across multiple businesses or segments. Once a triggering event has been identified, the impairment test employed is based on whether we intend to continue to use the asset group or to hold the asset group for sale. For assets held for use, recoverability is assessed based on the estimated undiscounted future cash flows expected to result from the use and eventual disposition of the asset group. If the undiscounted future cash flows are less than the carrying amount of the asset group, the asset group is impaired. The amount of impairment, if any, is measured as the difference between the carrying amount of the asset group and its fair value. To the extent the carrying amount of each asset exceeds its fair value, the impairment is allocated to the finite-lived assets of the asset group on a pro rata basis using their relative carrying amounts.
For assets held for sale, to the extent the asset group's carrying amount is greater than its fair value less cost to sell, an impairment loss is recognized for the difference. Assets held for sale are separately presented in the Consolidated Balance Sheets at the lower of their carrying amount or fair value less cost to sell, and are no longer depreciated.
Determining whether a finite-lived asset group is impaired requires various estimates, assumptions and judgments, including whether a triggering event has occurred and the identification of appropriate asset groups. When required to estimate
the fair value of a finite-lived asset group, we generally use an income approach, such as a discounted cash flow technique. Significant estimates, assumptions and judgments inherent in the income approach include the amount and timing of the future cash flows associated with the asset group, the expected long-term growth rate, income tax rates and economic and market conditions, as well as risk-adjusted discount rates. If we establish different asset groups or utilize different valuation methodologies or assumptions, the impairment test results could differ.
As of December 31, 2019, the carrying amount of property and equipment and finite-lived intangible assets was $48.3 million and $401.1 million, respectively.
Equity-Based Compensation
Equity-based compensation costs are estimated based on the grant date fair value of the award. Equity-based compensation cost is recognized for those awards expected to meet the service or performance vesting conditions on a straight-line basis over the requisite service period of the award. Equity-based compensation is estimated based on the aggregate grant for service-based awards and at the individual vesting tranche for awards with performance or market conditions. Forfeiture estimates are based on historical experience.
As our restricted stock awards are generally not eligible for dividend protection, the fair value of restricted awards subject to service or performance conditions is estimated as the price of our common stock at the close of trading on the date of grant, less the present value of dividends expected to be paid during the vesting period. When restricted stock award requires a post-vesting restriction on sale, the grant date fair value is adjusted to reflect a liquidity discount based on the expected post-vesting holding period.
A Monte Carlo simulation is used to estimate the fair value of restricted stock units subject to market conditions with expected volatility estimated using the historical volatility of our common stock.
We use the Black-Scholes-Merton option-pricing formula to estimate the fair value of stock options and employee stock purchase plan ("ESPP") shares. The Black-Scholes-Merton option-pricing formula uses complex and subjective inputs, such as the expected volatility of our common stock over the expected term of the award and projected employee exercise behavior. Expected volatility is estimated using a combination of historical volatility and implied volatility derived from publicly-traded options on our common stock. The expected term is estimated by calculating the average term from historical experience. The risk-free interest rate is the yield on U.S. Treasury zero-coupon bonds with remaining terms similar to the expected term of the ESPP shares at the grant date. The expected dividend yield assumes a constant dividend yield commensurate with the dividend yield of TiVo's common stock on the grant date.
The number of awards expected to vest during the requisite service period is estimated at the time of grant. We use historical data to estimate pre-vesting forfeitures and record equity-based compensation only for those awards for which the requisite service is expected to be rendered. Forfeiture estimates are revised during the requisite service period and the effect of changes in the number of awards expected to be forfeited is recorded as a cumulative adjustment in the period estimates are revised.
The estimated fair value of our equity-based compensation awards is subject to significant estimates, assumptions and judgments. Changing the terms of our equity-based compensation awards, granting new forms of awards, changing the number of awards granted, changes in the price of our common stock or the historical or implied volatility derived from publicly-traded options on our common stock or adjusting our forfeiture assumptions, may cause us to realize material changes in equity-based compensation in the future.
Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions and are subject to the examination of our income tax returns by the relevant tax authorities which may assert assessments against us. Significant estimates, assumptions and judgments are required in determining our provision for income taxes and income tax assets and liabilities, including the effects of any valuation allowance or unrecognized tax benefits. Our estimates, assumptions and judgments consider existing tax laws, our interpretation of existing tax laws and possible outcomes of current and future audits conducted by various tax authorities. Changes in tax law or our interpretation of existing tax laws and the resolution of current and future tax audits could significantly impact the provision for income taxes in our Consolidated Financial Statements.
We assess the likelihood that we will be able to recover the carrying amount of our deferred tax assets and reflect any changes to our estimate of the amount we are more likely than not to realize as a deferred tax asset valuation allowance, with a
corresponding adjustment to earnings or other comprehensive income, as appropriate. The ultimate realization of a deferred tax asset depends on the generation of future taxable income during the periods in which those deferred tax assets will become deductible. In determining the need for a valuation allowance, we assess all available positive and negative evidence regarding the realizability of our deferred tax assets, including the future reversal of existing taxable temporary differences, taxable income in carryback periods, prudent and feasible tax planning strategies, estimated future taxable income (including the reversal of deferred tax liabilities) and whether we have a recent history of pre-tax losses. Significant judgment is required in assessing the need for, and extent of, any deferred tax asset valuation allowance. The deferred tax asset valuation allowance can be affected by changes in tax regulations, interpretations and rulings, changes to enacted statutory tax rates and changes to estimates of future taxable income.
Cumulative U.S. GAAP pre-tax losses incurred beginning in 2014, including those from discontinued operations, represent a significant source of negative evidence indicating the need for a valuation allowance with respect to a substantial portion of our deferred tax assets. We believe the size and frequency of losses, including those from discontinued operations, in recent years and the uncertainty associated with projecting future taxable income support the conclusion that a valuation allowance is required to reduce our deferred tax assets to the amount expected to be realized. If we achieve profitability in future periods, an evaluation would be performed of whether the recent history of profitability would constitute sufficient positive evidence to support the reversal of a portion, or all, of the valuation allowances.
From time to time, we engage in transactions for which the tax consequences may be uncertain. Accruals are established for unrecognized tax benefits, which represent the difference between a tax position taken or expected to be taken in a tax return and the benefit recognized for financial reporting purposes, when we believe it is not more-likely-than-not that the tax position will be sustained on examination by the taxing authority based on the technical merits of the position. We adjust our accruals for unrecognized tax benefits when facts and circumstances change, such as the closing of a tax audit, notice of an assessment by a taxing authority or the refinement of an estimate. The final outcome of a matter can differ from amounts recorded for a number of reasons, including the decision to settle rather than litigate a matter, relevant legal precedent related to similar matters and success in supporting our position with the tax authorities. Although we believe we have adequately accrued for our unrecognized tax benefits, if our estimate proves different than the ultimate outcome, such differences will affect the provision for income taxes in the period in which such a determination is made.
Contractual Obligations
Our contractual obligations as of December 31, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
Contractual Obligations (1)
|
|
Total
|
|
2020
|
|
2021 - 2022
|
|
2023 - 2024
|
|
Thereafter
|
Long-term debt (2)
|
|
$
|
1,010,048
|
|
|
$
|
350,413
|
|
|
$
|
143,048
|
|
|
$
|
516,587
|
|
|
$
|
—
|
|
Interest on long-term debt (2, 3)
|
|
209,152
|
|
|
55,223
|
|
|
90,284
|
|
|
63,645
|
|
|
—
|
|
Purchase obligations
|
|
19,771
|
|
|
6,693
|
|
|
9,671
|
|
|
3,407
|
|
|
—
|
|
Operating lease commitments (4)
|
|
91,529
|
|
|
17,657
|
|
|
30,087
|
|
|
23,676
|
|
|
20,109
|
|
Transition Tax (5)
|
|
486
|
|
|
69
|
|
|
200
|
|
|
217
|
|
|
—
|
|
Total
|
|
$
|
1,330,986
|
|
|
$
|
430,055
|
|
|
$
|
273,290
|
|
|
$
|
607,532
|
|
|
$
|
20,109
|
|
|
|
(1)
|
The following items have been excluded from the table:
|
|
|
•
|
Due to uncertainty about the periods in which tax examinations will be completed and limited information related to ongoing tax return audits, we are unable to reliably estimate the timing of cash payments and settlements associated with accruals for unrecognized tax benefits; therefore, amounts related to these obligations have been excluded from the table.
|
|
|
(2)
|
The 2020 Convertible Notes can be freely converted by holders at any time. For additional information, see Note 8 to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K, which is incorporated by reference herein.
|
|
|
(3)
|
Interest on the 2019 Term Loan Facility is presented based on the interest rate in effect as of December 31, 2019. For additional information, see Note 8 to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K, which is incorporated by reference herein.
|
|
|
(4)
|
Operating leases are presented on a gross basis. We have agreements to receive payments of approximately $37.0 million under subleases through 2026.
|
|
|
(5)
|
As a result of the Tax Act of 2017, during the year ended December 31, 2018, we determined our Transition Tax on unrepatriated foreign earnings of our foreign subsidiaries was $33.7 million. We utilized $32.8 million of available tax
|
credits to offset the majority of the Transition Tax. We elected to pay the Transition Tax over the 8 year period provided by the Tax Act of 2017. For additional information on the Tax Act of 2017, see Note 13 to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K, which is incorporated by reference herein.
Off-Balance Sheet Arrangements
We have not engaged in any material off-balance sheet arrangements, including the use of structured finance vehicles, special purpose entities or variable interest entities.
Recent Accounting Pronouncements
For a summary of applicable recent accounting pronouncements, see Note 1 to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K, which is incorporated by reference herein.
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Board Leadership Structure and Risk Oversight
Board Leadership Structure. We separate the roles of Chief Executive Officer and Chairman of the Board of Directors in recognition of the differences between the two roles. The Chief Executive Officer is responsible for setting the strategic direction for the company and the day-to-day leadership and performance of the company, while the Chairman of the Board of Directors provides guidance to the Chief Executive Officer and sets the agenda for Board meetings and presides over meetings of the full Board. We also believe that separation of the positions reinforces the independence of the Board of Directors in its oversight of the business and affairs of the company, and creates an environment that is more conducive to objective evaluation and oversight of management’s performance, increasing management accountability and improving the ability of the Board of Directors to monitor whether management’s actions are in the best interests of the company and its stockholders. Our Chairman of the Board of Directors, is “independent” and presides at all executive sessions of “non-management” directors.
Risk Oversight. The Board’s role in the company’s risk oversight process includes receiving regular reports from members of senior management on areas of material risk to the company, including operational, financial, legal and regulatory, information security, and strategic and reputational risks. The full Board of Directors (or the appropriate committee in the case of risks that are under the purview of a particular committee) receives these reports to enable it to understand our risk identification, risk management and risk mitigation strategies. The company’s compensation committee is responsible for overseeing the management of risks relating to the company’s executive compensation plans and arrangements. The audit committee oversees management of financial risks, including as such financial risks maybe impacted by operational, legal and regulatory and information security risks. The corporate governance and nominating committee manages risks associated with the independence of the Board of Directors and potential conflicts of interest. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire Board of Directors is regularly informed of such risks through committee reports at the Board of Directors meeting following a given committee meeting. This enables the Board and its committees to coordinate the risk oversight role, particularly with respect to risk interrelationships.
The company has a formal compliance program, which includes a risk management committee comprised of key operational, financial, legal and information technology personnel who regularly assess risks to the company, including through annual enterprise risk assessments. In addition to the company’s formal compliance program, the Board of Directors encourages management to promote a corporate culture that understands risk management and incorporates it into the overall corporate strategy and day-to-day business operations. The company’s risk management structure also includes an ongoing effort to assess and analyze the most likely areas of future risk for the company. As a result, the Board of Directors (and its committees) periodically asks the company’s executives to discuss the most likely sources of material future risks and how the company is addressing any significant potential vulnerability.
Independence of Directors
As required by the Nasdaq listing standards, a majority of the members of our Board must qualify as “independent,” as affirmatively determined by our Board. Our Board consults with our legal counsel to ensure that its determinations are consistent with all relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in the SEC rules and pertinent Nasdaq listing standards.
Consistent with these considerations, after review of all relevant transactions and relationships between each director, any of his or her family members, and the company, our executive officers and our independent registered public accounting firm, the Board has affirmatively determined that, except for Mr. Shull, the company’s current President and Chief Executive Officer, who is not an independent director by virtue of his employment with the company, and Mr. Rau, who was employed as the company’s Interim President and Chief Executive Officer through May 30, 2019, all other directors who served on the Board of Directors in 2019 are independent directors.
All members of our Audit Committee, at all times during which they served on such Committee, are “independent” as required by Nasdaq Rule 5605(c)(2)(A). All members of our Compensation Committee, at all times during which they served on such Committee, are “independent” as required by Nasdaq Rule 5605(d)(2)(A).
Meetings of the Board and Committees
As of December 31, 2019, our Board of Directors and committees were comprised as follows:
|
|
|
|
|
|
Name
|
Board of
Directors
|
Audit
Committee
|
Compensation
Committee
|
Corporate
Governance
and
Nominating
Committee
|
David Shull
|
P
|
|
|
|
Laura J. Durr
|
P
|
P
|
|
|
Alan L. Earhart
|
P
|
Chair
|
|
|
Eddy W. Hartenstein
|
P
|
P
|
P
|
|
James E. Meyer
|
Chair
|
|
|
Chair
|
Daniel Moloney
|
P
|
|
P
|
|
Raghavendra Rau
|
P
|
|
|
|
Glenn W. Welling
|
P
|
|
Chair
|
P
|
Loria B. Yeadon
|
P
|
|
|
P
|
Total # of Meetings in 2019
|
14
|
5
|
10
|
7
|
Total # of Actions by Written Consent in 2019
|
6
|
—
|
1
|
1
|
Raghavendra Rau served on our Board of Directors and as the company’s Interim President and Chief Executive Officer through May 30, 2019. During the time he served as the company’s Interim President and Chief Executive Officer, Mr. Rau did not serve on any committees of the Board of Directors.
Board of Directors
Each director who served on the Board during 2019 attended, for the portion of the year in which they served, at least 75% of the aggregate of: (i) the total number of meetings of our Board of Directors that were held in 2019 and (ii) the total number of all meetings of the committees of our Board of Directors on which he or she served. As part of each regularly scheduled Board meeting, the independent members of our Board of Directors hold a separate meeting that non-independent directors and other members of management do not attend. Although we do not have a formal policy regarding attendance by members of the Board of Directors at the annual meeting of stockholders, we encourage directors to attend. Last year, all of the members of our Board of Directors then serving attended the annual meeting in person or by teleconference.
Our Board of Directors has an audit committee, a compensation committee and a corporate governance and nominating committee. Our Board of Directors has adopted charters governing the duties and responsibilities of each of these committees and a copy of each such charter is available in the investor relations section on our website at www.tivo.com.
The following is a brief biography of each member of our board of directors, as of December 31, 2019, with each biography including information regarding the experiences, qualifications, attributes or skills that caused our board of directors to determine that each member of our board of directors should serve as a director as of the date of this Form 10-K. The initial year of each member’s service on the board of directors denotes the year in which such member joined as a director of TiVo Corporation or one of its subsidiaries, Rovi, TiVo Inc., Rovi Solutions Corporation (formerly Macrovision Corporation) or Rovi Guides, Inc. (formerly Gemstar-TV Guide International, Inc. (“Gemstar”)).
David Shull. Mr. Shull, age 47, has served as our President and CEO and a member of our Board of Directors since 2019. He has deep experience in the Pay-TV, OTT and digital media fields and served as Chief Executive Officer of The Weather Channel cable network from January 2016 until its sale in September 2018 and served as Group President, TV of The Weather Channel group from May 2015 to January 2016. Prior to The Weather Channel, Mr. Shull held various executive roles from October 2004 to May 2014 at DISH Network and EchoStar, including Executive Vice President and Chief Commercial Officer, Senior Vice President, Programming, Senior Vice President and Managing Director, Asia Pacific, and Vice President, Operations. Mr. Shull holds a B.A. in philosophy from Harvard University and an M.B.A. from Oxford University.
Laura J. Durr. Ms. Durr, age 58, has served as a member of the Board since 2019. Ms. Durr served as the Executive Vice President and Chief Financial Officer of Polycom, Inc. from May 2014 until its acquisition by Plantronics Inc. in July
2018. Prior to becoming Chief Financial Officer, Ms. Durr held various finance leadership roles at Polycom between 2004 and 2014, including Senior Vice President-Worldwide Finance, Chief Accounting Officer and Worldwide Controller. Prior to joining Polycom, Ms. Durr held executive positions in finance and administration at Lucent Technologies and International Network Services and also spent six years at Price Waterhouse LLP. Ms. Durr was a certified public accountant and holds a B.S. in Accounting from San Jose State University.
Alan L Earhart. Mr. Earhart, age 76, has served as a member of the Board since 2008. Mr. Earhart retired as partner of PricewaterhouseCoopers LLP, an accounting and consulting firm, in 2001. At the time of his retirement, he served as Managing Partner for PricewaterhouseCoopers’ Silicon Valley office. From 1970 to 2001, Mr. Earhart held a variety of positions with Coopers & Lybrand and its successor entity, PricewaterhouseCoopers LLP. Mr. Earhart holds a B.S. in accounting from the University of Oregon.
Eddy W. Hartenstein. Mr. Hartenstein, age 69, has served as a member of the Board since 2015. Mr. Hartenstein served as President and Chief Executive Officer of the Tribune Company, a multimedia, publishing, digital media and broadcasting company, from May 2011 to January 2013. Mr. Hartenstein was also publisher and Chief Executive Officer of the Los Angeles Times Media Group, a print and online company, from August 2008 to August 2014. Previously, Mr. Hartenstein served as President of DIRECTV, Inc., a television service provider, from its inception in 1990 through 2001 and then as its Chairman and Chief Executive Officer from 2001 to 2003, when News Corporation purchased a controlling interest in the company. He continued as Vice Chairman of The DIRECTV Group until 2004. Mr. Hartenstein was inducted into the Consumer Electronics Association Hall of Fame in 2008, the Broadcasting and Cable Hall of Fame in 2002 and the National Academy of Engineering in 2001, and received an Emmy® from the National Academy of Television Arts and Sciences for lifetime achievement in 2007. Mr. Hartenstein serves as the lead independent director of Sirius XM Holdings Inc., a satellite radio broadcaster, and as a director of Broadcom Limited, a semiconductor company, and Tribune Publishing Company, a media company. Mr. Hartenstein has a B.S. in Aerospace Engineering, a B.S. in Mathematics and an honorary Doctor of Science from California State Polytechnic University, Pomona, and an M.S. in Applied Mechanics from the California Institute of Technology.
James E. Meyer. Mr. Meyer, age 65, has served as a member of the Board since 1997 and has served as Chairman of the Board since 2015. Mr. Myer was Chief Executive Officer of Sirius XM Radio since December 2012. Mr. Meyer served as President of Operations and Sales of Sirius Satellite Radio from April 2004 to December 2012. From 1997 to 2002, Mr. Meyer served in various capacities at Thomson Multimedia Corporation. Mr. Meyer currently serves as a director of Charter Communications, Inc., a broadband communications and cable operator. Mr. Meyer holds a B.S. in Economics and an MBA from St. Bonaventure University.
Dan Moloney. Mr. Moloney, age 60, has served as a member of the Board since 2013. Mr. Moloney has been an Executive Partner at Siris Capital, LLC, a leading private equity firm in the technology and telecommunications industries, since 2013. Prior to this, he served as the President of Motorola Mobility, Inc., a leading provider of innovative technologies, products and services for the mobile and cable/wireline industries. He has almost 30 years of senior executive management, leadership and technological expertise and experience. Prior to Motorola Mobility being spun out of Motorola in early 2011, he served as the President of the Home & Networks Mobility business within Motorola and led the expansion of this business into a worldwide leader in both video and broadband wireless solutions. From 2002 - 2006, he led the Connected Home business for Motorola. He joined Motorola as part of their acquisition of General Instrument in 2000, where he served in various leadership roles around the forefront of key technological breakthroughs including digital TV and HDTV, VoIP, and internet/video applications over cable. Mr. Moloney currently serves as a director of Plantronics, a designer and manufacturer of lightweight communications devices. Mr. Moloney holds a bachelor’s degree in electrical engineering from the University of Michigan and a Master of Business Administration from the University of Chicago.
Raghavendra Rau. Mr. Rau, age 70, has served as a member of the Board since 2015 and has served as Vice Chairman since 2019. He served as the interim President and Chief Executive Officer of TiVo from July 2018 to May 2019. Mr. Rau also served as Chief Executive Officer of SeaChange International Inc., a video software technology company, from November 2011 to October 2014 and was a member of its board from July 2010. Previously, Mr. Rau held a number of senior leadership positions with Motorola Inc. from 1992 to 2008, including Senior Vice President of Strategy and Business Development of the Networks & Enterprise business, Senior Vice President of the Mobile TV Solutions business, and Corporate Vice President of Marketing and Professional Services. Mr. Rau currently serves as a director of Quantum Corp., a storage, archive and data protection company. Mr. Rau holds a bachelor's degree in engineering from the National Institute of Technology (India) and an MBA from the Indian Institute of Management (Ahmedabad).
Glenn W. Welling. Mr. Welling, age 49, has served as a member of the Board since 2015. Mr. Welling has been the founder and Chief Investment Officer of Engaged Capital since 2012. Prior to Engaged Capital, Mr. Welling was a principal
and managing director at Relational Investors, an activist equity fund, which he joined in July 2008. At Relational, Mr. Welling was responsible for managing the equity fund's consumer, healthcare and utility group. Mr. Welling spent six years as a managing director at Credit Suisse Group AG, where he also served as the head of the investment banking department's advisory business. Mr. Welling is a member of the board of directors of Hain Celestial Group, a marketer, manufacturer and seller of organic and natural better-for-you food and beverage offerings. Mr. Welling is a graduate of The Wharton School of Business at the University of Pennsylvania.
Loria B. Yeadon. Ms. Yeadon, age 57, has served as a member of the Board since 2019. Ms. Yeadon has been serving as the Chief Executive Officer of YMCA of Greater Seattle since February 2019. She served as the Chief Executive Officer of Yeadon Intellectual Property LLC, a specialized intellectual property consulting firm, from 2014 to 2019. From 2009 to 2014, Ms. Yeadon held various roles at Intellectual Ventures, a global invention and investment business focused on the development and licensing of intellectual property, including serving as the Executive Vice President and General Manager of the IV transportation business, EVP of the Invention Investment Fund and as their Chief IP Counsel. Prior to her tenure at Intellectual Ventures, Ms. Yeadon served as CEO of Honeywell Intellectual Properties, Inc. Ms. Yeadon holds a B.S. in Electrical Engineering from the University of Virginia, a M.S. in Electrical Engineering from Georgia Institute of Technology, and a J.D. from Seton Hall School of Law.
Audit Committee
The principal function of the audit committee is to assist our Board of Directors in its oversight responsibilities relating to our financial accounting, reporting and controls. The audit committee monitors and evaluates periodic reviews of the adequacy of the accounting and financial reporting processes and systems of internal control that are conducted by our financial and senior management and our independent registered public accounting firm; is responsible for the appointment, compensation and monitoring of the work of our independent registered public accounting firm; reviews and evaluates the qualifications, independence and performance of our independent registered public accounting firm; monitors our compliance with legal and regulatory requirements; monitors the performance of our internal audit function; and facilitates communication among our independent registered public accounting firm, our financial and senior management and our Board of Directors. Mr. Earhart and Ms. Durr are “Audit Committee Financial Experts” as defined by SEC rules and regulations and also meet Nasdaq’s professional experience requirements.
From January 1, 2019 to May 1, 2019, the audit committee was comprised of Messrs. Earhart, Hartenstein and former director Jeffrey T. Hinson. Since the annual meeting of stockholders on May 1, 2019, the audit committee membership is as shown in the chart above.
Compensation Committee
The principal functions of the compensation committee are to review and approve our incentive compensation programs for all executive-level direct reports of the Chief Executive Officer and review and recommend the annual compensation for the Chief Executive Officer to the Board of Directors for approval. The compensation committee reviews and approves all compensation (including the adjustment of base salary each year) and all bonus and other incentive compensation programs for our executive-level officers (other than our Chief Executive Officer), and authorizes all awards to our executive-level officers under those programs. The compensation committee also approves any employment severance or termination arrangement with any executive-level officer (other than our Chief Executive Officer). All decisions regarding the compensation of our Chief Executive Officer are reviewed by the compensation committee, which then recommends such compensation to the full Board of Directors for approval. The Chief Executive Officer abstains from voting on approval of his own compensation and such approval is made by the remaining members of the Board of Directors, all of whom are “independent” under applicable rules of the SEC.
The compensation committee meets with our Chief Executive Officer and other internal personnel responsible for compensation analysis for the company prior to the beginning of each fiscal year to plan, and meets several times during the first quarter of each year to discuss, the incentive compensation programs to be effective for that fiscal year. The agenda for each compensation committee meeting is determined by the chairman of our compensation committee. The compensation committee may delegate to subcommittees any power and authority of the compensation committee, and such subcommittees have the sole authority to assist the compensation committee in carrying out its responsibilities, including the sole authority to approve any consultant fees.
For the entirety of 2019, the compensation committee membership was as shown in the chart above.
Corporate Governance and Nominating Committee
The principal functions of the corporate governance and nominating committee are to advise and make recommendations to our Board of Directors on matters concerning corporate governance, review potential or actual conflicts of interest involving members of our Board of Directors, help identify, evaluate and recruit candidates to fill vacancies on our Board of Directors, identify the nominees for election to our Board of Directors at the annual meeting of stockholders and oversee the annual evaluation of members of and performance of our Board of Directors and Board committees.
From January 1, 2019 to May 1, 2019, the corporate governance and nominating committee was comprised of Messrs. Earhart, Meyer and Welling. Since the annual meeting of stockholders on May 1, 2019, the corporate governance and nominating committee membership is as shown in the chart above.
Director Nomination Process
Director Qualifications
The corporate governance and nominating committee reviews, evaluates and proposes prospective candidates for our Board of Directors. Each member of our Board of Directors must have broad experience and business acumen, a record of professional accomplishment in his or her field, and demonstrated honesty and integrity consistent with our values. In evaluating director nominees, the corporate governance and nominating committee considers a variety of factors, including the appropriate size of the Board of Directors, our needs with respect to the particular talents and experience of the directors, the nominee’s experience and understanding of our business and industry, familiarity with national and international business matters, strategic thinking and willingness to share ideas, network of contacts, experience with accounting rules and practices, and diversity of professional expertise and experience beneficial to the achievement of our strategic goals. The corporate governance and nominating committee may also consider such other factors as it may deem are in the best interests of our company and our stockholders. The corporate governance and nominating committee understands that it is necessary for at least one, and preferably for several, members of the Board of Directors to meet the criteria for an “audit committee financial expert” as defined by SEC rules and for a majority of the members of the Board of Directors to meet the definition of “independent director” under the Nasdaq listing standards.
Identifying Nominees
In February 2018, our Board of Directors approved amendments to the company’s corporate governance and nominating committee charter to emphasize the Board’s commitment to diversity and inclusiveness in its Board membership. The corporate governance and nominating committee seeks to create a Board of Directors that is strong in its collective knowledge and has a diversity of viewpoints, skills and experience with respect to management and leadership, vision and strategy, business operations, business judgment, industry knowledge, accounting and finance, legal and intellectual property, corporate governance and global markets. Accordingly, in performing its responsibilities to review director candidates and recommend candidates to the Board for election, the Committee will: (i) ensure that candidates with a diversity of gender, race and ethnicity are included in each pool of candidates from which Board nominees are chosen; and (ii) seek diverse candidates by ensuring director searches include nominees from both non-executive corporate positions and non-traditional environments. We will also consider California’s new law, SB 826, in our consideration of nominees to the Board.
The corporate governance and nominating committee identifies nominees by first identifying the desired skills and experience of a new nominee based on the qualifications and diversity considerations discussed above. The corporate governance and nominating committee may identify potential nominees based upon suggestions by non-employee members of the Board of Directors, senior level executives, individuals personally known to the members of the Board of Directors, third-party search firms and/or stockholders, and evaluate those persons on its own. The corporate governance and nominating committee does not evaluate proposed nominees differently depending upon who has made the proposal.
Stockholder Nominations
In identifying nominees for our Board of Directors, the corporate governance and nominating committee will consider any stockholder recommendations for candidates to serve on the Board of Directors. If a stockholder wishes to nominate a candidate to serve on our Board of Directors, the stockholder should follow the procedures as set forth in our bylaws. Any notice of director nomination must meet all the requirements contained in our bylaws and include other information required pursuant to Regulation 14A of the Exchange Act, including the nominee’s consent to serve as a director and evidence of the nominating stockholder’s ownership of our stock. If a stockholder wishes to suggest a candidate for consideration by the
corporate governance and nominating committee, the stockholder should provide comparable information to the corporate governance and nominating committee with a request that the committee consider the candidate for nomination.
Communications with the Board
Stockholders may send communications to the Board of Directors or individual members of the Board by submitting one or more letters in sealed envelopes labeled with the names of the desired recipients. Any such letters should be placed in a larger envelope and mailed to TiVo Corporation, Attention: TiVo Corporation, Attention: General Counsel & Corporate Secretary, 2160 Gold Street, San Jose, California 95002. The Corporate Secretary will forward the sealed envelopes to the designated recipient. Comments or complaints relating to accounting or auditing matters may be submitted directly to the chair of the audit committee through the same address listed above.
Executive Officers
The names of our executive officers, their ages, positions and biographical summaries as of December 31, 2019 are shown below.
|
|
|
|
Name
|
Age
|
Position
|
David Shull
|
47
|
President and Chief Executive Officer
|
Wesley Gutierrez
|
42
|
Chief Financial Officer
|
Michael Hawkey
|
54
|
Senior Vice President and General Manager, User Experience
|
Matt Milne
|
52
|
Chief Revenue Officer
|
Arvin Patel
|
48
|
Executive Vice President and Chief Intellectual Property Officer
|
Pamela Sergeeff
|
47
|
Executive Vice President, General Counsel and Chief Compliance Officer
|
For a biography of David Shull, please see above in Item 10, "Board of Directors".
Wesley Gutierrez. Mr. Gutierrez has served as our Chief Financial Officer since December 2019. Mr. Gutierrez was appointed as the Company’s Senior Vice President, Chief Accounting Officer and Treasurer in July 2015 and served in this role until his appointment as Chief Financial Officer in December 2019. He joined Gemstar-TV Guide International Inc. in November 2004 and served in various roles in the finance organization, including as the Company’s Director, Financial Reporting from May 2008 (when the Company acquired Gemstar-TV Guide) to February 2009, the Company’s Vice President, Financial Reporting from March 2009 to September 2013 and the Company’s Vice President, Finance and Treasury from October 2013 to July 2015. Mr. Gutierrez holds a B.A in business economics from the University of California at Los Angeles.
Michael Hawkey. Mr. Hawkey has served as our Senior Vice President and General Manager, User Experience since September 2015. Prior to joining the Company (then Rovi), Mr. Hawkey was Senior Vice President and General Manager for Sling Media, Inc., a former subsidiary of EchoStar Corporation, from 2012 to 2015. Prior to this role, Mr. Hawkey worked as Vice President of Marketing and Sales for EchoStar Technologies, a communications technology company. He has also held leadership positions at Advanced Digital Broadcast (ADB) Americas and STMicroelectronics. Mr. Hawkey holds a B.S. in Computer Engineering from Rose-Hulman Institute of Technology.
Matt Milne. Mr. Milne has served as our Chief Revenue Officer since January 2017. Mr. Milne joined the Company (then Rovi) in February 2011 and served as Senior Vice President, CE Sales from 2011 to 2012. Mr. Milne served as our Executive Vice President, Worldwide Sales and Marketing from January 2012 to May 2014 and as Senior Vice President responsible for Tier 1 Intellectual Property Licensing & Sales from May 2014 to April 2016. He served as SVP and GM of Intellectual Property and Licensing from April 2016 until his promotion to Chief Revenue Officer in January 2017. Prior to joining the Company, Mr. Milne held various sales, marketing and product leadership positions at DivX, MediaFLO USA (a wholly owned subsidiary of Qualcomm Incorporated), Viewsonic, Gateway, Inc., Cameo Technologies and Western Digital. Mr. Milne holds an MBA from California State Polytechnic University, Pomona and a B.A. in business from California State University, Fullerton.
Arvin Patel. Mr. Patel has served as our Executive Vice President and Chief Intellectual Property Officer since August 2017. Prior to joining the Company, Mr. Patel served as Chief Intellectual Property Officer at Technicolor SA, a video technologies supplier, from August 2015 to June 2017. Mr. Patel previously served as Senior Vice President, Intellectual Property Licensing at Rovi from April 2011 to July 2015. Mr. Patel holds a B.A. in legal studies from the University of California, Berkeley, and a J.D. from the California Western School of Law.
Pamela Sergeeff. Ms. Sergeeff has served as our Executive Vice President and General Counsel since December 2013. Ms. Sergeeff also serves as the Company’s Chief Compliance Officer and Corporate Secretary. Ms. Sergeeff joined the Company (then Macrovision) in 2003 and has held various positions of increasing responsibility in the legal group, including serving as Senior Vice President and Associate General Counsel from 2011 to 2013 and as Vice President and Associate General Counsel from 2007 to 2011. Ms. Sergeeff holds a B.A. in Economics from the University of California, Los Angeles and a J.D. from the University of California, Berkeley. Ms. Sergeeff is a member of the California State bar.
Corporate Governance Materials
Code of Conduct. We adopted our Code of Personal and Business Conduct and Ethics (the “Code of Conduct”) as required by applicable securities laws, rules of the SEC and the Nasdaq listing standards. The Code of Conduct applies to all of our directors and employees, including the principal executive officer, principal financial officer and principal accounting officer. A copy of our current Code of Conduct is available in the investor relations section of our website at www.tivo.com. If we make any substantive amendments to the Code of Conduct or grant any waiver, including implicit waiver, from a provision of the Code of Conduct to our principal executive officer, principal financial officer or principal accounting officer, we will disclose the nature of such amendment or waiver on our website at www.tivo.com or in a Current Report on Form 8-K filed with the SEC.
Corporate Governance Guidelines. In November 2016, we adopted amended Corporate Governance Guidelines to assist the Board in following corporate practices that serve the best interest of the company and its stockholders. From time to time, we may further amend such Corporate Governance Guidelines as we believe appropriate and in the best interest of the company and its stockholders. Our currently effective Corporate Governance Guidelines are available in the investor relations section of our website at www.tivo.com.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
This Compensation Discussion and Analysis describes the material elements of our compensation programs and explains our executive compensation philosophy, policies and practices for the following executives, who are referred to in this Compensation Discussion and Analysis and in the subsequent tables as our named executive officers for 2019: David Shull, current President and Chief Executive Officer; Raghavendra Rau, former Interim President and Chief Executive Officer; Wesley Gutierrez, current Chief Financial Officer; Peter Halt, former Chief Financial Officer; Michael Hawkey, Senior Vice President and General Manager, User Experience; Matt Milne, Chief Revenue Officer; and Arvin Patel, Executive Vice President and Chief Intellectual Property Officer.
Prior to the TiVo Acquisition, Messrs. Halt, Hawkey and Milne were employed by Rovi, the predecessor registrant to TiVo Corporation and the acquiring entity in the TiVo Acquisition for accounting purposes under generally accepted accounting principles in the United States. All references in this Compensation Discussion and Analysis to “us”, the “company” and “TiVo” refer to Rovi prior to the TiVo Acquisition and TiVo Corporation following the TiVo Acquisition and all references in this Compensation Discussion and Analysis to “compensation committee” refer to the compensation committee of the Board of Directors of Rovi prior to the TiVo Acquisition and the compensation committee of the Board of Directors of TiVo Corporation following the TiVo Acquisition. All references in this Compensation Discussion and Analysis to the “Chief Executive Officer” and “CEO” refer to Raghavendra Rau prior to May 30, 2019, the date Mr. Rau ceased service as our Interim President and Chief Executive Officer, and David Shull on and after May 31, 2019, the date Mr. Shull became our Chief Executive Officer.
Executive Summary
Our Business
We are a global leader in media and entertainment products that power consumer entertainment experiences and enable our customers to deepen and further monetize their audience relationships. We provide a broad set of cloud-based services, embedded software solutions and intellectual property that enable people to find and enjoy online video, television programming, movies and music entertainment. Our solutions include content discovery through device embedded and cloud-based user experience, including interactive program guides (“IPGs”), digital video recorders (“DVRs”), natural language voice and text search, cloud-based recommendations services and our extensive entertainment metadata (i.e., descriptive information,
promotional images or other content that describes or relates to television shows, videos, movies, sports, music, books, games or other entertainment content).
We are industry pioneers having invented the IPG and the DVR. Today, we continue our strong focus on innovation with new advanced solutions for unified viewing of internet video and pay TV, cutting edge natural language voice enabled technologies, entertainment personalization, audience management and viewership prediction solutions. Through our innovations, we have established broad industry relationships with the companies leading the next generation of digital entertainment. As the industry transforms to deliver more content over the internet, we are developing complementary products, services and intellectual property to address our customers' needs.
To achieve our corporate mission, we rely on our employees. We encourage teamwork and collaboration among our employees and we demand accountability and strong results.
Accordingly, we have designed our executive compensation program to provide a competitive compensation package
that considers paying for performance, internal pay equity, retention value, comparability of compensation to peer group companies and executive pay survey data.
Our 2019 Performance
In February 2018, our Board of Directors reached the conclusion that our stock price was not at a level that they believed reflected the true value of the business given the company’s strong foundation, leading technologies, and solid cash flow from our long-term IP license agreements and guide deployments. As such, we announced we had begun a process of evaluating a wide range of strategic alternatives to realize long-term shareholder value. Over the balance of 2018 and throughout most of 2019, we continued to make progress with our review of strategic alternatives. That effort resulted in two major strategic announcements in 2019: (1) on May 9, 2019, we announced that our Board of Directors unanimously approved a plan to separate the Product and Intellectual Property Licensing businesses into separately traded public companies (the “Separation”); and (2) on December 18, 2019, we and Xperi entered into the Xperi Merger Agreement, pursuant to which we and Xperi agreed, subject to the terms and conditions of the Xperi Merger Agreement, to effect an all-stock, merger of equals strategic combination of our and Xperi’s respective businesses.
Additionally, in terms of major events with respect to our personnel, in late May 2019 we concluded our Chief Executive Officer search, hiring David Shull to replace Raghavendra Rau, one of our Board members who had stepped in as our Interim President and Chief Executive Officer in mid-2018.
The ongoing strategic review process and the David Shull announcement drove a significant number of our 2019
compensation decisions. Both circumstances presented high levels of uncertainty in terms of employee retention generally and executive retention specifically, and our compensation committee’s decisions reflect those uncertainties and retention needs. However, despite the uncertainties facing our business, our team achieved various successes against our 2019 operational strategy. Specifically, we (i) continued our cost reduction and cost containment efforts during the year (and exceeded our internal goals with respect to such reductions and containment efforts), (ii) exceeded our 2019 outlook for revenue and adjusted EBITDA, (iii) launched several products and released product enhancements, including TiVo+, (iv) focused on innovation which led to having 367 patents granted in 2019 and (v) entered into multiple IP licensing and product agreements, including with customers such as Shaw Communications and Discovery Communications.
CEO Appointment and Interim CEO Transition
In May 2019, Mr. Shull was appointed as our President and Chief Executive Officer. Effective as of Mr. Shull’s commencement of employment, Mr. Rau resigned as Interim President and Chief Executive Officer and, effective at the same time, was appointed as Vice Chairperson of the Board of Directors. In connection with this transition, in May 2019, we entered into (i) a Letter Agreement with Mr. Rau (the “Letter Agreement”) and (ii) an offer letter agreement with Mr. Shull, as further described under “Employment Agreements with Named Executives” below. We also entered into an Executive Severance and Arbitration Agreement with Mr. Shull, the terms of which are described below under “Potential Payments upon Termination or Change of Control.” In determining Mr. Shull’s compensation for his service as President and Chief Executive Officer, our Board of Directors considered the company’s existing executive compensation program, the 2019 compensation package that had been established for Mr. Rau and advice from the compensation committee’s independent compensation consultant to design a competitive, market-based compensation package appropriate for a CEO with Mr. Shull’s skills and experience.
Commitment to Responsible Executive Compensation Philosophy and Practices
The following table summarizes both the responsible practices we have implemented and the practices we have avoided to best serve our stockholders’ long-term interests.
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What We Do
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What We Don't Do
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Pay for performance
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We don’t guarantee salary increases
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Grant performance-based stock awards that directly align executive and stockholder interests and are based on TSR over a multi-year measurement period
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We don’t provide excise tax gross-ups upon change in control of the company
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Use a balanced mix of fixed and variable cash incentives and long-term equity
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We don't permit hedging or other forms of speculative transactions by executive officers, members of management or directors
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Maintain rigorous stock ownership guidelines for our named executive officers and directors
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We do not reprice underwater stock options without stockholder approval. Despite the fact that our executives hold stock options which are underwater, we have not repriced stock options since our option exchange program over ten years ago.
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Maintain a clawback policy that applies to incentive cash and stock compensation
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Value stockholder feedback on our compensation practices
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Limit payments following a change in control of our company to situations involving an involuntary termination of employment (a so-called “double trigger” arrangement) and situations where equity awards are not assumed by the successor or surviving company
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Conduct an annual assessment of compensation related risk to effectively manage our compensation related risks profile
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In addition, we are committed to aligning our executive compensation program with our stockholders’ interests and concerns, and thus we maintain the following pay practices:
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•
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Regularly evaluate our peer group to ensure that our peers are appropriate reference points;
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•
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Pay bonuses under our annual bonus plan only upon achievement of specified corporate and, if applicable, business group and individual performance goals without a discretionary bonus component;
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•
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Structure a significant percentage of the annual equity compensation of our named executive officers as performance-based, where vesting is based on relative TSR over a multi-year measurement period;
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•
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Use different performance goals for our short-term and long-term incentive compensation; and
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•
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Continue to provide enhanced disclosure about the structure and process of our performance-based equity awards, including the specific performance goals, so that our stockholders have visibility into the rigor of our goal-setting process and our goals.
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Stockholder Engagement
Management and our compensation committee value the input of our stockholders, which continues to inform our decisions designed to match compensation of our executives with the evolving nature of our business and align their compensation with the fundamental interests of investors. As we continue to focus on transforming our business, we intend to continue eliciting and addressing our stockholders’ interests and concerns regarding our compensation programs, as described below.
Our compensation committee is committed to ensuring that our executive compensation program is effective and aligned with our stockholders’ interests and concerns. Accordingly, an important component of our compensation committee’s process has been to continue to:
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•
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Review emerging compensation “best practices” in the United States, with a focus toward companies of similar size;
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•
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Solicit advice from our compensation committee’s independent compensation consultant; and
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•
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Consider feedback from major stockholders to gain a thorough understanding of their concerns and review proxy advisory firms’ methodology, rationale and critiques of our compensation program.
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Our interaction directly with stockholders, proxy advisors and other experts has significantly aided in the ongoing evolution of our compensation program, and prior changes to our compensation program that were made to address our stockholders’ concerns. Stockholder support for our recent say-on-pay votes was as follows: 96% in 2017, 95% in 2018 and 67% in 2019.
Our compensation committee carefully considers the results of our prior say-on-pay votes, including our 2019 vote. However, the compensation committee believes that evaluating our executive compensation program in light of changes in our business, best practices, market dynamics and stockholders’ input, is an important ongoing process. Accordingly, the compensation committee is committed to continue its thoughtful evaluation in an effort to continuously strengthen our compensation program to serve our company and stockholder objectives.
Executive Compensation Philosophy: Objectives, Considerations and Elements
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Objectives
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Our executive compensation programs are generally designed to:
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align the interests of executives with the long-term interests of our stockholders through equity-based awards whose value over time depends upon the market value of the company’s common stock;
motivate key executives to achieve strategic business initiatives and to reward them for their achievements;
support a pay-for-performance environment that differentiates bonus amounts among the named executive officers on their responsibilities and contributions toward company performance; and
attract and retain talented and experienced executives by offering compensation programs that are in line with our peer companies.
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Considerations
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To achieve these objectives, our executive compensation package typically provides a mix of compensation elements, including base salary, annual variable cash bonuses, stock-based compensation, broad-based employee benefits, severance benefits and, in certain circumstances, retention payments. In any given year, our compensation committee may consider one or more of the following factors in determining the amount and form of each of these compensation elements with appropriate attention to both absolute and relative levels of compensation and the mix in achieving proper parity:
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compensation practices and levels among our peer companies and pay levels among our peer companies and executive pay survey as further described below under “Compensation Positioning Against Peer Data and Executive Pay Survey Data”;
historical and anticipated corporate and individual performance, including stock price, achievement of revenue and adjusted EBITDA, and execution of individual, team and company-wide strategic initiatives;
budget constraints for salary, bonus and equity adjustments;
historical compensation levels;
broader economic conditions, with the goal of ensuring that our pay strategies are effective, yet responsible;
the potential dilutive effect of our equity compensation practices on our stockholders; and
individual negotiations with executives, as these executives may be leaving meaningful compensation opportunities at their prior employer or forgoing other compensation opportunities with other prospective employers to work for us, as well as negotiations upon their departures, as we recognize the benefit to our stockholders of smooth transitions.
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Elements
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What We Pay
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Why We Pay It
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Base Salary (fixed cash)
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Fixed source of compensation provides our executives a degree of certainty in the face of having a material portion of their compensation “at risk” in the form of annual variable cash bonuses and equity-based compensation.
Helps to attract and retain our named executive officers.
The compensation committee generally set base salaries annually and targets base salary levels at the 50th percentile of our market data (using peer group companies and executive pay survey data) as it believes this positioning provides adequate retention incentive.
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Annual Variable Cash Bonus (“at-risk” cash)
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Rewards the achievements of our executive officers and their contributions to our financial performance.
Promotes strong linkages between our executives’ contributions and our company performance, supports the achievement of our business objectives and promotes retention of our executives.
Our compensation committee recognizes the important role that variable compensation plays in attracting, retaining and motivating our executives to achieve our short-term goals.
The compensation committee generally sets bonus levels annually and targets annual variable cash bonus levels at the 50th percentile of our market data (using peer group companies and executive pay survey data).
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Equity Compensation (“at-risk” stock awards)
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Aligns the long-term interests of our stockholders and our employees by creating a strong, direct link between employee compensation and stock price appreciation and, with respect to performance-based awards, company performance and relative TSR.
The compensation committee believes that if our officers own shares of our common stock with values that are significant to them, they will have an incentive to act to maximize long-term stockholder value.
The compensation committee and/or Board of Directors generally approves equity awards annually in the form of restricted stock units (“RSUs”) that vest based on service and/or RSUs that vest based on achievement of specific performance goals.
The compensation committee generally targets annual equity awards at or near the 50th percentile of our market data (using peer group companies and executive pay survey data).
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Role of Our Compensation Committee
Our compensation committee evaluates and approves the annual compensation changes for our named executive officers other than our Chief Executive Officer. Our compensation committee also evaluates and recommends for approval by the independent members of the Board of Directors the annual compensation changes for our Chief Executive Officer, as well as the performance goals for our compensation programs. References below in this “Executive Compensation” section to approvals by our Board of Directors are intended to refer to approvals by the independent members of the Board of Directors.
Our compensation committee solicits and considers our Chief Executive Officer’s recommendations on the compensation levels of each named executive officer, as well as his reviews of each named executive officer’s performance and contributions in the prior year. In addition, our chairman of the Board of Directors solicits from other Board members their evaluations of the performance of the Chief Executive Officer for the prior year and discusses his assessment of our Chief Executive Officer’s performance with the other members of the compensation committee.
As part of its deliberations, in any given year, the compensation committee may review and consider materials such as company financial reports and projections, historical achievement of company-wide operational and financial objectives,
operational data, tax and accounting information, total compensation that may become payable to executives in various hypothetical scenarios, executive stock ownership information, company stock performance data, analyses of historical executive compensation levels and current company-wide compensation levels, and the recommendations of our Chief Executive Officer, human resources department and the advice of the compensation committee’s independent compensation consultant.
Role of Management in Setting Compensation
The company’s human resources, finance and legal departments work with our Chief Executive Officer to review peer compensation data, to propose compensation programs for consideration by the compensation committee, to recommend changes to existing compensation programs, to recommend financial and other performance targets to be achieved under those programs, to prepare analyses of financial data and other briefing materials, and ultimately to implement the decisions of the compensation committee.
Our internal personnel responsible for compensation analysis for the company generally attend a portion of each of the compensation committee’s meetings and leave before certain executive sessions. None of our named executive officers were present or participated directly in the compensation committee or the Board of Directors’ final determinations regarding the amount of any component of their own 2019 compensation packages.
However, given our Chief Executive Officer’s responsibilities for managing the performance of our executive officers, our Chief Executive Officer generally plays a primary role in establishing the performance goals for, and evaluating the performance of, our other named executive officers, as described in greater detail below under “Short-Term Incentive Compensation”. The compensation committee solicits and considers our Chief Executive Officer’s evaluations and recommendations (as well as those of the human resources group), including recommendations regarding base salary adjustments and target cash and equity incentive award levels for the other named executive officers. In the case of the Chief Executive Officer, the compensation committee and the Board of Directors meet outside the presence of our Chief Executive Officer to assess his performance.
Role of Our Independent Compensation Consultant
The compensation committee retains an independent consultant to provide the compensation committee with an additional external perspective with respect to its evaluation of relevant market and industry practices. Since August 2015, the compensation committee has retained Farient Advisors (“Farient”) to act as its independent compensation consultant.
In weighing its recommendations for executive compensation for the fiscal year 2019, the compensation committee directed Farient to advise the compensation committee on both best practices and peer practices when designing and modifying our compensation program for executive officers in order to achieve our objectives. As part of its duties, Farient provided the compensation committee with the following services with respect to 2019 compensation decisions:
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provided compensation data for the peer group for 2019 pay decisions, using the same peer group as in the prior year, which was established in November 2017, and relevant executive pay survey data and an analysis of the compensation of the company’s executive officers as compared to this market data;
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reviewed and provided recommendations regarding proposed special retention equity grants with performance conditions for certain executive officers (Messrs. Milne and Patel);
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assisted the compensation committee in determining a pay package for Mr. Shull;
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conducted a comprehensive pay-for-performance assessment;
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provided recommendations regarding the annual bonus and long-term incentive program design for 2019;
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assisted the compensation committee with the design of 2019 pay programs consistent with the company’s business strategy and pay philosophy;
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provided background information and data for 2019 adjustments to the company’s executive compensation program consistent with good governance practices and the company’s objectives;
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provided analysis and peer group development for each of the two businesses as stand-alone businesses, competitive compensation data for potential positions in the stand-alone businesses, and director pay for the stand-alone businesses that were ultimately not used in light of the announced Xperi Combination; and
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provided a review of regulatory changes, and stockholder and proxy advisor firms’ best practices with respect to executive pay.
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In 2019, the compensation committee met regularly with Farient, both with and without the Chief Executive Officer and the senior vice president and chief human resources officer present depending upon the topic being discussed. Farient took its direction from the compensation committee chairman. The company’s senior vice president and chief human resources
officer worked with Farient to provide any information Farient needed about the company to provide its services; however, the compensation committee retained the sole authority to direct, terminate or continue Farient’s services. Farient was not engaged for any non-compensation related services.
The compensation committee has analyzed whether the work of Farient as a compensation consultant has raised any conflict of interest, taking into consideration the following factors: (i) the provision of other services to the company by Farient; (ii) the amount of fees from the company paid to Farient as a percentage of the firm’s total revenue; (iii) Farient’s policies and procedures that are designed to prevent conflicts of interest; (iv) any business or personal relationship of Farient or the individual compensation advisors employed by the firm with an executive officer of the company; (v) any business or personal relationship of the individual compensation advisors with any member of the compensation committee; and (vi) any stock of the company owned by Farient or the individual compensation advisors employed by the firm. The compensation committee has determined, based on its analysis of the above factors, that the work of Farient and the individual compensation advisors employed by Farient as compensation consultants to the company has not created any conflict of interest.
Peer Group Determination
The compensation committee considers compensation practices and levels among our peer companies as one factor in determining compensation each year. This helps us, among other process objectives, to balance our goal of attracting and retaining top executive talent with the need to maintain a reasonable and responsible cost structure. Our compensation committee generally reviews and updates our peer group of companies annually to reflect changes in the industry and to ensure that our comparisons to peer group data are meaningful to the compensation committee’s process and review.
2019 Peer Group. Given the ongoing development of strategic alternatives during 2018 (and ultimately up to May 2019), the compensation committee, management, and Farient determined that for 2019 compensation decisions our peer group of companies should remain unchanged from 2018, with the exception of one company that was acquired in late 2017, as listed below. The companies in our peer group were companies: (i) that have similar business focus to us (focusing on a combination of IP licensing, data solutions, data aggregator or provider services, content delivery platforms and solutions, integrated targeted advertising products and a similar customer base) and with whom we believed we compete within the market for executive talent; and (ii) with a revenue range of approximately one-half to up to potentially three times our 2017 actual revenue (resulting in median revenue for the group higher than our actual 2017 revenue of $826 million, determined as of August 2017 when the peer group proposed by Farient was approved by the compensation committee). Market capitalization, enterprise value and EBITDA were also considered in developing the peer group, as indicative of company performance, but were not formal screening criteria.
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Akamai Technologies, Inc.
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InterDigital, Inc.
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Take-Two Interactive Software, Inc.
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Commvault Systems, Inc.
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j2 Global, Inc.
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Teradata Corporation
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CoreLogic, Inc.
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LiveRamp Holdings, Inc.
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Universal Electronics Inc.
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Dolby Laboratories, Inc.
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MicroStrategy Incorporated
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Verint Systems Inc.
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Envestnet, Inc.
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Nuance Communications, Inc.
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Xperi Corporation
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Fair Isaac Corporation
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Pegasystems, Inc.
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Compensation Positioning Against Peer Data and Executive Pay Survey Data
As a general guideline, our compensation committee targets total direct compensation at a level that is competitive within our peer group and also the marketplaces in which we operate. The compensation committee’s compensation consultant collects, analyzes and provides to the compensation committee a report on the total direct compensation, target total direct compensation, base salary, long-term incentive awards, target short-term incentives, target short-term compensation, equity award and pay practice data, as applicable, for executive officers holding comparable positions at the peer group companies from individual proxy filings (specifically with respect to chief executive officer and chief financial officer compensation) and based on other proprietary and published survey sources (collectively referred to as the “peer data”). In order to provide a broader reference point for certain of the named executive officers, our compensation consultant referred to data from the 2018 Radford Global Technology Survey for technology companies with revenue between $500 million and $1.5 billion, both generally and as specifically limited to our peer group companies who participated in the survey, in order to capture compensation data from our peer group companies for certain named executive officer positions for which there was less publicly available data.
Our compensation committee believes that compensation should be at the levels necessary to achieve the objectives of our executive compensation program - attracting and retaining top talent as well as linking more of our executives’ compensation to achievement of annual and longer-term corporate performance goals and long-term gains in the value of our stock. The opportunity for higher performance-based compensation reflects our commitment to pay for performance, with compensation being higher for exceptional performance and compensation being lower if our performance goals are not reached
Our compensation committee believes that comparisons to the peer data and executive pay survey data are useful guidelines to measure the competitiveness of our compensation practices. For 2019 compensation decisions made in the normal course for our named executive officers other than Mr. Shull and Mr. Rau, the compensation committee generally targeted overall cash compensation, long-term incentives and total target compensation around the 50th percentile of peer data. The compensation committee feels that targeting around the 50th percentile of peer data serves the committee’s objective of offering a market competitive compensation program, while at the same time motivating and rewarding our executives to achieve our initiatives and aligning their interests with those of our stockholders, as the incentive nature of our long-term and short-term compensation is designed to deliver above median pay with strong company performance and below median pay with poor company performance. The compensation committee referenced the full range of pay for executives in similarly sized firms from the peer data. For 2019, the compensation committee maintained discretion to set levels of executive compensation above or below peer levels based upon distinguishing factors such as individual performance, an executive’s level of experience and responsibilities, the comparability or lack thereof in roles and responsibilities when compared with peer companies, internal pay equity and our compensation budget.
Reasons for Providing, and Manner of Structuring, the Key Compensation Elements in 2019
As described above under “Compensation Philosophy: Our Objectives, Elements and Considerations,” our 2019 executive compensation program consists of three principal components: base salary, annual variable cash bonus and equity compensation. The compensation committee does not have a set formula for determining the mix of each pay element, but instead seeks to ensure that compensation across all elements is fair and consistent with our company’s compensation philosophy as a whole. In addition, the compensation committee has not adopted any formal or informal policies or guidelines on the mix of the equity awards in future years. We believe having flexibility in our allocation among various elements of compensation allows us to tailor each executive’s compensation package to meet our compensation goals based on the facts and circumstances known at that time.
2019 Base Salary Decisions
Base Salary: In May 2019 and June 2019, our compensation committee reviewed and determined the 2019 base salaries set forth in the table below for each of the named executive officers, other than Mr. Shull, whose 2019 base salary was approved in connection with his hiring in May 2019, Mr. Rau, whose 2018 base salary was approved in connection with his appointment in July 2018 and remained the same for 2019, and Mr. Gutierrez, whose 2019 base salary was determined prior to - and did not change in connection with - his appointment as Chief Financial Officer in December 2019. In making these 2019 decisions, the compensation committee considered the positioning of each individual’s salary as compared to the peer data, as well as the individual’s historical salary levels, our then-current budget for employee salary adjustments and the individual’s anticipated role and responsibilities for the coming year.
The compensation committee determined not to make any increases to the base salaries of the continuing named executive officers in May 2019 and June 2019 in light of its assessment of comparable market data regarding base salaries and the ongoing strategic alternatives process.
In connection with his commencement of employment in May 2019, the Board of Directors set Mr. Shull’s annual base salary at $750,000, consistent with the base salary the Board of Directors had approved for Mr. Rau in 2019.
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Executive Officer
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2019 Base Salary
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Change from 2018
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Dave Shull (1)
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$
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750,000
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N/A
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Raghavendra Rau (2)
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$
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750,000
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—
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%
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Wesley Gutierrez (3)
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$
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330,000
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3.8
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%
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Peter Halt (4)
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$
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413,751
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—
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%
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Michael Hawkey
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$
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400,000
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—
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%
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Matt Milne
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$
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444,960
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—
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%
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Arvin Patel
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$
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450,000
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—
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%
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(1)
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Mr. Shull’s 2019 base salary was effective upon his commencement of employment as President and Chief Executive Officer on May 31, 2019.
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(2)
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Mr. Rau resigned as our Interim President and Chief Executive Officer on May 30, 2019 and, effective at the same time, was appointed Vice Chairperson of the Board of Directors. Pursuant to his Letter Agreement, we agreed to pay Mr. Rau (i) for June 2019, as part of the transition, a cash payment of $62,500 and (ii) for the balance of fiscal year 2019, a cash payment of $250,000, reduced as described below under “Employment Agreements with Named Executives.”
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(3)
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Mr. Gutierrez was appointed as Chief Financial Officer, effective December 30, 2019.
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(4)
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Mr. Halt ceased serving as Chief Financial Officer on December 30, 2019. Mr. Halt will remain in an advisory role from January 2, 2020, through March 31, 2020, and will be paid $50,000 per month during such period.
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2019 Short-Term Incentive Compensation Decisions
Target Amounts: In May 2019 and June 2019, the compensation committee reviewed the target bonus levels of all of the named executive officers serving at such time (including for Mr. Milne, who participates in a sales commission plan, the details of which are discussed more fully in the section below entitled “Milne Sales Incentive Compensation Plan”), considering the peer data and Messrs. Rau’s and Shull’s recommendations (other than for themselves) and determined all such bonus levels were appropriate and should remain unchanged from the 2018 target bonus levels, with the exception of Mr. Hawkey’s, which was increased from 55% to 60% for purposes of retention and to reflect his role overseeing the entire products organization and to be closer to the 50th percentile. Messrs. Halt’s, Hawkey’s and Patel’s resulting 2019 target bonus percentages were at or below approximately the 50th percentile of the peer data with respect to short-term incentive compensation targets, which the compensation committee determined was appropriate in light of the ongoing strategic alternatives process. Mr. Gutierrez’s 2019 target bonus percentage was determined prior to - and did not change in connection with - his appointment as Chief Financial Officer.
In connection with Mr. Shull’s appointment as President and Chief Executive Officer in May 2019, the Board of Directors considered recommendations from Farient and approved a target bonus percentage of 125% of base salary for Mr. Shull, consistent with the 2019 target bonus percentage the Board of Directors had approved for Mr. Rau.
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|
|
|
|
|
|
Executive Officer
|
2019 Target Bonus (% of base salary)
|
Change from 2018
|
Dave Shull
|
125
|
|
%
|
N/A
|
|
Raghavendra Rau
|
125
|
|
%
|
—
|
%
|
Wesley Gutierrez
|
40
|
|
%
|
0
|
|
Peter Halt
|
70
|
|
%
|
—
|
%
|
Michael Hawkey
|
60
|
|
%
|
9.1
|
%
|
Arvin Patel
|
70
|
|
%
|
—
|
%
|
Determining and Weighting of Goals. Our named executive officers were eligible to earn annual variable cash bonuses under our 2019 Senior Executive Company Incentive Plan (the “2019 Executive Incentive Plan”). Such bonuses were based on the company’s achievement of worldwide revenue (“Revenue”) and worldwide adjusted EBITDA (“Adjusted EBITDA”) targets, and, except for Messrs. Shull and Rau, achievement of individual performance goals, with the weightings set forth in the following table. Each of Mr. Hawkey’s and Mr. Patel’s cash bonus is additionally based on achievement of a business group performance factor (“BGPF”) based on a given business unit achieving a revenue target and non-GAAP contribution margin target.
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|
|
|
|
|
|
|
Weighting Among Goals
|
Executive Officer
|
Corporate
Performance
|
|
Individual
Performance
|
|
Business Group Performance Weighting
|
Dave Shull
|
100%
|
|
—%
|
|
—%
|
Raghavendra Rau
|
100%
|
|
—%
|
|
—%
|
Wesley Gutierrez
|
70%
|
|
30%
|
|
—%
|
Peter Halt
|
75%
|
|
25%
|
|
—%
|
Michael Hawkey
|
50%
|
|
10%
|
|
40%
|
Arvin Patel
|
50%
|
|
10%
|
|
40%
|
With respect to Mr. Halt, the compensation committee set the 2019 weighting between corporate and individual performance at the same level as in effect at the end of 2018, as they believed it appropriately aligned Mr. Halt with corporate performance. To further align our business unit leaders with corporate performance, for 2019, the compensation committee increased the weighting of the corporate performance goals (from 20% to 50%) and decreased the weighting of individual goals (from 30% to 10%) and business group goals (from 50% to 40%) for Mr. Hawkey, and updated Mr. Patel’s weightings to reflect this arrangement.
Corporate Performance Goals. The average of the payout percentages for the Revenue and Adjusted EBITDA goals is the “corporate performance factor” for Messrs. Shull, Rau, Gutierrez, Halt, Hawkey and Patel. The portion of the annual variable cash bonus that could be earned based on corporate performance is calculated as the product of: (i) the executive’s base salary, (ii) target bonus percentage, (iii) the fraction of the annual variable cash bonus that could be earned based on corporate performance, (iv) the corporate performance factor, and (v) the fraction of the number of calendar days during the fiscal year that the executive is in the incentive-eligible position.
Adjusted EBITDA is defined as operating income excluding depreciation, amortization of intangible assets, restructuring and asset impairment charges, goodwill impairment, equity-based compensation, transaction, transition and integration costs, retention earn-outs payable to former stockholders of acquired businesses, earn-out settlements, CEO transition cash costs, remeasurement of contingent consideration, gain on settlement of acquired receivable and changes in franchise tax reserve.
Rigor of Corporate Performance Targets. To assist the compensation committee in determining the appropriate target levels, Farient provided a competitive assessment of our targets, considering our historical performance and the historical performance of our peer group, the S&P 600 Software and Services Index, the S&P 400 Software and Services Index and projected performance.
To increase the rigor of our annual variable cash bonus program, for 2019 the compensation committee increased the threshold level of attainment necessary for our executives to earn any bonus from 90% to 95% (without a corresponding increase to the payout level) and reduced the maximum payout level from 200% to 175% (without a corresponding reduction to the level of attainment necessary to earn the maximum payout).
The corporate performance factor for Messrs. Shull, Gutierrez, Halt, Hawkey and Patel was calculated by averaging the payout of each of the Revenue and Adjusted EBITDA targets. The payout level for each level of attainment is set forth in the table below.
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|
|
|
|
|
|
|
|
|
Attainment
(% of target) (1)
|
|
Payout
(% of target)
|
Threshold
|
95
|
%
|
|
50
|
%
|
Target
|
100
|
%
|
|
100
|
%
|
|
105
|
%
|
|
125
|
%
|
Maximum
|
110
|
%
|
|
175
|
%
|
(1) Below 95% of attainment, the plan provided for 0% payout. Between 95% and 100% attainment of target, a straight-line interpolation of 10% points of payout were earned for every 1% point of attainment. From 100% to 105% of attainment, the plan provides for 5% points of payout for every 1% point of attainment. From 105% to 110% of attainment, 10% points of payout were earned for every 1% point of attainment. The maximum payout was capped at 175%.
Business Group Performance Goals. The BGPF for each of Messrs. Hawkey and Patel was calculated by averaging the payout of the applicable business group revenue target (“BG Revenue”) and contribution margin target (“BG Contribution Margin”). The portion of the annual variable cash bonus that could be earned based on business group performance is calculated as the product of: (i) Mr. Hawkey’s or Mr. Patel’s base salary, (ii) target bonus percentage, (iii) the fraction of the annual variable cash bonus that could be earned based on business group performance, (iv) the BGPF and (v) the fraction of the number of calendar days during the fiscal year that Mr. Hawkey or Mr. Patel, as applicable, was in the incentive-eligible position.
To increase the rigor of our annual variable cash bonus program, for 2019 the compensation committee increased the threshold level of attainment necessary to earn any bonus relating to BGPF from 90% to 95% (without a corresponding increase to the payout level) and reduced the maximum payout level from 200% to 175% (without a corresponding reduction to the level of attainment necessary to earn the maximum payout). The payout level for each level of attainment is set forth in the table below.
|
|
|
|
|
|
|
|
|
|
Attainment
(% of target) (1)
|
|
Payout
(% of target)
|
Threshold
|
95
|
%
|
|
50
|
%
|
Target
|
100
|
%
|
|
100
|
%
|
|
105
|
%
|
|
125
|
%
|
Maximum
|
110
|
%
|
|
175
|
%
|
(1) Below 95% of attainment, the plan provided for 0% payout. Between 95% and 100% attainment of target, a straight-line interpolation of 10% points of payout were earned for every 1% point of attainment. From 100% to 105% of attainment, the plan provides for 5% points of payout for every 1% point of attainment. From 105% to 110% of attainment, 10% points of payout were earned for every 1% point of attainment. The maximum payout was capped at 175%.
Individual Performance Goals. Individual performance is calculated as a number, between 0 and 175%, with 100% as target performance, and that number is called the individual performance factor. The portion of the annual variable cash bonus that could be earned based on individual performance was calculated for each participant as the product of: (i) the executive’s base salary, (ii) target bonus percentage, (iii) the fraction of the annual variable cash bonus that could be earned based on individual performance, (iv) the individual performance factor, and (v) the fraction of the number of calendar days during the fiscal year that the executive is in the incentive-eligible position. The compensation committee approved each eligible executive’s individual performance factor based on Mr. Shull’s evaluation of performance of each respective function and whether certain pre-established individual goals for the year had been achieved. The compensation committee believes it is important to retain flexibility to reward individuals for their contributions to overall company performance.
2019 Corporate Performance Results. The Revenue target at 100% achievement was $675.4 million and the Adjusted EBITDA target at 100% achievement was $200.0 million. Our performance in 2019 against our Revenue and Adjusted EBITDA goals was $668.1 million in Revenue, or 99% of the target goal, and $211.3 million in Adjusted EBITDA, or 106% of the target goal, resulting in a factor on the corporate performance factor of 110% (that is, the average of 89% payout for Revenue and 131% payout for Adjusted EBITDA).
2019 BGPF Results. Applicable to Mr. Hawkey, his bonus was tied to the results of only the User Experience product group for the first half of 2019 and was tied to the results of All Products, other than advertising and TV viewership data, for the second half of 2019. For the first half of 2019, the BG Revenue target at 100% achievement was $135.7 million and the BG Contribution Margin target at 100% achievement was $48.9 million. Our performance in the first half of 2019 against our BG Revenue and BG Contribution Margin goals for User Experience was $136.8 million in BG Revenue, or 101% of the target goal, and $47.8 million in BG Contribution Margin, or 98% of the target goal, resulting in a factor on the BGPF for User Experience of 92% (that is, the average of 104% payout for BG Revenue and 79% payout for BG Contribution Margin). Our performance in the second half of 2019 against our BG Revenue and BG Contribution Margin goals for All Products, other than advertising and TV viewership data, was $159.1 million in BG Revenue, or 88% of the target goal, and $56.6 million in BG Contribution Margin, or 78% of the target goal, resulting in a factor on the BGPF for All Products of 0% (that is, the average of 0% payout for BG Revenue and 0% payout for BG Contribution Margin). As a result, for the full year 2019, Mr. Hawkey is eligible for 46% of target BGPF, which is the average of 92% for the first half of 2019 and 0% for the second half of 2019.
Applicable to Mr. Patel, for the IP business group, the BG Revenue target at 100% achievement was $309.0 million and the BG Contribution Margin target at 100% achievement was $222.2 million. Our performance against our BG Revenue and BG Contribution Margin goals for the IP business group was $317.1 million in BG Revenue, or 103% of the target goal,
and $239.2 million in BG Contribution Margin, or 108% of the target goal, resulting in a factor on the BGPF for the IP business group of 132% (that is, the average of 113% payout for BG Revenue and 152% payout for BG Contribution Margin).
2019 Individual Performance Results. In February 2020, our compensation committee evaluated Messrs. Gutierrez, Halt, Hawkey and Patel to determine the individual performance factor payouts as follows:
|
|
•
|
Wesley Gutierrez: Mr. Shull recommended, and our compensation committee approved, an individual performance factor payout for Mr. Gutierrez of 1.15 (as reflected in the table below) based on Mr. Gutierrez’s contribution to the management of our financial reporting and audit processes, leadership in completing the November 2019 debt refinancing and support of the business during the strategic alternatives and separation processes.
|
|
|
•
|
Peter Halt: Mr. Shull recommended, and our compensation committee approved, an individual performance factor payout for Mr. Halt of 0.7 (as reflected in the table below) based on Mr. Halt’s management of the Company’s investor relations activities, assistance in the debt refinancing process and leadership of the finance group prior to his departure in December 2019.
|
|
|
•
|
Michael Hawkey: Mr. Shull recommended, and our compensation committee approved, an individual performance factor payout for Mr. Hawkey of 1.0 (as reflected in the table below) based upon management of our core products group, securing customer wins for future growth products such as internet TV and initiating cost efficiency programs for the product business.
|
|
|
•
|
Arvin Patel: Mr. Shull recommended, and our compensation committee approved, an individual performance factor payout for Mr. Patel of 0.85 (as reflected in the table below) based upon management of our IP business group and the development of strategic patent sourcing partnerships.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Target Bonus
|
|
|
2019 Actual Bonus Paid
|
|
|
Executive Officer
|
2019 Target
Bonus as a Percentage of Base Salary (%)
|
2019 Target
Bonus ($)
|
|
Corporate Performance Factor (#)
|
Corporate Performance Factor Payout Calculation ($)
|
Individual Performance Factor (#)
|
Individual Performance Factor Payment Calculation ($)
|
Business Group Performance Factor (#)
|
Business Group Performance Factor Payment Calculation ($)
|
2019 Actual Bonus Paid ($)(1)
|
2019 Actual Bonus as a % of Target Bonus
|
David Shull
|
125
|
|
552,226
|
|
(2)
|
1.10
|
|
607,449
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
607,449
|
|
110
|
%
|
Raghavendra Rau
|
125
|
|
385,274
|
|
(3)
|
1.10
|
|
423,801
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
423,801
|
|
110
|
%
|
Wesley Gutierrez
|
40
|
|
132,000
|
|
|
1.10
|
|
101,640
|
|
1.15
|
|
45,540
|
|
N/A
|
|
N/A
|
|
147,180
|
|
112
|
%
|
Peter Halt
|
70
|
|
289,626
|
|
(4)
|
1.10
|
|
238,941
|
|
0.70
|
|
50,684
|
|
N/A
|
|
N/A
|
|
289,626
|
|
100
|
%
|
Michael Hawkey
|
60
|
|
230,082
|
|
(5)
|
1.10
|
|
126,545
|
|
1.00
|
|
23,008
|
|
0.46
|
|
42,335
|
|
191,889
|
|
83
|
%
|
Arvin Patel
|
70
|
|
315,000
|
|
|
1.10
|
|
173,250
|
|
0.85
|
|
26,775
|
|
1.32
|
|
166,320
|
|
366,345
|
|
116
|
%
|
|
|
(1)
|
The Actual Bonus Paid for each executive is generally equal to the Corporate Performance Factor Payout Calculation plus the Individual Performance Factor Payout Calculation (plus the Business Group Performance Factor Payment Calculation for Messrs. Hawkey and Patel), as shown above. However, under the terms of the 2019 Executive Incentive Plan, the compensation committee has the discretion to pay less than the full amount (including to pay zero percent) of the payout to which any participant would otherwise be entitled, which determination shall be based upon such factors as the compensation committee determines appropriate.
|
|
|
(2)
|
Mr. Shull’s bonus calculations reflect proration of such base salary and related bonus target amounts to reflect the portion of 2019 during which Mr. Shull served as President and Chief Executive Officer.
|
|
|
(3)
|
Mr. Rau’s bonus calculations reflect proration of such base salary and related bonus target amounts to reflect the portion of 2019 during which Mr. Rau served as Interim President and Chief Executive Officer, pursuant to the Letter Agreement we entered into with Mr. Rau in connection with resignation, as further described under “Employment Agreements with Named Executives” below.
|
|
|
(4)
|
Mr. Halt's ceased serving as our Chief Financial Officer on December 30, 2019, but he remained eligible to receive his annual bonus for 2019.
|
(5) Mr. Hawkey’s bonus calculations reflect proration to account for an increase in bonus target percentage from 55% to 60%, effective as of July 1, 2019.
Milne Sales Incentive Compensation Plan
Mr. Milne participates in the FY2019 Sales Incentive Compensation Plan (the “Commission Plan”), which is designed to compensate employees who are engaged in sales activities for sales performance and to reward such employees for delivering early and often during the plan year. As a participant in the Commission Plan, Mr. Milne is not eligible to participate in the 2019 Executive Incentive Plan. Mr. Milne’s total commission target for 2019 was based on specified target revenue quotas and target quotas for new sales contracts. For 2019, Mr. Milne’s total commission target was $280,325, or 63% of his base salary, which was approved by the compensation committee in May 2019 and June 2019. Under the Commission Plan, compensation is paid as an advance by the 45th day following the close of the quarter and deemed earned after the company recognizes revenue and receives payment from a customer. For the year ended December 31, 2019, Mr. Milne earned compensation under the Commission Plan in the amount of $275,241.
Executive Cash Retention Payments
In May 2018, to provide continuity of key members of the management team and address the elevated risk of executive retention associated with the ongoing strategic alternatives process, at the recommendation of the compensation committee, the Board of Directors approved an Executive Retention Plan for certain company executives as designated by the compensation committee, including Messrs. Hawkey, Milne and Patel. During this period of uncertainty, the Board of Directors determined it was critical to retain key executives who are critical in driving the business and steering the company through its review of strategic alternatives, and that retention awards were critical to achieve this goal. The plan provided for a cash retention award of $750,000 to each of Messrs. Hawkey, Milne and Patel if the officer remained employed by the company on December 31, 2019. Each such officer met the conditions of the award and received such retention payment on January 15, 2020.
Under the terms of Mr. Rau’s Letter Agreement, Mr. Rau is entitled to a change of control payment of $750,000 paid in one lump sum, subject to his continued services as a director. In addition, Mr. Gutierrez is eligible to receive a one-time cash retention bonus of $200,000 on the earlier of (i) the consummation of the Xperi Combination, (ii) November 15, 2020, or (iii) the date of his termination by the Company without cause. The details of such payments are discussed more fully in the section below entitled “Employment Agreements with Named Executives.”
Other Bonuses
In connection with his appointment as President and Chief Executive Officer, Mr. Shull received a one-time $1,000,000 cash signing bonus, subject to standard payroll reductions and withholdings, a portion of which is subject to repayment under certain circumstances.
Prior to his appointment as our Chief Financial Officer, Mr. Gutierrez received (i) a $50,000 bonus in February 2019 as a CEO Special Recognition Award and (ii) a $62,500 cash retention award in October 2019 under the company's broad-based employee retention plan.
2019 Long-Term Incentive Compensation Decisions
Size of Equity Awards. In determining the size of the total equity compensation opportunity in 2019, the compensation committee:
|
|
•
|
aimed to have the aggregate target award value result in target total direct compensation at a level that is competitive in the marketplaces in which we compete;
|
|
|
•
|
focused a larger portion of total direct compensation in the form of long-term and performance-based equity awards intended to drive long-term differentiated value relative to our peers and maximize long-term stockholder value;
|
|
|
•
|
aimed to structure a substantial portion of equity opportunity in the form of awards that vest based on achievement of performance goals to better align our executives’ long-term compensation opportunity with our stockholders’ interests; and
|
|
|
•
|
considered the recommendations of Mr. Shull for the other named executive officers.
|
Interim CEO Equity Award. In connection with the amendment of Mr. Rau’s employment agreement to extend his tenure as Interim President and Chief Executive Officer, the Board of Directors granted to Mr. Rau a time-vesting RSU award in January 2019 with a grant date target value of $2,000,000. The award value was determined based on peer data with input from Farient and pro-rated in recognition of Mr. Rau’s expected tenure in such role of six months. Pursuant to the Letter Agreement, the vesting of the 2019 RSU award, as well as the RSU granted to Mr. Rau in 2018, was accelerated in full.
New CEO Equity Award. In connection with his appointment as President and Chief Executive Officer, the Board of Directors granted to Mr. Shull a performance-vesting RSU award in June 2019 with a grant date target value of $3,500,000. The award value was determined based on peer data with input from Farient.
Equity Award Mix for Annual Awards to Other Named Executive Officers. The compensation committee determined that the annual equity awards granted to the named executive officers (other than Messrs. Rau, Shull and Halt and except for Mr. Gutierrez who was not a named executive officer at the time of grant and therefore received only time-vesting RSUs) in 2019 should consist of time-vesting RSU grants and performance-vesting RSU grants as set forth in the table below. The compensation committee determined that these two types of equity awards provided the appropriate balance of long-term incentives for our executive officers in 2019. Specifically, RSU awards that vest based on performance goals focus executives on achieving specific longer-term company performance goals and increasing stockholder value, and RSU awards that vest over time provide tangible value to executive officers and serve as an incentive and retention tool during a difficult operating or volatile business environment, while still being tied to our stockholder value. The compensation committee determined not to grant stock options in 2019 because it felt that using solely performance-vesting RSUs and time-vesting RSUs would strengthen the direct alignment of the long-term incentive program to stockholder value creation.
In setting the mix of the two types of equity awards for 2019, the compensation committee determined that a substantial portion of the equity grants should consist of awards that vest based on our performance (in the form of measurable performance goals based on relative TSR), in addition to continued service over time. Accordingly, the compensation committee structured performance-based awards to account for half of each executive’s annual equity award.
In setting the annual grant levels, the compensation committee reviewed peer data and generally aimed for the equity grants to the executive officers for 2019 to fall around the 50th percentile of peer data. The compensation committee believes that this positioning, combined with its mix of equity compensation reflects our commitment to pay for performance, with compensation above the median of our peers for exceptional performance and compensation below this level if our performance goals are not reached. The resulting target grant values were established based on market data, individual performance and criticality, the retention value of current existing equity awards. Each award fell around or under the 50th percentile of the peer data, except for the grant to Mr. Hawkey, which fell around the 60th percentile of the peer data. The compensation committee determined Mr. Hawkey’s award was appropriate in recognition of his 2018 performance and from an internal pay equity perspective.
The Board of Directors did not grant any annual equity awards to Mr. Rau in July 2019 in his role as Interim President and Chief Executive Officer because Mr. Rau had resigned prior to the grant of the annual equity awards in July 2019; however, pursuant to his Letter Agreement, Mr. Rau received an annual restricted stock award grant on July 1, 2019, on the same terms as all other non-employee directors, in connection with his appointment as Vice Chairperson.
The compensation committee approved a total dollar value for each named executive officer’s annual grants, which we refer to as the grant date target value, based on the market data and other factors described above, and the allocation of such value to each of the two forms of equity awards (50% performance-vesting RSUs and 50% time-vesting RSUs). The actual number of performance-based RSUs and time-based RSUs granted on July 1, 2019 were calculated using the closing stock price of our common stock as of grant date or, if the grant date is not a trading day, the last trading day immediately prior to the grant date (dividing the applicable grant date target value by such closing stock price to arrive at the target number of performance-based RSUs and the number of time-based RSUs.
|
|
|
|
|
|
Executive Officer
|
|
RSU -
Time Vesting
|
|
RSU -
Performance Vesting (Target)
|
Wesley Gutierrez
|
|
35,000
|
|
—
|
Michael Hawkey
|
|
67,842
|
|
67,842
|
Matt Milne
|
|
67,842
|
|
67,842
|
Arvin Patel
|
|
61,058
|
|
61,058
|
2019 Performance Award Vesting Criteria. The 2019 performance-vesting RSU awards were structured to be based entirely on a three-year performance period (2019-2021) and are eligible to vest on a cliff basis, if at all, after three years based upon the achievement of a three-year relative TSR metric of percentile ranking against the S&P 600 Software & Services Index (the “TSR Factor”), as reflected below. We carefully set the performance award goals to be rigorous and ultimately serve to align management and our stockholders’ interests. The TSR Factor was set at levels the compensation committee determined to be competitively challenging, with the maximum metric extremely robust. Further, the vesting of the performance awards is conditioned upon the grantee remaining employed with the company through the vesting date, which is the third anniversary of the grant date.
The compensation committee structured the TSR Factor to be based on a three-year measurement period (rather than one-year measurements over a three-year period), to enhance the long-term nature of the award, distinguish long-term incentive award and short-term incentive award goals and further align management with our long-term stockholder interests. The compensation committee chose the TSR Factor to provide a relative performance metric against an appropriate comparator group of companies to incentivize and reward not only for returns to our stockholders, but also returns in excess of our general industry.
At the end of the 2019-2021 performance period, the compensation committee will determine the level of achievement of the TSR Factor for the three-year performance period and then apply the resulting vesting factor to the grant amount to determine the total amount that will vest. Depending on the level of achievement, the minimum number of shares issuable pursuant to the performance award is zero and the maximum number of shares issuable is twice the number of target shares.
The range of threshold, target and maximum levels for the three-year TSR Factor and resulting vesting are as follows:
|
|
|
|
TSR Factor
|
Payout as a % of
Target (if TSR is positive)
|
Payout as a % of
Target (if TSR is
negative)
|
75 or higher
|
200%
|
100%
|
70
|
180%
|
100%
|
65
|
160%
|
100%
|
60
|
140%
|
100%
|
55
|
120%
|
100%
|
50 (target)
|
100%
|
100%
|
45
|
90%
|
90%
|
40
|
80%
|
80%
|
35
|
70%
|
70%
|
30
|
60%
|
60%
|
25
|
50%
|
50%
|
Below 25
|
—%
|
—%
|
Additional Executive Equity Awards. In connection with increased responsibilities undertaken with respect to completion of the separation of the product and intellectual property businesses contemplated in our announcement of the same on May 9, 2019, on June 1, 2019, each of Messrs. Milne and Patel were granted performance-vesting RSU awards with a total value of $200,000 and $100,000, respectively, the details of which are set forth in the Grants of Plan-Based Awards table and Outstanding Equity Awards table below.
Mr. Halt’s Equity Awards. In connection with his cessation of employment on December 30, 2019 and in accordance with the terms of the Non-Change in Control Executive Severance Plan (as described below), the vesting of Mr. Halt’s non-performance-based equity awards was accelerated by twelve months from the date sixty days following his separation date. As a result of the determination of the TSR calculations for the performance period starting January 1, 2017 and ending December 31, 2019, none of the shares of Mr. Halt’s 2017 performance-based equity awards that would have vested, if at all, based on the performance period ending December 31, 2019 were vested at the end of such performance period. All other outstanding, but unvested, equity awards were canceled as of December 30, 2019.
Equity Compensation Policies
Our general policy is to make annual, new-hire and promotion equity grants on pre-determined dates as follows:
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|
•
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In 2019, annual equity grants for named executive officers were recommended by the compensation committee and approved by the Board of Directors, or approved by the compensation committee, as applicable, on the second regularly scheduled meeting of the compensation committee and/or the Board of Directors during the second quarter of each year, with a target grant date effective as of July 1.
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•
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New-hire and promotion grants of equity awards (stock options and/or RSUs) for all executive officers are subject to approval by our compensation committee and occur on the first day of the month following the new employee’s start date or promotion date, as applicable (except for January, which would be January 2, due to the perpetual January 1 holiday). For example, if the compensation committee authorized a grant to a new-hire executive officer on January 10 and the executive officer started employment on January 20, the grant date would be February 1. If the new-hire executive officer started employment on January 20 but the compensation committee did not authorize the grant until February 2, the grant date would be March 1.
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It is our policy not to purposely accelerate or delay the public release of material information in consideration of a pending equity grant to allow the grantee to benefit from a more favorable stock price.
Directors and Named Executive Officers Stock Ownership Guidelines
We have maintained stock ownership guidelines for our Board of Directors and our executive officers (including the named executive officers) since 2011. Those guidelines currently provide the following:
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|
•
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Board members are required to own, or acquire within five years after appointment, shares of common stock of the company (including vested stock options or other vested equity awards received as compensation for serving as a member of the Board of Directors) having a market value of at least four times the amount of the annual cash retainer for such director.
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•
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Our Chief Executive Officer is required to own, or acquire within five years after appointment), shares of common stock of the company (including vested stock options or other vested equity awards received as compensation in connection with his employment with the company) having a market value of at least six times his then-current annual base salary.
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•
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Each named executive officer (other than the Chief Executive Officer) is required to own, or acquire within five years after appointment), shares of common stock of the company (including vested stock options or other vested equity awards received as compensation in connection with his employment with the company) having a market value of at least three times his then-current annual base salary.
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•
|
The required ownership level for each member of the Board of Directors, the Chief Executive Officer and the other named executive officers of the company shall be recalculated whenever such person’s level of base pay changes (for members of the Board of Directors, such director’s annual cash retainer), and as of January 1 of every third year; and, if such re-calculation results in an increased ownership amount being required under the above guidelines, then such person shall have five years from the date of the re-calculation to accumulate the incremental amount of the increase resulting from the re-calculation.
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Compensation Recovery Policy
We adopted a clawback policy, even though the SEC has not yet issued final rules implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act requirement. Our policy currently provides that, in the event of (i) a financial statement restatement or (ii) a later determination that the figures upon which incentive compensation (equity compensation or cash) was calculated and paid to executive officers were in error (provided that in each case that an executive officer’s misconduct caused either the noncompliance that resulted in the restatement or the error in the figures upon which incentive compensation was calculated and paid), the Board of Directors may take action to recover the incentive compensation that was paid or vested (including gain from the sale of vested shares) during the three-year period preceding the restatement or the determination of the error as noted above. In addition, as a public company subject to the provisions of Section 304 of the Sarbanes-Oxley Act of 2002, if we are required as a result of misconduct to restate our financial results due to our material noncompliance with any financial reporting requirements under the federal securities laws, our Chief Executive Officer and Chief Financial Officer may be legally required to reimburse us for any bonus or other incentive-based or equity-based compensation they receive. We will also comply with the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act and will modify our policy to the extent required by law once the SEC adopts final regulations on the subject.
Anti-Hedging Policy
We have a policy that prohibits our executive officers, directors and other members of management from engaging in short sales, transactions in put or call options, hedging transactions or other inherently speculative transactions with respect to our stock. We adopted this policy as a matter of good corporate governance. Furthermore, by not allowing executives to engage in such transactions, they face the downside risk of a reduction in value of their unvested equity awards, and therefore pay from equity is more strongly correlated to stock price performance over the vesting period.
Agreements Providing for Change of Control and Severance Benefits
The employment of each of our named executive officers is “at will.”
Executive Severance and Arbitration Agreements. Messrs. Halt, Hawkey, Milne and Patel have entered into executive severance and arbitration agreements with us that have substantially the same material terms, providing cash severance of up to twelve months of base pay, continuation of Welfare Benefits (as defined in the agreement) during the period in which cash severance is being paid, and accelerated vesting of certain equity-based compensation, only upon termination of employment (i) by the company for any reason other than cause or (ii) by each officer with good reason, and in either the case of (i) or (ii), in connection with a change in control of the company.
In connection with his appointment as Interim President and Chief Executive Officer, we entered into an executive severance and arbitration agreement with Mr. Rau, which was amended and restated effective December 27, 2018.
In connection with his appointment as President and Chief Executive Officer, we entered into an executive severance and arbitration agreement with Mr. Shull, which provides for certain severance and change in control-related benefits. Our Board of Directors determined that these severance benefits were necessary and appropriate in order to secure Mr. Shull’s employment.
The details of the executive severance and arbitration agreements are discussed more fully in the section below entitled “Potential Payments upon Termination or Change of Control.”
Non-Change in Control Executive Severance Plan. Additionally, each of Messrs. Gutierrez, Halt, Hawkey, Milne and Patel are eligible for severance benefits under the Company’s Executive Severance Plan effective July 7, 2017 and as amended September 3, 2019 and filed with the Securities and Exchange Commission on November 7, 2019 (as amended, the “Executive Severance Plan”) that is applicable for certain designated company executive vice presidents and senior vice presidents. The plan provides for cash severance of twelve months of base salary for executive vice presidents and our chief revenue officer and six months of base salary for certain other senior vice presidents, certain equity acceleration benefits and certain health and outplacement severance benefits to each such named executive officer, upon a termination of employment by the company for any reason other than cause or by each officer for specified limited instances of good reason. The benefits under the plan are offset by any then-existing change in control severance agreements and subject to certain cessation upon commencement of new employment. In connection with his termination, Mr. Halt received a lump sum payment equal to twelve months of base salary under the Executive Severance Plan and is also entitled to continued welfare benefits and to outplacement services for up to twelve months. The details of the Executive Severance Plan are discussed more fully in the section below entitled “Potential Payments upon Termination or Change of Control.”
Executive Retention Plan. In addition, in May 2018, to provide continuity of key members of the management team and address the elevated risk of executive retention associated with the ongoing strategic alternatives process being undertaken by the management team and the Board of Directors, at the recommendation of the compensation committee, the Board of Directors approved an Executive Retention Plan for certain company executives as designated by the compensation committee, including Messrs. Hawkey, Milne and Patel.
The Executive Retention Plan provided for a cash retention award of $750,000 to each of Messrs. Hawkey, Milne and Patel if the officer remained employed by the company on December 31, 2019. Each such officer met the conditions of the award and received such retention payment on November 15, 2019 for Mr. Gutierrez and on January 15, 2020 for Messrs. Hawkey, Milne and Patel.
Additional Executive Cash Retention Payments. Under the terms of Mr. Rau’s Letter Agreement, Mr. Rau is entitled to a change of control payment of $750,000 paid in one lump sum, subject to his continued services. In addition, Mr. Gutierrez is eligible to receive a one-time cash retention bonus of $200,000 on the earlier of (i) the consummation of the Company’s previously announced combination with Xperi Corporation, (ii) November 15, 2020, or (iii) the date of his termination by the
Company without cause. The details of such payments are discussed more fully in the section below entitled “Potential Payments upon Termination or Change of Control.”
The amounts, terms and conditions of these change in control and severance rights reflect the arrangements between our named executive officers and the company at the time these awards and documents were entered into and the benefits provided by our peer companies to similarly situated executives, as well as our desire for internal pay equity among our executive officers. The compensation committee believes that the severance benefits and accelerated vesting offered to our named executive officers in the event of a termination of employment in connection with a change in control (i) serves to minimize the distractions to our executive team and helps our named executive officers maintain a balanced perspective in making overall business decisions during periods of uncertainty and (ii) are structured so that an acquirer that wishes to retain our management team during a transition period or over the long term will have an opportunity to do so. The non-change in control severance benefits under the Executive Severance Plan and the cash award under the Executive Retention Plan were intended to facilitate leadership stability in the company’s management team.
401(k) Plan
Our employees, including our named executive officers, are eligible to participate in our 401(k) plan. Our 401(k) plan is intended to qualify as a tax qualified plan under Section 401 of the Code. Each participant may contribute a portion of his or her pretax compensation to our 401(k) plan. Employee contributions are held and invested by the 401(k) plan’s trustee. Our 401(k) matching contribution program matches employee contributions at a rate of 50% up to 6% of eligible compensation and within the federal statutory limit under Section 401(a)(17). We believe that this benefit is consistent with the practices of our peer companies, and therefore is a necessary element of compensation in attracting and retaining employees.
Other Employee Benefits
We provide health insurance, dental insurance, life insurance, disability insurance, healthcare savings accounts, wellness program incentives, health club membership reimbursement and paid vacation time benefits to all of our employees, including our named executive officers on the same terms and conditions. We believe these benefits are consistent with the practices of our peer companies, and therefore necessary in attracting and retaining our employees.
In addition to the benefits listed above, the compensation committee provides, from time to time, limited business-related perquisites to our named executive officers. In considering potential perquisites, the compensation committee reviews the company’s cost of such benefits against the perceived value we receive. Pursuant to his offer letter agreement, Mr. Shull is entitled to (i) a monthly supplemental stipend of $8,000 beginning in June 2019, the intent of which is to cover Mr. Shull’s travel and housing expenses and (ii) a reimbursement of up to $25,000 for legal fees in connection with the negotiation of his offer letter agreement and executive severance and arbitration agreement, which was paid in full in 2019, and $9,819 in legal fees related to the separate negotiation of Mr. Shull’s potential role as the Chief Executive Officer of the Product business following its contemplated separation from the IP Licensing business.
Tax Deductibility of Executive Compensation
Under Section 162(m), compensation paid to any publicly held corporation’s “covered employees” that exceeds $1 million per taxable year for any covered employee is generally non-deductible.
Prior to the enactment of the Tax Cuts and Jobs Act (the “Tax Act”), Section 162(m) provided a performance-based compensation exception, pursuant to which the deduction limit under Section 162(m) did not apply to any compensation that qualified as “performance-based compensation” under Section 162(m). Pursuant to the Tax Act, the performance-based compensation exception under Section 162(m) was repealed with respect to taxable years beginning after December 31, 2017, except that certain transition relief is provided for compensation paid pursuant to a written binding contract which was in effect on November 2, 2017 and which is not modified in any material respect on or after such date.
As a result, compensation paid to any of the company’s “covered employees” in excess of $1 million per taxable year generally will not be deductible unless it qualifies for the performance-based compensation exception under Section 162(m) pursuant to the transition relief provided by the Tax Act. Because of certain ambiguities and uncertainties as to the application and interpretation of Section 162(m) and the recently released proposed regulations thereunder, no assurance can be given that any compensation paid by the company will be eligible for such transition relief and qualify for the performance-based compensation exception under Section 162(m). Although the compensation committee will continue to monitor the applicability of Section 162(m) to the company’s ongoing compensation arrangements, the compensation committee also intends to continue to provide compensation for the company’s named executive officers in a manner consistent with the best
interests of the company and its stockholders (which may include providing for compensation that is non-deductible due to the deduction limit under Section 162(m)).
Accounting Considerations
The company accounts for equity compensation paid to our employees under the FASB ASC Topic No. 718 (“Topic 718”), Compensation - Stock Compensation, which requires us to measure the grant date fair value of our equity-based awards and recognize the grant date fair value as an expense over the requisite service period of the award. Our cash compensation is recorded as an expense at the time the obligation is incurred. The accounting impact of our compensation programs are one of many factors that the compensation committee considers in determining the structure and size of our executive compensation programs.
Compensation Program Risk Review
Our compensation committee has reviewed our compensation policies as generally applicable to our employees and believes that our policies do not encourage excessive or inappropriate risk taking and that the level of risk that they do encourage is not reasonably likely to have a material adverse effect on the company.
SUMMARY EXECUTIVE COMPENSATION TABLE
The following table shows compensation for the years ended December 31, 2019, 2018 and 2017 awarded to, earned by or paid to each person who served as our President and Chief Executive Officer in 2019, each person who served as
our Chief Financial Officer in 2019, and our three other most highly compensated executive officers, each of whom has total 2019 compensation in excess of $100,000 ("Named Executives").
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Name and Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards ($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
All Other
Compensation
($)
|
Total
($)
|
(a)
|
(b)
|
(c)
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(d)(5)
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(e)(1)(6)
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(f)
|
(g)(7)
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(i)(1)(8)
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(j)
|
David Shull
President and Chief Executive Officer (1)
|
2019
|
440,104
|
1,000,000
|
3,305,555
|
—
|
607,449
|
98,619
|
5,451,727
|
|
|
|
|
|
|
|
|
Raghavendra Rau
Interim President and Chief Executive Officer (2)
|
2019
|
312,500
|
—
|
2,016,101
|
—
|
423,801
|
253,193
|
3,005,595
|
2018
|
365,625
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—
|
1,893,118
|
—
|
522,432
|
50,960
|
2,832,135
|
Wesley Gutierrez Chief Financial Officer (3)
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2019
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324,000
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112,600
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225,750
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—
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147,180
|
9,485
|
819,015
|
|
|
|
|
|
|
|
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Peter Halt
Chief Financial Officer (4)
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2019
|
413,751
|
—
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—
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—
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289,626
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644,972
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1,348,349
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2018
|
413,751
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—
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975,804
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—
|
339,586
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10,650
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1,739,791
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2017
|
413,751
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—
|
1,193,260
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—
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297,490
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10,500
|
1,915,001
|
Michael Hawkey
SVP and General Manager
|
2019
|
400,000
|
750,000
|
816,139
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—
|
191,889
|
101,892
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2,259,920
|
2018
|
400,000
|
—
|
977,968
|
--
|
293,170
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88,266
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1,759,404
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Matt Milne
Chief Revenue Officer
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2019
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444,960
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750,000
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1,005,023
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—
|
275,241
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15,515
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2,490,739
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2018
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444,960
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—
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668,865
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—
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291,495
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16,778
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1,422,098
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Arvin Patel
EVP and Chief Intellectual Property Officer
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2019
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450,000
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750,000
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828,966
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—
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366,345
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9,587
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2,404,898
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2018
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450,000
|
—
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668,865
|
--
|
369,338
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9,087
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1,497,290
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(1)
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Mr. Shull was appointed as President and Chief Executive Officer on May 31, 2019. In connection with his appointment, Mr. Shull was paid a $1,000,000 signing bonus.
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(2)
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Mr. Rau was appointed as Interim President and Chief Executive Officer on July 5, 2018. He resigned from his position on May 31, 2019 and was appointed Vice Chairperson of the Board of Directors. Amounts disclosed under "Stock Awards" includes aggregate grant date fair value of stock awards of $150,009 and "All Other Compensation" includes cash director fees of $232,500 received by Mr. Rau for his services as a non-employee director after his resignation as Interim President and Chief Executive Officer.
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(3)
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Mr. Gutierrez was appointed as Chief Financial Officer on December 30, 2019. Prior to this appointment, Mr. Gutierrez served as Chief Accounting Officer and Treasurer.
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(4)
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No stock awards were granted to Mr. Halt in 2019. Mr. Halt ceased serving as our Chief Financial Officer on December 30, 2019.
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(5)
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Amounts disclosed under “Bonus” represent (a) a sign-on bonus in connection with Mr. Shull joining the Company in May 2019, (b) payments earned as part of an Executive Retention Plan for Messrs. Hawkey, Milne and Patel in the amount of $750,000 each if the officer remained employed by the Company through December 31, 2019 and (c) a broad-based employee cash retention plan payment earned by Mr. Gutierrez in the amount of $62,600 if he remained employed by the Company through October 31, 2019. Such cash retention awards were paid on November 15, 2019 to Mr. Gutierrez and on January 15, 2020 to Messrs. Hawkey, Milne and Patel. Mr. Gutierrez also received a $50,000 CEO Special Recognition Bonus on February 28, 2019.
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(6)
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Amounts disclosed under “Stock Awards” represent the aggregate grant date fair value of stock awards granted during the year indicated, measured in accordance with Topic 718. For a discussion of assumptions used to measure fair value, see Note 12, “Equity-based Compensation,” to the Consolidated Financial Statements in this Annual Report on
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Form 10-K. As our restricted stock units are not dividend-protected, with respect to restricted stock units subject to only service-based vesting conditions, the grant date fair value of restricted stock units was estimated based on the price of our common stock at the close of trading on the date of grant, reduced by the present value of dividends expected to be paid during the vesting period. In addition, as restricted stock units granted to Mr. Rau in connection with his employment as Interim President and Chief Executive Officer are subject to a post-vesting restriction on sale, the grant date fair value of Mr. Rau's restricted stock units were further reduced by an illiquidity discount consistent with Topic 718. With respect to restricted stock units granted July 1, 2019, 2018 and 2017, subject to market vesting conditions, the grant date fair value was estimated using a Monte-Carlo simulation. Assuming that the highest level of attainment is achieved for awards subject to market vesting conditions, the aggregate maximum grant date fair value of awards granted in 2019 would be as follows: Mr. Hawkey - $757,117; Mr. Milne - $757,117; and Mr. Patel - $681,407. With respect to performance-based restricted stock units granted June 1, 2019 that are subject to a liquidity vesting condition, the grant date fair value was measured using was estimated as the price of our common stock at the close of trading on the date of grant, reduced by the present value of dividends expected to be paid during the vesting period. Assuming the highest level of performance criteria will be achieved, the aggregate maximum grant date fair value of awards granted will be as follows: Mr. Shull - $3,305,555; Mr. Milne - $188,884; and Mr. Patel - $94,438. These amounts do not necessarily correspond to the actual value that may be realized by the Named Executives.
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(7)
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Amounts disclosed under “Non-Equity Incentive Plan Compensation” represent: (i) for all persons listed other than Mr. Milne, the individual and corporate performance component (with respect to Mr. Shull, only the corporate performance component, and for Messrs. Hawkey and Patel, the business group performance component) of the annual cash bonuses earned pursuant to the 2019 Executive Incentive Plan for services rendered in 2019, and (ii) for Mr. Milne, his earned compensation under a sales commission plan, the details of which are discussed more fully in the section above entitled “Milne Sales Incentive Compensation Plan”. Such bonuses for services rendered in 2019 were paid in 2020.
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|
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(8)
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Amounts disclosed under “All Other Compensation” in 2019 consist of: (i) matching contributions made on behalf of the Named Executives to our 401(k) plan, (ii) employer paid premiums for life insurance coverage, (iii) $25,000 in legal fee reimbursement for Mr. Shull in connection with his appointment as Chief Executive Officer (which was paid in full in 2019) and $9,819 in legal fees related to the separate negotiation of his potential role as the Chief Executive Officer of the Product business following its contemplated separation from the IP Licensing business (which was paid in full in 2020), a $56,000 stipend to cover Mr. Shull’s travel and housing expenses, (iv) $12,153 in employer paid COBRA premiums for medical insurance for Mr. Rau after his resignation as Interim President and Chief Executive Officer, (v) a $527 bonus for Mr. Gutierrez, (vi) termination benefits for Mr. Halt consisting of a $413,751 cash payment and $220,421 related to the acceleration of vesting on time-based restricted stock units, (vii) $92,208 in commuting costs for Mr. Hawkey, and (viii) $6,920 in costs, inclusive of a tax gross-up, related to attendance at the Sales Excellence Club for Mr. Milne.
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Grants of Plan-Based Awards
The following table sets forth certain information with respect to grants of plan-based awards for the fiscal year ended December 31, 2019 to the Named Executives.
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Name
|
Grant
Date
|
Approval
Date
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Estimated Possible Payouts
Under Non-Equity Incentive
Plan Awards (1)
|
|
Estimated Future Payouts
Under Equity Incentive Plan
Awards
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All Other Stock Awards:
Number of Shares of Stock or Units
(#)(2)
|
All Other Option Awards:
Number of Securities Underlying Options
(#)
|
Exercise or Base Price of Option Awards
($/Sh)
|
Grant Date Fair Value of Stock and Option Awards
($)(3)
|
Threshold
($)
|
Target
($)(4)
|
Maximum
($)
|
|
Threshold
(#)
|
Target
(#)(5)
|
Maximum
(#)(5)
|
(a)
|
(b)
|
|
(c)
|
(d)
|
(e)
|
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(f)
|
(g)
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(h)
|
(i)
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(j)
|
(k)
|
(l)
|
David Shull
|
N/A
|
N/A
|
276,113
|
552,226
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966,396
|
|
|
|
|
|
|
|
|
6/1/2019
|
5/23/2019
|
|
|
|
|
|
486,111
|
486,111
|
|
|
0.001
|
3,305,555
|
Raghavendra Rau
|
N/A
|
N/A
|
193,921
|
387,842
|
678,724
|
|
|
|
|
|
|
|
|
1/2/2019
|
12/29/2018
|
|
|
|
|
|
|
|
212,539
|
|
0.001
|
1,866,092
|
7/1/2019
|
5/29/2019
|
|
|
|
|
|
|
|
21,709 (7)
|
|
0.001
|
150,009
|
Wesley Gutierrez
|
N/A
|
N/A
|
66,000
|
132,000
|
231,000
|
|
|
|
|
|
|
|
|
7/1/2019
|
6/19/2019
|
|
|
|
|
|
|
|
35,000
|
|
0.001
|
225,750
|
Peter Halt
|
N/A
|
N/A
|
144,813
|
289,626
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506,845
|
|
|
|
|
|
|
|
|
Michael Hawkey
|
N/A
|
N/A
|
115,041
|
230,082
|
402,644
|
|
|
|
|
|
|
|
|
7/1/2019
|
5/29/2019
|
|
|
|
|
|
|
|
67,842
|
|
0.001
|
437,581
|
7/1/2019
|
5/29/2019
|
|
|
|
|
|
67,842
|
135,684
|
|
|
0.001
|
378,558
|
Matt Milne
|
N/A
|
N/A
|
N/A
|
280,325
|
N/A
|
|
|
|
|
|
|
|
|
7/1/2019
|
5/29/2019
|
|
|
|
|
|
|
|
67,842
|
|
0.001
|
437,581
|
6/1/2019
|
5/29/2019
|
|
|
|
|
|
27,777
|
27,777
|
|
|
0.001
|
188,884
|
7/1/2019
|
5/29/2019
|
|
|
|
|
|
67,842
|
135,684
|
|
|
0.001
|
378,558
|
Arvin Patel
|
N/A
|
N/A
|
157,500
|
315,000
|
551,250
|
|
|
|
|
|
|
|
|
7/1/2019
|
5/29/2019
|
|
|
|
|
|
|
|
61,058
|
|
0.001
|
393,824
|
6/1/2019
|
5/29/2019
|
|
|
|
|
|
13,888
|
13,888
|
|
|
0.001
|
94,438
|
7/1/2019
|
5/29/2019
|
|
|
|
|
|
61,058
|
122,116
|
|
|
0.001
|
340,704
|
|
|
(1)
|
We award the individual and corporate components of cash bonuses pursuant to our 2019 Executive Incentive Plan. The 2019 Executive Incentive Plan provides for the award of such annual cash bonuses based upon the attainment of: (i) corporate performance based on specified revenue and operating income goals (the only factor with respect to Mr. Shull), (ii) individual performance based upon achievement of pre-established individual objectives, and (iii) with respect to Messrs. Hawkey and Patel, business group performance based on specified revenue and contribution margin goals. The table above reflects the threshold, target and maximum cash bonuses that each Named Executive could earn. Because there is no threshold level for an executive’s individual performance achievement, the amounts shown in the threshold payout column assume that the individual performance threshold equals the threshold for corporate performance. The actual amount of the cash bonus attributable to corporate and individual performance (and, with respect to Messrs. Hawkey and Patel, business group performance) that was earned and paid to each of the Named Executives for year ended December 31, 2019 is set forth in the Summary Compensation Table under the column Non-Equity Incentive Plan Compensation.
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(2)
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All time-based restricted stock granted to the Named Executives in 2019 was granted under the TiVo Corporation 2008 Equity Incentive Plan, as amended, other than with respect to Mr. Rau, whose restricted stock units granted on January 2, 2019 were pursuant to the 2008 TiVo Plan.
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(3)
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Amounts disclosed represent the aggregate grant date fair value of stock awards granted during the year, measured in accordance with Topic 718. For a discussion of valuation assumptions used to measure fair value, see Note 12, “Equity-based Compensation” in the Consolidated Financial Statements of this Annual Report on Form 10-K. As our restricted stock units are not dividend-protected, with respect to restricted stock units subject to only service-based vesting conditions, the grant date fair value of restricted stock units was estimated based on the price of our common stock at the close of trading on the date of grant, reduced by the present value of dividends expected to be paid during the vesting period. In addition, as restricted stock units granted to Mr. Rau, January 2, 2019, in connection with his employment as Interim President and Chief Executive Officer are subject to a post-vesting restriction on sale, the grant date fair value of Mr. Rau's restricted stock units were further reduced by an illiquidity discount. With respect to restricted stock units granted in 2019 subject to market vesting conditions, the grant date fair value was measured using a Monte-Carlo simulation.
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(4)
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Other than Mr. Milne, amounts represent the target payout with respect to corporate performance under the 2019 Executive Incentive Plan assuming 100% achievement of target. Amount for Mr. Milne represents the target payout with respect to his commission payments under the 2019 Sales Incentive Compensation Plan. Mr. Shull’s amounts are prorated from his hire date on May 31, 2019. Mr. Rau’s amounts are prorated through May 31, 2019, when he resigned his position as Interim President and Chief Executive Officer. Mr. Hawkey’s amounts are prorated to account for an increase in bonus target during the year.
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(5)
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Represents the target and maximum number of shares that may be earned under the restricted stock units granted July 1, 2019 to Named Executives subject to TSR criteria and pursuant to the TiVo Corporation 2008 Equity Incentive Plan, as amended. Restricted stock units granted June 1, 2019 allow for equal target and maximum shares (grant date shares) that may be earned subject to specific "Performance Criteria" as stipulated in the "Notice of Restricted Stock Unit Grant" and subject to the TiVo Corporation 2008 Equity Incentive Plan, as amended.
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(6)
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No awards were issued in 2019 to Mr. Halt.
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(7)
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Represents restricted stock award granted to Mr. Rau as Vice Chairperson, Board of Directors after his resignation as Interim President and Chief Executive Officer.
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Discussion of Summary Compensation and Plan-Based Awards Tables
Our executive compensation policies and practices, pursuant to which the compensation set forth in the Summary Compensation Table and the Grants of Plan-Based Awards table was paid or awarded, are described above under “Compensation Discussion and Analysis.” A summary of certain material terms of our continuing compensation plans and arrangements is set forth below.
Employment Agreements with Named Executives
Mr. Shull. In May 2019, we appointed Mr. Shull as the company’s President and Chief Executive Officer. On May 24, 2019, we entered into an offer letter agreement with Mr. Shull under which he is entitled to an annual base salary, currently set at $750,000, and is eligible to participate in the company’s Senior Executive Company Incentive Plan with a cash bonus target equal to 125% of his base salary and a maximum payout of up 175% of the target amount, pro rated for any partial year served. In connection with his appointment, the company also granted Mr. Shull, on June 1, 2019, a restricted stock unit award with a total value of $3,500,000. The restricted stock unit award will vest, if at all, only to the extent Mr. Shull remains in employment as the CEO of the company on the earliest date that TiVo consummates: (i) a sale of the entire company, (ii) a spin-off of the company’s Product business, (iii) a spin-off of the company’s IP Licensing business or (iv) a sale of either the company’s Product or IP Licensing businesses (the “Vesting Date”). The restricted stock unit award was granted pursuant to the company’s TiVo Corporation 2008 Equity Incentive Plan and standard form of performance-based restricted stock unit award agreement thereunder, and the awards are not subject to any vesting acceleration benefits under any executive severance plan or otherwise. Mr. Shull also received a one-time $1,000,000 cash signing bonus, subject to standard payroll reductions and withholdings, within 30 days following his start date. A portion of such signing bonus will be subject to repayment by Mr. Shull if his employment is terminated prior to the first anniversary of the start date: (i) by the company or a subsidiary for Cause (as defined in the Severance Agreement), (ii) by Mr. Shull without Good Reason (as defined in the Severance Agreement), or (iii) by the company or a subsidiary due to Mr. Shull’s failure to perform his duties, subject to certain notice requirements as set forth in the offer letter agreement; provided, that if the Vesting Date occurs prior to the first anniversary of the start date, the foregoing repayment obligation will lapse.
Additionally, Mr. Shull is paid a monthly stipend of $8,000 to cover his travel and housing expenses in travelling from his home and working at the company’s San Jose offices, and was reimbursed for up to $25,000 for his legal expenses incurred in connection with negotiation of the offer letter and Severance Agreement. Mr. Shull also entered into an Executive Severance and Arbitration Agreement (the “Severance Agreement”) with the company, the terms of which are described under “Potential Payments upon Termination or Change of Control.”
Mr. Rau. In July 2018, we appointed Mr. Rau as the company’s Interim President and Chief Executive Officer. On July 23, 2018, we entered into an offer letter agreement with Mr. Rau under which he was entitled to an annual base salary of $750,000, and was eligible to participate in the company’s Senior Executive Company Incentive Plan (the “SECIP”) with a cash bonus target equal to 125% of his base salary and a maximum payout of up to two times the target amount, pro rated for the time period during which he held the Interim President and Chief Executive Officer position. The cash portion of Mr. Rau’s director compensation was not paid with respect to such time period. In connection with his appointment, the company also granted Mr. Rau, on August 1, 2018, a restricted stock unit award in the amount of 164,609 shares, with a grant date target
value of approximately $2,000,000. The restricted stock unit award was subject to a quarterly vesting schedule, with one-fourth (1/4th) of the units vesting each three months after the grant date. In light of the interim nature of Mr. Rau’s role, he was reimbursed for his travel and housing expenses in travelling from his home and working at the company’s San Jose offices. Mr. Rau also entered into an Executive Severance and Arbitration Agreement with the company, which was later amended in December 2018 and replaced in its entirety by the Letter Agreement (as defined below) in May 2019 in connection with his resignation as Interim President and Chief Executive Officer.
In December 2018, we amended Mr. Rau’s compensation and related employment arrangements in connection with the extension of his tenure as the company’s Interim President and Chief Executive Officer. Under the terms of the amended arrangements, Mr. Rau’s annual base salary, eligibility to participate in the Senior Executive Company Incentive Plan and, except as described below, eligibility to receive company benefits, remained the same as provided under his original offer letter and Mr. Rau continued to be reimbursed for his travel and housing expenses in travelling from his home and working at the company’s San Jose offices. During the extension of his employment period, the cash portion of Mr. Rau’s director compensation was not paid. The company granted, on January 2, 2019, an additional restricted stock unit award of 212,539 shares, with a grant date target value of approximately $2,000,000. The restricted stock unit award was subject to a quarterly vesting schedule, with one-fourth (1/4th) of the units vesting each three months after the grant date. The company also entered into an Amended and Restated Executive Severance and Arbitration Agreement with Mr. Rau dated December 27, 2018.
In May 2019, Mr. Rau resigned as the company’s Interim President and Chief Executive Officer, and effective at the same time, the board of directors appointed Mr. Rau as Vice Chairperson of the Board. On May 24, 2019, the company entered into a Letter Agreement with Mr. Rau (the “Letter Agreement”), under the terms of which, the company agreed to pay Mr. Rau: (i) for June 2019, a cash payment $62,500, (ii) for the balance of fiscal year 2019, a cash payment of $250,000 reduced by one half of the value of the non-employee director annual equity grant to be made July 1, 2019, paid in two quarterly installments. Under the Letter Agreement, Mr. Rau is also entitled to such compensation as is determined by the Board for 2020.
On July 1, 2019, consistent with the company’s standard non-employee director arrangements, the company granted Mr. Rau an annual restricted stock award grant on the same terms as all other non-employee directors.
For the 2019 fiscal year, pursuant to the company’s standard Senior Executive Company Incentive Plan, Mr. Rau will receive a pro rated bonus for time served as Interim President and Chief Executive Officer in 2019, subject to a minimum payment of 50% of his target 2019 bonus (assuming full performance but no over-performance). Mr. Rau’s 2019 bonus will be paid concurrently with payment of other executive bonuses and no later than March 15, 2020. Such bonus payment is subject to Mr. Rau’s execution of a release of claims in the company’s standard form (the “Release”). In addition, the 2018 and 2019 RSU (each as defined in Mr. Rau’s amended and restated offer letter from the company dated December 27, 2018) will be fully vested on the effective date of the Release.
Additionally, the company agreed to reimburse Mr. Rau for (i) his travel and housing expenses in travelling from his home and working at the company’s San Jose offices through June 30, 2019, (ii) expenses incurred in the performance of his duties prior to June 30, 2019, and (iii) expenses incurred for travel as needed for fulfillment of his Vice Chairperson duties. The company has also agreed to pay Mr. Rau’s COBRA premiums, under certain conditions, through the earlier of: (i) December 31, 2019 and (ii) the date on which Mr. Rau becomes eligible for health insurance coverage through a new employer.
Finally, the Letter Agreement provides, among other things, for change of control payments to Mr. Rau under certain conditions as described in “Potential Payments upon Termination of Change of Control.”
Mr. Gutierrez. On December 27, 2019, we appointed Mr. Gutierrez, the Company’s Chief Accounting Officer as the Company’s Chief Financial Officer, effective December 30, 2019. In connection with Mr. Gutierrez’s appointment, his annual base salary of $330,000 and his cash bonus targets, equal to 40% of his base salary, were unchanged.
Mr. Gutierrez is not entitled to any payments from the Company in the event his employment by the Company terminates as a result of death or disability. Mr. Gutierrez participates in the Executive Severance Plan at the senior vice president level and his time-based equity awards will be accelerated by twelve months from the termination date in the event of his termination by the Company without cause. Mr. Gutierrez is also eligible to receive a one-time cash retention bonus of $200,000 on the earlier of (i) the consummation of the Company’s previously announced combination with Xperi Corporation, (ii) November 15, 2020, or (iii) the date of his termination by the Company without cause.
Mr. Halt. In May 2012, we appointed Mr. Halt as our Chief Financial Officer. Under the terms of Mr. Halt’s employment, prior to his termination date (described further below), he was entitled to an annual base salary of $413,751 and was eligible to participate in the company’s SECIP with a cash bonus target currently equal to 70% of his base salary. Also, Mr.
Halt was offered an Executive Severance and Arbitration Agreement (for which he is no longer eligible due to his separation in December 2019), the terms of which are described under “Potential Payments upon Termination or Change of Control.”
On December 27, 2019, the Board of Directors of the company approved the departure of Mr. Halt as the Chief Financial Officer effective as December 30, 2019. Mr. Halt will be engaged in an advisory role from January 2, 2020 through March 31, 2020 to facilitate a smooth transition of duties, and he will be paid $50,000 per month for his work in such role.
Consistent with the terms of the Company’s Executive Severance Plan for executive vice presidents, Mr. Halt received a lump sum payment equal to twelve months of base salary (excluding bonus or any pro ration thereof) and will be eligible to receive certain health and outplacement benefits, subject to the terms and conditions of the Executive Severance Plan.
Additionally, the vesting of Mr. Halt’s non-performance-based equity awards was accelerated by twelve months from December 30, 2019 and such awards will be released 60 days thereafter. None of Mr. Halt’s performance-based equity awards that would have vested based on the performance period ending December 31, 2019 will vest as the compensation committee determined that the TSR performance criteria for the three-year period was not achieved. All other outstanding, but unvested, equity awards were canceled as of December 30, 2019. Finally, Mr. Halt remained eligible to receive his annual bonus for 2019. All of the foregoing benefits are subject to the terms and conditions of the Executive Severance Plan.
Mr. Hawkey. In 2015, we appointed Mr. Hawkey as our Senior Vice President and General Manager, User Experience. Under the terms of Mr. Hawkey’s employment, he is entitled to an annual base salary, currently set at $400,000, and is eligible to participate in the company’s SECIP with a cash bonus target currently equal to 60% of his base salary, with such percentage subject to change each year as determined by the company’s compensation committee. Also, Mr. Hawkey was offered an Executive Severance and Arbitration Agreement, the terms of which are described under “Potential Payments upon Termination or Change of Control.”
Mr. Milne. In January 2017, we appointed Mr. Milne as our Chief Revenue Officer. Under the terms of Mr. Milne’s employment, he is entitled to an annual base salary, currently set at $444,960, and participates in the Commission Plan with a total commission target based on specified revenue quotas and quotas for new sales contracts. Also, Mr. Milne was offered an Executive Severance and Arbitration Agreement, the terms of which are described under “Potential Payments upon Termination or Change of Control.”
In connection with increased responsibilities and efforts related to the Separation, Mr. Milne was granted, on June 1, 2019, restricted stock unit awards with a total value of $200,000. The restricted stock unit awards will vest, if at all, only to the extent that the executive remains in employment with the Company on the earliest date that TiVo consummates: (i) a sale of the entire Company, (ii) a spin-off of the Company’s Product business, (iii) a spin-off of the Company’s IP Licensing business or (iv) a sale of either the Company’s Product or IP Licensing businesses. The proposed combination with Xperi Corporation will trigger the vesting of these restricted stock unit awards. The restricted stock unit awards will be granted pursuant to the Company’s TiVo Corporation 2008 Equity Incentive Plan and standard form of performance-based restricted stock unit award agreement thereunder, and the awards are not subject to any vesting acceleration benefits under any executive severance plan or otherwise.
Mr. Patel. In August 2017, we appointed Mr. Patel as our Executive Vice President and Chief Intellectual Property Officer. Under the terms of Mr. Patel’s employment, he is entitled to an annual base salary, currently set at $450,000, and is eligible to participate in the company’s SECIP with a cash bonus target currently equal to 70% of his base salary, with such percentage subject to change each year as determined by the company’s compensation committee. Also, Mr. Patel was offered an Executive Severance and Arbitration Agreement, the terms of which are described under “Potential Payments upon Termination or Change of Control.”
To recognize his responsibilities related to the Separation, Mr. Patel was granted, on June 1, 2019, restricted stock unit awards with a total value of $100,000. The restricted stock unit awards will vest, if at all, only to the extent that the executive remains in employment with the Company on the earliest date that TiVo consummates: (i) a sale of the entire Company, (ii) a spin-off of the Company’s Product business, (iii) a spin-off of the Company’s IP Licensing business or (iv) a sale of either the Company’s Product or IP Licensing businesses. The proposed combination with Xperi Corporation will trigger the vesting of these restricted stock unit awards. The restricted stock unit awards will be granted pursuant to the Company’s TiVo Corporation 2008 Equity Incentive Plan and standard form of performance-based restricted stock unit award agreement thereunder, and the awards are not subject to any vesting acceleration benefits under any executive severance plan or otherwise.
2019 Executive Incentive Plan Cash Awards. Our 2019 Senior Executive Company Incentive Plan (“SECIP”) provides for annual cash bonus award opportunities to reward executive officers for performance in the prior fiscal year. For more
information regarding our 2019 SECIP, please see the section entitled “2019 Short-Term Incentive Compensation Decisions” in the Compensation Discussion and Analysis above.
2019 Equity Incentive Awards. During 2019, the Named Executives received restricted stock unit awards under the TiVo Corporation 2008 Equity Plan (formerly known as the Rovi Corporation Amended 2008 Equity Incentive Plan), other than with respect to Mr. Rau, which restricted stock units were granted pursuant to the 2008 TiVo Plan. Other than with respect to Mr. Rau, the restricted stock unit awards granted to the Named Executive Officers in 2019 consisted of awards that vest over a four-year period and awards that vest upon specified performance goals, as further described under “2019 Long-Term Incentive Compensation Decisions in the Compensation Discussion and Analysis” section above.
Executive Severance Plan. Certain of our Named Executives are participants in our Executive Severance Plan as described under “Potential Payments upon Termination or Change of Control.”
Executive Retention Plan. Certain of our Named Executives were participants in our Executive Retention Plan as described under “Executive Retention Plan in the Compensation Discussion and Analysis” section above.
Outstanding Equity Awards
The following table sets forth certain information with respect to outstanding equity awards held by the Named Executives as of December 31, 2019.
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Option Awards
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Stock Awards
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Name
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Number of Securities Underlying Unexercised Options (#) Exercisable
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Number of Securities Underlying Unexercised Options (#) Unexercisable
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Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)
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Option Exercise Price ($)
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Option Expiration Date
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Number of Shares or Units of Stock That Have Not Vested (#)
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Market Value of Shares or Units of Stock That Have Not Vested ($)
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Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)
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Equity Incentive Plan Awards:
Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
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(a)
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(b)
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(c)
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(d)
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(e)
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(f)
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(g)
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(h)
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(i)
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(j)
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David Shull
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486,111 (8)
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4,122,221
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Raghavendra Rau
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21,709 (2)
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184,092
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Wesley Gutierrez
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61,625 (3)
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522,580
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Peter Halt
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23,000
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24.84
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3/1/2021 (1)
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25,993 (4)
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220,421
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32,172 (9)
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272,819 (9)
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40,000
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24.88
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3/1/2022 (1)
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22,195
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23.44
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3/1/2023 (1)
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Michael Hawkey
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115,132 (5)
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976,319
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35,316 (10)
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299,480
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67,842 (11)
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575,300
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Matt Milne
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14,000
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24.84
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3/1/2021
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115,128 (6)
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976,285
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27,777 (8)
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235,549
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27,881 (10)
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236,431
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67,842 (11)
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575,300
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Arvin Patel
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113,996 (7)
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966,686
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13,888 (8)
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117,770
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27,881 (10)
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236,431
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61,058 (11)
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517,772
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10,000 (12)
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84,800
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(1)
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As stipulated in Mr. Halt's Separation Agreement and General Release, all unexercised options expire on March 30, 2020, which is 90 days after the date he ceased serving as our Chief Financial Officer.
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(2)
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These shares vest on July 1, 2020.
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(3)
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These shares vest as follows: 2,625 shares on March 1, 2020; 17,750 shares on July 1, 2020; 17,750 shares on July 1, 2021; 14,750 shares on July 1, 2022; and 8,750 shares on July 1, 2023.
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(4)
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As stipulated in Mr. Halt's Separation Agreement and General Release, vesting for these shares accelerated on December 30, 2019 and will be released on February 28, 2020, which is 60 days after he ceased serving as our Chief Financial Officer.
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(5)
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These shares vest as follows: 2,500 shares on March 1, 2020; 2,768 shares on April 1, 2020; 30,789 shares on July 1, 2020; 2,767 shares on April 1, 2021; 30,790 shares on July 1, 2021; 2,768 shares on April 1, 2022; 25,789 shares on July 1, 2022; and 16,961 shares on July 1, 2023.
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(6)
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These shares vest as follows: 1,250 shares on February 1, 2020; 7,000 shares on March 1, 2020; 1,125 shares on April 1, 2020; 29,930 shares on July 1, 2020; 5,000 shares on March 1, 2021; 29,931 shares on July 1, 2021; 23,931 shares on July 1, 2022; and 16,961 shares on July 1, 2023.
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(7)
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These shares vest as follows: 22,234 shares on July 1, 2020; 16,013 shares on August 1, 2020; 22,235 shares on July 1, 2021; 16,014 shares on August 1, 2021; 22,235 shares on July 1, 2022; and 15,265 shares on July 1, 2023.
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(8)
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These shares are eligible to vest, if at all, on the date the Compensation Committee of the Board of Directors approves the achievement of the "Performance Criteria" as discussed in the "Notice of Restricted Stock Unit Grant." The Participant must remain in Continuous Service on the earliest date (the "Performance Vesting Date") that the Company consummates: (i) a sale of the entire Company, (ii) a spin-off of the Company's Product business, (iii) a spin-off of the Company's IP Licensing business, or (iv) a sale of either the Company's Product or IP Licensing businesses (collectively, the "Performance Criteria").
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(9)
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As stipulated in Mr. Halt's Separation Agreement and General Release, these shares remained eligible to vest and eligible to be released on March 1, 2020 based on the achievement of a three-year relative TSR metric of percentile ranking against a peer group established by our compensation committee. On February 12, 2020, the compensation committee determined that the TSR performance criteria for the three-year period was not achieved and therefore none of Mr. Halt’s performance-based equity awards will vest. All other outstanding, but unvested, equity awards were canceled as of December 30, 2019.
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(10)
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These shares are eligible to vest on March 1, 2021 based on the achievement of a three-year relative TSR metric of percentile ranking against a peer group established by our compensation committee.
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(11)
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These shares are eligible to vest on March 1, 2022 based on the achievement of a three-year relative TSR metric of percentile ranking against a peer group established by our compensation committee.
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(12)
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These shares are eligible to vest on March 1, 2020 based on the achievement of a three-year relative TSR metric of percentile ranking against a peer group established by our compensation committee.
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Option Exercises and Stock Vested
The following table shows for the fiscal year ended December 31, 2019 certain information regarding option exercises and stock awards acquired on vesting during 2019 with respect to the Named Executives:
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Option Awards
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Stock Awards
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Name
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Number of Shares Acquired on Exercise (#)
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Value Realized on Exercise ($)
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Number of Shares Acquired on Vesting (#)(1)
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Value Realized on Vesting ($)(2)
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(a)
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(b)
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(c)
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(d)
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(e)
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David Shull
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--
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--
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--
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--
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Raghavendra Rau
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--
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--
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335,996
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2,709,718
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Wesley Gutierrez
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--
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--
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20,761
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169,906
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Peter Halt (3)
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--
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--
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38,034
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333,155
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Michael Hawkey
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--
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--
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25,346
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197,831
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Matt Milne
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--
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--
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24,345
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207,254
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Arvin Patel
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--
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--
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22,984
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182,325
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(1)
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Represents the vesting of restricted stock.
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(2)
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The value realized is based on the closing price of our common stock on the vest date multiplied by the number of restricted stock or restricted stock units vested, less the par value of the stock issued.
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(3)
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As stipulated in Mr. Halt's Separation Agreement and General Release, 25,993 of these shares were accelerated on December 30, 2019 and are scheduled to be released on February 28, 2020, which is 60 days after he ceased serving as our Chief Financial Officer.
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Potential Payments upon Termination or Change of Control
We entered into an Executive Severance and Arbitration Agreement (the “Severance Agreement”) with Mr. Shull dated as of May 31, 2019. The Severance Agreement provides, among other things, for severance payments to Mr. Shull under certain conditions as follows: if, at any time, (i) the company terminates Mr. Shull’s employment without Cause and other than as a result of Mr. Shull’s death or Disability, (ii) Mr. Shull resigns for Good Reason or (iii) Mr. Shull does not become the Chief Executive Officer of either of the Product or IP businesses at the completion of the separation of such businesses contemplated in the Company’s May 9, 2019 announcement of same (the “Separation”), then subject to certain obligations required of Mr. Shull, including the execution, delivery and non-revocation of a release of claims against the Company, the Company will provide Mr. Shull: (A) an amount equal to one year of his annual base salary in effect on the date of such termination (without giving effect to any change of pay triggering a Good Reason resignation), paid over the twelve-month period following Mr. Shull’s separation from service, (B) if Mr. Shull’s termination occurs six months or more following the Start Date, a pro rated annual bonus based on time served in the year of termination (or the prior year if termination occurs after the end of a given year and prior to the payment of bonuses for such year), and (C) continuation of welfare benefits and COBRA premiums for up to twelve months, for a total value of $1,387,722. The consummation of the proposed combination with Xperi Corporation announced on December 19, 2019 will trigger these payments, provided that Mr. Shull satisfies the obligations required of him to obtain same. Additionally, in the event that Mr. Shull is terminated on a change in control of the company, Mr. Shull would also be entitled to accelerated vesting of his performance-based restricted stock having a value of $4,122,221.
Mr. Shull’s severance benefits are conditional upon, as applicable: (a) Mr. Shull continuing to comply with his obligations under his proprietary information, inventions and ethics agreement during the period of time in which he is receiving such severance benefits; (b) Mr. Shull delivering to the company an effective, general release of claims in favor of the Company within 60 days following his Separation from Service (as defined in the Severance Agreement), and (c) Mr. Shull’s resignation from the board of directors, to be delivered and effective no later than 48 hours after the date of Mr. Shull’s termination of employment (or such later date as requested by the board of directors).
Concurrent with Mr. Rau’s appointment as Interim President and Chief Executive Officer in July 2018, the company entered into an Executive Severance and Arbitration Agreement with Mr. Rau, which was amended and restated in connection with the extension of his tenure as the company’s Interim President and Chief Executive Officer in December 2018 by the Amended and Restated Executive Severance and Arbitration Agreement (the “Amended Severance Agreement”).
In May 2019, Mr. Rau resigned as the company’s Interim President and Chief Executive Officer, and effective at the same time, the board of directors appointed Mr. Rau as Vice Chairperson of the Board pursuant to a Letter Agreement dated May 24, 2019. The Letter Agreement superseded and replaced the amended and restated offer letter and the Amended Severance Agreement in their entirety, except as specifically provided in the Letter Agreement. Mr. Rau has received payment in connection with his resignation as Interim President and Chief Executive Officer in accordance with the terms of the Letter Agreement as described in “Employment Agreements with Named Executives”.
Under the terms of Mr. Rau’s Letter Agreement, if the company enters into an agreement, on or prior to December 31, 2019, to consummate: (i) a sale of the entire company, or (ii) a sale of either the company’s Product business or IP Licensing business, then subject to Mr. Rau’s continued service to the company through end of his current term as a director, the company will pay Mr. Rau a change of control payment of $750,000 paid in one lump sum, subject to standard deductions and withholdings, upon consummation of such transaction; provided, that such transaction is completed prior to December 31, 2020. The consummation of the proposed combination with Xperi Corporation announced on December 19, 2019 will trigger this payment, provided that such transaction is, as is currently expected, completed prior to December 31, 2020 and provided that Mr. Rau continues his service to the company through the end of his current term as a director.
We have also entered into executive severance and arbitration agreements with each of Messrs. Halt (whose eligibility for benefits under this agreement ended in December 2019 when he ceased serving as our Chief Financial Officer), Hawkey, Milne and Patel (see Exhibit 10.22 to the company’s Annual Report on Form 10-K filed with the SEC on February 27, 2018). Under the agreements, in the event of a change in control of TiVo, each of the eligible executives is entitled to receive minimum severance payments in the form of up to twelve months of salary continuation calculated on base salary (excluding bonus) upon termination of employment by the company for any reason other than cause or by the eligible executive with good reason within 90 days prior or 12 months following a change in control of the company. In addition, upon such event all unvested stock awards held by the eligible executives shall become immediately vested, except for performance-based stock unit awards (which awards may or may not vest based on performance achieved through the date of the change in control of the company). The eligible executives are also entitled to receive all welfare benefits we have provided to them immediately prior to a change in control during the period we are obligated to make their severance payments, or if sooner, until the eligible executive is entitled to welfare benefits from any entity employing such executive after such executive’s employment with the
company terminates. Such executive’s right to receive benefits under these agreements, including the right to exercise any options that have accelerated under these agreements, will cease if such executive accepts employment with one of our competitors. In addition, the eligible executive agrees not to solicit, for one year following termination, any employee of ours to work for another business. The consummation of the proposed combination with Xperi Corporation announced on December 19, 2019 will trigger the payments provided for under these agreements, provided that the conditions as to the payments described above are satisfied.
In July 2017, we approved an executive severance plan (and as amended September 3, 2019 and filed with the Securities and Exchange Commission on November 7, 2019, the “Executive Severance Plan”) for certain company executive vice presidents and senior vice presidents designated by the compensation committee, including the following Named Executives: (i) Mr. Halt (who is receiving the benefits under the Executive Severance Plan in connection with his departure in December 2019), (ii) Mr. Gutierrez, (iii) Mr. Hawkey, (iv) Mr. Milne and (v) Mr. Patel. Under the terms of the Executive Severance Plan, upon termination of employment by the company for any reason other than cause or by the Executive Severance Plan participant with good reason (each, a “Termination Event”), each designated executive vice president (including Mr. Patel) and Mr. Milne is entitled to receive up to twelve (12) months of base salary (excluding bonus) and each designated senior vice president (including Messrs. Gutierrez and Hawkey) is entitled to receive up to six (6) months of base salary (excluding bonus), along with certain health and outplacement severance benefits, subject in each case to offset of benefits provided under any then-existing change in control severance agreements. Health benefits cease upon the participant becoming eligible for coverage under another employer's plan prior to the end of the severance period, and outplacement benefits cease upon the participant commencing employment with a new employer prior to the end of the severance period. In addition to the Executive Severance Plan benefits, upon a Termination Event, (i) the vesting of non-performance-based equity awards held by the designated executive will be accelerated by twelve (12) months and (ii) performance-based equity awards held by the designated executive will vest, if the Termination Event occurs within the last twelve (12) months of a given performance-based award’s performance period, if and to the extent that the performance criteria are achieved for the entire performance period of such original award. An Executive Severance Plan participant’s right to receive benefits under the Executive Severance Plan is conditioned, among other things, on the participant (i) timely executing an effective release of claims against the company following the Termination Event, and (ii) agreeing not to solicit, for two years following the Termination Event, any employee of the company to work for another business.
In addition, in May 2018, to provide continuity of key members of the management team and address the elevated risk of executive retention associated with the ongoing strategic alternatives process being undertaken by the management team and the Board, the compensation committee approved an Executive Retention Plan for certain company executives as designated by the compensation committee, including Messrs. Hawkey, Milne and Patel. The plan provided for a cash retention award of $750,000 to each of Messrs. Hawkey, Milne and Patel if the officer remains employed by the company on December 31, 2019. Such cash retention awards were paid on January 15, 2020.
In addition, in connection with increased responsibilities undertaken with respect to completion of the separation of the product and intellectual property businesses contemplated in the company’s announcement of the same on May 9, 2019, on June 1, 2019, each of Messrs. Milne and Patel were granted performance-vesting RSU awards with a target value of $200,000 and $100,000, respectively, the details of which are set forth in the Grants of Plan-Based Awards table and Outstanding Equity Awards table below.
None of our Named Executives is entitled to any payments from the company in the event his employment by the company terminates as a result of death or disability.
In the event that the company had terminated the employment of Mr. Hawkey, Mr. Milne or Mr. Patel without “cause” or any of such executives had voluntarily terminated with good reason on December 31, 2019, and this was within 90 days prior or 12 months following a change in control of the company, then: (i) Mr. Hawkey would be entitled to salary continuation having a value of $400,000; accelerated vesting of stock options having a value of $0; accelerated vesting of time-based restricted stock having a value of $976.319; accelerated vesting of performance-based restricted stock having a value of $0 assuming performance to date; and healthcare benefit continuation having a value of $30,117, for a total value of $1,406,436; (ii) Mr. Milne would be entitled to salary continuation having a value of $444,960; accelerated vesting of stock options having a value of $0; accelerated vesting of time-based restricted stock having a value of $976,285; accelerated vesting of performance-based restricted stock having a value of $235,549 assuming performance to date; and healthcare benefit continuation having a value of $31,887, for a total value of $1,688,681; and (iii) Mr. Patel would be entitled to salary continuation having a value of $450,000; accelerated vesting of stock options having a value of $0; accelerated vesting of time-based restricted stock having a value of $966,686; accelerated vesting of performance-based restricted stock having a value of $117,770 assuming performance to date; and healthcare benefit continuation having a value of $31,686, for a total value of $1,566,142. The above amounts assume vesting at target for performance-based restricted stock.
In the event that the company had terminated the employment of Mr. Gutierrez, Mr. Hawkey, Mr. Milne or Mr. Patel without “cause” or any of such executives had voluntarily terminated with good reason on December 31, 2019, and such termination was not within 90 days prior or 12 months following a change in control of the company, then: (i) Mr. Gutierrez would be entitled to salary continuation having a value of $165,000; a cash retention payment of $200,000; accelerated vesting of time-based restricted stock having a value of $172,780, and healthcare benefit continuation having a value of $910, for a total value of $538,690; (ii) Mr. Hawkey would be entitled to salary continuation having a value of $200,000; accelerated vesting of time-based restricted stock having a value of $305,763; and healthcare benefit continuation having a value of $15,059, for a total value of $520,822; (iii) Mr. Milne would be entitled to salary continuation having a value of $444,960; accelerated vesting of time-based restricted stock having a value of $333,306; healthcare benefit continuation having a value of $31,887, for a total value of $810,153; and (iv) Mr. Patel would be entitled to salary continuation having a value of $450,000; accelerated vesting of time-based restricted stock having a value of $324,335; and healthcare benefit continuation having a value of $31,686; for a total value of $806,021.
CEO Pay Ratio Disclosure
For 2019, the median of the annual total compensation of all employees of our company (other than our CEO) was $115,636 and the annual total compensation of our President and Chief Executive Officer, David Shull, was $6,362,250. Based on this information, for 2019 the ratio of the annual total compensation of our CEO to the median of the annual total compensation of all employees was 55 to 1. This ratio is a reasonable estimate calculated in a manner consistent with SEC rules.
During 2019, Mr. Rau served as our Interim President and Chief Executive Officer until May 31, 2019, at which time Mr. Shull was appointed as our President and Chief Executive Officer. As permitted by SEC rules, we chose to use the annual total compensation of Mr. Shull, who was serving as our Chief Executive Officer on December 31, 2019, to calculate our pay ratio. We determined Mr. Shull's annual total compensation for the year ended December 31, 2019 was $6,362,250, which, as required by SEC rules, includes his annualized base salary and annual variable cash bonus for 2019. Because we are required to annualize his compensation for purposes of this disclosure, Mr. Shull's annual total compensation is greater than the total compensation as reported for him in our 2019 Summary Compensation Table.
In 2019, there was no change in our employee population or employee compensation arrangements that we believe would significantly impact the pay ratio. Accordingly, for purposes of calculating the pay ratio set forth above, we used the same median employee that we identified for purposes of our 2018 pay ratio.
For a description of our methodology for identifying the median employee, see “CEO Pay Ratio Disclosure” on page 78 of our definitive proxy statement filed with the Securities and Exchange Commission on March 16, 2018.
We calculated the 2019 annual total compensation for our median employee using the same methodology we use for our named executive officers as set forth in our Summary Compensation Table (which excludes any retirement and health benefits).
Because SEC rules for identifying the median of the annual total compensation of all employees allow companies to adopt a variety of methodologies, apply certain exclusions, and make reasonable estimates and assumptions that reflect their employee population and compensation practices, the pay ratio reported by other companies may not be comparable to our pay ratio, as other companies have different employee populations and compensation practices and may have used different methodologies, exclusions, estimates and assumptions in calculating their pay ratios. As explained by the SEC when it adopted these rules, the rule was not designed to facilitate comparisons of pay ratios among different companies, even companies within the same industry, but rather to allow stockholders to better understand and assess each particular company’s compensation practices and pay ratio disclosures.
DIRECTOR COMPENSATION
Non-Employee Director Compensation Philosophy
Our non-employee director compensation philosophy is based on the following guiding principles:
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•
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Aligning the long-term interests of stockholders and directors; and
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•
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Compensating directors appropriately and adequately for their time, effort and experience.
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The elements of director compensation consist of annual cash retainers and equity awards, as well as customary and usual expense reimbursement in attending company meetings. The targeted competitive position for total annual compensation for our non-employee directors is at the 50th percentile of peers. In an effort to align the long-term interests of our stockholders and non-employee directors, the mix of cash and equity compensation has historically been, and is currently, weighted more heavily to equity.
Each year, our compensation committee reviews non-employee director compensation levels with its compensation consultant and recommends to our Board, as it deems appropriate, changes to such compensation levels. Our director compensation for fiscal 2019 is described below.
Non-Employee Director Compensation for Fiscal 2019
For 2019, each of the company’s non-employee directors, other than Mr. Rau (whose compensation is set forth in the Summary Compensation Table above), and excluding the chairman of the Board, received an annual cash retainer of $46,000. The chairman of the Board received an annual cash retainer of $96,000. Each director serving on the committees of the Board of Directors received annual cash retainers in the following amounts: the chair of the audit committee received $23,500; each other member of the audit committee received $10,000; the chair of the compensation committee received $18,500; each other member of the compensation committee received $9,000; the chair of the corporate governance and nominating committee received $10,000; and each other member of the corporate governance and nominating committee receive $5,000. The company does not pay, and directors do not receive, any fees for serving on the strategy committee of the Board. The company does not pay, and directors do not receive, any “per-meeting” fees as the annual retainer and respective committee fees are ascertained to provide proper compensation for Board duties irrespective of the number of meetings held. Non-employee directors are also reimbursed for customary and usual travel expenses incurred attending company meetings.
For 2019, cash retainers payable to the each of the company’s non-employee directors, were paid in arrears for prior quarters, in four quarterly installments, i.e. on April 1 for first quarter service; July 1 for the second quarter service; October 1 for the third quarter service and January 2 for fourth quarter service. If a Board member ceases serving prior to the end of a quarter, such Board member’s retainer payment would be pro-rated for the time served during the quarter. Non-employee directors have the option to receive their Board retainers in cash or in equity (in the form of fully-vested restricted stock), with an annual election form to be completed prior to the beginning of the year.
Stock Awards. Each non-employee director received restricted stock under the TiVo Corporation 2008 Equity Incentive Plan (formerly known as the Rovi Corporation Amended 2008 Equity Incentive Plan). On July 1, 2019, each non-employee director, provided that he or she continued to serve as a member of the Board of Directors, received an automatic annual restricted stock grant for the number of shares with a grant date target value equal to approximately $160,000 on the grant date or, if the grant date is not a trading day, on the last trading day immediately prior to the grant date. The restricted stock has a purchase price equal to $0.001 per share, with all of the shares vesting on the one-year anniversary of the Board grant date, in each case provided that such member remains on our Board of Directors through the applicable vesting date.
Non-Employee Director Limitation. The aggregate value of all compensation paid or granted to any non-employee director for services on the company’s Board with respect to any fiscal year beginning with 2016, including awards granted under the TiVo Corporation 2008 Equity Incentive Plan (formerly known as the Rovi Corporation Amended 2008 Equity Incentive Plan) and cash fees paid by the company to such non-employee director, shall not exceed $700,000 in total value, calculating the value of any equity awards based on the grant date fair value of such awards for financial reporting purposes. The Board may make exceptions to this limit in extraordinary circumstances, as the Board determines in its discretion, provided that the director who is granted or paid such additional compensation may not participate in the decision to grant or pay such compensation.
The table below summarizes the compensation paid by the company to our non-employee directors for the fiscal year ended December 31, 2019.
DIRECTOR COMPENSATION FOR FISCAL YEAR 2019
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Name (a)
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Fees Earned or Paid in Cash ($)(b)
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Stock Awards ($)(c)(1)
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Option Awards ($)(d)
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Non-Equity Incentive Plan Compensation ($)(e)
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Change in Pension Value and Nonqualified Deferred Compensation Earnings
($)(f)
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All Other Compensation ($)(g)
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Total ($)(h)
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Laura Durr
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25,912
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150,009
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—
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—
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—
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—
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175,921
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Alan L. Earhart
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72,426
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150,009
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—
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—
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—
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—
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222,435
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Eddy W. Hartenstein
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48,750
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166,249
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—
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—
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—
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—
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214,999
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Jeffrey T. Hinson (2)
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32,615
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—
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—
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—
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—
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—
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32,615
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James E. Meyer
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106,000
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150,009
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—
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—
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—
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—
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256,009
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Daniel Moloney
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55,000
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150,009
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—
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—
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—
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—
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205,009
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Glenn W. Welling
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—
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219,488
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—
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—
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—
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—
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219,488
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Loria Yeadon
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23,824
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150,009
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—
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—
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—
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—
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173,833
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(1)
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Amounts disclosed under "Stock Awards" represent the aggregate grant date fair value of restricted stock awards granted during 2019. As our restricted stock awards are not dividend-protected, the fair value of restricted stock awards is estimated based on the price of our common stock at the close of trading on the date of grant, reduced by the present value of dividends expected to be paid during the vesting period. All non-employee directors were each granted restricted stock awards in the following amounts: Ms. Durr - 21,709 shares, Mr. Earhart - 21,709 shares, Mr. Hartenstein - 23,435 shares, Mr. Meyer - 21,709 shares, Mr. Moloney - 21,709 shares, Mr. Rau - 21,709 shares, Mr. Welling - 30,113 and Ms. Yeadon - 21,709 shares. The restricted stock has a purchase price equal to $0.001 per share, par value.
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(2)
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Mr. Hinson served as a non-employee director until May 1, 2019.
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As of December 31, 2019, each current non-employee director held 21,709 shares in unvested restricted stock awards.
As of December 31, 2019, no non-employee director holds outstanding options.
Employee Director Compensation for Fiscal 2019
Mr. Shull serves as President and Chief Executive Officer and also as a member of our Board of Directors, but is not compensated for his services as a director. As an employee, Mr. Shull receives the salary as disclosed in the “Summary Compensation Table”. Subsequent to his resignation as Interim President and Chief Executive Officer, Mr. Rau received non-employee director compensation as reflected in the table above. In addition to the compensation Mr. Rau received as Interim President and Chief Executive Officer, the “Summary Compensation Table” also includes disclosure of the compensation he received as a non-employee director.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee during 2019 had any interlocking relationship as defined by the SEC.
Compensation Committee Report
The material in this compensation committee report is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference in any filing of the company under the Securities Act or the Exchange Act, other than in TiVo’s Annual Report on Form 10-K where it shall be deemed to be furnished, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
The compensation committee has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K contained in this proxy statement. Based on this review and discussion, the compensation committee recommended to our Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement for the year ended December 31, 2019.
Respectfully submitted,
Members of the Compensation Committee
Glenn W. Welling (Chair)
Eddy Hartenstein
Daniel Moloney
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows how much of our common stock was beneficially owned as of February 12, 2020, by each director, each executive officer named in the summary compensation table, all executive officers and directors as a group, and by each holder of 5% or more of our common stock. To our knowledge and except as set forth in the footnotes to the table, the persons named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to community property laws where applicable. Unless we indicate otherwise, each holder’s address is c/o TiVo Corporation, 2160 Gold Street, San Jose, California 95002.
The option column below reflects shares of common stock that are subject to options that are currently exercisable or are exercisable within 60 days of February 12, 2020. Those shares are deemed outstanding for the purpose of computing the percentage ownership of the person holding these options, but are not deemed outstanding for the purpose of computing the beneficial ownership of any other person. Percentage ownership is based on 127,549,868 shares outstanding on February 12, 2020. All options listed below have exercise prices in excess of the current fair market value of our common stock.
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Beneficial Owner
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Shares
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Options
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Total
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Percent of
Class
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BlackRock, Inc. (1)
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19,747,751
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—
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19,747,751
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15.6%
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The Vanguard Group (2)
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13,592,247
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—
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13,592,247
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10.7%
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Ameriprise Financial, Inc. (3)
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10,309,197
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—
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10,309,197
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8.1%
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Dimensional Fund Advisors LP (4)
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7,276,630
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—
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7,276,630
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5.7%
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Wesley Gutierrez
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46,819
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—
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46,819
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*
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Peter Halt
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218,680
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85,195
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303,875
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*
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Michael Hawkey
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42,504
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—
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42,504
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*
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Matt Milne
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69,452
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14,000
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83,452
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*
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Arvin Patel
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30,693
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—
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30,693
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*
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Raghavendra Rau (5)
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285,191
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—
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285,191
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*
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David Shull
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2,424
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—
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2,424
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*
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Laura Durr (5)
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21,709
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—
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21,709
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*
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Alan L. Earhart (5)
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86,091
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—
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86,091
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*
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Eddy W. Hartenstein (5)
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98,380
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—
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98,380
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*
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Jeffrey T. Hinson (6)
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49,063
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—
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49,063
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*
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James E. Meyer (5)
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122,304
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—
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122,304
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*
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Daniel Moloney (5)
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50,692
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—
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50,692
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*
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Glenn W. Welling (7)
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2,626,473
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—
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2,626,473
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2.1%
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Loria Yeadon (8)
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21,709
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—
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21,709
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*
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All executive officers and directors as a group (15 persons) (9)
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3,772,184
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99,195
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3,871,379
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3.0%
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* Less than one percent
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(1)
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Based solely on, and in reliance upon, and without independent investigation of, information provided by BlackRock, Inc. in an amended Schedule 13G filed with the SEC on February 10, 2020. BlackRock, Inc. has sole voting power with respect to 19,421,569 shares and sole dispositive power with respect to 19,747,751 of the shares. The address of BlackRock, Inc. is 55 East 52nd Street, New York, NY 10055.
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(2)
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Based solely on, and in reliance upon, and without independent investigation of, information provided by The Vanguard Group in an amended Schedule 13G filed with the SEC on February 12, 2020. The Vanguard Group has sole voting power with respect to 117,622 shares, sole dispositive power with respect to 13,469,753 shares, shared voting power with respect to 19,392 shares, and shared dispositive power with respect to 122,494 shares. The address of The Vanguard Group is 100 Vanguard Blvd., Malvern, Pennsylvania 19355.
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(3)
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Based solely on, and in reliance upon, and without independent investigation of, information provided by Ameriprise Financial, Inc. and Columbia Management Investment Advisers, LLC in an amended Schedule 13G filed with the SEC on February 14, 2020. Ameriprise Financial, Inc. has sole voting power and sole dispositive power with respect to 0 shares, shared voting power with respect to 9,716,816 shares, and shared dispositive power with respect to all of the shares. Columbia Management Investment Advisers, LLC has sole voting power and sole dispositive power with respect to 0 shares, shared voting power with respect to 10,053,232 shares, and shared dispositive power with respect to 10,309,197 shares. Ameriprise Financial, Inc., or AFI, is the parent company of Columbia Management Investment Advisors, LLC, or CMIA (225 Franklin St., Boston, MA 02110). AFI may be deemed to beneficially own the shares reported by CMIA. The shares reported by AFI include those shares separately reported by CMIA. Each of AFI and CMIA disclaim beneficial ownership of the shares reported herein. The address of Ameriprise Financial, Inc. is 145 Ameriprise Financial Center, Minneapolis, MN 55474.
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(4) Based solely on, and in reliance upon, and without independent investigation of, information provided by Dimensional Fund Advisors LP in an amended Schedule 13G filed with the SEC on February 12, 2020. Dimensional Fund Advisors LP has sole voting power with respect to 7,160,234 shares and sole dispositive power with respect to 7,276,630 of the shares. The address of Dimensional Fund Advisors LP is Building One, 6300 Bee Cave Road, Austin, Texas 78746. Dimensional Fund Advisors LP, an investment adviser registered under Section 203 of the Investment Advisors Act of 1940, furnishes investment advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager or sub-adviser to certain other commingled funds, group trusts and separate accounts (such investment companies, trusts and accounts, collectively referred to as the “Funds”). In certain cases, subsidiaries of Dimensional Fund Advisors LP may act as an adviser or sub-adviser to certain Funds. In its role as investment advisor, sub-adviser and/or manager, Dimensional Fund Advisors LP or its subsidiaries (collectively, “Dimensional”) may possess voting and/or investment power over the securities of the Issuer that are owned by the Funds, and may be deemed to be the beneficial owner of the shares held by the Funds. Dimensional disclaims beneficial ownership of such securities. In addition, the filing of this Schedule 13G shall not be construed as an admission that the reporting person or any of its affiliates is the beneficial owner of any securities covered by this Schedule 13G for any other purposes than Section 13(d) of the Securities Exchange Act of 1934.
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(5)
|
Shares beneficially owned include 21,709 unvested shares subject to the release of restricted stock awards. TiVo has a right of repurchase with respect to unvested shares subject to the restricted stock awards, which lapse when the shares vest on July 1, 2020.
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|
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(6)
|
Mr. Hinson served on the TiVo board of directors until May 1, 2019. Shares beneficially owned are based on a Form 4 filed with the SEC on July 3, 2018 and do not include any shares subject to release of restricted stock awards.
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|
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(7)
|
Shares beneficially owned include direct ownership of 21,709 unvested shares subject to the release of restricted stock awards and indirect ownership of 2,271,000 shares held by Engaged Capital Flagship Master Fund, LP and 254,000 shares held by Managed Account of Engaged Capital, LLC (together with Engaged Capital Flagship Master Fund, LP, the "Engaged Capital Funds"). TiVo has a right of repurchase with respect to unvested shares subject to the restricted stock awards, which lapse when the shares vest on July 1, 2020. Mr. Welling is a Principal and Chief Executive Officer of Engaged Capital, LLC, which is the general partner of each of the Engaged Capital Funds, and may be deemed to have shared voting and dispositive power with respect to the shares held by or issuable to the Engaged Capital Funds. Mr. Welling disclaims beneficial ownership of all such shares held by the Engaged Capital Funds, except to the extent of his proportionate pecuniary interest therein.
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|
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(8)
|
Shares beneficially owned include 21,709 unvested shares subject to the release of restricted stock awards, held in the name of “Yeadon IP, LLC”, over which Ms. Yeadon has sole voting and dispositive power. TiVo has a right of repurchase with respect to unvested shares subject to the restricted stock awards, which lapse when the shares vest on July 1, 2020.
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|
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(9)
|
All executive officers and directors as a group includes all individual executive officers and directors listed in the summary compensation table.
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EQUITY COMPENSATION PLAN INFORMATION
The following table provides certain information with respect to all of the company’s equity compensation plans in effect as of December 31, 2019.
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|
|
|
|
|
|
|
Plan Category
|
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(#)
(a) (1)
|
|
Weighted-average exercise price of outstanding options, warrants and rights
($)
(b)
|
|
Number of securities remaining available for issuance under equity compensation plans (excluding securities reflected in column (a))
(#)
(c)
|
Equity compensation plan
approved by security holders
|
|
7,051,458
|
|
$23.49 (2)
|
|
14,803,474 (3)
|
Equity compensation plans not
approved by security holders
|
|
0
|
|
$0
|
|
0
|
Total
|
|
7,051,458
|
|
$23.49
|
|
14,803,474
|
|
|
(1)
|
All shares reflected in this table are issuable pursuant to the TiVo Corporation Amended 2008 Equity Incentive Plan (the “2008 EIP”) and the TiVo Corporation 2008 Employee Stock Purchase Plan (the “2008 ESPP”), as well as the TiVo Inc. Amended and Restated 2008 Equity Incentive Award Plan (the “2008 TiVo Plan”), which was assumed in connection with the TiVo Acquisition.
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|
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(2)
|
This reflects the weighted average exercise price for stock options granted pursuant to equity compensation plans only. Restricted stock is issued at a cost of $0.001 per share and therefore has no weighted average exercise price.
|
With respect to the 2008 TiVo Plan, there are 24,094 shares of stock available to be issued upon exercise of outstanding options, with a weighted average exercise price of $23.87. The 2008 TiVo Plan expired on August 6, 2018.
|
|
(3)
|
As of December 31, 2019, 3,315,021 shares remained available for future issuance under the 2008 ESPP.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
From January 1, 2019 to the date of this report, there have not been any transactions, and there are currently no proposed transactions, in which the amount involved exceeded $120,000 to which we or any of our subsidiaries were or are to be a party and in which any executive officer, director, nominee for director, 5% beneficial owner of our common stock or member of their immediate family had or will have a direct or indirect material interest, except as described above under “Executive Compensation”. There are no business relationships between us and any entity of which a director of the company is an executive officer or of which a director of the company owns an equity interest in excess of 10%, involving indebtedness in excess of 5% of our total consolidated assets for 2019 or involving payments for property or services in excess of 5% of our (or the other entity’s) consolidated gross revenues for 2019.
Procedures for Approval of Related Party Transactions
We have a number of policies, procedures and practices that relate to the identification, review and approval of related party transactions. In accordance with our Corporate Governance Guidelines, our Board of Directors reviews the relationships that each director has with the company and shall endeavor to have a majority of directors that are “independent directors” as defined by the SEC and Nasdaq rules. As part of the review process, the company distributes and collects questionnaires that solicit information about any direct or indirect transactions with the company from each of our directors and officers and legal counsel and the chief accounting officer reviews the responses to these questionnaires and reports the any related party transactions to the audit committee. We may enter into arrangements in the ordinary course of our business that involve the company receiving or providing goods or services on a non-exclusive basis and at arm’s-length negotiated rates or in accordance with regulated price schedules with corporations and other organization in which a company director, executive officer or nominee for director may also be a director, trustee or investor, or have some other direct or indirect relationship.
Our Code of Conduct requires all directors, officers and employees to avoid any situation that involves an actual or apparent conflict of interest in personal and professional relationships or with their duty to, or with any interest of, the company. Depending on the nature of the potential conflict, such related party transactions involving an employee require approval by our Chief Compliance Officer, Chief Financial Officer or Chief Executive Officer. If such transaction is determined to be material to the company by our Chief Compliance Officer, Chief Financial Officer or Chief Executive Officer, our audit committee must review and approve in writing in advance such related party transactions. All related party transactions involving the company’s directors or executive officers or members of their immediate families must be reviewed and approved in writing in advance by the audit committee.
Independence of Directors
As required by the Nasdaq listing standards, a majority of the members of our Board must qualify as “independent,” as affirmatively determined by our Board. Our Board consults with our legal counsel to ensure that its determinations are consistent with all relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in pertinent Nasdaq listing standards.
Consistent with these considerations, after review of all relevant transactions and relationships between each director, any of his or her family members, and the company, our executive officers and our independent registered public accounting firm, the Board has affirmatively determined that, except for (a) Mr. Shull, the company’s current President and Chief Executive Officer, who is not an independent director by virtue of his employment with the company, and (b) Mr. Rau, the company’s former Interim President and Chief Executive Officer, who is not an independent director by virtue of his employment with the company through May 30, 2019, all other directors who served on the Board of Directors in 2019 are independent directors.
All members of our Audit Committee, at all times during which they served on such Committee, are “independent” as required by Nasdaq Rule 5605(c)(2)(A). All members of our Compensation Committee, at all times during which they served on such Committee, are “independent” as required by Nasdaq Rule 5605(d)(2)(A).
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Ernst & Young, who performed our audit services for fiscal year 2019, including an examination of the consolidated financial statements and services related to filings with the SEC, has served as our independent registered public accounting firm since June 5, 2008. Ernst & Young performed all of its services in 2019 at customary rates and terms. The audit report of Ernst & Young on the consolidated financial statements of the company and subsidiaries as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019, did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty or audit scope.
The following table presents fees for professional audit services rendered by Ernst & Young for the audit of our annual financial statements for 2019 and 2018, and fees billed for other services rendered by Ernst & Young during 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
Type of Fees
|
|
Fees for Fiscal 2019
|
|
Fees for Fiscal 2018
|
Audit Fees (1)
|
|
$
|
4,872,457
|
|
|
$
|
3,019,941
|
|
Audit-Related Fees (2)
|
|
6,000
|
|
|
—
|
|
Tax Fees (3)
|
|
—
|
|
|
108,379
|
|
All Other Fees (4)
|
|
4,670
|
|
|
7,029
|
|
Total Fees
|
|
$
|
4,883,127
|
|
|
$
|
3,135,349
|
|
|
|
(1)
|
Audit Fees consist of fees for: professional services rendered for the audit of our consolidated financial statements included in our annual report and the review of our interim financial statements included in our quarterly reports; statutory audits of our subsidiaries; services provided in connection with the audit of our internal control over financial reporting as required by the Sarbanes-Oxley Act of 2002; and services that are normally provided by Ernst & Young in connection with regulatory filings or engagements. Audit Fees in 2019 also include fees to audit the carve-out financial statements of the Product business.
|
|
|
(2)
|
Audit-Related Fees consist of due diligence reviews.
|
|
|
(3)
|
Tax Fees consist of fees for tax compliance and tax advice.
|
|
|
(4)
|
All Other Fees include fees paid for the Ernst & Young online accounting research tool, and in 2018 include fees paid in connection with a review of our Audience Management Platform’s processes.
|
All the fees described above were approved by our audit committee.
The audit committee must pre-approve, except as provided below, all audit related services and non-audit services provided by our independent registered public accounting firm. However, until the Board of Directors amended our audit committee charter on February 22, 2018, for de minimus audit related services or permitted non-audit services, the audit committee was permitted to approve such services after the fact if the following conditions were met:
|
|
•
|
the aggregate amount of all such services provided constituted no more than 5% of the total amount of fees paid by us to our accounting firm during the fiscal year in which the services were provided;
|
|
|
•
|
such services were not recognized by us at the time of engagement as being audit related or non-audit related services; and
|
|
|
•
|
such services were promptly brought to the attention of the audit committee and approved by the audit committee prior to completion of the annual audit.
|
The audit committee has determined that all such services rendered by the independent registered public accounting firm are permissible under applicable laws and regulations, and during 2019, were pre-approved by the audit committee in accordance with the audit committee pre-approval policy that is attached as an exhibit to our audit committee charter. A copy of our audit committee charter and the pre-approval policy attached as Exhibit A to our audit committee charter are available in the investor relations section of our website at www.tivo.com.
The audit committee has determined the services provided by Ernst & Young are compatible with maintaining the independence of Ernst & Young.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation and Summary of Significant Accounting Policies
Description of Business
On April 28, 2016, Rovi Corporation ("Rovi") and TiVo Inc. (renamed TiVo Solutions Inc. ("TiVo Solutions")) entered into an Agreement and Plan of Merger (the “Merger Agreement”) for Rovi to acquire TiVo Solutions in a cash and stock transaction (the "TiVo Acquisition"). Following consummation of the TiVo Acquisition on September 7, 2016 (the "TiVo Acquisition Date"), TiVo Corporation (the "Company" or "TiVo"), a Delaware corporation founded in April 2016 as Titan Technologies Corporation and then a wholly-owned subsidiary of Rovi, owns both Rovi and TiVo Solutions.
The Company is a global leader in bringing entertainment together, making entertainment content easy to find, watch and enjoy. TiVo provides a broad set of cloud-based services, embedded software solutions and intellectual property that bring entertainment together for the watchers, creators and advertisers. For the creators and advertisers, TiVo's products deliver a passionate group of watchers to increase viewership and engagement across online video, TV and other entertainment viewing platforms. Our products and innovations are protected by broad portfolios of licensable technology patents. These portfolios cover many aspects of content discovery, digital video recorder ("DVR"), VOD and OTT experiences, multi-screen viewing, mobile device video experiences, entertainment personalization, voice interaction, social and interactive applications, data analytics solutions and advertising.
On May 9, 2019, the Company announced that its Board of Directors unanimously approved a plan to separate the Product and Intellectual Property Licensing businesses into separately traded public companies (the “Separation”). The Separation was expected to be completed through a dividend of newly issued shares of the common stock of a Company subsidiary that would hold the Product business (“ProductCo”).
On December 18, 2019, the Company and Xperi Corporation (“Xperi”) entered into an Agreement and Plan of Merger and Reorganization (the “Xperi Merger Agreement”), pursuant to which TiVo and Xperi have agreed, subject to the terms and conditions of the Xperi Merger Agreement, to effect an all-stock, merger of equals strategic combination of their respective businesses (the "Xperi Combination"). The board of directors of each of TiVo and Xperi have approved the Xperi Combination Agreement and the transactions contemplated thereby. The Xperi Combination is subject to certain customary approvals, including the approval of shareholders of TiVo and Xperi, and is expected to be completed by June 30, 2020.
Basis of Presentation and Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of TiVo Corporation and subsidiaries and affiliates in which the Company has a controlling financial interest after the elimination of intercompany accounts and transactions.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of the Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and related disclosures as of the date of the financial statements and the results of operations for the reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, long-lived asset impairment, including goodwill and intangible assets, equity-based compensation and income taxes. Actual results may differ from those estimates.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, fair value measurements are based on quoted market prices. If quoted market prices are not available, fair value is measured based on models that consider relevant transaction characteristics (such as maturity and nonperformance risk) and may use observable or unobservable inputs. Various methodologies and assumptions are used in the measurement of fair value. The use of different methodologies or assumptions could result in a different estimate of fair value at the measurement date.
Foreign Currency Translation
The Company predominately uses the U.S dollar as its functional currency. Certain non-U.S. subsidiaries designate a local currency as their functional currency. The translation of assets and liabilities into U.S. dollars for subsidiaries with a functional currency other than the U.S. dollar is performed using exchange rates in effect at the balance sheet date. The translation of revenues and expenses into U.S. dollars for subsidiaries with a functional currency other than the U.S. dollar is performed using the average exchange rate for the respective period. Losses from cumulative translation adjustments, net of tax, of $3.6 million and $3.5 million as of December 31, 2019 and 2018, respectively, are included as a component of Accumulated other comprehensive loss in the Consolidated Balance Sheets.
Concentrations of Risk
The TiVo service is enabled using a DVR manufactured by a third-party. The Company also relies on third parties with whom it outsources supply-chain activities related to inventory warehousing, order fulfillment, distribution and other direct sales logistics. The Company cannot be sure that these parties will perform their obligations as expected or that any revenue, cost savings or other benefits will be derived from the efforts of these parties. If any of these parties breaches or terminates their agreement with the Company or otherwise fails to perform their obligations in a timely manner, the Company may be delayed or prevented from commercializing its products and services.
Cash, Cash Equivalents and Investments
Highly liquid investments with original maturities at the date of acquisition of three months or less are considered cash equivalents. The majority of payments due from banks for third-party credit card, debit card and electronic benefit transactions ("EBT") process within 24-72 hours, except for transactions occurring on a Friday, which are generally processed the following Monday. All credit card, debit card and EBT transactions that process in less than three days are classified as cash and cash equivalents. As of December 31, 2019 and 2018, Cash and cash equivalents includes payments due from banks for these transactions of $0.9 million and $0.9 million, respectively.
Marketable securities with original maturities at the date of acquisition of more than three months are classified as Short-term marketable securities or Long-term marketable securities based on the remaining contractual maturity of the security at the reporting date.
Marketable securities are considered available-for-sale and are reported at fair value in the Consolidated Balance Sheets. Realized gains and losses on marketable securities are calculated based on the specific identification method and are included in Interest income and other, net in the Consolidated Statements of Operations. Interest income from marketable securities is included in Interest income and other, net in the Consolidated Statements of Operations.
Unrealized gains and losses, net of applicable taxes, are reported in Accumulated other comprehensive loss in the Consolidated Balance Sheets. The Company monitors its marketable securities portfolio for potential impairment. When the carrying amount of an investment in debt securities exceeds its fair value and the decline in fair value is determined to be other-than-temporary (i.e., when the Company does not intend to sell the security and it is not more-likely-than-not that the Company will be required to sell the security prior to the anticipated recovery of its amortized cost basis), an impairment associated with the credit loss is recorded in Interest income and other, net in the Consolidated Statements of Operations and the remainder, if any, is recorded in Other comprehensive income (loss), net of tax in the Consolidated Statements of Comprehensive Loss.
Investments in non-marketable equity securities are accounted for using either the equity method or the cost method. Investments in entities over which the Company has the ability to exercise significant influence, but does not hold a controlling interest, are accounted for using the equity method. Under the equity method, the Company records its proportionate share of income or loss in Interest income and other, net in the Consolidated Statements of Operations. Investments in entities over which the Company does not have the ability to exercise significant influence are accounted for using the cost method. The Company monitors its non-marketable securities portfolio for potential impairment. When the carrying amount of an investment in a non-marketable security exceeds its fair value and the decline in fair value is determined to be other-than-temporary, the loss is recorded in Interest income and other, net in the Consolidated Statements of Operations.
Accounts Receivable
The timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a receivable when revenue is recognized prior to cash collection. A receivable related to revenue recognized for multi-year
licenses is recognized when the Company has an unconditional right to invoice and receive payment in the future related to those licenses.
Payment terms and conditions vary by contract type, location of customer and the products or services offered, although terms generally require payment from a customer within 30 to 60 days. When the timing of revenue recognition differs from the timing of cash collection, an evaluation is performed to determine whether the contract includes a significant financing component. As the primary purpose of the Company's invoicing terms is to provide customers with simplified and predictable ways of purchasing products and services, significant financing components are generally not identified in the Company’s contracts with customers.
Allowance for Doubtful Accounts
The Company performs ongoing credit evaluations of its customers. The Company reviews its accounts receivable to identify potential collection issues. A specific allowance for doubtful accounts is recorded when warranted by specific customer circumstances, such as in the case of a bankruptcy filing, a deterioration in the customer's operating results or financial position or the past due status of a receivable based on its contractual payment terms. If there are subsequent changes in circumstances related to the specific customer, adjustments to recoverability estimates are recorded. For accounts receivable not specifically reserved, an allowance for doubtful accounts is recorded based on historical loss experience and other currently available evidence. Accounts receivable deemed uncollectible are charged off when collection efforts have been exhausted.
Inventory
Inventories consist primarily of finished DVRs and accessories and are stated at the lower of cost or net realizable value on an aggregate basis. Cost is computed using standard cost, which approximates actual cost on a first-in, first-out basis. Adjustments to reduce the carrying amount of inventory to the lower of cost or net realizable value are made, if required, for excess or obsolete goods, which includes a review of, among other factors, demand requirements and market conditions.
Contract Assets
Contract assets primarily consist of revenue recognized in excess of the amount billed to the customer, limited to net realizable value and deferred engineering costs for significant software customization or modification and set-up services to the extent deemed recoverable. Contract assets for unbilled receivables are included in Accounts receivable, net in the Consolidated Balance Sheets.
Contract assets also include the incremental costs of obtaining a contract with a customer, principally sales commissions when the renewal commission is not commensurate with the initial commission. The incremental costs of obtaining a contract with a customer are recognized as an asset when the expected period of benefit is greater than one year. The incremental costs of obtaining a contract with a customer are amortized on a straight-line basis over a period of time commensurate with the period of benefit, generally three to five years, which considers the transfer of goods or services to which the assets relate, technological developments during the period of benefit, customer history and other factors. The period of benefit is generally the estimated life of the customer relationship if renewals are expected, and may exceed the contract term. Amortization of the capitalized incremental costs of obtaining a contract with a customer is included in Selling, general and administrative expenses in the Consolidated Statements of Operations.
Contract assets are classified as current or noncurrent in the Consolidated Balance Sheets based on when the asset is expected to be realized. Contract assets are subject to periodic impairment reviews.
Long-Lived Assets, including Property and Equipment and Finite-Lived Intangible Assets
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization of property and equipment is recognized on a straight-line basis over the estimated useful lives of the respective assets. Computer equipment and software are depreciated over three years. Furniture and fixtures are depreciated over five years. Leasehold improvements are amortized over the shorter of the asset's useful life or the remaining lease term. Intangible assets with finite lives are amortized on a straight-line basis over the estimated economic life of the asset, which generally ranges from two to 18 years at the date of acquisition.
Long-lived assets, including property and equipment and intangible assets with finite lives, are assessed for potential impairment whenever events or changes in circumstances indicate the carrying amount of an asset group may not be recoverable. Once a triggering event has been identified, the impairment test employed is based on whether the Company
intends to continue to use the asset group or to hold the asset group for sale. For assets held for use, recoverability is assessed based on the estimated undiscounted future cash flows expected to result from the use and eventual disposition of the asset group. If the undiscounted future cash flows are less than the carrying amount of an asset group, the asset group is impaired. The amount of impairment, if any, is measured as the difference between the carrying amount of the asset group and its fair value, which is generally estimated using an income approach. To the extent the carrying amount of each asset exceeds its fair value, the impairment is allocated to the finite-lived assets of the asset group on a pro rata basis using their relative carrying amounts.
For assets held for sale, to the extent the asset group's carrying amount is greater than its fair value less cost to sell, an impairment loss is recognized for the difference. Assets held for sale are separately presented in the Consolidated Balance Sheets at the lower of their carrying amount or fair value less cost to sell, and are no longer depreciated.
Software Development Costs
Costs are capitalized to acquire or develop software subsequent to establishing technological feasibility for the software, which is generally on completion of a working prototype that has been certified as having no critical bugs and is a release candidate or when an alternative future use exists. Capitalized software development costs are amortized using the greater of the amortization on a straight-line basis or the ratio that current gross revenues for a product bear to the total current and anticipated future gross revenues for that product. The estimated useful life for capitalized software development costs is generally 5 years or less. To date, software development costs incurred between completion of a working prototype and general availability of the related product have not been material.
Indefinite-Lived Intangible Assets and Goodwill
Indefinite-lived intangible assets and Goodwill are evaluated for potential impairment annually, as of the beginning of the fourth quarter, and whenever events or changes in circumstances indicate their carrying amount may not be recoverable. The recoverability of goodwill is assessed at the reporting unit level, which is either the operating segment or one level below.
Qualitative factors are first assessed to determine whether events or changes in circumstances indicate it is more-likely-than-not that the fair value of an indefinite-lived intangible asset or a reporting unit is less than its carrying amount. If, based on the qualitative assessment, it is considered more-likely-than-not that the fair value of an indefinite-lived intangible asset or a reporting unit is less than its carrying amount, then a quantitative impairment test is performed.
In the quantitative impairment test for indefinite-lived intangible assets, fair value is compared to the carrying amount of the indefinite-lived intangible asset. When required to estimate the fair value of an indefinite-lived intangible asset, an income approach, such as a relief-from-royalty technique, is used. Estimating the fair value of an indefinite-lived intangible asset considers the amount and timing of the future cash flows associated with the asset, the expected long-term growth rate, assumed royalty rates, income tax rates and economic and market conditions, as well as risk-adjusted discount rates. If the fair value of an indefinite-lived intangible asset exceeds its carrying amount, the indefinite-lived intangible asset is not impaired. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss equal to the difference is recognized.
In the quantitative impairment test for goodwill, the fair value of the reporting unit is compared to its carrying amount. In 2019, the fair value of the Product reporting unit and the Intellectual Property Licensing reporting unit was estimated using an income approach. In 2018, the fair value of the Product reporting unit was estimated by weighting the fair values derived from an income approach and a market approach and the fair value of the Intellectual Property Licensing reporting unit was estimated using an income approach.
Under the income approach, the fair value of a reporting unit is estimated based on the present value of estimated future cash flows and considers estimated revenue growth rates, future operating margins and risk-adjusted discount rates. Under the market approach, the fair value of a reporting unit is estimated based on market multiples of revenue or earnings derived from comparable publicly-traded companies. The carrying amount of a reporting unit is determined by assigning the assets and liabilities, including goodwill and intangible assets, to the reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not impaired. If the fair value of a reporting unit is less than its carrying amount, an impairment loss equal to the difference is recognized.
Right-of-Use Assets and Lease Liabilities
At inception of an agreement, the agreement is reviewed to determine if it is or contains a lease. If an agreement is or contains a lease, the Company recognizes a Right-of-use asset, representing the right to use an underlying asset for the lease term, and a Lease liability, representing the obligation to make lease payments arising from a lease.
Right-of-use assets and Lease liabilities are measured based on the present value of the lease payments over the lease term. The lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The present value of future lease payments is calculated utilizing the discount rate implicit in the lease. If the discount rate implicit in the lease is not readily determinable, the present value of future lease payments is calculated utilizing the Company’s incremental borrowing rate. Right-of-use assets and Lease liabilities are subject to adjustment in the event of modifications to lease terms, changes in the probability that an option to extend or terminate a lease would be exercised and other factors. In addition, Right-of-use assets are periodically reviewed for impairment.
Certain of the Company’s lease agreements require variable payments, such as inflation-indexed measures. When a lease requires an indexed payment, Right-of-use assets and Lease liabilities are measured based on the variable rate in effect at the measurement date. All other variable fees, such as increases in lessor operating costs and usage-based fees, are excluded from the calculation of the Right-of-use assets and Lease liabilities and are expensed as incurred.
The Company has lease agreements that contain both lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) and non-lease components (e.g., common-area maintenance costs). The Company applies a practical expedient to combine lease components and non-lease components into a single lease component for recognition and measurement purposes.
Lease expense includes amortization of the Right-of-use assets and accretion of the Lease liabilities. Amortization of the Right-of-use assets is calculated as the periodic lease cost less accretion of the lease liability. The amortization period for Right-of-use assets is limited to the expected lease term. For operating leases, lease expense is recognized in the Consolidated Statements of Operations as an operating expense over the lease term on a straight-line basis. For financing leases, amortization of the Right-of-use asset is recognized as an operating expense in the Consolidated Statements of Operations over the lease term separately from accretion of the Lease liability.
The Company applies a practical expedient to not measure or recognize Right-of-use assets or Lease liabilities for leases with a lease term of 12 months or less and lease expense for these leases is recognized as incurred.
Contract Liabilities, including Unearned Revenue
Contract liabilities are mainly comprised of unearned revenue related to consumer lifetime subscriptions to the TiVo service and multi-period licensing or cloud-based services and other offerings for which the Company is paid in advance of when control of the good or service is transferred to the customer. Unearned revenue also includes amounts related to professional services to be performed in the future. Unearned revenue arises when cash payments are received or due, including amounts which are refundable, in advance of performance. Contract liabilities exclude amounts expected to be refunded. Payment terms and conditions vary by contract type, location of customer and the products or services offered. For certain products or services and customer types, payment before the products or services are delivered to the customer is required.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of assets and liabilities and their respective tax bases and operating loss and tax carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable to the years in which those temporary differences are expected to reverse. A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized.
From time to time, the Company engages in transactions in which the tax consequences may be subject to uncertainty. Significant judgment is required in assessing and estimating the tax consequences of these transactions. Accruals for unrecognized tax benefit liabilities, which represent the difference between a tax position taken or expected to be taken in a tax return and the benefit recognized for financial reporting purposes, are recorded when the Company believes it is not more-likely-than-not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Adjustments to unrecognized tax benefits are recognized when facts and circumstances change, such as the closing
of a tax audit, notice of an assessment by a taxing authority or the refinement of an estimate. Income tax expense (benefit) includes the effects of adjustments to unrecognized tax benefits, as well as any related interest and penalties.
Revenue Recognition
General
Revenue is recognized when control of the promised goods or services is transferred to a customer in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services, which may include various combinations of goods and services which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of taxes collected from customers which are subsequently remitted to governmental authorities.
Depending on the terms of the contract, a portion of the consideration received may be deferred because of a requirement to satisfy a future obligation. Stand-alone selling price for separate performance obligations is based on observable prices charged to customers for goods or services sold separately or the cost-plus-a-margin approach when observable prices are not available, considering overall pricing objectives.
Arrangements with Multiple Performance Obligations
Some of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the individual performance obligations are separately accounted for if they are distinct. In an arrangement with multiple performance obligations, the transaction price is allocated among the separate performance obligations on a relative stand-alone selling price basis. The determination of stand-alone selling price considers market conditions, the size and scope of the contract, customer and geographic information, and other factors. The allocation of transaction price among performance obligations in a contract may impact the amount and timing of revenue recognized in the Consolidated Statements of Operations during a given period.
Contract Modifications
Contracts may be modified due to changes in contract specifications or customer requirements. Contract modifications occur when the change in terms either creates new enforceable rights and obligations or changes existing enforceable rights and obligations. The effect of a contract modification for goods and services that are not distinct in the context of the contract on the transaction price is recognized as an adjustment to revenue on a cumulative catch-up basis. Contract modifications that result in goods or services that are distinct from the existing goods or services are accounted for as separate contracts if they are sold at their stand-alone selling price, or otherwise prospectively.
Variable Consideration
When a contract with a customer includes a variable transaction price, an estimate of the consideration to which the Company expects to be entitled to for transferring the promised goods or services is made at contract inception. Depending on the terms of the contract, variable consideration is estimated using either the expected value approach or the most likely value approach. Under either approach to estimating variable consideration, the estimate considers all information (historical, current and forecast) that is reasonably available at contract inception. The amount of variable consideration is estimated at contract inception and updated as additional information becomes available. The estimate of variable consideration is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Subsequent changes in the transaction price resulting from changes in the estimate of variable consideration are allocated to the performance obligations in the contract on the same basis as at contract inception. Certain payments to retailers and distributors, such as market development funds and revenue shares, are treated as a reduction of the transaction price, and therefore revenue, rather than Selling, general and administrative expense.
When variable consideration is in the form of a sales-based or usage-based royalty in exchange for a license of intellectual property, or when a license of intellectual property is the predominant item to which the variable consideration relates, revenue is recognized at the later of when the subsequent sale or usage occurs or the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied or partially satisfied.
Significant Judgments
Determining whether promises to transfer multiple goods and services in contracts with customers are considered distinct performance obligations that should be accounted for separately requires significant judgment, including related to the level of integration and interdependency between the performance obligations. In addition, judgment is necessary to allocate the transaction price to the distinct performance obligations, including whether there is a discount or significant financing component to be allocated based on the relative stand-alone selling price of the various performance obligations.
Significant judgment is required to determine the stand-alone selling price for each distinct performance obligation when an observable price is not available. In instances where stand-alone selling price is not directly observable, such as when the Company does not sell the good or service separately, the stand-alone selling price is determined using a range of inputs that includes market conditions and other observable inputs. More than one stand-alone selling price may exist for individual goods and services due to the stratification of those goods and services, considering attributes such as the size of the customer and geographic region.
Due to the nature of the work required to be performed on some performance obligations, significant judgment may be required to determine the transaction price. It is common for the Company's license agreements to contain provisions that can either increase or decrease the transaction price. These variable amounts are generally estimated based on usage. In addition to estimating variable consideration, significant judgment is necessary to identify forms of variable consideration, determine whether the variable consideration relates to a sales-based or usage-based royalty of intellectual property and determine whether and when to include estimates of variable consideration in the transaction price.
Some hardware products are sold with a right of return and in other circumstances, other credits or incentives may be provided such as consideration (sales incentives) given to customers or resellers, which are accounted for as variable consideration and recognized as a reduction to the revenue recognized. Estimates of returns, credits and incentives are made at contract inception and updated each reporting period.
In contracts where the Company does not host the TiVo service and that include engineering services that are essential to the functionality of the licensed technology or involve significant customization or modification of software, the Company recognizes revenue as progress toward completion occurs using an input method based on the ratio of costs incurred to date to total estimated costs of the project. Significant judgment is required to estimate the remaining effort to complete the project. These estimates are reassessed throughout the term of the arrangement.
On an ongoing basis, management evaluates its estimates, inputs and assumptions related to revenue recognition. Using different estimates, inputs or assumptions may materially affect the reported amounts of assets and liabilities as of the date of the financial statements and the results of operations for the reporting period.
Nature of Goods and Services
The following is a discussion of the principal activities from which the Company generates its revenue.
Patent Licensing Agreements
The Company licenses its discovery patent portfolio to traditional pay TV providers, virtual service providers, OTT video providers, CE manufacturers and others. The Company licenses its patented technology portfolio under two revenue models: (i) fixed-fee licenses and (ii) per-unit royalty licenses.
The Company's long-term fixed-fee license agreements provide rights to future patented technologies over the term of the agreement that are highly interdependent or highly interrelated to the patented technologies provided at the inception of the agreement. The Company treats these rights as a single performance obligation with revenue recognized on a straight-line basis over the term of the fixed-fee license agreement.
At times, the Company enters into license agreements in which a licensee is released from past patent infringement claims and is granted a license to ship an unlimited number of units over a future period for a fixed fee. In these arrangements, the Company allocates the transaction price between the release for past patent infringement claims and the future license. In determining the stand-alone selling price of the release for past patent infringement claims and the future license, the Company considers such factors as the number of units shipped in the past and in what geographies these units were shipped, the number of units expected to be shipped in the future and in what geographies these units are expected to be shipped, as well as the licensing rate the Company generally receives for units shipped in the same geographies. As the release from past patent
infringement claims is generally satisfied at execution of the agreement, the transaction price allocated to the release from past patent infringement claims is generally recognized in the period the agreement is executed and the amount of transaction price allocated to the future license is recognized ratably over the future license term.
The Company recognizes revenue from per-unit royalty licenses in the period in which the licensee's sales are estimated to have occurred, which results in an adjustment to revenue when actual sales are subsequently reported by the licensees, which is generally in the month or quarter following usage or shipment. The Company generally recognizes revenue from per-unit royalty licenses on a per-subscriber per-month model for licenses with service providers and a per-unit shipped model for licenses with CE manufacturers.
Arrangements with Multiple System Operators for the TiVo Service
The Company's arrangements with multiple system operators ("MSOs") typically include software customization and set-up services, associated maintenance and support, limited training, post-contract support, TiVo-enabled DVRs, non-DVR STBs and the TiVo service.
The Company has two types of arrangements with MSOs that include technology deployment and engineering services. In instances where the Company hosts the TiVo service, non-refundable payments received for customization and set-up services are deferred and recognized as revenue ratably over the hosting term. The related cost of such services is capitalized to the extent it is deemed recoverable and amortized to cost of revenues over the same period as the related TiVo service revenue is recognized. The Company estimates the stand-alone selling prices for training, DVRs, non-DVR STBs and maintenance and support based on the price charged in stand-alone sales of the promised good or service. The stand-alone selling price for the TiVo service is determined considering the size of the MSO and expected volume of deployment, market conditions, competitive landscape, internal costs and total gross margin objectives. For a term license to the TiVo service, the Company receives license fees for the hosted TiVo service on either a per-subscriber per-month basis or a fixed fee. The Company recognizes revenue from per-subscriber per-month licenses during the month the TiVo service is provided to the customer and recognizes revenue from fixed fee licenses ratably over the license period.
In arrangements where the Company does not host the TiVo service and that include engineering services that are essential to the functionality of the licensed technology or involve significant customization or modification of the software, the Company recognizes revenue as progress toward completion is made using an input method based on the ratio of costs incurred to date to total estimated costs of the project. Project costs are primarily labor related to the specific activities required for the project. Costs related to general infrastructure or uncommitted platform development are not included in the project cost estimates and are expensed as incurred. Estimating project costs requires forecasting costs, tracking progress toward completion and projecting the remaining effort to complete the project. These estimates are reassessed throughout the term of the arrangement, and revisions to estimates are recognized on a cumulative catch-up basis when the changed conditions become known. Provisions for losses are recorded when estimates indicate it is probable that a loss will be incurred for the contract. The Company generally recognizes revenue from license fees for the TiVo service that it does not host on a per-subscriber per-month basis due to the recognition constraint on intellectual property usage-based royalties.
Subscription Services
Subscription services revenues primarily consist of fees to provide customers with access to one or more of the Company's hosted products such as its iGuide IPG, advanced search and recommendations, metadata and analytics products, including routine customer support. The Company generally receives per-subscriber per-month fees for its iGuide IPG and search and recommendations service and revenue is recorded in the month the customer uses the service. The Company generally receives a monthly or quarterly fee from its metadata or analytics licenses for the right to use the metadata or access its analytics platform and to receive regular updates. Revenue from the Company's metadata and analytics service is recognized ratably over the subscription period.
Passport Software
The Company licenses its Passport IPG software to pay TV providers in North and South America. The Company generally receives per-subscriber per-month fees for licenses to its Passport IPG software and support. Due to the usage-based royalty provisions of the revenue recognition guidance, revenue is generally recognized in the month the customer uses the software.
Advertising
The Company generates advertising revenue through its IPGs. Advertising revenue is recognized when the related advertisement is provided. Advertising revenue is recorded net of agency commissions and revenue shares with service providers and CE manufacturers.
TiVo-enabled DVRs and TiVo Service
The Company sells TiVo-enabled DVRs and the related service directly to customers through sales programs via the TiVo.com website and licenses the sale of TiVo-enabled DVRs through a limited number of retailers. For sales through the TiVo.com website, the customer receives a DVR and commits to either a minimum subscription period of one year or for the lifetime of the DVR. Customers who purchase a DVR from TiVo.com have the right to return the DVR within 30 days of purchase for a full refund. For licensed sales of TiVo-enabled DVRs through retailers, the customer commits to either a minimum subscription period of one year or for the lifetime of the DVR. All customers have the right to cancel their subscription to the TiVo service within 30 days of subscription activation for a full refund. After the initial subscription period, all customers have various pricing options when they renew their subscription.
The stand-alone selling price for the TiVo service is established based on stand-alone sales of the service and varies by the length of the service period. The stand-alone selling price of the DVR is determined based on the price for which the Company would sell the DVR without any service commitment from the customer.
The transaction price allocated to the DVR is recognized as revenue on delivery and the transaction price allocated to the TiVo service is recognized as revenue ratably over the service period. Subscription revenues from lifetime subscriptions are recognized ratably over the estimated useful life of the DVR associated with the subscription. The estimated useful life for a DVR depends on a number of assumptions, including, but not limited to, customer retention rates, the timing of new product introductions and historical experience. As of December 31, 2019, the Company recognizes revenue for lifetime subscriptions over a 72-month period. The Company periodically reassesses the estimated useful life of a DVR. When the actual useful life of the DVR materially differs from the Company's estimate, the estimated useful life of the DVR is adjusted, which could result in the recognition of revenue over a longer or shorter period of time.
Shipping and handling costs associated with outbound freight after control of a DVR has transferred to a customer are accounted for as a fulfillment cost and are included in Cost of hardware revenues, excluding depreciation and amortization of intangible assets as incurred.
Warranty
The Company accrues for the expected material and labor costs required to provide warranty services on its hardware products. The Company’s warranty accrual is estimated based on the total volume of units sold, the term of the warranty period, expected failure rates and the estimated cost to replace or repair the defective unit.
Research and Development
Research and development costs are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred and are presented within Selling, general and administrative expense in the Consolidated Statements of Operations. Advertising expenses for the years ended December 31, 2019, 2018 and 2017, were $7.7 million, $7.8 million and $8.8 million, respectively.
Restructuring
Management-approved restructuring plans can include employee severance and benefit costs to terminate a specified number of employees, including the acceleration of vesting in equity-based compensation awards, infrastructure charges to vacate facilities and consolidate operations and contract cancellation costs. Employee severance and benefit costs are accrued under these actions when it is probable that benefits will be paid and the amount is reasonably estimable.
Equity-Based Compensation
Equity-based compensation costs are estimated based on the grant date fair value of the award. Equity-based compensation cost is recognized for those awards expected to meet the service or performance vesting conditions on a straight-line basis over the requisite service period of the award. Equity-based compensation is estimated based on the aggregate grant for service-based awards and at the individual vesting tranche for awards with performance or market conditions. Forfeiture estimates are based on historical experience.
Recent Accounting Pronouncements
Standards Adopted in 2019
In February 2016, the FASB issued a new accounting standard for leases. The new lease accounting standard generally requires the recognition of operating and financing lease liabilities and corresponding right-of-use assets on the statement of financial position. The Company adopted the provisions of the new lease accounting standard on January 1, 2019 using the modified retrospective transition approach and certain practical expedients as described in Note 9. On adoption, the Company recognized the present value of its existing minimum lease payments as a $66.7 million Right-of-use asset and an $81.9 million Lease liability. The difference between the Right-of-use asset and the Lease liability on adoption primarily arises from previously recorded deferred rent, which was effectively reclassified to the Right-of-use asset on adoption. As a result, there was no impact on Accumulated deficit. Results for periods beginning after December 31, 2018 are presented in accordance with the new lease accounting standard, while prior period amounts were not restated and continue to be reported in accordance with the Company's previous lease accounting policies.
In March 2017, the FASB shortened the amortization period for certain investments in callable debt securities held at a premium to the earliest call date. Application of the shortened amortization period was effective for the Company beginning on January 1, 2019 on a modified retrospective basis. The application of the shortened amortization period did not have an effect on the Company's Consolidated Financial Statements.
In February 2018, the FASB issued guidance on the reclassification of certain income tax effects from accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 (the "Tax Act of 2017"). Application of the reclassification guidance was effective for the Company beginning on January 1, 2019. On adoption, the Company made an accounting policy election to use the specific identification method to release income tax effects from Accumulated other comprehensive loss. The Company also made an accounting policy election not to reclassify the stranded tax effects of the Tax Act of 2017 from Accumulated other comprehensive loss to Accumulated deficit. The application of the reclassification guidance did not have a material effect on the Company's Consolidated Financial Statements.
Standards Adopted in 2018
In January 2017, the Financial Accounting Standards ("FASB") clarified the definition of a business. The clarified guidance provides a more defined framework to use in determining when a set of assets and activities constitute a business. The clarified definition was effective for the Company on January 1, 2018 and was applied using a prospective transition approach. Application of this guidance did not have an effect on the Consolidated Financial Statements.
In October 2016, the FASB amended its guidance on the tax effects of intra-entity transfers of assets other than inventory. The amended guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendment was effective for the Company on January 1, 2018 and was applied using a modified retrospective transition approach. Application of this guidance did not have an effect on the Consolidated Financial Statements.
In August 2016, the FASB issued clarifying guidance on the presentation of eight specific cash flow issues for which previous guidance was either unclear or not specific. The clarified guidance was effective for the Company on January 1, 2018 and was applied using a retrospective transition approach. Application of this guidance did not have an effect on the Consolidated Financial Statements.
In March 2016, the FASB provided guidance for the derecognition of prepaid stored-value product liabilities, such as gift cards. Pursuant to this guidance, among other criteria, prepaid stored-value product liabilities are eligible to be derecognized when the likelihood of redemption becomes remote. The guidance was effective for the Company on January 1, 2018 and was applied using a modified retrospective transition approach. On adoption, the Company recorded a cumulative
effect adjustment, net of tax effects, of $2.2 million that reduced Accumulated deficit for prepaid stored-value product liabilities where the likelihood of redemption was deemed to be remote at the adoption date.
In May 2014, the FASB issued an amended accounting standard for revenue recognition. The core principle of the amended revenue recognition guidance is for an entity to recognize revenue to depict the transfer of promised goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments also require enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. In addition, the FASB amended its guidance related to the capitalization and amortization of the incremental costs of obtaining a contract with a customer. The Company adopted the amended revenue and cost recognition guidance on January 1, 2018 using the modified retrospective transition approach. On adoption, the Company recorded a cumulative effect adjustment, net of tax effects, that reduced Accumulated deficit by $27.9 million for the effects of the amended revenue recognition guidance and reduced Accumulated deficit by $1.3 million for the effects of capitalizing incremental costs to obtain contracts with customers. The significant differences giving rise to the cumulative effect adjustments are described in Note 4. Results for periods beginning after December 31, 2017 are presented under the amended revenue and cost recognition guidance, while prior period amounts were not restated and continue to be reported in accordance with the Company's previous revenue and cost recognition policies.
Standards Pending Adoption
In August 2018, the FASB modified the requirements for capitalizing costs incurred to implement a hosting arrangement that is a service contract. The modified requirements were intended to align the cost capitalization requirements for hosting arrangements with the cost capitalization requirements for internal-use software. The modified guidance is effective for the Company beginning on January 1, 2020, with early adoption permitted. The guidance can be applied prospectively to all arrangements entered into or materially modified after the effective date or using a retrospective transition approach. The Company does not expect application of the modified requirements for capitalizing costs incurred to implement a hosting arrangement to have a material effect on its Consolidated Financial Statements.
In June 2016, the FASB issued updated guidance that requires entities to use a current expected credit loss model to measure credit-related impairments for financial instruments held at amortized cost. The current expected credit loss model is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect collectability. Current expected credit losses, and subsequent adjustments, represent an estimate of lifetime expected credit losses that are recorded as an allowance deducted from the amortized cost of the financial instrument. The updated guidance also amends the other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments for credit-related losses through an allowance and eliminating the length of time a security has been in an unrealized loss position as a consideration in the determination of whether a credit loss exists. The updated guidance is effective for the Company beginning on January 1, 2020 and is effective using a modified retrospective transition approach for the provisions related to application of the current expected credit loss model to financial instruments and using a prospective transition approach for the provisions related to credit losses on available-for-sale debt securities. Early application is permitted. Adoption of the updated guidance is expected to result in the recognition of an immaterial addition to the allowance for credit losses as an adjustment to Accumulated deficit, primarily related to establishing an allowance for credit losses for contract assets for which revenue has been recognized in excess of the amount billed to the customer.
In December 2019, the FASB issued guidance to simplify the accounting for income taxes by removing certain exceptions to general principles, clarifying requirements and including amendments to improve consistent application of the guidance. The guidance specifically removes the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items, such as discontinued operations or other comprehensive income. The guidance also requires an entity to recognize a franchise tax that is partially based on income as an income-based tax and to account for any other amounts incurred as a non-income based tax. The guidance is effective for the Company beginning on January 1, 2021 using a prospective approach. Early adoption is permitted. The Company is evaluating the effect of application on its Consolidated Financial Statements.
(2) Discontinued Operations
In the year ended December 31, 2019, the Company recognized a Loss from discontinued operations, net of tax, of $4.8 million as a result of executing a settlement agreement during the period associated with a previous business disposal and associated legal defense costs.
In the year ended December 31, 2018, the Company recognized Income from discontinued operations, net of tax, of $3.7 million as a result of the expiration of certain indemnification obligations and the execution of settlement agreements during the period associated with previous business disposals, partially offset by an increase in legal defense costs.
(3) Financial Statement Details
Inventory
Components of Inventory were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Raw materials
|
$
|
133
|
|
|
$
|
864
|
|
Finished goods
|
3,064
|
|
|
6,585
|
|
Inventory
|
$
|
3,197
|
|
|
$
|
7,449
|
|
Property and equipment, net
Components of Property and equipment, net were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Computer software and equipment
|
$
|
156,335
|
|
|
$
|
148,935
|
|
Leasehold improvements
|
50,941
|
|
|
47,431
|
|
Furniture and fixtures
|
10,054
|
|
|
9,494
|
|
Property and equipment, gross
|
217,330
|
|
|
205,860
|
|
Less: Accumulated depreciation and amortization
|
(169,066
|
)
|
|
(152,274
|
)
|
Property and equipment, net
|
$
|
48,264
|
|
|
$
|
53,586
|
|
Property and equipment, net by geographic area was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
United States
|
$
|
41,125
|
|
|
$
|
44,516
|
|
Rest of the world
|
7,139
|
|
|
9,070
|
|
Property and equipment, net
|
$
|
48,264
|
|
|
$
|
53,586
|
|
As of December 31, 2019 and 2018, India accounted for 9% and 13%, respectively, of Property and equipment, net.
Accounts payable and accrued expenses
Components of Accounts payable and accrued expenses were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Accounts payable
|
$
|
11,801
|
|
|
$
|
2,180
|
|
Accrued compensation and benefits
|
44,456
|
|
|
46,466
|
|
Other accrued liabilities
|
69,992
|
|
|
56,335
|
|
Accounts payable and accrued expenses
|
$
|
126,249
|
|
|
$
|
104,981
|
|
Interest income and other, net
Components of Interest income and other, net were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Interest income
|
$
|
5,939
|
|
|
$
|
5,232
|
|
|
$
|
3,122
|
|
Foreign currency loss
|
(1,128
|
)
|
|
(550
|
)
|
|
(1,574
|
)
|
Equity method income (loss)
|
1,572
|
|
|
996
|
|
|
(451
|
)
|
Other income, net
|
2,143
|
|
|
4
|
|
|
1,818
|
|
Interest income and other, net
|
$
|
8,526
|
|
|
$
|
5,682
|
|
|
$
|
2,915
|
|
Supplemental cash flow information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Cash paid during the period for:
|
|
|
|
|
|
Income taxes, net of refunds
|
$
|
27,298
|
|
|
$
|
17,906
|
|
|
$
|
17,660
|
|
Interest
|
$
|
33,896
|
|
|
$
|
32,462
|
|
|
$
|
26,567
|
|
|
|
|
|
|
|
Significant noncash transactions:
|
|
|
|
|
|
Fair value of shares issued in connection with the TiVo Acquisition
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
536
|
|
Patents acquired as part of a licensing agreement
|
$
|
7,086
|
|
|
$
|
16,000
|
|
|
$
|
—
|
|
(4) Revenues
Adoption of Amended Revenue and Cost Recognition Guidance
The Company adopted the provisions of the amended revenue recognition guidance described in Note 1 using the modified retrospective transition approach on January 1, 2018. As such, the amended revenue recognition guidance was applied to those contracts which were not completed as of December 31, 2017. Results for periods beginning after December 31, 2017 are presented under the amended revenue recognition guidance, while prior period amounts were not restated and continue to be reported in accordance with the previous revenue recognition guidance.
In addition, the Company adopted amended guidance related to the capitalization and amortization of incremental costs to obtain a contract with a customer and guidance for the de-recognition of prepaid stored-value product liabilities, such as gift cards, each as described in Note 1 using the modified retrospective transition approach on January 1, 2018.
The cumulative effect of these changes on the Consolidated Balance Sheets on adoption was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts with Customers
|
|
Costs to Obtain Contracts with Customers
|
|
De-recognition of Prepaid Stored Value Product Liabilities
|
|
|
|
December 31, 2017
|
|
|
|
|
January 1, 2018
|
Accounts receivable, net
|
$
|
180,768
|
|
|
$
|
24,177
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
204,945
|
|
Prepaid expenses and other current assets
|
34,751
|
|
|
(2,705
|
)
|
|
525
|
|
|
—
|
|
|
32,571
|
|
Other long-term assets
|
71,641
|
|
|
(4,419
|
)
|
|
819
|
|
|
—
|
|
|
68,041
|
|
Accounts payable and accrued expenses
|
(135,852
|
)
|
|
—
|
|
|
—
|
|
|
2,155
|
|
|
(133,697
|
)
|
Unearned revenue
|
(55,393
|
)
|
|
11,208
|
|
|
—
|
|
|
—
|
|
|
(44,185
|
)
|
Deferred tax liabilities, net
|
(50,356
|
)
|
|
(348
|
)
|
|
—
|
|
|
—
|
|
|
(50,704
|
)
|
Accumulated deficit
|
1,392,651
|
|
|
(27,913
|
)
|
|
(1,344
|
)
|
|
(2,155
|
)
|
|
1,361,239
|
|
The most significant impact of the amended revenue recognition guidance relates to the accounting for software arrangements. Under prior industry-specific software revenue recognition guidance, when the Company concluded it did not have vendor-specific objective evidence ("VSOE") of fair value for the undelivered elements of an arrangement, revenue was deferred until the last element without VSOE was delivered. The amended revenue recognition guidance eliminated the concept of VSOE of fair value. The amended revenue recognition guidance requires an evaluation of whether the undelivered elements are distinct performance obligations and, therefore, should each be recognized separately when delivered. On adoption of the amended revenue recognition guidance, the Company accounted for the software and support elements of the TiVo Solutions international MSO agreements as two distinct performance obligations. These agreements contain minimum guarantees, and on adoption of the amended revenue recognition guidance, $34.4 million of these minimums were recorded as an increase in Accounts receivable, net and a reduction to Accumulated deficit as the software was delivered prior to the date of adoption.
The amended revenue recognition guidance also requires the Company to record revenue related to fixed-fee patent licensing agreements that do not provide the right to future patented technologies acquired by the Company during the term of the license when access to the existing patented technology is granted to the licensee. Under prior revenue recognition guidance, the Company recognized revenue from this type of fixed-fee license agreement on a straight-line basis over the term of the agreement. On adoption of the amended revenue recognition guidance, the Company recorded a $10.2 million reduction in Unearned revenue and Accumulated deficit for this type of fixed-fee license agreement.
The amended revenue recognition guidance includes specific guidance for contract modifications. Based on the nature of the modification, the revenue recognized for the contract may be updated on a cumulative catch-up basis on execution of the modification or updated prospectively as a result of the modification. For certain contract modifications, this accounting treatment differs from the accounting treatment in accordance with previous revenue recognition guidance.
Prior to the adoption of the amended revenue recognition guidance, the Company recognized revenue from per-unit royalty licenses with certain CE manufacturers and third party IPG providers in the period the licensee reported its sales to the Company, which was generally in the month or quarter after the underlying sales by the licensee occurred. On adoption of the amended revenue recognition guidance, revenue from per-unit royalty licenses is recognized in the period in which the licensee's sales are estimated to have occurred, limited to the amount of revenue that is not subject to a significant risk of reversal, which results in an adjustment to revenue when actual amounts are subsequently reported by the Company's licensees.
Pursuant to the amended cost capitalization guidance, incremental costs to obtain a contract with a customer are capitalized and amortized over a period of time commensurate with the expected period of benefit, which may exceed the contract term. Prior to the adoption of the amended cost capitalization guidance, the Company expensed incremental costs to obtain a contract with a customer as incurred.
The impact of adoption of the amended revenue and cost recognition guidance on the Consolidated Statements of Operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
As Reported
|
|
As If Applying Prior Guidance
|
|
Effect of Change
Higher/(Lower)
|
Total Revenues, net
|
$
|
695,865
|
|
|
$
|
713,142
|
|
|
$
|
(17,277
|
)
|
Cost of licensing, services and software revenues, excluding depreciation and amortization of intangible assets
|
169,149
|
|
|
171,898
|
|
|
(2,749
|
)
|
Selling, general and administrative
|
181,047
|
|
|
181,245
|
|
|
(198
|
)
|
Loss from continuing operations before income taxes
|
(339,011
|
)
|
|
(324,681
|
)
|
|
(14,330
|
)
|
Income tax expense
|
14,052
|
|
|
15,561
|
|
|
(1,509
|
)
|
Loss from continuing operations, net of tax
|
(353,063
|
)
|
|
(340,242
|
)
|
|
(12,821
|
)
|
Practical Expedients and Exemptions
The Company applies a practical expedient to not perform an evaluation of whether a contract includes a significant financing component when the timing of revenue recognition differs from the timing of cash collection by one year or less.
The Company applies a practical expedient to expense costs to obtain a contract with a customer as incurred as a component of Selling, general and administrative expenses when the amortization period would have been one year or less.
The Company applies a practical expedient when disclosing revenue expected to be recognized from unsatisfied performance obligations to exclude contracts with customers with an original duration of less than one year, contracts for which revenue is recognized based on the amount which the Company has the right to invoice for services performed and amounts attributable to variable consideration arising from (i) a sales-based or usage-based royalty of an intellectual property license or (ii) when variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation.
Revenue Details
The following information depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors by disaggregating revenue by significant customer, contract-type, geographic area and product offering (presented in Note 14). This information includes revenue recognized from contracts with customers and revenue from other sources, including out-of-license settlements.
Customers representing 10% or more of Total Revenues, net were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
AT&T Inc. ("AT&T")
|
11
|
%
|
|
10
|
%
|
|
14
|
%
|
Substantially all revenue from AT&T is reported in the Intellectual Property Licensing segment.
By segment, the pattern of revenue recognition was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
Year Ended December 31, 2018
|
|
Product
|
|
Intellectual Property Licensing
|
|
Total Revenues, net
|
|
Product
|
|
Intellectual Property Licensing
|
|
Total Revenues, net
|
Goods and services transferred at a point in time
|
$
|
73,948
|
|
|
$
|
125,194
|
|
|
$
|
199,142
|
|
|
$
|
104,803
|
|
|
$
|
110,679
|
|
|
$
|
215,482
|
|
Goods and services transferred over time
|
277,033
|
|
|
148,249
|
|
|
425,282
|
|
|
295,927
|
|
|
161,230
|
|
|
457,157
|
|
Out-of-license settlements
|
—
|
|
|
43,705
|
|
|
43,705
|
|
|
—
|
|
|
23,226
|
|
|
23,226
|
|
Total Revenues, net
|
$
|
350,981
|
|
|
$
|
317,148
|
|
|
$
|
668,129
|
|
|
$
|
400,730
|
|
|
$
|
295,135
|
|
|
$
|
695,865
|
|
Revenue by geographic area was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
448,630
|
|
|
$
|
464,364
|
|
|
$
|
616,883
|
|
Canada
|
68,136
|
|
|
39,997
|
|
|
37,680
|
|
Rest of the world
|
151,363
|
|
|
191,504
|
|
|
171,893
|
|
Total Revenues, net
|
$
|
668,129
|
|
|
$
|
695,865
|
|
|
$
|
826,456
|
|
Revenue by geographic area is predominately based on the end user's location. Other than the U.S. and Canada, no country accounted for more than 10% of Total Revenues, net for the year ended December 31, 2019. Other than the U.S., no country accounted for more than 10% of Total Revenues, net for the years ended December 31, 2018 and 2017.
Accounts receivable, net
Components of Accounts receivable, net were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Accounts receivable, gross
|
$
|
160,139
|
|
|
$
|
155,708
|
|
Less: Allowance for doubtful accounts
|
(2,123
|
)
|
|
(2,842
|
)
|
Accounts receivable, net
|
$
|
158,016
|
|
|
$
|
152,866
|
|
As of December 31, 2019 and 2018, AT&T represented 19% and 18% of Accounts receivable, net, respectively. Other than AT&T, no customer accounted for more than 10% of Accounts receivable, net as of December 31, 2019 and 2018.
Allowance for Doubtful Accounts
Changes in the Allowance for Doubtful Accounts were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Balance at beginning of period
|
$
|
(2,842
|
)
|
|
$
|
(2,575
|
)
|
|
$
|
(1,963
|
)
|
Provision for bad debt
|
(671
|
)
|
|
(579
|
)
|
|
1,726
|
|
Deductions and write-offs, net
|
1,390
|
|
|
312
|
|
|
(2,338
|
)
|
Balance at end of period
|
$
|
(2,123
|
)
|
|
$
|
(2,842
|
)
|
|
$
|
(2,575
|
)
|
Contract Balances
Contract assets primarily consist of revenue recognized in excess of the amount billed to the customer, limited to net realizable value and deferred engineering costs for significant software customization or modification and set-up services to the extent deemed recoverable. Substantially all unbilled amounts are expected to be invoiced to the customer within the next 12 months. Contract assets also include the incremental costs of obtaining a contract with a customer, principally sales commissions when the renewal commission is not commensurate with the initial commission. Contract assets were recorded in the Consolidated Balance Sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Accounts receivable, net
|
$
|
51,433
|
|
|
$
|
35,115
|
|
Prepaid expenses and other current assets
|
2,600
|
|
|
1,654
|
|
Other long-term assets
|
11,514
|
|
|
8,532
|
|
Total contract assets, net
|
$
|
65,547
|
|
|
$
|
45,301
|
|
No impairment losses were recognized with respect to contract assets for the years ended December 31, 2019 and 2018.
Contract liabilities are mainly comprised of unearned revenue related to consumer lifetime subscriptions for the TiVo service, multi-period licensing or cloud-based services and other offerings for which the Company is paid in advance of when control of the promised good or service is transferred to the customer. Unearned revenue also includes amounts related to professional services to be performed in the future. For the year ended December 31, 2019, the Company recognized $44.2 million of revenue that had been included in Unearned revenue as of December 31, 2018.
As of December 31, 2019, approximately $662.7 million of revenue is expected to be recognized from unsatisfied performance obligations that are primarily related to fixed-fee intellectual property and software-as-a-service agreements, which is expected to be recognized as follows: 31% in 2020, 20% in 2021, 15% in 2022, 13% in 2023, 11% in 2024 and 11% thereafter.
(5) Investments and Fair Value Measurements
Fair Value Hierarchy
The Company uses valuation techniques that are based on observable and unobservable inputs to measure fair value. Observable inputs are developed using publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use. Fair value measurements are classified in a hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. Assets and liabilities are classified in a fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety:
|
|
•
|
Level 1. Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2. Inputs other than Level 1 inputs that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or market-corroborated inputs.
|
|
|
•
|
Level 3. Unobservable inputs for the asset or liability.
|
The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. For the years ended December 31, 2019, 2018 and 2017, there were no transfers between levels of the fair value hierarchy.
Recurring Fair Value Measurements
Assets
The amortized cost and fair value of cash, cash equivalents and marketable securities by significant investment
category, as well as their classification on the Consolidated Balance Sheets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
|
Cash and Cash Equivalents
|
|
Short-Term Investments
|
|
Long-Term Investments
|
Cash
|
|
$
|
119,349
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
119,349
|
|
|
$
|
119,349
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
226,111
|
|
|
—
|
|
|
—
|
|
|
226,111
|
|
|
226,111
|
|
|
—
|
|
|
—
|
|
Level 1 Subtotal
|
|
226,111
|
|
|
—
|
|
|
—
|
|
|
226,111
|
|
|
226,111
|
|
|
—
|
|
|
—
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
40,522
|
|
|
—
|
|
|
(1
|
)
|
|
40,521
|
|
|
16,280
|
|
|
24,241
|
|
|
—
|
|
U.S. Treasuries / Agencies
|
|
39,009
|
|
|
32
|
|
|
(10
|
)
|
|
39,031
|
|
|
11,979
|
|
|
27,052
|
|
|
—
|
|
Level 2 Subtotal
|
|
79,531
|
|
|
32
|
|
|
(11
|
)
|
|
79,552
|
|
|
28,259
|
|
|
51,293
|
|
|
—
|
|
Total assets
|
|
$
|
424,991
|
|
|
$
|
32
|
|
|
$
|
(11
|
)
|
|
$
|
425,012
|
|
|
$
|
373,719
|
|
|
$
|
51,293
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
|
Cash and Cash Equivalents
|
|
Short-Term Investments
|
|
Long-Term Investments
|
Cash
|
|
$
|
40,125
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40,125
|
|
|
$
|
40,125
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
121,830
|
|
|
—
|
|
|
—
|
|
|
121,830
|
|
|
121,830
|
|
|
—
|
|
|
—
|
|
Level 1 Subtotal
|
|
121,830
|
|
|
—
|
|
|
—
|
|
|
121,830
|
|
|
121,830
|
|
|
—
|
|
|
—
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
114,159
|
|
|
1
|
|
|
(400
|
)
|
|
113,760
|
|
|
—
|
|
|
90,753
|
|
|
23,007
|
|
U.S. Treasuries / Agencies
|
|
118,497
|
|
|
70
|
|
|
(164
|
)
|
|
118,403
|
|
|
—
|
|
|
68,203
|
|
|
50,200
|
|
Level 2 Subtotal
|
|
232,656
|
|
|
71
|
|
|
(564
|
)
|
|
232,163
|
|
|
—
|
|
|
158,956
|
|
|
73,207
|
|
Total assets
|
|
$
|
394,611
|
|
|
$
|
71
|
|
|
$
|
(564
|
)
|
|
$
|
394,118
|
|
|
$
|
161,955
|
|
|
$
|
158,956
|
|
|
$
|
73,207
|
|
The fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
Description of Securities
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
Corporate debt securities
|
$
|
7,003
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,003
|
|
|
$
|
(1
|
)
|
U.S. Treasuries / Agencies
|
11,979
|
|
|
(1
|
)
|
|
16,497
|
|
|
(9
|
)
|
|
28,476
|
|
|
(10
|
)
|
Marketable securities
|
$
|
18,982
|
|
|
$
|
(2
|
)
|
|
$
|
16,497
|
|
|
$
|
(9
|
)
|
|
$
|
35,479
|
|
|
$
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
Description of Securities
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
Corporate debt securities
|
$
|
52,617
|
|
|
$
|
(170
|
)
|
|
$
|
46,991
|
|
|
$
|
(230
|
)
|
|
$
|
99,608
|
|
|
$
|
(400
|
)
|
U.S. Treasuries / Agencies
|
68,519
|
|
|
(82
|
)
|
|
19,160
|
|
|
(82
|
)
|
|
87,679
|
|
|
(164
|
)
|
Marketable securities
|
$
|
121,136
|
|
|
$
|
(252
|
)
|
|
$
|
66,151
|
|
|
$
|
(312
|
)
|
|
$
|
187,287
|
|
|
$
|
(564
|
)
|
As of December 31, 2019 and 2018, Other long-term assets include equity securities accounted for under the equity method with a carrying amount of $3.7 million and $2.2 million, respectively, and equity securities without a readily determinable fair value with a carrying amount of $0.4 million and $1.5 million, respectively. During the year ended December 31, 2019, the Company realized a gain from the sale of equity securities without a readily determinable fair value of $2.0 million. No impairments or adjustments to the carrying amount of the Company's equity securities without a readily determinable fair value were recognized in the years ended December 31, 2019 and 2018. For the year ended December 31, 2017, an impairment loss of $1.2 million was recognized on the Company's equity securities without a readily determinable fair value.
Liabilities
Liabilities reported at fair value in the Consolidated Balance Sheets were classified in the fair value hierarchy as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant Other
Observable Inputs
(Level 2)
|
Liabilities
|
|
|
|
|
Other long-term liabilities
|
|
|
|
|
Interest rate swaps
|
|
$
|
(6,120
|
)
|
|
$
|
(3,012
|
)
|
Total Liabilities
|
|
$
|
(6,120
|
)
|
|
$
|
(3,012
|
)
|
Rollforward of Level 3 Fair Value Measurements
Changes in the fair value of assets and liabilities classified in Level 3 of the fair value hierarchy were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
Auction Rate Securities
|
|
Cubiware Contingent Consideration
|
|
Auction Rate Securities
|
|
Cubiware Contingent Consideration
|
Balance at beginning of period
|
$
|
10,584
|
|
|
$
|
(2,234
|
)
|
|
$
|
10,368
|
|
|
$
|
(5,273
|
)
|
Sales
|
(10,715
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
—
|
|
|
1,874
|
|
|
—
|
|
|
2,650
|
|
Transfers out (a)
|
—
|
|
|
1,700
|
|
|
—
|
|
|
—
|
|
Gain (loss) included in earnings
|
(85
|
)
|
|
(1,340
|
)
|
|
—
|
|
|
389
|
|
Unrealized loss reclassified on sale
|
216
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Unrealized gains included in other comprehensive income
|
—
|
|
|
—
|
|
|
216
|
|
|
—
|
|
Balance at end of period
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,584
|
|
|
$
|
(2,234
|
)
|
|
|
(a)
|
During the year ended December 31, 2018, $1.7 million related to the Cubiware Contingent Consideration was reclassified to a contingent liability that is not measured at fair value.
|
For the year ended December 31, 2018, the Loss included in earnings related to the Cubiware contingent consideration liability is included in Selling, general and administrative expense related to remeasurement of the liability as a $1.1 million loss, respectively, and in Interest expense related to accretion of the liability to future value of $0.2 million. For the year ended December 31, 2017, the Gain included in earnings related to the Cubiware contingent consideration liability is included in Selling, general and administrative expense related to remeasurement of the liability as a $1.0 million gain and in Interest expense related to accretion of the liability to future value of $0.6 million.
Nonrecurring Fair Value Measurements
As part of the goodwill impairment tests performed for the years ended December 31, 2019 and 2018, the Product and Intellectual Property Licensing reporting units were measured at fair value, resulting in Goodwill impairment charges of $354.6 million and $269.0 million, respectively. The unobservable inputs used to estimate the fair value of the Product and Intellectual Property Licensing reporting units include projected revenue growth rates, future operating margins and risk-adjusted discount rates, and, accordingly, these measurements would be classified in Level 3 of the fair value hierarchy. The Goodwill impairment charge and the valuation techniques used to estimate reporting unit fair values are more fully described in Note 1 and Note 6.
In May 2017, TiVo Corporation vacated a portion of a leased facility as part of its ongoing TiVo Integration Restructuring Plan (as described in Note 7) resulting in a $6.7 million loss on the impairment of certain property and equipment, principally leasehold improvements. The fair value of the impaired assets was estimated using a discounted cash flow analysis that incorporated among other items, the timing and amount of expected future cash flows associated with the assets, income tax rates and economic and market conditions, as well as a risk adjusted discount rate. The fair value of the impaired assets would be classified in Level 2 of the fair value hierarchy.
Valuation Techniques
The fair value of marketable securities is estimated using observable market-corroborated inputs, such as quoted prices in active markets for similar assets or independent pricing vendors, obtained from a third-party pricing service.
The fair value of interest rate swaps is estimated using a discounted cash flow analysis that considers the expected future cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swap, including the remaining period to maturity, and uses market-corroborated inputs, including forward interest rate curves and implied interest rate volatilities. The fair value of an interest rate swap is estimated by netting the discounted future fixed cash payments against the discounted expected variable cash receipts. The variable cash receipts are estimated based on an expectation of future
interest rates derived from forward interest rate curves. The fair value of an interest rate swap also incorporates credit valuation adjustments to reflect the nonperformance risk of the Company and the respective counterparty. In adjusting the fair value of its interest rate swaps for the effect of nonperformance risk, the Company considers the effect of its master netting agreements.
Other Fair Value Disclosures
The carrying amount and fair value of debt issued or assumed by the Company were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Carrying Amount
|
|
Fair Value (a)
|
|
Carrying Amount
|
|
Fair Value (a)
|
2020 Convertible Notes
|
$
|
292,699
|
|
|
$
|
292,419
|
|
|
$
|
326,640
|
|
|
$
|
316,538
|
|
2021 Convertible Notes
|
48
|
|
|
48
|
|
|
48
|
|
|
48
|
|
2019 Term Loan Facility
|
692,792
|
|
|
736,110
|
|
|
—
|
|
|
—
|
|
Term Loan Facility B
|
—
|
|
|
—
|
|
|
665,449
|
|
|
633,404
|
|
Total Long-term debt
|
$
|
985,539
|
|
|
$
|
1,028,577
|
|
|
$
|
992,137
|
|
|
$
|
949,990
|
|
|
|
(a)
|
If reported at fair value in the Consolidated Balance Sheets, debt issued or assumed by the Company would be classified in Level 2 of the fair value hierarchy.
|
(6) Intangible Assets, Net and Goodwill
Intangible Assets, Net
Intangible assets, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Weighted-Average Remaining Useful Life
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Finite-lived intangible assets
|
|
|
|
|
|
|
|
Developed technology and patents
|
4.1 years
|
|
$
|
1,065,506
|
|
|
$
|
(855,934
|
)
|
|
$
|
209,572
|
|
Existing contracts and customer relationships
|
12.3 years
|
|
402,695
|
|
|
(216,148
|
)
|
|
186,547
|
|
Content databases and other
|
4.0 years
|
|
57,410
|
|
|
(52,475
|
)
|
|
4,935
|
|
Trademarks / Tradenames
|
N/A
|
|
8,300
|
|
|
(8,300
|
)
|
|
—
|
|
Total finite-lived intangible assets
|
|
|
1,533,911
|
|
|
(1,132,857
|
)
|
|
401,054
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
TiVo Tradename
|
N/A
|
|
14,000
|
|
|
—
|
|
|
14,000
|
|
Total intangible assets
|
|
|
$
|
1,547,911
|
|
|
$
|
(1,132,857
|
)
|
|
$
|
415,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Finite-lived intangible assets
|
|
|
|
|
|
Developed technology and patents
|
$
|
1,051,635
|
|
|
$
|
(765,221
|
)
|
|
$
|
286,414
|
|
Existing contracts and customer relationships
|
402,756
|
|
|
(195,752
|
)
|
|
207,004
|
|
Content databases and other
|
57,235
|
|
|
(50,883
|
)
|
|
6,352
|
|
Trademarks / Tradenames
|
8,300
|
|
|
(8,300
|
)
|
|
—
|
|
Total finite-lived intangible assets
|
1,519,926
|
|
|
(1,020,156
|
)
|
|
499,770
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
TiVo Tradename
|
14,000
|
|
|
—
|
|
|
14,000
|
|
Total intangible assets
|
$
|
1,533,926
|
|
|
$
|
(1,020,156
|
)
|
|
$
|
513,770
|
|
Patent Acquisitions
In the year ended December 31, 2019, the Company acquired patent portfolios for an aggregate cost of $14.0 million. The patent portfolios acquired in 2019 were obtained for $7.1 million as consideration in a licensing agreement and for $6.9 million in cash payments. The Company accounted for the patent portfolios acquired as asset acquisitions and is amortizing the purchase prices over a weighted average period of nine years.
In the year ended December 31, 2018, the Company acquired patent portfolios for an aggregate cost of $17.7 million. The patent portfolios acquired in 2018 were obtained for $16.0 million as consideration in a licensing agreement and for a $1.7 million cash payment. The Company accounted for the patent portfolios acquired as asset acquisitions and is amortizing the purchase price over a weighted average period of ten years.
During the year ended December 31, 2017, the Company acquired a portfolio of patents for $2.0 million in cash. The Company accounted for the patent portfolio acquired as an asset acquisition and is amortizing the purchase price over a weighted average period of five years.
Estimated Amortization of Finite-Lived Intangible Assets
As of December 31, 2019, estimated amortization expense for finite-lived intangible assets was as follows (in thousands):
|
|
|
|
|
2020
|
$
|
112,512
|
|
2021
|
69,744
|
|
2022
|
42,026
|
|
2023
|
24,852
|
|
2024
|
21,851
|
|
Thereafter
|
130,069
|
|
Total
|
$
|
401,054
|
|
Goodwill
Goodwill allocated to the reportable segments and changes in the carrying amount of goodwill by reportable segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
Intellectual Property Licensing
|
|
Total
|
December 31, 2017
|
$
|
521,895
|
|
|
$
|
1,291,332
|
|
|
$
|
1,813,227
|
|
Impairment
|
(269,000
|
)
|
|
—
|
|
|
(269,000
|
)
|
Foreign currency translation
|
116
|
|
|
—
|
|
|
116
|
|
December 31, 2018
|
$
|
253,011
|
|
|
$
|
1,291,332
|
|
|
$
|
1,544,343
|
|
Impairment
|
(99,828
|
)
|
|
(254,733
|
)
|
|
(354,561
|
)
|
Foreign currency translation
|
43
|
|
|
—
|
|
|
43
|
|
December 31, 2019
|
$
|
153,226
|
|
|
$
|
1,036,599
|
|
|
$
|
1,189,825
|
|
Goodwill at each reporting unit is evaluated for potential impairment annually, as of the beginning of the fourth quarter, and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. The process of evaluating goodwill for potential impairment is subjective and requires significant estimates, assumptions and judgments particularly related to the identification of reporting units, the assignment of assets and liabilities to reporting units and estimating the fair value of each reporting unit.
Following the Company's announcement of the Xperi Combination in December 2019, management concluded sufficient indicators of potential impairment were identified and that it was more-likely-than-not that goodwill was impaired and that a quantitative interim goodwill impairment test should be performed as of December 31, 2019 for the Product and Intellectual Property Licensing reporting units. Although the long-range forecasts for the Product and Intellectual Property Licensing reporting units did not materially change from those used in performing the quantitative interim goodwill impairment test as of September 30, 2019, the fair value decreased. The decrease in fair value was primarily due to the elimination of an
assumed control premium from the fair value estimate following execution of the Xperi Merger Agreement. Based on this decline in fair value, a Goodwill impairment charge of $217.1 million was recognized during the three months ended December 31, 2019, of which $20.5 million related to the Product reporting unit and $196.6 million related to the Intellectual Property Licensing reporting unit.
During September 2019, sufficient indicators of potential impairment were identified that management concluded it was more-likely-than-not that goodwill was impaired and quantitative interim goodwill impairment tests should be performed as of September 30, 2019 for the Product and Intellectual Property Licensing reporting units. Indicators of potential impairment included a significant and sustained decline in the trading price of TiVo's common stock, as well as lower-than-previously forecast revenue and profitability levels for the Product reporting unit and downward revisions to this reporting unit's short- and long-term forecasts. The forecast revisions for the Product reporting unit were identified as part of TiVo's 2020 budgeting process and reflect lower expectations for its Platform Solutions products, including changes in both the market and business models internationally. The changes in such expectations related to revenue growth rates, current market trends, business mix, cost structure and other expectations about the anticipated short- and long-term operating results. As a result of the quantitative interim goodwill impairment tests performed as of September 30, 2019, Goodwill impairment charges of $137.5 million was recognized during the three months ended September 30, 2019, of which $79.3 million related to the Product reporting unit and $58.2 million related to the Intellectual Property Licensing reporting unit. The Goodwill impairment charge for the Intellectual Property Licensing reporting unit resulted from an increase in the discount rate used to estimate fair value due to the decline in the trading price of TiVo's common stock.
During December 2018, sufficient indicators of potential impairment were identified that management concluded it was more-likely-than-not that goodwill was impaired and a quantitative interim goodwill impairment test should be performed as of December 31, 2018 for the Product and Intellectual Property Licensing reporting units. Indicators of potential impairment included a significant decline in the trading price of TiVo's common stock during the second half of the fourth quarter of 2018 and current market conditions, as well as lower-than-previously forecast revenue and profitability levels over a sustained period of time and downward revisions to management's short- and long-term forecasts. The forecast revisions were identified as part of TiVo's overall long-term forecasting process, which was substantially completed in December 2018. The revised forecast reflected lower expectations for the Company's Platform Solutions products, including changes in both the market and business models internationally, as well as the decision to eliminate certain analytic products. The changes in such expectations were related to revenue growth rates, current market trends, business mix, cost structure and other expectations about the anticipated short- and long-term operating results. As a result of the quantitative interim goodwill impairment test performed as of December 31, 2018, a Goodwill impairment charge of $269.0 million was recognized related to the Product reporting unit. As a result of the quantitative interim goodwill impairment test performed as of December 31, 2018, no Goodwill impairment charge was recognized related to the Intellectual Property Licensing reporting unit.
Prior to completing the quantitative interim goodwill impairment test, TiVo tested the recoverability of long-lived assets other than goodwill assigned to the Product and Intellectual Property Licensing reporting units and concluded that such assets were not impaired.
(7) Restructuring and Asset Impairment Charges
Components of Restructuring and asset impairment charges were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Facility-related costs
|
$
|
(180
|
)
|
|
$
|
340
|
|
|
$
|
4,465
|
|
Severance costs
|
6,576
|
|
|
6,658
|
|
|
4,696
|
|
Share-based payments
|
375
|
|
|
3,039
|
|
|
2,663
|
|
Asset impairment
|
961
|
|
|
24
|
|
|
7,220
|
|
Contract termination costs and other
|
9
|
|
|
—
|
|
|
4
|
|
Restructuring and asset impairment charges
|
$
|
7,741
|
|
|
$
|
10,061
|
|
|
$
|
19,048
|
|
Components of accrued restructuring costs were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Facility-related costs
|
$
|
—
|
|
|
$
|
264
|
|
Severance costs
|
2,264
|
|
|
3,996
|
|
Accrued restructuring costs
|
$
|
2,264
|
|
|
$
|
4,260
|
|
The Company expects a substantial portion of the accrued restructuring costs to be paid by the end of 2020.
2019 Transformation Plan
In connection with the May 2019 announcement of its plan to separate its Product and Intellectual Property Licensing business, the Company initiated certain activities to transform its business operations in order to execute the Separation (the "2019 Transformation Plan"). As a result of the 2019 Transformation Plan, the Company expects to reduce headcount, move certain positions to lower cost locations, rationalize facilities and legal entities and terminate certain leases and other contracts. Restructuring activities related to the 2019 Transformation Plan for the year ended December 31, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
Restructuring Expense
|
|
Cash Settlements
|
|
Non-Cash Settlements
|
|
Other
|
|
Balance at End of Period
|
Severance costs
|
$
|
—
|
|
|
$
|
1,960
|
|
|
$
|
(1,355
|
)
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
603
|
|
Share-based payments
|
—
|
|
|
375
|
|
|
—
|
|
|
(375
|
)
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
8
|
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
—
|
|
|
$
|
2,343
|
|
|
$
|
(1,363
|
)
|
|
$
|
(375
|
)
|
|
$
|
(2
|
)
|
|
$
|
603
|
|
The process of completing the Xperi Combination and the 2019 Transformation Plan has been and is expected to continue to be time-consuming and involve significant costs and expenses. In addition to the restructuring costs associated with the 2019 Transformation Plan, the Company also recorded costs that do not qualify as restructuring expense related to the Separation, Transformation and Xperi Combination of $26.2 million during the year ended December 31, 2019. These costs are primarily Selling, general and administrative costs and consist of employee-related costs, costs to establish certain stand-alone functions and information technology systems and other one-time transaction-related costs, including investment banking and consulting fees and other incremental costs directly associated with the prior Separation efforts and Xperi Combination.
Profit Improvement Plan
In February 2018, the Company announced its intention to explore strategic alternatives. In connection with exploring strategic alternatives, the Company initiated certain cost saving actions (the "Profit Improvement Plan"). As a result of the Profit Improvement Plan, the Company moved certain positions to lower cost locations, eliminated layers of management and rationalized facilities resulting in severance costs and the termination of certain leases and other contracts. Restructuring activities related to the Profit Improvement Plan were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Balance at Beginning of Period
|
|
Restructuring Expense
|
|
Cash Settlements
|
|
Non-Cash Settlements
|
|
Other
|
|
Balance at End of Period
|
Facility-related costs
|
$
|
—
|
|
|
$
|
(180
|
)
|
|
$
|
—
|
|
|
$
|
180
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Severance costs
|
3,857
|
|
|
4,617
|
|
|
(6,916
|
)
|
|
—
|
|
|
(36
|
)
|
|
1,522
|
|
Asset impairment
|
—
|
|
|
961
|
|
|
—
|
|
|
(961
|
)
|
|
—
|
|
|
—
|
|
Total
|
$
|
3,857
|
|
|
$
|
5,398
|
|
|
$
|
(6,916
|
)
|
|
$
|
(781
|
)
|
|
$
|
(36
|
)
|
|
$
|
1,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Balance at Beginning of Period
|
|
Restructuring Expense
|
|
Cash Settlements
|
|
Non-Cash Settlements
|
|
Other
|
|
Balance at End of Period
|
Facility-related costs
|
$
|
—
|
|
|
$
|
47
|
|
|
$
|
(47
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Severance costs
|
—
|
|
|
6,541
|
|
|
(2,668
|
)
|
|
—
|
|
|
(16
|
)
|
|
3,857
|
|
Share-based payments
|
—
|
|
|
3,039
|
|
|
—
|
|
|
(3,039
|
)
|
|
—
|
|
|
—
|
|
Asset impairment
|
—
|
|
|
24
|
|
|
—
|
|
|
(24
|
)
|
|
—
|
|
|
—
|
|
Total
|
$
|
—
|
|
|
$
|
9,651
|
|
|
$
|
(2,715
|
)
|
|
$
|
(3,063
|
)
|
|
$
|
(16
|
)
|
|
$
|
3,857
|
|
The Profit Improvement Plan was substantially complete as of December 31, 2019.
Previous Restructuring Plans
TiVo Integration Restructuring Plan
Following completion of the TiVo Acquisition, TiVo Corporation began implementing integration plans that were intended to realize operational synergies between Rovi and TiVo Solutions (the "TiVo Integration Restructuring Plan"). As a result of these integration plans, the Company eliminated duplicative positions resulting in severance costs and the termination of certain leases and other contracts. Restructuring activities related to the TiVo Integration Restructuring Plan were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Balance at Beginning of Period
|
|
Restructuring Expense
|
|
Cash Settlements
|
|
Non-Cash Settlements
|
|
Other
|
|
Balance at End of Period
|
Facility-related costs
|
$
|
110
|
|
|
$
|
—
|
|
|
$
|
(47
|
)
|
|
$
|
—
|
|
|
$
|
(63
|
)
|
|
$
|
—
|
|
Total
|
$
|
110
|
|
|
$
|
—
|
|
|
$
|
(47
|
)
|
|
$
|
—
|
|
|
$
|
(63
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Balance at Beginning of Period
|
|
Restructuring Expense
|
|
Cash Settlements
|
|
Non-Cash Settlements
|
|
Other
|
|
Balance at End of Period
|
Facility-related costs
|
$
|
111
|
|
|
$
|
280
|
|
|
$
|
(230
|
)
|
|
$
|
—
|
|
|
$
|
(51
|
)
|
|
$
|
110
|
|
Severance costs
|
448
|
|
|
115
|
|
|
(564
|
)
|
|
—
|
|
|
1
|
|
|
—
|
|
Total
|
$
|
559
|
|
|
$
|
395
|
|
|
$
|
(794
|
)
|
|
$
|
—
|
|
|
$
|
(50
|
)
|
|
$
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Balance at Beginning of Period
|
|
Restructuring Expense
|
|
Cash Settlements
|
|
Non-Cash Settlements
|
|
Other
|
|
Balance at End of Period
|
Facility-related costs
|
$
|
224
|
|
|
$
|
3,690
|
|
|
$
|
(3,486
|
)
|
|
$
|
—
|
|
|
$
|
(317
|
)
|
|
$
|
111
|
|
Severance costs
|
3,504
|
|
|
4,850
|
|
|
(7,876
|
)
|
|
—
|
|
|
(30
|
)
|
|
448
|
|
Share-based payments
|
—
|
|
|
2,663
|
|
|
—
|
|
|
(2,663
|
)
|
|
—
|
|
|
—
|
|
Asset impairment
|
—
|
|
|
7,220
|
|
|
—
|
|
|
(7,220
|
)
|
|
—
|
|
|
—
|
|
Contract termination costs and other
|
63
|
|
|
4
|
|
|
(67
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
3,791
|
|
|
$
|
18,427
|
|
|
$
|
(11,429
|
)
|
|
$
|
(9,883
|
)
|
|
$
|
(347
|
)
|
|
$
|
559
|
|
The TiVo Integration Restructuring Plan was completed as of December 31, 2018.
Legacy Rovi and TiVo Solutions Restructuring Plans
Prior to the TiVo Acquisition, Rovi and TiVo Solutions had each initiated restructuring plans. The Legacy Rovi Restructuring Plan and the Legacy TiVo Solutions Restructuring Plan were completed as of December 31, 2018. Immaterial Restructuring and asset impairment charges were recognized related to these plans for the year ended December 31, 2018. For the year ended December 31, 2017, Restructuring and asset impairment charges of $0.6 million were recognized in the Consolidated Statements of Operations related to these plans. As of December 31, 2019 and 2018, Accrued restructuring costs of $0.1 million and $0.3 million, respectively, are included in the Consolidated Balance Sheets related to the Legacy Rovi Restructuring Plan.
(8) Debt and Interest Rate Swaps
A summary of debt issued by or assumed by the Company was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Stated Interest Rate
|
Issue Date
|
Maturity Date
|
Outstanding Principal
|
Carrying Amount
|
|
Outstanding Principal
|
Carrying Amount
|
2020 Convertible Notes
|
0.500%
|
March 4, 2015
|
March 1, 2020
|
$
|
295,000
|
|
$
|
292,699
|
|
|
$
|
345,000
|
|
$
|
326,640
|
|
2021 Convertible Notes
|
2.000%
|
September 22, 2014
|
October 1, 2021
|
48
|
|
48
|
|
|
48
|
|
48
|
|
2019 Term Loan Facility
|
Variable
|
November 22, 2019
|
November 22, 2024
|
715,000
|
|
692,792
|
|
|
—
|
|
—
|
|
Term Loan Facility B
|
Variable
|
July 2, 2014
|
NA
|
—
|
|
—
|
|
|
668,500
|
|
665,449
|
|
Total Long-term debt
|
|
|
|
$
|
1,010,048
|
|
985,539
|
|
|
$
|
1,013,548
|
|
992,137
|
|
Less: Current portion of long-term debt
|
|
|
|
|
343,035
|
|
|
|
373,361
|
|
Long-term debt, less current portion
|
|
|
|
|
$
|
642,504
|
|
|
|
$
|
618,776
|
|
2020 Convertible Notes
Rovi issued $345.0 million in aggregate principal of 0.500% Convertible Senior Notes that mature March 1, 2020 (the “2020 Convertible Notes”) at par pursuant to an Indenture dated March 4, 2015 (as supplemented, the "2015 Indenture"). The 2020 Convertible Notes were sold in a private placement and bear interest at an annual rate of 0.500% payable semi-annually in arrears on March 1 and September 1 of each year, commencing September 1, 2015. In connection with the TiVo Acquisition, TiVo Corporation and Rovi entered into a supplemental indenture under which TiVo Corporation became a guarantor of the 2020 Convertible Notes and the notes became convertible into TiVo Corporation common stock.
In June 2019, the Company repurchased $50.0 million of outstanding principal of the 2020 Convertible Notes for $49.4 million. The Company allocated $48.4 million of the repurchase price to the liability component and the remaining $1.0 million to the equity component of the 2020 Convertible Notes. The Company accounted for the repurchase as a partial debt extinguishment and recognized a Loss on debt extinguishment of $0.1 million during the three months ended June 30, 2019 from writing off unamortized debt discount and issuance costs related to the repurchase.
The 2020 Convertible Notes were convertible at an initial conversion rate of 34.5968 shares of TiVo Corporation common stock per $1,000 of principal of notes, which was equivalent to an initial conversion price of $28.9044 per share of TiVo Corporation common stock. The conversion rate and conversion price are subject to adjustment pursuant to the 2015 Indenture, including as a result of dividends paid by TiVo Corporation. As of December 31, 2019, the 2020 Convertible Notes are convertible at a conversion rate of 39.7348 shares of TiVo Corporation common stock per $1,000 principal of notes, which is equivalent to a conversion price of $25.1668 per share of TiVo Corporation common stock.
On or after December 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert the 2020 Convertible Notes, in multiples of $1,000 of principal, at any time. In addition, during the 35-day trading period following a Merger Event, as defined in the 2015 Indenture, holders may convert the 2020 Convertible Notes, in multiples of $1,000 of principal.
On conversion, a holder will receive the conversion value of the 2020 Convertible Notes converted based on the conversion rate multiplied by the volume-weighted average price of TiVo Corporation’s common stock over a specified observation period. On conversion, Rovi will pay cash up to the aggregate principal of the 2020 Convertible Notes converted
and deliver shares of TiVo Corporation’s common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal of the 2020 Convertible Notes being converted.
The conversion rate is subject to adjustment in certain events, including certain events that constitute a "Make-Whole Fundamental Change" (as defined in the 2015 Indenture). In addition, if Rovi undergoes a "Fundamental Change" (as defined in the 2015 Indenture) prior to March 1, 2020, holders may require Rovi to repurchase for cash all or a portion of the 2020 Convertible Notes at a repurchase price equal to 100% of the principal of the repurchased 2020 Convertible Notes, plus accrued and unpaid interest. The conversion rate is also subject to customary anti-dilution adjustments.
The 2020 Convertible Notes are not redeemable prior to maturity by Rovi and no sinking fund is provided. The 2020 Convertible Notes are unsecured and do not contain financial covenants or restrictions on the payment of dividends, the incurrence of indebtedness or the repurchase of other securities by Rovi. The 2015 Indenture includes customary terms and covenants, including certain events of default after which the 2020 Convertible Notes may be due and payable immediately.
TiVo Corporation has separately accounted for the liability and equity components of the 2020 Convertible Notes. The initial carrying amount of the liability component was calculated by estimating the value of the 2020 Convertible Notes using TiVo Corporation’s estimated non-convertible borrowing rate of 4.75% at the time the instrument was issued. The carrying amount of the equity component, representing the value of the conversion option, was determined by deducting the liability component from the principal of the 2020 Convertible Notes. The difference between the principal of the 2020 Convertible Notes and the liability component is considered a debt discount which is being amortized to interest expense using the effective interest method over the expected term of the 2020 Convertible Notes. The equity component of the 2020 Convertible Notes was recorded as a component of Additional paid-in capital in the Consolidated Balance Sheets and will not be remeasured as long as it continues to meet the conditions for equity classification. Transaction costs of $7.6 million attributable to the liability component were recorded in Long-term debt, less current portion in the Consolidated Balance Sheets and are being amortized to interest expense using the effective interest method over the expected term of the 2020 Convertible Notes.
Related to the 2020 Convertible Notes, the Consolidated Balance Sheets included the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Liability component
|
|
|
|
Principal outstanding
|
$
|
295,000
|
|
|
$
|
345,000
|
|
Less: Unamortized debt discount
|
(2,031
|
)
|
|
(16,253
|
)
|
Less: Unamortized debt issuance costs
|
(270
|
)
|
|
(2,107
|
)
|
Carrying amount
|
$
|
292,699
|
|
|
$
|
326,640
|
|
|
|
|
|
Equity component
|
$
|
62,858
|
|
|
$
|
63,854
|
|
Components of interest expense related to the 2020 Convertible Notes included in the Consolidated Statements of Operations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Stated interest
|
$
|
1,594
|
|
|
$
|
1,725
|
|
|
$
|
1,725
|
|
Amortization of debt discount
|
12,809
|
|
|
13,246
|
|
|
12,645
|
|
Amortization of debt issuance costs
|
1,652
|
|
|
1,628
|
|
|
1,475
|
|
Total interest expense
|
$
|
16,055
|
|
|
$
|
16,599
|
|
|
$
|
15,845
|
|
Purchased Call Options and Sold Warrants related to the 2020 Convertible Notes
Concurrent with the issuance of the 2020 Convertible Notes in 2015, Rovi purchased call options with respect to its common stock. The call options gave TiVo Corporation the right, but not the obligation, to purchase up to 11.9 million shares of TiVo Corporation's common stock at an exercise price of $28.9044 per share, which corresponds to the initial conversion price of the 2020 Convertible Notes, and are exercisable by TiVo Corporation on conversion of the 2020 Convertible Notes. The exercise price is subject to adjustment, including as a result of dividends paid by TiVo Corporation. As of December 31, 2019, the call options give TiVo Corporation the right, but not the obligation, to purchase up to 11.7 million shares of TiVo
Corporation's common stock at an exercise price of $25.1668 per share. The call options are intended to reduce the potential dilution from conversion of the 2020 Convertible Notes. The purchased call options are separate transactions from the 2020 Convertible Notes and holders of the 2020 Convertible Notes do not have any rights with respect to the purchased call options.
Concurrent with the issuance of the 2020 Convertible Notes in 2015, Rovi sold warrants that provide the holder of the warrant the right, but not the obligation, to purchase up to 11.9 million shares of TiVo Corporation common stock at an exercise price of $40.1450 per share. The exercise price is subject to adjustment, including as a result of dividends paid by TiVo Corporation. As of December 31, 2019, 13.0 million warrants were outstanding with an exercise price of $34.9541 per share. The warrants are exercisable beginning June 1, 2020 and can be settled in cash or shares at TiVo Corporation's election. The warrants were entered into to offset the cost of the purchased call options. The warrants are separate transactions from the 2020 Convertible Notes and holders of the 2020 Convertible Notes do not have any rights with respect to the warrants.
2021 Convertible Notes
TiVo Solutions issued $230.0 million in aggregate principal of 2.0% Convertible Senior Notes that mature October 1, 2021 (the "2021 Convertible Notes") at par pursuant to an Indenture dated September 22, 2014 (as supplemented, "the 2014 Indenture"). The 2021 Convertible Notes bear interest at an annual rate of 2.0%, payable semi-annually in arrears on April 1 and October 1 of each year, commencing April 2015. On October 12, 2016, TiVo Solutions repaid $229.95 million of the par value of the 2021 Convertible Notes.
The 2021 Convertible Notes were convertible at an initial conversion rate of 56.1073 shares of TiVo Solutions common stock per $1,000 principal of notes, which was equivalent to an initial conversion price of $17.8230 per share of TiVo Solutions common stock. The conversion rate and conversion price are subject to adjustment pursuant to the 2014 Indenture, including as a result of dividends paid by TiVo Corporation. As of December 31, 2019, the 2021 Convertible Notes are convertible at a conversion rate of 24.8196 shares of TiVo Corporation common stock per $1,000 principal of notes and $154.30 per $1,000 principal of notes, which is equivalent to a conversion price of $34.0738 per share of TiVo Corporation common stock.
TiVo Solutions can settle the 2021 Convertible Notes in cash, shares of common stock, or any combination thereof pursuant to the 2014 Indenture. Subject to certain exceptions, holders may require TiVo Solutions to repurchase, for cash, all or part of their 2021 Convertible Notes upon a “Fundamental Change” (as defined in the 2014 Indenture) at a price equal to 100% of the principal amount of the 2021 Convertible Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the “Fundamental Change Repurchase Date” (as defined in the 2014 Indenture). In addition, on a “Make-Whole Fundamental Change” (as defined in the 2014 Indenture) prior to the maturity date of the 2021 Convertible Notes, TiVo Solutions will, in some cases, increase the conversion rate for a holder that elects to convert its 2021 Convertible Notes in connection with such Make-Whole Fundamental Change.
2019 Term Loan Facility and Revolving Loan Credit Agreement
On November 22, 2019, the Company, as borrower, and certain of the Company’s subsidiaries, as guarantors (together with the Company, collectively, the “Loan Parties”), entered into (i) a Credit and Guaranty Agreement (the “2019 Term Loan Facility”), with the lenders party thereto and HPS Investment Partners, LLC, as administrative agent and collateral agent and (ii) an ABL Credit and Guaranty Agreement (the “Revolving Loan Credit Agreement” and, together with the 2019 Term Loan Facility, the “2019 Credit Agreements”), with the lenders party thereto, Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent and Wells Fargo Bank, National Association, as co-collateral agent.
Under the 2019 Term Loan Facility, the Company borrowed $715.0 million, which matures on November 22, 2024. Loans under the 2019 Term Loan Facility bear interest, at the Company's option, at an interest rate equal to either (a) the London Interbank Offered Rate ("LIBOR"), plus (i) if TiVo’s Total Leverage Ratio (as defined in the 2019 Term Loan Facility) is greater than or equal to 3.50:1.00, 5.75%, (ii) if TiVo’s Total Leverage Ratio is greater than or equal to 3.00:1.00 but less than 3.50:100, 5.50%, or (iii) if TiVo’s Total Leverage Ratio is less than 3.00:1.00, 5.25%, in each case, subject to a 1.00% LIBOR floor or (b) the Base Rate (as defined in the 2019 Term Loan Facility), (i) if TiVo’s Total Leverage Ratio is greater than or equal to 3.50:1.00, 4.75%, (ii) if TiVo’s Total Leverage Ratio is greater than or equal to 3.00:1.00 but less than 3.50:100, 4.50%, or (iii) if TiVo’s Total Leverage Ratio is less than 3.00:1.00, 4.25%, in each case, subject to a 2.00% Base Rate floor.
TiVo may voluntarily prepay the 2019 Term Loan Facility at any time subject to (i) a 3.00% prepayment premium if the loans are prepaid on or prior to November 22, 2020 and (ii) a 2.00% prepayment premium if the loans are prepaid on or prior to November 22, 2021. TiVo is required to make mandatory prepayments with (i) net cash proceeds from certain asset sales, (ii) net insurance or condemnation proceeds, (iii) net cash proceeds from issuances of debt (other than permitted debt),
(iv) beginning with the fiscal year ending December 31, 2020, 50% of TiVo’s Consolidated Excess Cash Flow (as defined in the 2019 Term Loan Facility), (v) extraordinary receipts and (vi) certain net litigation proceeds, in each case, subject to certain exceptions. In the event the Xperi Combination is completed on or prior to November 22, 2020, TiVo would be required to repay the then-outstanding principal of the 2019 Term Loan Facility at par plus a 3.00% prepayment premium.
On March 31, 2020, TiVo will be required to make a payment equal to 0.25% of the original principal amount of the 2019 Term Loan Facility. Thereafter, quarterly installments in an amount equal to 2.50% of the original principal amount of the 2019 Term Loan Facility are due, with any remaining balance payable on the final maturity date of the 2019 Term Loan Facility.
The Company also entered into a $60.0 million Revolving Loan Credit Facility as part of the 2019 Credit Agreements, which expires on March 31, 2021. Availability of the Revolving Loan Credit Facility is based upon a borrowing base formula and periodic borrowing base certifications valuing certain of the Loan Parties’ accounts receivable as reduced by certain reserves, if any. There were no amounts outstanding under the Revolving Loan Credit Agreement at any time during the year ended December 31, 2019. Loans under the Revolving Loan Credit Facility bear interest, at TiVo’s option, at a rate equal to either (a) LIBOR, plus (i) if the average daily Specified Excess Availability (as defined in the Revolving Loan Credit Agreement) is greater than 66.67%, 1.50%, (ii) if the average daily Specified Excess Availability is greater than 33.33% but less than or equal to 66.66%, 1.75%, or (iii) if the average daily Specified Excess Availability is less than or equal to 33.33%, 2.00%, in each case, subject to a 0.00% LIBOR floor or (b) the Base Rate (as defined in the Revolving Loan Credit Agreement), (i) if the average daily Specified Excess Availability is greater than 66.67%, 0.50%, (ii) if the average daily Specified Excess Availability is greater than 33.33% but less than or equal to 66.66%, 0.75%, or (iii) if the average daily Specified Excess Availability is less than or equal to 33.33%, 1.00%, in each case, subject to a 1.00% Base Rate floor.
Revolving loans may be borrowed, repaid and re-borrowed until March 31, 2021, when all outstanding amounts must be repaid.
The 2019 Credit Agreements contain customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, and dividends and other distributions. The 2019 Credit Agreements are secured by substantially all of the Company's assets.
Senior Secured Credit Facility
On July 2, 2014, Rovi Corporation, as parent guarantor, and two of its wholly-owned subsidiaries, Rovi Solutions Corporation and Rovi Guides, Inc., as borrowers, and certain of its other subsidiaries, as subsidiary guarantors, entered into a Credit Agreement (the “Credit Agreement”). After the completion of the TiVo Acquisition, TiVo Corporation became a guarantor under the Credit Agreement. The Credit Agreement provided for a (i) five-year $125.0 million term loan A facility (“Term Loan Facility A”), (ii) seven-year $700.0 million term loan B facility (“Term Loan Facility B” and together with Term Loan Facility A, the “Term Loan Facility”) and (iii) five-year $175.0 million revolving credit facility (including a letter of credit sub-facility) (the "Revolving Facility” and together with the Term Loan Facility, the “Senior Secured Credit Facility”). In September 2015, Rovi made a voluntary principal prepayment to extinguish Term Loan Facility A and elected to terminate the Revolving Facility. In November 2019, in conjunction with entering into the 2019 Term Loan Facility, the outstanding principal balance of $621.9 million of Term Loan Facility B was repaid in full.
Prior to the refinancing described below, Term Loan Facility B was amortizing in equal quarterly installments in an aggregate annual amount equal to 1% of the original principal amount thereof, with any remaining balance payable on the final maturity date of Term Loan Facility B. Loans under Term Loan Facility B bore interest, at the Company's option, at a rate equal to either the London Interbank Offered Rate ("LIBOR"), plus an applicable margin equal to 3.00% per annum (subject to a 0.75% LIBOR floor) or the prime lending rate, plus an applicable margin equal to 2.00% per annum.
On January 26, 2017, TiVo Corporation, as parent guarantor, two of its wholly-owned subsidiaries, Rovi Solutions Corporation and Rovi Guides, Inc., as borrowers, and certain of TiVo Corporation’s other subsidiaries, as subsidiary guarantors, entered into Refinancing Agreement No. 1 with respect to Term Loan Facility B. The $682.5 million in proceeds from Refinancing Agreement No. 1 was used to repay existing loans under Term Loan Facility B in full. The borrowing terms for Refinancing Agreement No. 1 were substantially similar to the borrowing terms of Term Loan Facility B. However, loans under Refinancing Agreement No. 1 bore interest, at the borrower's option, at a rate equal to either LIBOR, plus an applicable margin equal to 2.50% per annum (subject to a 0.75% LIBOR floor) or the prime lending rate, plus an applicable margin equal to 1.50% per annum. Refinancing Agreement No. 1 was part of the Senior Secured Credit Facility.
The Credit Agreement contained customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, and dividends and other distributions. The Credit Agreement was secured by substantially all of the Company's assets.
The November 2019 repayment of the remaining outstanding principal balance Term Loan Facility B of $621.9 million was accounted for as a debt extinguishment. In addition, annually, the Company was required to make an additional principal payment on Term Loan Facility B, which was calculated as a percentage of the prior year's "Excess Cash Flow" as defined in the Credit Agreement. In February 2019, the Company made an Excess Cash Flow payment of $46.6 million, which eliminated the remaining quarterly principal payments required by Term Loan Facility B. The Company accounted for the Excess Cash Flow payment in February 2019 as a partial debt extinguishment. During the year ended December 31, 2019, the Company recognized a Loss on debt extinguishment of $2.1 million from writing off unamortized debt discount and issuance costs related to the Excess Cash Flow payment and the final extinguishment of Term Loan Facility B.
Financing for the Xperi Combination
In connection with the execution of the Xperi Merger Agreement, TiVo and Xperi obtained a debt commitment letter (the “Commitment Letter”), dated December 18, 2019, with Bank of America, N.A. (“Bank of America”), BofA Securities, Inc. and Royal Bank of Canada (“Royal Bank”), pursuant to which, Bank of America and Royal Bank have committed to provide a senior secured first lien term loan B facility in an aggregate principal amount of $1,100 million (the “Debt Financing”). On January 3, 2020, TiVo, Xperi, Bank of America, Royal Bank and Barclays Bank PLC (“Barclays”) entered into a supplement to the Commitment Letter to add Barclays as an additional initial lender and an additional joint lead arranger and joint bookrunner and to reallocate a portion of the debt commitments of Bank of America and Royal Bank under the Commitment Letter to Barclays. The proceeds from the Debt Financing may be used (i) to pay fees and expenses incurred in connection with the Merger and the related transactions, (ii) to finance the refinancing of certain existing indebtedness of TiVo and Xperi, and (iii) to the extent of any remaining amounts, for working capital and other general corporate purposes.
Expected Principal Payments
As of December 31, 2019, aggregate expected principal payments on long-term debt, including the current portion of long-term debt, were as follows (in thousands):
|
|
|
|
|
2020
|
$
|
350,413
|
|
2021
|
71,548
|
|
2022
|
71,500
|
|
2023
|
71,500
|
|
2024
|
445,087
|
|
Total
|
$
|
1,010,048
|
|
Interest Rate Swaps
The Company issues long-term debt denominated in U.S. dollars based on market conditions at the time of financing and may enter into interest rate swaps to achieve a primarily fixed interest rate. Alternatively, the Company may choose not to enter into an interest rate swap or may terminate a previously executed interest rate swap if it believes a larger proportion of floating-rate debt would be beneficial. The Company has not designated any of its interest rate swaps as hedges for accounting purposes. The Company records interest rate swaps in the Consolidated Balance Sheets at fair value with changes in fair value recorded as (Loss) gain on interest rate swaps in the Consolidated Statements of Operations. Amounts are presented in the Consolidated Balance Sheets after considering the right of offset based on its master netting agreements. During the years ended December 31, 2019, 2018 and 2017, the Company recorded a loss of $5.0 million and gains of $3.4 million and $1.9 million, respectively, from adjusting its interest rate swaps to fair value.
Details of the Company's interest rate swaps as of December 31, 2019 and December 31, 2018 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Contract Inception
|
Contract Effective Date
|
Contract Maturity
|
December 31, 2019
|
December 31, 2018
|
Interest Rate Paid
|
Interest Rate Received
|
June 2013
|
January 2016
|
March 2019
|
$
|
—
|
|
$
|
250,000
|
|
2.23%
|
One-month USD-LIBOR
|
September 2014
|
January 2016
|
July 2021
|
$
|
125,000
|
|
$
|
125,000
|
|
2.66%
|
One-month USD-LIBOR
|
September 2014
|
March 2017
|
July 2021
|
$
|
200,000
|
|
$
|
200,000
|
|
2.93%
|
One-month USD-LIBOR
|
(9) Leases
Adoption of New Lease Accounting Standard
The Company adopted the provisions of the new lease accounting standard described in Note 1 using the modified retrospective transition approach on January 1, 2019. As such, the new lease accounting standard was applied to contracts in effect as of December 31, 2018. Results for periods beginning after December 31, 2018 are presented in accordance with the new lease accounting standard, while prior period amounts were not restated and continue to be reported in accordance with the Company's previous lease accounting policies. On adoption, the Company recognized a $66.7 million Right-of-use asset and an $81.9 million Lease liability.
Practical Expedients and Exemptions
On adoption, the Company elected to apply the package of practical expedients permitted under the transition provisions of the new lease accounting standard, which among other things, allowed the Company to carryforward the historical lease classification. In addition, the Company elected to apply a practical expedient to combine the lease components and non-lease components into a single lease component. The Company also elected to apply a practical expedient to not measure or recognize right-of-use assets or lease liabilities for leases with a lease term of 12 months or less.
Lease Details
The Company has operating leases for corporate offices, data centers and certain equipment. As of December 31, 2019, the Company's leases have remaining lease terms of 6 months to 10 years and the Company has an option to terminate certain leases within the next 7 years. Additionally, certain leases include options to extend the lease term for up to 10 years. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company subleases certain real estate to third parties. The sublease portfolio consists of operating leases for previously exited office space. Certain subleases include variable payments for operating costs. The subleases are generally co-terminus with the head lease, or shorter. Subleases do not include any residual value guarantees or restrictions or covenants imposed by the leases. Income from subleases is recognized as a reduction to Selling, general and administrative expenses.
The components of operating lease costs were as follows (in thousands):
|
|
|
|
|
Classification
|
Year Ended December 31, 2019
|
Fixed lease cost
|
$
|
17,601
|
|
Variable lease cost
|
5,031
|
|
Short-term lease cost
|
426
|
|
Less: Sublease income
|
(9,317
|
)
|
Total operating lease cost
|
$
|
13,741
|
|
Supplemental cash flow information related to leases was as follows (in thousands):
|
|
|
|
|
|
Year Ended December 31, 2019
|
Operating cash flows:
|
|
Cash paid for amounts included in the measurement of operating Lease liabilities
|
$
|
19,328
|
|
Non-cash activity:
|
|
Right-of-use assets obtained in exchange for operating Lease liabilities
|
$
|
8,519
|
|
Derecognition of Right-of-use assets upon early termination of lease
|
$
|
(2,373
|
)
|
Impairment of Right-of-use assets
|
$
|
(591
|
)
|
Supplemental balance sheet information related to operating leases was as follows (in thousands, except weighted average lease term and discount rate):
|
|
|
|
|
|
December 31, 2019
|
Right-of-use assets
|
$
|
59,888
|
|
|
|
Lease liabilities - current
|
$
|
13,009
|
|
Lease liabilities - non current
|
61,603
|
|
Total Lease liabilities
|
$
|
74,612
|
|
|
|
Weighted average remaining lease term
|
6.0 years
|
|
Weighted average discount rate
|
6.6
|
%
|
Expected Lease Payments
As of December 31, 2019, aggregate expected lease payments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Liabilities
|
|
Sublease Income
|
|
Net Operating Lease Payments
|
2020
|
$
|
17,657
|
|
|
$
|
(5,823
|
)
|
|
$
|
11,834
|
|
2021
|
16,406
|
|
|
(5,738
|
)
|
|
10,668
|
|
2022
|
13,681
|
|
|
(5,909
|
)
|
|
7,772
|
|
2023
|
11,681
|
|
|
(6,081
|
)
|
|
5,600
|
|
2024
|
11,995
|
|
|
(6,256
|
)
|
|
5,739
|
|
Thereafter
|
20,109
|
|
|
(7,214
|
)
|
|
12,895
|
|
Total lease payments
|
91,529
|
|
|
(37,021
|
)
|
|
54,508
|
|
Less: imputed interest
|
(16,917
|
)
|
|
—
|
|
|
(16,917
|
)
|
Total
|
$
|
74,612
|
|
|
$
|
(37,021
|
)
|
|
$
|
37,591
|
|
(10) Contingencies
Guaranteed Minimum Purchase Obligation
On December 31, 2019, the Company entered into a contract requiring the Company to generate a minimum number of Qualified Referred Subscribers (as defined in the contract) over a 30 month period. In the event that the aggregate number of Qualified Referred Subscribers generated by the Company within the specified time period is less than the minimum guaranteed subscribers, the Company is required to pay an amount equal to the shortfall between the number of Qualified Referred Subscribers generated by the Company and the required minimum multiplied by a per Qualified Referred Subscribers fee, up to a maximum of $5.0 million. As of December 31, 2019, no amounts were accrued in the Consolidated Balance Sheets related to this contract as the Company believes is will be able to satisfy the contractual minimum within the 30 month period.
Indemnifications
In the normal course of business, the Company provides indemnifications of varying scopes and amounts to certain of its licensees against claims made by third parties arising out of the use and / or incorporation of the Company's products, intellectual property, services and / or technologies into the licensees' products and services. TiVo Solutions has also indemnified certain customers and business partners for, among other things, the licensing of its products, the sale of its digital video recorders ("DVRs"), and the provision of engineering and consulting services. The Company’s obligation under its indemnification agreements with customer and business partners would arise in the event a third party filed a claim against one of the parties that was covered by the Company’s indemnification. Pursuant to these agreements, the Company may indemnify the other party for certain losses suffered or incurred by the indemnified party in connection with various types of claims, which may include, without limitation, intellectual property infringement, advertising and consumer disclosure laws, certain tax liabilities, negligence and intentional acts in the performance of services and violations of laws.
In some cases, the Company may receive tenders of defense and indemnity arising from products, intellectual property services and / or technologies that are no longer provided by the Company due to having divested certain assets, but which were previously licensed or provided by the Company.
The term of the Company's indemnification obligations is generally perpetual. The Company's indemnification obligations are typically limited to the cumulative amount paid to the Company by the licensee under the license agreement; however, some license agreements, including those with the Company's largest multiple system operator and digital broadcast satellite providers, have larger limits or do not specify a limit on amounts that may be payable under the indemnity arrangements.
The Company cannot reasonably estimate the possible range of losses that may be incurred pursuant to its indemnification obligations, if any. Variables affecting any such assessment include, but are not limited to: the nature of the claim asserted; the relative merits of the claim; the financial ability of the party suing the indemnified party to engage in protracted litigation; the number of parties seeking indemnification; the nature and amount of damages claimed by the party suing the indemnified party; and the willingness of such party to engage in settlement negotiations. Due to the nature of the Company's potential indemnity liability, the Consolidated Financial Statements could be materially adversely affected in a particular period by one or more of these indemnities.
Under certain circumstances, TiVo Solutions may seek to recover some or all amounts paid to an indemnified party from its insurers. TiVo Solutions does not have any assets held either as collateral or by third parties that, on the occurrence of an event requiring it to indemnify a customer, could be obtained and liquidated to recover all or a portion of the amounts paid pursuant to its indemnification obligations.
Legal Proceedings
The Company may be involved in various lawsuits, claims and proceedings, including intellectual property, commercial, securities and employment matters that arise in the normal course of business. The Company accrues a liability when management believes information available prior to the issuance of the financial statements indicates it is probable a loss has been incurred as of the date of the financial statements and the amount of loss can be reasonably estimated. The Company adjusts its accruals to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Legal costs are expensed as incurred.
In July 2018, Dell Technologies Inc. filed a complaint against the Company and certain of its subsidiaries in Texas state court, alleging breach of contract and other causes of action. The claim was related to Dell’s past relationship with the Company’s Sonic Solutions subsidiary dating back to 2001 whereby Dell and Sonic had an agreement related to one of Sonic’s product lines (the Company acquired Sonic in 2011 and divested the product line at issue in 2012). In 2011, Dell sought indemnity from Sonic Solutions for a third-party claim of patent infringement, which was rejected. Dell subsequently resolved the underlying claim with the third-party. In response to the July 2018 complaint, the Company filed its defenses to Dell’s claims and the state court had set a trial date for September 2020. Dell and the Company had been in discussions regarding Dell’s claim throughout the discovery period and in December 2019, the parties agreed to settle all claims for a $4.0 million payment from the Company and the case was dismissed. The settlement loss and cash payment are included as part of discontinued operations during the year ended December 31, 2019.
On June 15, 2011, TNS Media Research, LLC (d/b/a Kantar Media Audiences, or "Kantar") brought a claim for declaratory judgment against TRA Global Inc. (which was acquired by TiVo Inc. in July 2012 and renamed TiVo Research and
Analytics, Inc. or "TiVo Research") in U.S. District Court alleging non-infringement of a TiVo Research patent, among other claims. TiVo Research responded by alleging affirmative defenses as well as counterclaims alleging infringement by Kantar of the TiVo Research patent at issue and one other patent. On February 22, 2016, the District Court granted Kantar's summary judgment motion on invalidity under Section 101 as to each of TiVo Research's asserted patent claims. On May 18, 2018, the District Court granted Kantar’s motion for attorneys' fees and expenses related to TiVo Research’s patent claims in this action. During the three months ended June 30, 2018, TiVo Research recorded a $4.5 million loss in Selling, general and administrative expenses and agreed to transfer of ownership of the two patents at issue to Kantar as part of a settlement agreement. TiVo Research paid the settlement during the year ended December 31, 2018.
On January 27, 2017, UBS Securities LLC ("UBS") filed a complaint against TiVo Solutions in the Supreme Court of the State of New York, County of New York alleging TiVo Solutions breached its contractual obligations to UBS under a September 14, 2010 letter agreement (the "Letter Agreement") whereby TiVo Solutions retained UBS as its financial advisor. In the complaint, UBS alleged that TiVo Solutions never terminated its Letter Agreement with UBS and, as a result, TiVo Solutions breached its obligations to UBS by (i) not paying UBS's annual retainer fee of $0.3 million for an unspecified number of years, but totaling an amount of $1.4 million, including unpaid retainer fees and out-of-pocket expenses, and (ii) not considering or retaining UBS as TiVo Solutions' financial advisor in connection with its merger with Rovi, for which UBS alleged TiVo Solutions owed it a fee of $14.5 million (the amount TiVo Solutions paid its financial advisor for the merger). The Company and UBS settled this matter in May 2017 for $0.7 million, to be paid in a combination of a current cash payment and potential future service fees.
On November 15, 2016, Driehaus Appraisal Litigation Fund, L.P., Driehaus Companies Profit Sharing Plan and Trust, and Richard H. Driehaus IRA (the “Driehaus Entities”) filed a petition for appraisal pursuant to Section 262 of the Delaware General Corporation Law ("Section 262") in the Court of Chancery of the State of Delaware covering a total of 1.9 million shares of common stock of TiVo Solutions in connection with the TiVo Acquisition. Additionally, on November 15, 2016, Fir Tree Value Master Fund L.P. and Fir Tree Capital Opportunity Master Fund L.P. (the “Fir Tree Entities” and together with the Driehaus Entities, the “Dissenting Holders”) filed a petition for appraisal pursuant to Section 262 in the Court of Chancery of the State of Delaware covering a total of 7.2 million shares of common stock of TiVo Solutions in connection with the TiVo Acquisition. On January 11, 2017, the Court of Chancery consolidated the two petitions into a consolidated action entitled In re Appraisal of TiVo, Inc., C.A. No. 12909-CB (Del. Ch.). The Dissenting Holders were also seeking the payment of their costs and attorneys’ fees. On March 27, 2017, TiVo Corporation executed a settlement agreement with the Dissenting Holders to settle their claims for $117.0 million, which was paid in cash in April 2017. In connection with the settlement, in March 2017, the exchange agent in the TiVo Acquisition returned $25.1 million in cash related to the Dissenting Holders to TiVo Corporation. As the amount paid to Dissenting Holders resulted from a settlement other than a judgment from the Delaware Court of Chancery, a TiVo Acquisition litigation loss of $12.9 million was recognized in the Consolidated Statements of Operations for the year ended December 31, 2017.
The Company believes it has recorded adequate provisions for any such lawsuits, claims and proceedings and, as of December 31, 2019, it was not reasonably possible that a material loss had been incurred in excess of the amounts recognized in the Consolidated Financial Statements. Based on its experience, the Company believes that damage amounts claimed in these matters are not meaningful indicators of potential liability. Some of the matters pending against the Company involve potential compensatory, punitive or treble damage claims or sanctions, that, if granted, could require the Company to pay damages or make other expenditures in amounts that could have a material adverse effect on its Consolidated Financial Statements. Given the inherent uncertainties of litigation, the ultimate outcome of the ongoing matters cannot be predicted with certainty. While litigation is inherently unpredictable, the Company believes it has valid defenses with respect to the legal matters pending against it. Nevertheless, the Consolidated Financial Statements could be materially adversely affected in a particular period by the resolution of one or more of these contingencies.
(11) Stockholders' Equity
Earnings (Loss) Per Share
Basic earnings per share ("EPS") is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares and dilutive common share equivalents outstanding during the period, except for periods of a loss from continuing operations. In periods of a loss from continuing operations, no common share equivalents are included in Diluted EPS because their effect would be anti-dilutive.
The number of shares used to calculate Basic and Diluted EPS were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Weighted average shares used in computing basic per share amounts
|
125,484
|
|
|
123,020
|
|
|
120,355
|
|
Dilutive effect of equity-based compensation awards
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average shares used in computing diluted per share amounts
|
125,484
|
|
|
123,020
|
|
|
120,355
|
|
Weighted average potential shares excluded from the calculation of Diluted EPS as their effect would have been anti-dilutive were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Restricted awards
|
5,377
|
|
|
4,696
|
|
|
4,567
|
|
Stock options
|
800
|
|
|
2,027
|
|
|
2,850
|
|
2020 Convertible Notes (a)
|
12,589
|
|
|
13,162
|
|
|
12,429
|
|
2021 Convertible Notes (a)
|
1
|
|
|
1
|
|
|
1
|
|
Warrants related to 2020 Convertible Notes (a)
|
12,933
|
|
|
12,486
|
|
|
12,232
|
|
Weighted average potential shares excluded from the calculation of Diluted EPS
|
31,700
|
|
|
32,372
|
|
|
32,079
|
|
|
|
(a)
|
See Note 8 for additional details.
|
For the years ended December 31, 2019, 2018 and 2017, 0.8 million, 0.7 million and 0.4 million weighted average performance-based restricted awards, respectively, were excluded from the calculation of Diluted EPS as the performance metric had yet to be achieved.
Effect of the 2020 Convertible Notes and related transactions on Diluted EPS
In periods when the Company reports income from continuing operations, the dilutive effect of additional shares of common stock that may be issued on conversion of the 2020 Convertible Notes are included in the calculation of Diluted EPS if the price of the Company’s common stock exceeds the conversion price. The 2020 Convertible Notes have no impact on Diluted EPS until the price of the Company's common stock exceeds the conversion price of $25.1668 per share because the principal of the 2020 Convertible Notes is required to be settled in cash. Based on the closing price of the Company's common stock of $8.48 per share on December 31, 2019, the if-converted value of the 2020 Convertible Notes was less than the outstanding principal.
The 2020 Convertible Notes would be dilutive if the Company’s common stock closed at or above $25.1668 per share. However, on conversion, no economic dilution is expected from the 2020 Convertible Notes as the exercise of call options purchased by the Company with respect to its common stock described in Note 8 is expected to eliminate any potential dilution from the 2020 Convertible Notes that would have otherwise occurred. The call options are always excluded from the calculation of Diluted EPS as they are anti-dilutive under the treasury stock method.
The warrants sold by the Company with respect to its common stock in connection with the 2020 Convertible Notes described in Note 8 have an effect on Diluted EPS when the Company’s share price exceeds the warrant’s strike price of $34.9541 per share. As the price of the Company’s common stock increases above the warrant strike price, additional dilution would occur.
Share Repurchase Program
On February 14, 2017, TiVo Corporation's Board of Directors approved an increase to the share repurchase program authorization to $150.0 million. The February 2017 authorization includes amounts which were outstanding under previously authorized share repurchase programs. During the years ended December 31, 2019, 2018 and 2017, no shares were repurchased under the share repurchase program. As of December 31, 2019, the Company had $150.0 million of share repurchase authorization remaining.
The Company issues restricted stock and restricted stock units (collectively, "restricted awards") as part of the equity-based compensation plans described in Note 12. For the majority of restricted awards, shares are withheld to satisfy required withholding taxes at the vesting date. Shares withheld to satisfy required withholding taxes in connection with the vesting of restricted awards are treated as common stock repurchases in the Consolidated Financial Statements because they reduce the number of shares that would have been issued on vesting. However, these withheld shares are not included in common stock repurchases under the Company's authorized share repurchase plan. During the years ended December 31, 2019, 2018 and 2017, the Company withheld 0.7 million, 0.5 million and 0.8 million shares of common stock to satisfy $6.1 million, $7.4 million and $15.1 million of required withholding taxes, respectively.
Dividends
For the years ended December 31, 2019, 2018 and 2017, the Company declared and paid dividends of $0.34, $0.72 and $0.72 per share, respectively, for aggregate cash payments of $42.5 million, $89.0 million and $87.1 million, respectively.
The capacity to pay dividends in the future depends on many factors, including the Company's financial condition, results of operations, capital requirements, capital structure, industry practice and other business conditions that the Board of Directors considers relevant. In addition, the agreements governing the Company's debt and the Xperi Merger Agreement restrict the payment of dividends.
Section 382 Transfer Restrictions
On December 18, 2019 (the “Rights Dividend Declaration Date”), upon entering into an Agreement and Plan of Merger and Reorganization with Xperi Corporation, the Board of Directors of the Company adopted a Section 382 rights plan (the “Section 382 Rights Plan”), and declared a dividend distribution of one right for each outstanding share of the Company’s common stock to stockholders of record at the close of business on January 6, 2020. The Board of Directors adopted the Section 382 Rights Plan in an effort to protect stockholder value by attempting to protect against a possible limitation on the Company’s ability to use its net operating loss carryforwards (“NOLs”). If the Company experiences an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), the Company’s ability to fully utilize the NOLs on an annual basis will be substantially limited, and the timing of the usage of the NOLs could be substantially delayed, which could therefore significantly impair the value of those benefits. The Section 382 Rights Plan is intended to act as a deterrent to any person (an “Acquiring Person”) acquiring (together with all affiliates and associates of such person) beneficial ownership of 4.95% or more of the Company’s outstanding common stock within the meaning of Section 382 of the Code, without the approval of the Board of Directors. Stockholders who beneficially own 4.95% or more of the Company’s outstanding common stock as of the Rights Dividend Declaration Date will not be deemed to be an Acquiring Person, but such person will be deemed an Acquiring Person if such person (together with all affiliates and associates of such person) becomes the beneficial owner of securities representing a percentage of the Company’s common stock that exceeds by 0.5% or more than the lowest percentage of beneficial ownership of the Company’s common stock that such person had at any time since the Rights Dividend Declaration Date. The description and terms of the rights are set forth in a Section 382 Rights Agreement, dated as of December 18, 2019, by and between the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent.
On the Rights Dividend Declaration Date, the Board of Directors authorized the issuance of one right (a “Right”) for each outstanding share of the Company’s common stock to the Company’s stockholders of record as of December 18, 2019. Subject to the terms, provisions and conditions of the Section 382 Rights Agreement, if the Rights become exercisable, each Right would initially represent the right to purchase from the Company one one-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock, par value $0.001 per share, for a purchase price of $35 per Right. If issued, each fractional share of Series A Junior Participating Preferred Stock would give the stockholder approximately the same dividend, voting and liquidation rights as does one share of the Company’s common stock. However, prior to exercise, a Right does not give its holder any rights as a stockholder of TiVo, including any dividend, voting or liquidation rights.
(12) Equity-based Compensation
Restricted Awards and Stock Options
The Company grants equity-based compensation awards from the Rovi 2008 Equity Incentive Plan (the “Rovi 2008 Plan”). The Rovi 2008 Plan permits the grant of restricted awards, stock options and similar types of equity awards to employees, officers, directors and consultants of the Company. Restricted stock is considered outstanding at the time of grant as holders are entitled to voting rights. Restricted awards are generally subject to a four-year graded vesting period. Stock options generally have vesting periods of four years with one quarter of the grant vesting on the first anniversary of the grant, followed by monthly vesting thereafter. Stock options generally have a contractual term of seven years. As of December 31, 2019, the Company had 36.5 million shares of common stock reserved and 11.5 million shares of common stock available for issuance under the Rovi 2008 Plan.
On September 7, 2016, the Company assumed the TiVo Inc. Amended and Restated 2008 Equity Incentive Award Plan (the “TiVo 2008 Plan”). The Company amended and restated the TiVo 2008 Plan effective as of the closing of the TiVo Acquisition to be the TiVo Corporation Titan Equity Incentive Award Plan for purposes of awards granted following the TiVo Acquisition Date. Restricted stock is considered outstanding at the time of grant as holders are entitled to voting rights. Restricted awards assumed from the TiVo 2008 Plan are generally subject to a three-year vesting period, with semiannual vesting. Restricted awards issued by the Company from the TiVo 2008 Plan are generally subject to a four-year graded vesting period. Stock options assumed from the TiVo 2008 Plan generally have a four-year vesting period with one quarter of the grant vesting on the first anniversary of the grant followed by monthly vesting thereafter. Stock options assumed from the TiVo 2008 Plan generally have a contractual term of seven years. As of December 31, 2019, there were 3.9 million shares of common stock reserved for future issuance as outstanding awards vest under the TiVo 2008 Plan. The TiVo 2008 Plan expired in August 2018, and no further shares of common stock are available for future grant.
The Company also grants performance-based restricted stock units to certain of its senior officers for three-year performance periods. Vesting in the performance-based restricted stock units is subject to a market condition, as well as a service condition. Depending on the level of achievement, the maximum number of shares that could be issued on vesting generally could be up to 200% of the target number of performance-based restricted stock units granted. For awards subject to a market vesting condition, the fair value per award is fixed at the grant date and the amount of compensation expense is not adjusted during the performance period regardless of changes in the level of achievement of the market condition.
In June 2019, the Company granted 0.6 million performance-based restricted stock units to certain of its senior officers with vesting conditioned on completion of a change-in-control event as defined in the grant agreement, as well as a service condition. For these awards, the fair value per award is estimated as the price of the Company's common stock at the close of trading on the date of grant, less the present value of dividends expected to be paid during the vesting period. However, no compensation expense is recognized for these awards until the change-in-control event occurs, at which time the grant date fair value of $3.8 million, adjusted for any forfeitures, would be recognized as compensation expense.
Employee Stock Purchase Plan
The Company’s 2008 Employee Stock Purchase Plan (“ESPP”) allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP consists of up to four consecutive six-month purchase periods within a twenty-four-month offering period. Employees purchase shares each purchase period at the lower of 85% of the market value of the Company’s common stock at either the beginning of the offering period or the end of the purchase period. As of December 31, 2019, the Company had 3.3 million shares of common stock reserved and 3.3 million shares available for issuance under the ESPP.
Valuation Techniques and Assumptions
As the Company's restricted awards are generally not eligible for dividend protection, the fair value of restricted awards subject to service conditions is estimated as the price of the Company's common stock at the close of trading on the date of grant, less the present value of dividends expected to be paid during the vesting period. Where a restricted stock award requires a post-vesting restriction on sale, the grant date fair value is adjusted to reflect a liquidity discount based on the expected post-vesting holding period.
A Monte Carlo simulation is used to estimate the fair value of restricted stock units subject to market conditions with expected volatility estimated using the historical volatility of the Company's common stock.
The Company uses the Black-Scholes-Merton option-pricing formula to estimate the fair value of ESPP shares. The Black-Scholes-Merton option-pricing formula uses complex and subjective inputs, such as the expected volatility of the Company's common stock over the expected term of the grant and projected employee exercise behavior. Expected volatility is estimated using a combination of historical volatility and implied volatility derived from publicly-traded options on the Company's common stock. The expected term is estimated by calculating the period the award is expected to be outstanding based on historical experience and the terms of the grant. The risk-free interest rate is estimated based on the yield of U.S. Treasury zero-coupon bonds with remaining terms similar to the expected term at the grant date. The Company assumes a constant dividend yield commensurate with the dividend yield on the grant date.
Weighted-average assumptions used to estimate the fair value of equity-based compensation awards granted during the period were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Restricted stock units subject to market conditions:
|
|
|
|
|
|
Expected volatility
|
40.7
|
%
|
|
39.2
|
%
|
|
50.1
|
%
|
Expected term
|
2.5 years
|
|
|
2.5 years
|
|
|
3.0 years
|
|
Risk-free interest rate
|
1.8
|
%
|
|
2.6
|
%
|
|
1.9
|
%
|
Expected dividend yield
|
4.4
|
%
|
|
5.5
|
%
|
|
4
|
%
|
ESPP shares:
|
|
|
|
|
|
Expected volatility
|
49.2
|
%
|
|
43.3
|
%
|
|
42.0
|
%
|
Expected term
|
1.3 years
|
|
|
1.3 years
|
|
|
1.3 years
|
|
Risk-free interest rate
|
2.1
|
%
|
|
2.2
|
%
|
|
1.1
|
%
|
Expected dividend yield
|
5.1
|
%
|
|
5.6
|
%
|
|
2.4
|
%
|
The number of awards expected to vest during the requisite service period is estimated at the time of grant using historical data and equity-based compensation is only recognized for awards for which the requisite service is expected to be rendered for awards subject to service or performance vesting conditions. Forfeiture estimates are revised during the requisite service period and the effect of changes in the number of awards expected to vest during the requisite service period is recognized on a cumulative catch-up basis in the period estimates are revised.
The weighted-average grant date fair value of equity-based awards (per award) and pre-tax equity-based compensation expense (in thousands) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Weighted average grant date fair value
|
|
|
|
|
|
Restricted awards
|
$
|
6.73
|
|
|
$
|
11.63
|
|
|
$
|
15.18
|
|
ESPP shares
|
$
|
3.62
|
|
|
$
|
3.99
|
|
|
$
|
5.70
|
|
Equity-based compensation
|
|
|
|
|
|
Pre-tax equity-based compensation, excluding amounts included in restructuring expense
|
$
|
28,705
|
|
|
$
|
39,779
|
|
|
$
|
52,561
|
|
Pre-tax equity-based compensation, included in restructuring expense
|
$
|
375
|
|
|
$
|
3,039
|
|
|
$
|
2,663
|
|
As of December 31, 2019, there was $50.4 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested equity-based awards which is expected to be recognized over a remaining weighted average period of 2.6 years. The unrecognized compensation cost, net of estimated forfeitures, excludes $3.8 million of unrecognized compensation cost related to performance-based restricted stock units with vesting conditioned on completion of a change-in-control event.
Equity-Based Compensation Award Activity
Activity related to the Company's restricted awards for the year ended December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
Restricted Awards (In Thousands)
|
|
Weighted-Average Grant Date Fair Value
|
Outstanding as of beginning of period
|
5,350
|
|
|
$
|
14.26
|
|
Granted
|
4,591
|
|
|
$
|
6.73
|
|
Vested
|
(2,063
|
)
|
|
$
|
14.29
|
|
Forfeited
|
(1,346
|
)
|
|
$
|
12.18
|
|
Outstanding as of end of period
|
6,532
|
|
|
$
|
9.39
|
|
As of December 31, 2019, unvested restricted awards include 1.1 million performance-based restricted stock units.
The aggregate fair value of restricted awards vested during the years ended December 31, 2019, 2018 and 2017 was $16.8 million, $23.5 million and $48.6 million, respectively.
Activity related to the Company's stock options for the year ended December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options (In Thousands)
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value (In Thousands)
|
Outstanding as of beginning of period
|
1,702
|
|
|
$
|
24.56
|
|
|
|
|
|
Forfeited and expired
|
(1,182
|
)
|
|
$
|
25.03
|
|
|
|
|
|
Outstanding as of end of period
|
520
|
|
|
$
|
23.49
|
|
|
1.3 years
|
|
$
|
—
|
|
Vested and expected to vest as of December 31, 2019
|
520
|
|
|
$
|
22.49
|
|
|
1.3 years
|
|
$
|
—
|
|
Exercisable as of December 31, 2019
|
517
|
|
|
$
|
23.50
|
|
|
1.3 years
|
|
$
|
—
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have received had all option holders exercised their options at the end of the last trading day in the period. The aggregate intrinsic value is the difference between the closing price of the Company's common stock on the last trading day of the period and the exercise price of the stock option, multiplied by the number of in-the-money stock options.
The aggregate intrinsic value of stock options exercised is the difference between the market price of the Company's common stock at the time of exercise and the exercise price of the stock option, multiplied by the number of stock options exercised. No stock options were exercised during the years ended December 31, 2019 and 2018. The aggregate intrinsic value of stock options exercised during the year ended December 31, 2017 was $2.1 million.
(13) Income Taxes
Deferred Tax Assets and Liabilities
Significant deferred tax assets and deferred tax liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Deferred tax assets:
|
|
|
|
U.S. federal and state net operating losses and credits
|
$
|
424,515
|
|
|
$
|
414,994
|
|
Accrued liabilities
|
19,759
|
|
|
21,906
|
|
Deferred revenue
|
24,241
|
|
|
27,210
|
|
Equity-based compensation
|
2,802
|
|
|
5,384
|
|
Capital and other losses
|
5,407
|
|
|
14,477
|
|
Other
|
7,655
|
|
|
9,773
|
|
Gross deferred tax assets
|
484,379
|
|
|
493,744
|
|
Valuation allowance
|
(409,124
|
)
|
|
(387,643
|
)
|
Net deferred tax assets
|
75,255
|
|
|
106,101
|
|
Deferred tax liabilities:
|
|
|
|
Intangible assets
|
(105,348
|
)
|
|
(148,207
|
)
|
Other
|
(1,842
|
)
|
|
(1,309
|
)
|
Gross deferred tax liabilities
|
(107,190
|
)
|
|
(149,516
|
)
|
Net deferred tax liabilities
|
$
|
(31,935
|
)
|
|
$
|
(43,415
|
)
|
Deferred tax assets and liabilities are presented in the Consolidated Balance Sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Other long-term assets
|
$
|
2,296
|
|
|
$
|
1,615
|
|
Deferred tax liabilities, net
|
(34,231
|
)
|
|
(45,030
|
)
|
Net deferred tax liabilities
|
$
|
(31,935
|
)
|
|
$
|
(43,415
|
)
|
As of December 31, 2019, the Company had recorded deferred tax assets for the tax effects of the following gross tax loss carryforwards (in thousands):
|
|
|
|
|
|
|
|
Carryforward Amount
|
|
Years of Expiration
|
Federal
|
$
|
952,627
|
|
|
2020 - 2035
|
State
|
$
|
1,073,262
|
|
|
2020 - 2039
|
Utilization of federal and state net operating losses and credit carryforwards may be subject to limitations to due future ownership changes.
As of December 31, 2019, the Company had the following credits available to reduce future income tax expense as follows (in thousands):
|
|
|
|
|
|
|
|
Carryforward Amount
|
|
Years of Expiration
|
Federal research and development credits
|
$
|
65,761
|
|
|
2023 - 2039
|
State research and development credits
|
$
|
69,199
|
|
|
Indefinite
|
Foreign tax credits
|
$
|
101,417
|
|
|
2020 - 2029
|
Deferred Tax Asset Valuation Allowance
During 2010, the Company entered into a closing agreement with the Internal Revenue Service through its Pre-Filing Agreement ("PFA") program confirming that the Company recognized an ordinary tax loss of $2.4 billion from the 2008 sale of its TV Guide Magazine business. In connection with the PFA closing agreement, the Company established a valuation allowance as a result of determining that it was more-likely-than-not that its deferred tax assets would not be realized. While the Company believes that its fundamental business model is robust, there has been no change to the Company's position that it is more-likely-than-not that this deferred tax asset will not be realized.
The deferred tax asset valuation allowance and changes in the deferred tax asset valuation allowance consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Balance at beginning of period
|
$
|
(387,643
|
)
|
|
$
|
(390,161
|
)
|
|
$
|
(428,778
|
)
|
Additions
|
(21,481
|
)
|
|
(12,356
|
)
|
|
(66,578
|
)
|
Deductions resulting from TiVo Acquisition
|
—
|
|
|
—
|
|
|
195
|
|
Deductions resulting from Tax Act of 2017
|
—
|
|
|
14,874
|
|
|
105,000
|
|
Balance at end of period
|
$
|
(409,124
|
)
|
|
$
|
(387,643
|
)
|
|
$
|
(390,161
|
)
|
During the year ended December 31, 2017, the Company recorded an income tax benefit of $105.0 million due to a change in the deferred tax valuation allowance resulting from a reduction in the U.S. federal tax rate.
Unrecognized Tax Benefits
Unrecognized tax benefits and changes in unrecognized tax benefits were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Balance at beginning of period
|
$
|
85,480
|
|
|
$
|
73,080
|
|
|
$
|
83,055
|
|
Increases:
|
|
|
|
|
|
Assumed in acquisition
|
—
|
|
|
—
|
|
|
365
|
|
Tax positions related to the current year
|
1,993
|
|
|
—
|
|
|
6,263
|
|
Tax positions related to prior years
|
158
|
|
|
81
|
|
|
2,091
|
|
Tax Act of 2017
|
—
|
|
|
14,938
|
|
|
—
|
|
Decreases:
|
|
|
|
|
|
Tax positions related to prior years
|
(8,312
|
)
|
|
(1,724
|
)
|
|
(2,232
|
)
|
Tax Act of 2017
|
—
|
|
|
—
|
|
|
(15,282
|
)
|
Audit settlements
|
(409
|
)
|
|
—
|
|
|
—
|
|
Statute of limitations lapses
|
(698
|
)
|
|
(893
|
)
|
|
(1,242
|
)
|
Foreign currency
|
(1
|
)
|
|
(2
|
)
|
|
62
|
|
Balance at end of period
|
$
|
78,211
|
|
|
$
|
85,480
|
|
|
$
|
73,080
|
|
The amount of unrecognized tax benefits that would affect the Company's effective tax rate, if recognized, was $3.0 million and $4.5 million as of December 31, 2019 and 2018, respectively.
The Company recorded a benefit of $0.4 million, $0.1 million and $0.1 million for interest and penalties related to unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017, respectively. Accrued interest and penalties related to unrecognized tax benefits were $0.3 million and $0.7 million at December 31, 2019 and 2018.
In the normal course of business, the Company conducts business globally and, as a result, files U.S. federal, state and foreign income tax returns in various jurisdictions and therefore is subject to examination by taxing authorities throughout the world. With few exceptions, the Company is no longer subject to income tax examination prior to 2012. Based on the status of U.S. federal, state, and foreign tax audits, the Company does not believe it is reasonably possible that a significant change in unrecognized tax benefits will occur in the next twelve months.
The Company believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits that could result from U.S. federal, state and foreign income tax audits. The Company regularly assesses the potential outcomes of these audits in order to determine the appropriateness of its tax positions. Adjustments to accruals for unrecognized tax benefits are made to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular income tax audit. However, income tax audits are inherently unpredictable, and there can be no assurance the Company will accurately predict the outcome of these audits. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously recognized, and therefore the resolution of one or more of these uncertainties in any particular period could have a material adverse impact on the Consolidated Financial Statements.
Income tax expense (benefit)
The components of Loss from continuing operations before income taxes consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
(402,407
|
)
|
|
$
|
(350,017
|
)
|
|
$
|
(55,846
|
)
|
Rest of the world
|
11,277
|
|
|
11,006
|
|
|
7,611
|
|
Loss from continuing operations before income taxes
|
$
|
(391,130
|
)
|
|
$
|
(339,011
|
)
|
|
$
|
(48,235
|
)
|
Income tax expense (benefit) consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
Federal
|
$
|
4,015
|
|
|
$
|
3,000
|
|
|
$
|
—
|
|
State
|
1,279
|
|
|
3,451
|
|
|
906
|
|
Foreign
|
20,173
|
|
|
14,136
|
|
|
16,329
|
|
Total current income tax expense
|
25,467
|
|
|
20,587
|
|
|
17,235
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(5,019
|
)
|
|
(7,663
|
)
|
|
(24,579
|
)
|
State
|
(4,311
|
)
|
|
60
|
|
|
(1,947
|
)
|
Foreign
|
(1,993
|
)
|
|
1,068
|
|
|
(988
|
)
|
Total deferred income tax benefit
|
(11,323
|
)
|
|
(6,535
|
)
|
|
(27,514
|
)
|
Income tax expense (benefit)
|
$
|
14,144
|
|
|
$
|
14,052
|
|
|
$
|
(10,279
|
)
|
For the years ended December 31, 2019, 2018 and 2017, the Company utilized U.S. federal net operating loss carryforwards of $66.9 million, $101.5 million and $144.4 million, respectively. For the years ended December 31, 2019, 2018 and 2017, the Company utilized state net operating loss carryforwards of $17.4 million, $26.3 million and $49.0 million, respectively.
Income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate to Loss from continuing operations before income taxes as a result of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Federal income tax
|
$
|
(82,137
|
)
|
|
$
|
(71,192
|
)
|
|
$
|
(16,882
|
)
|
State income tax, net of federal benefit
|
(1,674
|
)
|
|
2,878
|
|
|
(397
|
)
|
Foreign income tax rate differential
|
(1,103
|
)
|
|
(1,053
|
)
|
|
(748
|
)
|
Foreign withholding tax
|
18,199
|
|
|
14,533
|
|
|
13,849
|
|
Repatriation of foreign income, deemed and actual
|
2,390
|
|
|
1,948
|
|
|
1,526
|
|
Change in unrecognized tax benefits
|
(123
|
)
|
|
339
|
|
|
(704
|
)
|
Change in valuation allowance
|
7,722
|
|
|
10,887
|
|
|
12,511
|
|
Equity-based compensation
|
870
|
|
|
2,175
|
|
|
(976
|
)
|
TiVo Acquisition-related items
|
—
|
|
|
595
|
|
|
5,724
|
|
Entity rationalization
|
—
|
|
|
—
|
|
|
2,369
|
|
Tax Act of 2017
|
4,083
|
|
|
2,936
|
|
|
(26,551
|
)
|
Goodwill impairment
|
65,917
|
|
|
50,006
|
|
|
—
|
|
Income tax expense (benefit)
|
$
|
14,144
|
|
|
$
|
14,052
|
|
|
$
|
(10,279
|
)
|
Due to the fact that the Company has significant net operating loss carryforwards and has recorded a valuation allowance against a significant portion of its deferred tax assets, foreign withholding taxes are the primary driver of Income tax expense (benefit). Luxembourg is the main contributor to the Company’s foreign income tax rate differential. For the years ended December 31, 2019, 2018 and 2017, Luxembourg had gains with no net income tax expense due to the utilization of the valuation allowance.
Tax Act of 2017
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act of 2017”) was signed into law. The Tax Act of 2017 enacted comprehensive tax reform that made broad and complex changes to the U.S. federal income tax code which affect 2017, including, but not limited to requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years (the "Transition Tax"). The Tax Act of 2017 also established new tax laws which affect 2018 and later years, including, but not limited to, a reduction of the U.S. federal income tax rate from 35% to 21%, a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries and a new provision designed to tax global intangible low-taxed income (“GILTI”), a limitation of the deductibility of interest expense, a limitation of the deduction for newly generated net operating losses to 80% of current year taxable income and the elimination of net operating loss carrybacks.
The Tax Act of 2017 requires that certain income (i.e., GILTI) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. The tax effect of GILTI is fully offset by the Company’s net operating losses, resulting in no net U.S. federal income tax expense from GILTI. The Company has made an accounting policy election to treat GILTI as a component of current income tax expense.
The Tax Act of 2017 created a minimum tax on corporations for payments to related foreign persons (referred to as the base erosion and anti-abuse tax ("BEAT")). The Company recorded a BEAT liability of $4.3 million and $2.1 million during the years ended December 31, 2019 and 2018.
As a result of the Tax Act of 2017, during the year ended December 31, 2018, the Company changed its assertion regarding the indefinite reinvestment of undistributed foreign earnings. In the year ended December 31, 2017, the Company accrued a Transition Tax liability for U.S. federal and certain U.S. state income taxes on its non-U.S. subsidiaries’ previously undistributed foreign earnings. The nature of the Transition Tax is that undistributed foreign earnings are now considered previously taxed income ("PTI") for U.S. federal income tax purposes. However, because the PTI was previously taxed, any repatriation of PTI is not subject to additional U.S. federal income tax. The Company determined that a distribution of PTI would be subject to tax and recorded $0.7 million and $1.2 million in foreign withholding taxes during the years ended December 31, 2019 and 2018, respectively. The Company's revised assertion regarding indefinite reinvestment of undistributed
earnings is that only undistributed earnings in excess of PTI are indefinitely reinvested. The Company previously asserted that all of its foreign undistributed earnings were indefinitely reinvested.
The Company has not recognized U.S. federal or state tax liabilities on certain of its non-U.S. subsidiaries' undistributed foreign earnings as such amounts are considered indefinitely reinvested outside of the U.S. As of December 31, 2019, the Company has not provided for income and withholding tax on $5.2 million of undistributed foreign earnings. If these foreign earnings were to be distributed, the Company would recognize tax expense of approximately $0.3 million.
(14) Segment Information
Reportable segments are identified based on the Company's organizational structure and information reviewed by the Company’s chief operating decision maker ("CODM") to evaluate performance and allocate resources. The Company's operations are organized into two reportable segments for financial reporting purposes: Product and Intellectual Property Licensing.
The Product segment consists primarily of licensing Company-developed user experience products and services to multi-channel video service providers and consumer electronics ("CE") manufacturers, licensing the TiVo service and selling TiVo-enabled devices, licensing metadata and advanced search and recommendation and viewership data, as well as sponsored discovery and in-guide advertising. We group our Product segment into three verticals based on the products delivered to our customer: Platform Solutions; Software and Services; and Other. Platform Solutions includes licensing Company-developed UX products, the TiVo service and selling TiVo-enabled devices. Software and Services includes licensing our metadata and advanced media and advertising solutions, including viewership data, sponsored discovery and in-guide advertising. Other includes legacy Analog Content Protection ("ACP"), VCR Plus+ and media recognition products.
The Intellectual Property Licensing segment consists primarily of licensing our patent portfolio to U.S. and international pay television ("TV") providers (directly and through their suppliers), mobile device manufacturers, CE manufacturers and over-the-top ("OTT") video providers. Our broad portfolio of licensable technology patents covers many aspects of content discovery, DVR, video-on-demand, OTT experiences, multi-screen functionality and personalization, as well as interactive applications and advertising. We group our Intellectual Property Licensing segment into three verticals based primarily on the business of our customer: US Pay TV Providers; CE Manufacturers; and New Media, International Pay TV Providers and Other. US Pay TV Providers includes direct and indirect licensing of traditional US Pay TV Providers regardless of the particular distribution technology (e.g., cable, satellite or the internet). CE Manufacturers includes the licensing of our patents to traditional CE manufacturers. New Media, International Pay TV Providers and Other includes licensing to international pay TV providers, virtual service providers, mobile device manufacturers and content and new media companies.
Segment results are derived from the Company's internal management reporting system. The accounting policies used to derive segment results are substantially the same as those used by the consolidated company. Intersegment revenues and expenses have been eliminated from segment financial information as transactions between reportable segments are excluded from the measure of segment profitability reviewed by the CODM. In addition, certain costs are not allocated to the segments as they are considered corporate costs. Corporate costs primarily include general and administrative costs such as corporate management, finance, legal and human resources. The CODM uses an Adjusted EBITDA (as defined below) measure to evaluate the performance of, and allocate resources to, the segments. Segment balance sheets are not used by the CODM to allocate resources or assess performance.
Segment results were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Product
|
|
|
|
|
|
Platform Solutions
|
$
|
267,441
|
|
|
$
|
315,814
|
|
|
$
|
334,004
|
|
Software and Services
|
80,443
|
|
|
76,249
|
|
|
84,964
|
|
Other
|
3,097
|
|
|
8,667
|
|
|
4,548
|
|
Revenues, net
|
350,981
|
|
|
400,730
|
|
|
423,516
|
|
Adjusted Operating Expenses (1)
|
302,491
|
|
|
333,720
|
|
|
377,107
|
|
Adjusted EBITDA (2)
|
48,490
|
|
|
67,010
|
|
|
46,409
|
|
Intellectual Property Licensing
|
|
|
|
|
|
US Pay TV Providers
|
173,217
|
|
|
185,954
|
|
|
278,973
|
|
CE Manufacturers
|
42,503
|
|
|
35,644
|
|
|
51,219
|
|
New Media, International Pay TV Providers and Other
|
101,428
|
|
|
73,537
|
|
|
72,748
|
|
Revenues, net
|
317,148
|
|
|
295,135
|
|
|
402,940
|
|
Adjusted Operating Expenses (1)
|
95,962
|
|
|
99,532
|
|
|
97,059
|
|
Adjusted EBITDA (2)
|
221,186
|
|
|
195,603
|
|
|
305,881
|
|
Corporate
|
|
|
|
|
|
Adjusted Operating Expenses (1)
|
58,383
|
|
|
62,521
|
|
|
62,148
|
|
Adjusted EBITDA (2)
|
(58,383
|
)
|
|
(62,521
|
)
|
|
(62,148
|
)
|
Consolidated
|
|
|
|
|
|
Total Revenues, net
|
668,129
|
|
|
695,865
|
|
|
826,456
|
|
Adjusted Operating Expenses (1)
|
456,836
|
|
|
495,773
|
|
|
536,314
|
|
Adjusted EBITDA (2)
|
211,293
|
|
|
200,092
|
|
|
290,142
|
|
Depreciation
|
21,247
|
|
|
21,464
|
|
|
22,144
|
|
Amortization of intangible assets
|
112,727
|
|
|
147,336
|
|
|
166,657
|
|
Restructuring and asset impairment charges
|
7,741
|
|
|
10,061
|
|
|
19,048
|
|
Goodwill impairment
|
354,561
|
|
|
269,000
|
|
|
—
|
|
Equity-based compensation
|
28,705
|
|
|
39,779
|
|
|
52,561
|
|
Merger, separation and transformation costs
|
26,212
|
|
|
—
|
|
|
—
|
|
Transition and integration costs
|
1,736
|
|
|
9,797
|
|
|
20,364
|
|
Earnout amortization
|
—
|
|
|
1,494
|
|
|
3,833
|
|
CEO transition cash costs
|
1,000
|
|
|
(975
|
)
|
|
4,305
|
|
Remeasurement of contingent consideration
|
—
|
|
|
1,104
|
|
|
(1,023
|
)
|
Gain on settlement of acquired receivable
|
—
|
|
|
—
|
|
|
(2,537
|
)
|
Operating (loss) income
|
(342,636
|
)
|
|
(298,968
|
)
|
|
4,790
|
|
Interest expense
|
(49,902
|
)
|
|
(49,150
|
)
|
|
(42,756
|
)
|
Interest income and other, net
|
8,526
|
|
|
5,682
|
|
|
2,915
|
|
(Loss) gain on interest rate swaps
|
(4,966
|
)
|
|
3,425
|
|
|
1,859
|
|
TiVo Acquisition litigation
|
—
|
|
|
—
|
|
|
(14,006
|
)
|
Loss on debt extinguishment
|
(2,152
|
)
|
|
—
|
|
|
(108
|
)
|
Loss on debt modification
|
—
|
|
|
—
|
|
|
(929
|
)
|
Loss from continuing operations before income taxes
|
$
|
(391,130
|
)
|
|
$
|
(339,011
|
)
|
|
$
|
(48,235
|
)
|
|
|
(1)
|
Adjusted Operating Expenses are defined as operating expenses excluding Depreciation, Amortization of intangible assets, Restructuring and asset impairment charges, Goodwill impairment, Equity-based compensation, Merger, separation and transformation costs, Transition and integration costs, retention earn-outs payable to former shareholders of acquired businesses, CEO transition cash costs and Remeasurement of contingent consideration.
|
|
|
(2)
|
Adjusted EBITDA is defined as operating loss excluding Depreciation, Amortization of intangible assets, Restructuring and asset impairment charges, Goodwill impairment, Equity-based compensation, Merger, separation and transformation costs, Transition and integration costs, retention earn-outs payable to former shareholders of acquired businesses, CEO transition cash costs and Remeasurement of contingent consideration.
|
(15) Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
(in thousands, except per share amounts)
|
2019
|
|
|
|
|
|
|
|
Total Revenues, net
|
$
|
158,235
|
|
|
$
|
176,172
|
|
|
$
|
158,524
|
|
|
$
|
175,198
|
|
Restructuring and asset impairment charges
|
1,813
|
|
|
2,676
|
|
|
1,995
|
|
|
1,257
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
137,453
|
|
|
217,108
|
|
Operating (loss) income from continuing operations
|
(8,020
|
)
|
|
12,629
|
|
|
(137,717
|
)
|
|
(209,528
|
)
|
Loss from continuing operations, net of tax
|
(26,644
|
)
|
|
(9,540
|
)
|
|
(151,010
|
)
|
|
(218,080
|
)
|
Loss from discontinued operations, net of tax
|
—
|
|
|
—
|
|
|
(379
|
)
|
|
(4,414
|
)
|
Net loss
|
(26,644
|
)
|
|
(9,540
|
)
|
|
(151,389
|
)
|
|
(222,494
|
)
|
|
|
|
|
|
|
|
|
Basic loss per share:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.21
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(1.20
|
)
|
|
$
|
(1.72
|
)
|
Discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.03
|
)
|
Basic loss per share
|
$
|
(0.21
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(1.20
|
)
|
|
$
|
(1.75
|
)
|
Weighted average shares used in computing basic per share amounts
|
124,422
|
|
|
124,960
|
|
|
126,081
|
|
|
126,444
|
|
|
|
|
|
|
|
|
|
Diluted loss per share:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.21
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(1.20
|
)
|
|
$
|
(1.72
|
)
|
Discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.03
|
)
|
Diluted loss per share
|
$
|
(0.21
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(1.20
|
)
|
|
$
|
(1.75
|
)
|
Weighted average shares used in computing diluted per share amounts
|
124,422
|
|
|
124,960
|
|
|
126,081
|
|
|
126,444
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
$
|
0.18
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
Total Revenues, net
|
$
|
189,837
|
|
|
$
|
172,860
|
|
|
$
|
164,709
|
|
|
$
|
168,459
|
|
Restructuring and asset impairment charges
|
4,546
|
|
|
1,101
|
|
|
2,921
|
|
|
1,493
|
|
Goodwill impairment
|
—
|
|
|
—
|
|
|
—
|
|
|
269,000
|
|
Operating loss from continuing operations
|
(9,040
|
)
|
|
(8,763
|
)
|
|
(7,681
|
)
|
|
(273,484
|
)
|
Loss from continuing operations, net of tax
|
(19,014
|
)
|
|
(22,868
|
)
|
|
(22,992
|
)
|
|
(288,189
|
)
|
Income (loss) from discontinued operations, net of tax
|
1,297
|
|
|
2,298
|
|
|
143
|
|
|
(23
|
)
|
Net loss
|
(17,717
|
)
|
|
(20,570
|
)
|
|
(22,849
|
)
|
|
(288,212
|
)
|
|
|
|
|
|
|
|
|
Basic loss per share:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.16
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(2.33
|
)
|
Discontinued operations
|
0.01
|
|
|
0.02
|
|
|
—
|
|
|
—
|
|
Basic loss per share
|
$
|
(0.15
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(2.33
|
)
|
Weighted average shares used in computing basic per share amounts
|
122,080
|
|
|
122,713
|
|
|
123,459
|
|
|
123,802
|
|
|
|
|
|
|
|
|
|
Diluted loss per share:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.16
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(2.33
|
)
|
Discontinued operations
|
0.01
|
|
|
0.02
|
|
|
—
|
|
|
—
|
|
Diluted loss per share
|
$
|
(0.15
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(2.33
|
)
|
Weighted average shares used in computing diluted per share amounts
|
122,080
|
|
|
122,713
|
|
|
123,459
|
|
|
123,802
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
$
|
0.18
|
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|