Adeia Inc. (ADEA)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to promote understanding of the results of operations and financial condition and should be read in conjunction with our consolidated financial statements and notes thereto.

This section of this Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons of 2024 against 2023. A discussion regarding 2022 items and year-to-year comparisons of 2023 against 2022 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Except as otherwise indicated, the year-to-year comparisons and results of operations discussed herein present the results of Adeia Inc. after giving effect to the Separation described herein. The following discussion of our financial condition and results of operations should be read together with the audited consolidated financial statements and notes to the consolidated financial statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed under “Risk Factors” in Part I, Item 1A above.

Business Overview

Adeia Inc. (formerly known as Xperi Holding Corporation) (“Adeia”, “we”) is a leading IP licensing platform in the consumer and entertainment space, with a diverse portfolio of media and semiconductor intellectual property and approximately 12,250 patents and patent applications worldwide. In order to serve an increasingly connected world, we invent, develop, and license fundamental innovations that enhance billions of devices and shape the way millions of people explore and experience entertainment. Our inventions are key enabling technologies that drive how consumers interact with entertainment and devices at home and on the go around the world. Our foundational technologies help elevate content and improve how audiences connect with it in a way that is more intelligent, immersive and personal. Our innovative solutions help power smart devices, entertainment experiences and more, and have created a unified ecosystem that reaches highly-engaged consumers and uncovered new business opportunities.

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

Headquartered in Silicon Valley with more than 35 years of operating experience, we have approximately 150 employees, with substantially all of our employees located in the U.S.

Macroeconomic Conditions

Macroeconomic conditions due to inflation, geopolitical instability and global health events had in the past, and may in the future have, an adverse impact on our business. For example, such conditions may cause volatility in the markets we serve, particularly the broad consumer electronics market. Impacts from adverse macroeconomic conditions may negatively impact our financial condition and results of operations, which could result in an impairment of our long-lived assets, including goodwill, and increased credit losses.

Although a significant portion of our revenue is derived from fixed-fee and minimum-guarantee arrangements from large, well-capitalized customers, our per-unit and variable-fee based revenue will continue to be susceptible to global health concerns, outbreaks, pandemics, armed conflict, geopolitical factors, tariffs, market volatility, labor shortages, supply chain disruptions, microchip shortages, changes in demand for semiconductors and market downturns.

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Reportable Segments

We operate and report in one segment: IP Licensing. We believe that this structure reflects our current operational and financial management and provides the best structure for us to focus on growth opportunities. Our Chief Executive Officer has been determined to be the Chief Operating Decision Maker (“CODM”) in consideration with the authoritative guidance on segment reporting.

We primarily license our innovations to leading companies in the broader media entertainment and semiconductor industries, and those companies developing new technologies that will help drive these industries forward. Licensing arrangements include access to one or more of our foundational patent portfolios and may also include access to some portions of our industry-leading technologies and know-how.

Key Metrics

In evaluating our financial condition and operating performance, we primarily focus on revenue and cash flows from operations. For the year ended December 31, 2024, as compared to the same period in 2023:

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Revenue decreased by $12.6 million, or 3%, from $388.8 million in 2023 to $376.2 million in 2024.

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Recurring revenues increased by $2.8 million, or 0.8% from $338.7 million in 2023 to $341.5 million in 2024.

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Non-recurring revenues decreased by $15.5 million, or 31% from $50.1 million in 2023 to $34.6 million in 2024.

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Cash provided by operating activities increased by $59.7 million, or 39.1%, from $152.8 million in 2023 to $212.5 million in 2024.

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We repriced our term loan which lowered our interest rate by 61 basis points and made $114.2 million in principal payments, bringing the outstanding balance to $487.1 million as of December 31, 2024. We subsequently completed another repricing in January 2025, further reducing our interest rate by 50 basis points.

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We repurchased $20.0 million of our common stock in December 2024 following the decision of our Board of Directors to increase the total share repurchase authorization to $200.0 million in October of 2024.

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Results of Operations

Revenue

We derive the majority of our revenue from the licensing of our intellectual property (“IP”) rights to customers. For our revenue recognition policy, including descriptions of revenue-generating activities, refer to “Note 4 – Revenue” of the Notes to Consolidated Financial Statements. The following table presents our historical operating results for the periods indicated as a percentage of revenue:

The following table sets forth our revenue by year (in thousands, except for percentages):

The decrease in revenue during the year ended December 31, 2024, as compared to the prior year, was primarily attributable to the execution of two long-term license agreements with Kioxia and Western Digital in the first quarter of 2023, which did not recur in 2024, and declines in royalty revenue from certain Pay-TV customers, partially offset by a multi-year license agreement with Amazon for access to our media portfolio that occurred in the fourth quarter of 2024.

Recurring revenues for the years ended December 31, 2024 and 2023 were $341.5 million and $338.7 million, respectively. The increase of $2.8 million was driven primarily by the execution of new customer agreements in 2024, and the ramp-up of recurring royalty payments under existing semiconductor agreements, partially offset by declines in royalty revenue from certain Pay-TV customers.

Non-recurring revenues for the years ended December 31, 2024 and 2023 were $34.6 million and $50.1 million, respectively. The decrease of $15.5 million was primarily attributable to the execution of long-term license agreements with Kioxia and Western Digital in the first quarter of 2023 and the execution of the long-term renewal of a license agreement with Samsung in the third quarter of 2023, partially offset by a settlement agreement and multi-year renewal with X Corp. for access to our media portfolio that occurred in the second quarter of 2024 and the execution of the multi-year license agreement with Amazon in the fourth quarter of 2024.

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Research and Development

Research and development expense (“R&D expense”) consists primarily of personnel costs, stock-based compensation, outside engineering consulting expenses associated with new IP development, as well as costs related to patent applications and examinations, reverse engineering, materials, supplies and an allocation of facilities costs. All R&D expense is expensed as incurred. We intend to make a continued investment in our R&D efforts because we believe they are essential to grow our patent portfolios to maintain and improve our competitiveness.

The increase in R&D expense during the year ended December 31, 2024, as compared to the prior year, was primarily due to an increase in personnel costs as a result of increased headcount and an increase in patent portfolio expenses, patent technical sales support expenses, partially offset by a decrease in professional services costs.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses consist primarily of personnel costs, sales commission, advertising, branding activities, stock-based compensation, professional services, facilities costs, and expenses related to our executive finance, human resource, legal, and information technology organizations.

The increase in SG&A expense during the year ended December 31, 2024, as compared to the prior year, was primarily due to an increase in personnel related costs as a result of increased headcount as we scaled our business in 2024, an increase in professional services costs, an increase in certain administrative costs associated with the repricing of our credit facility in the second quarter of 2024, partially offset by decreases in separation costs that were incurred in 2023 but did not recur in 2024 since they were one-time costs, lower insurance costs and recovery of certain bad debt expenses.

Amortization Expense

The decrease in amortization expense during the year ended December 31, 2024, as compared to the prior year, was primarily due to certain intangible assets becoming fully amortized during 2024. The decrease was partially offset by an increase in amortization expense as a result of patents acquired in 2024.

Litigation Expense

The increase in litigation expense during the year ended December 31, 2024, as compared to the prior year, was primarily due to increased activity in current litigation matters. See Part I, Item 3. – Legal Proceedings for additional information regarding these matters.

We expect that litigation expense will continue to be a significant portion of our operating expenses, as it is used to enforce and protect our IP and contract rights. Litigation expense may fluctuate between periods because of planned or ongoing litigation, as described in Part I, Item 3 – Legal Proceedings.

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Interest Expense

The decrease in interest expense during the year ended December 31, 2024, as compared to the prior year, was primarily due to lower debt balance, the reduction of the interest rate margin resulting from the repricing of our Term Loan B during the second quarter of 2024, and the Federal Reserve interest rate cut during the third quarter of 2024.

Other Income and Expense, Net

The decrease in other income and expense, net during the year ended December 31, 2024, as compared to the prior year, was primarily due to a decrease in interest income from significant financing components from certain revenue contracts.

Loss on Debt Extinguishment

During the year ended December 31, 2024, we recognized $0.5 million associated with the repricing of our Term Loan B and there were no such costs in 2023. Refer to discussion below for further detail on the repricing of our Term Loan B.

Provision for Income Taxes

For the year ended December 31, 2024, we recorded an income tax expense of $16.6 million on a pretax income from continuing operations of $81.2 million, which resulted in an effective tax rate of 20.4%. The income tax expense of $16.6 million was primarily related to tax on current year income, foreign withholding tax and unrealized foreign exchange loss from prior year South Korea refund claims offset by releases of uncertain tax positions, the foreign derived intangible income deduction and foreign tax credits. The increase in income tax expense for the year ended December 31, 2024, as compared to the prior year, was attributable to tax on current year income and unrealized foreign exchange loss from prior year South Korea refund claims offset by releases of uncertain tax positions.

For the year ended December 31, 2023, we recorded an income tax expense of $12.6 million on a pretax income from continuing operations of $80.0 million, which resulted in an effective tax rate of 15.8%. The income tax expense of $12.6 million was primarily related to tax on current year income, foreign withholding tax and unrealized foreign exchange loss from prior year South Korea refund claims offset by releases of uncertain tax positions.

During the fourth quarter of 2024, we filed a refund claim for foreign taxes previously withheld from licensees in South Korea based on court rulings in South Korea and other business factors. These previously withheld foreign taxes were claimed as a foreign tax credit in the U.S. As a result of the filed and planned refund claims, we recorded a total of $112.4 million and $120.3 million as a noncurrent income tax receivable at December 31, 2024 and 2023, respectively, $64.6 million and $64.6 million as a noncurrent income tax payable at December 31, 2024 and 2023, respectively, and $56.7 million and $49.1 million as a reduction in deferred tax assets at December 31, 2024 and 2023, respectively. Although the refund claim is subject to judicial review, we anticipate we will receive refunds in the amount recorded in the receivable.

The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. In making such an assessment, significant weight is given to evidence that can be objectively verified. After considering both positive and negative evidence to assess the realizability of our net deferred tax assets, we determined that the positive evidence outweighed the negative evidence primarily due to cumulative income from our IP Licensing business on a continuing operations basis and the expectation of sustained profitability in future periods, and concluded that it was more-likely-than-not that we would realize our U.S. federal and certain state deferred tax assets. As a result, during the fourth quarter of 2022, we released the valuation allowance on all the federal deferred tax assets and state deferred tax assets, except for California and certain other states where tax attributes can only be utilized against the income of specific legal entities. The release of the valuation allowance resulted in $86.1 million of tax benefit in the fourth quarter of 2022. We will maintain a full valuation allowance on our foreign deferred tax asset as the expectation of future taxable income is uncertain.

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Liquidity and Capital Resources

The following table presents selected financial information related to our liquidity and significant sources and uses of cash and cash equivalents as of and for the years ended December 31, 2024 and 2023:

Our primary sources of liquidity and capital resources are our operating cash flows and our short-term investments in marketable securities. Cash, cash equivalents and marketable securities were $110.4 million at December 31, 2024, an increase of $26.8 million from $83.6 million at December 31, 2023. This increase resulted primarily from $212.5 million of cash generated from operations and $3.2 million in proceeds from our employee stock purchase program and exercise of stock options, partially offset by $114.2 million in repayment of long-term debt, $22.3 million in purchases of long-lived assets, $21.8 million in dividends paid, $20.0 million in repurchases of common stock ($1.3 million in repurchases of common stock were pending settlement as of December 31, 2024), and $12.8 million in repurchases of common stock for tax withholdings on equity awards.

The primary objectives of our investment activities are to preserve principal and to maintain liquidity, while at the same time capturing a market rate of return. To achieve these objectives, we maintain a diversified portfolio of securities including money market funds and debt securities such as corporate bonds and notes, municipal bonds and notes, commercial paper, treasury and agency notes and bills and certificates of deposit. Our marketable debt securities are classified as available-for-sale (“AFS”) with credit losses recognized as a credit loss expense and non-credit related unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income or loss.

We expect to continue to make additional payments on our existing debt from cash generated from operations. Our material cash requirements include the following contractual and other obligations:

Debt

As of December 31, 2024, we had outstanding long-term debt in an aggregate principal amount of $487.1 million, with a minimum of $28.1 million payable within 12 months. For the year ended December 31, 2023, we were required to make $29.1 million in payments based on the consolidated excess cash flow clause within the debt agreement. The excess cash flow payment was classified as current portion of long-term debt in the Consolidated Balance Sheet as of December 31, 2023. Based on certain leverage ratios and the voluntary prepayments we made during the year ended December 31, 2024, no excess cash flow payment is required in 2025.

Future interest payments associated with the debt, based on current interest rates, total $117.2 million, with $36.7 million payable within 12 months. The interest payments may vary with changes in interest rates, as well as due to reductions of the principal amount. Refer to “Note 11 – Debt” of the Notes to Consolidated Financial Statements for additional information on debt obligations and maturities.

Leases

We have lease arrangements for office and research facilities, data centers and office equipment. As of December 31, 2024, fixed lease payment obligations amounted to $10.0 million, with $0.3 million payable within 12 months. Refer to “Note 8 – Leases” of the Notes to Consolidated Financial Statements for additional information on lease obligations and maturities.

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Guarantee

Prior to the Separation, we and a subsidiary of Xperi Inc. (“Xperi Sub”) entered into an agreement (the “Specified Agreement”) with a third party pursuant to which we guarantee the performance of Xperi Sub under the Specified Agreement, including its payment obligations to such third party. In connection with the Separation, we and Xperi Sub entered into a separate cross business agreement (the “Cross Business Agreement”) effective as of October 1, 2022 under which we agreed to make guarantee payments to Xperi Sub in amounts based on certain of its operating expenses and other minimum performance obligations under the Specified Agreement through 2031. Consequently, on October 1, 2022, we recognized a guarantee liability of $19.7 million which represents the fair value of our projected payments of such operating expenses during the term of the Cross Business Agreement. Subsequent changes to the carrying value of the guarantee are recognized as part of our results of operations. As of December 31, 2024, the balance of the guarantee liability is $17.1 million, including a current portion of $2.5 million.

Other Purchase Obligations

Our other purchase obligations primarily consist of non-cancelable obligations related to advertising, engineering services and internet and telecommunications services. As of December 31, 2024, we had purchase obligations of $5.1 million, including $2.9 million due in 2025, $1.1 million due in 2026, and $1.1 million due thereafter. These purchase obligations represent commitments under enforceable and legally binding agreements and do not represent the entire anticipated purchases in the future. Refer to “Note 16 – Commitments and Contingencies” of the Notes to Consolidated Financial Statements for additional detail.

Income Tax Payable

As of December 31, 2024, we had accrued $84.6 million of unrecognized tax benefits in long-term income taxes payable related to uncertain tax positions, which includes an immaterial amount of accrued interest and penalties. At this time, we are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. If we are successful in receiving our South Korean withholding tax refunds of $112.4 million, including interest and foreign exchange, then $64.6 million of unrecognized tax benefit would be payable to the U.S. tax authorities.

In addition to the cash requirements outlined above, we have returned cash to stockholders through both quarterly dividend payments and repurchases of our common stock under our stock repurchase plan, as further described below:

Quarterly Dividends

In 2024 and 2023, we paid quarterly dividends of $0.05 per share in each of the March, June, September and December quarterly periods. Our capacity to pay dividends in the future depends on many factors, including our financial condition, results of operations, capital requirements, capital structure, industry practice and other business conditions that the Board of Directors considers relevant. We anticipate that all quarterly dividends will be paid out of cash, cash equivalents and short-term investments in marketable securities.

Stock Repurchase Plan

On June 12, 2020, our Board of Directors terminated a prior stock repurchase program and approved a new stock repurchase plan (the “Plan”), which provides for the repurchase of up to $150.0 million of our common stock dependent on market conditions, share price and other factors. No expiration has been specified for this Plan. On April 22, 2021, our Board of Directors authorized an additional $100.0 million of purchases under the Plan, under which $172.2 million was utilized for stock repurchases, leaving the total authorized amount available for repurchase under the Plan at $77.8 million. In October 2024, our Board of Directors approved an increase of the existing share repurchase authorization up to a total of $200.0 million. The stock repurchases may be made from time to time, through solicited or unsolicited transactions in the open market, in privately negotiated transactions, or pursuant to a Rule 10b5-1 plan. Since the inception of the Plan, and through December 31, 2024, we have repurchased an aggregate of approximately 11.4 million shares of common stock at a total cost of $192.2 million at an average price of $16.83. As of December 31, 2024, the total remaining amount available for repurchase under the Plan was $180.0 million.

We may continue to execute authorized repurchases from time to time under the Plan. The amount and timing of any repurchases under the Plan depend on a number of factors, including, but not limited to, the trading price, volume and availability of our common shares. There is no guarantee that such repurchases under the Plan will enhance the value of our common stock.

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We believe that based on current levels of operations and anticipated growth, our cash from operations, together with cash and cash equivalents currently available, will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months and thereafter for the foreseeable future. Poor financial results, unanticipated expenses, unanticipated acquisitions of technologies or businesses, or unanticipated strategic investments could give rise to additional financing requirements sooner than we expect. There can be no assurance that equity or debt financing will be available when needed or, if available, that such financing will be on terms satisfactory to us. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness could result in increased debt service obligations and may include covenants that would restrict our operations.

Cash Flows from Operating Activities

Cash flows provided by operations were $212.5 million for the year ended December 31, 2024, primarily due to our net income of $64.6 million being adjusted for non-cash items of amortization of intangible assets of $70.7 million, stock-based compensation expense of $26.6 million, amortization of debt issuance costs of $3.5 million, depreciation of $2.1 million, partially offset by the change in deferred income tax of $(7.1) million, and $53.2 million net change in operating assets and liabilities.

Cash flows provided by operations were $152.8 million for the year ended December 31, 2023, primarily due to our net income of $67.4 million being adjusted for non-cash items of depreciation of $1.5 million, amortization of intangible assets of $93.7 million, stock-based compensation expense of $18.1 million, deferred income tax of $11.4 million, amortization of debt issuance costs of $4.3 million and $(43.4) million net change in operating assets and liabilities.

Cash Flows from Investing Activities

Net cash used in investing activities was $24.0 million for the year ended December 31, 2024, primarily related to purchases of short-term investments in marketable securities of $33.2 million, and purchases of long-lived assets of $22.3 million, partially offset by maturities of marketable securities of $31.5 million.

Net cash used in investing activities was $34.5 million for the year ended December 31, 2023, primarily related to purchases of short-term investments in marketable securities of $42.8 million, and purchases of long-lived assets of $6.3 million, partially offset by maturities of marketable securities of $14.7 million.

Capital Expenditures

Our capital expenditures for property and equipment consist primarily of leasehold improvements, purchases of computer hardware and software, information systems, and production and test equipment. During the years ended December 31, 2024 and 2023, we spent $1.8 million and $3.8 million on capital expenditures, respectively. We expect capital expenditures in 2025 to be approximately $2.0 million. Our capital expenditures for intangible assets consists primarily of acquired patents. During the years ended December 31, 2024 and 2023, we spent $20.5 million and $2.5 million on purchases of intangible assets, respectively. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents and short-term investments. There can be no assurance that current expectations will be realized, and plans are subject to change upon further review of our capital expenditure needs.

Cash Flows from Financing Activities

Net cash used in financing activities was $164.2 million for the year ended December 31, 2024 principally due to $114.2 million in repayment of indebtedness, $21.8 million in dividends paid, $20.0 million in repurchases of common stock ($1.3 million in repurchases of common stock were pending settlement as of December 31, 2024), and $12.8 million in repurchases of common stock for tax withholdings on equity awards, partially offset by $3.2 million in proceeds from our employee stock purchase program and exercise of stock options.

Net cash used in financing activities was $178.3 million for the year ended December 31, 2023 principally due to $148.0 million in repayment of indebtedness, $21.3 million in dividends paid, and $11.3 million in repurchases of common stock for tax withholdings on equity awards, partially offset by $2.4 million in proceeds from the issuance of common stock under our employee stock grant programs and employee stock purchase plans.

Long-term Debt

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On June 8, 2021, we entered into Amendment No. 1 (“Amendment No. 1”) to that certain Credit Agreement dated June 1, 2020 by and among us, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (the “2020 Credit Agreement”). The 2020 Credit Agreement initially provided for a five-year senior secured term loan B facility in an aggregate principal amount of $1,050 million (the “2020 Term Loan B Facility”). Amendment No. 1 provided for, among other things, (i) a new tranche of term loans (the “2021 Refinanced Term Loan B”) in an aggregate principal amount of $810.0 million, (ii) a reduction of the interest rate margin applicable to such loans to (x) in the case of base rate loans, 2.50% per annum and (y) in the case of Eurodollar loans, LIBOR plus a margin of 3.50% per annum, (iii) a prepayment premium of 1.00% in connection with any repricing transaction with respect to the 2021 Refinanced Term Loan B within six months of the closing date of Amendment No. 1, (iv) an extension of the maturity to June 8, 2028, and (v) certain additional amendments, including amendments to provide us with additional flexibility under the covenant governing restricted payments.

On May 30, 2023, we entered into Amendment No. 2 (“Amendment No. 2”) to the 2020 Credit Agreement to replace the reference to LIBOR as the base rate with the reference to the Secured Overnight Financing Rate “SOFR” as administered by the Federal Reserve Bank of New York.

On May 20, 2024, we entered into Amendment No. 3 (“Amendment No. 3”) to the 2020 Credit Agreement, which provided for, among other things, (i) a repricing of the 2020 Term Loan B Facility through a refinancing of the entire amount of the 2021 Refinanced Term Loan B with a new tranche of term loans (the “2024 Term Loan B”) in an aggregate principal amount of $561.1 million, (ii) a reduction of the interest rate margin applicable to such loans to (x) in the case of SOFR loans, SOFR plus a margin of 3.00% per annum and (y) in the case of base rate loans, 2.00% per annum, (iii) a reduction in the excess cash flow mandatory payment thresholds and (iv) a prepayment premium of 1.00% in connection with any repricing transaction with respect to the 2024 Term Loan B within six months of the closing date of Amendment No. 3. The 2024 Term Loan B will mature on June 8, 2028, the same date upon which the 2021 Refinanced Term Loan B matured prior to giving effect to Amendment No. 3.

On January 30, 2025, the Company entered into Amendment No. 4 (“Amendment No. 4”) to the 2020 Credit Agreement, which provided for, among other things, (i) a repricing of the 2020 Term Loan B Facility through a refinancing of the entire amount of the 2024 Term Loan B (the “2025 Term Loan B”) in an aggregate principal amount of $487.1 million, (ii) a reduction of the interest rate margin applicable to such loans to (x) in the case of SOFR loans, 2.50% per annum and (y) in the case of base rate loans, 1.50% per annum and (iii) a prepayment premium of 1.00% in connection with any repricing transaction with respect to the 2025 Term Loan B within six months of the closing date of Amendment No. 4. The 2025 Term Loan B will mature on June 8, 2028, the same date upon which the 2024 Term Loan B matured prior to giving effect to Amendment No. 4.

At December 31, 2024, $487.1 million was outstanding under the term loan B facility with an interest rate, including unamortized debt discount and issuance costs of $11.6 million. Interest is payable monthly. Under the existing loan agreement, we have future minimum principal payments for $28.1 million each year from 2025 through 2027, with the remaining principal balance of $402.9 million due in 2028. After the Separation, we own the debt under the term loan B facility. Additionally, we paid $29.1 million during the year ended December 31, 2024, based on certain leverage ratios and our excess cash flow generated for the year ended December 31, 2023. The 2020 Credit Agreement, as amended, also requires that we continue to make cash payments on an annual basis based on certain leverage ratios and excess cash flow generated for the immediately preceding fiscal year. The cash payments are applied to the remaining principal balance due at final maturity. Based on certain leverage ratios and the voluntary prepayments we made during the year ended December 31, 2024, no excess cash flow payment is required in 2025. The term loan B facility contains customary covenants, and as of December 31, 2024, we were in full compliance with such covenants.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States which requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. We evaluate our estimates based on our historical experience and various other assumptions that are believed to be reasonable under the circumstances. These estimates relate to revenue recognition, the assessment of recoverability of goodwill and intangible assets, business combinations, recognition and measurement of deferred income tax assets and liabilities, the assessment of unrecognized tax benefits and others. Actual results could differ from those estimates, and material effects on our operating results and financial position may result.

We believe the following accounting policies and estimates are most critical to understanding our consolidated financial statements. See “Note 2 – Summary of Significant Accounting Policies” and “Note 4 – Revenue” of the Notes to Consolidated Financial Statements for a full description of our accounting policies.

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Revenue recognition

We derive the majority of our revenue from the licensing of our intellectual property (“IP”) rights to customers. Generally, revenue is recognized upon transfer of control of the IP rights to customers in an amount that reflects the consideration that we expect to be entitled to in exchange for those IP rights. The primary judgments include identifying the performance obligations in the contract, estimating variable consideration relating to potential future price adjustments as a result of legal contract disputes, estimating quarterly royalties prior to receiving the royalty reports from the licensee, determining standalone selling price and allocating consideration in a contract with multiple performance obligations.

When the uncertainty associated with variable consideration relates to potential future price adjustments as a result of a legal contract dispute, we estimate variable consideration using the expected value method or the most likely amount method, whichever is more appropriate in the circumstances, and consider all available information, including historical data and experience. Estimating variable consideration related to potential future price adjustments requires significant management judgment in evaluating the possible outcomes.

We generally recognize royalty revenue from per-unit or per-subscriber licenses based on units shipped or manufactured or number of subscribers. Revenue is recognized in the period in which the customer’s sales or usage are estimated to have occurred. This may result in an adjustment to revenue when actual sales or usage are subsequently reported by the customer, generally in the month or quarter following sales or usage. Estimating a customer’s quarterly royalties prior to receiving the royalty reports requires us to make significant assumptions and judgments related to forecasted trends and growth rates used to estimate sales or usage, which could have a material impact on the amount of revenue we report on a quarterly basis.

At times, we enter into long-term license contracts, which may include releases from past patent infringement claims or one or more prospective licenses. In these contracts, we allocate the transaction price between releases for past patent infringement claims and prospective licenses based on their relative standalone selling prices, which requires significant management judgment. In determining the standalone selling price of each performance obligation, we consider such factors as the customer’s revenues, the number of past and projected future subscribers, units shipped, and units manufactured, as well as the per-subscriber or per-unit licensing rates we generally receive from licensees of comparable sizes in comparable markets and geographies. As a release from past patent infringement claims is generally satisfied at execution of the contract, the transaction price allocated to the release from past patent infringement claims is generally recognized in the period the contract is executed. Transaction price allocated to prospective Media IP licenses is recognized ratably over the license term, and transaction price allocated to prospective Semiconductor IP licenses is recognized upon execution of the contract.

Accounting for income taxes

We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments are used in the calculation of tax credits, tax benefits and deductions and in the calculation of tax assets and liabilities. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

We must assess the likelihood that we will be able to realize our deferred tax assets. If realizability is not likely on a more-likely-than-not basis, we must increase our provision for income taxes by recording a valuation allowance against our deferred tax assets. We considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Should there be a change in our ability to recover our deferred tax assets, our provision for income taxes would fluctuate in the period of the change.

We account for uncertain tax positions in accordance with authoritative guidance related to income taxes. The calculation of our unrecognized tax benefits involves dealing with uncertainties in the application of complex tax regulations. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. We record unrecognized tax benefits for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional tax liabilities are more-likely-than-not, assuming the tax authorities have full knowledge of all relevant information. If we ultimately determine that the tax liabilities are unnecessary, we reverse the liabilities and recognize a tax benefit during the period in which it occurs. This may occur for a variety of reasons, such as the expiration of the statute of limitations on a particular tax return or the completion of an examination by the relevant tax authority. We record an additional charge in our provision for taxes in the period in which we determine that the recorded unrecognized tax benefits are less than the expected ultimate settlement.

Our policy is to classify accrued interest and penalties related to the accrued liability for unrecognized tax benefits in the provision for income taxes. For the years ended December 31, 2024 and 2023, respectively, we did not recognize any significant interest or penalties. See “Note 15 – Income Taxes” of the Notes to Consolidated Financial Statements for additional detail.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to promote understanding of the results of operations and financial condition and should be read in conjunction with our consolidated financial statements and notes thereto.

This section of this Form 10-K generally discusses 2023, 2022 and 2021 items and year-to-year comparisons of 2023 against 2022 and of 2022 against 2021. Except otherwise indicated, the year-to-year comparisons and results of operations discussed herein present the results of Adeia Inc. after giving effect to the Separation described herein. The following discussion of our financial condition and results of operations should be read together with the audited consolidated financial statements and notes to the consolidated financial statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed under “Risk Factors” in Part I, Item 1A above.

Business Overview

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

Following the Separation, we are a leading IP licensing platform in the consumer and entertainment space, with a diverse portfolio of media and semiconductor intellectual property and approximately 10,950 patents and patent applications worldwide. In order to serve an increasingly connected world, we invent, develop, and license fundamental innovations that enhance billions of devices and shape the way millions of people explore and experience entertainment. Through our IP licensing business, we help enable extraordinary experiences at home and on the go for millions of consumers around the world, with IP that helps elevate content and improves how audiences connect with it in a way that is more intelligent, immersive and personal. Through providing the IP that helps to power smart devices, entertainment experiences and more, we have created a unified ecosystem that reaches highly-engaged consumers and uncovered new business opportunities.

Headquartered in Silicon Valley with more than 35 years of operating experience, we have approximately 130 employees, with substantially all of our employees located in the U.S.

Macroeconomic Conditions

The current macroeconomic environment, which has arisen in part from the effects of the COVID-19 pandemic, has had, and may continue to have, an adverse impact on our business. The impact to date has included periods of significant volatility in the markets we serve, in particular the broad consumer electronics market. The current macroeconomic environment has also caused challenges and delays in acquiring new customers and executing license renewals. These factors have negatively impacted our financial condition and results of operations, which may result in an impairment of our long-lived assets, including goodwill, and increased credit losses.

Further, our operations and those of our customers have also been negatively impacted by certain trends arising out of the COVID-19 pandemic and macroeconomic conditions including labor market constraints, shortages of semiconductor components, decreased manufacturing capacities and delays in shipments, product development and product launches. Moreover, United States federal, state and foreign government policies have contributed to a rise of inflation that has increased, and may continue to increase, the cost of our operations and have had, and may continue to have, an adverse effect on demand for our customers’ products and services and in turn our licensing revenues, which has had and may continue to have an adverse effect on our financial performance.

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Although a significant portion of our revenue is derived from fixed-fee and minimum-guarantee arrangements from large, well-capitalized customers, our per-unit and variable-fee based revenue will continue to be susceptible to global health concerns, outbreaks, pandemics, armed conflict, market volatility, labor shortages, supply chain disruptions, microchip shortages and market downturns.

Key Developments

The accounting requirements for reporting the Separation of Xperi Inc. as a discontinued operation were met when the Separation was completed on October 1, 2022. Accordingly, the financial results of Xperi Inc. for the years ended December 31, 2022 and 2021 are presented as net loss from discontinued operations, net of tax on the Consolidated Statements of Operations. Unless noted otherwise, the discussion of our results of operations pertain to continuing operations.

Additionally, the operating results from continuing operations for all periods presented and those prior to the Separation, include certain general corporate overhead costs that do not meet the requirements to be presented in discontinued operations, although such costs are not reflective of our on-going operations. Such general corporate overhead costs include labor and non-labor costs related to our corporate support functions (e.g., administration, human resources, finance, accounting, tax, information technology, corporate development and legal, among others) that historically provided support to Xperi Inc. prior to the Separation. In addition, discontinued operations excludes the historical intercompany balances and transactions between Adeia and Xperi Inc. that were eliminated in consolidation.

In connection with the Separation, we incurred separation costs of $45.0 million from January 1, 2020 to December 31, 2023. Separation costs primarily consist of third-party advisory, consulting, legal and professional service, IT and employee bonus costs directly related to the Separation, as well as other items that are incremental and one-time in nature. Out of these costs, $28.6 million were incurred prior to the Separation and are included in net loss from discontinued operations, net of tax. The remaining separation costs of $16.4 million were incurred after the Separation and are reflected in continuing operations within operating expenses in our Consolidated Statements of Operations.

Reportable Segments

Upon completion of the Separation, in the fourth quarter of 2022, we changed our organizational structure to operate and report in one segment: IP Licensing. We believe that this structure reflects our current operational and financial management following the completion of the Separation and provides the best structure for us to focus on growth opportunities. Our Chief Executive Officer has been determined to be the Chief Operating Decision Maker (“CODM”) in consideration with the authoritative guidance on segment reporting.

We primarily license our innovations to leading companies in the broader media entertainment and semiconductor industries, and those companies developing new technologies that will help drive these industries forward. Licensing arrangements include access to one or more of our foundational patent portfolios and may also include access to some portions of our industry-leading technologies and know-how.

Key Metrics

In evaluating our financial condition and operating performance, we primarily focus on revenue and cash flows from operations. For the year ended December 31, 2023, as compared to the same period in 2022:

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Revenue decreased by $50.1 million, or 11.4%, from $438.9 million in 2022 to $388.8 million in 2023. The decrease was due to the execution of a new, multi-year license agreement with Micron Technology in the first quarter of 2022 and the execution of a long-term license agreement with a leading consumer electronics and OTT service provider in the second quarter of 2022, for which a meaningful portion of the total revenue was recognized in the respective quarters, and in part due to a decline in royalty revenue from certain Pay-TV customers. The decline was partially offset by the execution of two long-term license agreements with Kioxia and Western Digital in the first quarter of 2023 and execution of a long-term renewal contract with Samsung in the third quarter of 2023, covering our media portfolio as it pertains to its mobile devices, for which a portion of revenue was recognized up-front in the respective quarters.

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Recurring revenues decreased by $24.9 million, or 6.8% from $363.6 million in 2022 to $338.7 million in 2023, driven primarily by a decline in royalty revenue from certain Pay-TV customers in Canada.

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Non-recurring revenues decreased by $25.2 million, or 33.5% from $75.3 million in 2022 to $50.1 million in 2023, driven primarily by the execution of a new, multi-year license agreement with Micron Technology in the first quarter of 2022 and the execution of a long-term license agreement with a leading consumer electronics and OTT service provider in the second quarter of 2022, partially offset by the execution of long-term license agreements with Kioxia and Western Digital, respectively, in the first quarter of 2023, and the execution of the long-term renewal of a license agreement with Samsung in the third quarter of 2023.

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Cash provided by operating activities, including discontinued operations, decreased by $30.2 million, or 16.5%, from $183.0 million to $152.8 million. The decrease was primarily due to an increase in unbilled contracts receivable, which resulted from multi-year and long-term license agreements executed during the year.

Results of Operations

Revenue

We derive the majority of our revenue from the licensing of our intellectual property (“IP”) rights to customers. For our revenue recognition policy, including descriptions of revenue-generating activities, refer to “Note 4 – Revenue” of the Notes to Consolidated Financial Statements. The following table presents our historical operating results for the periods indicated as a percentage of revenue:

The following table sets forth our revenue by year (in thousands, except for percentages):

2023 compared to 2022

The decrease in revenue during the year ended December 31, 2023, as compared to the prior year, was primarily attributable to the execution of a new, multi-year license agreement with Micron Technology in the first quarter of 2022 and the execution of a long-term license agreement with a leading consumer electronics and OTT service provider in the second quarter of 2022, for which a meaningful portion of the total revenue was recognized in the respective quarters, and in part due to a decline in royalty revenue from certain Pay-TV customers. The decline was partially offset by the execution of two long-term license agreements with Kioxia and Western Digital in the first quarter of 2023 and execution of a long-term renewal contract with Samsung in the third quarter of 2023, covering our media portfolio as it pertains to its mobile devices, for which a portion of revenue was recognized up-front in the respective quarters.

Recurring revenues for the years ended December 31, 2023 and 2022 were $338.7 million and $363.6 million, respectively. The decrease of $24.9 million was primarily due to a decline in royalty revenue from certain Pay-TV customers in Canada.

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Non-recurring revenues for the years ended December 31, 2023 and 2022 were $50.1 and $75.3 million, respectively. The decrease of $25.2 million was primarily due to the execution of a new, multi-year license agreement with Micron Technology in the first quarter of 2022 and the execution of a long-term license agreement with a leading consumer electronics and OTT service provider in the second quarter of 2022, partially offset by the execution of long-term license agreements with Kioxia and Western Digital, respectively, in the first quarter of 2023, and the execution of the long-term renewal of a license agreement with Samsung in the third quarter of 2023.

2022 compared to 2021

The increase in revenue during the year ended December 31, 2022, as compared to the prior year, was primarily due to the recognition of license revenue associated with an IP license agreement with Micron Technology, the execution of a long-term license agreement with a leading consumer electronics and OTT service provider, the renewal of long-term license agreements with two leading social media companies and the renewal of a long-term license agreement with a leading consumer electronics company. Such increases were partially offset by the delay in renewals of media related IP licenses that expired in 2022 and were not renewed until early 2023, as well as non-recurring revenue recognized in 2021 related to certain media IP licensing agreements.

Recurring revenues for the years ended December 31, 2022 and 2021 were $363.6 million and $350.6 million, respectively. The increase of $13.0 million was primarily due to the execution of a long-term license agreement with a leading consumer electronics and OTT service provider offset by a decline in revenue from Pay-TV customers.

Non-recurring revenues for the years ended December 31, 2022 and 2021 were $75.3 million and $40.6 million, respectively. The increase of $34.7 million was primarily due the execution of an IP license agreement with Micron Technology offset by a decline in revenue from releases for past patent infringement.

Research and Development

Research and development expense (“R&D expense”) consists primarily of personnel costs, stock-based compensation, outside engineering consulting expenses associated with new IP development, as well as costs related to patent applications and examinations, reverse engineering, materials, supplies and an allocation of facilities costs. All R&D expense is expensed as incurred. We intend to make a continued investment in our R&D efforts because we believe they are essential to grow our patent portfolios to maintain and improve our competitiveness.

2023 compared to 2022

The increase in R&D expense during the year ended December 31, 2023, as compared to the prior year, was primarily due to an increase in patent prosecution costs associated with an increase in patent filings to grow our patent portfolio, professional services costs and personnel costs as a result of increased headcount.

2022 compared to 2021

The increase in R&D expense during the year ended December 31, 2022, as compared to the prior year, was primarily driven by higher employee-related costs due to increased headcount.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses consist primarily of personnel costs, sales commission, advertising, branding activities, stock-based compensation, professional services, facilities costs, and expenses related to our executive finance, human resource, legal, and information technology organizations.

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2023 compared to 2022

The decrease in SG&A expense during the year ended December 31, 2023, as compared to the prior year, was primarily due to a decrease in certain general corporate overhead costs incurred prior to the Separation that did not meet the requirements to be presented in discontinued operations. Such costs are not reflective of our on-going operations and include labor and non-labor costs related to our corporate support functions (e.g., administration, human resources, finance, accounting, tax, information technology, corporate development, legal, among others) that historically provided support to the former product business. The decrease was partially offset by an increase in marketing and advertising expense, professional services costs and personnel costs as a result of increased headcount.

2022 compared to 2021

The increase in SG&A expense during the year ended December 31, 2022, as compared to the prior year, was primarily due to increased stock-based compensation associated with the accelerated vesting of outstanding restricted stock awards upon the separation of a former executive in the first quarter of 2022, an increase in variable compensation, and the incurrence of certain separation related costs upon the consummation of the Separation in the fourth quarter of 2022. The increase was partially offset by decreases in the provision for credit losses, facilities and other related expenses.

Amortization Expense

2023 compared to 2022

The decrease in amortization expense during the year ended December 31, 2023, as compared to the prior year, was primarily due to certain intangible assets acquired in prior years, which became fully amortized during 2022. The decrease was partially offset by an increase in amortization expense as a result of patents acquired during the year.

2022 compared to 2021

The decrease in amortization expense during the year ended December 31, 2022, as compared to the prior year, was primarily due to certain intangible assets acquired in prior years, which became fully amortized during the year.

Litigation Expense

2023 compared to 2022

The increase in litigation expense during the year ended December 31, 2023, as compared to the prior year, was primarily due to increased legal fees during 2023 as a result of increased case activity, partially offset by a $2.5 million expense related to the Videotron matter and $2.6 million expense related to the Bell and Tellus matter that were each recorded in the second half of 2022. See Part I, Item 3. – Legal Proceedings for additional information regarding these matters.

2022 compared to 2021

The increase in litigation expense during the year ended December 31, 2022, as compared to the prior year, was primarily due to a $2.5 million expense related to the Videotron matter and a $2.6 million expense related to the Bell and Telus matter.

We expect that litigation expense will continue to be a significant portion of our operating expenses, as it is used to enforce and protect our IP and contract rights. Litigation expense may fluctuate between periods because of planned or ongoing litigation, as described in Part I, Item 3 – Legal Proceedings.

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Interest Expense

2023 compared to 2022

The increase in interest expense during the year ended December 31, 2023, as compared to the prior year, was primarily due to increased interest rates on our variable interest rate debt due to the rising interest rate environment, partially offset by a lower debt balance.

2022 compared to 2021

The increase in interest expense during the year ended December 31, 2022, as compared to the prior year, was primarily due to increased interest rates on our variable interest rate debt due to the rising interest rate environment.

We anticipate interest expense will decrease in 2024, when compared to 2023, as a result of a full year of a lower debt balance and amortization of debt discount and issuance costs.

Other Income and Expense, Net

2023 compared to 2022

The increase in other income and expense, net during the year ended December 31, 2023, as compared to the prior year, was primarily due to an increase in interest income from significant financing components from certain revenue contracts and an increase in realized gain on our investment in marketable securities.

2022 compared to 2021

The increase in other income and expense, net during the year ended December 31, 2022, as compared to the prior year, was primarily due to an increase in interest income from significant financing components from certain revenue contracts executed during the year, partially offset by a decrease in realized loss on marketable investments.

Discontinued Operations

As the Separation occurred on October 1, 2022, net loss from discontinued operations, net of tax for the year ended December 31, 2022, includes nine months of Xperi Inc.’s operations compared to a full year in 2021. The decrease in revenue of $119.8 million or 25% during the year ended December 31, 2022, as compared to the prior year, was primarily driven by a decrease in revenue from the Pay-TV and connected car market verticals partially offset by increased revenue from the settlement of a contract dispute with a large mobile imagining customer and increased revenue from the consumer electronics market vertical.

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The increase in operating expenses of $193.3 million or 33% during the year ended December 31, 2022, as compared to the prior year, was primarily driven by a goodwill impairment charge of $354.0 million, an increase in R&D costs primarily due to employees hired in connection with business combinations, an increase in separation and related costs, and an increase in variable compensation. The increases were partially offset by decreases in amortization expense due to certain acquired intangible assets reaching the end of their useful lives during 2022 and a decrease in litigation expense due to reduced case activity.

The increase in operating loss of $313.0 million or 297% during the year ended December 31, 2022, as compared to the prior year, was primarily due to the decrease in revenue and the increase in operating expenses during the year ended December 31, 2022 as compared to the prior year as described above.

Loss on Debt Extinguishment

In June 2021, we refinanced the 2020 Term B Loan Facility by, among other things, lowering the interest rate on the debt. Certain lenders of the original loan syndication did not participate in the refinancing. Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment and recorded, a loss on debt extinguishment of $8.0 million related to the write-off of unamortized debt discount and issuance costs for the portions of the 2020 Term B Loan Facility considered to be extinguished. There were no such costs and expenses in 2023 and 2022. We did not recognize any loss or gain on extinguishment of debt in 2023 and 2022.

Provision for (benefit from) Income Taxes

For the year ended December 31, 2023, we recorded an income tax expense of $12.6 million on a pretax income from continuing operations of $80.0 million, which resulted in an effective tax rate of 15.8%. The income tax expense of $12.6 million was primarily related to tax on current year income, foreign withholding tax and unrealized foreign exchange loss from prior year South Korea refund claims offset by releases of uncertain tax positions. The increase in income tax expense for the year ended December 31, 2023, as compared to the prior year, was attributable to the impact of the release of certain valuation allowances of $78.7 million for the year ended December 31, 2022.

For the year ended December 31, 2022, we recorded an income tax benefit of $28.6 million on a pretax income from continuing operations of $109.8 million, which resulted in an effective tax rate of (26.1)%. The income tax benefit of $28.6 million was primarily related to the release of certain valuation allowances of $78.7 million, partially offset by tax on current year income, foreign withholding taxes and, unrealized foreign exchange loss from prior year South Korea refund claims. The negative tax rate is the result of a tax benefit recorded against pre-tax income. The decrease in income tax expense for the year ended December 31, 2022, as compared to the prior year, was attributable to the release of valuation allowance.

During the fourth quarter of 2019, we filed a refund claim for foreign taxes previously withheld from licensees in South Korea based on court rulings in South Korea and other business factors. These previously withheld foreign taxes were claimed as a foreign tax credit in the U.S. As a result of the filed and planned refund claims, we recorded a total of $120.3 million and $113.7 million as a noncurrent income tax receivable at December 31, 2023 and 2022, respectively, $64.6 million and $63.6 million as a noncurrent income tax payable at December 31, 2023 and 2022, respectively, and $49.1 million and $42.2 million as a reduction in deferred tax assets at December 31, 2023 and 2022, respectively. Although the refund claim is subject to judicial review, we anticipate we will receive refunds in the amount recorded in the receivable.

The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. In making such an assessment, significant weight is given to evidence that can be objectively verified. After considering both positive and negative evidence to assess the realizability of our net deferred tax assets, we determined that the positive evidence outweighed the negative evidence primarily due to cumulative income from our IP Licensing business on a continuing operations basis and the expectation of sustained profitability in future periods, and concluded that it was more-likely-than-not that we would realize our U.S. federal and certain state deferred tax assets. As a result, during the fourth quarter of 2022, we released the valuation allowance on all the federal deferred tax assets and state deferred tax assets, except for California and certain other states where tax attributes can only be utilized against the income of specific legal entities. The release of the valuation allowance resulted in $86.1 million of tax benefit in the fourth quarter of 2022. We will maintain a full valuation allowance on our foreign deferred tax asset as the expectation of future taxable income is uncertain.

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Liquidity and Capital Resources

The following table presents selected financial information related to our liquidity and significant sources and uses of cash and cash equivalents as of and for the years ended December 31, 2023, 2022 and 2021.

The cash flows below are presented on a consolidated basis and therefore, also include $120.7 million of cash and cash equivalents included in current assets of discontinued operations as of December 31, 2021.

Our primary sources of liquidity and capital resources are our operating cash flows and our short-term investments in marketable securities. Cash, cash equivalents and marketable securities were $83.6 million at December 31, 2023, a decrease of $31.0 million from $114.6 million at December 31, 2022. This decrease resulted primarily from $148.0 million in repayment of long-term debt, $11.3 million in repurchases of common stock for tax withholdings on equity awards, $21.3 million in dividends paid, and $6.3 million in purchases of long-lived assets, partially offset by $152.8 million of cash generated from operations and $2.4 million in proceeds from the issuance of common stock under our employee stock grant programs and employee stock purchase plans.

The primary objectives of our investment activities are to preserve principal and to maintain liquidity, while at the same time capturing a market rate of return. To achieve these objectives, we maintain a diversified portfolio of securities including money market funds and debt securities such as corporate bonds and notes, municipal bonds and notes, commercial paper, treasury and agency notes and bills and certificates of deposit. Our marketable debt securities are classified as available-for-sale (“AFS”) with credit losses recognized as a credit loss expense and non-credit related unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income or loss. We did not hold any such investments as of December 31, 2022.

We expect to continue to make additional payments on our existing debt from cash generated from operations. Our material cash requirements include the following contractual and other obligations.

Debt

As of December 31, 2023, we had outstanding long-term debt in an aggregate principal amount of $601.3 million, with a minimum of $40.5 million payable within 12 months. Additionally, we are required to make $29.1 million in payments based on the consolidated excess cash flow clause within the debt agreement. The excess cash flow payment has been classified as current portion of long-term debt in the Consolidated Balance Sheet as of December 31, 2023.

Future interest payments associated with the debt, based on current interest rates, total $208.4 million, with $53.4 million payable within 12 months. The interest payments may vary with changes in interest rates, as well as due to reductions of the principal amount. Refer to “Note 11 – Debt” of the Notes to Consolidated Financial Statements for additional information on debt obligations and maturities.

Leases

We have lease arrangements for office and research facilities, data centers and office equipment. As of December 31, 2023, fixed lease payment obligations amounted to $9.7 million, with $0.5 million payable within 12 months. Refer to “Note 8 – Leases” of the Notes to Consolidated Financial Statements for additional information on lease obligations and maturities.

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Guarantee

Prior to the Separation, we and a subsidiary of Xperi Inc. (“Xperi Sub”) entered into an agreement (the “Specified Agreement”) with a third party pursuant to which we guarantee the performance of Xperi Sub under the Specified Agreement, including its payment obligations to such third party. In connection with the Separation, we and Xperi Sub entered into a separate cross business agreement (the “Cross Business Agreement”) effective as of October 1, 2022 under which we agreed to make guarantee payments to Xperi Sub in amounts based on certain of its operating expenses and other minimum performance obligations under the Specified Agreement through 2031. Consequently, on October 1, 2022, we recognized a guarantee liability of $19.7 million which represents the fair value of our projected payments of such operating expenses during the term of the Cross Business Agreement. Subsequent changes to the carrying value of the guarantee are recognized as part of our results of operations. As of December 31, 2023, the balance of the guarantee liability is $18.5 million, including a current portion of $2.4 million. The maximum potential amount of future payments subject to guarantee is approximately $7.5 million per annum between 2023 and 2031.

Other Purchase Obligations

Our other purchase obligations primarily consist of non-cancelable obligations related to advertising, engineering services and internet and telecommunications services. As of December 31, 2023, we had purchase obligations of $3.4 million, including $1.8 million due in 2024, $1.4 million due in 2025, and $0.2 million due thereafter. These purchase obligations represent commitments under enforceable and legally binding agreements and do not represent the entire anticipated purchases in the future. Refer to “Note 16 – Commitments and Contingencies” of the Notes to Consolidated Financial Statements for additional detail.

Income Tax Payable

As of December 31, 2023, we had accrued $81.8 million of unrecognized tax benefits in long-term income taxes payable related to uncertain tax positions, which includes an immaterial amount of accrued interest and penalties. At this time, we are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. If we are successful in receiving our South Korean withholding tax refunds of $120.3 million, including interest and foreign exchange gain, then $64.6 million of unrecognized tax benefit would be payable to the U.S. tax authorities.

In addition to the cash requirements outlined above, we have returned cash to stockholders through both quarterly dividend payments and repurchases of our common stock under our stock repurchase plan.

Quarterly Dividends

In 2023, 2022 and 2021, we paid quarterly dividends of $0.05 per share in each of the March, June, September and December quarterly periods. Our capacity to pay dividends in the future depends on many factors, including our financial condition, results of operations, capital requirements, capital structure, industry practice and other business conditions that the Board of Directors considers relevant. We anticipate that all quarterly dividends will be paid out of cash, cash equivalents and short-term investments in marketable securities.

Stock Repurchase Plan

On June 12, 2020, our Board of Directors terminated a prior stock repurchase program and approved a new stock repurchase plan (the “Plan”), which provides for the repurchase of up to $150.0 million of our common stock dependent on market conditions, share price and other factors. No expiration has been specified for this Plan. On April 22, 2021, our Board of Directors authorized an additional $100.0 million of purchases under the Plan. The stock repurchases may be made from time to time, through solicited or unsolicited transactions in the open market, in privately negotiated transactions, or pursuant to a Rule 10b5-1 plan. Since the inception of the Plan, and through December 31, 2023, we have repurchased an aggregate of approximately 10.0 million shares of common stock at a total cost of $172.2 million at an average price of $17.24. As of December 31, 2023, the total remaining amount available for repurchase under the Plan was $77.8 million.

We may continue to execute authorized repurchases from time to time under the Plan. The amount and timing of any repurchases under the Plan depend on a number of factors, including, but not limited to, the trading price, volume and availability of our common shares. There is no guarantee that such repurchases under the Plan will enhance the value of our common stock.

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We believe that based on current levels of operations and anticipated growth, our cash from operations, together with cash and cash equivalents currently available, will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months and thereafter for the foreseeable future. Poor financial results, unanticipated expenses, unanticipated acquisitions of technologies or businesses, or unanticipated strategic investments could give rise to additional financing requirements sooner than we expect. There can be no assurance that equity or debt financing will be available when needed or, if available, that such financing will be on terms satisfactory to us. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness could result in increased debt service obligations and may include covenants that would restrict our operations.

Cash Flows from Operating Activities

Cash flows provided by operations were $152.8 million for the year ended December 31, 2023, primarily due to our net income of $67.4 million being adjusted for non-cash items of depreciation of $1.5 million, amortization of intangible assets of $93.7 million, stock-based compensation expense of $18.1 million, deferred income tax of $11.4 million, amortization of debt issuance costs of $4.3 million and $(43.4) million net change in operating assets and liabilities.

Cash flows provided by operations, including discontinued operations, were $183.0 million for the year ended December 31, 2022, primarily due to our net loss of $298.6 million being adjusted for non-cash items of depreciation of $17.1 million, amortization of intangible assets of $143.2 million, stock-based compensation expense of $52.6 million, and an impairment charge of $354.0 million recognized in the third quarter of 2022 and included as part of discontinued operations for the year ended December 31, 2022.

Cash Flows from Investing Activities

Net cash used in investing activities was $34.5 million for the year ended December 31, 2023, primarily related to purchases of short-term investments in marketable securities of $42.8 million, and purchases of long-lived assets of $6.3 million, partially offset by maturities of marketable securities of $14.7 million.

Net cash used in investing activities, including discontinued operations, was $2.9 million for the year ended December 31, 2022, primarily related to purchases of short-term investments of $4.5 million, and capital expenditures of $12.6 million, partially offset by maturities and sales of securities of $64.8 million.

Capital Expenditures

Our capital expenditures for property and equipment consist primarily of leasehold improvements, purchases of computer hardware and software, information systems, and production and test equipment. During the years ended December 31, 2023 and 2022, we spent $3.8 million and $12.6 million on capital expenditures, respectively, and we expect capital expenditures in 2024 to be approximately $2.5 million. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents and short-term investments. There can be no assurance that current expectations will be realized, and plans are subject to change upon further review of our capital expenditure needs.

Cash Flows from Financing Activities

Net cash used in financing activities was $178.3 million for the year ended December 31, 2023 principally due to $148.0 million in repayment of indebtedness, $21.3 million in dividends paid, and $11.3 million in repurchases of common stock for tax withholdings on equity awards, partially offset by $2.4 million in proceeds from the issuance of common stock under our employee stock grant programs and employee stock purchase plans.

Net cash used in financing activities, including discontinued operations, was $263.3 million for the year ended December 31, 2022 principally due to $40.5 million in repayment of indebtedness, $20.9 million in dividends paid, $33.2 million in repurchases of common stock, and $183.0 net cash impact of the Separation, partially offset by $14.3 million in proceeds from the issuance of common stock under our employee stock grant programs and employee stock purchase plans.

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Long-term Debt

On June 8, 2021, we amended (the “Amendment”) that certain Credit Agreement dated June 1, 2020 by and among us, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (the “2020 Credit Agreement”). The 2020 Credit Agreement initially provided for a five-year senior secured term B loan facility in an aggregate principal amount of $1,050 million (the “2020 Term B Loan Facility”). The Amendment provided for, among other things, (i) a new tranche of term loans (the “Refinanced Term B Loans”) in an aggregate principal amount of $810.0 million, (ii) a reduction of the interest rate margin applicable to such loans to (x) in the case of base rate loans, 2.50% per annum and (y) in the case of Eurodollar loans, LIBOR plus a margin of 3.50% per annum, (iii) a prepayment premium of 1.00% in connection with any repricing transaction with respect to the Refinanced Term B Loans within six months of the closing date of the Amendment, (iv) an extension of the maturity to June 8, 2028, and (v) certain additional amendments, including amendments to provide us with additional flexibility under the covenant governing restricted payments. We commenced repaying quarterly installments under the Refinanced Term B Loans in the third quarter of 2021.

On May 30, 2023, we amended the 2020 Credit Agreement to replace the reference to LIBOR as the base rate with the reference to the Secured Overnight Financing Rate “SOFR” as administered by the Federal Reserve Bank of New York. At December 31, 2023, $601.3 million was outstanding under the Refinanced Term B Loans with an interest rate, including unamortized debt discount and issuance costs of $15.6 million. Interest is payable monthly. Under the existing loan agreements, we have future minimum principal payments for our debt of $40.5 million in each year from 2024 through 2027, with the remaining principal balance of $439.3 million due in 2028. After the Separation, we own the debt under the Refinanced B Term Loans. Additionally, we are obligated to pay $29.1 million by April 2024, based on certain leverage ratios and our excess cash flow generated for the year ended December 31, 2023. We are obligated to continue to pay a portion of excess cash flows on an annual basis. The Refinanced Term B Loans contain customary covenants, and as of December 31, 2023, we were in full compliance with such covenants.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States which requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. We evaluate our estimates based on our historical experience and various other assumptions that are believed to be reasonable under the circumstances. These estimates relate to revenue recognition, the assessment of recoverability of goodwill and intangible assets, business combinations, recognition and measurement of deferred income tax assets and liabilities, the assessment of unrecognized tax benefits and others. Actual results could differ from those estimates, and material effects on our operating results and financial position may result.

We believe the following accounting policies and estimates are most critical to understanding our consolidated financial statements. See “Note 2 – Summary of Significant Accounting Policies” and “Note 4 – Revenue” of the Notes to Consolidated Financial Statements for a full description of our accounting policies.

Revenue recognition

We derive the majority of our revenue from the licensing of our intellectual property (“IP”) rights to customers. Generally, revenue is recognized upon transfer of control of the IP rights to customers in an amount that reflects the consideration that we expect to be entitled to in exchange for those IP rights. The primary judgments include identifying the performance obligations in the contract, estimating variable consideration relating to potential future price adjustments as a result of legal contract disputes, estimating quarterly royalties prior to receiving the royalty reports from the licensee, determining standalone selling price and allocating consideration in a contract with multiple performance obligations.

When the uncertainty associated with variable consideration relates to potential future price adjustments as a result of a legal contract dispute, we estimate variable consideration using the expected value method or the most likely amount method, whichever is more appropriate in the circumstances, and consider all available information, including historical data and experience. Estimating variable consideration related to potential future price adjustments requires significant management judgment in evaluating the possible outcomes.

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We generally recognize royalty revenue from per-unit or per-subscriber licenses based on units shipped or manufactured or number of subscribers. Revenue is recognized in the period in which the customer’s sales or usage are estimated to have occurred. This may result in an adjustment to revenue when actual sales or usage are subsequently reported by the customer, generally in the month or quarter following sales or usage. Estimating a customer’s quarterly royalties prior to receiving the royalty reports requires us to make significant assumptions and judgments related to forecasted trends and growth rates used to estimate sales or usage, which could have a material impact on the amount of revenue we report on a quarterly basis.

At times, we enter into long-term license contracts, which may include releases from past patent infringement claims or one or more prospective licenses. In these contracts, we allocate the transaction price between releases for past patent infringement claims and prospective licenses based on their relative standalone selling prices, which requires significant management judgment. In determining the standalone selling price of each performance obligation, we consider such factors as the number of past and projected future subscribers, units shipped, and units manufactured, as well as the per-subscriber or per-unit licensing rates we generally receive from licensees of comparable sizes in comparable markets and geographies. As a release from past patent infringement claims is generally satisfied at execution of the contract, the transaction price allocated to the release from past patent infringement claims is generally recognized in the period the contract is executed. Transaction price allocated to prospective Media IP licenses is recognized ratably over the license term, and transaction price allocated to prospective Semiconductor IP licenses is recognized upon execution of the contract.

Accounting for income taxes

We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments are used in the calculation of tax credits, tax benefits and deductions and in the calculation of tax assets and liabilities. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

We must assess the likelihood that we will be able to realize our deferred tax assets. If realizability is not likely on a more-likely-than-not basis, we must increase our provision for income taxes by recording a valuation allowance against our deferred tax assets. We considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Should there be a change in our ability to recover our deferred tax assets, our provision for income taxes would fluctuate in the period of the change.

We account for uncertain tax positions in accordance with authoritative guidance related to income taxes. The calculation of our unrecognized tax benefits involves dealing with uncertainties in the application of complex tax regulations. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. We record unrecognized tax benefits for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional tax liabilities are more-likely-than-not, assuming the tax authorities have full knowledge of all relevant information. If we ultimately determine that the tax liabilities are unnecessary, we reverse the liabilities and recognize a tax benefit during the period in which it occurs. This may occur for a variety of reasons, such as the expiration of the statute of limitations on a particular tax return or the completion of an examination by the relevant tax authority. We record an additional charge in our provision for taxes in the period in which we determine that the recorded unrecognized tax benefits are less than the expected ultimate settlement.

Our policy is to classify accrued interest and penalties related to the accrued liability for unrecognized tax benefits in the provision for income taxes. For the years ended December 31, 2023 and 2022, respectively, we did not recognize any significant interest or penalties. See “Note 15 – Income Taxes” of the Notes to Consolidated Financial Statements for additional detail.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to promote understanding of the results of operations and financial condition and should be read in conjunction with our consolidated financial statements and notes thereto.

This section of this Form 10-K generally discusses 2022, 2021 and 2020 items and year-to-year comparisons of 2022 against 2021 and of 2021 against 2020. Except otherwise indicated, the year-to-year comparisons and results of operations discussed herein present the results of Adeia Inc. after giving effect to the Separation described herein. The following discussion of our financial condition and results of operations should be read together with the audited consolidated financial statements and notes to the consolidated financial statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed under “Risk Factors” in Part I, Item 1A above.

Business Overview

On December 18, 2019, Xperi Corporation (“Xperi”) entered into a definitive agreement with TiVo Corporation (“TiVo”), to combine in an all-stock merger of equals transaction (the “Mergers”). Following consummation of the Mergers on June 1, 2020, Xperi Holding Corporation became the parent company of both Xperi and TiVo.

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

Following the Separation, we are a leading intellectual property ("IP") licensing platform in the consumer and entertainment space, with a diverse portfolio of media and semiconductor intellectual property and more than 9,750 patents and patent applications worldwide. In order to serve an increasingly connected world, we invent, develop, and license fundamental innovations that enhance billions of devices and shape the way millions of people explore and experience entertainment. Through our IP licensing business, we help enable extraordinary experiences at home and on the go for millions of consumers around the world, with IP that helps elevate content and improves how audiences connect with it in a way that is more intelligent, immersive and personal. Through providing the IP that helps to power smart devices, entertainment experiences and more, we have created a unified ecosystem that reaches highly-engaged consumers and uncovered new business opportunities.

Headquartered in Silicon Valley and more than 35 years of operating experience, we have approximately 120 employees, with substantially all of our employees located in the U.S.

COVID-19 Impact and Resultant Macroeconomic Conditions

The COVID-19 pandemic has had, and may continue to have, an adverse impact on our business. The impact to date has included periods of significant volatility in the markets we serve, in particular the broad consumer electronics market. The pandemic has also caused challenges and delays in acquiring new customers and executing license renewals. These factors have negatively impacted our financial condition and results of operations, which may result in an impairment of our long-lived assets, including goodwill, and increased credit losses.

Further, our operations and those of our customers have also been negatively impacted by certain trends arising out of the COVID-19 pandemic, including labor market constraints, shortages of semiconductor components, decreased manufacturing capacities, and delays in shipments, product development and product launches. Moreover, since the onset of the COVID-19 pandemic, United States federal, state and foreign government policies enacted to combat the pandemic have contributed to a recent rise of inflation that has increased, and may continue to increase, the cost of our operations and have had, and may continue to have, an adverse effect on demand for our customers' products and services and in turn our licensing revenues, which has and may continue to adversely affect our financial performance.

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Although a significant portion of our revenue is derived from fixed-fee and minimum-guarantee arrangements from large, well-capitalized customers, our per-unit and variable-fee based revenue will continue to be susceptible to the volatility, labor shortages, supply chain disruptions, microchip shortages, and potential market downturns precipitated by the COVID-19 pandemic.

The impact of the pandemic on our overall results of operations remains uncertain for the foreseeable future. Further discussion of COVID-19's potential impact on our business is provided under Part I, Item 1A – Risk Factors of this Form 10-K.

Key Developments

The accounting requirements for reporting the Separation of Xperi Inc. as a discontinued operation were met when the Separation was completed on October 1, 2022. Accordingly, the financial results of Xperi Inc. for the years ended December 31, 2022, 2021 and 2020 are presented as net loss from discontinued operations, net of tax on the Consolidated Statements of Operations. Unless noted otherwise, the discussion of our results of operations pertain to continuing operations.

Additionally, the operating results from continuing operations for all periods presented and those prior to the Separation, include certain general corporate overhead costs that do not meet the requirements to be presented in discontinued operations, although such costs are not reflective of our on-going operations. Such general corporate overhead costs include labor and non-labor costs related to our corporate support functions (e.g., administration, human resources, finance, accounting, tax, information technology, corporate development and legal, among others) that historically provided support to Xperi Inc. prior to the Separation. In addition, discontinued operations excludes the historical intercompany balances and transactions between the Company and Xperi Inc. that were eliminated in consolidation.

In connection with the Separation, we incurred separation costs of $42.3 million from January 1, 2020 to December 31, 2022. Separation costs primarily consist of third-party advisory, consulting, legal and professional service, IT and employee bonus costs directly related to the Separation, as well as other items that are incremental and one-time in nature. Out of these costs, $28.6 million are reflected in our Consolidated Statements of Operations as discontinued operations for all periods presented. The remaining separation costs of $13.7 million were incurred after the Separation and are reflected in continuing operations within operating expenses in our Consolidated Statements of Operations.

Reportable Segments

Upon completion of the Separation, in the fourth quarter of 2022, we changed our organizational structure to operate and report in one segment: IP Licensing. We believe that this structure reflects our current operational and financial management following the completion of the Separation and provides the best structure for us to focus on growth opportunities. Our Chief Executive Officer has been determined to be the Chief Operating Decision Maker ("CODM") in consideration with the authoritative guidance on segment reporting.

We primarily license our innovations to leading companies in the broader entertainment and semiconductor industries, and those companies developing new technologies that will help drive these industries forward. Licensing arrangements include access to one or more of our foundational patent portfolios and may also include access to some portions of our industry-leading technologies and know-how.

Key Metrics

In evaluating our financial condition and operating performance, we primarily focus on revenue and cash flows from operations. For the year ended December 31, 2022, as compared to the year ended December 31, 2021:

•
Revenue increased by $47.7 million, or 12%, from $391.2 million to $439.0 million. The increase was due to the recognition of license revenue associated with an IP license agreement with a large semiconductor company, the execution of a long-term license agreement with a leading consumer electronics and OTT service provider, the renewal of long-term license agreements with two leading social media companies and the renewal of a long-term license agreement with a leading consumer electronics company. Such increases were partially offset by the delay in renewals of media related IP licenses that expired in 2022 and were not renewed until early 2023, as well as non-recurring revenue recognized in 2021 related to certain media IP licensing agreements.

•
Cash provided by operating activities decreased by $51.8 million, or 22%, from $234.8 million to $182.8 million. The decrease was primarily due to increased, unbilled contract receivables, which resulted from multi-year license agreements executed during the year.

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Results of Operations

Revenue

We derive the majority of our revenue from the licensing of our intellectual property (“IP”) rights to customers. For our revenue recognition policy, including descriptions of revenue-generating activities, refer to “Note 4 – Revenue” of the Notes to Consolidated Financial Statements.

The following table presents our historical operating results for the periods indicated as a percentage of revenue:

The following table sets forth our revenue by year (in thousands, except for percentages):

2022 compared to 2021

The increase in revenue during the year ended December 31, 2022, as compared to the prior year, was primarily due to the recognition of license revenue associated with an IP license agreement with a large semiconductor company, the execution of a long-term license agreement with a leading consumer electronics and OTT service provider, the renewal of long-term license agreements with two leading social media companies and the renewal of a long-term license agreement with a leading consumer electronics company. Such increases were partially offset by the delay in renewals of media related IP licenses that expired in 2022 and were not renewed until early 2023, as well as non-recurring revenue recognized in 2021 related to certain media IP licensing agreements.

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2021 compared to 2020

The decrease in revenue during the year ended December 31, 2021, as compared to the prior year, was primarily due to past royalty revenue from a patent license agreement with a pay-TV provider recorded in the fourth quarter of 2020, and secondarily due to a decrease in revenue from a patent license agreement with a semiconductor company, partially offset by the inclusion of a full year of post-merger IP licensing revenue from TiVo in 2021.

Research and Development

Research and development expense (“R&D expense”) consists primarily of employee-related costs, stock-based compensation expense, engineering consulting expenses associated with new IP development, as well as costs related to patent applications and examinations, reverse engineering, materials, supplies and an allocation of facilities costs. All R&D expense is expensed as incurred. We believe that a significant level of R&D expense will be required for us to remain competitive in the future.

2022 compared to 2021

The increase in R&D expense during the year ended December 31, 2022, as compared to the prior year, was primarily driven by higher employee-related costs due to increased headcount.

2021 compared to 2020

The increase in R&D expense during the year ended December 31, 2021, as compared to the prior year, was primarily due to the inclusion of a full year of post-merger TiVo IP Licensing expenses.

Selling, General and Administrative

Selling, general and administrative ("SGA") expenses consist primarily of compensation and related costs for sales and marketing personnel engaged in sales and licensee support, marketing programs, public relations, promotional materials, travel, trade show expenses, compensation and related costs for general management, information technology, finance personnel, corporate legal fees and expenses, facilities costs, stock-based compensation expense and professional services. Our SGA expenses, other than facilities-related expenses, are not allocated to other expense line items.

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2022 compared to 2021

The increase in SGA expense during the year ended December 31, 2022, as compared to the prior year, was primarily due to increased stock-based compensation associated with the accelerated vesting of outstanding restricted stock awards upon the separation of a former executive in the first quarter of 2022, an increase in variable compensation, and the incurrence of certain separation related costs upon the consummation of the Separation in the fourth quarter of 2022. The increase was partially offset by decreases in the provision for credit losses and in facilities and other related expenses.

2021 compared to 2020

The decrease in SGA expense during the year ended December 31, 2021, as compared to the prior year, was primarily due to decreases in merger-related transaction costs, severance and retention costs, provision for credit losses and personnel-related costs resulting from cost synergies implemented in 2021. The overall decrease was partially offset by the inclusion of a full year of post-merger TiVo SG&A expenses.

Amortization Expense

2022 compared to 2021

The decrease in amortization expense during the year ended December 31, 2022, as compared to the prior year, was primarily due to certain intangible assets acquired in prior years, which became fully amortized during the year.

2021 compared to 2020

The increase in amortization expense during the year ended December 31, 2021, as compared to the prior year, was primarily due to amortization of intangible assets recorded in connection with the Mergers in June 2020.

Litigation Expense

2022 compared to 2021

The increase in litigation expense during the year ended December 31, 2022, as compared to the prior year, was primarily due to a $2.5 million reserve related to the Videotron matter and a $2.6 million reserve related to the Bell and Telus matter. See Part I, Item 3. – Legal Proceedings for additional information regarding these matters. Such increases were partially offset by reduced case activity.

2021 compared to 2020

The decrease in litigation expense during the year ended December 31, 2021, as compared to the prior year, was primarily due to the resolution of prior litigation and reduced case activity.

We expect that litigation expense will continue to be a significant portion of our operating expenses, as it is used to enforce and protect our IP and contract rights. Litigation expense may fluctuate between periods because of planned or ongoing litigation, as described in Part I, Item 3 – Legal Proceedings.

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Interest Expense

2022 compared to 2021

The increase in interest expense during the year ended December 31, 2022, as compared to the prior year, was primarily due to increased interest rates on our variable interest rate debt due to the rising interest rate environment.

2021 compared to 2020

The increase in interest expense during the year ended December 31, 2021, as compared to the prior year, was primarily due to higher average debt balance in 2021 as we entered into a new term loan of $1,050 million on June 1, 2020 to refinance our indebtedness, partially offset by a reduction in interest rate as a result of the debt refinancing described below.

We anticipate interest expense will increase in 2023, when compared to 2022, as a result of the effect of rising interest rates on our existing variable-rate debt, partially offset by a full year of a lower debt balance and amortization of debt discount and issuance costs.

Other Income and Expense, Net

2022 compared to 2021

The increase in other income and expense, net during the year ended December 31, 2022, as compared to the prior year, was primarily due to an increase in interest income from significant financing components from revenue contracts executed during the year, partially offset by a decrease in realized loss on marketable investments.

2021 compared to 2020

The decrease in other income and expense, net during the year ended December 31, 2021, as compared to the prior year, was primarily due to a decrease in interest income from significant financing components from revenue contracts and a decrease in interest income from our short-term investments.

Discontinued Operations

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As the Separation occurred on October 1, 2022, the current period net loss from discontinued operations, net of tax includes 9 months of Xperi Inc.'s operations compared to a full year in 2021 and 2020. The decrease in revenue of $119.8 million or 25% during the year ended December 31, 2022, as compared to the prior year, was primarily driven by a decrease in revenue from the pay-TV and connected car market verticals partially offset by increased revenue from the settlement of a contract dispute with a large mobile imagining customer and increased revenue from the consumer electronics market vertical. The increase in revenue of $110.4 million or 29% during the year ended December 31, 2021, as compared to the prior year, was primarily driven by the inclusion of a full year of post-merger of TiVo's revenue attributable to our former product segment, partially offset by a decrease in revenue from the consumer electronics market vertical due to supply chain constraints that impacted shipment volumes in 2021.

The increase in operating expenses of $193.3 million or 33% during the year ended December 31, 2022, as compared to the prior year, was primarily driven by a goodwill impairment charge of $354.0 million, an increase in R&D costs primarily due to employees hired in connection with business combinations, an increase in separation and related costs, and an increase in variable compensation. The increases were partially offset by decreases in amortization expense due to certain acquired intangible assets reaching the end of their useful lives during 2022 and a decrease in litigation expense due to reduced case activity. The increase in operating expenses of $125.8 million or 27% during the year ended December 31, 2021, as compared to the prior year, was primarily driven by the inclusion of a full year of post-merger of TiVo's operating expenses attributable to our former product segment and increases in compensation costs due to business combinations, partially offset by a decrease in personnel-related costs resulting from cost synergies implemented subsequent to certain business combinations.

The increase in operating loss of $313.0 million or 297% during the year ended December 31, 2022, as compared to the prior year, was primarily due to the decrease in revenue and the increase in operating expenses for the year ended December 31, 2022 as compared to the year ended December 31, 2021 as described above. The increase in operating loss of $15.4 million or 17% during the year ended December 31, 2021, as compared to the prior year, was primarily due to the rate of the increase in operating expenses outpacing the increase in revenue for the period in each case as described above. The discontinued operations provision for income taxes in 2022 was $18.1 million compared to $23.6 million in 2021, a decrease of $5.5 million or 23%. The discontinued operations provision for income taxes in 2021 was $23.6 million compared to $7.4 million in 2020, an increase of $16.1 million or 217%. The current year provision includes tax charges related to the Separation.

Loss on Debt Extinguishment

In June 2021, we refinanced the 2020 Term B Loan Facility by, among other things, lowering the interest rate on the debt. Certain lenders of the original loan syndication did not participate in the refinancing. Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment and recorded, a loss on debt extinguishment of $8.0 million related to the write-off of unamortized debt discount and issuance costs for the portions of the 2020 Term B Loan Facility considered to be extinguished. There were no such costs and expenses in 2022. We did not recognize any loss or gain on extinguishment of debt in 2022.

Provision for (benefit from) Income Taxes

For the year ended December 31, 2022, we recorded an income tax benefit of $28.6 million on a pretax income from continuing operations of $109.8 million, which resulted in an effective tax rate of (26.1)%. The income tax benefit of $28.6 million was primarily related to the release of certain valuation allowances of $78.7 million, partially offset by tax on current year income, foreign withholding taxes and, unrealized foreign exchange loss from prior year South Korea refund claims. The negative tax rate is the result of a tax benefit recorded against pre-tax income.

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For the year ended December 31, 2021, we recorded an income tax provision of $4.8 million on a pretax income from continuing operations of $72.8 million, which resulted in an effective tax rate of 6.6%. The income tax expense was primarily related to foreign withholding taxes, unrealized foreign exchange loss from prior year South Korea refund claims and state income taxes, partially offset by releases of unrecognized tax benefits.

The decrease in income tax expense for the year ended December 31, 2022, as compared to the prior year, was attributable to the release of valuation allowance.

During the fourth quarter of 2019, we filed a refund claim for foreign taxes previously withheld from licensees in South Korea based on court rulings in South Korea and other business factors. These previously withheld foreign taxes were claimed as a foreign tax credit in the U.S. As a result of the filed and planned refund claims, we recorded a total of $113.7 million and $118.1 million as a noncurrent income tax receivable at December 31, 2022 and 2021, respectively, $63.6 million and $63.1 million as a noncurrent income tax payable at December 31, 2022 and 2021, respectively, and $42.2 million and $39.9 million as a reduction in deferred tax assets at December 31, 2022 and 2021, respectively. Although the refund claim is subject to judicial review, we anticipate we will receive refunds in the amount recorded in the receivable.

The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. In making such an assessment, significant weight is given to evidence that can be objectively verified. After considering both positive and negative evidence to assess the recoverability of our net deferred tax assets, we determined that the positive evidence outweighed the negative evidence primarily due to cumulative income from our IP Licensing business on a continuing operations basis and the expectation of sustained profitability in future periods, and concluded that it was more-likely-than-not that we would realize our federal and certain state deferred tax assets. As a result, during the fourth quarter of 2022, we released the valuation allowance on all the federal deferred tax assets and state deferred tax assets, except for California and certain other states where tax attributes can only be utilized against the income of specific legal entities. The release of the valuation allowance resulted in $86.1 million of tax benefit. We will maintain a full valuation allowance on our foreign deferred tax asset as the expectation of future taxable income is uncertain.

Liquidity and Capital Resources

The following table presents selected financial information related to our liquidity and significant sources and uses of cash and cash equivalents as of and for the years ended December 31, 2022, 2021 and 2020. The cash flows below are presented on a consolidated basis and therefore, also include $120.7 million and $85.6 million of cash and cash equivalents included in current assets of discontinued operations in the Consolidated Balance Sheets as of December 31, 2021 and 2020, respectively.

Our primary sources of liquidity and capital resources are our operating cash flows and our short-term investments. Cash, cash equivalents and short-term investments were $114.6 million at December 31, 2022, a decrease of $147.1 million from $261.7 million at December 31, 2021. This decrease resulted primarily from $183.0 million in net cash decrease resulting from the Separation, $40.5 million in repayment of long-term debt, $33.2 million in repurchases of common stock, $20.9 million in dividends paid, and $12.6 million of capital expenditures, partially offset by $183.0 million of cash generated from operations and $14.3 million in proceeds from the issuance of common stock under our employee stock grant programs and employee stock purchase plans. Cash and cash equivalents totaled $114.6 million at December 31, 2022, a decrease of $86.6 million from $201.1 million at December 31, 2021.

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The primary objectives of our investment activities are to preserve principal and to maintain liquidity, while at the same time capturing a market rate of return. To achieve these objectives, we maintain a diversified portfolio of securities including money market funds and debt securities such as corporate bonds and notes, municipal bonds and notes, commercial paper, treasury and agency notes and bills and certificates of deposit. Our marketable debt securities are classified as available-for-sale (“AFS”) with credit losses recognized as a credit loss expense and non-credit related unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income or loss. We did not hold such investments as of December 31, 2022.

We expect to continue to make additional payments on our existing debt from cash generated from operations. Our material cash requirements include the following contractual and other obligations.

Debt

As of December 31, 2022, we had outstanding long-term debt in an aggregate principal amount of $749.3 million, with a minimum of $114.0 million payable within 12 months, including a $73.5 million payment based on the consolidated excess cash flow clause within the debt agreement. The excess cash flow payment has been classified as current portion of long-term debt in the Consolidated Balance Sheet as of December 31, 2022.

Future interest payments associated with the debt, based on current interest rates, total $265.3 million, with $55.6 million payable within 12 months. The interest payments may vary with changes in interest rates, as well as due to accelerated payments of the principal amount. Refer to “Note 12 – Debt” of the Notes to Consolidated Financial Statements for additional information on debt obligations and maturities.

Leases

We have lease arrangements for office and research facilities, data centers and office equipment. As of December 31, 2022, fixed lease payment obligations amounted to $7.5 million, with $2.4 million payable within 12 months. Refer to “Note 8 – Leases” of the Notes to Consolidated Financial Statements for additional information on lease obligations and maturities.

Guarantee

Prior to the Separation, we and a subsidiary of Xperi Inc. (“Xperi Sub”) entered into an agreement (the “Specified Agreement”) with a third party pursuant to which we guarantee the performance of Xperi Sub under the Specified Agreement, including its payment obligations to such third party. In connection with the Separation, we and Xperi Sub entered into a separate cross business agreement (the “Cross Business Agreement”) effective as of October 1, 2022 under which we agreed to make guarantee payments to Xperi Sub in amounts based on certain of its operating expenses and other minimum performance obligations under the Specified Agreement through 2031. Consequently, on October 1, 2022, we recognized a guarantee liability of $19.7 million which represents the fair value of our projected payments of such operating expenses during the term of the Cross Business Agreement. Subsequent changes to the fair value of the guarantee are recognized as part of our results of operations. As of December 31, 2022, the balance of the guarantee liability is $20.5 million, including a current portion of $2.4 million. The maximum potential amount of future payments subject to guarantee is approximately $7.5 million per annum between 2023 and 2031.

Other Purchase Obligations

Our other purchase obligations primarily consist of non-cancelable obligations related to advertising, engineering services and internet and telecommunications services. As of December 31, 2022, we had purchase obligations of $0.7 million, including $0.4 million due in 2023 and $0.3 million due in 2024. These purchase obligations represent commitments under enforceable and legally binding agreements and do not represent the entire anticipated purchases in the future. Refer to “Note 17 – Commitments and Contingencies” of the Notes to Consolidated Financial Statements for additional detail.

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Income Tax Payable

As of December 31, 2022, we had accrued $87.3 million of unrecognized tax benefits in long-term income taxes payable related to uncertain tax positions, which includes an immaterial amount of accrued interest and penalties. At this time, we are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. If we are successful in receiving our South Korean withholding tax refunds of $113.7 million, including interest and foreign exchange gain, then $63.6 million of unrecognized tax benefit would be payable to the U.S. tax authorities.

In addition to the cash requirements outlined above, we have returned cash to stockholders through both quarterly dividend payments and repurchases of our common stock under our stock repurchase plan.

Quarterly Dividends

In 2022 and 2021, we paid quarterly dividends of $0.05 per share in each of the March, June, September and December quarterly periods. Our capacity to pay dividends in the future depends on many factors, including our financial condition, results of operations, capital requirements, capital structure, industry practice and other business conditions that the Board of Directors considers relevant. We anticipate that all quarterly dividends will be paid out of cash, cash equivalents and short-term investments.

Stock Repurchase Plan

On June 12, 2020, our Board of Directors terminated a prior stock repurchase program and approved a new stock repurchase plan (the “Plan”), which provides for the repurchase of up to $150.0 million of our common stock dependent on market conditions, share price and other factors. No expiration has been specified for this Plan. On April 22, 2021, our Board of Directors authorized an additional $100.0 million of purchases under the Plan. The stock repurchases may be made from time to time, through solicited or unsolicited transactions in the open market, in privately negotiated transactions, or pursuant to a Rule 10b5-1 plan. Since the inception of the Plan, and through December 31, 2022, we have repurchased an aggregate of approximately 10.0 million shares of common stock at a total cost of $172.2 million at an average price of $17.24. As of December 31, 2022, the total remaining amount available for repurchase under the Plan was $77.8 million.

We may continue to execute authorized repurchases from time to time under the Plan. The amount and timing of any repurchases under the Plan depend on a number of factors, including, but not limited to, the trading price, volume and availability of our common shares. There is no guarantee that such repurchases under the Plan will enhance the value of our common stock.

While we expect to continue to generate cash flows from operating activities in 2023, the COVID-19 pandemic continues to present uncertainties as to the level of such cash flows as compared to prior years. Additionally, transaction costs relating to the Separation are expected to impact operating cash flows for at least the next three months. We have taken actions to manage cash flows by reducing discretionary spending and other variable costs, and closely monitoring receivables and payables.

We believe that based on current levels of operations and anticipated growth, our cash from operations, together with cash and cash equivalents currently available, will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months and thereafter for the foreseeable future. Poor financial results, unanticipated expenses, unanticipated acquisitions of technologies or businesses, or unanticipated strategic investments could give rise to additional financing requirements sooner than we expect. There can be no assurance that equity or debt financing will be available when needed or, if available, that such financing will be on terms satisfactory to us. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness could result in increased debt service obligations and may include covenants that would restrict our operations.

Cash Flows from Operating Activities

Our cash flows are presented on a consolidated basis and therefore, also include $120.7 million and $85.6 million of cash and cash equivalents presented in current assets of discontinued operations in the Consolidated Balance Sheets as of December 31, 2021 and 2020, respectively.

Cash flows provided by operations were $183.0 million for the year ended December 31, 2022, primarily due to our net loss of $298.6 million being adjusted for non-cash items of depreciation of $17.1 million, amortization of intangible assets of $143.2 million, stock-based compensation expense of $52.6 million, and an impairment charge of $354.0 million recognized in the third quarter of 2022 and included as part of discontinued operations for the year ended December 31, 2022.

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Cash flows provided by operations were $234.8 million for the year ended December 31, 2021, primarily due to our net loss of $58.9 million being adjusted for non-cash items of depreciation of $23.8 million, amortization of intangible assets of $203.4 million, stock-based compensation expense of $58.2 million, and a loss on debt extinguishment of $8.0 million.

Cash Flows from Investing Activities

Net cash used in investing activities was $2.9 million for the year ended December 31, 2022, primarily related to purchases of short-term investments of $4.5 million, and capital expenditures of $12.6 million, partially offset by maturities and sales of securities of $64.8 million.

Net cash used in investing activities was $6.2 million for the year ended December 31, 2021, primarily related to purchases of short-term investments of $67.3 million, cash used in the MobiTV Acquisition of $17.4 million and capital expenditures of $14.0 million, partially offset by maturities and sales of securities of $92.7 million.

Capital Expenditures

Our capital expenditures for property and equipment consist primarily of purchases of computer hardware and software, information systems, and production and test equipment. During the years ended December 31, 2022 and 2021, we spent $12.6 million and $14.0 million on capital expenditures, respectively, and we expect capital expenditures in 2023 to be approximately $5.0 million. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents and short-term investments. There can be no assurance that current expectations will be realized, and plans are subject to change upon further review of our capital expenditure needs.

Cash Flows from Financing Activities

Net cash used in financing activities was $263.3 million for the year ended December 31, 2022 principally due to $40.5 million in repayment of indebtedness, $20.9 million in dividends paid, $33.2 million in repurchases of common stock, and $183.0 net cash impact of the Separation, partially offset by $14.3 million in proceeds from the issuance of common stock under our employee stock grant programs and employee stock purchase plans.

Net cash used in financing activities was $196.2 million for the year ended December 31, 2021 principally due to $84.0 million in repayment of indebtedness, $4.3 million in net debt refinancing costs, $21.0 million in dividends paid, and $100.8 million in repurchases of common stock, partially offset by $13.8 million in proceeds from the issuance of common stock under our employee stock grant programs and employee stock purchase plans.

Long-term Debt

On June 8, 2021, we amended (the "Amendment") that certain Credit Agreement dated June 1, 2020 by and among us, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (the “2020 Credit Agreement”). The 2020 Credit Agreement initially provided for a five-year senior secured term B loan facility in an aggregate principal amount of $1,050 million (the “2020 Term B Loan Facility”). In connection with the Amendment, we made a voluntary prepayment of $50.6 million of the term loan outstanding under the 2020 Credit Agreement using cash on hand. The Amendment provided for, among other things, (i) a new tranche of term loans (the “Refinanced Term B Loans”) in an aggregate principal amount of $810.0 million, (ii) a reduction of the interest rate margin applicable to such loans to (x) in the case of base rate loans, 2.50% per annum and (y) in the case of Eurodollar loans, LIBOR plus a margin of 3.50% per annum, (iii) a prepayment premium of 1.00% in connection with any repricing transaction with respect to the Refinanced Term B Loans within six months of the closing date of the Amendment, (iv) an extension of the maturity to June 8, 2028, and (v) certain additional amendments, including amendments to provide us with additional flexibility under the covenant governing restricted payments. We commenced repaying quarterly installments under the Refinanced Term B Loans in the third quarter of 2021.

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At December 31, 2022, $749.3 million was outstanding under the Refinanced Term B Loans with an interest rate, including amortization of debt discount and issuance costs of $19.9 million. Interest is payable monthly. Under the existing loan agreements, we have future minimum principal payments for our debt of $40.5 million in each year from 2023 through 2026, with the remaining principal balance of $546.8 million due in 2028. After the Separation, we own the debt under the Refinanced B Term Loans. Additionally, we are obligated to pay $73.5 million by April 2023, based on certain leverage ratios and our excess cash flow generated for the year ended December 31, 2022. We are obligated to continue to pay a portion of excess cash flows on an annual basis. The Refinanced Term B Loans contain customary covenants, and as of December 31, 2022, we were in full compliance with such covenants.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States which requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. We evaluate our estimates based on our historical experience and various other assumptions that are believed to be reasonable under the circumstances. These estimates relate to revenue recognition, the assessment of recoverability of goodwill and intangible assets, business combinations, recognition and measurement of deferred income tax assets and liabilities, the assessment of unrecognized tax benefits and others. Actual results could differ from those estimates, and material effects on our operating results and financial position may result.

We believe the following accounting policies and estimates are most critical to understanding our consolidated financial statements. See “Note 2 - Summary of Significant Accounting Policies” and “Note 4 - Revenue” of the Notes to Consolidated Financial Statements for a full description of our accounting policies.

Revenue recognition

We derive the majority of our revenue from the licensing of our intellectual property (“IP”) rights to customers. Generally, revenue is recognized upon transfer of control of the IP rights to customers in an amount that reflects the consideration that we expect to be entitled to in exchange for those IP rights. The primary judgments include identifying the performance obligations in the contract, estimating variable consideration, estimating quarterly royalties prior to receiving the royalty reports from the licensee, determining standalone selling price and allocating consideration in a contract with multiple performance obligations.

We generally recognize royalty revenue from per-unit or per-subscriber licenses based on units shipped or manufactured or number of subscribers. Revenue is recognized in the period in which the customer’s sales or usage are estimated to have occurred. This may result in an adjustment to revenue when actual sales or usage are subsequently reported by the customer, generally in the month or quarter following sales or usage. Estimating a customer’s quarterly royalties prior to receiving the royalty reports requires us to make significant assumptions and judgments related to forecasted trends and growth rates used to estimate sales or usage, which could have a material impact on the amount of revenue we report on a quarterly basis.

At times, we enter into long-term license contracts, which may include releases from past patent infringement claims or one or more prospective licenses. In these contracts, we allocate the transaction price between releases for past patent infringement claims and prospective licenses based on their relative standalone selling prices, which requires significant management judgment. In determining the standalone selling price of each performance obligation, we consider such factors as the number of past and projected future subscribers, units shipped, and units manufactured, as well as the per-subscriber or per-unit licensing rates we generally receive from licensees of comparable sizes in comparable markets and geographies. As a release from past patent infringement claims is generally satisfied at execution of the contract, the transaction price allocated to the release from past patent infringement claims is generally recognized in the period the contract is executed. Transaction price allocated to prospective Media IP licenses is recognized ratably over the license term, and transaction price allocated to prospective Semiconductor IP licenses is recognized upon execution of the contract.

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Valuation of goodwill and intangible assets

We make judgments about the recoverability of intangible assets whenever events or changes in circumstances indicate that impairment may exist. If such facts and circumstances exist, we assess recoverability by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. Such changes could result in impairment charges or higher amortization expense in future periods, which could have a significant impact on our operating results and financial condition.

We perform an annual review of the valuation of goodwill in the fourth quarter, or more often if indicators of impairment exist. Triggering events for impairment reviews may be indicators such as adverse industry or economic trends, restructuring actions, lower projections of profitability, or a sustained decline in our market capitalization. Evaluations of possible impairment and, if applicable, adjustments to carrying values require us to estimate, among other factors, future cash flows, useful lives, and fair market values of our assets. When we conduct our evaluation of goodwill, the fair value of goodwill is assessed using valuation techniques that require significant management estimates and judgment. Should conditions be different from management’s last assessment, significant impairments of goodwill may be required, which would adversely affect our operating results.

In performing the quantitative impairment test for goodwill, the fair value of the reporting unit is compared to its carrying amount. We utilize the market capitalization approach to determine the fair value of a reporting unit. Under the market capitalization approach, the fair value of a reporting unit is estimated based on the trading price of our stock as of the test date, or trading prices over a short period of time immediately prior or subsequent to the test date if such prices more reasonably represent the estimated fair value as of the test date, which is further adjusted by a control premium representing the synergies a market participant would achieve when obtaining control of the business.

Accounting for income taxes

We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments are used in the calculation of tax credits, tax benefits and deductions and in the calculation of tax assets and liabilities. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely on a more-likely-than-not basis, we must increase our provision for income taxes by recording a valuation allowance against our deferred tax assets. We considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Should there be a change in our ability to recover our deferred tax assets, our provision for income taxes would fluctuate in the period of the change.

We account for uncertain tax positions in accordance with authoritative guidance related to income taxes. The calculation of our unrecognized tax benefits involves dealing with uncertainties in the application of complex tax regulations. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. We record unrecognized tax benefits for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional tax liabilities are more-likely-than-not, assuming the tax authorities have full knowledge of all relevant information. If we ultimately determine that the tax liabilities are unnecessary, we reverse the liabilities and recognize a tax benefit during the period in which it occurs. This may occur for a variety of reasons, such as the expiration of the statute of limitations on a particular tax return or the completion of an examination by the relevant tax authority. We record an additional charge in our provision for taxes in the period in which we determine that the recorded unrecognized tax benefits are less than the expected ultimate settlement.

Our policy is to classify accrued interest and penalties related to the accrued liability for unrecognized tax benefits in the provision for income taxes. For the year ended December 31, 2022, we did not recognize any significant interest or penalties. For the years ended December 31, 2021, we recognized $0.2 million of interest and penalties, and for the year ended 2020, we did not recognize any significant penalties or interest related to unrecognized tax benefits. See “Note 16 - Income Taxes” of the Notes to Consolidated Financial Statements for additional detail.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to promote understanding of the results of operations and financial condition and should be read in conjunction with our consolidated financial statements and notes thereto.

This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC by Xperi Holding Corporation on February 26, 2021, which is available free of charge on the SEC’s website at www.sec.gov and our Investor Relations website at investor.xperi.com.

Business Overview

On December 18, 2019, Xperi Corporation (“Xperi”) entered into a definitive agreement with TiVo Corporation (“TiVo”), to combine in an all-stock merger of equals transaction (the “Mergers”). Following consummation of the Mergers on June 1, 2020, Xperi Holding Corporation became the parent company of both Xperi and TiVo. The common stock of both Xperi and TiVo were de-registered after completion of the Mergers. On June 2, 2020, Xperi Holding Corporation’s common stock, par value $0.001 per share, commenced trading on the Nasdaq Global Select Market (“Nasdaq”) under the ticker symbol “XPER.” Xperi was determined to be the accounting acquirer in the Mergers. As a result, the historical financial statements of Xperi for periods prior to the Mergers are considered to be the historical financial statements of Xperi Holding Corporation. As used herein, the “Company,” “we,” “us” and “our” refer to Xperi when referring to periods prior to June 1, 2020 and Xperi Holding Corporation when referring to periods subsequent to June 1, 2020. Our results of operations include the operations of TiVo after June 1, 2020. For further discussion on the Mergers, refer to “Item 1A. Risk Factors,” and “Note 9 – Business Combinations” in the Notes to Consolidated Financial Statements.

We are a leading consumer and entertainment product/solutions licensing company and one of the industry’s largest intellectual property licensing platforms, with a diverse portfolio of media and semiconductor intellectual property and more than 11,000 patents and patent applications worldwide. We create extraordinary experiences at home and on the go for millions of consumers around the world, elevating content and how audiences connect with it in a way that is more intelligent, immersive and personal. Powering smart devices, connected cars, entertainment experiences and more, we’ve created a unified ecosystem that reaches highly engaged consumers, uncovering significant new business opportunities, now and in the future. Our technologies are integrated into billions of consumer devices, media platforms, and semiconductors worldwide, driving increased value for partners, customers and consumers. Headquartered in Silicon Valley with operations around the world, we have approximately 1,900 employees and more than 35 years of operating experience.

We are currently planning, subject to any required regulatory approvals, a separation of our Product business and IP Licensing business through a tax-efficient transaction, resulting in two independent, publicly traded companies. We continue to evaluate the optimal timing of the contemplated business separation and currently anticipate that such separation will be completed in the second half of 2022.

COVID-19 Impact

Our business and results of operations have been adversely affected by the global COVID-19 pandemic and related events and we expect its impact to continue. The impact to date has included periods of significant volatility in various markets and industries. The volatility has had, and we anticipate it will continue to have, an adverse effect on our customers and on our business, financial condition and results of operations, and may result in an impairment of our long-lived assets, including goodwill, increased credit losses and impairments of investments in other companies. In particular, the automotive market, as well as the broad consumer electronics industry, has been and may continue to be impacted by the pandemic and/or other events beyond our control, and further volatility could have an additional negative impact on these industries, customers, and our business. In addition, the COVID-19 pandemic and, to a lesser extent, U.S. restrictions on trade with certain Chinese customers, have impacted and may continue to impact the financial conditions of our customers.

Actions by United States federal, state and local governments, as well as by foreign governments, to address the COVID-19 pandemic, including travel bans, stay-at-home orders and school, business and entertainment venue closures, also had a significant adverse effect on the markets in which we conduct our businesses. COVID-19 poses the risk that our workforce, suppliers, and other partners may be prevented from conducting normal business activities for an extended period of time, including due to shutdowns or stay-at-home orders that may be requested or mandated by governmental authorities. We have implemented policies to allow our employees to work remotely as a result of the pandemic as we reviewed processes related to

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workplace safety, including social distancing and sanitation practices recommended by the Centers for Disease Control and Prevention. The COVID-19 pandemic could also cause delays in acquiring new customers and executing renewals and could also impact our business as consumer behaviors continue to change in response to the pandemic.

Since the start of the summer of 2021, there has been rapid spread of the contagious Delta variant of COVID-19, particularly in the regions and among the age groups with low vaccination rates, leading to a resurgence in cases, hospitalizations and deaths. With the emergence of the highly transmissible Omicron variant in November 2021, COVID-19 daily cases in the U.S. reached the highest level in January 2022. Businesses and consumers have been adjusting their plans to comply with renewed mask and vaccine mandates, travel restrictions, event cancellations and delayed office reopenings. Our operations and those of our customers have also been negatively impacted by certain trends arising from the COVID-19 pandemic, including labor market constraints, shortage of semiconductor components and manufacturing capacities, and delays in shipments, product development and product launches. In addition, the widespread supply chain disruption is expected to impede global and regional economic activities, such as consumer spending and product availabilities, which may adversely affect our business operations and financial results. Moreover, the COVID-19 pandemic, its related impact, and United States federal, state and foreign government policies enacted to combat the pandemic have contributed to a recent rise of inflation that may increase the cost of our operations and reduce demand for our products and services and those of our customers, which may adversely affect our financial performance.

We have been closely monitoring the COVID-19 pandemic and its impact on our business, including legislation to mitigate the impact of COVID-19 such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act which was enacted in March 2020, and the American Rescue Plan Act of 2021 which was enacted in March 2021. Although a significant portion of our anticipated revenue for 2022 is derived from fixed-fee and minimum-guarantee arrangements, primarily from large, well-capitalized customers which we believe somewhat mitigates the risks to our business, our per-unit and variable-fee based revenue will continue to be susceptible to the volatility, labor shortages, supply chain disruptions, microchip shortages, and potential market downturns precipitated by the COVID-19 pandemic.

The full extent of the future impact of the COVID-19 pandemic on our operational and financial performance is uncertain and will depend on many factors outside our control, including, without limitation, the timing, extent, trajectory and duration of the pandemic; the availability, distribution and effectiveness of vaccines; the spread of new variants of COVID-19; the continued and renewed imposition of protective public safety measures; the continuing global disruption in supply chains in our industries; and the impact of the pandemic on the global economy and demand for consumer products. Although we are unable to predict the full impact and duration of the COVID-19 pandemic on our business, we are actively managing our financial expenditures in response to continued uncertainty. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided under Part I, Item 1A – Risk Factors.

Key Metrics

In evaluating our financial condition and operating performance, we focus on revenue and cash flow from operations. For the year ended December 31, 2021 as compared to the year ended December 31, 2020:

Results of Operations

Significant events occurred over the past two years that affect the comparability of our financial statements. Key events and their financial impacts include the following:

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Revenue

We derive the majority of our revenue from the licensing of our technologies and intellectual property (“IP”) rights to customers. For our revenue recognition policy including descriptions of revenue-generating activities, refer to “Note 4 – Revenue” of the Notes to Consolidated Financial Statements.

The following table presents our historical operating results for the periods indicated as a percentage of revenue:

The following table sets forth our revenue by year (in thousands, except for percentages):

The $14.3 million or 2% decrease in revenue for the year ended December 31, 2021, compared to the prior year, was primarily due to past royalty revenue from Comcast recorded in the fourth quarter of 2020 and declines in revenue from the Semiconductor IP licensing business and the Product business driven largely by supply chain disruptions from the COVID-19 pandemic, partially offset by the inclusion of a full year of post-merger revenue from TiVo in 2021.

On November 9, 2020, we entered into a patent license agreement (the “Comcast Agreement”) with Comcast and, as a result, we resolved all outstanding litigation with Comcast. The Comcast Agreement is effective as of the expiration of Comcast’s prior agreement in 2016 and its term continues into 2031. The Comcast Agreement provided for an initial payment by Comcast upon execution and provides for ongoing payments through the remainder of the Comcast Agreement. In connection with the

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Comcast Agreement, we recorded revenue for past royalties in the fourth quarter of 2020 and expect to recognize revenue from the prospective license into 2031.

Cost of revenue, Excluding Depreciation and Amortization of Intangible Assets

Cost of revenue, excluding depreciation and amortization of intangible assets, consists primarily of employee-related costs, royalties paid to third parties, hardware product-related costs, maintenance costs and an allocation of facilities costs, as well as service center and other expenses related to providing our technology solution offerings and NRE services.

Cost of revenue, excluding depreciation and amortization of intangible assets, for the year ended December 31, 2021 was $126.8 million, as compared to $78.4 million for the year ended December 31, 2020, an increase of $48.4 million. The increase was primarily due to the inclusion of a full year of post-merger TiVo costs, and secondarily from the growth in our hardware product sales in 2021.

Research, Development and Other Related Costs

Research, development and other related costs (“R&D expense”) are comprised primarily of employee-related costs, stock-based compensation expense, engineering consulting expenses associated with new product and technology development, product commercialization, quality assurance and testing costs, as well as costs related to patent applications and examinations, reverse engineering, materials, supplies, and an allocation of facilities costs. All research, development and other related costs are expensed as incurred.

R&D expense for the year ended December 31, 2021 was $232.2 million as compared to $195.2 million for the year ended December 31, 2020, an increase of $37.0 million. The increase was primarily due to the inclusion of a full year of post-merger TiVo R&D expenses in 2021, as well as employees hired in connection with the acquisition of certain assets of MobiTV on May 31, 2021, partially offset by a decrease in personnel-related costs resulting from cost synergies implemented subsequent to the Mergers.

We believe that a significant level of R&D expense will be required for us to remain competitive in the future.

Selling, General and Administrative

Selling expenses consist primarily of compensation and related costs for sales and marketing personnel engaged in sales and licensee support, reverse engineering personnel and services, marketing programs, public relations, promotional materials, travel, trade show expenses, and stock-based compensation expense. General and administrative expenses consist primarily of compensation and related costs for general management, information technology, finance personnel, legal fees and expenses, facilities costs, stock-based compensation expense, and professional services. Our general and administrative expenses, other than facilities-related expenses, are not allocated to other expense line items.

Selling, general and administrative expenses for the year ended December 31, 2021 were $266.1 million, as compared to $245.4 million for the year ended December 31, 2020, an increase of $20.7 million. The increase was due principally to the inclusion of a full year of post-merger TiVo SG&A expenses, partially offset by decreases in merger-related transaction costs, severance and retention, and provision for credit losses as well as decreased personnel-related costs resulting from cost synergies implemented in 2021.

Depreciation Expense

Depreciation expense was $23.8 million for the year ended December 31, 2021, as compared to $17.9 million for the year ended December 31, 2020, an increase of $5.9 million. The increase was primarily attributable to depreciation expense on TiVo fixed assets added through the Mergers in June 2020.

Amortization Expense

Amortization expense for the year ended December 31, 2021 was $203.4 million, as compared to $156.8 million for the year ended December 31, 2020, an increase of $46.6 million. The increase was primarily attributable to amortization of intangible assets recorded in connection with the Mergers in June 2020, and secondarily due to a significant amount of intangible assets

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acquired in the fourth quarter of 2020, which was partially offset by certain acquired intangible assets becoming fully amortized in the fourth quarter of 2021.

As a result of the Mergers, we anticipate that amortization expenses will continue to be a significant expense since we acquired approximately $878.0 million in intangible assets which will be amortized over the next several years. See “Note 10 - Goodwill and Identified Intangible Assets” in the Notes to Consolidated Financial Statements for additional information.

Litigation Expense

Litigation expense for the year ended December 31, 2021 was $11.6 million, as compared to $20.8 million for the year ended December 31, 2020, a decrease of $9.2 million. The decrease was primarily due to the resolution of prior litigation and reduced case activity.

We expect that litigation expense will continue to be a material portion of our operating expenses. Litigation expense may fluctuate between periods because of planned or ongoing litigation, as described in Part I, Item 3 – Legal Proceedings, and because of litigation planned for or initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights.

Upon expiration of our customers’ licenses, if those licenses are not renewed, litigation may become necessary to secure payment of reasonable royalties for the use of our patented technology. If we plan for or initiate such litigation, our future litigation expenses may increase.

Stock-based Compensation Expense

The following table sets forth our stock-based compensation (“SBC”) expense for the years ended December 31, 2021, 2020 and 2019 (in thousands):

Stock-based compensation awards include restricted stock awards and units, employee stock plan purchases and employee stock options. The increase in stock-based compensation for the year ended December 31, 2021, compared to the prior year, was primarily a result of including a full year of SBC expense from assumed TiVo stock awards from the Mergers and increases in stock award grants for an expanded workforce as a result of the Mergers.

Interest Expense

Interest expense for the year ended December 31, 2021 was $39.0 million, as compared to $37.9 million for the year ended December 31, 2020. The increase in interest expense was primarily a result of a higher average debt balance in 2021 as compared to 2020 as we entered into a new term loan of $1,050 million on June 1, 2020 to refinance the indebtedness of the combined companies in connection with the Mergers, partially offset by a reduction in interest rate as a result of the debt refinancing in June 2021 described below.

We anticipate interest expense will decrease in 2022 when compared to 2021 as a result of a full year of the lower debt balance and amortization of debt discount and issuance costs. However, those reductions could potentially be offset by increasing interest rates since our interest rate is variable.

Other Income and Expense, Net

Other income and expense, net, for the year ended December 31, 2021 was $2.6 million, as compared to $4.5 million for the year ended December 31, 2020. Other income was lower in the current year principally due to a decrease in interest income

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from significant financing components from revenue contracts, and secondarily from a decline in interest income from our short-term investments.

Loss on Debt Extinguishment

In June 2021, we refinanced the 2020 Term B Loan Facility by, among other things, lowering the interest rate on the debt. Certain lenders of the original loan syndication did not participate in the refinancing. Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment and recorded, in 2021, a loss on debt extinguishment of $8.0 million related to the write-off of unamortized debt discount and issuance costs for the portions of the 2020 Term B Loan Facility considered to be extinguished.

In June 2020, in connection with the Mergers we refinanced the indebtedness of the combined companies by entering into the 2020 Term B Loan Facility, and consequently recognized a loss of $8.3 million on early debt extinguishment on the legacy debt of TiVo in 2020.

Provision for (benefit from) Income Taxes

For the year ended December 31, 2021, we recorded an income tax provision of $28.4 million on a pretax loss of $30.5 million, which resulted in an effective tax rate of (92.9)%. The income tax expense of $28.4 million was primarily related to foreign withholding taxes, unrealized foreign exchange loss from prior year South Korea refund claims, tax on profitable foreign subsidiary earnings, state income taxes and BEAT, partially offset by releases of unrecognized tax benefits. The negative tax rate is the result of a tax expense recorded against a pre-tax loss.

For the year ended December 31, 2020, we recorded an income tax benefit of $7.9 million on a pretax income of $135.9 million, which resulted in an effective tax rate of (5.8)%. The income tax benefit of $7.9 million was primarily related to a net decrease in valuation allowance as a result of the Mergers, eligible deductions from foreign-derived intangible income (“FDII”), releases of unrecognized tax benefits due to the lapse of applicable statutes of limitation, deductibility of certain transaction expenses, and unrealized foreign exchange gains from the prior period South Korea refund claim, partially offset by tax expense from operating income, withholding taxes, shortfalls from stock-based compensation, and certain non-deductible expenses.

The year-over-year increase in income tax expense is largely attributable to the inclusion of twelve months of TiVo activity in the current year and to further declines in the dollar value of the South Korea refund claim.

During the fourth quarter of 2019, we filed a refund claim for foreign taxes previously withheld from licensees in South Korea based on court rulings in South Korea and other business factors. These previously-withheld foreign taxes were claimed as a foreign tax credit in the U.S. As a result of the 2019 refund claim and planned refund claims for 2020 and 2021, we recorded a total of $118.1 million and $123.0 million as a noncurrent income tax receivable at December 31, 2021 and 2020, respectively, $63.1 million and $62.3 million as a noncurrent income tax payable at December 31, 2021 and 2020, respectively, and $40.6 million and $36.7 million as a reduction in deferred tax assets at December 31, 2021 and 2020, respectively. Although the refund claim is subject to judicial review, we anticipate we will receive refunds in the amount recorded in the receivable.

The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. After considering both positive and negative evidence to assess the recoverability of our net deferred tax assets, we determined that it was not more-likely-than-not that we would realize our federal, certain state and certain foreign deferred tax assets given the substantial amount of tax attributes that will remain unutilized to offset reversing deferred tax liabilities as of December 31, 2021. We intend to continue maintaining a full valuation allowance on our federal deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the federal valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain federal deferred tax assets and a

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decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change based on the factors present when reevaluating both positive and negative evidence.

Segment Operating Results

We operate in two reportable segments: (1) IP Licensing and (2) Product. There are certain corporate overhead costs that are not allocated to these reportable segments because these operating amounts are not considered in evaluating the operating performance of our business segments.

Our Chief Executive Officer has been determined to be the Chief Operating Decision Maker (“CODM”) in accordance with the authoritative guidance on segment reporting.

In our IP Licensing segment, we primarily license our innovations to leading companies in the broader entertainment industry, and those developing new technologies that will help drive this industry forward. Licensing arrangements include access to one or more of our foundational patent portfolios and may also include access to some of our industry-leading technologies and proven know-how. In our Product segment, we derive the majority of the revenue from licensing our technology to customers primarily through Technology License arrangements and Technology Solutions arrangements. For Technology License arrangements, the customer obtains rights to the technology delivered at the commencement of the agreement. For Technology Solutions arrangements, the customer receives access to a platform, media or data that includes frequent updates, where access to such updates is critical to the functionality of the technology.

We do not identify or allocate assets by reportable segment, nor does the CODM evaluate reportable segments using discrete asset information. Reportable segments do not record inter-segment revenue and accordingly there are none to report. Although the CODM uses operating income to evaluate reportable segments, operating costs included in one segment may benefit other segments.

The following table sets forth our segment revenue, operating expenses and operating income (loss) for the years ended December 31, 2021, 2020 and 2019 (in thousands):

(1) Unallocated operating expenses consist primarily of selling, marketing, general and administrative expenses, such as administration, human resources, finance, information technology, corporate development and procurement. These expenses are not allocated because these amounts are not considered in evaluating the operating performance of our business segments.

(2) Includes seven months of financial results of TiVo following the Mergers.

For year ended December 31, 2021, the unallocated operating expenses were $271.7 million compared to $249.1 million for the year ended December 31, 2020. The increase of $22.6 million was due primarily to the inclusion of a full year of post-merger TiVo expenses, partially offset by decreases in merger-related transaction costs, severance and retention, and provision for credit losses in 2021.

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The revenue and operating income (loss) amounts in this section have been presented on a basis consistent with GAAP applied at the segment level. Of our $851.1 million in goodwill at December 31, 2021, approximately $527.8 million was allocated to our Product segment and approximately $323.3 million was allocated to our IP Licensing segment.

IP Licensing Segment

(1) Excludes operating expenses which are not allocated on a segment basis.

The decrease in revenue in 2021, as compared to 2020, was primarily attributable to past royalty revenue from Comcast recorded in the fourth quarter of 2020 as discussed in “Results of Operations,” and secondarily a decline in revenue from the Semiconductor IP licensing business, partially offset by the inclusion of a full year of post-merger IP Licensing revenue from TiVo in 2021.

The increase in operating expenses in 2021, as compared to 2020, was primarily due to the inclusion of a full year of post-merger TiVo IP Licensing expenses, partially offset by a decrease in litigation expenses in 2021.

We expect that litigation expense will continue to be a material portion of our operating expenses and may fluctuate between periods because of planned or ongoing litigation, as described in Part I, Item 3 – Legal Proceedings, and because of litigation planned for or initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights.

Operating income for the years ended December 31, 2021 and 2020 was $248.4 million and $402.6 million, respectively, which represented a decrease of $154.2 million, for the reasons stated above.

Product Segment

(1) Excludes operating expenses which are not allocated on a segment basis.

The increase in revenue in 2021, as compared to 2020, was primarily attributable to the inclusion of a full year of post-merger Product revenue from TiVo. This increase was partially offset by a decrease in Consumer Electronics revenue driven largely by supply chain constraints that impacted our customers’ shipment volumes in 2021, and from entering into minimum guarantee customer contracts of shorter duration in 2021 as compared to 2020.

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The increase in operating expenses in 2021, as compared to 2020, was primarily attributable to the inclusion of a full year of post-merger TiVo Product expenses, and costs of headcount added in connection with the acquisition of certain MobiTV assets in May 2021, partially offset by a decrease in personnel-related costs resulting from cost synergies implemented subsequent to the Mergers.

Operating income for the years ended December 31, 2021 and 2020 was $37.1 million and $24.2 million, respectively, which represented an increase of $12.9 million, for the reasons stated above.

Liquidity and Capital Resources

The following table presents selected financial information related to our liquidity and significant sources and uses of cash and cash equivalents as of and for the years ended December 31, 2021, 2020 and 2019:

Our primary sources of liquidity and capital resources are our operating cash flows and our short-term investments. Cash, cash equivalents and short-term investments were $261.7 million at December 31, 2021, an increase of $4.6 million from $257.1 million at December 31, 2020. This increase resulted primarily from $234.8 million in cash generated from operations and $13.8 million in proceeds from the issuance of common stock under our employee stock grant programs and employee stock purchase plans, which was partially offset by $21.0 million in dividends paid, $100.8 million in repurchases of common stock, $84.0 million in repayment of long-term debt, $17.4 million in cash used to acquire certain assets and liabilities of MobiTV, Inc. (the “MobiTV Acquisition”), $14.0 million of capital expenditures and $4.3 million in net debt refinancing costs. Cash and cash equivalents totaled $201.1 million at December 31, 2021, an increase of $30.9 million from $170.2 million at December 31, 2020.

The primary objectives of our investment activities are to preserve principal and to maintain liquidity while at the same time capturing a market rate of return. To achieve these objectives, we maintain a diversified portfolio of securities including money market funds and debt securities including corporate bonds and notes, municipal bonds and notes, commercial paper, treasury and agency notes and bills and certificates of deposit. We invest excess cash predominantly in high-quality investment grade debt securities with less than three years to maturity. Our marketable debt securities are classified as available-for-sale (“AFS”) with credit losses recognized as a credit loss expense and non-credit related unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income or loss.

Our material cash requirements include the following contractual and other obligations.

Debt

As of December 31, 2021, we had outstanding long-term debt in an aggregate principal amount of $789.8 million, with $40.5 million payable within 12 months. Future interest payments associated with the debt, based on current interest rates, total $153.6 million, with $27.8 million payable within 12 months. The interest payments may vary with changes in interest rates.  Refer to “Note 11 – Debt” of the Notes to Consolidated Financial Statements for additional information on debt obligations and maturities.

Leases

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We have lease arrangements for office and research facilities, data centers and office equipment. As of December 31, 2021, fixed lease payment obligations amounted to $79.7 million, with $19.7 million payable within 12 months. Refer to “Note 8 – Leases” of the Notes to Consolidated Financial Statements for additional information on lease obligations and maturities.

Inventory Purchase Commitments

We use contract manufacturers to provide manufacturing services for our products. As of December 31, 2021, we had total purchase commitments for inventory of $15.4 million, all of which is payable within 12 months.

Other Purchase Obligations

Our other purchase obligations primarily consist of noncancelable obligations related to advertising, engineering services and internet and telecommunications services. As of December 31, 2021, we had purchase obligations of $122.7 million, with $33.4 million payable within 12 months. These purchase obligations represent commitments under enforceable and legally binding agreements, and do not represent the entire anticipated purchases in the future. Refer to “Note 16 – Commitments and Contingencies” of the Notes to Consolidated Financial Statements for additional detail.

Income Tax Payable

As of December 31, 2021, we had accrued $91.6 million of unrecognized tax benefits in long-term income taxes payable related to uncertain tax positions, which includes $2.8 million of accrued interest and penalties. At this time, we are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. If we are successful in receiving our South Korean withholding tax refunds of $118.1 million, including interest and foreign exchange gain, then $63.1 million of unrecognized tax benefit would be payable to the U.S. tax authorities.

In addition to the cash requirements outlined above, we have returned cash to stockholders through both quarterly dividend payments and repurchases of our common stock under our stock repurchase plan.

Quarterly Dividends

In 2021, we paid quarterly dividends of $0.05 per share in each of March, June, September and December. In 2020, we paid quarterly dividends of $0.20 per share in each of March and May and quarterly dividends of $0.05 per share in each of September and December. Our capacity to pay dividends in the future depends on many factors, including our financial condition, results of operations, capital requirements, capital structure, industry practice and other business conditions that the Board of Directors considers relevant.

Stock Repurchase Plan

Following the closing of the Mergers, on June 12, 2020, our Board of Directors terminated a prior stock repurchase program and approved a new stock repurchase plan (the “Plan”) providing for the repurchase of up to $150.0 million of our common stock dependent on market conditions, share price and other factors. No expiration has been specified for this Plan. On April 22, 2021, our Board of Directors authorized an additional $100.0 million of purchases under the Plan. The stock repurchases may be made from time to time, through solicited or unsolicited transactions in the open market, in privately negotiated transactions, or pursuant to a Rule 10b5-1 plan. Since the inception of the Plan, and through December 31, 2021, we have repurchased an aggregate of approximately 9.0 million shares of common stock at a total cost of $155.0 million at an average price of $17.29. During the year ended December 31, 2021, our repurchases totaled $84.9 million. As of December 31, 2021, the total remaining amount available for repurchase under the Plan was $95.0 million. We may continue to execute authorized repurchases from time to time under the Plan. The amount and timing of any repurchases under the Plan depend on a number of factors, including but not limited to, the trading price, volume and availability of our common shares. In addition, as we plan for the separation of our Product business and IP Licensing business we may reduce or suspend share repurchases as we plan for the capital needs of two independent businesses. There is no guarantee that such repurchases under the Plan will enhance the value of our common stock.

From 2019 through 2021, we generated approximately $831.6 million of cash flows from operating activities. While we expect to continue to generate cash flows from operating activities in 2022, the COVID-19 pandemic continues to present uncertainties as to the level of such cash flows as compared to prior years. Additionally, transaction costs relating to the planned separation of our two business segments are expected to impact operating cash flow for at least the next 9 months. We

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have taken actions to manage cash flows by reducing discretionary spending and other variable costs, and closely monitoring receivables and payables.

We believe that based on current levels of operations and anticipated growth, our cash from operations, together with cash, cash equivalents and investments currently available, will be sufficient to satisfy our currently anticipated cash requirements through at least the next twelve (12) months and thereafter for the foreseeable future. Poor financial results, unanticipated expenses, unanticipated acquisitions of technologies or businesses, or unanticipated strategic investments could give rise to additional financing requirements sooner than we expect. There can be no assurance that equity or debt financing will be available when needed or, if available, that such financing will be on terms satisfactory to us. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and may include covenants that would restrict our operations.

Cash Flows from Operating Activities

Cash flows provided by operations were $234.8 million for the year ended December 31, 2021, primarily due to our net loss of $58.9 million being adjusted for non-cash items of depreciation of $23.8 million, amortization of intangible assets of $203.4 million, stock-based compensation expense of $58.2 million, and a loss on debt extinguishment of $8.0 million.

Cash flows provided by operations were $427.6 million for the year ended December 31, 2020, primarily due to our net income of $143.8 million, non-cash items of depreciation of $17.9 million, amortization of intangible assets of $156.8 million, stock-based compensation expense of $39.1 million and loss on debt extinguishment of $8.3 million, plus $76.8 million in changes in operating assets and liabilities. These increases were partially offset by a reduction of $34.7 million in deferred income taxes.

Cash Flows from Investing Activities

Net cash used in investing activities was $6.2 million for the year ended December 31, 2021, primarily related to purchases of short-term investments of $67.3 million, cash used in the MobiTV Acquisition of $17.4 million and capital expenditures of $14.0 million, partially offset by maturities and sales of securities of $92.7 million.

Net cash provided by investing activities was $17.8 million for the year ended December 31, 2020, primarily related to net cash acquired in the Mergers of $117.4 million and maturities and sales of securities of $35.9 million, partially offset by purchases of short-term investments of $77.2 million, purchases of intangible assets of $50.9 million and capital expenditures of $7.4 million.

Capital Expenditures

Our capital expenditures for property, plant, and equipment consist primarily of purchases of computer hardware and software, information systems, production and test equipment. During the years ended December 31, 2021 and 2020, we spent $14.0 million and $7.4 million on capital expenditures, respectively, and we expect capital expenditures in 2022 to be between $20.0 million to $25.0 million. These expenditures are expected to be financed with cash from operations, existing cash and cash equivalents, and short-term investments. There can be no assurance that current expectations will be realized and plans are subject to change upon further review of our capital expenditure needs.

Cash Flows from Financing Activities

Net cash used in financing activities was $196.2 million for the year ended December 31, 2021 principally due to $84.0 million in repayment of indebtedness, $4.3 million in net debt refinancing costs, $21.0 million in dividends paid, and $100.8 million in repurchases of common stock, partially offset by $13.8 million in proceeds from the issuance of common stock under our employee stock grant programs and employee stock purchase plans.

Net cash used in financing activities was $351.1 million for the year ended December 31, 2020 principally due to $1,254.9 million in repayment of indebtedness, $80.6 million in repurchases of common stock and $30.8 million in dividends paid, partially offset by $1,010.3 million in net long-term debt proceeds and $4.9 million in proceeds due to the issuance of common stock under our employee stock option programs and employee stock purchase plans.

Long-term Debt

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On December 1, 2016, we entered into a Credit Agreement with Royal Bank of Canada (“RBC”) which provided for a $600.0 million seven-year term B loan facility. The Term B Loan Facility was scheduled to mature on November 30, 2023. During 2019 we made three voluntary principal payments totaling $150.0 million, and upon consummation of the Mergers on June 1, 2020, we repaid the full remaining balance of $344.0 million under the Credit Agreement. In addition, upon consummation of the Mergers on June 1, 2020, we repaid $734.6 million of assumed TiVo debt with the proceeds from a new borrowing of $1,050 million discussed below.

On June 1, 2020, in connection with the consummation of the Mergers, we entered into a Credit Agreement (the “2020 Credit Agreement”) by and among us, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent. The 2020 Credit Agreement provided for a five-year senior secured term B loan facility in an aggregate principal amount of $1,050 million (the “2020 Term B Loan Facility”). The interest rate applicable to loans outstanding under the 2020 Term B Loan Facility was equal to, at our option, either (i) a base rate plus a margin of 3.00% per annum or (ii) LIBOR plus a margin of 4.00% per annum. Commencing on September 30, 2020, the 2020 Term B Loan Facility was amortized in quarterly installments equal to (i) with respect to repayments occurring on or prior to June 1, 2023, 1.25% of the original principal amount of the 2020 Term B Loan Facility and (ii) with respect to repayments occurring after June 1, 2023 and prior to June 1, 2025, 1.875% of the original principal amount of the 2020 Term B Loan Facility, with the balance payable on the maturity date of the 2020 Term B Loan Facility (in each case subject to adjustment for prepayments). The 2020 Term B Loan Facility was scheduled to mature on June 1, 2025. Upon the closing of the 2020 Credit Agreement, we borrowed $1,050 million under the 2020 Term B Loan Facility. Net proceeds were used on June 1, 2020, together with cash and cash equivalents, to repay existing indebtedness of the combined Company, including the aforementioned Term B Loan Facility with RBC. We commenced repaying quarterly installments under the 2020 Term B Loan Facility in the third quarter of 2020. The agreement permitted prepayment of principal without penalty and on December 31, 2020, we elected to make a voluntary principal payment of $150.0 million. On June 8, 2021, we paid down $50.6 million in principal balance and completed a refinancing of the 2020 Term B Loan Facility by entering into an amendment to the 2020 Term B Loan Facility (the “Refinanced Term B Loans”) to provide a new loan facility in the amount of $810.0 million, reducing the borrowing rate by 50 basis points and extending the loan maturity date to June 2028. We commenced repaying quarterly installments under the Refinanced Term B Loans in the third quarter of 2021.

At December 31, 2021, $789.8 million was outstanding under the Refinanced Term B Loans with an interest rate, including amortization of debt discount and issuance costs, of 4.2%. Interest is payable monthly. Under the existing loan agreements, we have future minimum principal payments for our debt of $40.5 million in each year from 2022 through 2027, with the remaining principal balance of $546.8 million due in 2028. We are obligated to pay a portion of excess cash flow on an annual basis beginning in March 2023 based on certain leverage ratios and our excess cash flow generated for the immediately preceding calendar year. The Refinanced Term B Loans contain customary covenants, and as of December 31, 2021, we were in full compliance with such covenants.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States which requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. We evaluate our estimates based on our historical experience and various other assumptions that are believed to be reasonable under the circumstances. These estimates relate to revenue recognition, the assessment of recoverability of goodwill and intangible assets, business combinations, recognition and measurement of deferred income tax assets and liabilities, the assessment of unrecognized tax benefits, and others. Actual results could differ from those estimates, and material effects on our operating results and financial position may result.

We believe the following accounting policies and estimates are most critical to understanding our consolidated financial statements. See “Note 2 - Summary of Significant Accounting Policies” and “Note 4 - Revenue” of the Notes to Consolidated Financial Statements for a full description of our accounting policies.

Revenue recognition

We derive the majority of our revenue from the licensing of our technologies and intellectual property (“IP”) rights to customers. Generally, revenue is recognized upon transfer of control of promised products, services or technologies and IP rights to customers in an amount that reflects the consideration that we expect to receive in exchange for those products, services or licensing of the technologies and IP rights. The primary judgments include estimating licensees’ quarterly royalties prior to receiving the royalty reports, estimating variable consideration, identifying the performance obligations in the contract,

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determining stand-alone selling price and the transaction price, and allocating consideration in an arrangement with multiple performance obligations.

We generally recognize royalty revenue from per-unit or per-subscriber licenses based on units shipped or manufactured. Revenue is recognized in the period in which the customer’s sales or production are estimated to have occurred. This may result in an adjustment to revenue when actual sales or production are subsequently reported by the customer, generally in the month or quarter following sales or production. Estimating customers’ quarterly royalties prior to receiving the royalty reports requires us to make significant assumptions and judgments related to forecasted trends and growth rates used to estimate quantities shipped or manufactured by customers, which could have a material impact on the amount of revenue we report on a quarterly basis.

At times, we enter into license agreements in which a licensee is released from past patent infringement claims or is granted a license to ship an unlimited number of units or for an unlimited number of subscribers 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 or the number of past subscribers and the relevant geographies of the shipped units or subscribers, the future number of subscribers or units, as well as the licensing rate we generally receive for per-subscriber or 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.

Business combinations

The fair value valuation of assets acquired and liabilities assumed in a business combination under ASC 805 requires management to make significant estimates and assumptions. Critical estimates in determining the fair value of certain intangible assets include, but are not limited to: future expected cash flows from customer contracts, customer lists, and acquired developed technologies and patents; competitive trends and market comparables; brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in our product portfolio; and discount rates. For additional information, refer to “Note 9 – Business Combinations” of the Notes to Consolidated Financial Statements.

Valuation of goodwill and intangible assets

We perform an annual review of the valuation of goodwill as of the beginning of the fourth quarter, or more often if indicators of impairment exist. Triggering events for impairment reviews may be indicators such as adverse industry or economic trends, restructuring actions, lower projections of profitability, or a sustained decline in our market capitalization. Evaluations of possible impairment and, if applicable, adjustments to carrying values require us to estimate, among other factors, future cash flows, useful lives, and fair market values of our reporting units and assets. When we conduct our evaluation of goodwill, the fair value of goodwill is assessed using valuation techniques that require significant management estimates and judgment. Should conditions be different from management’s last assessment, significant impairments of goodwill may be required, which would adversely affect our operating results.

As part of the annual goodwill impairment test, we elected to proceed with a quantitative goodwill impairment test as of October 1, 2021. Based on the quantitative assessment, we concluded that the fair value of the reporting units exceeded the carrying amount for both the Product and IP Licensing reporting units with the fair value calculated as approximately 25% and 200% in excess of the respective carrying value for each of the Product and IP Licensing reporting units. In performing the quantitative impairment test for goodwill, the fair value of the reporting unit is compared to its carrying amount. We determine the fair value of a reporting unit using weighted results derived from an income approach and market approaches. Under the income approach, the fair value of a reporting unit is estimated based on the present value of future cash flows and considers projected revenue growth rates, future operating margins, income tax rates and economic and market conditions, as well as risk-adjusted discount rates. Under the market approaches, the fair value of a reporting unit is estimated based on the market comparable method, which estimates the fair value based on revenue multiples from comparable companies in similar lines of business, and the market transaction method, which estimates the fair value of the reporting unit by utilizing comparable transactions and transaction multiples.

Identified finite-lived intangible assets consist of acquired patents, existing technology, customer relationships, trademarks and trade names, non-compete agreements resulting from business combinations, and acquired patents under asset purchase agreements. Our identified intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging

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from 1 to 10 years. We make judgments about the recoverability of finite-lived intangible assets whenever facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess recoverability by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, we would accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life.

Identified indefinite-lived intangible assets include TiVo trademarks and tradenames resulting from business combinations. We evaluate the carrying value of indefinite-lived intangible assets on an annual basis, and an impairment charge would be recognized to the extent that the carrying amount of such assets exceeds their estimated fair value.

Accounting for income taxes

We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments are used in the calculation of tax credits, tax benefits and deductions, and in the calculation of tax assets and liabilities. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely on a more-likely-than-not basis, we must increase our provision for income taxes by recording a valuation allowance against our deferred tax assets. Should there be a change in our ability to recover our deferred tax assets, our provision for income taxes would fluctuate in the period of the change.

We account for uncertain tax positions in accordance with authoritative guidance related to income taxes.  The calculation of our unrecognized tax benefits involves dealing with uncertainties in the application of complex tax regulations. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. We record unrecognized tax benefits for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional tax liabilities are more-likely-than-not assuming the tax authorities have full knowledge of all relevant information. If we ultimately determine that the tax liabilities are unnecessary, we reverse the liabilities and recognize a tax benefit during the period in which it occurs. This may occur for a variety of reasons, such as the expiration of the statute of limitations on a particular tax return or the completion of an examination by the relevant tax authority. We record an additional charge in our provision for taxes in the period in which we determine that the recorded unrecognized tax benefits are less than the expected ultimate settlement.

Our policy is to classify accrued interest and penalties related to the accrued liability for unrecognized tax benefits in the provision for income taxes. For the year ended December 31, 2021, we recognized $0.3 million of interest and penalties, and for the years ended December 31, 2020, and 2019, we did not recognize any significant penalties or interest related to unrecognized tax benefits. See “Note 15 - Income Taxes” of the Notes to Consolidated Financial Statements for additional detail.

Recent Accounting Pronouncements

See “Note 3 – Recent Accounting Pronouncements” of the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.