# Xperi Inc. (XPER) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Xperi Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1788999/000095017023006053/xper-20221231.htm
Accession: 0000950170-23-006053
Filing date: 2023-03-06
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/XPER/
All MD&A years: /company/XPER/mda/
Next year: /company/XPER/mda/fy2023/ (FY 2023)

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 discussion may contain forward-looking statements that reflect the plans, estimates and beliefs of Xperi. The words “plans,” “expects,” “will,” “anticipates,” “believes,” “intends,” “projects,” “estimates” or other words of similar meaning and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under Item 1A, “Risk Factors” and elsewhere in this report. We disclaim and do not undertake any obligation to update or revise any forward-looking statement, except as required by applicable law.

This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 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 our Registration Statement on Form 10, filed with the SEC on September 14, 2022 (the “Form 10”), 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 (“Pre-Merger Xperi”) entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with TiVo Corporation (“Pre-Merger TiVo”) to combine in an all-stock merger of equals transaction (the “Mergers”). Immediately following the consummation of the Mergers on June 1, 2020 (the “Merger Date”), Xperi Holding Corporation (“Xperi Holding,” “Adeia,” or the “Former Parent”), a Delaware corporation founded in December 2019 under the name “XRAY-TWOLF HoldCo Corporation,” became the parent company of both Pre-Merger Xperi and Pre-Merger TiVo.

Following the Mergers, Xperi Holding announced plans to separate into two independent publicly-traded companies (the “Separation”), one comprising its intellectual property (“IP”) licensing business and one comprising its product business (“Xperi Product”). On October 1, 2022, Xperi Holding completed the Separation (the “Spin-Off”) through a pro-rata distribution (the “Distribution”) of all of the outstanding common stock of its product-related business (“Xperi”, “we”, “our”, or the “Company”) to the stockholders of record of Xperi Holding as of the close of business on September 21, 2022, the record date (the “Record Date”) for the Distribution. Each Xperi Holding stockholder of record received four shares of Xperi common stock, $0.001 par value, for every ten shares of Xperi Holding common stock, $0.001 par value, held by such stockholder as of the close of business on the Record Date. Cash was paid in lieu of any fractional shares of Xperi common stock. Our Former Parent distributed 42,023,632 shares of Xperi common stock in the Distribution, which was effective on October 1, 2022. As a result of the Distribution, Xperi became an independent, publicly-traded company and its common stock is listed under the symbol “XPER” on the New York Stock Exchange (“NYSE”). In connection with the Separation and the Distribution, our Former Parent was renamed and continues as Adeia Inc. and also changed its stock symbol to “ADEA” on the Nasdaq Global Select Market.

We are a leading consumer and entertainment technology company. We believe 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 have created a unified ecosystem that reaches highly engaged consumers, uncovering significant new business opportunities, now and in the future. Our technologies are integrated into consumer devices and media platforms worldwide, driving increased value for partners, customers and consumers. We operate in one reportable business segment and currently group our business into four categories based on the markets served: Pay-TV, Consumer Electronics, Connected Car and Media Platform. Headquartered in Silicon Valley with operations around the world, we have approximately 2,100 employees and more than 35 years of operating experience.

COVID-19 Impact

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 markets we serve, in particular the automotive and broad consumer electronics markets. Additionally, the pandemic has caused some challenges and delays in acquiring new customers and executing license renewals. These factors have negatively impacted our financial condition and results of operations, contributed to an impairment of our long-lived assets, including goodwill, and may result in increased credit losses and impairments of investments in other companies.

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Our operations, particularly per-unit and variable-fee based revenue, will continue to be susceptible to the volatility, labor shortages, supply chain constraints, high energy prices and inflation, and potential market downturns precipitated by the COVID-19 pandemic as well as the current challenging macroeconomic environment. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided under Part I, Item 1A – Risk Factors.

Basis of Presentation

Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) and the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”).

During the three months ended September 30, 2022, all of the assets and liabilities of the Xperi Product business had been transferred to a legal entity (the “Transfer”) under the common control of Xperi. Subsequent to this Transfer and through December 31, 2022, our financial statements and accompanying notes are prepared on a consolidated basis and include the financial statements of Xperi and its subsidiaries in which Xperi has a controlling financial interest. All intercompany balances and transactions are eliminated in consolidation. Prior to the Transfer, the financial statements and accompanying notes of the Xperi Product business were prepared on a combined basis and were derived from the consolidated financial statements and accounting records of the Former Parent as we were not historically held by a single legal entity.

For a detailed discussion of the basis of presentation, refer to “Note 1 – The Company and Basis of Presentation” of Notes to the Consolidated Financial Statements.

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, 2022 as compared to the year ended December 31, 2021:

•
Revenue increased by $15.8 million, representing a 3% increase for the year ended December 31, 2022, compared to the prior year. The increase was primarily attributable to an increase in Consumer Electronics revenue driven by settling a contract dispute and entering into a new licensing agreement with a large mobile imaging customer, as well as an increase in Media Platform revenue from higher monetization and from the mid-year acquisition of Vewd. These increases were partially offset by overall declines in Pay TV, as declines in legacy guide and DVR platform revenue was somewhat offset by increases in IPTV solutions, and in Connected Car, as lower HD Radio revenue from reduced vehicle unit production was partially offset by increases from the DTS AutoStage and DTS AutoSense solutions.

•
Net cash from operating activities decreased by $5.0 million resulting primarily from acquisition-related transaction costs, severance and retention expenses and more cash paid for taxes in 2022.

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Results of Operations

Revenue

We derive the majority of our revenue from licensing our technology and solutions 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:

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[[/GREPCENT_TABLE]]

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

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[[/GREPCENT_TABLE]]

The $15.8 million or 3% increase in revenue for the year ended December 31, 2022, compared to the prior year, was primarily attributable to an increase in Consumer Electronics revenue driven by settling a contract dispute and entering into a new licensing agreement with a large mobile imaging customer, as well as an increase in Media Platform revenue from higher monetization and from the mid-year acquisition of Vewd. These increases were partially offset by overall declines in Pay TV, as declines in legacy guide and DVR platform revenue was somewhat offset by increases in IPTV solutions, and in Connected Car, as lower HD Radio revenue from reduced vehicle unit production was partially offset by increases from the DTS AutoStage and DTS AutoSense solutions.

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 non-recurring engineering (“NRE”) services.

Cost of revenue, excluding depreciation and amortization of intangible assets, for the year ended December 31, 2022 was $122.9 million, as compared to $125.6 million for the year ended December 31, 2021, a decrease of $2.7 million. This decrease was primarily attributable to lower hardware product-related costs due to a decline in hardware product sales in 2022.

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Research and Development

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, 2022 was $216.4 million as compared to $194.9 million for the year ended December 31, 2021, an increase of $21.5 million. The increase was primarily due to increased number of employees, primarily due to the MobiTV Acquisition in May 2021 and the Vewd Acquisition in July 2022, as well as increased bonus expense driven by higher bonus percentage attainment related to separation.

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, 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, 2022 were $217.4 million, as compared to $199.9 million for the year ended December 31, 2021, an increase of $17.5 million. The increase was primarily due to transaction and integration costs related to the Vewd Acquisition and an increase in bonus expense driven by higher bonus percentage attainment related to separation.

Depreciation Expense

Depreciation expense was $20.5 million for the year ended December 31, 2022, as compared to $22.6 million for the year ended December 31, 2021, a decrease of $2.1 million. The decrease was primarily due to certain fixed assets becoming fully depreciated during 2022.

Amortization Expense

Amortization expense for the year ended December 31, 2022 was $62.2 million, as compared to $105.3 million for the year ended December 31, 2021, a decrease of $43.1 million. The decrease was due to certain intangible assets becoming fully amortized in the fourth quarter of 2021, partially offset by new amortization expense as a result of the Vewd Acquisition in July 2022.

As a result of previous mergers and acquisitions, we anticipate that amortization expenses will continue to be a significant expense over the next several years. See “Note 10—Goodwill and Identified Intangible Assets” of the Notes to Consolidated Financial Statements for additional detail.

Stock-based Compensation Expense

The following table sets forth our stock-based compensation (“SBC”) expense for the years ended December 31, 2022, 2021 and 2020 (in thousands):

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[[/GREPCENT_TABLE]]

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Stock-based compensation awards include restricted stock awards and units, employee stock purchase plan (“ESPP”) purchases and employee stock options. The increase in stock-based compensation for the year ended December 31, 2022, compared to the prior year, was primarily a result of the vesting of restricted stock awards made to an increased number of employees resulting from the Mergers, the MobiTV Acquisition, the Vewd Acquisition and certain insourcing activity, and secondarily due to incremental compensation cost recognized related to the conversion of employee equity awards during the Spin-Off. For a detailed discussion on incremental SBC cost related to the Spin-Off, refer to Note 13 and Note 14 of the Notes to the Consolidated Financial Statements.

Impairment of Long-Lived Assets

As a result of consolidating our global real estate footprint and a decision to sublease a recently vacated office building, we recorded non-cash impairment charges of $7.7 million to reduce the carrying amount of certain operating lease right-of-use (“ROU”) assets and property and equipment, including leasehold improvements, during the year ended December 31, 2022. We determined that we may not be able to fully recover the carrying amount of the leased building due to a change in the manner in which the building is being used, a significant decrease in the expected market price of the leased asset, and expected delays in subleasing the space based on the current real estate leasing market.

We expect additional impairment charges related to operating lease ROU assets in the first half of 2023 based on current plans to reduce our real estate footprint.

We did not recognize an asset impairment charge for the year ended December 31, 2021.

Goodwill Impairment

During the three months ended December 31, 2022, sufficient indicators of potential impairment were identified such that management concluded it was more-likely-than-not that goodwill was impaired and a quantitative interim goodwill impairment test should be performed as of December 31, 2022. Indicators of potential impairment included a significant, sustained decline in the trading price of our common stock during the fourth quarter of 2022. We proceeded to perform a fair value analysis of the Product reporting unit (our sole reporting unit) using the market capitalization approach. Under this approach, we estimated the fair value as of December 31, 2022 using quoted market prices of our common stock as of December 30, 2022, the last trading date of 2022, and a control premium representing the estimated synergies a market participant would achieve upon obtaining control of Xperi. As a result of the fair value analysis, a goodwill impairment charge of $250.6 million was recognized during the three months ended December 31, 2022. As a result of this impairment charge, our goodwill balance was reduced to $0 as of December 31, 2022.

During the three months ended September 30, 2022, indicators of potential impairment for the Product reporting unit of our Former Parent were identified such that management concluded it was more-likely-than-not that goodwill was impaired and a quantitative interim goodwill impairment assessment should be performed as of September 30, 2022. Indicators of potential impairment included a sustained decline in our Former Parent’s stock price during the second half of the third quarter of 2022 reflective of rising interest rates and continued decline in macroeconomic conditions. We proceeded to perform a fair value analysis of the Product reporting unit using the market capitalization approach. Under this approach, we estimated the fair value of the Product reporting unit as of September 30, 2022 using quoted market prices of our common stock over its first ten trading days following the Separation, and a control premium representing the estimated synergies a market participant would achieve upon obtaining control of Xperi. As a result of the fair value analysis, we recognized a goodwill impairment charge of $354.0 million during the three months ended September 30, 2022.

We did not recognize a goodwill impairment charge for the year ended December 31, 2021.

Other Income (Expense), Net

Other income, net, for the year ended December 31, 2022 was $1.8 million, as compared to other income, net, of $1.6 million for the year ended December 31, 2021. Other income, net, was higher in 2022 principally due to an increase in interest payments from past due royalties received, partially offset by the interest expense on debt incurred in connection with the Vewd acquisition discussed below in Liquidity and Capital Resources.

Provision for (benefit from) Income Taxes

For the year ended December 31, 2022, we recorded an income tax expense of $13.6 million on a pretax loss of $747.6 million, which resulted in an effective tax rate of (1.8)%. The income tax expense of $13.6 million was primarily related to foreign

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withholding taxes of $10.2 million, state income taxes of $1.6 million, and foreign income tax expense of $7.2 million, partially offset by a tax benefit due to an impairment of goodwill of $5.0 million.

For the year ended December 31, 2021, we recorded an income tax expense of $18.8 million on a pretax loss of $160.2 million, which resulted in an effective tax rate of (11.8)%. The income tax expense of $18.8 million was primarily related to foreign withholding taxes of $9.5 million and foreign income tax expense of $7.9 million. Foreign income tax expense of $7.9 million was primarily due to an increase in valuation allowance of $7.1 million on the deferred tax assets of the UK subsidiary and a $1.4 million tax on a one-time foreign dividend distribution.

Our income tax expense for the years ended December 31, 2022, 2021 and 2020 was calculated on a separate return basis as if we would file our tax return for the full twelve months in each year. However, activities for periods prior to the Separation Date are generally reported on U.S. income tax returns filed by our Former Parent. Because of this, income tax expense presented in the Consolidated Statements of Operations for periods prior to the Separation is not necessarily representative of the taxes that may arise in the future when we file our income tax returns independent from the Former Parent's returns. In the future, under the Tax Matters Agreement, our Former Parent may utilize certain of our tax attributes generated during pre-Separation periods to reduce its tax liability for tax years ended December 31, 2022 and earlier. If our Former Parent should use such attributes, this would require an adjustment to our tax accounts.

At December 31, 2022, our 2018 through 2022 tax years are generally open and subject to potential examination in one or more jurisdictions. In addition, in the United States, any net operating losses or credits that were generated in prior years but not yet fully utilized in a year that is closed under the statute of limitations may also be subject to examination.

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 unlikely that we would realize a portion of our federal, certain state and certain foreign deferred tax assets. We intend to continue maintaining a 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. Release of the valuation allowance would result in the recognition of certain federal deferred tax assets and a decrease to income tax expense for the period the release is recorded. The exact timing and amount of the valuation allowance release depends on the level of profitability that we are able to achieve.

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:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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[[/GREPCENT_TABLE]]

Our primary sources of liquidity and capital resources are our cash on hand including cash provided by the Former Parent prior to the Separation. Cash and cash equivalents were $160.1 million at December 31, 2022, an increase of $39.4 million from $120.7 million at December 31, 2021. This increase resulted primarily from $52.8 million of net cash transfers from the Former Parent and $83.2 million of net proceeds from capital contributions by the Former Parent, partially offset by $28.4 million in cash used in operating activities and $64.8 million in cash used in investing activities including the acquisition of Vewd in July 2022.

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

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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 $59.9 million, with $19.9 million payable within 12 months. See “Note 8 – Leases” of the Notes to Consolidated Financial Statements for additional information on lease obligations and maturities.

Long-Term Debt

As of December 31, 2022, we had outstanding long-term debt in an aggregate principal amount of $50.0 million, which is due on July 1, 2025. We may, at any time and on any one or more occasions, prepay all or any portion of the outstanding principal amount, plus accrued and unpaid interest, if any, without premium or penalty. Future interest payments associated with the debt total $7.5 million, with $3.0 million payable within 12 months.

Purchase Obligations

Our purchase obligations primarily consist of noncancelable obligations related to advertising, engineering services and internet and telecommunications services. As of December 31, 2022, we had purchase obligations of $102.9 million, with $32.7 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. Additionally, under certain other contractual arrangements, we may be obligated to pay up to $1.3 million, a majority of which is expected to be paid in the next two years, if certain milestones are achieved. See “Note 16 – Commitments and Contingencies” of the Notes to Consolidated Financial Statements for additional information on our purchase obligations.

Inventory Purchase Commitments

We use contract manufacturers to provide manufacturing services for our products. As of December 31, 2022, we had total purchase commitments for inventory of $1.3 million, all of which were payable within 12 months.

Income Tax Payable

As of December 31, 2022, we had accrued $7.6 million of unrecognized tax benefits in long-term income taxes payable related to uncertain tax positions, which included immaterial 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.

Cash Flows

Cash Flows From Operating Activities

Net cash used by operations was $28.4 million for the year ended December 31, 2022, primarily due to our net loss of $761.2 million and $6.0 million in changes in operating assets and liabilities being adjusted for non-cash items of depreciation of $20.5 million, amortization of intangible assets of $62.2 million, stock-based compensation of $45.3 million, goodwill impairment of $604.6 million and impairment of long-lived assets of $7.7 million. The net loss included approximately $11.4 million of acquisition and separation-related costs, and severance and retention expenses.

Net cash used by operations was $23.5 million for the year ended December 31, 2021, primarily due to our net loss of $179.1 million, $10.9 million in changes in operating assets and liabilities, and provision for credit losses of $1.0 million, partially offset by a reduction in deferred income taxes of $6.9 million and non-cash items of depreciation of $22.6 million, amortization of intangible assets of $105.3 million, and stock-based compensation expense of $33.5 million. The net loss included $1.4 million of merger-related expenses and $6.5 million of severance and retention expenses incurred in 2021 which were primarily merger-related.

Cash Flows from Investing Activities

Net cash used in investing activities was $64.8 million for the year ended December 31, 2022, primarily related to net cash paid of $50.5 million for the Vewd Acquisition, capital expenditures of $14.2 million and purchases of intangible assets of $0.2 million.

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Net cash used in investing activities was $21.5 million for the year ended December 31, 2021, primarily related to net cash paid of $12.4 million for the MobiTV Acquisition, capital expenditures of $8.9 million and purchases of intangible assets of $0.2 million.

Capital Expenditures

Our capital expenditures for property, plant, 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 $14.2 million and $8.9 million on capital expenditures, respectively, and we expect capital expenditures in 2023 to be between $15.0 million and $20.0 million. These expenditures are expected to be financed with existing cash and cash equivalents. 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 provided by financing activities was $135.8 million for the year ended December 31, 2022 consisting primarily of $52.8 million of net transfers from the Former Parent and $83.2 million of net proceeds from capital contributions by the Former Parent.

Net cash provided by financing activities was $83.3 million for the year ended December 31, 2021, principally due to net transfers from the Former Parent.

Long-term Debt

In connection with the Vewd acquisition on July 1, 2022, we issued a senior unsecured promissory note (the “Promissory Note”) to the sellers of Vewd in the principal amount of $50.0 million. Indebtedness outstanding under the Promissory Note bears an interest rate of 6.00% per annum, payable in cash on a quarterly basis. If a certain qualified spin-off transaction occurs, the interest rate will be increased to the greater of (a) 6.00% and (b) the sum of (i) the highest interest rate payable under any credit facility or bonds, debentures, notes or similar instruments where we or any guarantor borrows money or guarantees obligations on a secured basis on or after the date of such spin-off transaction, plus (ii) 2.00%. It was determined that the Spin-Off completed on October 1, 2022 did not trigger any change in the interest rate of the debt. The Promissory Note matures on July 1, 2025. We may, at any time and on any one or more occasions, prepay all or any portion of the outstanding principal amount, plus accrued and unpaid interest, if any, under the Promissory Note without premium or penalty. In addition, the Promissory Note has mandatory prepayment provisions upon certain change of control or asset sale events.

At December 31, 2022, $50.0 million was outstanding under the Promissory Note with an annual interest rate of 6.0%. Interest is payable quarterly. Under the Promissory Note agreement, we are obligated to make a balloon principal payment of $50.0 million in 2025.

Following the Separation from the Former Parent, our capital structure and sources of liquidity changed significantly from our historical capital structure and sources of liquidity. Subsequent to the Separation, we no longer participate in cash management and funding arrangements managed by the Former Parent. At the time of the Spin-Off, our Former Parent capitalized us such that we carried an amount of cash and cash equivalents of over $180.0 million.

Our current cash and cash equivalents balance is expected to be sufficient to support our operations, capital expenditures and income tax payments, in addition to any investments and other capital allocation needs, for at least the next 12 months from the issuance date of these financial statements.

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 equity financing will be on terms satisfactory to us and not dilutive to our then-current stockholders or that debt financing will not impose significant restrictions on the operation of our business.

We plan to supplement this short-term liquidity, if necessary, with access to capital markets. Our access to capital markets may be constrained and our cost of borrowing may increase under certain business and market conditions, and our liquidity is subject to various risks including the risks identified in “Risk Factors” included in Item 1A of this Form 10-K.

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Critical Accounting 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 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 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 to customers. Generally, revenue is recognized upon transfer of control of promised products, services or technologies to customers in an amount that reflects the consideration that we expect to receive in exchange for those products, services and licensing of the technologies. The primary judgments include estimating licensees’ quarterly royalties prior to receiving the royalty reports, estimating variable consideration, identifying the performance obligations in the contract, 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.

Business combinations

The valuation of assets acquired and liabilities assumed in a business combination under ASC 805, Business Combinations (“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.

Impairment of goodwill and intangible assets

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, fair market values of our assets, and control premiums of our business. When we conduct our evaluation of goodwill, the fair value of goodwill is assessed using valuation techniques that require significant management estimates and judgment.

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.

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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 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 trade names 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 years ended December 31, 2022, 2021 and 2020, we recognized insignificant interest and penalties 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.

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