TIVO CORPORATION Forward-Looking Statements
This Quarterly Report on Form 10-Q forTiVo Corporation (the "Company," "we" or "us") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities and Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, including the discussion contained in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
We
have based these forward-looking statements on our current expectations and projections about future events or future financial performance, which include implementing our business strategy, developing and introducing new technologies, obtaining, maintaining and expanding market acceptance of the technologies we offer, successfully renewing intellectual property licenses with the major North American pay TV service providers, competition in our markets, the potential impact of the COVID-19 pandemic, and the impact of our previously announced combination with Xperi Corporation. In some cases, these forward-looking statements can be identified by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "future," "predict," "potential," "intend," or "continue," and similar expressions. These statements are based on the beliefs and assumptions of our management and on information currently available to our management. Our actual results, performance and achievements may differ materially from the results, performance and achievements expressed or implied in such forward-looking statements. For a discussion of some of the factors that might cause such a difference, see the "Risk Factors" contained in Part II, Item 1A . of this Quarterly Report on Form 10-Q. Except as required by law, we specifically disclaim any obligation to update such forward-looking statements. The following commentary should be read in conjunction with the Consolidated Financial Statements and related notes thereto contained in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and the Condensed Consolidated Financial Statements and related notes thereto contained in Part I, Item 1. of this Quarterly Report on Form 10-Q, which are incorporated by reference herein.
Executive Overview of Results
TiVo Corporation ("TiVo") is a global leader in bringing entertainment together, making entertainment content easy to find, watch and enjoy. TiVo provides a broad set of cloud-based services, embedded software solutions and intellectual property that bring entertainment together for the watchers, creators and advertisers. For the creators and advertisers, TiVo's products deliver a passionate group of watchers to increase viewership and engagement across online video, TV and other entertainment viewing platforms. Our products and innovations are protected by broad portfolios of licensable technology patents. These portfolios cover many aspects of content discovery, digital video recorder ("DVR"), video-on-demand ("VOD") and over-the-top ("OTT") experiences, multi-screen viewing, mobile device video experiences, entertainment personalization, voice interaction, social and interactive applications, data analytics solutions and advertising. Our operations are organized into two reportable segments for financial reporting purposes: Product andIntellectual Property Licensing . The Product segment consists primarily of licensing Company-developed user experience ("UX") products and services to multi-channel video service providers and consumer electronics ("CE") manufacturers, licensing the TiVo service and selling TiVo-enabled devices, licensing metadata and advanced search and recommendation and viewership data, as well as sponsored discovery and in-guide advertising.The Intellectual Property Licensing segment consists primarily of licensing our patent portfolio toU.S. and international pay television ("TV") providers (directly and through their suppliers), mobile device manufacturers, CE manufacturers and OTT video providers. Our broad portfolio of licensable technology patents covers many aspects of content discovery, DVRs, VOD, OTT experiences, multi-screen functionality and personalization, as well as interactive applications and advertising. Total Revenues, net for the three months endedMarch 31, 2020 increased by 1% compared to the prior year. The$4.8 million decrease in Product revenues was primarily attributable to$6.7 million of revenue from a perpetual Passport license agreement with an international MSO customer in the three months endedMarch 31, 2019 , which was partially offset by a$2.9 million increase in TV viewership data revenue.Intellectual Property Licensing revenues increased$6.5 million primarily due to subscriber growth since the year ago period, new licenses and contract amendments executed since the year ago period and a$1.4 million increase in catch-up payments intended to make us whole for the pre-license period of use. Our Net loss was$179.2 million , or$1.41 per diluted share, compared to$26.6 million , or$0.21 per diluted share, in the prior year. For the three months endedMarch 31, 2020 , we reduced Research and development and Selling, general and 30
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administrative costs by$17.7 million , primarily as a result of benefits from our ongoing transformation and restructuring activities. Offsetting these cost improvements, our Operating loss for the three months endedMarch 31, 2020 reflects a$171.6 million Goodwill impairment charge resulting from a significant and sustained decline in the trading price of TiVo's common stock. In addition, our Operating loss includes a$3.0 million increase in patent litigation costs compared to the year-ago period, primarily related to the timing of costs incurred in the ongoing Comcast litigation, and a$2.8 million increase in Merger, separation and transformation costs. Our Net loss for the three months endedMarch 31, 2020 benefited from$6.7 million of lower income tax costs, primarily related to tax benefits from theGoodwill impairment charge, and a$1.6 million revenue increase. Our Net loss for the three months endedMarch 31, 2020 also includes a$4.9 million increase in Interest expense as a result of refinancing our Term Loan B inNovember 2019 and a$3.4 million increase in the Loss on interest rate swaps resulting from adverse interest rate movements. The recent outbreak of a novel strain of coronavirus, SARS-CoV-2, or COVID-19, which has been declared by theWorld Health Organization to be a "public health emergency of international concern," is impacting worldwide economic activity. As a public health epidemic, COVID-19 poses the risk that we or our workforce, suppliers and other partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities. The COVID-19 pandemic has recently had adverse impacts on many aspects of our operations, directly and indirectly, including our workforce, consumer behavior, distribution, suppliers and the market generally. For example, inMarch 2020 , we announced our workforce would work remotely as a result of the pandemic as we reviewed our processes related to workplace safety, including social distancing and sanitation practices recommended by theCenters for Disease Control and Prevention . As we generate the substantial majority of our revenue from pay TV operators and others in the video delivery industry, to date COVID-19 has not had a significant impact on our revenue. However, the impacts of the COVID-19 pandemic could cause delays in obtaining new customers and executing renewals and could also impact our consumer business, including sales ofTiVo Stream 4K which was recently launched. Further, the global financial markets have experienced increased volatility and have declined sinceDecember 31, 2019 . The Condensed Consolidated Financial Statements as of and for the three months endedMarch 31, 2020 reflect our assumptions about the economic environment and our ability to realize certain assets, including long-lived assets, such as goodwill, accounts receivable and investments in other companies. Although the response to the COVID-19 pandemic is expected to be temporary, such conditions in the global financial markets and business activities could lead to further impairment of our long-lived assets, including goodwill, increased credit losses and impairments to our investments in other companies. We believe our Cash and cash equivalents and anticipated operating cash flow, supplemented with access to capital markets as necessary, are generally sufficient to support our operating businesses, capital expenditures, restructuring activities, interest payments and income tax payments, in addition to investments in future growth opportunities and activities related to the Xperi Combination for at least the next twelve months. We are taking steps to manage our resources by reducing and/or deferring capital expenditures, inventory purchases and operating expenses to mitigate the adverse impact of the COVID-19 pandemic. Future impacts of the COVID-19 pandemic may require us to take further actions to improve our cash position, including but not limited to, implementing employee furloughs and foregoing capital expenditures and other discretionary expenses. Our intellectual property license with Comcast Corporation ("Comcast") expired onMarch 31, 2016 . Our Product relationship with Comcast, primarily a metadata license, expired onSeptember 30, 2017 . The expiration of our intellectual property license with Comcast, as well as litigation initiated against Comcast, reduced revenues and increased litigation costs. While we anticipate Comcast will eventually execute a new intellectual property license, the length of time that Comcast is out of license prior to executing a new license is uncertain. OnMay 9, 2019 , we announced that our Board of Directors unanimously approved a plan to separate the Product andIntellectual Property Licensing businesses into separately traded public companies (the "TiVo Separation"), which was targeted for completion byApril 2020 . OnDecember 18, 2019 , the Company and Xperi Corporation ("Xperi") entered into an Agreement and Plan of Merger and Reorganization (the "Xperi Merger Agreement"), pursuant to which TiVo and Xperi agreed to effect an all-stock, merger of equals strategic combination of their respective businesses (the "Xperi Combination"). The board of directors of each of TiVo and Xperi have approved the Xperi Merger Agreement and the transactions contemplated thereby. The Xperi Combination is subject to certain customary approvals, including the approval of shareholders of TiVo and Xperi, and is expected to be completed byJune 30, 2020 . The TiVo Separation and the Xperi Combination processes have been and are expected to continue to be time-consuming and involve significant costs and expenses. During the three months endedMarch 31, 2020 , we incurred$4.0 million of Merger, separation and transformation costs. The Merger, separation and transformation costs are primarily Selling, general and administrative costs, consisting of employee-related costs, costs to improve information technology systems and other one-time transaction-related costs, including investment banking and consulting fees and other incremental costs directly 31
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associated with the TiVo Separation or the Xperi Combination. In addition, in connection with theMay 2019 announcement of our plan to separate the Product andIntellectual Property Licensing businesses, we implemented a cost efficiency program to transform our business operations and to execute the TiVo Separation (the "2019 Transformation Plan"). As a result of the 2019 Transformation Plan, we are reducing headcount, moving certain positions to lower cost locations, rationalizing facilities and legal entities and terminating certain leases and other contracts. The 2019 Transformation Plan will continue to be implemented prior to completion of the Xperi Combination. The 2019 Transformation Plan resulted in restructuring charges of$0.6 million during the three months endedMarch 31, 2020 , substantially all of which related to severance costs. We expect to spend up to an additional$15.0 million to complete the 2019 Transformation Plan and prepare for the Xperi Combination, excluding spend contingent on completion of the Xperi Combination.
Comparison of Three Months Ended
The consolidated results of operations for the three months ended
Three Months Ended March 31,
2020 2019 Change $ Change %
Revenues, net:
Licensing, services and software $ 157,238 $ 156,161 $ 1,077 1 %
Hardware 2,623 2,074 549 26 %
Total Revenues, net 159,861 158,235 1,626 1 %
Costs and expenses:
Cost of licensing, services and software
revenues, excluding depreciation and
amortization of intangible assets 37,396 39,433 (2,037 ) (5 )%
Cost of hardware revenues, excluding
depreciation and amortization of
intangible assets 5,022 4,093 929 23 %
Research and development 33,744 41,381 (7,637 ) (18 )%
Selling, general and administrative 35,897 45,993 (10,096 ) (22 )%
Depreciation 4,968 5,364 (396 ) (7 )%
Amortization of intangible assets 28,142 28,178 (36 ) - %
Restructuring and asset impairment
charges 739 1,813 (1,074 ) (59 )%
Goodwill impairment 171,572 - 171,572 N/a
Total costs and expenses 317,480 166,255 151,225 91 %
Operating loss (157,619 ) (8,020 ) (149,599 ) 1,865 %
Interest expense (17,049 ) (12,161 ) (4,888 ) 40 %
Interest income and other, net 187 1,775 (1,588 ) (89 )%
Loss on interest rate swaps (5,119 ) (1,721 ) (3,398 ) 197 %
Loss on debt extinguishment - (199 ) 199 N/a
Loss before income taxes (179,600 ) (20,326 ) (159,274 ) 784 %
Income tax (benefit) expense (416 ) 6,318 (6,734 ) (107 )%
Net loss $ (179,184 ) $ (26,644 ) $ (152,540 ) 573 %
Total Revenues, net
For the three months ended
For details on the changes in Total Revenues, net, see the discussion of our segment results below.
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Cost of licensing, services and software revenues, excluding depreciation and amortization of intangible assets
Cost of licensing, services and software revenues, excluding depreciation and amortization of intangible assets, consists primarily of employee-related costs, patent prosecution, maintenance and litigation costs and an allocation of overhead and facilities costs, as well as service center and other expenses related to providing the TiVo Service and our metadata offering. For the three months endedMarch 31, 2020 , Cost of licensing, services and software revenues, excluding depreciation and amortization of intangible assets decreased 5% compared to the prior year primarily due to benefits from our transformation and restructuring activities, including a$1.5 million decrease in compensation costs, a$1.4 million decrease in non-recurring engineering costs, a$0.9 million decrease in patent prosecution costs and a$0.9 million decrease in facility and information technology costs. These cost decreases were partially offset by a$3.0 million increase in patent litigation costs, which was primarily related to the timing of costs incurred in the ongoing Comcast litigation. We expect to continue to incur material expenses related to the Comcast litigation in the future.
Cost of hardware revenues, excluding depreciation and amortization of intangible assets
Cost of hardware revenues, excluding depreciation and amortization of intangible assets includes all product-related costs associated with TiVo-enabled devices, including employee-related costs, warranty costs and order fulfillment costs, as well as certain licensing costs and an allocation of overhead and facilities costs. Hardware is sold by the Company primarily as a means to generate revenue from the TiVo Service. As a result, generating positive gross margins from hardware sales is not the primary goal of our hardware operations. For the three months endedMarch 31, 2020 , Cost of hardware revenues, excluding depreciation and amortization of intangible assets increased 23% compared to the prior year, reflecting a$1.2 million charge resulting from a non-cancellable purchase commitment, which was partially offset by benefits from our transformation and restructuring activities.
Research and development
Research and development expenses are comprised primarily of employee-related costs, consulting costs and an allocation of overhead and facilities costs.
For the three months endedMarch 31, 2020 , Research and development expenses decreased 18% compared to the prior year, primarily due to benefits from our transformation and restructuring activities, including a$5.1 million decrease in compensation costs, a$1.9 million decrease in facility and information technology costs and a$1.2 million decrease in consulting costs.
Selling, general and administrative
Selling expenses are comprised primarily of employee-related costs, including travel costs, advertising costs and an allocation of overhead and facilities costs. General and administrative expenses are comprised primarily of employee-related costs, including travel costs, outside services such as accounting, consulting, legal and tax services, and an allocation of overhead and facilities costs. Selling, general and administrative expenses decreased 22% during the three months endedMarch 31, 2020 compared to the prior year, primarily due to benefits from our transformation and restructuring activities, including a$9.6 million decrease in compensation costs and a$3.5 million reduction in spending on outside services, which was partially offset by a$2.8 million increase in Merger, separation and transformation costs and a$0.9 million increase in bad debt expense.
Restructuring and asset impairment charges
In connection with theMay 2019 announcement of the TiVo Separation, we initiated certain activities to transform our business operations (the "2019 Transformation Plan"). As a result of the 2019 Transformation Plan, we are reducing headcount, moving certain positions to lower cost locations, rationalizing facilities and legal entities and terminating certain leases and other contracts. In connection with the 2019 Transformation Plan, in the last nine months, we have taken actions that are expected to generate in excess of$27 million in annualized cost savings and we expect to incur material restructuring charges through mid-2020. The 2019 Transformation Plan resulted in Restructuring charges of$0.6 million during the three months endedMarch 31, 2020 , substantially all of which related to severance costs. 33
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InFebruary 2018 , we announced our intention to explore strategic alternatives. In connection with exploring strategic alternatives, we initiated certain cost saving actions (the "Profit Improvement Plan"). As a result of the Profit Improvement Plan, we moved certain positions to lower cost locations, eliminated layers of management and rationalized facilities, which resulted in severance costs and the termination of certain leases and other contracts, generating over$40 million in annualized cost savings. As a result of actions associated with the Profit Improvement Plan, Restructuring and asset impairment charges of$0.1 million and$1.8 million , primarily for severance-related benefits, were recognized in the three months endedMarch 31, 2020 and 2019, respectively.
As a result of a quantitative goodwill impairment test performed as ofMarch 31, 2020 , aGoodwill impairment charge of$171.6 million was recognized, of which$76.1 million related to the Product reporting unit and$95.5 million related to theIntellectual Property Licensing reporting unit. For further details about theGoodwill impairment charge, refer to Note 5 to the Condensed Consolidated Financial Statements included in Part I, Item 1. of this Quarterly Report on Form 10-Q, which is incorporated by reference herein.
Interest expense
Interest expense increased by$4.9 million during the three months endedMarch 31, 2020 primarily due to changes in the effective interest rate associated with refinancing Term Loan Facility B inNovember 2019 , partially offset by the 2020 Convertible Notes maturing inMarch 2020 .
Interest income and other, net
The decrease in Interest income and other, net for the three months endedMarch 31, 2020 was primarily due to a$1.1 million decrease in interest income due to the liquidation of our marketable securities investment portfolio in connection with the maturing 2020 Convertible Notes,$0.4 million of adverse movements in foreign currency exchange rates and a$0.3 million impairment of a non-marketable equity security.
Loss on interest rate swaps
We have not designated any of our interest rate swaps as hedges for accounting purposes. Therefore, changes in the fair value of our interest rate swaps are not offset by changes in the fair value of the related hedged item in our Condensed Consolidated Statements of Operations (see Note 7 to the Condensed Consolidated Financial Statements included in Part I, Item 1. of this Quarterly Report on Form 10-Q, which is incorporated by reference herein). We generally utilize interest rate swaps to convert the interest rate on a portion of our loans with a floating interest rate to a fixed interest rate. Under the terms of our interest rate swaps, we receive a floating rate of interest and pay a fixed rate of interest. When there is an increase in expected future LIBOR, we generally have gains when adjusting our interest rate swaps to fair value. When there is a decrease in expected future LIBOR, we generally have losses when adjusting our interest rate swaps to fair value.
Loss on debt extinguishment
Prior to theNovember 2019 refinancing, annually, the Company was required to make an additional principal payment on Term Loan Facility B, which was calculated as a percentage of the prior year's "Excess Cash Flow" as defined in the Credit Agreement. InFebruary 2019 , the Company made an Excess Cash Flow payment of$46.6 million on Term Loan Facility B, which was accounted for as a partial debt extinguishment, and recognized a$0.2 million Loss on debt extinguishment in the three months endedMarch 31, 2019 .
Income tax expense
Due to our significant net operating loss carryforwards and a valuation allowance applied against a significant portion of our deferred tax assets, foreign withholding taxes are generally the primary driver of income tax expense and the primary reason for cash payments of income taxes.
We recorded an Income tax benefit for the three months endedMarch 31, 2020 of$0.4 million , which primarily consists of a$4.6 million benefit from theGoodwill impairment charge recognized during the three months endedMarch 31, 2020 , which was partially offset by$2.6 million of Foreign withholding tax and$1.3 million ofU.S. Federal income tax. 34
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We recorded an Income tax expense for the three months endedMarch 31, 2019 of$6.3 million , which primarily consists of$4.8 million of Foreign withholding tax and$1.3 million ofU.S. Federal income tax.
The year-over-year decrease in Foreign withholding tax was due to a smaller
portion of license fees received in the three months ended
Segment Results
We report segment information in the same way management internally organizes the business for assessing performance and making decisions regarding the allocation of resources to the business units. The terms Adjusted Operating Expenses and Adjusted EBITDA in the following discussion use the definitions provided in Note 13 of the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated by reference herein.
Product
We group our Product segment into three verticals based on the products
delivered to our customer: Platform Solutions; Software and Services; and Other.
Platform Solutions includes licensing Company-developed UX products, the TiVo
service and selling TiVo-enabled devices. Software and Services includes
licensing our metadata and advanced media and advertising solutions, including
viewership data, sponsored discovery and in-guide advertising. Other includes
legacy Analog Content Protection ("ACP"), VCR Plus+ and media recognition
products.
The Product segment's results of operations for the three months ended
Three Months Ended March 31,
2020 2019 Change $ Change %
Platform Solutions $ 64,535 $ 71,037 $ (6,502 ) (9 )%
Software and Services 21,636 19,902 1,734 9 %
Other 305 364 (59 ) (16 )%
Product Revenues 86,476 91,303 (4,827 ) (5 )%
Adjusted Operating Expenses 67,844 82,890 (15,046 ) (18 )%
Adjusted EBITDA $ 18,632 $ 8,413 $ 10,219 121 %
Adjusted EBITDA Margin 21.5 % 9.2 %
For the three months ended March 31, 2020 , Product revenue declined 5% compared
to the prior year due to a decrease in revenues from Platform Solutions and
Other, which was partially offset by an increase in revenue from Software and
Services.
For the three months ended March 31, 2020 , the $6.5 million decrease in Platform
Solutions revenue was primarily attributable to $6.7 million of revenue from a
perpetual Passport license agreement with an international MSO customer in the
three months ended March 31, 2019 .
For the three months ended March 31, 2020 , the $1.7 million increase in Software
and Services revenue was primarily the result of a $2.9 million increase in TV
viewership data revenue, which was partially offset by a $0.9 million decline in
metadata revenue. For the three months ended March 31, 2020 , other revenue
primarily consists of ACP revenue, which is expected to decline in the future.
The 18% decrease in Product Adjusted Operating Expenses for the three months
ended March 31, 2020 compared to the prior year was primarily due to benefits
from our transformation and restructuring activities which resulted in reduced
Research and development compensation and consulting costs and a decrease in
facility and information technology costs. These cost reductions were partially
offset by a $1.2 million charge resulting from a non-cancellable purchase
commitment during the three months ended March 31, 2020 and an increase in bad
debt expense.
The increase in Adjusted EBITDA Margin for the three months ended March 31, 2020
reflects the revenue declines and the non-cancellable purchase commitment
described above, which were more than offset by benefits from our transformation
and restructuring activities.
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We group ourIntellectual Property Licensing segment into three verticals based primarily on the business of our customer: US Pay TV Providers; CE Manufacturers; and New Media, International Pay TV Providers and Other. US Pay TV Providers includes direct and indirect licensing of traditional US Pay TV Providers regardless of the particular distribution technology (e.g., cable, satellite or the internet). CE Manufacturers includes the licensing of our patents to traditional CE manufacturers. New Media, International Pay TV Providers and Other includes licensing to international pay TV providers, virtual service providers, mobile device manufacturers and content and new media companies.The Intellectual Property Licensing segment's results of operations for the three months endedMarch 31, 2020 compared to the prior year were as follows (dollars in thousands): Three Months Ended March 31, 2020 2019 Change $ Change % US Pay TV Providers$ 45,109 $ 42,117 $ 2,992 7 % CE Manufacturers 8,334 8,618 (284 ) (3 )% New Media, International Pay TV Providers and Other 19,942 16,197 3,745 23 %Intellectual Property Licensing Revenues 73,385 66,932 6,453 10 % Adjusted Operating Expenses 22,120 21,807 313 1 % Adjusted EBITDA$ 51,265 $ 45,125 $ 6,140 14 % Adjusted EBITDA Margin 69.9 % 67.4 % For the three months endedMarch 31, 2020 ,Intellectual Property Licensing revenue grew 10% compared to the prior year due to an increase in revenues from New Media, International Pay TV Providers and Other and US Pay TV Providers, which was partially offset by a decrease in revenue from CE Manufacturers. For the three months endedMarch 31, 2020 , the increase in revenue from US Pay TV Providers was primarily due to subscriber growth since the year ago period and a$1.1 million increase in revenue from catch-up payments intended to make us whole for the pre-license period. For the three months endedMarch 31, 2020 , the decrease in revenue from CE Manufacturers compared to the prior year was primarily the result of a decrease of$0.7 million from catch-up payments intended to make us whole for the pre-license period of use and by a decrease in our licensees' market share, combined with continuing pressures on our licensees' business models. Such declines could continue unless we are able to successfully license new entrants to this market. Partially offsetting these revenue declines was a$1.1 million benefit from a new license with a large CE manufacturer executed in the three months endedDecember 31, 2019 . For the three months endedMarch 31, 2020 , New Media, International Pay TV Providers and Other reflects an increase in revenue compared to the prior period due to new licenses and contract amendments executed since the year ago period and an increase of$1.0 million in revenue from catch-up payments intended to make us whole for the pre-license period of use. The 1% increase in Intellectual Property Licensing Adjusted Operating Expenses during the three months endedMarch 31, 2020 reflects a$3.0 million increase in patent litigation costs compared to the year-ago period, primarily related to the timing of costs incurred in the ongoing Comcast litigation, partially offset by benefits from our transformation and restructuring activities. The increase in Adjusted EBITDA Margin for the three months endedMarch 31, 2020 is primarily the result of the increase inIntellectual Property Licensing revenue and benefits from our transformation and restructuring activities, which were partially offset by an increase in patent litigation costs. 36
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Corporate
Corporate costs primarily include employee-related general and administrative costs for the corporate management, finance, legal and human resources functions, outside services such as accounting, consulting, legal and tax services, and an allocation of overhead and facilities costs.
Corporate costs for the three months ended
Three Months Ended March 31,
2020 2019 Change $ Change %
Adjusted Operating Expenses $ 11,691 $ 16,097 $ (4,406 ) (27 )%
For the three months ended
Liquidity and Capital Resources
We finance our business primarily from operating cash flow. Our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and economic conditions; however, our use of a variety of funding sources to meet our liquidity needs is designed to facilitate continued access to sufficient capital resources under such conditions. As ofMarch 31, 2020 , we had$108.5 million in Cash and cash equivalents, which are held in numerous locations around the world, with$23.2 million held by our foreign subsidiaries. Due to our net operating loss carryforwards and the effects of the Tax Act of 2017, we could repatriate amounts to theU.S. with minimal income tax effects. However, the Company's liquidity may be negatively impacted by the COVID-19 pandemic if normal business operations are not resumed in the near-term. Further, the extent to which the COVID-19 pandemic and our precautionary measures in response thereto impact our business and liquidity will depend on future developments, which are highly uncertain and cannot be precisely predicted at this time.
Sources and Uses of Cash
Cash flows for the three months ended
Three Months Ended March 31,
2020 2019 Change $ Change %
Net cash (used in) provided by
operating activities - Continuing
operations $ (20,296 ) $ 4,325 $ (24,621 ) (569 )%
Net cash provided by investing
activities 48,627 10,599 38,028 359 %
Net cash used in financing activities (292,192 ) (63,577 ) (228,615 ) 360 %
Net cash used in operating activities
- Discontinued operations (406 ) - (406 ) N/a
Effect of exchange rate changes on
cash and cash equivalents (933 ) (120 ) (813 ) 678 %
Net decrease in cash and cash
equivalents $ (265,200 ) $ (48,773 ) $ (216,427 ) 444 %
For the three months ended March 31, 2020 , operating cash flow decreased $24.6
million . The decrease was primarily due to payments for Merger, separation and
transformation costs, the timing of collections on Accounts receivable, net and
a decrease in cash collections in advance of revenue being recognized. We expect
to make material cash payments for restructuring actions and Merger, separation
and transformation costs through 2020. The availability of cash generated by our
operations in the future could be adversely affected by business risks
including, but not limited to, the Risk Factors described in in Part II, Item
1A . of this Quarterly Report on Form 10-Q and Part 1, Item 1A. of our
Annual Report on Form 10-K for the year ended December 31, 2019 , which are
incorporated by reference herein.
For the three months ended March 31, 2020 , investing cash flow increased $38.0
million . Net proceeds from marketable security investment transactions increased
by $32.2 million compared to the prior year. The proceeds from the investment
transactions were primarily used to repay the 2020 Convertible Notes at their
maturity. In addition, investing cash
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flow benefited from the use of$4.3 million of cash to acquire patent portfolios during the three months endedMarch 31, 2019 . We expect 2020 full year capital expenditures of approximately$20 million to$25 million for infrastructure projects designed to support anticipated growth in our business, to strengthen our operations infrastructure and to complete the 2019 Transformation Plan. Financing cash flow for the three months endedMarch 31, 2020 reflects the repayment of$295.0 million of outstanding principal of the Company's 2020 Convertible Notes at their maturity and a$1.8 million principal payment on the 2019 Term Loan Facility. Net cash used in financing activities for the three months endedMarch 31, 2020 reflects a decrease of$0.8 million in tax withholding payments from the net share settlement of restricted awards, partially offset by a decrease in cash receipts of$1.7 million from sales of stock through our employee stock purchase plan. Financing cash flow for the three months endedMarch 31, 2019 reflects a$46.6 million principal payment on Term Loan FacilityB. Net cash used in financing activities for the three months endedMarch 31, 2019 reflects a dividend payment of$0.18 per share, resulting in an aggregate cash payment of$22.5 million . OnFebruary 14, 2017 ,TiVo Corporation's Board of Directors approved an increase to the stock repurchase program authorization to$150.0 million , which remains available as ofMarch 31, 2020 . TheFebruary 2017 authorization includes amounts which were outstanding under previously authorized share repurchase programs. TheFebruary 2017 authorization is subject to restrictions included in the Xperi Merger Agreement, and we do not intend to make purchases under theFebruary 2017 authorization during the pendency thereof.
Capital Resources
The outstanding principal and carrying amount of debt we issued or assumed was
as follows (in thousands):
March 31, 2020 December 31, 2019
Outstanding Outstanding
Principal Carrying Amount Principal Carrying Amount
2020 Convertible Notes $ - $ - $ 295,000 $ 292,699
2021 Convertible Notes 48 48 48 48
2019 Term Loan Facility 713,210 692,269 715,000 692,792
Total $ 713,258 $ 692,317 $ 1,010,048 $ 985,539
For more information on our borrowings, see Note 7 to the Condensed Consolidated
Financial Statements included in Part I, Item 1. of this Quarterly Report on
Form 10-Q, which is incorporated by reference herein. Our ability to make
payments on our indebtedness depends on our financial and operating performance,
which is subject to prevailing economic and competitive conditions. If our cash
flows and capital resources are insufficient to service our debt obligations, we
may be forced to reduce or delay investments and capital expenditures, or to
sell assets, seek additional capital or restructure or refinance our
indebtedness. For additional information about liquidity risk, see the Risk
Factors described in Part II, Item 1A. of this Quarterly Report on Form
10-Q, which are incorporated by reference herein.
2020 Convertible Notes
2021 Convertible Notes
TiVo Solutions issued$230.0 million in aggregate principal of 2.0% Convertible Senior Notes that matureOctober 1, 2021 (the "2021 Convertible Notes") at par pursuant to an Indenture datedSeptember 22, 2014 ("the 2014 Indenture"). OnOctober 12, 2016 ,TiVo Solutions repaid$229.95 million of the par value of the 2021 Convertible Notes. The 2021 Convertible Notes were convertible at an initial conversion rate of 56.1073 shares ofTiVo Solutions common stock per$1,000 principal of notes, which was equivalent to an initial conversion price of$17.8230 per share ofTiVo Solutions common stock. The conversion rate and conversion price are subject to adjustment pursuant to the 2014 Indenture, including as a result of dividends paid byTiVo Corporation . As ofMarch 31, 2020 , the 2021 Convertible Notes are convertible 38
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at a conversion rate of 24.8196 shares of
TiVo Solutions can settle the 2021 Convertible Notes in cash, shares of common stock, or any combination thereof pursuant to the 2014 Indenture. Subject to certain exceptions, holders may requireTiVo Solutions to repurchase, for cash, all or part of their 2021 Convertible Notes upon a "Fundamental Change" (as defined in the 2014 Indenture) at a price equal to 100% of the principal amount of the 2021 Convertible Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the "Fundamental Change Repurchase Date" (as defined in the 2014 Indenture). In addition, on a "Make-Whole Fundamental Change" (as defined in the 2014 Indenture) prior to the maturity date of the 2021 Convertible Notes,TiVo Solutions will, in some cases, increase the conversion rate for a holder that elects to convert its 2021 Convertible Notes in connection with such Make-Whole Fundamental Change.
2019 Term Loan Facility and Revolving Loan Credit Agreement
OnNovember 22, 2019 , the Company, as borrower, and certain of the Company's subsidiaries, as guarantors (together with the Company, collectively, the "Loan Parties"), entered into (i) a Credit and Guaranty Agreement (the "2019 Term Loan Facility"), with the lenders party thereto andHPS Investment Partners, LLC , as administrative agent and collateral agent and (ii) an ABL Credit and Guaranty Agreement (the "Revolving Loan Credit Agreement" and, together with the 2019 Term Loan Facility, the "2019 Credit Agreements"), with the lenders party thereto,Morgan Stanley Senior Funding, Inc. , as administrative agent and collateral agent andWells Fargo Bank, National Association , as co-collateral agent. Under the 2019 Term Loan Facility, the Company borrowed$715.0 million , which matures onNovember 22, 2024 . Loans under the 2019 Term Loan Facility bear interest, at the Company's option, at an interest rate equal to either (a) the London Interbank Offered Rate ("LIBOR"), plus (i) if TiVo's Total Leverage Ratio (as defined in the 2019 Term Loan Facility) is greater than or equal to 3.50:1.00, 5.75%, (ii) if TiVo's Total Leverage Ratio is greater than or equal to 3.00:1.00 but less than 3.50:100, 5.50%, or (iii) if TiVo's Total Leverage Ratio is less than 3.00:1.00, 5.25%, in each case, subject to a 1.00% LIBOR floor or (b) the Base Rate (as defined in the 2019 Term Loan Facility), (i) if TiVo's Total Leverage Ratio is greater than or equal to 3.50:1.00, 4.75%, (ii) if TiVo's Total Leverage Ratio is greater than or equal to 3.00:1.00 but less than 3.50:100, 4.50%, or (iii) if TiVo's Total Leverage Ratio is less than 3.00:1.00, 4.25%, in each case, subject to a 2.00% Base Rate floor. TiVo may voluntarily prepay the 2019 Term Loan Facility at any time subject to (i) a 3.00% prepayment premium if the loans are prepaid on or prior toNovember 22, 2020 and (ii) a 2.00% prepayment premium if the loans are prepaid on or prior toNovember 22, 2021 . TiVo is required to make mandatory prepayments with (i) net cash proceeds from certain asset sales, (ii) net insurance or condemnation proceeds, (iii) net cash proceeds from issuances of debt (other than permitted debt), (iv) beginning with the fiscal year endingDecember 31, 2020 , 50% of TiVo's Consolidated Excess Cash Flow (as defined in the 2019 Term Loan Facility), (v) extraordinary receipts and (vi) certain net litigation proceeds, in each case, subject to certain exceptions. In the event the Xperi Combination is completed on or prior toNovember 22, 2020 , TiVo would be required to repay the then-outstanding principal of the 2019 Term Loan Facility at par plus a 3.00% prepayment premium. OnMarch 31, 2020 , TiVo was required to make a payment equal to 0.25% of the original principal amount of the 2019 Term Loan Facility. Thereafter, quarterly installments in an amount equal to 2.50% of the original principal amount of the 2019 Term Loan Facility are due, with any remaining balance payable on the final maturity date of the 2019 Term Loan Facility. The Company also entered into a$60.0 million Revolving Loan Credit Facility as part of the 2019 Credit Agreements, which expires onMarch 31, 2021 . Availability of the Revolving Loan Credit Facility is based upon a borrowing base formula and periodic borrowing base certifications valuing certain of the Loan Parties' accounts receivable as reduced by certain reserves, if any. There were no amounts outstanding under the Revolving Loan Credit Facility at any time during the three months endedMarch 31, 2020 or the year endedDecember 31, 2019 . Loans under the Revolving Loan Credit Facility bear interest, at TiVo's option, at a rate equal to either (a) LIBOR, plus (i) if the average daily Specified Excess Availability (as defined in the Revolving Loan Credit Agreement) is greater than 66.67%, 1.50%, (ii) if the average daily Specified Excess Availability is greater than 33.33% but less than or equal to 66.66%, 1.75%, or (iii) if the average daily Specified Excess Availability is less than or equal to 33.33%, 2.00%, in each case, subject to a 0.00% LIBOR floor or (b) the Base Rate (as defined in the Revolving Loan Credit Agreement), (i) if the average daily Specified Excess Availability is greater than 66.67%, 0.50%, (ii) if the average daily Specified Excess Availability is greater than 33.33% but less than or equal to 66.66%, 0.75%, or (iii) if the average daily Specified Excess Availability is less than or equal to 33.33%, 1.00%, in each case, subject to a 1.00% Base Rate floor.
Revolving loans may be borrowed, repaid and re-borrowed until
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The 2019 Credit Agreements contain customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, and dividends and other distributions. The 2019 Credit Agreements are secured by substantially all of the Company's assets.
Financing for the Xperi Combination
In connection with the execution of the Xperi Merger Agreement, TiVo and Xperi obtained a debt commitment letter (the "Commitment Letter"), datedDecember 18, 2019 , withBank of America, N.A . ("Bank of America "),BofA Securities, Inc. and Royal Bank of Canada ("Royal Bank "), pursuant to which,Bank of America andRoyal Bank have committed to provide a senior secured first lien term loan B facility in an aggregate principal amount of$1,100 million (the "Debt Financing"). OnJanuary 3, 2020 , TiVo, Xperi,Bank of America ,Royal Bank and Barclays Bank PLC ("Barclays") entered into a supplement to the Commitment Letter to add Barclays as an additional initial lender and an additional joint lead arranger and joint bookrunner and to reallocate a portion of the debt commitments ofBank of America andRoyal Bank under the Commitment Letter to Barclays. The proceeds from the Debt Financing may be used (i) to pay fees and expenses incurred in connection with the Merger and the related transactions, (ii) to finance the refinancing of certain existing indebtedness of TiVo and Xperi, and (iii) to the extent of any remaining amounts, for working capital and other general corporate purposes.
Critical Accounting Policies and Estimates
The preparation of our Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in theU.S. requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Our estimates, assumptions and judgments are based on historical experience and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources. Making estimates, assumptions and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Management believes the estimates, assumptions and judgments employed and resulting balances reported in the Condensed Consolidated Financial Statements are reasonable; however, actual results could differ materially. Except as described below, there have been no significant changes to our critical accounting policies and estimates as compared to those disclosed in "Critical Accounting Policies and Estimates" in Part II, Item 7. of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which is incorporated by reference herein.
Goodwill represents the excess of cost over fair value of the net assets of an acquired business. The recoverability of goodwill is assessed at the reporting unit level, which is either the operating segment or one level below.Goodwill is evaluated for potential impairment annually, as of the beginning of the fourth quarter, and whenever events or changes in circumstances indicate its carrying amount may not be recoverable.
Qualitative factors are first assessed to determine whether events or changes in circumstances indicate it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount.
Qualitative factors which could trigger a quantitative impairment test, include, but are not limited to a: • significant deterioration in general economic, industry or market conditions;
• significant adverse development in cost factors;
• significant deterioration in actual or expected financial performance or
operating results;
• significant adverse changes in legal factors or in the business climate,
including adverse regulatory actions or assessments; and
• significant sustained decrease in share price.
If, based on the qualitative assessment, it is considered more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then a quantitative impairment test is performed. In the quantitative impairment test, the fair value of each reporting unit is compared to its carrying amount. The fair value of the Product reporting unit and theIntellectual Property Licensing reporting unit is estimated using an income approach. 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. The carrying 40
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amount of a reporting unit is determined by assigning assets and liabilities, including goodwill and intangible assets, to the reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not impaired. If the fair value of a reporting unit is less than its carrying amount, an impairment loss equal to the difference is recognized. The process of evaluating goodwill for potential impairment is subjective and requires significant estimates, assumptions and judgments particularly related to the identification of reporting units, the assignment of assets and liabilities to reporting units and estimating the fair value of each reporting unit. Due to significant and sustained decline in the trading price of TiVo's common stock during the three months endedMarch 31, 2020 , management concluded sufficient indicators of potential impairment were identified and that it was more-likely-than-not that goodwill was impaired and that a quantitative impairment test should be performed as ofMarch 31, 2020 for the Product andIntellectual Property Licensing reporting units. Although the long-range forecasts for the Product andIntellectual Property Licensing reporting units did not materially change from those used in performing the quantitative impairment test as ofDecember 31, 2019 , the fair value decreased due to the significant and sustained decline in the trading price of TiVo's common stock. Based on this decline in fair value, aGoodwill impairment charge of$171.6 million was recognized during the three months endedMarch 31, 2020 , of which$76.1 million related to the Product reporting unit and$95.5 million related to theIntellectual Property Licensing reporting unit. Following the recognition of theGoodwill impairment charge, the equity fair value of the Product reporting unit equaled its carrying amount of$351.5 million and the equity fair value of theIntellectual Property Licensing reporting unit equaled its carrying amount of$551.0 million , which is net of the Company's debt. A deterioration in conditions or circumstances similar to those described above may result in additional goodwill impairment charges for the Product orIntellectual Property Licensing reporting units in the future. In addition, if we fail to renew licenses, or renew licenses with materially different terms than those assumed, if there is an adverse outcome with respect to patent infringement claims we have asserted against Comcast, an impairment of goodwill for theIntellectual Property Licensing reporting unit could result, the effect of which could be material.
Contractual Obligations
For information about our contractual obligations, see "Contractual Obligations" in Part II, Item 7. of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which is incorporated by reference herein. Other than the maturity of$295.0 million of the Company's 2020 Convertible Notes inMarch 2020 and$6.4 million of new inventory purchase commitments, our contractual obligations have not changed materially sinceDecember 31, 2019 .
Off-Balance Sheet Arrangements
For information about our off-balance sheet arrangements, see "Off-Balance Sheet Arrangements" in Part II, Item 7. of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which is incorporated by reference herein. SinceDecember 31, 2019 , we have not engaged in any material off-balance sheet arrangements, including the use of structured finance vehicles, special purpose entities or variable interest entities.
Recent Accounting Pronouncements
For a summary of applicable recent accounting pronouncements, see Note 1 to the Condensed Consolidated Financial Statements included in Part I, Item 1. of this Quarterly Report on Form 10-Q, which is incorporated by reference herein.
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