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  • 10-Q (Aug 3, 2017)
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TiVo 10-Q 2017

Documents found in this filing:

  1. 10-Q
  2. Ex-31.01
  3. Ex-31.02
  4. Ex-32.01
  5. Ex-32.02
  6. Ex-32.02
Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________ 
FORM 10-Q
(Mark One)
  x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
or
  o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number: 001-37870
TiVo Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
61-1793262
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Two Circle Star Way, San Carlos, CA 94070
(Address of principal executive offices, including zip code)
(408) 562-8400
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
 
 
(Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  þ
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
(in thousands)
Outstanding as of
Class
April 28, 2017
Common Stock
121,083




TIVO CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS




1


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TIVO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

March 31, 2017
 
December 31, 2016
ASSETS
(Unaudited)


Current assets:



Cash and cash equivalents
$
187,636


$
192,627

Short-term marketable securities
103,307


117,084

Accounts receivable, net
174,832


147,142

Inventory
11,563

 
13,186

Prepaid expenses and other current assets
35,239


37,400

Total current assets
512,577

 
507,439

Long-term marketable securities
122,655


128,929

Property and equipment, net
45,716


48,372

Intangible assets, net
767,612


806,838

Goodwill
1,813,691


1,812,118

Other long-term assets
21,333


17,147

Total assets
$
3,283,584

 
$
3,320,843





LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Accounts payable and accrued expenses
$
226,648


$
226,451

Deferred revenue
45,286


49,145

Current portion of long-term debt
7,000


7,000

Total current liabilities
278,934

 
282,596

Taxes payable, less current portion
4,966


4,893

Deferred revenue, less current portion
44,039


43,545

Long-term debt, less current portion
969,827


967,732

Deferred tax liabilities, net
78,283


77,454

Other long-term liabilities
34,104


34,987

Total liabilities
1,410,153

 
1,411,207

Commitments and contingencies (Note 10)





Stockholders' equity:



Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued or outstanding



Common stock, $0.001 par value, 250,000 shares authorized; 122,106 shares issued and 121,130 shares outstanding as of March 31, 2017; and 120,526 shares issued and 120,061 shares outstanding as of December 31, 2016
121


121

Treasury stock, 976 shares and 465 shares at March 31, 2017 and December 31, 2016, respectively, at cost
(19,267
)

(9,646
)
Additional paid-in capital
3,286,905


3,280,905

Accumulated other comprehensive loss
(4,972
)

(7,049
)
Accumulated deficit
(1,389,356
)

(1,354,695
)
Total stockholders’ equity
1,873,431

 
1,909,636

Total liabilities and stockholders’ equity
$
3,283,584

 
$
3,320,843


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

2



TIVO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

 
 
Three Months Ended March 31,
 
2017
 
2016
Revenues, net:
 
 
 
Licensing, services and software
$
190,550

 
$
118,011

Hardware
15,214

 
373

Total Revenues, net
205,764

 
118,384

Costs and expenses:
 
 
 
Cost of licensing, services and software revenues, excluding depreciation and amortization of intangible assets
42,306

 
22,308

Cost of hardware revenues, excluding depreciation and amortization of intangible assets
14,221

 
229

Research and development
48,922

 
22,064

Selling, general and administrative
53,949

 
36,687

Depreciation
5,472

 
4,234

Amortization of intangible assets
41,700

 
19,132

Restructuring and asset impairment charges
4,539

 
2,333

Total costs and expenses
211,109

 
106,987

Operating (loss) income
(5,345
)
 
11,397

Interest expense
(10,264
)
 
(10,531
)
Interest income and other, net
(63
)
 
(17
)
Income (loss) on interest rate swaps
521

 
(13,087
)
Loss on debt extinguishment
(108
)
 

Loss on debt modification
(929
)
 

Litigation settlement
(12,906
)
 

Loss before income taxes
(29,094
)
 
(12,238
)
Income tax expense
5,567

 
5,414

Net loss
$
(34,661
)
 
$
(17,652
)
 
 
 
 
Basic earnings (loss) per share
$
(0.29
)
 
$
(0.22
)
Weighted average shares used in computing basic per share amounts
118,813

 
81,375

 
 
 
 
Diluted earnings (loss) per share
$
(0.29
)
 
$
(0.22
)
Weighted average shares used in computing diluted per share amounts
118,813

 
81,375

 
 
 
 
Dividends declared per share
$
0.18

 
$


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3


TIVO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
2017
 
2016
Net loss
$
(34,661
)
 
$
(17,652
)
Other comprehensive income, net of tax:
 
 
 
Foreign currency translation adjustment
1,855

 
973

Unrealized gains on marketable securities
222

 
527

Other comprehensive income, net of tax
2,077

 
1,500

Comprehensive loss
$
(32,584
)
 
$
(16,152
)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


4


TIVO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net loss
$
(34,661
)
 
$
(17,652
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation
5,472

 
4,234

Amortization of intangible assets
41,700

 
19,132

Amortization of convertible note discount and note issuance costs
3,628

 
3,445

Restructuring and asset impairment charges
4,539

 
2,333

Equity-based compensation
14,025

 
8,438

Change in fair value of interest rate swaps
(2,786
)
 
11,002

Loss on debt extinguishment
108

 

Loss on debt modification
929

 

Loss on litigation settlement
12,906

 

Deferred income taxes
736

 
939

Other operating, net
549

 
622

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(27,997
)
 
(11,445
)
Inventory
1,623

 
202

Prepaid expenses and other current assets and other long-term assets
(2,537
)
 
(13,919
)
Accounts payable and accrued expenses and other long-term liabilities
(34,884
)
 
(14,065
)
Accrued income taxes
282

 
(1,472
)
Deferred revenue
(3,365
)
 
(840
)
Net cash used in operating activities
(19,733
)
 
(9,046
)
Cash flows from investing activities:
 
 
 
Payments for purchase of short- and long-term marketable securities
(72,371
)
 
(31,879
)
Proceeds from sales or maturities of short- and long-term marketable securities
92,221

 
22,798

Payments for purchase of property and equipment
(7,100
)
 
(10,732
)
Payments for purchase of patents
(1,750
)
 
(2,500
)
Return of cash paid for TiVo Acquisition
25,143

 

Other investing, net
(29
)
 
(17
)
Net cash provided by (used in) investing activities
36,114

 
(22,330
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt, net of issuance costs
681,552

 

Principal payments on long-term debt
(684,250
)
 
(1,750
)
Payments for dividends
(21,662
)
 

Payments for deferred holdback

 
(750
)
Payments for withholding taxes related to net settlement of restricted stock units
(9,621
)
 
(3,750
)
Proceeds from exercise of employee stock options and employee stock purchase plan
11,721

 
7,215

Net cash (used in) provided by financing activities
(22,260
)
 
965

Effect of exchange rate changes on cash and cash equivalents
888

 
579

Net decrease in cash and cash equivalents
(4,991
)
 
(29,832
)
Cash and cash equivalents at beginning of period
192,627

 
101,675

Cash and cash equivalents at end of period
$
187,636

 
$
71,843


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

5


TIVO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation and Summary of Significant Accounting Policies

Description of Business

On April 28, 2016, Rovi Corporation ("Rovi") and TiVo Inc. (renamed TiVo Solutions Inc. ("TiVo Solutions")) entered into an Agreement and Plan of Merger (the “Merger Agreement”) for Rovi to acquire TiVo Solutions in a cash and stock transaction (the "TiVo Acquisition"). Following consummation of the TiVo Acquisition on September 7, 2016 (the "TiVo Acquisition Date"), TiVo Corporation (the "Company"), a Delaware corporation founded in April 2016 as Titan Technologies Corporation and then a wholly-owned subsidiary of Rovi, owns both Rovi and TiVo Solutions. The common stocks of Rovi and TiVo Solutions were de-registered after completion of the TiVo Acquisition.

The Company is a global leader in media and entertainment products that power consumer entertainment experiences and enable its customers to deepen and further monetize their audience relationships. The Company provides a broad set of intellectual property, cloud-based services and set-top box solutions that enable people to find and enjoy online video, television, movies and music entertainment, including content discovery through device embedded and cloud-based interactive program guides (“IPGs”), digital video recorders ("DVRs"), natural language voice and text search, cloud-based recommendations services and our extensive entertainment metadata (i.e., descriptive information, promotional images or other content that describes or relates to television shows, videos, movies, sports, music, books, games or other entertainment content). The Company's integrated platform includes software and cloud-based services that provide an all-in-one approach for navigating a fragmented universe of content by seamlessly combining live, recorded, video-on-demand ("VOD") and over-the-top ("OTT") content into one intuitive user interface with simple universal search, discovery, viewing and recording, to create a unified viewing experience. The Company distributes its products through service provider relationships, integrated into third party devices and directly to retail consumers. The Company also offers data analytics solutions, including advertising and programming promotion optimizers, which enable advanced audience targeting in linear television advertising. Solutions are sold globally to cable, satellite, consumer electronics, entertainment, media and online distribution companies, and, in the United States, we sell a suite of DVR and whole home media products and services directly to retail consumers.
    
Basis of Presentation and Principles of Consolidation

Rovi is the predecessor registrant to TiVo Corporation and therefore, for periods prior to the TiVo Acquisition Date, the Condensed Consolidated Financial Statements reflect the financial position, results of operations and cash flows of Rovi. As used herein, the “Company” refers to Rovi when referring to periods prior to and including the TiVo Acquisition Date and to TiVo Corporation when referring to periods subsequent to the TiVo Acquisition Date. The Company’s results of operations include the operations of TiVo Solutions after the TiVo Acquisition Date. See Note 2 for additional information on the TiVo Acquisition.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted in accordance with such rules and regulations. However, the Company believes the disclosures made are adequate to make the information not misleading. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management, are considered necessary to present fairly the results for the periods presented.

The information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto and other disclosures contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2017, for any future year, or for any other future interim period.

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of TiVo Corporation and subsidiaries and affiliates in which the Company has a controlling financial interest after the elimination of intercompany accounts and transactions.

Certain prior year amounts have been reclassified to conform to the current year presentation.

6


    
Use of Estimates

The preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statements and the results of operations for the reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, long-lived asset impairment, including goodwill and intangible assets, equity-based compensation and income taxes. Actual results may differ from those estimates.

Concentrations of Risk

Customers representing 10% or more of Total Revenues, net were as follows:
 
Three Months Ended March 31,
 
2017
 
2016
AT&T Inc. ("AT&T")
14
%
 
13
%

Substantially all of the Company's revenue from AT&T is reported in the Intellectual Property Licensing segment.

Customers representing 10% or more of Accounts receivable, net were as follows.
 
March 31, 2017
 
December 31, 2016
AT&T
22
%
 
15
%
DISH Network LLC
16
%
 
(1)

Virgin Media Inc.
(1)

 
13
%

(1) Customer represented less than 10% of Accounts receivable, net.

The TiVo service is enabled through the use of a DVR manufactured by a third-party contract manufacturer. The Company also relies on third-parties with whom it outsources supply-chain activities related to inventory warehousing, order fulfillment, distribution and other direct sales logistics. The Company cannot be sure that these parties will perform their obligations as expected or that any revenue, cost savings or other benefits will be derived from the efforts of these parties. If any of these parties breaches or terminates their agreement with the Company or otherwise fails to perform their obligations in a timely manner, the Company may be delayed or prevented from commercializing its products and services.

In instances where a supply agreement does not exist and suppliers fail to perform their obligations, the Company may be unable to find alternative suppliers or deliver its products and services to its customers on time, if at all. The Company does not have a long-term written supply agreement with Broadcom Corporation, the sole supplier of the system controller for its DVR.

Recent Accounting Pronouncements

Standards Recently Adopted

In January 2017, the Financial Accounting Standards ("FASB") simplified the goodwill impairment test by eliminating its second step. Pursuant to the simplified test, an entity performs its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company elected to early adopt the simplified test. Application of this guidance on January 1, 2017 did not have an effect on the Condensed Consolidated Financial Statements.

In March 2016, the FASB simplified certain areas of accounting for stock-based compensation, including accounting for the income tax consequences of stock-based compensation, determining the classification of awards as either equity or liabilities, presenting certain items within the statement of cash flows and introducing an accounting policy election to account for forfeitures of nonvested awards as they occur. Application of this guidance on January 1, 2017 increased the Company's deferred tax assets and the related valuation allowance by $70.1 million, resulting in no material effect on the Condensed Consolidated Financial Statements. On adoption, the Company did not change its accounting policy of estimating forfeitures for nonvested awards.


7


In March 2016, the FASB clarified the assessment of whether contingent options that can accelerate the payment of principal on debt instruments requires bifurcation as an embedded derivative. The amendments require a contingent option embedded in a debt instrument to be evaluated for possible separate accounting as a derivative instrument without regard to the nature of the exercise contingency. Application of the clarified guidance on January 1, 2017 did not have an effect on the Condensed Consolidated Financial Statements.

In July 2015, the FASB changed the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value for entities that do not use the last-in, first-out ("LIFO") or retail inventory method. The changes also eliminated the requirement to consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory for entities that do not use the LIFO or retail inventory method. Application of the changed measurement principle for inventory on January 1, 2017 did not have an effect on the Condensed Consolidated Financial Statements.

Standards Pending Adoption

In March 2017, the FASB shortened the amortization period for certain callable debt securities held at a premium to the earliest call date. Application of the shortened amortization period is effective for the Company in the first quarter of 2019 on a modified retrospective basis, with early application permitted. The Company does not expect application of the shortened amortization period to have a material effect on its Condensed Consolidated Financial Statements

In January 2017, the FASB clarified the definition of a business. The clarified guidance provides a more defined framework to use in determining when a set of assets and activities constitute a business. The clarified definition is effective for the Company in the first quarter of 2018 on a prospective basis, with early application permitted. The Company does not expect application of the clarified definition of a business to have a material effect on its Condensed Consolidated Financial Statements

In October 2016, the FASB amended its guidance on the tax effects of intra-entity transfers of assets other than inventory. The amended guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments are effective for the Company in the first quarter of 2018 and is required to be applied on a modified retrospective basis. Early application is permitted. The Company is evaluating the effect of application on its Condensed Consolidated Financial Statements.

In August 2016, the FASB issued clarifying guidance on the presentation of eight specific cash flow issues for which previous guidance was either unclear or not specific. The clarified guidance is effective for the Company in the first quarter of 2018 and is required to be applied on a retrospective basis. Early application is permitted. The Company is evaluating the effect of application on its Condensed Consolidated Financial Statements.

In June 2016, the FASB issued updated guidance that requires entities to use a current expected credit loss model to measure credit-related impairments for financial instruments held at amortized cost. The current expected credit loss model is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect collectibility. Current expected credit losses, and subsequent adjustments, represent an estimate of lifetime expected credit losses that are recorded as an allowance deducted from the amortized cost basis of the financial instrument. The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments for credit-related losses through an allowance and eliminating the length of time a security has been in an unrealized loss position as a consideration in the determination of whether a credit loss exists. The guidance is effective for the Company in the first quarter of 2020, and is effective using a modified retrospective approach for application of the current expected credit loss model to financial instruments and a prospective approach for credit losses on available-for-sale debt securities. Early application is permitted. The Company is evaluating the effect of application on its Condensed Consolidated Financial Statements.
    
In March 2016, the FASB provided guidance on the derecognition of prepaid stored-value product liabilities, such as gift cards. The guidance is effective for the Company in the first quarter of 2018 and may be applied using a full retrospective or modified retrospective approach, with early adoption permitted. The Company is evaluating the effect of application on its Condensed Consolidated Financial Statements.

In February 2016, the FASB issued a new accounting standard for leases. The new standard generally requires the recognition of financing and operating lease liabilities and corresponding right-of-use assets on the balance sheet. For financing leases, a lessee recognizes amortization of the right-of-use asset as an operating expense over the lease term separately from interest on the lease liability. For operating leases, a lessee recognizes its total lease expense as an operating expense over the

8


lease term. The amendments are effective for the Company in the first quarter of 2019 using a modified retrospective approach, with early application permitted. The Company is evaluating the effect of application on its Condensed Consolidated Financial Statements and expects that its existing operating lease commitments will be recognized as operating lease liabilities and right-of-use assets.

In May 2014, the FASB issued an amended accounting standard for revenue recognition. The amendments address how revenue is recognized in order to improve comparability between the financial statements of companies applying U.S. GAAP and International Financial Reporting Standards. The core principle of the amended standard is for an entity to recognize revenue to depict the transfer of promised goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments are effective for the Company in the first quarter of 2018 and may be applied using a full retrospective or modified retrospective approach. The Company expects to initially apply the amendments in the first quarter of 2018 and is evaluating the effect the amendments and transition alternatives will have on its Condensed Consolidated Financial Statements.

While the Company has not finalized its evaluation of the impact that the amended revenue recognition guidance will have on its Condensed Consolidated Financial Statements, the Company expects that revenue from both its fixed-fee and per-unit intellectual property licensees will be impacted. Under the amended revenue recognition standard, the Company may be required to recognize a substantial portion of license fees under a fixed-fee intellectual property license agreement at inception of the agreement, as opposed to recognizing the license fees ratably over the license term, which is its practice in accordance with existing U.S. GAAP. This could impact revenue recognition for all fixed-fee intellectual property license agreements, including certain fixed-fee agreements that license the Company's existing intellectual property portfolio and intellectual property that is added to the Company's portfolio during the term of the license. In addition, in accordance with existing U.S. GAAP, the Company currently recognizes revenue from per-unit royalty licenses with consumer electronic manufacturers and third party IPG providers in the period the licensee reports its sales, which is generally in the quarter after the underlying sales occurred. On adoption of the amended revenue recognition guidance, per-unit royalties are recognized as revenue during the period in which the licensee's sales are estimated to have occurred, which results in an adjustment to revenue when actual amounts are subsequently reported by the Company's licensees. In addition, some deferred revenue recognized in accordance with existing U.S. GAAP could be eliminated as part of the effect of adoption. The Company has not selected a transition approach.

(2) Acquisitions

TiVo Acquisition

On September 7, 2016, Rovi completed its acquisition of TiVo Solutions, a global leader in next-generation video technology and innovative cloud-based software-as-a-service solutions. On the TiVo Acquisition Date, each issued and outstanding share of TiVo Solutions common stock (other than shares of TiVo Solutions common stock held by those TiVo Solutions stockholders who had properly demanded and not waived or withdrawn appraisal rights under Delaware law as further discussed below) automatically converted into the right to receive $2.75 per share in cash and 0.3853 (the “Exchange Ratio”) validly issued, fully paid and non-assessable shares of TiVo Corporation common stock. As the employee restricted stock awards, stock options and performance-based restricted stock awards remained outstanding after the TiVo Acquisition Date, employee holders were not eligible for the cash component of the merger consideration and the number of TiVo Corporation restricted stock awards or stock options delivered at the TiVo Acquisition Date was based on an exchange ratio of 0.5186.

TiVo Solutions' results of operations and cash flows have been included in the Condensed Consolidated Financial Statements for periods subsequent to September 7, 2016. For the three months ended March 31, 2017, TiVo Corporation's results include revenue and operating loss from TiVo Solutions of $84.8 million and $9.7 million, respectively.

Preliminary Purchase Price

In November 2016, holders of 9.1 million shares of TiVo Solutions common stock outstanding at the TiVo Acquisition Date who did not vote to approve the TiVo Acquisition filed a petition for appraisal ("Dissenting Holders", and the shares held by such Dissenting Holders, the "Dissenting Shares") in the Delaware Court of Chancery. See Note 10 for additional information about the claims asserted by the Dissenting Holders.

As of December 31, 2016, $79.0 million was included in the aggregate merger consideration based on 9.1 million Dissenting Shares assuming a right to receive 0.3853 shares of TiVo Corporation common stock, or 3.5 million shares of TiVo Corporation common stock. In addition, on the TiVo Acquisition Date, TiVo Corporation paid the cash portion of the merger

9


consideration related to the Dissenting Shares, which was $2.75 per share, to an account held by the exchange agent in the TiVo Acquisition. As of December 31, 2016, the exchange agent in the TiVo Acquisition was holding $25.3 million in cash, substantially all of which related to the Dissenting Holders.

On March 27, 2017, TiVo Corporation agreed to settle the claims of the Dissenting Holders for $117.0 million, which was paid in cash in April 2017. In connection with the settlement, in March 2017, the exchange agent in the TiVo Acquisition returned $25.1 million in cash related to the Dissenting Holders to TiVo Corporation. As the amount paid to Dissenting Holders resulted from a settlement other than a judgment from the Delaware Court of Chancery, a Litigation settlement loss of $12.9 million was recognized in the Condensed Consolidated Statements of Operations. The Litigation settlement loss represents the settlement amount in excess of the amount due to the Dissenting Holders as merger consideration. The accrued merger consideration is presented in Accounts payable and accrued expenses on the Condensed Consolidated Balance Sheets.

Purchase Price Allocation

The Condensed Consolidated Financial Statements have been prepared using the acquisition method of accounting under U.S. GAAP with Rovi treated as the acquirer of TiVo Solutions for accounting purposes. Under the acquisition method of accounting, the purchase consideration delivered by TiVo Corporation to complete the acquisition was generally allocated to the assets acquired and liabilities assumed based on their fair value at the TiVo Acquisition Date. TiVo Corporation has made significant estimates and assumptions in determining the preliminary fair value of the assets acquired and liabilities assumed based on discussions with TiVo Solutions’ management and TiVo Corporation’s informed insights into the industries in which TiVo Solutions competes. To complete the allocation of the purchase price to the assets acquired and liabilities assumed at their TiVo Acquisition Date fair value, the measurement of the purchase price, the measurement of certain pre-acquisition contingencies and income tax returns for TiVo Solutions for the period prior to the TiVo Acquisition Date must be completed. As a result, as of March 31, 2017, the purchase price and purchase price allocation are preliminary and subject to change.

The final fair value of assets acquired and liabilities assumed may differ materially from the preliminary fair value estimates presented in these Condensed Consolidated Financial Statements, and such differences could have a material impact on the accompanying Condensed Consolidated Financial Statements and TiVo Corporation’s future results of operations and financial position. Final estimates of fair value are expected to be completed as soon as possible, but no later than one year from the TiVo Acquisition Date.

Changes to the purchase price allocation for the period from December 31, 2016 to March 31, 2017 were as follows (in thousands):
 
December 31, 2016
 
Adjustments
 
March 31, 2017
Goodwill
$
468,330

 
$
1,357

 
$
469,687

Accounts payable and accrued expenses and other long-term liabilities
(73,456
)
 
(1,200
)
 
(74,656
)
Deferred tax liabilities, net
(97,305
)
 
(157
)
 
(97,462
)
Total merger consideration
1,129,726

 

 
1,129,726


If the measurement period adjustments had been recognized as of the TiVo Acquisition Date, their effect on Net loss for the three months ended March 31, 2017 would have been immaterial.

Unaudited Pro Forma Information

The following unaudited pro forma financial information (in thousands, except per share amounts) has been adjusted to give effect to the TiVo Acquisition as if it were consummated on January 1, 2015. The unaudited pro forma financial information is presented for informational purposes only. The unaudited pro forma financial information is not intended to represent or be indicative of the results of operations that would have been reported had the TiVo Acquisition occurred on January 1, 2015 and should not be taken as representative of future results of operations of the combined company.

10


 
 
Three Months Ended March 31,
 
2016
Total Revenues, net
$
203,442

Net loss
$
(58,216
)
Basic earnings (loss) per share
$
(0.50
)
Diluted earnings (loss) per share
$
(0.50
)
    
The unaudited pro forma financial information includes material, nonrecurring pro forma adjustments directly attributable to the TiVo Acquisition primarily related to a reduction in revenues and costs to adjust TiVo Solutions' historical deferred revenue amortization and deferred technology cost amortization to fair value, the elimination of intercompany revenue as TiVo Solutions purchased products from Rovi, adjustments to the amortization of intangible assets, adjustments for direct and incremental acquisition-related costs and the related tax effects, as well as Rovi's valuation allowance release as a result of the TiVo Acquisition reflected in the historical financial statements. The unaudited pro forma financial information does not include any cost saving synergies from operating efficiencies or the effect of incremental costs incurred from integrating the companies.

(3) Discontinued Operations and Assets Held for Sale

DivX and MainConcept

During the fourth quarter of 2013, the Company determined it would pursue selling its DivX and MainConcept businesses. DivX and MainConcept were providers of high-quality video compression-decompression software and a software library that enabled the distribution of content across the internet and through recordable media, in either physical or streamed forms. On March 31, 2014, the Company sold its DivX and MainConcept businesses for $52.5 million in cash, plus up to $22.5 million in additional payments based on the achievement of certain revenue milestones over the three years following the acquisition. In the three years following the acquisition of DivX and MainConcept, no additional payments were received as the revenue milestones were not satisfied.

(4) Financial Statement Details

Accounts receivable, net (in thousands):
 
March 31, 2017
 
December 31, 2016
Accounts receivable, gross
$
176,952

 
$
149,105

Less: Allowance for doubtful accounts
(2,120
)
 
(1,963
)
Accounts receivable, net
$
174,832

 
$
147,142


Inventory (in thousands):
 
March 31, 2017
 
December 31, 2016
Raw materials
$
3,298

 
$
1,595

Finished goods
8,265

 
11,591

Inventory
$
11,563

 
$
13,186


Property and equipment, net (in thousands):
 
March 31, 2017
 
December 31, 2016
Computer software and equipment
$
138,720

 
$
136,776

Leasehold improvements
26,749

 
26,201

Furniture and fixtures
6,954

 
6,627

Property and equipment, gross
172,423

 
169,604

Less: Accumulated depreciation and amortization
(126,707
)
 
(121,232
)
Property and equipment, net
$
45,716

 
$
48,372



11


Accounts payable and accrued expenses (in thousands):
 
March 31, 2017
 
December 31, 2016
Accounts payable
$
9,236

 
$
29,218

Accrued compensation and benefits
22,238

 
54,571

Accrual for merger consideration
117,030

 
78,981

Other accrued liabilities
78,144

 
63,681

Accounts payable and accrued expenses
$
226,648

 
$
226,451


(5) Investments

The amortized cost and fair value of cash, cash equivalents and marketable securities by significant investment category were as follows (in thousands):
 
March 31, 2017
 
Amortized Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
27,384

 
$

 
$

 
$
27,384

Cash equivalents - Money market funds
160,252

 

 

 
160,252

Cash and cash equivalents
$
187,636

 
$

 
$

 
$
187,636

 
 
 
 
 
 
 
 
Auction rate securities
$
10,800

 
$

 
$
(324
)
 
$
10,476

Corporate debt securities
96,722

 
9

 
(124
)
 
96,607

Foreign government obligations
2,246

 

 
(8
)
 
2,238

U.S. Treasuries / Agencies
116,886

 
8

 
(253
)
 
116,641

Marketable securities
$
226,654

 
$
17

 
$
(709
)
 
$
225,962

Cash, cash equivalents and marketable securities
 
 
 
 
 
 
$
413,598

 
December 31, 2016
 
Amortized Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
50,969

 
$

 
$

 
$
50,969

Cash equivalents - Money market funds
141,658

 

 

 
141,658

Cash and cash equivalents
$
192,627

 
$

 
$

 
$
192,627

 
 
 
 
 
 
 
 
Auction rate securities
$
10,800

 
$

 
$
(432
)
 
$
10,368

Corporate debt securities
106,128

 
8

 
(215
)
 
105,921

Foreign government obligations
2,246

 

 
(8
)
 
2,238

U.S. Treasuries / Agencies
127,734

 
14

 
(262
)
 
127,486

Marketable securities
$
246,908

 
$
22

 
$
(917
)
 
$
246,013

Cash, cash equivalents and marketable securities
 
 
 
 
 
 
$
438,640


The Company attributes unrealized losses on its auction rate securities to liquidity issues rather than credit issues. The Company’s auction rate securities are comprised solely of AAA-rated federally insured student loans. The Company continues to earn interest on its auction rate securities and has the ability and intent to hold these securities until they recover their amortized cost.

As of March 31, 2017, the amortized cost and fair value of marketable securities, by contractual maturity, were as follows (in thousands): 
 
Amortized Cost
 
Fair Value
Due in less than 1 year
$
103,391

 
$
103,307

Due in 1-2 years
112,463

 
112,179

Due in more than 2 years
10,800

 
10,476

Total
$
226,654

 
$
225,962


12



As of March 31, 2017 and December 31, 2016, non-marketable equity securities accounted for under the equity method had a carrying amount of $1.7 million and $1.6 million, respectively, and non-marketable equity securities accounted for under the cost method had a carrying amount of $2.7 million and $2.7 million, respectively. We periodically review our non-marketable equity securities for potential impairment. No impairments were recognized for the three months ended March 31, 2017 and 2016.

(6) Fair Value Measurements
Fair Value Hierarchy
The Company uses valuation techniques that are based on observable and unobservable inputs to measure fair value. Observable inputs are developed using publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use. Fair value measurements are classified in a hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Inputs other than Level 1 inputs that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or market-corroborated inputs.
Level 3. Unobservable inputs for the asset or liability.
Assets and liabilities reported at fair value on a recurring basis in the Condensed Consolidated Balance Sheets were classified in the fair value hierarchy as follows (in thousands):
 
March 31, 2017
 
Total
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Money market funds
$
160,252

 
$
160,252

 
$

 
$

Short-term marketable securities
 
 
 
 
 
 
 
Corporate debt securities
71,943

 

 
71,943

 

U.S. Treasuries / Agencies
31,364

 

 
31,364

 

Long-term marketable securities
 
 
 
 
 
 
 
Auction rate securities
10,476

 

 

 
10,476

Corporate debt securities
24,664

 

 
24,664

 

Foreign government obligations
2,238

 

 
2,238

 

U.S. Treasuries / Agencies
85,277

 

 
85,277

 

Total Assets
$
386,214

 
$
160,252

 
$
215,486

 
$
10,476

Liabilities
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
 
 
 
 
 
 
Cubiware contingent consideration
$
(2,103
)
 
$

 
$

 
$
(2,103
)
Other long-term liabilities
 
 
 
 
 
 
 
Cubiware contingent consideration
(3,001
)
 

 

 
(3,001
)
Interest rate swaps
(17,165
)
 

 
(17,165
)
 

Total Liabilities
$
(22,269
)
 
$

 
$
(17,165
)
 
$
(5,104
)

13



 
December 31, 2016
 
Total
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Money market funds
$
141,658

 
$
141,658

 
$

 
$

Short-term marketable securities
 
 
 
 
 
 
 
Corporate debt securities
76,568

 

 
76,568

 

U.S. Treasuries / Agencies
40,516

 

 
40,516

 

Long-term marketable securities
 
 

 

 

Auction rate securities
10,368

 

 

 
10,368

Corporate debt securities
29,353

 

 
29,353

 

Foreign government obligations
2,238

 

 
2,238

 

U.S. Treasuries / Agencies
86,970

 

 
86,970

 

Total Assets
$
387,671

 
$
141,658

 
$
235,645

 
$
10,368

Liabilities
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
 
 
 
 
 
 
Cubiware contingent consideration
$
(1,988
)
 
$

 
$

 
$
(1,988
)
Interest rate swaps
(648
)
 

 
(648
)
 

Other long-term liabilities
 
 
 
 
 
 
 
Cubiware contingent consideration
(3,285
)
 

 

 
(3,285
)
Interest rate swaps
(19,303
)
 

 
(19,303
)
 

Total Liabilities
$
(25,224
)
 
$

 
$
(19,951
)
 
$
(5,273
)

The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting period. For the three months ended March 31, 2017 and 2016, there were no transfers between levels of the fair value hierarchy.

Changes in the fair value of assets and liabilities classified in Level 3 of the fair value hierarchy were as follows (in thousands): 
 
Three Months Ended March 31,
 
2017
 
2016
 
Auction rate securities
 
Cubiware contingent consideration
 
Auction rate securities
Balance at beginning of period
$
10,368

 
$
(5,273
)
 
$
10,260

Gain included in earnings

 
169

 

Unrealized gains (losses) included in other comprehensive income
108

 

 
(108
)
Balance at end of period
$
10,476

 
$
(5,104
)
 
$
10,152


The Gain included in earnings related to the Cubiware contingent consideration liability for the three months ended March 31, 2017 is included in Selling, general and administrative expense as a $324 thousand gain related to remeasurement of the Cubiware contingent consideration, offset in part by $155 thousand of Interest expense related to accretion of the liability to future value.

Valuation Techniques

The fair value of marketable securities, other than auction rate securities, is estimated using observable market-corroborated inputs, such as quoted prices in active markets for similar assets or independent pricing vendors, obtained from a third party pricing service.


14


The fair value of auction rate securities is estimated using a discounted cash flow analysis or other type of valuation model. These estimates are highly judgmental and incorporate, among other items, the likelihood of redemption, credit and liquidity spreads, duration, interest rates and the timing and amount of expected future cash flows. These securities are also compared, when possible, to other observable data for securities with characteristics similar to the securities held by the Company.

The fair value of contingent consideration liabilities related to acquisitions is estimated utilizing a probability-weighted discounted cash flow analysis based on the terms of the underlying purchase agreement. The significant unobservable inputs used in calculating the fair value of contingent consideration liabilities related to acquisitions include financial performance scenarios, the probability of achieving those scenarios and the discount rate.

The fair value of interest rate swaps is estimated using a discounted cash flow analysis that considers the expected future cash flows of each interest rate swap. This analysis reflects the contractual terms of the interest rate swap, including the remaining period to maturity, and uses market-corroborated inputs, including forward interest rate curves and implied interest rate volatilities. The fair value of an interest rate swap is estimated by netting the discounted future fixed cash payments against the discounted expected variable cash receipts. The variable cash receipts are estimated based on an expectation of future interest rates derived from forward interest rate curves. The fair value of an interest rate swap also incorporates credit valuation adjustments to reflect the nonperformance risk of the Company and the respective counterparty. In adjusting the fair value of its interest rate swaps for the effect of nonperformance risk, the Company considers the effect of its master netting agreements.
Other Fair Value Disclosures
The carrying amount and fair value of debt issued or assumed by the Company were as follows (in thousands): 
 
March 31, 2017
 
December 31, 2016
 
Carrying Amount
 
Fair Value (1)
 
Carrying Amount
 
Fair Value (1)
2020 Convertible Notes
$
301,107

 
$
331,752

 
$
297,646

 
$
349,140

2021 Convertible Notes
48

 
48

 
48

 
48

Term Loan Facility B
675,672

 
680,750

 
677,038

 
686,766

Total Long-term debt
$
976,827

 
$
1,012,550

 
$
974,732

 
$
1,035,954


(1)
The fair value of debt issued by the Company is estimated using quoted prices for the identical instrument in a market that is not active and considers interest rates currently available to companies of similar credit standing for similar terms and remaining maturities and considers the nonperformance risk of the Company. If reported at fair value in the Condensed Consolidated Balance Sheets, debt issued or assumed by the Company would be classified in Level 2 of the fair value hierarchy.

(7) Goodwill and Intangible Assets, Net

Goodwill

Goodwill allocated to the reportable segments and changes in the carrying amount of goodwill were as follows (in thousands):
 
Intellectual Property Licensing
 
Product
 
Total
December 31, 2016
$
1,291,120

 
$
520,998

 
$
1,812,118

TiVo Acquisition
309

 
1,048

 
1,357

Foreign currency translation

 
216

 
216

March 31, 2017
$
1,291,429

 
$
522,262

 
$
1,813,691


Goodwill resulting from the TiVo Acquisition was allocated to the Company's reportable segments based on the relative fair value of the TiVo Solutions businesses assigned to the Company's reporting units.
Goodwill at each reporting unit is evaluated for potential impairment annually, as of the beginning of the fourth quarter, and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable.


15


Intangible Assets, Net

Intangible assets, net consisted of the following (in thousands): 
 
March 31, 2017
 
Gross
 
Accumulated
Amortization
 
Net
Finite-lived intangible assets
 
 
 
 
 
Developed technology and patents
$
1,033,371

 
$
(609,141
)
 
$
424,230

Existing contracts and customer relationships
402,462

 
(83,001
)
 
319,461

Content databases and other
59,587

 
(49,666
)
 
9,921

Trademarks / Tradenames
8,300

 
(8,300
)
 

Total Finite-lived
1,503,720

 
(750,108
)
 
753,612

Indefinite-lived intangible assets
 
 
 
 
 
TiVo Tradename
14,000

 

 
14,000

Total intangible assets
$
1,517,720

 
$
(750,108
)
 
$
767,612

 
December 31, 2016
 
Gross
 
Accumulated
Amortization
 
Net
Finite-lived intangible assets
 
 
 
 
 
Developed technology and patents
$
1,031,280

 
$
(586,800
)
 
$
444,480

Existing contracts and customer relationships
402,143

 
(64,123
)
 
338,020

Content databases and other
59,390

 
(49,052
)
 
10,338

Trademarks / Tradenames
8,300

 
(8,300
)
 

Total Finite-lived
1,501,113

 
(708,275
)
 
792,838

Indefinite-lived intangible assets
 
 
 
 
 
TiVo Tradename
14,000

 

 
14,000

Total intangible assets
$
1,515,113

 
$
(708,275
)
 
$
806,838


Patent Acquisitions

In March 2017, the Company purchased a portfolio of patents for $1.8 million in cash. The Company accounted for the patent portfolio purchase as an asset acquisition and is amortizing the purchase price over a weighted average period of five years.
    
In January 2016, the Company purchased a portfolio of patents for $2.5 million in cash. The Company accounted for the patent portfolio purchase as an asset acquisition and is amortizing the purchase price over a weighted average period of five years.

Future Amortization

As of March 31, 2017, future estimated amortization expense for finite-lived intangible assets was as follows (in thousands): 
Remainder of 2017
$
124,786

2018
147,189

2019
109,752

2020
108,936

2021
66,175

Thereafter
196,774

Total
$
753,612



16


(8) Restructuring and Asset Impairment Charges

Components of Restructuring and asset impairment charges were as follows (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Future minimum lease payments, net
$
761

 
$
214

Severance costs
2,429

 
388

Share-based payments
1,345

 

Contract termination costs
4

 
1,279

Asset impairment

 
452

Restructuring and asset impairment charges
$
4,539

 
$
2,333


Accrued restructuring costs were as follows (in thousands):
 
March 31, 2017
 
December 31, 2016
Future minimum lease payments, net
$
1,329

 
$
758

Severance costs
2,836

 
3,796

Contract termination costs
100

 
183

Accrued restructuring costs
$
4,265

 
$
4,737


We expect a substantial portion of the Accrued restructuring costs, including those associated with the TiVo Acquisition, to be paid at various dates through December 31, 2017.

TiVo Integration Restructuring Plan

Following completion of the TiVo Acquisition, TiVo Corporation began implementing its integration plans which are intended to realize operational synergies between Rovi and TiVo Solutions. As a result of these integration plans, TiVo Corporation expects to eliminate duplicative positions resulting in severance costs and the termination of certain leases and other contracts. Restructuring activities related to the TiVo Integration Restructuring Plan for the three months ended March 31, 2017 were as follows (in thousands): 
 
Balance at Beginning of Period
 
Restructuring Expense
 
Cash Settlements
 
Non-Cash Settlements
 
Other
 
Balance at End of Period
Future minimum lease payments, net
$
224

 
$
761

 
$

 
$

 
$
275

 
$
1,260

Severance costs
3,504

 
2,579

 
(3,479
)
 

 
(46
)
 
2,558

Share-based payments

 
1,345

 

 
(1,345
)
 

 

Contract termination costs
63

 
4

 
(67
)
 

 

 

Total
$
3,791

 
$
4,689

 
$
(3,546
)
 
$
(1,345
)
 
$
229

 
$
3,818

    

17


Legacy TiVo Solutions Restructuring Plans

In the three months ended March 31, 2017, certain termination benefits expired that were offered by TiVo Solutions in connection with the elimination of a number of positions prior to the TiVo Acquisition Date. As a result of these termination benefits expiring unused, Restructuring and asset impairment charges recognized for the three months ended March 31, 2017 were reduced by $150 thousand. As of March 31, 2017, the Legacy TiVo Solutions Restructuring Plans were completed and no Accrued restructuring costs are included in the Condensed Consolidated Balance Sheets related to these actions.

Legacy Rovi Restructuring Plans

In the three months ended March 31, 2016, Rovi initiated certain facility rationalization activities, including relocating its corporate headquarters from Santa Clara, California to San Carlos, California and consolidating its Silicon Valley operations into the new corporate headquarters, and eliminated a number of positions associated with a reorganization of the sales force structure, downsizing the global services workforce and eliminating certain general and administrative positions. As a result of these actions, Restructuring and asset impairment charges of $2.3 million were recognized in the three months ended March 31, 2016.

As of March 31, 2017, Accrued restructuring costs of $0.4 million are included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets related to the Legacy Rovi Restructuring Plans.
    
(9) Debt and Interest Rate Swaps

A summary of the Company's financing arrangements was as follows (dollars in thousands):
 
 
 
 
March 31, 2017
 
December 31, 2016
 
Stated Interest Rate
Issue Date
Maturity Date
Outstanding Principal
Carrying Amount
 
Outstanding Principal
Carrying Amount
2020 Convertible Notes
0.500%
March 4, 2015
March 1, 2020
$
345,000

$
301,107

 
$
345,000

$
297,646

2021 Convertible Notes
2.000%
September 22, 2014
October 1, 2021
48

48

 
48

48

Term Loan Facility B
Variable
July 2, 2014
July 2, 2021
680,750

675,672

 
682,500

677,038

Total Long-term debt
 
 
 
$
1,025,798

976,827

 
$
1,027,548

974,732

Less: Current portion of long-term debt
 
 
 
 
7,000

 
 
7,000

Long-term debt, less current portion
 
 
 
 
$
969,827

 
 
$
967,732


2020 Convertible Notes

Rovi issued $345.0 million in aggregate principal of 0.500% Convertible Senior Notes that mature March 1, 2020 (the “2020 Convertible Notes”) at par pursuant to an Indenture dated March 4, 2015 (the "2015 Indenture"). The 2020 Convertible Notes were sold in a private placement and bear interest at an annual rate of 0.500% payable semi-annually in arrears on March 1 and September 1 of each year, commencing September 1, 2015. In connection with the TiVo Acquisition, TiVo Corporation and Rovi entered into a supplemental indenture under which TiVo Corporation became a guarantor of the 2020 Convertible Notes and the notes became convertible into TiVo Corporation common stock.

The 2020 Convertible Notes were convertible at an initial conversion rate of 34.5968 shares of TiVo Corporation common stock per $1,000 of principal of notes, which was equivalent to an initial conversion price of $28.9044 per share of TiVo Corporation common stock. As of March 31, 2017, the 2020 Convertible Notes are convertible at a conversion rate of 34.9200 shares of TiVo Corporation common stock per $1,000 principal of notes, which is equivalent to a conversion price of 28.6369 per share of TiVo Corporation common stock. The conversion rate and conversion price are subject to adjustment pursuant to the 2015 Indenture, including as a result of dividends paid by TiVo Corporation.

Holders may convert the 2020 Convertible Notes, prior to the close of business on the business day immediately preceding December 1, 2019, in multiples of $1,000 of principal under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending on June 30, 2015 (and only during such calendar quarter), if the last reported sale price of TiVo Corporation's common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day

18


of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 of principal of 2020 Convertible Notes for each trading day was less than 98% of the product of the last reported sale price of TiVo Corporation’s common stock and the conversion rate on each such trading day; or
on the occurrence of specified corporate events.
    
On or after December 1, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert the 2020 Convertible Notes, in multiples of $1,000 of principal, at any time.

In addition, during the 35-day trading period following a Merger Event, as defined in the 2015 Indenture, holders may convert the 2020 Convertible Notes, in multiples of $1,000 of principal.

On conversion, a holder will receive the conversion value of the 2020 Convertible Notes converted based on the conversion rate multiplied by the volume-weighted average price of TiVo Corporation’s common stock over a specified observation period. On conversion, Rovi will pay cash up to the aggregate principal of the 2020 Convertible Notes converted and deliver shares of TiVo Corporation’s common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal of the 2020 Convertible Notes being converted.

The conversion rate is subject to adjustment in certain events, including certain events that constitute a "Make-Whole Fundamental Change" (as defined in the 2015 Indenture). In addition, if Rovi undergoes a "Fundamental Change" (as defined in the 2015 Indenture) prior to March 1, 2020, holders may require Rovi to repurchase for cash all or a portion of the 2020 Convertible Notes at a repurchase price equal to 100% of the principal of the repurchased 2020 Convertible Notes, plus accrued and unpaid interest. The conversion rate is also subject to customary anti-dilution adjustments.

The 2020 Convertible Notes are not redeemable prior to maturity by Rovi and no sinking fund is provided. The 2020 Convertible Notes are unsecured and do not contain financial covenants or restrictions on the payment of dividends, the incurrence of indebtedness or the repurchase of other securities by Rovi. The 2015 Indenture includes customary terms and covenants, including certain events of default after which the 2020 Convertible Notes may be due and payable immediately.

TiVo Corporation has separately accounted for the liability and equity components of the 2020 Convertible Notes. The initial carrying amount of the liability component was calculated by estimating the value of the 2020 Convertible Notes using TiVo Corporation’s estimated non-convertible borrowing rate of 4.75% at the time the instrument was issued. The carrying amount of the equity component, representing the value of the conversion option, was determined by deducting the liability component from the principal of the 2020 Convertible Notes. The difference between the principal of the 2020 Convertible Notes and the liability component is considered a debt discount which is being amortized to interest expense using the effective interest method over the expected term of the 2020 Convertible Notes. The equity component of the 2020 Convertible Notes was recorded as a component of Additional paid-in capital in the Condensed Consolidated Balance Sheets and will not be remeasured as long as it continues to meet the conditions for equity classification. Related to the 2020 Convertible Notes, the Condensed Consolidated Balance Sheets included the following (in thousands):
 
March 31, 2017
 
December 31, 2016
Liability component
 
 
 
Principal outstanding
$
345,000

 
$
345,000

Less: Unamortized debt discount
(39,038
)
 
(42,144
)
Less: Unamortized debt issuance costs
(4,855
)
 
(5,210
)
Carrying amount
$
301,107

 
$
297,646

 
 
 
 
Equity component
$
63,854

 
$
63,854



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Components of interest expense related to the 2020 Convertible Notes included in the Condensed Consolidated Statements of Operations were as follows (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Stated interest
$
431

 
$
431

Amortization of debt discount
3,106

 
2,965

Amortization of debt issuance costs
355

 
321

Total interest expense
$
3,892

 
$
3,717


Rovi incurred $9.3 million in transaction costs related to the issuance of the 2020 Convertible Notes which were allocated to liability and equity components based on the relative amounts calculated for the 2020 Convertible Notes at the date of issuance. Transaction costs of $7.6 million attributable to the liability component were recorded in Long-term debt, less current portion in the Condensed Consolidated Balance Sheets and are being amortized to interest expense using the effective interest method over the expected term of the 2020 Convertible Notes. Transaction costs of $1.7 million attributable to the equity component were recorded as a component of Additional paid-in capital in the Condensed Consolidated Balance Sheets.

Purchased Call Options and Sold Warrants related to the 2020 Convertible Notes

Concurrent with the issuance of the 2020 Convertible Notes, Rovi paid $64.8 million to purchase call options with respect to its common stock. The call options give TiVo Corporation the right, but not the obligation, to purchase up to 11.9 million shares of TiVo Corporation's common stock at a strike price of $28.9044 per share, which corresponds to the initial conversion price of the 2020 Convertible Notes, and are exercisable by TiVo Corporation on conversion of the 2020 Convertible Notes. The call options are intended to reduce the potential dilution from conversion of the 2020 Convertible Notes. The purchased call options are separate transactions from the 2020 Convertible Notes and holders of the 2020 Convertible Notes do not have any rights with respect to the purchased call options.

Concurrent with the issuance of the 2020 Convertible Notes, Rovi received $31.3 million from the sale of warrants that provide the holder of the warrant the right, but not the obligation, to purchase up to 11.9 million shares of TiVo Corporation common stock at a strike price of $40.1450 per share. The warrants are exercisable beginning June 1, 2020 and can be settled in cash or shares at TiVo Corporation's election. The warrants were entered into to offset the cost of the purchased call options. The warrants are separate transactions from the 2020 Convertible Notes and holders of the 2020 Convertible Notes do not have any rights with respect to the warrants.

The amounts paid to purchase the call options and received to sell the warrants were recorded in Additional paid-in capital in the Condensed Consolidated Balance Sheets.

2021 Convertible Notes

TiVo Solutions issued $230.0 million in aggregate principal of 2.0% Convertible Senior Notes that mature October 1, 2021 (the "2021 Convertible Notes") at par pursuant to an Indenture dated September 22, 2014 ("the 2014 Indenture"). The 2021 Convertible Notes bear interest at an annual rate of 2.0%, payable semi-annually in arrears on April 1 and October 1 of each year, commencing April 2015. On October 12, 2016, TiVo Solutions repaid $229.95 million of the par value of the 2021 Convertible Notes.

The 2021 Convertible Notes were convertible at an initial conversion rate of 56.1073 shares of TiVo Solutions common stock per $1,000 principal of notes, which was equivalent to an initial conversion price of $17.8230 per share of TiVo Solutions common stock. Following the TiVo Acquisition, the 2021 Convertible Notes were convertible at a conversion rate of 21.6181 shares of TiVo Corporation common stock per $1,000 principal of notes and $154.30 per $1,000 principal of notes, which was equivalent to a conversion price of $39.12 per share of TiVo Corporation common stock. As of March 31, 2017, the 2021 Convertible Notes are convertible at a conversion rate of 21.8178 shares of TiVo Corporation common stock per $1,000 principal of notes and $154.30 per $1,000 principal of notes, which is equivalent to a conversion price of 38.7620 per share of TiVo Corporation common stock. The conversion rate and conversion price are subject to adjustment pursuant to the 2014 Indenture, including as a result of dividends paid by TiVo Corporation.

TiVo Solutions can settle the 2021 Convertible Notes in cash, shares of common stock, or any combination thereof pursuant to the 2014 Indenture. Subject to certain exceptions, holders may require TiVo Solutions to repurchase, for cash, all or part of their 2021 Convertible Notes upon a “Fundamental Change” (as defined in the 2014 Indenture) at a price equal to

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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.
    
Senior Secured Credit Facility

On July 2, 2014, Rovi Corporation, as parent guarantor, and two of its wholly-owned subsidiaries, Rovi Solutions Corporation and Rovi Guides, Inc., as borrowers, and certain of its other subsidiaries, as subsidiary guarantors, entered into a Credit Agreement (the “Credit Agreement”). After the completion of the TiVo Acquisition, TiVo Corporation became a guarantor under the Credit Agreement. The Credit Agreement provided for a (i) five-year $125.0 million term loan A facility (“Term Loan Facility A”), (ii) seven-year $700.0 million term loan B facility (“Term Loan Facility B” and together with Term Loan Facility A, the “Term Loan Facility”) and (iii) five-year $175.0 million revolving credit facility (including a letter of credit sub-facility) (the "Revolving Facility” and together with the Term Loan Facility, the “Senior Secured Credit Facility”). In September 2015, Rovi made a voluntary principal prepayment to extinguish Term Loan Facility A and elected to terminate the Revolving Facility.

Prior to the refinancing described below, loans under Term Loan Facility B bore interest, at the Company's option, at a rate equal to either LIBOR, plus an applicable margin equal to 3.00% per annum (subject to a 0.75% LIBOR floor) or the prime lending rate, plus an applicable margin equal to 2.00% per annum.

On January 26, 2017, TiVo Corporation, as parent guarantor, two of its wholly-owned subsidiaries, Rovi Solutions Corporation and Rovi Guides, Inc., as borrowers, and certain of TiVo Corporation’s other subsidiaries, as subsidiary guarantors, entered into Refinancing Agreement No. 1 with respect to Term Loan Facility B. The $682.5 million in proceeds from Refinancing Agreement No. 1 was used to repay existing loans under Term Loan Facility B in full. The borrowing terms for Refinancing Agreement No. 1 are substantially similar to the borrowing terms of Term Loan Facility B. However, loans under Refinancing Agreement No. 1 bear interest, at the borrower's option, at a rate equal to either LIBOR, plus an applicable margin equal to 2.50% per annum (subject to a 0.75% LIBOR floor) or the prime lending rate, plus an applicable margin equal to 1.50% per annum. Refinancing Agreement No. 1 requires quarterly principal payments of $1.75 million through June 2021, with any remaining balance payable in July 2021. Refinancing Agreement No. 1 is part of the Senior Secured Credit Facility.

The refinancing of Term Loan Facility B resulted in a Loss on debt extinguishment of $0.1 million and a Loss on debt modification of $0.9 million for the three months ended March 31, 2017. Creditors in Term Loan Facility B that elected not to participate in Refinancing Agreement No. 1 were extinguished. Creditors in Term Loan Facility B that elected to participate in Refinancing Agreement No. 1 and for which the present value of future cash flows were not substantially different were accounted for as a debt modification.

The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, and dividends and other distributions. The Credit Agreement is secured by substantially all of the Company's assets. The Company may be required to make an additional payment on the Term Loan Facility each February. This payment is calculated as a percentage of the prior year's "Excess Cash Flow" as defined in the Credit Agreement. No additional payment was required in February 2017.

Debt Maturities

As of March 31, 2017, aggregate expected future principal payments on long-term debt, including the current portion of long-term debt, were as follows (in thousands):
Remainder of 2017
$
5,250

2018
7,000

2019 (1)
352,000

2020
7,000

2021
654,548

Total
$
1,025,798



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(1)
While the 2020 Convertible Notes are scheduled to mature on March 1, 2020, future principal payments are presented based on the date the 2020 Convertible Notes can be freely converted by holders, which is December 1, 2019. However, the 2020 Convertible Notes may be converted by holders prior to December 1, 2019 in certain circumstances.

Interest Rate Swaps

The Company issues long-term debt denominated in U.S. dollars based on market conditions at the time of financing and may enter into interest rate swaps to achieve a primarily fixed interest rate. Alternatively, the Company may choose not to enter into interest rate swaps or may terminate a previously executed swap if it believes a larger proportion of floating-rate debt would be beneficial. The Company has not designated any of its interest rate swaps as hedges for accounting purposes. The Company records interest rate swaps in the Condensed Consolidated Balance Sheets at fair value with changes in fair value recorded as Income (loss) on interest rate swaps in the Condensed Consolidated Statements of Operations. Amounts are presented in the Condensed Consolidated Balance Sheets after considering the right of offset and the effect of master netting agreements. During the three months ended March 31, 2017 and 2016, the Company recorded a gain of $0.5 million and a loss of $13.1 million, respectively, from adjusting its interest rate swaps to fair value.

Details of the Company's interest rate swaps as of March 31, 2017 and December 31, 2016 were as follows (dollars in thousands):
 
 
 
Notional
 
 
Contract Inception
Contract Effective Date
Contract Maturity
March 31, 2017
December 31, 2016
Interest Rate Paid
Interest Rate Received
Senior Secured Credit Facility
 
 
 
 
May 2012
April 2014
March 2017
$

$
215,000

(1)
One month USD-LIBOR
June 2013
January 2016
March 2019
$
250,000

$
250,000

2.23%
One month USD-LIBOR
September 2014
January 2016
July 2021
$
125,000

$
125,000

2.66%
One month USD-LIBOR
September 2014
March 2017
July 2021
$
200,000

$
200,000

2.93%
One month USD-LIBOR

(1)
The Company pays a fixed interest rate which gradually increased from 0.65% for the three-month settlement period ended in June 2014 to 2.11% for the settlement period ended in March 2017.

(10) Commitments and Contingencies

Purchase Commitments

In August 2016, Rovi entered into a 10-year patent license agreement with DISH Network L.L.C. (“DISH”). Under the license agreement, DISH will pay Rovi for the period beginning on April 5, 2016 based on a monthly, per-subscriber fee, consistent with Rovi’s existing licensing program for its largest pay TV providers. In addition, DISH agreed to provide TiVo Inc. with a release for all past products and a going-forward covenant not-to-sue under DISH’s existing patents during the 10-year license term in exchange for TiVo Solutions providing DISH certain TiVo Solutions products during the term and cash payments by TiVo Solutions to DISH of $60.3 million in the aggregate, of which $15.0 million was paid in the fourth quarter of 2016 with the remainder due by the end of the third quarter of 2017. The TiVo Solutions release and covenant transaction is being recognized as a reduction to revenue over the license term in the Condensed Consolidated Statements of Operations. No changes were made to the prior, existing patent settlement between EchoStar, DISH Network Corporation, and TiVo Solutions as a result of this agreement.

The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing services for its products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, the Company enters into agreements with contract manufacturers and suppliers that either allow them to procure inventory based on criteria as defined by the Company or that establish the parameters defining the Company’s requirements. A significant portion of the Company’s reported purchase commitments arising from these agreements consists of firm, non-cancelable and unconditional purchase commitments. In certain instances, these agreements allow the Company the option to cancel, reschedule and adjust the Company’s requirements based on its business needs prior to firm orders being placed. As of March 31, 2017, the Company had total purchase commitments for inventory of $11.4 million, of which $1.6 million was accrued in the Condensed Consolidated Balance Sheets.


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