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EX-31.2 - EXHIBIT 31.2 - DTS, INC.dts-033116xq1ex312.htm
EX-32.2 - EXHIBIT 32.2 - DTS, INC.dts-033116xq1ex322.htm
EX-31.1 - EXHIBIT 31.1 - DTS, INC.dts-033116xq1ex311.htm
EX-32.1 - EXHIBIT 32.1 - DTS, INC.dts-033116xq1ex321.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2016

Commission File Number 000-50335


DTS, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 (State or other jurisdiction of
incorporation or organization)
77-0467655
(I.R.S. Employer
Identification No.)
 
 
5220 Las Virgenes Road
Calabasas, California 91302
 (Address of principal executive
offices and zip code)
(818) 436-1000
 (Registrant's telephone number,
including area code)
_____________________________________

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 ý    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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer ý
 
Non-accelerated filer o
 (Do not check if a smaller
reporting company)
 
Smaller reporting company 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 ý

As of May 2, 2016 a total of 17,488,830 shares of the Registrant's Common Stock, $0.0001 par value, were outstanding.




DTS, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



DTS, INC.
PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

DTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except per share data)
 
As of
March 31,
2016
 
As of
December 31,
2015
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
37,161

 
$
52,208

Short-term investments
20,280

 
9,657

Accounts receivable, net of allowance for doubtful accounts of $271 and $541 at March 31, 2016 and December 31, 2015, respectively
12,266

 
12,454

Prepaid expenses and other current assets
5,827

 
5,855

Income taxes receivable
4,669

 
4,130

Total current assets
80,203

 
84,304

Property and equipment, net
28,352

 
29,022

Intangible assets, net
152,971

 
157,936

Goodwill
108,854

 
108,726

Deferred income taxes
22,919

 
24,018

Other long-term assets
3,937

 
3,934

Total assets
$
397,236

 
$
407,940

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
4,835

 
$
5,979

Accrued expenses
19,751

 
22,960

Deferred revenue
2,890

 
5,711

Income taxes payable
204

 
123

Current portion of long-term debt, net
21,486

 
21,486

Total current liabilities
49,166

 
56,259

Long-term debt, net
131,295

 
136,666

Other long-term liabilities
9,957

 
9,983

Commitments and contingencies (Note 9)


 


Stockholders' equity:
 

 
 

Preferred stock—$0.0001 par value, 5,000 shares authorized at March 31, 2016 and December 31, 2015; no shares issued and outstanding

 

Common stock—$0.0001 par value, 70,000 shares authorized at March 31, 2016 and December 31, 2015; 22,156 and 21,988 shares issued at March 31, 2016 and December 31, 2015, respectively; 17,489 and 17,321 shares outstanding at March 31, 2016 and December 31, 2015, respectively
3

 
3

Additional paid-in capital
259,905

 
258,660

Treasury stock, at cost—4,667 at March 31, 2016 and December 31, 2015
(111,331
)
 
(111,331
)
Accumulated other comprehensive income
782

 
778

Retained earnings
57,459

 
56,922

Total stockholders' equity
206,818

 
205,032

Total liabilities and stockholders' equity
$
397,236

 
$
407,940


See accompanying notes to condensed consolidated financial statements.

1


DTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
 
For the Three Months
Ended March 31,
 
2016
 
2015
Revenue
$
45,195

 
$
33,937

Cost of revenue
6,091

 
2,784

Gross profit
39,104

 
31,153

Operating expenses:
 

 
 

Selling, general and administrative
24,509

 
19,783

Research and development
12,687

 
9,628

Total operating expenses
37,196

 
29,411

Operating income
1,908

 
1,742

Interest and other expense, net
(1,159
)
 
(161
)
Income before income taxes
749

 
1,581

Provision for income taxes
212

 
527

Net income
$
537

 
$
1,054

Net income per common share:
 

 
 

Basic
$
0.03

 
$
0.06

Diluted
$
0.03

 
$
0.06

Weighted average shares outstanding:
 

 
 

Basic
17,410

 
17,461

Diluted
17,770

 
18,235

   
See accompanying notes to condensed consolidated financial statements.

2


DTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
 
For the Three Months
Ended March 31,
 
2016
 
2015
Net income
$
537

 
$
1,054

Other comprehensive income (loss), net of tax:
 

 
 

Unrealized gains and losses on available-for-sale securities and other, net
4

 
(97
)
Total comprehensive income
$
541

 
$
957


See accompanying notes to condensed consolidated financial statements.

3


DTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
 
For the Three Months
Ended March 31,
 
2016
 
2015
Cash flows from operating activities:
 

 
 

Net income
$
537

 
$
1,054

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
6,679

 
3,581

Stock-based compensation charges
3,786

 
2,898

Deferred income taxes
(1,389
)
 
(891
)
Excess tax benefits from stock-based awards
(47
)
 
(891
)
Amortization of debt issuance costs
153

 

Other
(134
)
 
91

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
397

 
4,699

Prepaid expenses and other assets
18

 
1,916

Accounts payable, accrued expenses and other liabilities
(2,969
)
 
(6,258
)
Deferred revenue
(2,821
)
 
(2,864
)
Income taxes receivable/payable
1,413

 
782

Net cash provided by operating activities
$
5,623

 
$
4,117

Cash flows from investing activities:
 

 
 

Purchases of available-for-sale investments
(13,635
)
 
(30,345
)
Maturities of available-for-sale investments
3,000

 

Purchases of property and equipment
(733
)
 
(1,033
)
Purchases of intangible assets
(965
)
 
(1,087
)
Other investing activities

 
(300
)
Net cash used in investing activities
$
(12,333
)
 
$
(32,765
)
Cash flows from financing activities:
 

 
 

Repayment of long-term borrowings
(5,469
)
 

Payment of contingent consideration
(480
)
 

Holdback and other payments related to acquisitions
(370
)
 

Proceeds from the issuance of common stock under stock-based compensation plans          
82

 
4,239

Cash paid for shares withheld for taxes
(2,147
)
 
(1,442
)
Excess tax benefits from stock-based awards
47

 
891

Net cash provided by (used in) financing activities
$
(8,337
)
 
$
3,688

Net change in cash and cash equivalents
(15,047
)
 
(24,960
)
Cash and cash equivalents, beginning of period
52,208

 
99,435

Cash and cash equivalents, end of period
$
37,161

 
$
74,475

   
See accompanying notes to condensed consolidated financial statements.

4


DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except per share data)

Note 1Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of DTS, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair statement of the Company's financial position at March 31, 2016, and the results of operations and cash flows for the periods presented. All intercompany transactions have been eliminated in consolidation. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission on March 7, 2016.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Note 2Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers (Topic 606)." This ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. As updated in ASU 2015-14, for public entities, this ASU will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The FASB has further clarified Topic 606 by issuing ASU 2016-08 (which includes clarifications on principal versus agent considerations) and ASU 2016-10 (which includes clarifications on identifying performance obligations and implementation of licensing guidance). Entities have the option of applying either a full retrospective approach or a modified approach to adopt the ASU. The Company is evaluating the impact of adoption of this ASU on its consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments." The ASU requires that adjustments to provisional amounts identified during the measurement period be recognized in the reporting period in which the adjustment amounts are determined. For public entities, the ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The ASU must be applied prospectively to adjustments to provisional amounts that occur after the effective date. The Company adopted this ASU in the first quarter of 2016 and applied it to measurement period adjustments relating to the acquisition of iBiquity Digital Corporation. For additional information on these adjustments, refer to Note 5, "Business Combination."

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." This ASU requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous US GAAP. For public entities, this ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, but entities may elect certain practical expedients when implementing the ASU. The Company is evaluating the impact of adoption of this ASU on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Based Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting." This ASU simplifies several aspects of accounting for stock-based compensation transactions, including income tax consequences and presentation on the statements of cash flows. For public business entities, this ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the impact of adoption of this ASU on its consolidated financial statements.

5

DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)

Note 3Cash, Cash Equivalents and Investments

Cash, cash equivalents and investments, classified as available-for-sale, consisted of:
 
As of
March 31,
2016
 
As of
December 31,
2015
Cash and cash equivalents:
 

 
 

Cash
$
21,128

 
$
16,257

Money market accounts
16,033

 
35,951

Total cash and cash equivalents
$
37,161

 
$
52,208

Short-term investments:
 

 
 

Corporate bonds
$
14,791

 
$
9,657

Commercial paper
4,488

 

US government and agency securities
1,001

 

Total short-term investments
$
20,280

 
$
9,657


The Company had no material gross realized or unrealized holding gains or losses from its investments for the periods presented within this quarterly report. The contractual maturities of investments as of March 31, 2016 were all due within one year.

Note 4Fair Value Measurements

The Company's investments are required to be measured and recorded at fair value on a recurring basis. The Company obtained the fair value of its available-for-sale securities, which are not in active markets, from a third-party professional pricing service using quoted market prices for identical or comparable instruments, rather than direct observations of quoted prices in active markets. The Company's professional pricing service gathers observable inputs for all of its fixed income securities from a variety of industry data providers (e.g., large custodial institutions) and other third-party sources. Once the observable inputs are gathered, all data points are considered and the fair value is determined. The Company validates the quoted market prices provided by its primary pricing service by comparing their assessment of the fair values against the fair values provided by its investment managers. The Company's investment managers use similar techniques to its professional pricing service to derive pricing as described above. As all significant inputs were observable, derived from observable information in the marketplace or supported by observable levels at which transactions are executed in the marketplace, the Company has classified its available-for-sale securities within Level 2 of the fair value hierarchy.

6

DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)
Note 4—Fair Value Measurements (Continued)


The Company's financial assets and liabilities, measured at fair value on a recurring basis, were:
 
 
 
Fair Value Measurements
Assets (Liabilities)
Total
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
As of March 31, 2016
 

 
 

 
 

 
 

Corporate bonds
$
14,791

 
$

 
$
14,791

 
$

Commercial paper
$
4,488

 
$

 
$
4,488

 
$

US government and agency securities
$
1,001

 
$

 
$
1,001

 
$

As of December 31, 2015
 

 
 

 
 

 
 

Corporate bonds
$
9,657

 
$

 
$
9,657

 
$

Contingent consideration(1)
$
(480
)
 
$

 
$

 
$
(480
)
_______________________________________

(1)
Represents the final payment under the contingent consideration related to the acquisition of assets from Phorus, Inc. and Phorus, LLC, which was classified in accrued expenses on the consolidated balance sheet as of December 31, 2015. In the first quarter of 2016, the Company paid this remaining liability in full.


Note 5Business Combination

On October 1, 2015, the Company completed the acquisition of iBiquity Digital Corporation (“iBiquity”), pursuant to the Agreement and Plan of Merger, dated August 31, 2015. The acquisition was accounted for under the acquisition method of accounting. During the three months ended March 31, 2016, the Company recognized certain immaterial measurement period adjustments prospectively on the condensed consolidated balance sheet, resulting in an increase to goodwill of $128.

The preliminary purchase price allocation remains provisional and is subject to certain working capital and other adjustments. The Company has not yet obtained all available information necessary to finalize the measurement of certain assets and liabilities. The measurement of royalty recoveries remains provisional, because there may have been underreported royalty recoveries owed to iBiquity prior to the close of the acquisition, and the Company has not yet obtained the necessary information to determine such amounts. The Company is also waiting on information necessary to determine the fair value of certain rebate accruals and related indemnification assets. The measurement of legal contingencies has not yet been finalized because the Company has not yet received the information necessary to determine the fair value of any such contingencies. The measurement of acquired deferred income taxes has not been finalized as the Company is currently in the process of obtaining the necessary information to complete the analysis related to acquired net operating loss carryforwards. In addition, the Company is waiting on information related to certain pre-acquisition income tax filing positions of iBiquity that will assist the Company in finalizing the amounts to record for the acquired deferred income taxes. The Company is also waiting on information to assist the Company in finalizing the recording of any assumed uncertain income tax positions. The final allocation of the purchase price is expected to be completed as soon as practicable, but no later than one year from the date of acquisition.


7

DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)

Note 6Goodwill and Other Intangible Assets

The changes in the Company's goodwill were:
 
Goodwill
Balance at December 31, 2015
$
108,726

Purchase price allocation adjustments, net
128

Balance at March 31, 2016
$
108,854


The Company's other intangible assets were:
 
Weighted
Average
Life
(Years)
 
As of March 31, 2016
 
As of December 31, 2015
Gross
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
9
 
$
116,026

 
$
(25,199
)
 
$
90,827

 
$
116,026

 
$
(22,039
)
 
$
93,987

Acquired technology
9
 
52,073

 
(15,446
)
 
36,627

 
52,073

 
(14,071
)
 
38,002

Tradenames
9
 
12,851

 
(2,862
)
 
9,989

 
12,851

 
(2,452
)
 
10,399

Contractual rights
5
 
8,063

 
(2,930
)
 
5,133

 
7,713

 
(2,527
)
 
5,186

Patents
5
 
3,955

 
(1,630
)
 
2,325

 
3,805

 
(1,538
)
 
2,267

Trademarks
10
 
900

 
(435
)
 
465

 
894

 
(417
)
 
477

Non-compete
2
 
492

 
(470
)
 
22

 
492

 
(457
)
 
35

Total amortizable intangible assets
 
 
$
194,360

 
$
(48,972
)
 
$
145,388

 
$
193,854

 
$
(43,501
)
 
$
150,353

IPR&D
 
 
7,583

 

 
7,583

 
7,583

 

 
7,583

Total other intangible assets
 
 
$
201,943

 
$
(48,972
)
 
$
152,971

 
$
201,437

 
$
(43,501
)
 
$
157,936


Amortization of intangible assets included in the Company's condensed consolidated statements of operations was:
 
For the Three Months
Ended March 31,
 
2016
 
2015
Cost of revenue
$
4,936

 
$
2,368

Operating expenses
543

 
265

Total amortization of intangible assets
$
5,479

 
$
2,633


The Company expects the future amortization of amortizable intangible assets held at March 31, 2016, excluding IPR&D, to be as follows:
Years Ending December 31,
Estimated
Amortization
Expense
2016 (remaining 9 months)
$
16,540

2017
21,643

2018
19,694

2019
18,422

2020
15,050

2021 and thereafter
54,039

Total
$
145,388


8

DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)

Note 7Accrued Expenses

Accrued expenses consisted of:
 
As of
March 31,
2016
 
As of
December 31,
2015
Accrued payroll and related benefits
$
16,311

 
$
17,998

Contingent consideration

 
480

Other
3,440

 
4,482

Total accrued expenses
$
19,751

 
$
22,960


Note 8Long-term Debt

On October 1, 2015, the Company entered into a credit agreement with Wells Fargo Bank, National Association and other lenders, which provided the Company with a term loan and a revolver. The Company's outstanding balances under this credit agreement, presented net of certain debt issuance costs on the condensed consolidated balance sheets, were:    
 
As of
March 31,
2016
 
As of
December 31,
2015
Debt outstanding under term loan, current portion
$
21,875

 
$
21,875

Debt issuance costs, current portion
(389
)
 
(389
)
Current portion of long-term debt, net
$
21,486

 
$
21,486

 
 
 
 
Debt outstanding under term loan, long-term
$
97,656

 
$
103,125

Debt outstanding under revolver, long-term
35,000

 
35,000

Debt issuance costs, long-term
(1,361
)
 
(1,459
)
Long-term debt, net
$
131,295

 
$
136,666


Interest expense, including amortization of debt issuance costs, was $1,149 and $70 for the three months ended March 31, 2016 and 2015, respectively.

 
Note 9Commitments and Contingencies

During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. Those indemnities include intellectual property indemnities to the Company's customers in connection with the sale of its products and the licensing of its technology, indemnities for liabilities associated with the infringement of other parties' technology based upon the Company's products and technology, and indemnities to the Company's directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments that the Company could be obligated to make. To date, the Company has not been required to make any payments and has not recorded any liability for these indemnities, commitments and guarantees in its consolidated balance sheets. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable.

Under certain contractual rights arrangements, the Company may be obligated to pay up to approximately $7,500 over an estimated period of approximately four years if certain milestones are achieved.

9

DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)
Note 9—Commitments and Contingencies (Continued)


In connection with the acquisition of iBiquity, the Company evaluated the potential synergies and future operations of the combined entity and implemented a restructuring plan in the fourth quarter of 2015, impacting approximately 70 employees. As of December 31, 2015, the Company had accrued $5,517 of severance and related costs. For the three months ended March 31, 2016, the Company recorded additional severance and related costs of $211, which were included in selling, general and administrative expense in the condensed consolidated statement of operations. During the three months ended March 31, 2016, the Company paid $2,567 of severance and related costs, and as of March 31, 2016, $3,161 remained accrued, which is expected to be paid during 2016.

Note 10Income Taxes

Income taxes for quarterly periods are computed using the estimated annual effective tax rate for the year along with discrete items identified in the quarter.

For the three months ended March 31, 2016 and 2015, the Company's effective tax rate was approximately 28% and 33%, respectively. The effective tax rate for 2016 differed from the US statutory rate of 35% primarily due to certain foreign earnings subject to lower tax rates, certain stock-based compensation benefits, and research and development tax credits, partially offset by the impact of a foreign loss in a jurisdiction that will not result in a tax benefit and non-creditable foreign withholding taxes. The effective tax rate for 2015 differed from the US statutory rate primarily due to the impact of foreign operations, as the Company's tax rates in foreign countries are generally lower than the US statutory rate, which was partially offset by non-creditable foreign withholding taxes.

As of March 31, 2016 and December 31, 2015, the Company's uncertain tax positions were $19,601 and $19,454, respectively, of which $9,112 was recorded in other long-term liabilities for both periods. The remaining amounts were recorded as a reduction to non-current deferred tax assets. The increase was primarily due to uncertain tax positions relating to certain withholding taxes and research and development tax credits. The Company does not expect, or cannot quantify with any practicable certainty, any material increase or decrease to its unrecognized tax benefits within the next twelve months. Any resolution of the Company's uncertain tax positions may impact the Company's effective tax rate. The Company believes its accruals for uncertain tax positions are adequate for all open years, based on the assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. Inherent uncertainties exist in estimating accruals for uncertain tax positions due to the progress of income tax audits and changes in tax law, both legislated and concluded through the various jurisdictions' tax court systems.

The Company may, from time to time, be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to the Company's consolidated financial statements. Interest expense and penalties related to income taxes are included in income tax expense.

The Company, or one of its subsidiaries, files income tax returns in the US and other foreign jurisdictions. With few exceptions, the Company is no longer subject to income tax examinations by the Internal Revenue Service (IRS) for years prior to 2012 and by the California Franchise Tax Board (FTB) for years prior to 2011. Significant judgment is required in determining the consolidated provision for income taxes as the Company considers each tax jurisdiction's taxable earnings and the impact of the tax audit process. The final outcome of tax audits by the IRS, the FTB or other state tax authorities, and various foreign tax authorities could differ materially from amounts reflected in the condensed consolidated financial statements.

Licensing revenue is recognized gross of withholding taxes that are remitted by the Company's licensees directly to the local tax authorities. For the three months ended March 31, 2016 and 2015, withholding taxes were $714 and $406, respectively.


10

DTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Amounts in thousands, except per share data)

Note 11Net Income Per Common Share

Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is calculated by dividing net income by the sum of the weighted average number of common shares outstanding plus the dilutive effect of any outstanding stock options, unvested restricted stock, any unvested PSUs for which the performance conditions have been satisfied at the reporting date, and the Company's employee stock purchase plan (ESPP) using the treasury stock method.

The computation of basic and diluted net income per common share was:
 
For the Three Months
Ended March 31,
 
2016
 
2015
Numerator:
 
 
 
Net income
$
537

 
$
1,054

Denominator:
 

 
 

Weighted average shares outstanding
17,410

 
17,461

Effect of dilutive securities:
 

 
 

Stock options
195

 
612

Restricted stock
161

 
154

ESPP
4

 
8

Weighted average diluted shares outstanding
17,770

 
18,235

Basic net income per common share
$
0.03

 
$
0.06

Diluted net income per common share
$
0.03

 
$
0.06

Anti-dilutive shares excluded from the determination of diluted net income per share
2,232

 
566



11


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements May Prove Inaccurate

        This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as "believes," "anticipates," "estimates," "expects," "intends," "projections," "may," "can," "will," "should," "potential," "plan," "continue" and similar expressions are intended to identify those assertions as forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding our future financial performance or position, future economic conditions, our business strategy, plans or expectations, our future effective tax rates, and our objectives for future operations, including relating to our products and services. Although forward-looking statements in this report reflect our good faith judgment, such statements are based on facts and factors currently known by us. We caution readers that forward-looking statements are not guarantees of future performance and our actual results and outcomes may be materially different from those expressed or implied by the forward-looking statements. Important factors that could cause or contribute to such differences in results and outcomes include, without limitation, those discussed under "Risk Factors" contained in Part II, Item 1A in this quarterly report on Form 10-Q and in other documents we file with the Securities and Exchange Commission (SEC). Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise or update these forward-looking statements to reflect future events or circumstances, unless otherwise required by law.

        In Management's Discussion and Analysis of Financial Condition and Results of Operations, "we," "us" and "our" refer to DTS, Inc. and its consolidated subsidiaries. References to "Notes" are Notes included in our Notes to Condensed Consolidated Financial Statements.

        You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes to those statements included elsewhere in this Form 10-Q, as well as the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 7, 2016.

Overview

We are a premier audio solutions provider for high-definition entertainment experiences. Our mission is to make the world sound better—anytime, anywhere, on any device. Our audio solutions are designed to enable recording, delivery and playback of simple, personalized, and immersive high-definition audio which are incorporated by hundreds of licensee customers around the world, into an array of consumer electronics devices, including televisions (TVs), personal computers (PCs), smartphones, tablets, automotive audio systems, digital media players, set-top-boxes, soundbars, wireless speakers, video game consoles, Blu-ray Disc players, audio/video receivers, DVD-based products, and home theater systems.

We derive revenues from licensing our audio technologies, copyrights, trademarks, and know-how under agreements with substantially all of the major consumer audio electronics manufacturers. Our business model provides for these manufacturers to pay us royalties for DTS-enabled products that they manufacture or sell.

We actively engage in intellectual property compliance and enforcement activities focused on identifying third parties who have either incorporated our technologies, copyrights, trademarks or know-how without a license or who have under-reported the amount of royalties owed under license agreements with us. We continue to invest in our compliance and enforcement infrastructure to support the value of our intellectual property to us and our licensees and to improve the long-term realization of revenues from our intellectual property. As a result of these activities, from time to time, we recognize royalty revenues that relate to consumer electronics manufacturing activities from prior periods. These royalty recoveries may cause revenues to be higher than expected during a particular reporting period and may not occur in subsequent periods. While we consider such revenues to be a part of our normal operations, we cannot predict such recoveries or the amount or timing of such revenues.

Our cost of revenues consists primarily of amortization of acquired intangibles. It also includes royalty payments to third parties for use of intellectual property and costs for products and materials.

Our selling, general and administrative (SG&A) expenses consist primarily of compensation and related benefits and expenses for personnel engaged in sales and licensee support, as well as costs associated with promotional and other selling and

12


licensing activities. SG&A expenses also include professional fees, facility-related expenses and other general corporate expenses, including compensation and related benefits and expenses for personnel engaged in corporate administration, finance, human resources, information systems and legal.

Our research and development (R&D) costs consist primarily of compensation and related benefits and expenses for research and development personnel, engineering consulting expenses associated with new product and technology development, the commercialization of our R&D engineering efforts, and quality assurance and testing costs. R&D costs are expensed as incurred.

Acquisition of iBiquity

On October 1, 2015, we completed the acquisition of iBiquity Digital Corporation ("iBiquity"). iBiquity is the exclusive developer and licensor of HD Radio technology, the sole FCC-approved method for upgrading AM/FM broadcasting from analog to digital. HD Radio technology provides compelling benefits, including improved audio quality, expanded content choices and new digital data services such as album cover art, weather and real-time traffic updates. iBiquity's partners include leading automakers, consumer electronics and broadcast equipment manufacturers, radio broadcasters, semiconductor and electronic component manufacturers and retailers. We believe that this acquisition will extend our strategy of delivering a personalized, immersive and compelling audio experience across the entertainment value chain and will complement our existing suite of technology and content delivery solutions while enabling us to strengthen our position in the large automotive market. For additional information, refer to Note 5, "Business Combination."

Executive Summary

Highlights

HD Radio technology has expanded our automotive footprint and positioned us for continued growth in 2016 and beyond. As a result, we achieved the highest revenue quarter in our history with $45.2 million in total revenue.

Excluding royalty recoveries, revenue for the quarter ended March 31, 2016 increased by 32% compared to the prior year quarter.

Trends, Opportunities, and Challenges

Historically, our revenue was primarily dependent upon the DVD and Blu-ray Disc based home theater markets. Because we are a mandatory technology in the Blu-ray standard, our revenue stream from this market is closely tracking the sales trend of Blu-ray equipped players, game consoles and PCs. However, the market for optical disc based media players has slowed in favor of a growing trend toward network-based delivery of entertainment content to network-connected devices. In response to this shift in entertainment delivery and consumption over the past several years, we have transitioned our focus to providing end-to-end audio solutions to the network-connected markets both in the home and on-the-go, and we believe that our mandatory position in the Blu-ray standard has given us the ability to extend the reach of our audio into the growing network-connected markets. Additionally, with our recent acquisition of iBiquity, we will be able to extend our presence in the car, which is becoming another key personal entertainment environment for consumers.

We have signed agreements with a number of network-connected digital TV, mobile device and PC manufacturers to incorporate DTS audio solutions into their products. We have also pursued partnerships to expand the integration of our premium audio technologies into streaming and downloadable content. To date, our technologies have been integrated into tens of thousands of titles, and we continue to work with numerous partners to expand our presence in streaming and downloadable content, including 3DGo, CinemaNow, FandangoNOW, Starz, Alibaba Tmall Box, Carrefour's Nolim Films and Primetime. Additionally, we have maintained a strategy focused on increasing DTS support among providers of streaming and downloadable solutions and tools within the cloud-based content delivery ecosystem, working with partners such as Amazon Web Services, NexStreaming, Deluxe Digital Distribution and CastLabs.

One of the largest challenges we face is the growing consumer trend toward open platform, online entertainment consumption and the need to constantly and rapidly evolve our technologies to address the emerging consumer electronics markets. We believe that although the trend has begun, a complete transition to such open platform, online entertainment will take many years. Further, we believe that this trend demands that playback devices be capable of processing content originating in any form, whether optical disc based or online, which creates a substantial opportunity for our technologies to extend into

13


network-connected products. During the transition period, we expect that optical disc based media will continue to contribute meaningfully to our revenues, while online entertainment formats will continue to grow and thrive.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the SEC. The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities. On an ongoing basis, estimates and judgments are evaluated, including those related to revenue recognition; valuations of goodwill, other intangible assets and long-lived assets; stock-based compensation; and income taxes. These estimates and judgments are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ materially from these estimates. There have been no material changes to our critical accounting policies and estimates from our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 7, 2016.

Results of Operations

Revenue
 
 
 
 
 
Change
 
2016
 
2015
 
$
 
%
 
($ in thousands)
Three months ended March 31,
$
45,195

 
$
33,937

 
$
11,258

 
33
%

Revenue for the three months ended March 31, 2016 and 2015 included $2.6 million and $1.7 million, respectively, of royalties recovered through intellectual property compliance and enforcement activities, which we characterize as "royalty recoveries." While we believe royalty recoveries are a normal and ongoing aspect of our business, royalty recoveries may cause revenues to be higher than expected during a particular period and may not occur in subsequent periods. Therefore, unless otherwise noted, to provide a more comparable analysis, the impact of royalty recoveries has been excluded from our revenue discussion below.

We have recently reorganized aspects of our business to better align with the three core high quality entertainment environments that we believe will drive our long-term revenue growth – home, mobile and automotive. As such, we believe that going forward, it is most informative for our revenue to be classified into these three categories. Our new "home" category primarily includes revenues from TVs, game consoles, Blu-ray players, AVRs, soundbars, set-top-boxes and wireless speakers. Historically, revenues from TVs and wireless speakers were included in a category we referred to as "network-connected." Our new "mobile" category primarily includes revenues from smartphones, tablets and PCs. Historically, revenues from this market were included in our "network-connected" category. Our new "automotive" category includes revenues from both our legacy automotive products and revenues from HD Radio technology. In our discussion below, we have reclassified revenue categories from the prior year period to conform with our new presentation.

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

Excluding the impact of royalty recoveries, the increase in revenues was primarily attributable to increased royalties from the automotive market, largely driven by revenue from the HD Radio technology acquired from iBiquity in the fourth quarter of 2015. Royalties from the automotive market increased by over 300% and represented over 35% and 10% of total revenues in the first quarter of 2016 and 2015, respectively. Revenues from the mobile market also increased, up 25%, driven primarily by increased royalties from smartphones and tablets. Revenues from the mobile market represented under 15% of total revenues in the first quarter of both 2016 and 2015. These increases were partially offset by decreases in royalties from the home market, which was down 14%, primarily due to the timing of certain TV contract renewals and a market decline in Blu-ray standalone players. Revenues from the home market represented over 45% and 70% of total revenues in the first quarter of 2016 and 2015, respectively.

For 2016, we expect to see growth primarily in the automotive and mobile markets, driven by royalties from HD Radio technology and wider adoption of DTS mobile solutions by smartphone manufacturers, respectively. Over the long-term, we

14


expect to achieve growth in all three of our key markets – home, mobile and automotive – as we expand our footprint in terms of both products and geographies served.

Gross Profit
 
2016
 
%
 
2015
 
%
 
Percentage point change
in gross profit margin
 
($ in thousands)
 
 
Three months ended March 31,
$
39,104

 
87%
 
$
31,153

 
92%
 
(5)%

The decrease in our gross profit margin was driven primarily by cost of sales resulting from our acquisition of iBiquity in October 2015, including an increase in amortization expense due to newly acquired intangible assets, as well as certain ongoing third party royalties assumed in the acquisition.

Selling, General and Administrative (SG&A)

 
 
 
 
 
Change
 
2016
 
2015
 
$
 
%
 
($ in thousands)
Three months ended March 31,
$
24,509

 
$
19,783

 
$
4,726

 
24
%
% of Revenue
54
%
 
58
%
 
 

 
 


The dollar increase in SG&A was primarily due to higher employee related costs and professional service fees. The higher employee related costs largely resulted from higher salary expense due to increased headcount resulting from the iBiquity acquisition in October 2015.

Research and Development (R&D)
 
 
 
 
 
Change
 
2016
 
2015
 
$
 
%
 
($ in thousands)
Three months ended March 31,
$
12,687

 
$
9,628

 
$
3,059

 
32
%
% of Revenue
28
%
 
28
%
 
 

 
 


The dollar increase in R&D was primarily driven by an increase in employee related costs, largely due to increased headcount resulting from the iBiquity acquisition in October 2015.

Interest and Other Expense, Net
 
 
 
 
 
Change
 
2016
 
2015
 
$
 
%
 
($ in thousands)
Three months ended March 31,
$
(1,159
)
 
$
(161
)
 
$
(998
)
 
(620
)%

Interest and other expense, net, increased primarily due to higher interest expense on debt. As of March 31, 2016 and 2015, our outstanding debt balance was $154.5 million and $25.0 million, respectively. The increase in debt was due to a new credit agreement entered into with Wells Fargo Bank, National Association ("Wells Fargo") and other lenders, entered into in connection with the iBiquity acquisition in October 2015.

Income Taxes
 
2016
 
2015
 
($ in thousands)
Three months ended March 31,
$
212

 
$
527

Effective tax rate
28
%
 
33
%

15



Our quarterly effective tax rates are based in part upon projections of our annual pre-tax results. The tax rate for 2016 differed from the US statutory rate of 35% primarily due to certain foreign earnings subject to lower tax rates, certain stock-based compensation benefits, and research and development tax credits, partially offset by the impact of a foreign loss in a jurisdiction that will not result in a tax benefit and non-creditable foreign withholding taxes. The tax rate for 2015 differed from the US statutory rate primarily due to the impact of foreign operations, as our tax rates in foreign countries are generally lower than the US statutory rate, which was partially offset by non-creditable foreign withholding taxes.

Liquidity and Capital Resources

As of March 31, 2016, we had cash, cash equivalents and short-term investments of $57.4 million, compared to $61.9 million at December 31, 2015. As of March 31, 2016, $50.0 million of cash, cash equivalents, and short-term investments was held by our foreign subsidiaries. If these funds are needed for our operations in the US, they would be subject to US federal and state income taxes, less applicable foreign tax credits. However, our intent is to permanently reinvest funds outside of the US and our current plans do not demonstrate a need to repatriate them to fund our US operations.

Net cash provided by operating activities was $5.6 million and $4.1 million for the three months ended March 31, 2016 and 2015, respectively. Cash flows from operating activities are primarily impacted by net income adjusted for certain non-cash items and the effect of changes in working capital and other operating activities. The operating cash flows for both periods were also impacted by the timing of payments related to certain liabilities, including annual incentive compensation payments. The operating cash flows for 2015 were also impacted by the timing of cash receipts for certain receivables.

We typically use cash in investing activities to purchase office equipment, fixtures, computer hardware and software, engineering and certification equipment for securing patent and trademark protection for our proprietary technology and brand names, and to purchase investments such as corporate bonds and commercial paper. Net cash used in investing activities totaled $12.3 million and $32.8 million for the three months ended March 31, 2016 and 2015, respectively. The 2016 investing cash flows were primarily driven by purchases of investments, partially offset by maturities of investments. The 2015 investing cash flows were primarily driven by purchases of investments.

Net cash used in financing activities was $8.3 million for the three months ended March 31, 2016, which primarily resulted from repayment of long-term borrowings and cash paid for shares withheld for taxes upon settlement of stock-based awards. Net cash provided by financing activities was $3.7 million for the three months ended March 31, 2015, which primarily resulted from proceeds from the issuance of common stock under stock-based compensation plans and related tax benefits.

Credit Facility

On October 1, 2015, we entered into a credit agreement with Wells Fargo and other lenders which provides us with (i) a $50.0 million revolving line of credit (the "Revolver") and (ii) a $125.0 million secured term loan (the "Term Loan"). As of March 31, 2016, $119.5 million and $35.0 million remained outstanding under the Term Loan and Revolver, respectively. All advances under the Revolver will become due and payable on October 1, 2020 or earlier in the event of a default. $5.5 million of the principal amount of the Term Loan is due and payable in quarterly installments beginning March 31, 2016, with the remaining balance due and payable on October 1, 2020.

We anticipate that repayment of the credit agreement will be satisfied with our future available cash and cash equivalents and operating cash flows, by renewing the credit facility, or by entering into a new credit facility. As of and during the three months ended March 31, 2016, we were in compliance with all loan covenants.

Common Stock Repurchases

In February 2014, our Board of Directors authorized, subject to certain business and market conditions, the purchase of up to 2.0 million shares of our common stock in the open market or in privately negotiated transactions. As of March 31, 2016, we had repurchased 1.0 million shares under this authorization for an aggregate of $26.6 million. All shares repurchased under this authorization were accounted for as treasury stock.

Contractual Obligations

There have been no material changes to our contractual obligations since December 31, 2015. As of March 31, 2016, our total amount of unrecognized tax benefits was $19.6 million. We are currently unable to make reasonably reliable estimates of

16


the periods of cash settlements associated with these obligations. We believe that it is not estimable with any practicable degree of certainty that our unrecognized tax benefits will increase or decrease.

Under certain contractual rights arrangements, we may be obligated to pay up to $7.5 million over an estimated period of approximately four years if certain milestones are achieved.

Working Capital and Capital Expenditure Requirements

We believe that our cash, cash equivalents, short-term investments, cash flows from operations and our credit facility will be sufficient to satisfy our working capital and capital expenditure requirements for at least the next twelve months. Additionally, under our credit agreement, we currently have $15.0 million unused on the Revolver and may request additional term loans and increases to the Revolver in an aggregate principal amount up to $50.0 million.

Changes in our operating plans, including lower than anticipated revenues, increased expenses, acquisitions of businesses, products or technologies or other events, including those described in "Risk Factors" included elsewhere herein and in other SEC filings, may cause us to seek additional debt or equity financing on an accelerated basis. Financing may not be available on acceptable terms, or at all, particularly if there is a lack of confidence in the financial markets and limited availability of capital and demand for debt and equity securities. Our failure to raise capital when needed could negatively impact our growth plans and our financial condition and results of operations. Additional equity financing may be dilutive to the holders of our common stock and debt financing, if available, may involve significant cash payment obligations and financial or operational covenants that restrict our ability to operate our business.

Recently Issued Accounting Standards

Refer to Note 2, "Recent Accounting Pronouncements."


Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Our market risk represents the risk of loss arising from adverse changes in interest rates and foreign exchange rates. There have been no material changes in our market risks during the quarter ended March 31, 2016.

Interest Rate Risk

Our interest rate risk relates primarily to interest expense on our debt, which has a variable interest rate, and interest income from investments. As of March 31, 2016, a one percentage point change in interest rates on our debt throughout a one-year period would have an annual effect of approximately $1.5 million on our income before income taxes. Our interest income is sensitive to changes in the general level of US interest rates, particularly since a significant portion of our investments have been, and may in the future be, in short-term and long-term corporate bonds, marketable securities and US government securities. The average maturity of our investment portfolio is less than one year. As of March 31, 2016, a one percentage point change in interest rates on our cash and investments throughout a one-year period would have an annual effect of approximately $0.6 million on our income before income taxes.

Exchange Rate Risk

During the three months ended March 31, 2016, we derived over 75% of our revenues from sales outside the US, and maintain international research, sales, marketing and business development offices. Therefore, our results could be negatively affected by factors such as changes in foreign currency exchange rates, trade protection measures, longer accounts receivable collection patterns and changes in regional or worldwide economic or political conditions. The risks of our international operations are mitigated in part by the extent to which our revenues are denominated in US dollars and, accordingly, we are not exposed to significant foreign currency risk on these items. During the three months ended March 31, 2016, substantially all of our revenues were denominated in US dollars. We do have foreign currency risk on certain operating expenses such as salaries and overhead costs of our foreign operations and cash maintained by these operations. Operating expenses, including cost of revenue, of our foreign subsidiaries that are predominantly denominated in a currency other than the US dollar were approximately $5.8 million for the three months ended March 31, 2016. Based on the expenses for this period, a 10% or greater change in foreign currency rates throughout a one-year period could have a material impact on our condensed consolidated statement of operations.


17


Our international business is subject to risks, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility when compared to the US dollar. Accordingly, our future results could be materially impacted by changes in these or other factors.

We are also affected by exchange rate fluctuations as the financial statements of our foreign subsidiaries are translated into the US dollar in consolidation. As exchange rates fluctuate, these results, when translated, may vary from expectations and could adversely or positively impact overall profitability. During the three months ended March 31, 2016, the impact of foreign exchange rate fluctuations related to translation of our foreign subsidiaries' financial statements was immaterial to our condensed consolidated financial statements.

Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, our chief executive officer and chief financial officer concluded that the Company's disclosure controls and procedures were effective as of the period covered by this Quarterly Report.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

18


PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

In the ordinary course of our business, we actively pursue legal remedies to enforce our intellectual property rights and to stop unauthorized use of our technologies and trademarks.

We are not currently a party to any material legal proceedings. We may, however, become subject to lawsuits from time to time in the course of our business.

Item 1A.    Risk Factors

Set forth below and elsewhere in this report and in other documents we file with the SEC are risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report and other public statements we make. If any of the following risks actually occurs, our business, financial condition, or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. There have been no material changes from the risks included in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015.

Risks Related to Our Business

We may not be able to evolve our technologies, products, and services, or develop new technologies, products, and services, that are acceptable to our customers or the evolving markets.

The markets for our technologies, products, and services are characterized by:

rapid technological change and product obsolescence;

new and improved product introductions;

changing consumer demands;

increasingly competitive product landscape; and

evolving industry standards.

Our future success depends upon our ability to enhance our existing technologies, products, and services and to develop enhanced and acceptable new technologies, products, and services on a timely basis. The development of enhanced and new technologies, products, and services is a complex and uncertain process requiring high levels of innovation, highly-skilled engineering and development personnel, and the accurate anticipation of technological and market trends. We may not be able to accurately identify, develop, market, or support new or enhanced technologies, products, or services on a timely basis, if at all. Furthermore, our new technologies, products, and services may never gain market acceptance, and we may not be able to respond effectively to evolving consumer demands, technological changes, product announcements by competitors, or emerging industry standards. Any failure to respond to these changes or concerns would likely prevent our technologies, products, and services from gaining market acceptance or maintaining market share and could lead to our technologies, products, and services becoming obsolete.

If we are unable to maintain a sufficient amount of content released in the DTS audio format, demand for the technologies, products, and services that we offer to consumer electronics product manufacturers may significantly decline, which would adversely impact our business and prospects.

We expect to derive a significant percentage of our revenues from the technologies, products, and services that we offer to manufacturers of consumer electronics products. We believe that demand for our audio technologies in growing markets for multi-channel and/or high resolution audio, including TVs, tablets, mobile phones, video game consoles, automobiles, and soundbars, will be based on the amount, quality, and popularity of content (such as movies, TV shows, music, and games) either released in the DTS audio format or capable of being coded and played in the DTS format. In particular, our ability to penetrate the growing markets in the network-connected space depends on the presence of streaming and downloadable content released in the DTS audio format. We generally do not have contracts that require providers of streaming and downloadable

19


content to develop and release such content in a DTS audio format. Accordingly, our revenue could decline if these providers elect not to incorporate DTS audio into their content or if they sell less content that incorporates DTS audio.

In addition, we may not be successful in maintaining existing relationships or developing new relationships with other existing or new content providers. As a result, we cannot assure you that a sufficient amount of content will be released in a DTS audio format to ensure that manufacturers continue offering DTS decoders in the consumer electronics products that they sell.

Our customers, who are also our current or potential competitors, may choose to use their own or competing technologies rather than ours.

We face competitive risks in situations where our customers are also current or potential competitors. For example, certain of our licensee customers maintain in-house audio engineering teams. To the extent that our customers choose to use technologies they have developed or in which they have an interest, rather than use our technologies, our business and operating results could be adversely affected.

Our revenue is dependent upon our customers and licensees incorporating our technologies into their products, and we have limited control over existing and potential customers' and licensees' decisions to include our technologies in their product offerings.

We are dependent upon our customers and licensees - including consumer electronics product manufacturers, semiconductor manufacturers, producers and distributors of content - to incorporate our technologies into their products, purchase our products and services, or integrate DTS audio into their content. The future success of our technologies depends upon the ability of our licensees to develop, introduce and deliver products that achieve and sustain market acceptance. We have contracts and license agreements with many of these companies, which generally are non-exclusive and do not contain any minimum purchase commitments. Furthermore, the decision by a party dominant in the entertainment value chain to provide audio technology at very low or no cost could impact a licensee's decision to use our technology. Our customers, licensees and other manufacturers might not utilize our technologies or services in the future. Accordingly, our revenue could decline if our customers and licensees choose not to incorporate our technologies in their products, or if they sell fewer products incorporating our technologies.

Our licensing revenue depends in large part upon semiconductor manufacturers incorporating our technologies into integrated circuits (ICs), for sale to our consumer electronics product licensees. If our technologies are not incorporated in these ICs, IC production is delayed, or fewer ICs are sold that incorporate our technologies, our operating results would be adversely affected.

Our licensing revenue from consumer electronics product manufacturers depends, in large part, upon the availability of ICs that implement our technologies. IC manufacturers incorporate our technologies into these ICs, which are then incorporated into consumer electronics products. We do not manufacture these ICs, but rather depend upon IC manufacturers to develop, produce and then sell them to licensed consumer electronics product manufacturers. We do not control the IC manufacturers' decisions whether or not to incorporate our technologies into their ICs, and we do not control their product development or commercialization efforts. If these IC manufacturers are unable or unwilling to implement our technologies into their ICs, production is delayed, or if they sell fewer ICs incorporating our technologies, our operating results could be adversely affected.

We face intense competition and certain of our competitors have greater resources than we do.

The digital audio, consumer electronics and entertainment markets are intensely competitive, subject to rapid change, and significantly affected by new product introductions and other market activities of industry participants. Our principal competitor is Dolby Laboratories, Inc. (Dolby), who competes with us in most of our markets. We also compete with other companies offering digital audio technology incorporated into consumer electronics product and entertainment mediums, such as Fraunhofer Institut Integrierte Schaltungen, and with respect to our wireless audio technology, Sonos, Inc.

Certain of our current and potential competitors may enjoy substantial competitive advantages, including:

greater name recognition;

a longer operating history;


20


a greater global footprint and presence;

more developed distribution channels and deeper relationships with our common customer base;

a more extensive customer base;

technologies that provide features that ours do not;

broader product and service offerings;

greater resources for competitive activities, such as research and development, marketing, strategic acquisitions, alliances, joint ventures, sales and marketing, subsidies and lobbying industry and government standards;

more technicians and engineers;

greater technical support;

the ability to offer open source or free codecs; and

greater inclusion in government or industry standards.

As a result, these current and potential competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements.

In addition to the competitive advantages described above, Dolby also enjoys other unique competitive strengths relative to us. For example, it introduced multi-channel audio technology before we did. It has also achieved mandatory standard status in product categories that we have not, including terrestrial digital TV broadcasts in the US. As a result of these factors, Dolby has a competitive advantage in selling its digital multi-channel audio technology.

Our ability to develop proprietary technologies in markets in which “open standards” are adopted may be limited, which could adversely affect our ability to generate revenue and growth.

Standards-setting bodies may require the use of open standards, meaning that the technologies necessary to meet those standards are publicly available, free of charge and often on an "open source" basis. These standards have primarily been focused on markets and regions traditionally adverse to the notion of intellectual property ownership and the associated royalties. If the concept of open standards gains more industry momentum or further regional adoption in the future, the use of open standards may reduce our opportunity to generate revenue, as open standards technologies are based upon non-proprietary technology platforms in which no single company maintains ownership over the dominant technologies.

Demand for our newly acquired HD Radio technology may be insufficient to sustain projected growth.

Demand for and adoption of HD Radio technology may not be sufficient for us to continue to increase the number of licensees of our HD Radio system, which include IC manufacturers, manufacturers of broadcast transmission equipment, consumer electronics products manufacturers, component manufacturers, data service providers, manufacturers of specialized and test equipment and radio broadcasters.
Among other things, continuing and increased consumer acceptance of HD Radio technology will depend upon:
the number of radio stations broadcasting digitally using HD Radio technology;

the willingness of automobile manufacturers to include HD Radio receivers in their vehicles;

the willingness of manufacturers to incorporate HD Radio technology into their products;

the cost and availability of HD Radio enabled products; and

the marketing and pricing strategies that we employ and that are employed by our licensees and retailers.


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If demand for HD Radio technology does not continue to increase as expected, we may not be able to increase revenue as projected.
Our recently acquired HD Radio technology may not remain competitive if we do not respond to changes in technology, standards and services that affect the radio broadcasting industry.

The radio broadcasting industry is subject to technological change, evolving industry standards, regulatory restrictions and the emergence of other media technologies and services. Our HD Radio technology may not gain market acceptance over these other technologies. Various other audio technologies and services that have been developed and introduced include:
internet streaming, cable-based audio programming and other digital audio broadcast formats;

satellite delivered digital audio radio services that offer numerous programming channels;

other digital radio competitors, such as Digital Radio Mondiale, or DAB; and

growth in use of portable devices for storage and playback of audio content.

Competition arising from these or other technologies or potential regulatory change may have an adverse effect on the radio broadcasting industry or on our company and our financial condition and results of operations.
If we are unable to further penetrate the streaming and downloadable content delivery markets and adapt our technologies for those markets, our revenues and ability to grow could be adversely impacted.

Video and audio content has historically been purchased and consumed primarily via optical disc based media. However, the growth of the internet and network-connected device usage, along with the rapid advancement of online and mobile content delivery has resulted in download and streaming services becoming mainstream with consumers in various parts of the world. We expect the shift away from optical disc based media to streaming and downloadable content consumption to continue. If we fail to continue to penetrate the streaming and downloadable content delivery market, our business could suffer.

The services that provide content from the cloud are not generally governed by international or national standards and are thus free to choose any media format(s) to deliver their products and services. This freedom of choice on the part of online content providers could limit our ability to grow if such content providers do not incorporate our technologies into their services, which could affect demand for our technologies.

Furthermore, our inclusion in mobile and other network-connected devices may be less profitable for us than optical disc players. The online and mobile markets are characterized by intense competition, evolving industry standards and business and distribution models, disruptive software and hardware technology developments, frequent new product and service introductions, short product and service life cycles, and price sensitivity on the part of consumers, all of which may result in downward pressure on pricing. If we are unable to adequately and timely respond to the foregoing, our business and operating results could be adversely affected.

A loss of one or more of our key customers or licensees in any of our markets could adversely affect our business.

From time to time, one or a small number of our customers or licensees may represent a significant percentage of our revenue. While our business is not substantially dependent on any single customer agreement, we have entered into several license agreements with the various divisions and companies that comprise Samsung Electronics Co., Ltd. and Sony Corporation, which relate to various types of consumer electronics devices. Each of these significant customers, in the aggregate, accounted for more than 10% of total revenues for the year ended December 31, 2015. For additional information, refer to "Concentration of Business and Credit Risk" in Note 2 of our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 7, 2016. Although we have agreements with our customers, many of these agreements do not require any material minimum purchases or minimum royalty fees and typically do not prohibit customers from purchasing or licensing technologies, products, and services from competitors. A decision by any of our major customers or licensees not to use our technologies, products, or services or their failure or inability to pay amounts owed to us in a timely manner, or at all, could have a significant adverse effect on our business.



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The licensing of patents constitutes a significant source of our revenue. If we do not replace expiring patents with new patents or proprietary technologies, our revenue could decline.

We hold patents covering a majority of the technologies that we license, and our licensing revenue is tied in large part to the life of those patents. Our right to receive royalties related to our patents terminates with the expiration of the last patent covering the relevant technologies. Accordingly, to the extent that we do not replace licensing revenue from technologies covered by expiring patents with licensing revenue based on new patents and proprietary technologies, our revenue could decline.

Our business and prospects depend upon the strength of our brands, and if we do not maintain and strengthen our brands, our business could be materially harmed.

Establishing, maintaining and strengthening our corporate and product brands is critical to our success. Our brand identity is key to maintaining and expanding our business and entering new markets. Our success depends in large part on our reputation for providing high-quality technologies, products, and services to the consumer electronics, broadcast and entertainment industries. If we fail to promote and maintain our brands successfully, our business and prospects may suffer. Additionally, we believe that the likelihood that our technologies will be adopted in industry standards depends, in part, upon the strength of our brands, because professional organizations and industry participants are more likely to incorporate technologies developed by well-respected and well-known brands into industry standards.

Declining retail prices for consumer electronics products could force us to lower the license or other fees we charge our customers or prompt our customers to exclude our audio technologies from their products altogether, which would adversely affect our business and operating results.

The market for consumer electronics products is intensely competitive and price sensitive. Retail prices for consumer electronics products that include our audio technologies have decreased significantly, and we expect prices to continue to decrease for the foreseeable future. Declining prices for consumer electronics products could create downward pressure on the licensing fees we currently charge our customers who integrate our technologies into the consumer electronics products that they sell and distribute. As a result of pricing pressure, consumer electronics product manufacturers who produce products in which our audio technologies are not a mandatory standard could decide to exclude our audio technologies from their products altogether. In addition, certain royalty fees that we receive are based on a percentage of the sales price of the individual consumer electronic product, and if sales prices decline faster than we forecast the amount of the royalty fees we receive may significantly decrease.

If we fail to protect our intellectual property rights or if changing laws have an adverse effect on our ability to protect such rights, our ability to compete could be harmed.

Protection of our intellectual property is critical to our success. Copyright, trademark, patent, and trade secret laws and confidentiality and other contractual provisions afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. We rely on our patents, copyrights, trademarks and trade secrets, as well as licenses and other agreements with our suppliers, customers and other parties, to use our technologies, conduct our operations and sell our products and services. We face numerous risks in protecting our intellectual property rights, including the following:

our competitors may produce competitive technologies, products or services that do not unlawfully infringe upon our intellectual property rights;

the laws related to the protection of intellectual property may not be the same in all countries or may change over time resulting in no or inadequate protection for our intellectual property, or may restrict the scope of our intellectual property rights, and mechanisms for enforcement of intellectual property rights may be inadequate;

we may be unable to successfully identify or prosecute unauthorized uses of our technologies;

efforts to identify and prosecute unauthorized uses of our technologies are time consuming, expensive, and divert resources from the operation of our business;

our patents may be challenged, found unenforceable or invalidated by our competitors;


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our pending patent applications may be found not patentable, may not issue, or if issued, may not provide meaningful protection for related products or proprietary rights;

we may not be able to practice our trade secrets as a result of patent protection afforded a third-party for such product, technique or process; and

we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by employees, consultants, and advisors.

As a result, our means of protecting our intellectual property rights and brands may prove inadequate or unenforceable. Furthermore, despite our efforts, third parties may violate, or attempt to violate, our intellectual property rights. Enforcement, including infringement claims and lawsuits would likely be expensive to resolve and would require management's time and resources. In addition, effective patent, copyright and trade secret protection may be unavailable or limited in certain foreign countries in which we do business or may do business in the future. We have not sought, and do not intend to seek, patent and other intellectual property protections in all foreign countries. In countries where we do not have such protection, products incorporating our technology may be able to be lawfully produced and sold without a license.

The process of developing enhanced new technology solutions is complex and uncertain. It requires accurate anticipation of customer's changing needs and emerging technological trends. We must make long-term investments and commit significant resources before knowing whether these investments will eventually result in solutions that achieve customer acceptance and generate the revenues required to provide desired returns. As such, we rely on laws protecting our intellectual property and we may take legal action to enforce our patents and other intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could negatively affect our business, operating results and financial condition.

We may be sued by third parties for alleged infringement of their proprietary rights, and we may be subject to litigation proceedings that could harm our business.

Companies that participate in the digital audio, consumer electronics, broadcast and entertainment industries hold a large number of patents, trademarks, and copyrights, and are frequently involved in litigation based on allegations of patent infringement or other violations of intellectual property rights. Intellectual property disputes frequently involve highly complex and costly scientific matters, and each party generally has the right to seek a trial by jury which adds additional costs and uncertainty. Accordingly, intellectual property disputes, with or without merit, could be costly and time consuming to litigate or settle, and could divert management's attention from executing our business plan. In addition, our technologies and products may not be able to withstand any third-party claims or rights against their use. If we were unable to obtain any necessary license following a determination of infringement or an adverse determination in litigation or in interference or other administrative proceedings, we may need to redesign some of our technologies or products to avoid infringing a third party's rights and could be required to temporarily or permanently discontinue licensing our technologies or products.

Additionally, our suppliers and customers may also have similar claims of intellectual property infringement asserted against them. In some circumstances, we have agreed to indemnify some of our suppliers and customers for alleged patent infringement. The scope of this indemnity varies, but, in some instances, includes indemnification for damages and expenses including reasonable attorneys’ fees.

In the past, we have been a party to litigation related to protection and enforcement of our intellectual property, and we may be a party to litigation in the future. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling could include monetary damages (including treble damages under the Clayton Act) and an injunction prohibiting us from licensing our technologies in particular ways or at all. If an unfavorable ruling occurred, our business and operating results could be materially harmed. If any of our products were found to infringe on another company’s intellectual property rights, we could be required to redesign our products or license such rights and/or pay damages or other compensation. There is no guarantee we would be able to redesign our products, license such intellectual property rights used in our products or otherwise distribute our products through a licensed supplier, which could result in our inability to make and sell such products. In addition, any protracted litigation, regardless of its outcome, could result in substantial expense, divert management's attention from our day-to-day operations, disrupt our business and cause our operating results to suffer.




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We rely on the accuracy of our customers' manufacturing reports for reporting and collecting our revenues, and if these reports are untimely or incorrect, our revenues could be delayed or inaccurately reported.

Most of our revenues are generated from consumer electronics product manufacturers who license and incorporate our technology in their products. Under our existing agreements, many of these customers pay us per-unit licensing fees based on the number of products manufactured that incorporate our technology. We rely on our customers to accurately report the number of units manufactured on a timely basis in collecting our license fees, preparing our financial reports, projections, budgets, and directing our sales and product development efforts. The timing of our revenue depends upon the timing of our receipt of these customer reports. Our license agreements permit us to audit our customers, but audits are generally expensive, time consuming, difficult to manage effectively, dependent in large part upon the cooperation of our licensees and the quality of the records they keep, and could harm our customer relationships. If any of our customer reports understate the number of products they manufacture, we may not collect and recognize revenues to which we are entitled, or may endure significant expense to obtain compliance. Alternatively, customer reports could overstate the number of products manufactured, which would require us to refund the customer and reflect the overstated amount as a reduction of revenue in the period determined.

We have had in the past, and may have in the future, disputes with our licensees regarding our licensing arrangements.

At times, we are engaged in disputes regarding the licensing of our intellectual property rights, including matters related to misreporting of units manufactured, application of royalty rates, and interpretation of other terms of our licensing arrangements. These types of disputes can be asserted by our customers or prospective customers or by other third parties as part of negotiations with us or in private actions seeking monetary damages or injunctive relief, or in regulatory actions. In the past, licensees have threatened to initiate litigation against us regarding our licensing royalty rate practices including our adherence to licensing on fair, reasonable, and non-discriminatory terms and potential antitrust claims. Damages and requests for injunctive relief asserted in claims like these could be material and could be disruptive to our business. Any disputes with our customers or potential customers or other third parties could adversely affect our business, results of operations, and prospects.

Our technologies and products are complex and may contain errors that could cause us to lose customers, damage our reputation, or incur substantial costs.

Our technologies or products could contain errors that could cause our technologies or products to operate improperly and could cause unintended consequences. If our technologies or products contain errors, we could be required to replace them, and if any such errors cause unintended consequences, we could face claims for product liability. Although we generally attempt to contractually limit our exposure to incidental and consequential damages, as well as provide insurance coverage for such events, if these contract provisions are not enforced or are unenforceable, if liabilities arise that are not effectively limited, or if our insurance coverage is inadequate to satisfy the liability, we could incur substantial costs in defending or settling product liability claims.

We may not successfully address problems encountered in connection with mergers and acquisitions or strategic investments.

We consider opportunities to acquire or make investments in other technologies, products, and businesses that could enhance our technical capabilities, complement our current technologies, products and services, or expand the breadth of our markets. While we have acquired a number of businesses in the past, each business is unique, and there can be no assurance that we will be successful in realizing the expected benefits from an acquisition or investment. Future success depends, in part, upon our ability to manage an expanded business, which could pose substantial challenges for management. Acquisitions and strategic investments involve numerous risks and potential difficulties, including:

problems assimilating the purchased technologies, products, or business operations;

significant future charges relating to in-process research and development and the amortization of intangible assets;

significant amount of goodwill and other intangible assets that are not amortizable and are subject to annual impairment review and potential impairment losses;

problems maintaining and enforcing uniform standards, procedures, controls, policies and information systems;


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unanticipated costs, including accounting and legal fees, capital expenditures, and transaction expenses;

diversion of management's attention from our core business;

adverse effects on existing business relationships with suppliers and customers;

risks associated with entering markets in which we have no or limited experience;

unanticipated or unknown liabilities relating to the acquired businesses;

the need to integrate accounting, management information, manufacturing, human resources and other administrative systems and personnel to permit effective management;

uncovering information missed or not understood in target diligence; and

potential loss of key employees of acquired organizations.

If we fail to properly evaluate and execute acquisitions and strategic investments, our management team may be distracted from our day-to-day operations, our business may be disrupted, and our operating results may suffer. In addition, if we finance acquisitions by issuing equity or convertible debt securities, our existing stockholders would be diluted. Foreign acquisitions and investments involve unique risks in addition to those mentioned above, including those related to integration of operations across different geographies, cultures and languages, currency risks and risks associated with the particular economic, political and regulatory environment in specific countries. Furthermore, future results will be affected by our ability or inability to integrate acquired businesses quickly and obtain the anticipated benefits and synergies. Also, in cases where stockholder approval of an acquisition or strategic investment is required, and we fail to obtain such stockholder approval, the anticipated benefit of our acquisitions and investments may not materialize.

Future acquisitions and investments could result in potentially dilutive issuances of our equity securities, the incurrence of debt or contingent liabilities, amortization expenses, or impairment losses on goodwill and other intangible assets, any of which could harm our operating results and financial condition. Future acquisitions may also require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all.

We may have difficulty managing any growth that we might experience.

As a result of a combination of organic growth and growth through acquisitions, we expect to continue to experience growth in the scope of our operations and the number of our employees. If our growth continues, it may place a significant strain on our management team and on our operational and financial systems, procedures, and controls. Our future success will depend, in part, upon the ability of our management team to manage any growth effectively, requiring our management to:

recruit, hire, and train additional personnel;

implement and improve our operational and financial systems, procedures, and controls;

maintain our cost structure at an appropriate level based on the revenues and cash we forecast and generate

manage multiple concurrent development projects; and

manage operations in multiple time zones with different cultures and languages.

Any failure to successfully manage our growth could distract management's attention and result in failure to execute our business plan.

We are dependent upon certain key employees.

Our success depends, in part, upon the continued availability and contributions of our management team and engineering and technical personnel because of the complexity of our technologies, products, and services. Important factors that could cause the loss of key personnel include:


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our existing employment agreements with the members of our management team allow such persons to terminate their employment with us at any time;

we do not have employment agreements with a majority of our key engineering and technical personnel;

not maintaining a competitive compensation package, including cash and equity compensation;

our ability to obtain stockholder support for new or amended equity plans to provide the level of initial and annual equity grants expected by key talent in today's competitive job market; and

significant portions of the equity awards are vested or may be underwater.

The loss of key personnel or an inability to attract qualified personnel in a timely manner could slow our technology and product development and harm our ability to execute our business plan.

We expect our expenses to increase in the future, which may impact profitability.

We expect our expenses to increase as we, among other things:

expand our sales and marketing activities, including the continued development of our international operations and increased advertising;

adopt a more customer-focused business model which is expected to entail additional hiring;

acquire businesses or technologies and integrate them into our existing organization;

increase our research and development efforts to advance our existing technologies, products, and services and develop new technologies, products, and services;

hire additional personnel, including engineers and other technical staff;

expand and defend our intellectual property portfolio; and

upgrade our operational and financial systems, procedures, and controls.

As a result, we will need to grow our revenues and manage our costs in order to positively impact profitability. In addition, we may fail to accurately estimate and assess our increased operating expenses as we grow.

We have previously identified material weaknesses in our internal control over financial reporting. If we are unable to maintain effective internal controls over our financial reporting, investors may lose confidence in our ability to provide reliable and timely financial reports and the value of our common stock may decline.

We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting.

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting in accordance with accounting principles generally accepted in the United States. Because the inherent limitations of internal control over financial reporting cannot guarantee the prevention or detection of a material weakness, we can never guarantee a material weakness in our internal control over financial reporting will not occur, including with respect to any previously reported material weaknesses. If we identify any material weaknesses in the future, investors could lose confidence in the accuracy and completeness of our financial reports, which could have a material adverse effect on the price of our common stock.

Our multi-national legal structure is complex, which increases the risk of errors in financial reporting related to our accounting for income taxes. We may find additional errors in our accounting for income taxes or discover new facts that cause us to reach different conclusions. In addition, given the complexity of certain of the Company's license agreements and the

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accounting standards governing revenue recognition related thereto, we may find additional errors in our accounting for revenue or discover new facts that cause us to reach different conclusions. This could result in adjustments that could have a material adverse effect on our consolidated financial statements. This could also adversely impact our stock price, damage our reputation, or cause us to incur substantial costs.

Compliance with changing securities laws, regulations and financial reporting standards will increase our costs and pose challenges for our management team.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Sarbanes-Oxley Act of 2002, and the rules and regulations promulgated thereunder have created uncertainty for public companies and significantly increased the costs and risks associated with operating as a publicly traded company in the US. Our management team will need to devote significant time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities. Furthermore, with such uncertainties, we cannot assure you that our system of internal control will be effective or satisfactory to our independent registered public accounting firm. As a result, our financial reporting may not be timely or accurate and we may be issued an adverse or qualified opinion by our independent registered public accounting firm. If reporting delays or material errors actually occur, we could be subject to sanctions or investigation by regulatory authorities, such as the SEC or the Nasdaq Stock Market, which could adversely affect our financial results or result in a loss of investor confidence in the reliability of our financial information, which could materially and adversely affect the market price of our common stock.

The SEC has adopted rules regarding disclosure of the use of conflict minerals (commonly referred to as tantalum, tin, tungsten, and gold), which are sourced from the Democratic Republic of the Congo and surrounding countries. This requirement could affect the sourcing, availability and pricing of materials used to manufacture certain of our products. Consequently, we will incur costs in complying with these disclosure requirements, including due diligence to determine the source of the minerals used in our products, and we may not be able to sufficiently verify the origins for the minerals used in our products. Our reputation may suffer if we determine that our products contain conflict minerals that are not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products.

In addition, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) has issued a new 2013 version of its internal control framework, which was deemed by COSO to supersede the 1992 version of the framework effective December 15, 2014. We have adopted this updated framework, which has required and may continue to require management's ongoing attention to documenting, maintaining and auditing our internal controls under the new COSO framework.

Further, the SEC has passed, promulgated and proposed new rules on a variety of subjects including the possibility that we would be required to adopt International Financial Reporting Standards (IFRS). Additionally, the Financial Accounting Standards Board (FASB) continually updates accounting standards with which we may be required comply. In order to comply with IFRS requirements or implementation of new or updated accounting standards, we may have to add additional accounting staff, engage consultants or change our internal practices, standards and policies which could significantly increase our costs.

We believe that these new and proposed laws and regulations could make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve on our audit committee, and qualified executive officers.

Current and future governmental and industry standards may significantly limit our business opportunities.

Technology standards are important in the audio and video industry as they help to assure compatibility across a system or series of products. Generally, standards adoption occurs on either a mandatory basis, requiring a particular technology to be available in a particular product or medium, or an optional basis, meaning that a particular technology may be, but is not required to be, utilized. If standards are re-examined or a new standard is developed in which we are not included, our revenue growth in that area of our business could be significantly lower than expected.

As new technologies and entertainment media emerge, new standards relating to these technologies or media may develop. New standards may also emerge in existing markets that are currently characterized by competing formats, such as the market for PCs. We may not be successful in our efforts to include our technology in any such standards.




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Changes in or failure to comply with FCC requirements could adversely impact our HD Radio revenue.

In October 2002, the Federal Communications Commission, or the FCC, selected our “In-Band, On-Channel (“IBOC”) technology, also known as “HD Radio technology,” as the exclusive technology for introduction of terrestrial digital operations by AM and FM radio stations. In the United States, the FCC regulates the broadcast radio industry, interprets laws enacted by Congress and establishes and enforces regulations governing radio broadcasting. It is unclear what rules and regulations the FCC may adopt regarding digital audio broadcasting and what effect, if any, such rules and regulations will have on our business, the operations of stations using our HD Radio technology or consumer electronics manufacturers. Any additional rules and regulations imposed on digital audio broadcasting could adversely impact the attractiveness of HD Radio technology and negatively impact our business. Also, non-compliance by us, or by radio stations offering HD Radio broadcasts, with any FCC requirements or conditions could result in fines, additional license conditions, license revocation or other detrimental FCC actions.
Our licensing of industry standard technologies can be subject to limitations that could adversely affect our business and prospects.

When a standards-setting body adopts our technologies as explicit industry standards, we generally must agree to license such technologies on a fair, reasonable and non-discriminatory basis, which we believe means that we treat similarly situated licensees similarly. In these situations, we may be required to limit the royalty rates we charge for these technologies, which could adversely affect our business. Furthermore, we may have limited control over whom we license such technologies to, and may be unable to restrict many terms of the license. From time to time, we may be subject to claims that our licenses of our industry standard technologies may not conform to the requirements of the standards-setting body. Claimants in such cases could seek to restrict or change our licensing practices or our ability to license our technologies in ways that could harm our reputation and otherwise materially and adversely affect our business, operating results and prospects.

Our business, operations and reputation could suffer in the event of security breaches.

Attempts by others to gain unauthorized access to information technology systems, including systems designed and managed by third parties, are becoming more sophisticated and successful. These attempts can include introducing malware to computers and networks, impersonating authorized users, overloading systems and servers, and data theft. While we seek to detect and investigate any security issue, in some cases, we might be unaware of an incident or its magnitude and effects. The theft, unauthorized use, loss or publication of our intellectual property or confidential business information could harm our competitive position, reduce the value of our investment in research and development and other strategic initiatives or otherwise adversely affect our business. Any security breach resulting in inappropriate disclosure of our customers' or licensees' confidential information, may result in legal claims or proceedings, liability under laws or contracts and disruption of our operations. Further, disruptions to certain of our information technology systems could have severe consequences to our business operations, including financial loss and reputational damage.

We may experience fluctuations in our operating results.

We have historically experienced moderate seasonality in our business due to our business mix and the nature of our products. Consumer electronics manufacturing activities are generally lowest in the first calendar quarter of each year, and increase progressively throughout the remainder of the year. Manufacturing output is generally strongest in the third and fourth quarters as our technology licensees’ increase manufacturing to prepare for the holiday buying season. Since recognition of a majority of revenue lags manufacturing activity by one quarter, our revenues and earnings are generally lowest in the second quarter. The introduction of new technologies, products and services and inclusion of our technologies in new and rapidly growing markets can distort and amplify the seasonality described above. Our revenues may continue to be subject to fluctuations, seasonal or otherwise, in the future. Unanticipated fluctuations, whether due to seasonality, economic downturns, product cycles, or otherwise, could cause us to miss our revenue and earnings projections, or could lead to higher than normal variation in short-term revenue and earnings, either of which could cause our stock price to decline.

In addition, we actively engage in intellectual property compliance and enforcement activities focused on identifying third parties who have either incorporated our technologies, trademarks, or know-how without a license or who have underreported to us the amount of royalties owed under license agreements with us. As a result of these activities, from time to time, we may recognize royalty revenues that relate to manufacturing activities from prior periods, and we may incur expenditures related to enforcement activity. These royalty recoveries and expenditures, as applicable, may cause revenues to be higher than expected, or results to be lower than expected, during a particular reporting period and may not recur in future reporting periods. Such fluctuations in our revenues and operating results may cause declines in our stock price.


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We are subject to additional risks associated with our international operations.

We market and sell our technologies, products and services outside the US. We currently have employees located in several countries throughout Europe and Asia, and most of our customers and licensees are located outside the US. A significant part of our strategy involves our continued pursuit of growth opportunities in a number of international markets. If we are not able to maintain or increase international market demand for our technologies, we may not be able to maintain a desired rate of growth in our business. In addition, our pursuit of international growth opportunities may require significant investments.

During the three months ended March 31, 2016, over 75% of our revenues were derived internationally.

We face numerous risks in doing business outside the US, including:

unusual or burdensome foreign laws or regulatory requirements or unexpected changes to those laws or requirements;

tariffs, trade protection measures, import or export licensing requirements, trade embargos, and other trade barriers;

difficulties in attracting and retaining qualified personnel and managing foreign operations;

competition from foreign companies;

longer accounts receivable collection cycles and difficulties in collecting accounts receivable;

less effective and less predictable protection and enforcement of our intellectual property;

changes in the political or economic condition of a specific country or region, particularly in emerging markets;

fluctuations in the value of foreign currency versus the US dollar and the cost of currency exchange;

potentially adverse tax consequences, including withholding taxes, VAT, and other sales-related taxes, and changes in tax laws;

nationalization, expropriation or limitations on repatriation of cash; and

cultural differences in the conduct of business.

Such factors could cause our future international sales to decline.

Our business practices in international markets are also subject to the requirements of the Foreign Corrupt Practices Act. If any of our employees are found to have violated these requirements, we and our employees could be subject to significant fines, criminal sanctions and other penalties.

Our international revenue is mostly denominated in US dollars. As a result, fluctuations in the value of the US dollar and foreign currencies may make our technologies, products, and services more expensive for international customers, which could cause them to decrease their business with us. Expenses for our subsidiaries are denominated in their respective local currencies. As a result, if the US dollar weakens against the local currency, the translation of our foreign currency-denominated expenses will result in higher operating expense without a corresponding increase in revenue. Significant fluctuations in the value of the US dollar and foreign currencies could have a material impact on our consolidated financial statements. The main foreign currencies we encounter in our operations are the EUR, GBP, HKD, JPY, KRW, RMB, SGD and TWD. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations.

Unanticipated changes in our tax provisions or adverse outcomes resulting from examination of our income tax returns could adversely affect our net income.

We are subject to income taxes in both the US and in foreign jurisdictions. Our effective income tax rate could be adversely affected by changes in tax laws or interpretations of those tax laws, by changes in the mix of earnings in countries

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with differing statutory tax rates or by changes in the valuation of our deferred tax assets and liabilities. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We may come under audit by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. Based on the results of an audit or litigation, a material effect on our income tax provision, net income or cash flows in the period or periods for which that determination is made could result. In addition, changes in tax rules, such as expiration of tax credits, may adversely affect our future reported financial results or the way we conduct our business. We earn a significant amount of our operating income from outside the US, and any repatriation of funds currently held in foreign jurisdictions would result in additional tax expense. In addition, there have been proposals to change US and foreign tax laws that would significantly impact how US multinational corporations are taxed on foreign earnings. Any such revisions could have a material adverse impact on our income tax expense, net income and cash flows.

Economic downturns could disrupt and materially harm our business.

Negative trends in the general economy could cause a downturn in the market for our technologies, products and services, as the end-products in which our technologies are incorporated are discretionary goods, including TVs, automobiles, game consoles, speakers, soundbars, PCs, and mobile devices. Weakness in the global financial markets could result in a tightening in the credit markets, a low level of liquidity in many financial markets and volatility in credit and equity markets. Such a weakness could adversely affect our operating results if it results, for example, in the insolvency of a key licensee or other customer, the inability of our licensees or other customers to obtain credit to finance their operations, including financing the manufacture of products containing our technologies, and delays in reporting or payments from our licensees. Tight credit markets could also delay or prevent us from acquiring or making investments in other technologies, products or businesses that could enhance our technical capabilities, complement our current technologies, products, and services, or expand the breadth of our markets. If we are unable to execute such acquisitions or strategic investments, our operating results and business prospects may suffer.

In addition, global economic conditions, including increased cost of commodities, widespread employee layoffs, actual or threatened military action by the US and the threat of terrorism could result in decreased consumer confidence, disposable income and spending. Any reduction in consumer confidence or disposable income may negatively affect the demand for consumer electronics products that incorporate our technologies.

We cannot predict other negative events that may have adverse effects on the global economy in general and the consumer electronics industry specifically. However, the factors described above and such unforeseen events could negatively affect our revenues and operating results.

We have a limited operating history in certain new and evolving consumer electronics markets.

Our technologies have only recently been incorporated into certain markets, such as mobile devices and wireless speakers. We do not have the same experience in these markets as in our traditional consumer electronics business, nor do we have as much operating history as other companies, such as Dolby. As a result, the demand for our technologies, products, and services and the income potential of these businesses is unproven. In addition, because our participation in these markets is relatively new and rapidly evolving, we may have limited insight into trends that may emerge and affect our business. We may make errors in predicting and reacting to relevant business trends, which could harm our business. Before investing in our common stock, investors should consider the risks, uncertainties, and difficulties frequently encountered by companies in new and rapidly evolving markets such as ours. We may not be able to successfully address any or all of these risks.

We have incurred a significant amount of indebtedness. Our level of indebtedness, and covenant restrictions under such indebtedness, could adversely affect our operations and liquidity.

In October 2015, we entered into a credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”) and other lenders, which provides us with a $50.0 million secured revolving line of credit and a $125.0 million secured term loan. As of March 31, 2016, we had $154.5 million outstanding under the credit agreement.

Our indebtedness could adversely affect our operations and liquidity, by, among other things:

making it more difficult for us to pay or refinance our debts as they become due during adverse economic and industry conditions, because we may not have sufficient cash flows to make our scheduled debt payments;


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causing us to use a larger portion of our cash flows to fund interest and principal payments, reducing the availability of cash to fund working capital, capital expenditures, and other business activities;

making it more difficult for us to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions; and

limiting our ability to borrow additional monies in the future to fund working capital, capital expenditures and other general corporate purposes.

The terms of our indebtedness include certain reporting and financial covenants, as well as other covenants, that, among other things, may restrict our ability to: dispose of certain assets, enter into merges, acquisitions or other business combination transactions, incur additional indebtedness, grant liens and make certain other restricted payments. If we fail to comply with any of these covenants or restrictions, such failure may result in an event of default, which if not cured or waived, could result in the lenders increasing the interest rate as of the date of default or accelerating the maturity of our indebtedness. If the maturity is accelerated, we may not have sufficient cash resources to satisfy our debt obligations and such acceleration would adversely affect our business and financial condition. In addition, the indebtedness under our credit agreement is secured by a security interest in substantially all of our tangible and intangible assets and therefore, if we are unable to repay such indebtedness, the lenders could foreclose on these assets, which would adversely affect our ability to operate our business.

The interest rate on our debt is variable and fluctuates based upon changes in various underlying interest rates and other factors. An adverse change in interest rates could have a material adverse effect on our results of operations and cash flows. We do not currently engage in interest rate hedging activities to limit the risk of interest rate fluctuations.

Our future capital needs are uncertain and we may need to raise additional funds in the future, and such funds may not be available on acceptable terms or at all.

Our capital requirements will depend upon many factors, including:

acceptance of, and demand for, our technologies, products and services;

the costs of developing new technologies or products;

the extent to which we invest in new technologies and research and development projects;

the number and timing of acquisitions and other strategic investments;

the costs associated with our expansion; and

the costs of litigation and enforcement activities to defend our intellectual property.

In the future, we may need to raise additional funds, and such funds may not be available on favorable terms, or at all, particularly given the credit crisis and downturn in the overall global economy. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences, and privileges senior to those of our existing stockholders. If we cannot raise funds on acceptable terms, or at all, we may not be able to develop or enhance our technologies, products, and services, execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. This may materially harm our business, results of operations, and financial condition.

Natural or other disasters could disrupt our business and negatively impact our operating results and financial condition.

Natural or other disasters such as earthquakes, hurricanes, tsunamis or other adverse weather and climate conditions, whether occurring in the US or abroad, and the consequences and effects thereof, including energy shortages and public health issues, could disrupt our operations, or the operations of our business partners and customers, or result in economic instability that may negatively impact our operating results and financial condition. Our corporate headquarters and many of our operations are located in California, a seismically active region, potentially exposing us to greater risk of natural disasters.





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Risks Related to Our Common Stock

The price of our common stock may fluctuate.

The market price of our common stock has been highly volatile and may fluctuate substantially due to many factors, including:

actual or anticipated fluctuations in our results of operations or non-GAAP operating income or loss;

market perception of our progress toward announced objectives;

announcements of technological innovations by us or our competitors or technology standards;

announcements of significant contracts or partnerships by us or our competitors;

changes in our pricing policies or the pricing policies of our competitors;

developments with respect to intellectual property rights;

the introduction of new technologies or products or product enhancements by us or our competitors;

the commencement of or our involvement in litigation;

resolution of significant litigation in a manner adverse to our business;

our sale or purchase of common stock or other securities in the future;

conditions and trends in technology and entertainment industries;

changes in market valuation or earnings of our competitors;

the trading volume of our common stock;

announcements of potential acquisitions or strategic investments;

the adoption rate of new products incorporating our or our competitors' technologies, including mobile devices;

changes in the estimation of the future size and growth rate of our markets; and

general economic conditions.

In addition, the stock market in general, and the Nasdaq Global Select Market and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management's attention and resources.

Shares of our common stock may be relatively illiquid.

As a result of our relatively small public float, our common stock may be less liquid than the common stock of companies with broader public ownership. Among other things, trading of a relatively small volume of our common shares may have a greater impact on the trading price for our shares than would be the case if our public float were larger.

If securities or industry analysts publish inaccurate or unfavorable research about our business or if our operating results do not meet or exceed their projections, our stock price could decline.


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The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us or our industry downgrade our stock or the stock of other companies in our industry, or publish inaccurate or unfavorable research about our business or industry, or if our results do not meet or exceed their projections, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control and could also limit the market price of our stock.

Our Restated Certificate of Incorporation and Restated Bylaws contain provisions that could delay or prevent a change of control of our company or changes in our Board of Directors that our stockholders might consider favorable. Some of these provisions:

authorize the issuance of preferred stock which can be created and issued by the Board of Directors without prior stockholder approval, with rights senior to those of the common stock;

provide for a classified Board of Directors, with each director serving a staggered three-year term;

prohibit stockholders from filling Board vacancies, calling special stockholder meetings, or taking action by written consent; and

require advance written notice of stockholder proposals and director nominations.

In addition, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our Restated Certificate of Incorporation, Restated Bylaws, and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our Board or initiate actions that are opposed by the then-current Board, and could delay or impede a merger, tender offer, or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our Board could cause the market price of our common stock to decline.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
(c)   Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On March 17, 2014, we announced a share repurchase program that was authorized by the Board of Directors in February 2014, for us to repurchase up to two million shares of our common stock in the open market or in privately negotiated transactions, depending upon market conditions and other factors. This share repurchase program does not have an expiration date. There was no stock repurchase activity during the quarter ended March 31, 2016, and 1,025,800 shares remained available for repurchase under this authorization.

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Mine Safety Disclosures
Not applicable.

Item 5.    Other Information
None.

Item 6.    Exhibits
Refer to the Exhibit Index immediately following the signature page, which is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
DTS, Inc.
 
 
Date:
May 9, 2016
by:
/s/ JON E. KIRCHNER
 
 
 
Jon E. Kirchner
 Chairman and Chief Executive Officer
(Duly Authorized Officer)
 
 
Date:
May 9, 2016
by:
/s/ MELVIN L. FLANIGAN
 
 
 
Melvin L. Flanigan
 Executive Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)

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EXHIBIT INDEX
 
 
 
Incorporated by Reference
Exhibit
Number
Filed with
this
Form 10-Q
Exhibit Title
Form
File No.
Date Filed
3.1
Composite Certificate of Incorporation
 
10-K
000-50335-13698275
3/18/2013
3.2
Amended and Restated Bylaws
 
8-K
000-50335-15628362
2/18/2015
10.1*
Form of 2016 Executive Incentive Compensation Plan
 
10-K
000-50355-161489460

3/7/2016
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended
X
 
 
 
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended
X
 
 
 
32.1‡
Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. section 1350
X
 
 
 
32.2‡
Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. section 1350
X
 
 
 
101.INS
XBRL Instance Document
X
 
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
X
 
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
X
 
 
 
101.DEF
XBRL Extension Definition
X
 
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
X
 
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
X
 
 
 
__________________________________

* Indicates management contract, arrangement or compensatory plan.

‡ This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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