10-Q

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 September 30, 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 (Do not check if a smaller reporting company) o 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 November 1, 2016 a total of 17,872,368 shares of the Registrant's Common Stock, $0.0001 par value, were outstanding.

DTS, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION	1
Item 1.	Condensed Consolidated Financial Statements (unaudited):	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Comprehensive Income (Loss)	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	23
PART II.	OTHER INFORMATION	24
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	41
Item 6.	Exhibits	41
SIGNATURES		42

INTRODUCTORY NOTE

On September 19, 2016, DTS, Inc. (the "Company") entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Tessera Technologies, Inc. (“Tessera”), Tempe Holdco Corporation, a wholly owned subsidiary of Tessera (“Holdco”), Tempe Merger Sub Corporation, a wholly owned subsidiary of Holdco and Arizona Merger Sub Corporation, a wholly owned subsidiary of Holdco (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, among other things, Merger Sub will merge with and into the Company (the “DTS Merger”), with the Company surviving the DTS Merger as a wholly owned subsidiary of Holdco. As a result of the DTS Merger, the Company’s stockholders will cease to own shares in the Company, and will be entitled to receive the merger consideration in exchange for their shares. Following the DTS Merger, the Company’s common stock will cease to be listed on the Nasdaq Global Select Market. On October 21, 2016, the Company filed a definitive proxy statement (the “Proxy Statement”), which was mailed to its stockholders on or about October 24, 2016, in connection with a special meeting of its stockholders (the “Special Meeting”) to be held on December 1, 2016, to seek adoption of the Merger Agreement, among other things. Additional information about the Merger Agreement and the DTS Merger can be found in the Proxy Statement and the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on September 20, 2016, each available on the SEC’s website at www.sec.gov.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report 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. Forward-looking statements are based on management’s beliefs, assumptions and expectations concerning the statements relating to regulatory approvals and the expected timing, completion and effects of the DTS Merger and other future events and the transaction’s potential effects on the Company, including, but not limited to, statements relating to anticipated financial and operating results, the Company’s plans, objectives, expectations and intentions, cost savings and other statements. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance or financial condition to differ materially from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. Forward-looking statements often contain words such as “believe,” “may,” “forecast,” “could,” “will,” “should,” “would,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” or similar words, or the negative of these words. Actual results may differ materially from the results anticipated in these forward looking statements due to various factors, including, without limitation:

• the effect of the announcement of the DTS Merger on the Company's business relationships, operating results and business generally;

• the ability to obtain the Company's stockholder approval;

• the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement or the payment of the termination fee provided by the Merger Agreement;

• the ability to satisfy conditions to the transaction on the proposed terms and timeframe;

• the possibility that the DTS Merger does not close when expected or at all;

• the outcome of pending or future litigation against the Company, Tessera or others in connection with the Merger Agreement;

• the ability to meet expectations regarding the timing and completion of the DTS Merger;

• the amount of the costs, fees, expenses and charges related to the DTS Merger;

• the Company's ability to evolve its technologies, products, and services, or develop new technologies, products, and services, that are acceptable to its customers or the evolving markets;

• the Company's ability to develop proprietary technologies in markets in which “open standards” are adopted;

• political, economic, currency and other risks associated with the Company's operations;

• the Company's ability to protect its intellectual property;

• risks associated with competition;

• the failure of Tessera to obtain the necessary debt financing to complete the DTS Merger;

• the risk that the DTS Merger disrupts the Company's current operations, including its relationship with its customers, or affects its ability to retain or recruit key employees;

• limitations placed on the Company's ability to operate its business by the Merger Agreement; and

• other risks and uncertainties.

These and other risks and uncertainties are difficult to predict, involve uncertainties that may materially affect actual results and may be beyond the Company’s control. New factors emerge from time to time, and it is not possible for management to predict all such factors or to assess the impact of each such factor on the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, the Company does not undertake any obligation to update any forward-looking statement to reflect actual results, changes in plans, assumptions,

estimates or projections, or other circumstances occurring after the date of this quarterly report, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Investors, potential investors and others are urged to carefully consider all such factors and are cautioned not to place undue reliance on these forward-looking statements.

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 September 30, 2016			As of December 31, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	26,686		$	52,208
Short-term investments	13,083			9,657
Accounts receivable, net of allowance for doubtful accounts of $245 and $541 at September 30, 2016 and December 31, 2015, respectively	26,911			12,454
Prepaid expenses and other current assets	7,832			5,855
Income taxes receivable	2,276			4,130
Total current assets	76,788			84,304
Property and equipment, net	28,076			29,022
Intangible assets, net	144,907			157,936
Goodwill	90,692			108,726
Deferred income taxes	41,866			24,018
Other long-term assets	9,348			3,934
Total assets	$	391,677		$	407,940
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	6,792		$	5,979
Accrued expenses	17,963			22,960
Deferred revenue	3,096			5,711
Income taxes payable	80			123
Current portion of long-term debt, net	26,486			21,486
Total current liabilities	54,417			56,259
Long-term debt, net	100,552			136,666
Other long-term liabilities	12,419			9,983
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock—$0.0001 par value, 5,000 shares authorized at September 30, 2016 and December 31, 2015; no shares issued and outstanding	—			—
Common stock—$0.0001 par value, 70,000 shares authorized at September 30, 2016 and December 31, 2015; 22,501 and 21,988 shares issued at September 30, 2016 and December 31, 2015, respectively; 17,834 and 17,321 shares outstanding at September 30, 2016 and December 31, 2015, respectively	3			3
Additional paid-in capital	272,479			258,660
Treasury stock, at cost—4,667 at September 30, 2016 and December 31, 2015	(111,331		)	(111,331		)
Accumulated other comprehensive income	778			778
Retained earnings	62,360			56,922
Total stockholders' equity	224,289			205,032
Total liabilities and stockholders' equity	$	391,677		$	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 September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015
Revenue	$	48,749		$	30,673		$	142,599		$	99,036
Cost of revenue	6,449			2,702			18,751			8,229
Gross profit	42,300			27,971			123,848			90,807
Operating expenses:
Selling, general and administrative	26,283			21,348			71,563			59,317
Research and development	13,489			9,320			38,788			28,559
Change in fair value of contingent consideration	—			(400		)	—			(400		)
Total operating expenses	39,772			30,268			110,351			87,476
Operating income (loss)	2,528			(2,297		)	13,497			3,331
Interest and other expense, net	(1,234		)	(173		)	(3,633		)	(792		)
Income (loss) before income taxes	1,294			(2,470		)	9,864			2,539
Provision for income taxes	724			332			4,072			2,000
Net income (loss)	$	570		$	(2,802	)	$	5,792		$	539
Net income (loss) per common share:
Basic	$	0.03		$	(0.16	)	$	0.33		$	0.03
Diluted	$	0.03		$	(0.16	)	$	0.32		$	0.03
Weighted average shares outstanding:
Basic	17,701			17,255			17,560			17,431
Diluted	18,637			17,255			18,126			18,167
Cash dividend declared per common share	$	0.02		$	—		$	0.02		$	—

See accompanying notes to condensed consolidated financial statements.

2

DTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Amounts in thousands)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016		2015
Net income (loss)	$	570		$	(2,802	)	$	5,792	$	539
Other comprehensive income (loss), net of tax:
Unrealized gains and losses on available-for-sale securities and other, net	(4		)	1			—		3
Total comprehensive income (loss)	$	566		$	(2,801	)	$	5,792	$	542

See accompanying notes to condensed consolidated financial statements.

3

DTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)

	For the Nine Months Ended September 30,
	2016			2015
Cash flows from operating activities:
Net income	$	5,792		$	539
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	20,103			10,838
Stock-based compensation charges	9,581			8,678
Deferred income taxes	(3,317		)	(5,310		)
Excess tax benefits from stock-based awards	(486		)	(914		)
Change in fair value of contingent consideration	—			(400		)
Amortization of debt issuance costs	460			—
Other	45			353
Changes in operating assets and liabilities, net of business combinations:
Accounts receivable	(13,015		)	(669		)
Prepaid expenses and other assets	(2,658		)	881
Accounts payable, accrued expenses and other liabilities	(4,277		)	(1,884		)
Deferred revenue	(2,615		)	(2,831		)
Income taxes receivable/payable	4,790			4,758
Net cash provided by operating activities	$	14,403		$	14,039
Cash flows from investing activities:
Purchases of available-for-sale investments	(26,718		)	(34,666		)
Maturities of available-for-sale investments	11,125			8,800
Sales of available-for-sale investments	12,125			2,502
Cash paid for business combinations, net	(2,404		)	—
Purchases of property and equipment	(2,530		)	(2,525		)
Purchases of intangible assets	(2,429		)	(1,853		)
Other investing activities	—			(300		)
Net cash used in investing activities	$	(10,831	)	$	(28,042	)
Cash flows from financing activities:
Repayments of long-term borrowings	(31,406		)	—
Payment of contingent consideration	(480		)	—
Holdback and other payments related to business combinations	(1,170		)	—
Proceeds from the issuance of common stock under stock-based compensation plans	6,138			7,962
Cash paid for shares withheld for taxes	(2,308		)	(2,864		)
Dividend payments	(354		)	—
Excess tax benefits from stock-based awards	486			914
Purchases of treasury stock	—			(19,147		)
Net cash used in financing activities	$	(29,094	)	$	(13,135	)
Net change in cash and cash equivalents	(25,522		)	(27,138		)
Cash and cash equivalents, beginning of period	52,208			99,435
Cash and cash equivalents, end of period	$	26,686		$	72,297
Significant non-cash transactions:
Holdbacks for business combinations	$	1,658		$	—

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 1—Basis 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 September 30, 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.

Pending Acquisition by Tessera Technologies, Inc.

On September 19, 2016, the Company entered into the Merger Agreement, which provides, upon the terms and subject to the conditions thereof, Merger Sub will merge with and into the Company, with the Company surviving the DTS Merger as a wholly owned subsidiary of Holdco. Following the completion of the DTS Merger, DTS common stock will cease to be listed on the Nasdaq Global Select Market.

At the effective time of the DTS Merger, each outstanding share of DTS common stock (other than shares that are held by Tessera or Holdco, or any of their respective subsidiaries or held by DTS as treasury stock, or that are owned by DTS, Merger Sub or any wholly owned subsidiary of DTS, and shares with respect to which appraisal rights pursuant to Section 262 of the Delaware General Corporation Law are properly exercised and not withdrawn) will be automatically converted into the right to receive $42.50 in cash, without interest and less any required tax withholding. The Special Meeting is scheduled to be held on December 1, 2016 to consider and vote upon, among other things, a proposal to adopt the Merger Agreement.

At the effective time of the DTS Merger, (i) each then outstanding, in-the-money, vested option to purchase shares of DTS common stock will be canceled, and the holder of such option will be entitled to receive cash as set forth in the Merger Agreement; (ii) each then outstanding, out-of-the-money, vested or unvested option and each then outstanding, in-the-money, unvested option to purchase shares of DTS common stock will be assumed by Holdco and converted into an option to purchase shares of Holdco common stock pursuant to the exchange ratio set forth in the Merger Agreement; (iii) each vested DTS restricted stock unit award will be canceled, and the holder of such restricted stock unit award will be entitled to receive cash as set forth in the Merger Agreement; (iv) each unvested DTS restricted stock unit award will be assumed by Holdco and converted into a Holdco restricted stock unit award pursuant to the exchange ratio set forth in the Merger Agreement; and (v) each then outstanding DTS performance-based restricted stock unit (“PSU”) award (treating for this purpose any performance-based vesting condition to which such PSU award is subject as of the effective time of the DTS Merger or was as of the date of the Merger Agreement as having been attained at the “target level”) will become fully vested and canceled, and the holder of such PSU award will be entitled to receive cash as set forth in the Merger Agreement.

The transaction is expected to close in December 2016. Consummation of the transaction remains subject to customary closing conditions, including, among other things, (i) adoption of the Merger Agreement by the Company’s stockholders; (ii) the absence of any injunctions or any other legal order prohibiting or restraining the DTS Merger; (iii) subject to certain exceptions, the accuracy of the Company’s and Tessera’s representations and warranties in the Merger Agreement; (iv) performance by the Company and Tessera of their respective obligations, covenants and agreements contained in the Merger Agreement; and (v) the absence of any material adverse effect on the Company.

5

DTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 1—Basis of Presentation (Continued)

The Merger Agreement contains customary representations and warranties made by each of the Company and Tessera, and also contains customary pre-closing covenants, including covenants, among others, (i) for each of the parties to use its reasonable best efforts to cause the DTS Merger to be consummated; (ii) for the Company to operate its businesses in the ordinary course consistent with past practice and to refrain from taking certain actions without Tessera’s consent; (iii) for the Company not to declare or pay any dividend (whether in cash, stock, property or otherwise) in respect of any shares of DTS common stock and (iv) for the Company not to solicit, initiate or knowingly take any action to facilitate or encourage any alternative acquisition proposal or proposal or inquiry that constitutes, or would reasonably be expected to lead to, an alternative acquisition proposal.

The Merger Agreement contains certain termination rights for each of the Company and Tessera, including in the event that (i) the DTS Merger is not consummated on or before February 28, 2017; (ii) the approval of the stockholders of the Company is not obtained at the Special Meeting; or (iii) the Company terminates the Merger Agreement to enter into a binding agreement providing for a superior proposal. The Merger Agreement further provides that, upon termination of the Merger Agreement under specified circumstances, including a termination of the Merger Agreement by the Company to enter into a binding agreement providing for a superior proposal, the Company must pay to Tessera a termination fee equal to $25,500 in cash.

The description of the Merger Agreement herein does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is attached as Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on September 20, 2016, and is hereby incorporated by reference. Additionally, the Proxy Statement filed by the Company on October 21, 2016 describes the Merger Agreement and the DTS Merger in more detail. Investors and stockholders of DTS are urged to read the Proxy Statement and any other relevant documents that have been or will be filed with the SEC carefully and in their entirety because they contain or will contain important information about the DTS Merger.

For both the three and nine months endedSeptember 30, 2016, the Company's condensed consolidated statements of operations included $3,116 of operating expenses associated with the DTS Merger.

Acquisitions

In the third quarter of 2016, the Company completed two immaterial acquisitions related to the Company's HD Radio technology. Both purchases were accounted for using the acquisition method of accounting. The Company considers the allocations of the purchase price for both acquisitions to be immaterial to the condensed consolidated financial statements. The Company's financial results include these acquisitions from their dates of acquisition.

Note 2—Recent 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 superseded the then 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 (principal versus agent considerations), ASU 2016-10 (identifying performance obligations and licensing), and ASU 2016-12 (narrow-scope improvements and practical expedients). 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

6

DTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 2—Recent Accounting Pronouncements (Continued)

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. For information on measurement period adjustments relating to the acquisition of iBiquity Digital Corporation, 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 statement 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.

In October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory." This ASU requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements have not been issued. The Company is evaluating the impact of adoption of this ASU on its consolidated financial statements.

Note 3—Cash, Cash Equivalents and Investments

Cash, cash equivalents and investments, classified as available-for-sale, consisted of:

	As of September 30, 2016		As of December 31, 2015
Cash and cash equivalents:
Cash	$	13,765	$	16,257
Money market accounts	10,923		35,951
Commercial paper	1,998		—
Total cash and cash equivalents	$	26,686	$	52,208
Short-term investments:
Corporate bonds	$	12,091	$	9,657
Commercial paper	992		—
Total short-term investments	$	13,083	$	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 September 30, 2016 were all due within one year.

7

DTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 4—Fair Value Measurements

The Company's investments are required to be measured and recorded at fair value on a recurring basis. The Company obtains 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 classifies its available-for-sale securities within Level 2 of the fair value hierarchy.

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 September 30, 2016
Corporate bonds	$	12,091		$	—	$	12,091	$	—
Commercial paper	$	992		$	—	$	992	$	—
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.

8

DTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 5—Business 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. On September 30, 2016, the Company finalized the purchase price allocation:

	Weighted Average Estimated Useful Life (years)		Preliminary Fair Value as of December 31, 2015			Measurement Period Adjustments (1)			Final Fair Value
Cash and cash equivalents			$	20,837					$	20,837
Short-term investments			4,000						4,000
Accounts receivable			13,468			644		(2)	14,112
Prepaid expenses and other current assets			1,058			131		(3)	1,189
Property and equipment			1,656						1,656
Goodwill			58,370			(20,299	)	(4)	38,071
Identifiable intangible assets:
Customer relationships	10	70,225
Developed technology	10	33,590
Tradenames	10	9,590
IPR&D		7,583
Total identifiable intangible assets			120,988						120,988
Other long-term assets			190			(60	)	(3)	130
Deferred tax assets (liabilities), net			(13,058		)	21,258		(5)	8,200
Accounts payable			(535		)				(535		)
Accrued expenses			(21,402		)	(1,882	)	(6)	(23,284		)
Deferred revenue			(1,019		)				(1,019		)
Other long-term liabilities			(6,783		)	208		(5)	(6,575		)
Total purchase price			$	177,770		—			$	177,770

_______________________________________

(1) All adjustments were recorded prospectively within the Company's condensed consolidated balance sheet.

(2) Primarily consists of the recognition of underreported royalty recoveries owed to iBiquity prior to the close of the acquisition, which were collected during the measurement period.

(3) Consists of miscellaneous working capital and other immaterial adjustments.

(4) Represents the net impact to goodwill of all measurement period adjustments recorded.

(5) Primarily consists of the finalization of the measurement of acquired net operating loss carryforwards (NOLs) that can be realized, subject to the limitations under Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”). During the measurement period, the Company was in the process of determining the amount of additional NOLs that would be available if certain unrealized gains attributed to periods before the ownership change date are recognized. In connection with the intercompany transfer of intellectual property rights discussed in Note 10, “Income Taxes,” the Company finalized the measurement of the amount of additional NOLs that are available if certain unrealized gains attributable to periods before the ownership change date are recognized. The decrease to other long-term liabilities is primarily due to the finalization of the measurement of certain uncertain tax positions.

(6) Primarily consists of adjustments to the estimated fair value of certain acquired legal contingencies and certain rebate accruals, determined based on information obtained during the measurement period.

9

DTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 6—Goodwill 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	(20,299		)
Increase due to current period business combinations	2,265
Balance at September 30, 2016	$	90,692

The Company's other intangible assets were:

	Weighted Average Life (Years)	As of September 30, 2016							As of December 31, 2015
		Gross Amount		Accumulated Amortization			Net Carrying Amount		Gross Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	9	$	116,838	$	(31,513	)	$	85,325	$	116,026	$	(22,039	)	$	93,987
Acquired technology	9	56,151		(18,375		)	37,776		52,073		(14,071		)	38,002
Tradenames	9	12,912		(3,683		)	9,229		12,851		(2,452		)	10,399
Contractual rights	5	8,363		(3,833		)	4,530		7,713		(2,527		)	5,186
Patents	5	5,155		(1,821		)	3,334		3,805		(1,538		)	2,267
Trademarks	10	919		(468		)	451		894		(417		)	477
Non-compete	2	553		(496		)	57		492		(457		)	35
Total amortizable intangible assets		$	200,891	$	(60,189	)	$	140,702	$	193,854	$	(43,501	)	$	150,353
IPR&D		4,205		—			4,205		7,583		—			7,583
Total other intangible assets		$	205,096	$	(60,189	)	$	144,907	$	201,437	$	(43,501	)	$	157,936

During the nine months endedSeptember 30, 2016, the Company reclassified $3,378 of IPR&D assets not previously subject to amortization to amortizable intangible assets.

Amortization of intangible assets included in the Company's condensed consolidated statements of operations was:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2016		2015		2016		2015
Cost of revenue	$	5,111	$	2,392	$	15,085	$	7,146
Operating expenses	543		266		1,620		792
Total amortization of intangible assets	$	5,654	$	2,658	$	16,705	$	7,938

10

DTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 6—Goodwill and Other Intangible Assets (Continued)

The Company expects the future amortization of amortizable intangible assets held at September 30, 2016 to be as follows:

Years Ending December 31,	Estimated Amortization Expense
2016 (remaining 3 months)	$	5,775
2017	22,640
2018	20,559
2019	19,142
2020	15,676
2021 and thereafter	56,910
Total	$	140,702

Note 7—Accrued Expenses

Accrued expenses consisted of:

	As of September 30, 2016		As of December 31, 2015
Accrued payroll and related benefits	$	13,670	$	17,998
Contingent consideration	—		480
Other	4,293		4,482
Total accrued expenses	$	17,963	$	22,960

Note 8—Long-term Debt

On October 1, 2015, the Company entered into a credit agreement with Wells Fargo Bank, National Association and other lenders (the "Credit Agreement"), which provided the Company with a term loan and a revolver. On June 24, 2016, the Company entered into the First Amendment to Credit Agreement (the "Amendment") in connection with the intercompany transfer of intellectual property rights discussed in Note 10, "Income Taxes." The Amendment requires the Company to make prepayments of $20,000 of the term loan in 2016. During the three months ended June 30 and September 30, 2016, the Company made prepayments of $10,000 and $5,000, respectively, in addition to the scheduled quarterly principal payments of $5,469 in each quarter. Under the Amendment, the final prepayment of $5,000 is due by December 30, 2016. These prepayments will be applied to the scheduled principal installments under the Credit Agreement in inverse order of maturity, beginning with the final principal balance due on October 1, 2020. The original scheduled quarterly principal installment payments under the Credit Agreement are unchanged by the Amendment.

11

DTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 8—Long-term Debt (Continued)

The Company's outstanding balances under the Credit Agreement, presented net of certain debt issuance costs on the condensed consolidated balance sheets, were:

	As of September 30, 2016			As of December 31, 2015
Debt outstanding under term loan, current portion	$	26,875		$	21,875
Debt issuance costs, current portion	(389		)	(389		)
Current portion of long-term debt, net	$	26,486		$	21,486
Debt outstanding under term loan, long-term	$	66,719		$	103,125
Debt outstanding under revolver, long-term	35,000			35,000
Debt issuance costs, long-term	(1,167		)	(1,459		)
Long-term debt, net	$	100,552		$	136,666

Future long-term debt principal payments are as follows:

Years Ending December 31,
2016 (remaining 3 months)	$	10,469
2017	21,876
2018	21,876
2019	21,876
2020	52,497
Total	$	128,594

Interest expense, including amortization of debt issuance costs, was:

For the Three Months Ended September 30,				For the Nine Months Ended September 30,
2016		2015		2016		2015
$	983	$	75	$	3,276	$	223

Note 9—Commitments 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 $7,200 over an estimated period of approximately four years if certain milestones are achieved.

12

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 nine months ended September 30, 2016, the Company recorded additional severance and related costs of $200 within operating expenses in the condensed consolidated statement of operations. During the nine months endedSeptember 30, 2016, the Company paid $4,682 of severance and related costs, and as of September 30, 2016, $1,035 remained accrued under certain separation agreements, which is expected to be paid within the next nine months.

Litigation

Robert Garfield v. DTS, Inc.

On October 26, 2016, an alleged stockholder of the Company filed a putative class action lawsuit, captioned Robert Garfield v. DTS, Inc., et al., Case Number TBD, in the Superior Court of California, Ventura County. The defendants are the Company, the members of its Board of Directors, the Company's financial advisor in connection with the DTS Merger, and Tessera. The complaint alleges that the Company's directors breached their fiduciary duties by agreeing to inadequate merger consideration and engaging in a sales process that is in their best interests, but not the interests of the Company's other stockholders, and that the Company and its directors committed a breach of fiduciary duty by causing the issuance of a Proxy Statement that fails to disclose all material facts concerning the DTS Merger. The complaint alleges that the Company's financial advisor and Tessera abetted the purported breaches. The complaint seeks an order enjoining the merger or, if it is consummated, an order rescinding it. The complaint also seeks a reduction in the termination fee payable by the Company to Tessera, plus damages and attorneys’ fees. The Company believes the complaint is meritless and intends to defend the action.

Paul Parshall v. DTS, Inc.

On November 2, 2016, an alleged stockholder of the Company filed a putative class action lawsuit, captioned Paul Parshall v. DTS, Inc., et al., Case Number 12870-CB, in the Court of Chancery of the State of Delaware. The defendants are the Company, the members of its Board of Directors, Tessera, Tempe Holdco Corporation, Tempe Merger Sub Corporation, and Arizona Merger Sub Corporation. The complaint alleges that the Company's directors breached their fiduciary duties by causing the issuance of a Proxy Statement that fails to disclose all material facts concerning the DTS Merger. The complaint alleges that the Company, Tessera, Tempe Holdco Corporation, Tempe Merger Sub Corporation, and Arizona Merger Sub Corporation abetted the individuals’ purported breaches. The complaint seeks an order enjoining the merger or, if it is consummated, an order rescinding it, plus rescissory damages and attorneys’ fees. The Company believes the complaint is meritless and intends to defend the action.

Note 10—Income 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 nine months ended September 30, 2016 and 2015, the Company's effective tax rate was approximately 41% and 79%, respectively. The effective tax rate for 2016 differed from the US statutory rate of 35% primarily due to the impact of a foreign loss in a jurisdiction that will not result in a tax benefit, non-creditable foreign withholding taxes and non-deductible transaction costs, partially offset by certain foreign earnings subject to lower tax rates and research and development tax credits. The effective tax rate for 2015 differed from the US statutory rate primarily due to the impact of a foreign loss in a jurisdiction that will not result in a tax benefit, non-creditable foreign withholding taxes and non-deductible transaction costs, partially offset by certain foreign earnings subject to lower tax rates, the federal tax deduction for domestic production activities and state research and development tax credits.

13

DTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 10—Income Taxes (Continued)

The Company has a strategy of commercializing certain non-US intellectual property rights from outside the US. In line with this strategy, in June 2016, the Company completed the implementation of an intercompany transfer of certain intellectual property licensing rights acquired from iBiquity to certain of the Company's foreign subsidiaries. The transaction was implemented to align with the Company's current operating processes, to optimize the global legal, operational and tax structure, and to allow for the efficient recovery of net operating loss carryforwards acquired from iBiquity. The transaction will not have a material impact on the Company’s effective tax rate in 2016 but should benefit future periods as a result of the non-US income being subject to lower tax rates and the ability to amortize the intellectual property for tax purposes in the foreign jurisdictions.

As of September 30, 2016 and December 31, 2015, the Company's uncertain tax positions were $18,743 and $19,454, respectively, of which $9,604 and $9,112, respectively, were recorded in other long-term liabilities. The remaining amounts were recorded as a reduction to non-current deferred tax assets. The decrease was primarily due to the reversal of an uncertain tax position relating to the deductibility of certain expenses. The Company believes that within the next twelve months it is reasonably possible that unrecognized tax benefits will decrease by approximately $300 due to the expiration of certain statutes of limitations. 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. The Company is no longer subject to income tax examinations by the Internal Revenue Service (IRS) for years prior to 2013 and by the California Franchise Tax Board (FTB) for years prior to 2011 except for certain prior period carryforwards. 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 September 30, 2016 and 2015, withholding taxes were $711 and $632, respectively. For the nine months ended September 30, 2016 and 2015, withholding taxes were $2,522 and $1,614, respectively. The increase in withholding taxes for the nine month period is primarily due to increases in revenue resulting from the iBiquity acquisition in October 2015.

14

DTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Amounts in thousands, except per share data)

Note 11—Net Income (Loss) Per Common Share

Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated by dividing net income (loss) 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. Due to the net loss for the three months ended September 30, 2015, all potential common shares were excluded from the diluted shares outstanding for this period.

The computation of basic and diluted net income (loss) per common share was:

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2016		2015			2016		2015
Numerator:
Net income (loss)	$	570	$	(2,802	)	$	5,792	$	539
Denominator:
Weighted average shares outstanding	17,701		17,255			17,560		17,431
Effect of dilutive securities:
Stock options	638		—			363		568
Restricted stock	278		—			192		159
ESPP	20		—			11		9
Weighted average diluted shares outstanding	18,637		17,255			18,126		18,167
Basic net income (loss) per common share	$	0.03	$	(0.16	)	$	0.33	$	0.03
Diluted net income (loss) per common share	$	0.03	$	(0.16	)	$	0.32	$	0.03
Anti-dilutive shares excluded from the determination of diluted net income (loss) per share	305		3,779			1,475		535

Note 12— Dividend

On August 8, 2016, the Company announced that the Board of Directors approved a cash dividend of $0.02 per common share, which was paid on August 31, 2016 to stockholders of record on August 22, 2016. Dividend payments for the three and nine months ended September 30, 2016 were $354, and were recorded as a reduction to retained earnings. Pursuant to the Merger Agreement with Tessera, the Company is not permitted to declare or pay any dividend without Tessera's consent.

15

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 ability to complete the DTS Merger and the timing of such completion, our ability to satisfy the closing conditions specified in the Merger Agreement, including receipt of stockholder approval, the risk that the proposed transactions contemplated by the Merger Agreement disrupt current plans and operations, increase operating costs or create potential difficulties in customer and employee retention as a result of the announcement and consummation of such transactions, 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 technologies, 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.

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 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) expenses 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.

16

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, patents 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.

Pending Acquisition by Tessera Technologies, Inc.

On September 19, 2016, we entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Tessera Technologies, Inc. ("Tessera") agreed to acquire DTS for $42.50 per share in an all cash transaction (the "DTS Merger"). The DTS Merger is expected to close in December 2016 subject to certain conditions, including stockholder approval. For additional information, refer to Note 1, "Basis of Presentation."

Acquisitions

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 digital data services such as album cover art, weather and real-time traffic updates. Our HD Radio partners include leading automakers, consumer electronics and broadcast equipment manufacturers, radio broadcasters, semiconductor and electronic component manufacturers and retailers. We believe that this acquisition has extended our strategy of delivering a personalized, immersive and compelling audio experience across the entertainment value chain and complements 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."

In the third quarter of 2016, we completed two immaterial acquisitions related to our HD Radio technology.

Our financial results include all acquisitions from their respective dates of acquisition.

Executive Summary

Highlights

• HD Radio technology has expanded our automotive footprint, with automotive royalties comprising over 35% of total revenues for the third quarter of 2016, positioning us for continued growth in 2016 and beyond.

• Excluding royalty recoveries, revenue in the third quarter of 2016 increased by 61% compared to the prior year quarter, driven largely by royalties from HD Radio technology acquired in October 2015.

• Revenues from the mobile market increased 43% in the third quarter of 2016 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-

17

connected markets. Additionally, with our acquisition of iBiquity, we have extended our presence in the car, which is 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 LeEco. 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 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 September 30,	$	48,749	$	30,673	$	18,076	59	%
Nine months ended September 30,	$	142,599	$	99,036	$	43,563	44	%

Revenue for the three months ended September 30, 2016 and 2015 included $1.2 million and $1.1 million, respectively, of royalties recovered through intellectual property compliance and enforcement activities, which we characterize as "royalty recoveries." Revenue for the nine months ended September 30, 2016 and 2015 included $4.7 million and $3.7 million, respectively, of 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.

In the first quarter of 2016, we reorganized aspects of our business to better align with the three core entertainment environments that we believe will drive our long-term revenue growth – home, mobile and automotive. We believe that going forward, it is most informative for our revenue to be classified into these three categories. Our "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

18

"mobile" category primarily includes revenues from smartphones, tablets and PCs. Historically, revenues from this market were included in our "network-connected" category. Our "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 current presentation. With the addition of HD Radio technology, our revenue mix has shifted compared to prior year periods, with the automotive market representing more and the home market representing less as a proportion of total revenues, creating a more balanced portfolio.

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 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%, primarily due to royalties from HD Radio technology, and represented over 35% and 10% of total revenues in the third quarter of 2016 and 2015, respectively. Revenues from the mobile market also increased, up 43%, driven primarily by increased royalties from smartphones. Revenues from the mobile market represented roughly 15% of total revenues in both periods. Revenues from the home market also increased, up 12%, primarily due to increased royalties from TVs. Revenues from the home market represented roughly 50% and 70% of total revenues in the third quarter of 2016 and 2015, respectively.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 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%, primarily due to royalties from HD Radio technology, and represented over 35% and 10% of total revenues in 2016 and 2015, respectively. Revenues from the mobile market also increased, up 35%, driven primarily by increased royalties from smartphones and tablets. Revenues from the mobile market represented under 15% of total revenues in both 2016 and 2015. These increases were partially offset by decreases in royalties from the home market, which was down 3%, primarily due to TVs and a market decline in Blu-ray standalone players. Revenues from the home market represented over 45% and 70% of total revenues in 2016 and 2015, respectively.

Gross Profit

	2016		%	2015		%	Percentage point change in gross profit margin
	($ in thousands)
Three months ended September 30,	$	42,300	87%	$	27,971	91%	(4)%
Nine months ended September 30,	$	123,848	87%	$	90,807	92%	(5)%

The decrease in our gross profit margin for both periods was driven primarily by cost of sales resulting from our acquisition of iBiquity in October 2015, including an increase in amortization expense due to 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 September 30,	$	26,283		$	21,348		$	4,935	23	%
% of Revenue	54		%	70		%
Nine months ended September 30,	$	71,563		$	59,317		$	12,246	21	%
% of Revenue	50		%	60		%

The dollar increase in SG&A for both periods was primarily due to higher employee related costs and professional service costs. The higher employee related costs largely resulted from higher accruals for estimated employee incentive compensation and higher compensation expense due to increased headcount resulting from the iBiquity acquisition in October 2015. The higher professional service costs primarily related to due diligence costs associated with the DTS Merger and other legal and tax consulting fees.

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Research and Development (R&D)

							Change
	2016			2015			$		%
	($ in thousands)
Three months ended September 30,	$	13,489		$	9,320		$	4,169	45	%
% of Revenue	28		%	30		%
Nine months ended September 30,	$	38,788		$	28,559		$	10,229	36	%
% of Revenue	27		%	29		%

The dollar increase in R&D for both periods was primarily driven by an increase in employee related costs, largely due to increased headcount resulting from the iBiquity acquisition in October 2015, and higher accruals for estimated employee incentive compensation.

Interest and Other Expense, Net

							Change
	2016			2015			$			%
	($ in thousands)
Three months ended September 30,	$	(1,234	)	$	(173	)	$	(1,061	)	(613	)%
Nine months ended September 30,	$	(3,633	)	$	(792	)	$	(2,841	)	(359	)%

Interest and other expense, net, for both periods increased primarily due to higher interest expense on debt. As of September 30, 2016 and 2015, our outstanding debt balance was $128.6 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)
Nine months ended September 30,	$	4,072		$	2,000
Effective tax rate	41		%	79		%

Our quarterly effective tax rates are based in part upon projections of our annual pre-tax results. The effective tax rate for 2016 differed from the US statutory rate of 35% primarily due to the impact of a foreign loss in a jurisdiction that will not result in a tax benefit, non-creditable foreign withholding taxes and non-deductible transaction costs, partially offset by certain foreign earnings subject to lower tax rates and research and development tax credits. The effective tax rate for 2015 differed from the US statutory rate primarily due to the impact of a foreign loss in a jurisdiction that will not result in a tax benefit, non-creditable foreign withholding taxes and non-deductible transaction costs, partially offset by certain foreign earnings subject to lower tax rates, the federal tax deduction for domestic production activities and state research and development tax credits.

Liquidity and Capital Resources

As of September 30, 2016, we had cash, cash equivalents and short-term investments of $39.8 million, compared to $61.9 million at December 31, 2015. As of September 30, 2016, $13.7 million of cash and cash equivalents 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 $14.4 million and $14.0 million for the nine months ended September 30, 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 cash receipts for certain receivables, including large payments relating to certain

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minimum guarantee arrangements, and the timing of payments related to certain liabilities, including payments of severance and related costs.

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 $10.8 million for the nine months ended September 30, 2016 and was comprised of purchases of investments, purchases of property and equipment and intangible assets, and cash paid for business combinations, partially offset by maturities and sales of investments. Net cash used in investing activities totaled $28.0 million for the nine months ended September 30, 2015 and was primarily driven by purchases of investments, partially offset by maturities and sales of investments.

Net cash used in financing activities was $29.1 million for the nine months ended September 30, 2016, which primarily resulted from repayments and prepayments of long-term borrowings and cash paid for shares withheld for taxes upon settlement of stock-based awards, partially offset by proceeds from the issuance of common stock under stock-based compensation plans. Net cash used in financing activities was $13.1 million for the nine months ended September 30, 2015, which primarily resulted from purchases of treasury stock, partially offset by proceeds from the issuance of common stock under stock-based compensation plans.

Pending Acquisition by Tessera Technologies, Inc.

In connection with the DTS Merger, we have agreed to various customary covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the completion of the DTS Merger. In addition, without the consent of Tessera, we may not, among other things, declare any dividend, repurchase any of our common stock, incur capital expenditures above specified thresholds or incur additional indebtedness. We do not believe these restrictions will prevent us from meeting our debt repayment obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements for the next twelve months.

Upon termination of the Merger Agreement under specified circumstances, we may be required to pay Tessera a termination fee of $25.5 million.

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 September 30, 2016, $93.6 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, with the remaining balance due and payable on October 1, 2020. In June 2016 and September 2016, we made prepayments of $10.0 million and $5.0 million, respectively, on the Term Loan in addition to the scheduled quarterly installments of $5.5 million in each quarter, pursuant to the First Amendment to Credit Agreement, entered into on June 24, 2016. Additionally, we are required to prepay an additional prepayment of $5.0 million by December 30, 2016. Refer to Note 8, "Long-term Debt," for additional information.

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, by entering into a new credit facility, or through completion of the DTS Merger. As of and during the nine months ended September 30, 2016, we were in compliance with all loan covenants.

Common Stock Repurchases and Dividends

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 September 30, 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.

On August 8, 2016, we announced that our Board of Directors approved a cash dividend of $0.02 per common share, which was paid on August 31, 2016 to stockholders of record on August 22, 2016. During both the three and nine months ended September 30, 2016, dividend payments were $0.4 million.

Pursuant to the Merger Agreement, we are not permitted to pay dividends or repurchase any shares of our common stock without Tessera's consent.

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Contractual Obligations

There have been no material changes to our contractual obligations since December 31, 2015. As of September 30, 2016, our total amount of unrecognized tax benefits was $18.7 million. We believe that within the next twelve months it is reasonably possible that unrecognized tax benefits will decrease by approximately $0.3 million due to the expiration of certain statutes of limitations.

Under certain contractual rights arrangements, we may be obligated to pay up to $7.2 million over an estimated period of approximately four years if certain milestones are achieved.

In connection with the termination of the Merger Agreement under specified circumstances, we may be required to pay Tessera a termination fee of $25.5 million.

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 September 30, 2016.

Interest Rate Risk

Our interest rate risk relates primarily to interest expense on our debt, which has a variable interest rate. As of September 30, 2016, a one percentage point change in interest rates on our debt throughout a one-year period would have an annual effect of approximately $1.3 million on our income before income taxes. Our interest income is also 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. Due to the nature and maturity of our investments, we have concluded that there is no material market risk exposure to our principal at September 30, 2016. As of September 30, 2016, a one percentage point change in interest rates on our cash and investments through a one-year period would have an annual effect of approximately $0.4 million on our income before taxes.

Exchange Rate Risk

During the nine months ended September 30, 2016, we derived approximately 80% 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 nine months ended

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September 30, 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 $20.5 million for the nine months ended September 30, 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.

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 nine months ended September 30, 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.

As permitted by SEC staff interpretive guidance for newly acquired businesses, management has excluded iBiquity from its assessment of internal control over financial reporting as of September 30, 2016, because the acquisition was consummated on October 1, 2015. For additional information on this acquisition, refer to Note 6, "Business Combinations," to 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. We are currently in the process of finalizing the integration of internal controls over financial reporting relating to iBiquity into our existing control environment.

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

Other than as described above, there have been no other changes 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 September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

In the ordinary course of its business, the Company actively pursues legal remedies to enforce its intellectual property rights and to stop unauthorized use of its technologies and trademarks.

On October 26, 2016, an alleged stockholder of the Company filed a putative class action lawsuit, captioned Robert Garfield v. DTS, Inc., et al., Case Number TBD, in the Superior Court of California, Ventura County. The defendants are the Company, the members of its Board of Directors, the Company's financial advisor in connection with the DTS Merger, and Tessera. The complaint alleges that the Company's directors breached their fiduciary duties by agreeing to inadequate merger consideration and engaging in a sales process that is in their best interests, but not the interests of the Company's other stockholders, and that the Company and its directors committed a breach of fiduciary duty by causing the issuance of a Proxy Statement that fails to disclose all material facts concerning the DTS Merger. The complaint alleges that the Company's financial advisor and Tessera abetted the purported breaches. The complaint seeks an order enjoining the merger or, if it is consummated, an order rescinding it. The complaint also seeks a reduction in the termination fee payable by the Company to Tessera, plus damages and attorneys’ fees. The Company believes the complaint is meritless and intends to defend the action.

On November 2, 2016, an alleged stockholder of the Company filed a putative class action lawsuit, captioned Paul Parshall v. DTS, Inc., et al., Case Number 12870-CB, in the Court of Chancery of the State of Delaware. The defendants are the Company, the members of its Board of Directors, Tessera, Tempe Holdco Corporation, Tempe Merger Sub Corporation, and Arizona Merger Sub Corporation. The complaint alleges that the Company's directors breached their fiduciary duties by causing the issuance of a Proxy Statement that fails to disclose all material facts concerning the DTS Merger. The complaint alleges that the Company, Tessera, Tempe Holdco Corporation, Tempe Merger Sub Corporation, and Arizona Merger Sub Corporation abetted the individuals’ purported breaches. The complaint seeks an order enjoining the merger or, if it is consummated, an order rescinding it, plus rescissory damages and attorneys’ fees. The Company believes the complaint is meritless and intends to defend the action.

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. We have marked with an asterisk (*) those risks described below that reflect substantive 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 the Pending Acquisition by Tessera

* The failure to complete the proposed DTS Merger could adversely affect our business and our stock price.

Completion of the DTS Merger is subject to several conditions beyond our control that may prevent, delay or otherwise adversely affect its completion in a material way, including the adoption by our stockholders of the Merger Agreement. If we are unable to consummate the DTS Merger, the price of our common stock may drop. In addition, under certain circumstances specified in the Merger Agreement, we may be required to pay a termination fee of $25.5 million in the event the DTS Merger is not consummated. Further, a failure to complete the DTS Merger may result in negative publicity for the Company. Any disruption to our business resulting from the announcement and pendency of the DTS Merger and from intensifying competition from our competitors, including any adverse changes in our relationships with our customers and vendors, could continue or accelerate in the event of a failure to complete the DTS Merger. There can be no assurance that our business, these relationships or our financial condition will not be adversely affected, as compared to the condition prior to the announcement of the DTS Merger, if the DTS Merger is not consummated.

* The announcement and pendency of our agreement to be acquired by Tessera could have an adverse effect on our business.

Uncertainty about the effect of the DTS Merger on our employees and customers may have an adverse effect on our business and operations that may be material to our company. Our employees may experience uncertainty about their roles following the DTS Merger. There can be no assurance we will be able to attract and retain key talent, including senior leaders,

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to the same extent that we have previously been able to attract and retain employees. Any loss or distraction of such employees could have a material adverse effect on our business and operations. In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the DTS Merger, which could materially adversely affect our business and operations.

Our customers may experience uncertainty associated with the DTS Merger, including with respect to current or future business relationships with us, which could result in an adverse effect on our business, operations and financial position in a way that may be material to our company.

Pursuant to the terms of the Merger Agreement, we are subject to certain restrictions on the conduct of our business, including the ability in certain cases to enter into contracts, acquire or dispose of assets, incur indebtedness or incur capital expenditures, until the DTS Merger is completed or the Merger Agreement is terminated. These restrictions may prevent us from taking actions with respect to our business that we may consider advantageous and result in our inability to respond effectively to competitive pressures and industry developments, and may otherwise harm our business and operations.

* The Merger Agreement contains provisions that restrict our ability to pursue alternatives to the DTS Merger and, in specified circumstances, could require us to pay to Tessera a termination fee.

Under the Merger Agreement, we are restricted, subject to certain exceptions, from (i) soliciting, initiating or knowingly taking any action to facilitate or encourage any acquisition proposal or proposal or inquiry that constitutes, or would reasonably be expected to lead to, an acquisition proposal and (ii) withdrawing or changing our board of directors’ recommendation in favor of the DTS Merger or approving or recommending any competing acquisition proposal. We may terminate the Merger Agreement and enter into an agreement providing for a superior proposal only if specified conditions have been satisfied. A termination in this instance, among others, would result in us being required to pay Tessera a termination fee of $25.5 million. These provisions could discourage a third party that may have an interest in acquiring us from considering or proposing a competing acquisition proposal with us, even if such third party were prepared to pay consideration with a higher value than the value of the merger consideration.

* Lawsuits have been filed against the Company, the members of our Board of Directors, our financial advisor and Tessera challenging Tessera’s acquisition of the Company, and an adverse ruling may prevent the DTS Merger from being completed in a timely manner if at all.

Two class action lawsuits have been filed against us and Tessera, challenging Tessera’s acquisition of the Company. The lawsuits seek, among other things, to enjoin consummation of the DTS Merger. One of the conditions to the consummation of the DTS Merger is the absence of any injunctions or any other legal order prohibiting or restraining the DTS Merger. As such, if either plaintiff is successful in their efforts, then Tessera’s acquisition of the Company may not be consummated at all or within the expected timeframe. For additional information regarding this litigation, refer to Note 9, “Commitments and Contingencies,” of our condensed consolidated financial statements included in this report.

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

25

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 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'

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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;

• 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.

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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.

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.

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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.

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:

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• 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;

• 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

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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.

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,

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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;

• 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

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• 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:

• 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

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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 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.

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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.

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

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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.

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 nine months ended September 30, 2016, approximately 80% 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

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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 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.

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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 and other lenders, which provides us with a $50.0 million secured revolving line of credit and a $125.0 million secured term loan. In 2016, we have made prepayments of $15.0 million of the term loan in addition to the scheduled quarterly installments of $5.5 million, pursuant to the First Amendment to Credit Agreement, entered into on June 24, 2016. Additionally, we are required to prepay one additional prepayment of $5.0 million by December 30, 2016. As of September 30, 2016, we had $128.6 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;

• 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

38

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.

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

39

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.

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 September 30, 2016, and 1,025,800 shares remained available for repurchase under this authorization. Pursuant to the Merger Agreement, we are not permitted to repurchase any shares of our common stock without Tessera's consent.

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Mine Safety Disclosures

40

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.

41

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:	November 7, 2016	by:	/s/ JON E. KIRCHNER
			Jon E. Kirchner Chairman and Chief Executive Officer (Duly Authorized Officer)
Date:	November 7, 2016	by:	/s/ MELVIN L. FLANIGAN
			Melvin L. Flanigan Executive Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

42

EXHIBIT INDEX

			Incorporated by Reference
Exhibit Number		Filed with this Form 10-Q
	Exhibit Title		Form	File No.	Date Filed
2.1	Agreement and Plan of Merger, dated September 19, 2016, by and among DTS, Inc., Tessera Technologies, Inc., Tempe Holdco Corporation, Tempe Merger Sub Corporation and Arizona Merger Sub Corporation		8-K	000-50335-161893016	9/20/2016
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
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

__________________________________

‡ 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.

43

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECURITIES ACT RULES 13a-14(a) OR 15d-14(a)

I, Jon E. Kirchner, certify that:

1.I have reviewed this quarterly report on Form 10-Q of DTS, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	November 7, 2016	By:	/s/ JON E. KIRCHNER
			Jon E. Kirchner Chairman and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECURITIES ACT RULES 13a-14(a) OR 15d-14(a)

I, Melvin L. Flanigan, certify that:

1.I have reviewed this quarterly report on Form 10-Q of DTS, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	November 7, 2016	By:	/s/ MELVIN L. FLANIGAN
			Melvin L. Flanigan Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(b) OR 15d-14(b)

AND 18 U.S.C. SECTION 1350

In connection with the quarterly report on Form 10-Q of DTS, Inc. (the "Company") for the quarterly period ended September 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jon E. Kirchner, Chairman and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	November 7, 2016	By:	/s/ JON E. KIRCHNER
			Jon E. Kirchner Chairman and Chief Executive Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to DTS, Inc. and will be retained by DTS, Inc. and furnished to the Securities and Exchange Commission upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(b) OR 15d-14(b)

AND 18 U.S.C. SECTION 1350

In connection with the quarterly report on Form 10-Q of DTS, Inc. (the "Company") for the quarterly period ended September 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Melvin L. Flanigan, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	November 7, 2016	By:	/s/ MELVIN L. FLANIGAN
			Melvin L. Flanigan Chief Financial Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to DTS, Inc. and will be retained by DTS, Inc. and furnished to the Securities and Exchange Commission upon request.

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2016	Nov. 01, 2016
Document and Entity Information
Entity Registrant Name	DTS, INC.
Entity Central Index Key	0001226308
Document Type	10-Q
Document Period End Date	Sep. 30, 2016
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		17,872,368
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q3

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Current assets:
Cash and cash equivalents	$ 26,686	$ 52,208
Short-term investments	13,083	9,657
Accounts receivable, net of allowance for doubtful accounts of $245 and $541 at September 30, 2016 and December 31, 2015, respectively	26,911	12,454
Prepaid expenses and other current assets	7,832	5,855
Income taxes receivable	2,276	4,130
Total current assets	76,788	84,304
Property and equipment, net	28,076	29,022
Intangible assets, net	144,907	157,936
Goodwill	90,692	108,726
Deferred income taxes	41,866	24,018
Other long-term assets	9,348	3,934
Total assets	391,677	407,940
Current liabilities:
Accounts payable	6,792	5,979
Accrued expenses	17,963	22,960
Deferred revenue	3,096	5,711
Income taxes payable	80	123
Current portion of long-term debt, net	26,486	21,486
Total current liabilities	54,417	56,259
Long-term debt, net	100,552	136,666
Other long-term liabilities	12,419	9,983
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock—$0.0001 par value, 5,000 shares authorized at September 30, 2016 and December 31, 2015; no shares issued and outstanding	0	0
Common stock—$0.0001 par value, 70,000 shares authorized at September 30, 2016 and December 31, 2015; 22,501 and 21,988 shares issued at September 30, 2016 and December 31, 2015, respectively; 17,834 and 17,321 shares outstanding at September 30, 2016 and December 31, 2015, respectively	3	3
Additional paid-in capital	272,479	258,660
Treasury stock, at cost—4,667 at September 30, 2016 and December 31, 2015	(111,331)	(111,331)
Accumulated other comprehensive income	778	778
Retained earnings	62,360	56,922
Total stockholders' equity	224,289	205,032
Total liabilities and stockholders' equity	$ 391,677	$ 407,940

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - USD ($) shares in Thousands, $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Statement of Financial Position [Abstract]
Accounts receivable, allowance for doubtful accounts (in dollars)	$ 245	$ 541
Preferred stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Preferred stock, shares authorized	5,000	5,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Common stock, shares authorized	70,000	70,000
Common stock, shares issued	22,501	21,988
Common stock, shares outstanding	17,834	17,321
Treasury stock, shares	4,667	4,667

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Income Statement [Abstract]
Revenue	$ 48,749	$ 30,673	$ 142,599	$ 99,036
Cost of revenue	6,449	2,702	18,751	8,229
Gross profit	42,300	27,971	123,848	90,807
Operating expenses:
Selling, general and administrative	26,283	21,348	71,563	59,317
Research and development	13,489	9,320	38,788	28,559
Change in fair value of contingent consideration	0	(400)	0	(400)
Total operating expenses	39,772	30,268	110,351	87,476
Operating income (loss)	2,528	(2,297)	13,497	3,331
Interest and other expense, net	(1,234)	(173)	(3,633)	(792)
Income (loss) before income taxes	1,294	(2,470)	9,864	2,539
Provision for income taxes	724	332	4,072	2,000
Net income (loss)	$ 570	$ (2,802)	$ 5,792	$ 539
Net income (loss) per common share:
Basic (in dollars per share)	$ 0.03	$ (0.16)	$ 0.33	$ 0.03
Diluted (in dollars per share)	$ 0.03	$ (0.16)	$ 0.32	$ 0.03
Weighted average shares outstanding:
Basic (in shares)	17,701	17,255	17,560	17,431
Diluted (in shares)	18,637	17,255	18,126	18,167
Cash dividend declared per common share (in dollars per share)	$ 0.02	$ 0	$ 0.02	$ 0

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Statement of Comprehensive Income [Abstract]
Net income (loss)	$ 570	$ (2,802)	$ 5,792	$ 539
Other comprehensive income (loss), net of tax:
Unrealized gains and losses on available-for-sale securities and other, net	(4)	1	0	3
Total comprehensive income (loss)	$ 566	$ (2,801)	$ 5,792	$ 542

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Cash flows from operating activities:
Net income (loss)	$ 5,792	$ 539
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	20,103	10,838
Stock-based compensation charges	9,581	8,678
Deferred income taxes	(3,317)	(5,310)
Excess tax benefits from stock-based awards	(486)	(914)
Change in fair value of contingent consideration	0	(400)
Amortization of debt issuance costs	460	0
Other	45	353
Changes in operating assets and liabilities, net of business combinations:
Accounts receivable	(13,015)	(669)
Prepaid expenses and other assets	(2,658)	881
Accounts payable, accrued expenses and other liabilities	(4,277)	(1,884)
Deferred revenue	(2,615)	(2,831)
Income taxes receivable/payable	4,790	4,758
Net cash provided by operating activities	14,403	14,039
Cash flows from investing activities:
Purchases of available-for-sale investments	(26,718)	(34,666)
Maturities of available-for-sale investments	11,125	8,800
Sales of available-for-sale investments	12,125	2,502
Cash paid for business combinations, net	(2,404)	0
Purchases of property and equipment	(2,530)	(2,525)
Purchases of intangible assets	(2,429)	(1,853)
Other investing activities	0	(300)
Net cash used in investing activities	(10,831)	(28,042)
Cash flows from financing activities:
Repayments of long-term borrowings	(31,406)	0
Payment of contingent consideration	(480)	0
Holdback and other payments related to business combinations	(1,170)	0
Proceeds from the issuance of common stock under stock-based compensation plans	6,138	7,962
Cash paid for shares withheld for taxes	(2,308)	(2,864)
Dividend payments	(354)	0
Excess tax benefits from stock-based awards	486	914
Purchases of treasury stock	0	(19,147)
Net cash used in financing activities	(29,094)	(13,135)
Net change in cash and cash equivalents	(25,522)	(27,138)
Cash and cash equivalents, beginning of period	52,208	99,435
Cash and cash equivalents, end of period	26,686	72,297
Significant non-cash transactions:
Holdbacks for business combinations	$ 1,658	$ 0

XML

Basis of Presentation

9 Months Ended

Sep. 30, 2016

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation

Basis 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 September 30, 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.

Pending Acquisition by Tessera Technologies, Inc.

On September 19, 2016, the Company entered into the Merger Agreement, which provides, upon the terms and subject to the conditions thereof, Merger Sub will merge with and into the Company, with the Company surviving the DTS Merger as a wholly owned subsidiary of Holdco. Following the completion of the DTS Merger, DTS common stock will cease to be listed on the Nasdaq Global Select Market.

At the effective time of the DTS Merger, each outstanding share of DTS common stock (other than shares that are held by Tessera or Holdco, or any of their respective subsidiaries or held by DTS as treasury stock, or that are owned by DTS, Merger Sub or any wholly owned subsidiary of DTS, and shares with respect to which appraisal rights pursuant to Section 262 of the Delaware General Corporation Law are properly exercised and not withdrawn) will be automatically converted into the right to receive $42.50 in cash, without interest and less any required tax withholding. The Special Meeting is scheduled to be held on December 1, 2016 to consider and vote upon, among other things, a proposal to adopt the Merger Agreement.

At the effective time of the DTS Merger, (i) each then outstanding, in-the-money, vested option to purchase shares of DTS common stock will be canceled, and the holder of such option will be entitled to receive cash as set forth in the Merger Agreement; (ii) each then outstanding, out-of-the-money, vested or unvested option and each then outstanding, in-the-money, unvested option to purchase shares of DTS common stock will be assumed by Holdco and converted into an option to purchase shares of Holdco common stock pursuant to the exchange ratio set forth in the Merger Agreement; (iii) each vested DTS restricted stock unit award will be canceled, and the holder of such restricted stock unit award will be entitled to receive cash as set forth in the Merger Agreement; (iv) each unvested DTS restricted stock unit award will be assumed by Holdco and converted into a Holdco restricted stock unit award pursuant to the exchange ratio set forth in the Merger Agreement; and (v) each then outstanding DTS performance-based restricted stock unit (“PSU”) award (treating for this purpose any performance-based vesting condition to which such PSU award is subject as of the effective time of the DTS Merger or was as of the date of the Merger Agreement as having been attained at the “target level”) will become fully vested and canceled, and the holder of such PSU award will be entitled to receive cash as set forth in the Merger Agreement.

The transaction is expected to close in December 2016. Consummation of the transaction remains subject to customary closing conditions, including, among other things, (i) adoption of the Merger Agreement by the Company’s stockholders; (ii) the absence of any injunctions or any other legal order prohibiting or restraining the DTS Merger; (iii) subject to certain exceptions, the accuracy of the Company’s and Tessera’s representations and warranties in the Merger Agreement; (iv) performance by the Company and Tessera of their respective obligations, covenants and agreements contained in the Merger Agreement; and (v) the absence of any material adverse effect on the Company.

The Merger Agreement contains customary representations and warranties made by each of the Company and Tessera, and also contains customary pre-closing covenants, including covenants, among others, (i) for each of the parties to use its reasonable best efforts to cause the DTS Merger to be consummated; (ii) for the Company to operate its businesses in the ordinary course consistent with past practice and to refrain from taking certain actions without Tessera’s consent; (iii) for the Company not to declare or pay any dividend (whether in cash, stock, property or otherwise) in respect of any shares of DTS common stock and (iv) for the Company not to solicit, initiate or knowingly take any action to facilitate or encourage any alternative acquisition proposal or proposal or inquiry that constitutes, or would reasonably be expected to lead to, an alternative acquisition proposal.

The Merger Agreement contains certain termination rights for each of the Company and Tessera, including in the event that (i) the DTS Merger is not consummated on or before February 28, 2017; (ii) the approval of the stockholders of the Company is not obtained at the Special Meeting; or (iii) the Company terminates the Merger Agreement to enter into a binding agreement providing for a superior proposal. The Merger Agreement further provides that, upon termination of the Merger Agreement under specified circumstances, including a termination of the Merger Agreement by the Company to enter into a binding agreement providing for a superior proposal, the Company must pay to Tessera a termination fee equal to $25,500 in cash.

The description of the Merger Agreement herein does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is attached as Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on September 20, 2016, and is hereby incorporated by reference. Additionally, the Proxy Statement filed by the Company on October 21, 2016 describes the Merger Agreement and the DTS Merger in more detail. Investors and stockholders of DTS are urged to read the Proxy Statement and any other relevant documents that have been or will be filed with the SEC carefully and in their entirety because they contain or will contain important information about the DTS Merger.

For both the three and nine months endedSeptember 30, 2016, the Company's condensed consolidated statements of operations included $3,116 of operating expenses associated with the DTS Merger.

Acquisitions

In the third quarter of 2016, the Company completed two immaterial acquisitions related to the Company's HD Radio technology. Both purchases were accounted for using the acquisition method of accounting. The Company considers the allocations of the purchase price for both acquisitions to be immaterial to the condensed consolidated financial statements. The Company's financial results include these acquisitions from their dates of acquisition.

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Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2016

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

Recent Accounting Pronouncements

Recent 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 superseded the then 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 (principal versus agent considerations), ASU 2016-10 (identifying performance obligations and licensing), and ASU 2016-12 (narrow-scope improvements and practical expedients). 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. For information on measurement period adjustments relating to the acquisition of iBiquity Digital Corporation, 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 statement 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.

In October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory." This ASU requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements have not been issued. The Company is evaluating the impact of adoption of this ASU on its consolidated financial statements.

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Cash, Cash Equivalents and Investments

9 Months Ended

Sep. 30, 2016

Investments and Cash [Abstract]

Cash, Cash Equivalents and Investments

Cash, Cash Equivalents and Investments

Cash, cash equivalents and investments, classified as available-for-sale, consisted of:

	As of September 30, 2016		As of December 31, 2015
Cash and cash equivalents:
Cash	$	13,765	$	16,257
Money market accounts	10,923		35,951
Commercial paper	1,998		—
Total cash and cash equivalents	$	26,686	$	52,208
Short-term investments:
Corporate bonds	$	12,091	$	9,657
Commercial paper	992		—
Total short-term investments	$	13,083	$	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 September 30, 2016 were all due within one year.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2016

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

The Company's investments are required to be measured and recorded at fair value on a recurring basis. The Company obtains 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 classifies its available-for-sale securities within Level 2 of the fair value hierarchy.

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 September 30, 2016
Corporate bonds	$	12,091		$	—	$	12,091	$	—
Commercial paper	$	992		$	—	$	992	$	—
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.

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Business Combination

9 Months Ended

Sep. 30, 2016

Business Combinations [Abstract]

Business Combination

Business 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. On September 30, 2016, the Company finalized the purchase price allocation:

	Weighted Average Estimated Useful Life (years)		Preliminary Fair Value as of December 31, 2015			Measurement Period Adjustments (1)			Final Fair Value
Cash and cash equivalents			$	20,837					$	20,837
Short-term investments			4,000						4,000
Accounts receivable			13,468			644		(2)	14,112
Prepaid expenses and other current assets			1,058			131		(3)	1,189
Property and equipment			1,656						1,656
Goodwill			58,370			(20,299	)	(4)	38,071
Identifiable intangible assets:
Customer relationships	10	70,225
Developed technology	10	33,590
Tradenames	10	9,590
IPR&D		7,583
Total identifiable intangible assets			120,988						120,988
Other long-term assets			190			(60	)	(3)	130
Deferred tax assets (liabilities), net			(13,058		)	21,258		(5)	8,200
Accounts payable			(535		)				(535		)
Accrued expenses			(21,402		)	(1,882	)	(6)	(23,284		)
Deferred revenue			(1,019		)				(1,019		)
Other long-term liabilities			(6,783		)	208		(5)	(6,575		)
Total purchase price			$	177,770		—			$	177,770

_______________________________________

(1) All adjustments were recorded prospectively within the Company's condensed consolidated balance sheet.

(2) Primarily consists of the recognition of underreported royalty recoveries owed to iBiquity prior to the close of the acquisition, which were collected during the measurement period.

(3) Consists of miscellaneous working capital and other immaterial adjustments.

(4) Represents the net impact to goodwill of all measurement period adjustments recorded.

(5) Primarily consists of the finalization of the measurement of acquired net operating loss carryforwards (NOLs) that can be realized, subject to the limitations under Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”). During the measurement period, the Company was in the process of determining the amount of additional NOLs that would be available if certain unrealized gains attributed to periods before the ownership change date are recognized. In connection with the intercompany transfer of intellectual property rights discussed in Note 10, “Income Taxes,” the Company finalized the measurement of the amount of additional NOLs that are available if certain unrealized gains attributable to periods before the ownership change date are recognized. The decrease to other long-term liabilities is primarily due to the finalization of the measurement of certain uncertain tax positions.

(6) Primarily consists of adjustments to the estimated fair value of certain acquired legal contingencies and certain rebate accruals, determined based on information obtained during the measurement period.

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Goodwill and Other Intangible Assets

9 Months Ended

Sep. 30, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Other Intangible Assets

Goodwill 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	(20,299		)
Increase due to current period business combinations	2,265
Balance at September 30, 2016	$	90,692

The Company's other intangible assets were:

	Weighted Average Life (Years)	As of September 30, 2016							As of December 31, 2015
		Gross Amount		Accumulated Amortization			Net Carrying Amount		Gross Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	9	$	116,838	$	(31,513	)	$	85,325	$	116,026	$	(22,039	)	$	93,987
Acquired technology	9	56,151		(18,375		)	37,776		52,073		(14,071		)	38,002
Tradenames	9	12,912		(3,683		)	9,229		12,851		(2,452		)	10,399
Contractual rights	5	8,363		(3,833		)	4,530		7,713		(2,527		)	5,186
Patents	5	5,155		(1,821		)	3,334		3,805		(1,538		)	2,267
Trademarks	10	919		(468		)	451		894		(417		)	477
Non-compete	2	553		(496		)	57		492		(457		)	35
Total amortizable intangible assets		$	200,891	$	(60,189	)	$	140,702	$	193,854	$	(43,501	)	$	150,353
IPR&D		4,205		—			4,205		7,583		—			7,583
Total other intangible assets		$	205,096	$	(60,189	)	$	144,907	$	201,437	$	(43,501	)	$	157,936

During the nine months endedSeptember 30, 2016, the Company reclassified $3,378 of IPR&D assets not previously subject to amortization to amortizable intangible assets.

Amortization of intangible assets included in the Company's condensed consolidated statements of operations was:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2016		2015		2016		2015
Cost of revenue	$	5,111	$	2,392	$	15,085	$	7,146
Operating expenses	543		266		1,620		792
Total amortization of intangible assets	$	5,654	$	2,658	$	16,705	$	7,938

The Company expects the future amortization of amortizable intangible assets held at September 30, 2016 to be as follows:

Years Ending December 31,	Estimated Amortization Expense
2016 (remaining 3 months)	$	5,775
2017	22,640
2018	20,559
2019	19,142
2020	15,676
2021 and thereafter	56,910
Total	$	140,702

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Accrued Expenses

9 Months Ended

Sep. 30, 2016

Payables and Accruals [Abstract]

Accrued Expenses

Accrued Expenses

Accrued expenses consisted of:

	As of September 30, 2016		As of December 31, 2015
Accrued payroll and related benefits	$	13,670	$	17,998
Contingent consideration	—		480
Other	4,293		4,482
Total accrued expenses	$	17,963	$	22,960

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Long-term Debt

9 Months Ended

Sep. 30, 2016

Debt Disclosure [Abstract]

Long-term Debt

Long-term Debt

On October 1, 2015, the Company entered into a credit agreement with Wells Fargo Bank, National Association and other lenders (the "Credit Agreement"), which provided the Company with a term loan and a revolver. On June 24, 2016, the Company entered into the First Amendment to Credit Agreement (the "Amendment") in connection with the intercompany transfer of intellectual property rights discussed in Note 10, "Income Taxes." The Amendment requires the Company to make prepayments of $20,000 of the term loan in 2016. During the three months ended June 30 and September 30, 2016, the Company made prepayments of $10,000 and $5,000, respectively, in addition to the scheduled quarterly principal payments of $5,469 in each quarter. Under the Amendment, the final prepayment of $5,000 is due by December 30, 2016. These prepayments will be applied to the scheduled principal installments under the Credit Agreement in inverse order of maturity, beginning with the final principal balance due on October 1, 2020. The original scheduled quarterly principal installment payments under the Credit Agreement are unchanged by the Amendment.

The Company's outstanding balances under the Credit Agreement, presented net of certain debt issuance costs on the condensed consolidated balance sheets, were:

	As of September 30, 2016			As of December 31, 2015
Debt outstanding under term loan, current portion	$	26,875		$	21,875
Debt issuance costs, current portion	(389		)	(389		)
Current portion of long-term debt, net	$	26,486		$	21,486
Debt outstanding under term loan, long-term	$	66,719		$	103,125
Debt outstanding under revolver, long-term	35,000			35,000
Debt issuance costs, long-term	(1,167		)	(1,459		)
Long-term debt, net	$	100,552		$	136,666

Future long-term debt principal payments are as follows:

Years Ending December 31,
2016 (remaining 3 months)	$	10,469
2017	21,876
2018	21,876
2019	21,876
2020	52,497
Total	$	128,594

Interest expense, including amortization of debt issuance costs, was:

For the Three Months Ended September 30,				For the Nine Months Ended September 30,
2016		2015		2016		2015
$	983	$	75	$	3,276	$	223

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2016

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments 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 $7,200 over an estimated period of approximately four years if certain milestones are achieved.

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 nine months ended September 30, 2016, the Company recorded additional severance and related costs of $200 within operating expenses in the condensed consolidated statement of operations. During the nine months endedSeptember 30, 2016, the Company paid $4,682 of severance and related costs, and as of September 30, 2016, $1,035 remained accrued under certain separation agreements, which is expected to be paid within the next nine months.

Litigation

Robert Garfield v. DTS, Inc.

On October 26, 2016, an alleged stockholder of the Company filed a putative class action lawsuit, captioned Robert Garfield v. DTS, Inc., et al., Case Number TBD, in the Superior Court of California, Ventura County. The defendants are the Company, the members of its Board of Directors, the Company's financial advisor in connection with the DTS Merger, and Tessera. The complaint alleges that the Company's directors breached their fiduciary duties by agreeing to inadequate merger consideration and engaging in a sales process that is in their best interests, but not the interests of the Company's other stockholders, and that the Company and its directors committed a breach of fiduciary duty by causing the issuance of a Proxy Statement that fails to disclose all material facts concerning the DTS Merger. The complaint alleges that the Company's financial advisor and Tessera abetted the purported breaches. The complaint seeks an order enjoining the merger or, if it is consummated, an order rescinding it. The complaint also seeks a reduction in the termination fee payable by the Company to Tessera, plus damages and attorneys’ fees. The Company believes the complaint is meritless and intends to defend the action.

Paul Parshall v. DTS, Inc.

On November 2, 2016, an alleged stockholder of the Company filed a putative class action lawsuit, captioned Paul Parshall v. DTS, Inc., et al., Case Number 12870-CB, in the Court of Chancery of the State of Delaware. The defendants are the Company, the members of its Board of Directors, Tessera, Tempe Holdco Corporation, Tempe Merger Sub Corporation, and Arizona Merger Sub Corporation. The complaint alleges that the Company's directors breached their fiduciary duties by causing the issuance of a Proxy Statement that fails to disclose all material facts concerning the DTS Merger. The complaint alleges that the Company, Tessera, Tempe Holdco Corporation, Tempe Merger Sub Corporation, and Arizona Merger Sub Corporation abetted the individuals’ purported breaches. The complaint seeks an order enjoining the merger or, if it is consummated, an order rescinding it, plus rescissory damages and attorneys’ fees. The Company believes the complaint is meritless and intends to defend the action.

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Income Taxes

9 Months Ended

Sep. 30, 2016

Income Tax Disclosure [Abstract]

Income Taxes

Income 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 nine months ended September 30, 2016 and 2015, the Company's effective tax rate was approximately 41% and 79%, respectively. The effective tax rate for 2016 differed from the US statutory rate of 35% primarily due to the impact of a foreign loss in a jurisdiction that will not result in a tax benefit, non-creditable foreign withholding taxes and non-deductible transaction costs, partially offset by certain foreign earnings subject to lower tax rates and research and development tax credits. The effective tax rate for 2015 differed from the US statutory rate primarily due to the impact of a foreign loss in a jurisdiction that will not result in a tax benefit, non-creditable foreign withholding taxes and non-deductible transaction costs, partially offset by certain foreign earnings subject to lower tax rates, the federal tax deduction for domestic production activities and state research and development tax credits.

The Company has a strategy of commercializing certain non-US intellectual property rights from outside the US. In line with this strategy, in June 2016, the Company completed the implementation of an intercompany transfer of certain intellectual property licensing rights acquired from iBiquity to certain of the Company's foreign subsidiaries. The transaction was implemented to align with the Company's current operating processes, to optimize the global legal, operational and tax structure, and to allow for the efficient recovery of net operating loss carryforwards acquired from iBiquity. The transaction will not have a material impact on the Company’s effective tax rate in 2016 but should benefit future periods as a result of the non-US income being subject to lower tax rates and the ability to amortize the intellectual property for tax purposes in the foreign jurisdictions.

As of September 30, 2016 and December 31, 2015, the Company's uncertain tax positions were $18,743 and $19,454, respectively, of which $9,604 and $9,112, respectively, were recorded in other long-term liabilities. The remaining amounts were recorded as a reduction to non-current deferred tax assets. The decrease was primarily due to the reversal of an uncertain tax position relating to the deductibility of certain expenses. The Company believes that within the next twelve months it is reasonably possible that unrecognized tax benefits will decrease by approximately $300 due to the expiration of certain statutes of limitations. 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. The Company is no longer subject to income tax examinations by the Internal Revenue Service (IRS) for years prior to 2013 and by the California Franchise Tax Board (FTB) for years prior to 2011 except for certain prior period carryforwards. 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 September 30, 2016 and 2015, withholding taxes were $711 and $632, respectively. For the nine months ended September 30, 2016 and 2015, withholding taxes were $2,522 and $1,614, respectively. The increase in withholding taxes for the nine month period is primarily due to increases in revenue resulting from the iBiquity acquisition in October 2015.

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Net Income (Loss) Per Common Share

9 Months Ended

Sep. 30, 2016

Earnings Per Share [Abstract]

Net Income Per Common Share

Net Income (Loss) Per Common Share

Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated by dividing net income (loss) 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. Due to the net loss for the three months ended September 30, 2015, all potential common shares were excluded from the diluted shares outstanding for this period.

The computation of basic and diluted net income (loss) per common share was:

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2016		2015			2016		2015
Numerator:
Net income (loss)	$	570	$	(2,802	)	$	5,792	$	539
Denominator:
Weighted average shares outstanding	17,701		17,255			17,560		17,431
Effect of dilutive securities:
Stock options	638		—			363		568
Restricted stock	278		—			192		159
ESPP	20		—			11		9
Weighted average diluted shares outstanding	18,637		17,255			18,126		18,167
Basic net income (loss) per common share	$	0.03	$	(0.16	)	$	0.33	$	0.03
Diluted net income (loss) per common share	$	0.03	$	(0.16	)	$	0.32	$	0.03
Anti-dilutive shares excluded from the determination of diluted net income (loss) per share	305		3,779			1,475		535

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Dividend

9 Months Ended

Sep. 30, 2016

Equity [Abstract]

Dividend

Dividend

On August 8, 2016, the Company announced that the Board of Directors approved a cash dividend of $0.02 per common share, which was paid on August 31, 2016 to stockholders of record on August 22, 2016. Dividend payments for the three and nine months ended September 30, 2016 were $354, and were recorded as a reduction to retained earnings. Pursuant to the Merger Agreement with Tessera, the Company is not permitted to declare or pay any dividend without Tessera's consent.

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Cash, Cash Equivalents and Investments (Tables)

9 Months Ended

Sep. 30, 2016

Investments and Cash [Abstract]

Schedule of cash, cash equivalents and investments

Cash, cash equivalents and investments, classified as available-for-sale, consisted of:

	As of September 30, 2016		As of December 31, 2015
Cash and cash equivalents:
Cash	$	13,765	$	16,257
Money market accounts	10,923		35,951
Commercial paper	1,998		—
Total cash and cash equivalents	$	26,686	$	52,208
Short-term investments:
Corporate bonds	$	12,091	$	9,657
Commercial paper	992		—
Total short-term investments	$	13,083	$	9,657

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2016

Fair Value Disclosures [Abstract]

Schedule of financial assets and liabilities, measured at fair value on a recurring basis

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 September 30, 2016
Corporate bonds	$	12,091		$	—	$	12,091	$	—
Commercial paper	$	992		$	—	$	992	$	—
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.

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Business Combination (Tables)

9 Months Ended

Sep. 30, 2016

Business Combinations [Abstract]

Schedule of Recognized Identified Assets Acquired and Liabilities Assumed

On September 30, 2016, the Company finalized the purchase price allocation:

	Weighted Average Estimated Useful Life (years)		Preliminary Fair Value as of December 31, 2015			Measurement Period Adjustments (1)			Final Fair Value
Cash and cash equivalents			$	20,837					$	20,837
Short-term investments			4,000						4,000
Accounts receivable			13,468			644		(2)	14,112
Prepaid expenses and other current assets			1,058			131		(3)	1,189
Property and equipment			1,656						1,656
Goodwill			58,370			(20,299	)	(4)	38,071
Identifiable intangible assets:
Customer relationships	10	70,225
Developed technology	10	33,590
Tradenames	10	9,590
IPR&D		7,583
Total identifiable intangible assets			120,988						120,988
Other long-term assets			190			(60	)	(3)	130
Deferred tax assets (liabilities), net			(13,058		)	21,258		(5)	8,200
Accounts payable			(535		)				(535		)
Accrued expenses			(21,402		)	(1,882	)	(6)	(23,284		)
Deferred revenue			(1,019		)				(1,019		)
Other long-term liabilities			(6,783		)	208		(5)	(6,575		)
Total purchase price			$	177,770		—			$	177,770

_______________________________________

(1) All adjustments were recorded prospectively within the Company's condensed consolidated balance sheet.

(2) Primarily consists of the recognition of underreported royalty recoveries owed to iBiquity prior to the close of the acquisition, which were collected during the measurement period.

(3) Consists of miscellaneous working capital and other immaterial adjustments.

(4) Represents the net impact to goodwill of all measurement period adjustments recorded.

(5) Primarily consists of the finalization of the measurement of acquired net operating loss carryforwards (NOLs) that can be realized, subject to the limitations under Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”). During the measurement period, the Company was in the process of determining the amount of additional NOLs that would be available if certain unrealized gains attributed to periods before the ownership change date are recognized. In connection with the intercompany transfer of intellectual property rights discussed in Note 10, “Income Taxes,” the Company finalized the measurement of the amount of additional NOLs that are available if certain unrealized gains attributable to periods before the ownership change date are recognized. The decrease to other long-term liabilities is primarily due to the finalization of the measurement of certain uncertain tax positions.

(6) Primarily consists of adjustments to the estimated fair value of certain acquired legal contingencies and certain rebate accruals, determined based on information obtained during the measurement period.

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Goodwill and Other Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Goodwill

The changes in the Company's goodwill were:

	Goodwill
Balance at December 31, 2015	$	108,726
Purchase price allocation adjustments, net	(20,299		)
Increase due to current period business combinations	2,265
Balance at September 30, 2016	$	90,692

Summary of the Company's finite lived intangible assets

The Company's other intangible assets were:

	Weighted Average Life (Years)	As of September 30, 2016							As of December 31, 2015
		Gross Amount		Accumulated Amortization			Net Carrying Amount		Gross Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	9	$	116,838	$	(31,513	)	$	85,325	$	116,026	$	(22,039	)	$	93,987
Acquired technology	9	56,151		(18,375		)	37,776		52,073		(14,071		)	38,002
Tradenames	9	12,912		(3,683		)	9,229		12,851		(2,452		)	10,399
Contractual rights	5	8,363		(3,833		)	4,530		7,713		(2,527		)	5,186
Patents	5	5,155		(1,821		)	3,334		3,805		(1,538		)	2,267
Trademarks	10	919		(468		)	451		894		(417		)	477
Non-compete	2	553		(496		)	57		492		(457		)	35
Total amortizable intangible assets		$	200,891	$	(60,189	)	$	140,702	$	193,854	$	(43,501	)	$	150,353
IPR&D		4,205		—			4,205		7,583		—			7,583
Total other intangible assets		$	205,096	$	(60,189	)	$	144,907	$	201,437	$	(43,501	)	$	157,936

Summary of the Company's indefinite lived intangible assets

The Company's other intangible assets were:

	Weighted Average Life (Years)	As of September 30, 2016							As of December 31, 2015
		Gross Amount		Accumulated Amortization			Net Carrying Amount		Gross Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	9	$	116,838	$	(31,513	)	$	85,325	$	116,026	$	(22,039	)	$	93,987
Acquired technology	9	56,151		(18,375		)	37,776		52,073		(14,071		)	38,002
Tradenames	9	12,912		(3,683		)	9,229		12,851		(2,452		)	10,399
Contractual rights	5	8,363		(3,833		)	4,530		7,713		(2,527		)	5,186
Patents	5	5,155		(1,821		)	3,334		3,805		(1,538		)	2,267
Trademarks	10	919		(468		)	451		894		(417		)	477
Non-compete	2	553		(496		)	57		492		(457		)	35
Total amortizable intangible assets		$	200,891	$	(60,189	)	$	140,702	$	193,854	$	(43,501	)	$	150,353
IPR&D		4,205		—			4,205		7,583		—			7,583
Total other intangible assets		$	205,096	$	(60,189	)	$	144,907	$	201,437	$	(43,501	)	$	157,936

Summary of amortization of intangible assets

Amortization of intangible assets included in the Company's condensed consolidated statements of operations was:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2016		2015		2016		2015
Cost of revenue	$	5,111	$	2,392	$	15,085	$	7,146
Operating expenses	543		266		1,620		792
Total amortization of intangible assets	$	5,654	$	2,658	$	16,705	$	7,938

Schedule of expected future amortization of intangible assets

The Company expects the future amortization of amortizable intangible assets held at September 30, 2016 to be as follows:

Years Ending December 31,	Estimated Amortization Expense
2016 (remaining 3 months)	$	5,775
2017	22,640
2018	20,559
2019	19,142
2020	15,676
2021 and thereafter	56,910
Total	$	140,702

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Accrued Expenses (Tables)

9 Months Ended

Sep. 30, 2016

Payables and Accruals [Abstract]

Schedule of accrued expenses

Accrued expenses consisted of:

	As of September 30, 2016		As of December 31, 2015
Accrued payroll and related benefits	$	13,670	$	17,998
Contingent consideration	—		480
Other	4,293		4,482
Total accrued expenses	$	17,963	$	22,960

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Long-term Debt (Tables)

9 Months Ended

Sep. 30, 2016

Debt Disclosure [Abstract]

Schedule of Debt

The Company's outstanding balances under the Credit Agreement, presented net of certain debt issuance costs on the condensed consolidated balance sheets, were:

	As of September 30, 2016			As of December 31, 2015
Debt outstanding under term loan, current portion	$	26,875		$	21,875
Debt issuance costs, current portion	(389		)	(389		)
Current portion of long-term debt, net	$	26,486		$	21,486
Debt outstanding under term loan, long-term	$	66,719		$	103,125
Debt outstanding under revolver, long-term	35,000			35,000
Debt issuance costs, long-term	(1,167		)	(1,459		)
Long-term debt, net	$	100,552		$	136,666

Schedule of Maturities of Long-term Debt

Future long-term debt principal payments are as follows:

Years Ending December 31,
2016 (remaining 3 months)	$	10,469
2017	21,876
2018	21,876
2019	21,876
2020	52,497
Total	$	128,594

Schedule of Debt Interest Payments [Table Text Block]

Interest expense, including amortization of debt issuance costs, was:

For the Three Months Ended September 30,				For the Nine Months Ended September 30,
2016		2015		2016		2015
$	983	$	75	$	3,276	$	223

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Net Income (Loss) Per Common Share (Tables)

9 Months Ended

Sep. 30, 2016

Earnings Per Share [Abstract]

Computation of basic and diluted net income per common share

The computation of basic and diluted net income (loss) per common share was:

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2016		2015			2016		2015
Numerator:
Net income (loss)	$	570	$	(2,802	)	$	5,792	$	539
Denominator:
Weighted average shares outstanding	17,701		17,255			17,560		17,431
Effect of dilutive securities:
Stock options	638		—			363		568
Restricted stock	278		—			192		159
ESPP	20		—			11		9
Weighted average diluted shares outstanding	18,637		17,255			18,126		18,167
Basic net income (loss) per common share	$	0.03	$	(0.16	)	$	0.33	$	0.03
Diluted net income (loss) per common share	$	0.03	$	(0.16	)	$	0.32	$	0.03
Anti-dilutive shares excluded from the determination of diluted net income (loss) per share	305		3,779			1,475		535

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Basis of Presentation Basis of Presentation (Details)		3 Months Ended		9 Months Ended
	Sep. 19, 2016 USD ($) $ / shares	Sep. 30, 2016 USD ($) acquisition	Sep. 30, 2015 USD ($)	Sep. 30, 2016 USD ($)	Sep. 30, 2015 USD ($)
Business Acquisition [Line Items]
Operating expenses		$ 39,772,000	$ 30,268,000	$ 110,351,000	$ 87,476,000
DTS Merger
Business Acquisition [Line Items]
Per share price to be paid per outstanding share | $ / shares	$ 42.50
Termination fee payable if merger is canceled	$ 25,500,000
Operating expenses		$ 3,116,000		$ 3,116,000
Immaterial Business Acquisitions
Business Acquisition [Line Items]
Number of acquisitions | acquisition		2

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Cash, Cash Equivalents and Investments (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015	Sep. 30, 2015	Dec. 31, 2014
Cash, cash equivalents and investments
Total cash and cash equivalents	$ 26,686	$ 52,208	$ 72,297	$ 99,435
Total short-term investments	13,083	9,657
Corporate bonds
Cash, cash equivalents and investments
Short-term investments	12,091	9,657
Commercial paper
Cash, cash equivalents and investments
Short-term investments	992	0
Cash
Cash, cash equivalents and investments
Cash	13,765	16,257
Money market accounts
Cash, cash equivalents and investments
Cash equivalents	10,923	35,951
Commercial paper
Cash, cash equivalents and investments
Cash equivalents	$ 1,998	$ 0

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Fair Value Measurements (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Fair Value Measurements
Contingent consideration	$ 0	$ (480)
Recurring basis | Total
Fair Value Measurements
Contingent consideration		(480)
Recurring basis | Total | Corporate bonds
Fair Value Measurements
Available-for-sale securities	12,091	9,657
Recurring basis | Total | Commercial paper
Fair Value Measurements
Available-for-sale securities	992
Recurring basis | Fair Value Measurements | Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Value Measurements
Contingent consideration		0
Recurring basis | Fair Value Measurements | Quoted Prices in Active Markets for Identical Assets (Level 1) | Corporate bonds
Fair Value Measurements
Available-for-sale securities	0	0
Recurring basis | Fair Value Measurements | Quoted Prices in Active Markets for Identical Assets (Level 1) | Commercial paper
Fair Value Measurements
Available-for-sale securities	0
Recurring basis | Fair Value Measurements | Significant Other Observable Inputs (Level 2)
Fair Value Measurements
Contingent consideration		0
Recurring basis | Fair Value Measurements | Significant Other Observable Inputs (Level 2) | Corporate bonds
Fair Value Measurements
Available-for-sale securities	12,091	9,657
Recurring basis | Fair Value Measurements | Significant Other Observable Inputs (Level 2) | Commercial paper
Fair Value Measurements
Available-for-sale securities	992
Recurring basis | Fair Value Measurements | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Contingent consideration		(480)
Recurring basis | Fair Value Measurements | Significant Unobservable Inputs (Level 3) | Corporate bonds
Fair Value Measurements
Available-for-sale securities	0	$ 0
Recurring basis | Fair Value Measurements | Significant Unobservable Inputs (Level 3) | Commercial paper
Fair Value Measurements
Available-for-sale securities	$ 0

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Business Combination (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2015	Sep. 30, 2016
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Noncurrent Assets [Abstract]
Goodwill	$ 108,726	$ 90,692
iBiquity
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Current Assets [Abstract]
Cash and cash equivalents		20,837
Short-term investments		4,000
Accounts receivable		14,112
Prepaid expenses and other current assets		1,189
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Noncurrent Assets [Abstract]
Property and equipment		1,656
Goodwill		38,071
Total identifiable intangible assets		120,988
Other long-term assets		130
Deferred tax assets (liabilities), net		8,200
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Current Liabilities [Abstract]
Accounts payable		(535)
Accrued expenses		(23,284)
Deferred revenue		(1,019)
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Noncurrent Liabilities [Abstract]
Other long-term liabilities		(6,575)
Total purchase price		177,770
iBiquity | Customer relationships
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Noncurrent Assets [Abstract]
Identifiable intangible assets, finite-lived	$ 70,225
Weighted Average Estimated Useful Life (years)	10 years
iBiquity | Developed technology
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Noncurrent Assets [Abstract]
Identifiable intangible assets, finite-lived	$ 33,590
Weighted Average Estimated Useful Life (years)	10 years
iBiquity | Tradenames
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Noncurrent Assets [Abstract]
Identifiable intangible assets, finite-lived	$ 9,590
Weighted Average Estimated Useful Life (years)	10 years
iBiquity | IPR&D
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Noncurrent Assets [Abstract]
Identifiable intangible assets, indefinite-lived	$ 7,583
iBiquity | Preliminary Fair Value as of December 31, 2015
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Current Assets [Abstract]
Cash and cash equivalents	20,837
Short-term investments	4,000
Accounts receivable	13,468
Prepaid expenses and other current assets	1,058
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Noncurrent Assets [Abstract]
Property and equipment	1,656
Goodwill	58,370
Total identifiable intangible assets	120,988
Other long-term assets	190
Deferred tax assets (liabilities), net	(13,058)
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Current Liabilities [Abstract]
Accounts payable	(535)
Accrued expenses	(21,402)
Deferred revenue	(1,019)
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Noncurrent Liabilities [Abstract]
Other long-term liabilities	(6,783)
Total purchase price	$ 177,770
iBiquity | Measurement Period Adjustments
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Current Assets [Abstract]
Accounts receivable		644
Prepaid expenses and other current assets		131
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Noncurrent Assets [Abstract]
Goodwill		(20,299)
Other long-term assets		(60)
Deferred tax assets (liabilities), net		21,258
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Current Liabilities [Abstract]
Accrued expenses		(1,882)
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Noncurrent Liabilities [Abstract]
Other long-term liabilities		$ 208

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Goodwill and Other Intangible Assets - Goodwill (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2016 USD ($)
Goodwill [Roll Forward]
Balance at December 31, 2015	$ 108,726
Purchase price allocation adjustments, net	(20,299)
Increase due to current period business combinations	2,265
Balance at September 30, 2016	$ 90,692

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Goodwill and Other Intangible Assets - Intangible Assets (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Summary of acquired intangible assets by category
Gross amount of amortizable assets	$ 200,891		$ 200,891		$ 193,854
Accumulated Amortization	(60,189)		(60,189)		(43,501)
Net Carrying Amount of amortizable assets	140,702		140,702		150,353
Total amortization of intangible assets	5,654	$ 2,658	16,705	$ 7,938
Total intangible assets, gross	205,096		205,096		201,437
Accumulated Amortization	(60,189)		(60,189)		(43,501)
Intangible assets, net	144,907		144,907		157,936
IPR&D
Summary of acquired intangible assets by category
Indefinite-lived intangible assets	4,205		$ 4,205		7,583
Customer relationships
Summary of acquired intangible assets by category
Weighted Average Life (Years)			9 years
Gross amount of amortizable assets	116,838		$ 116,838		116,026
Accumulated Amortization	(31,513)		(31,513)		(22,039)
Net Carrying Amount of amortizable assets	85,325		85,325		93,987
Accumulated Amortization	(31,513)		$ (31,513)		(22,039)
Acquired technology
Summary of acquired intangible assets by category
Weighted Average Life (Years)			9 years
Gross amount of amortizable assets	56,151		$ 56,151		52,073
Accumulated Amortization	(18,375)		(18,375)		(14,071)
Net Carrying Amount of amortizable assets	37,776		37,776		38,002
Accumulated Amortization	(18,375)		$ (18,375)		(14,071)
Tradenames
Summary of acquired intangible assets by category
Weighted Average Life (Years)			9 years
Gross amount of amortizable assets	12,912		$ 12,912		12,851
Accumulated Amortization	(3,683)		(3,683)		(2,452)
Net Carrying Amount of amortizable assets	9,229		9,229		10,399
Accumulated Amortization	(3,683)		$ (3,683)		(2,452)
Contractual rights
Summary of acquired intangible assets by category
Weighted Average Life (Years)			5 years
Gross amount of amortizable assets	8,363		$ 8,363		7,713
Accumulated Amortization	(3,833)		(3,833)		(2,527)
Net Carrying Amount of amortizable assets	4,530		4,530		5,186
Accumulated Amortization	(3,833)		$ (3,833)		(2,527)
Patents
Summary of acquired intangible assets by category
Weighted Average Life (Years)			5 years
Gross amount of amortizable assets	5,155		$ 5,155		3,805
Accumulated Amortization	(1,821)		(1,821)		(1,538)
Net Carrying Amount of amortizable assets	3,334		3,334		2,267
Accumulated Amortization	(1,821)		$ (1,821)		(1,538)
Trademarks
Summary of acquired intangible assets by category
Weighted Average Life (Years)			10 years
Gross amount of amortizable assets	919		$ 919		894
Accumulated Amortization	(468)		(468)		(417)
Net Carrying Amount of amortizable assets	451		451		477
Accumulated Amortization	(468)		$ (468)		(417)
Non-compete
Summary of acquired intangible assets by category
Weighted Average Life (Years)			2 years
Gross amount of amortizable assets	553		$ 553		492
Accumulated Amortization	(496)		(496)		(457)
Net Carrying Amount of amortizable assets	57		57		35
Accumulated Amortization	(496)		(496)		$ (457)
IPR&D
Summary of acquired intangible assets by category
Indefinite lived intangible assets transferred to finite lived intangible assets			3,378
Cost of revenue
Summary of acquired intangible assets by category
Total amortization of intangible assets	5,111	2,392	15,085	7,146
Operating expenses
Summary of acquired intangible assets by category
Total amortization of intangible assets	$ 543	$ 266	$ 1,620	$ 792

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Goodwill and Other Intangible Assets - Future Amortization (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Future amortization of intangible assets
2016 (remaining 3 months)	$ 5,775
2017	22,640
2018	20,559
2019	19,142
2020	15,676
2021 and thereafter	56,910
Net Carrying Amount of amortizable assets	$ 140,702	$ 150,353

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Accrued Expenses (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Payables and Accruals [Abstract]
Accrued payroll and related benefits	$ 13,670	$ 17,998
Contingent consideration	0	480
Other	4,293	4,482
Total accrued expenses	$ 17,963	$ 22,960

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Long-term Debt (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Jun. 30, 2016	Sep. 30, 2016	Dec. 31, 2015
Long-term debt
Current portion of long-term debt, net	$ 26,486,000		$ 26,486,000	$ 21,486,000
Debt issuance costs, long-term	(1,167,000)		(1,167,000)	(1,459,000)
Long-term debt, net	100,552,000		100,552,000	136,666,000
Term Loan
Long-term debt
Debt outstanding, current portion	26,875,000		26,875,000	21,875,000
Debt issuance costs, current portion	(389,000)		(389,000)	(389,000)
Current portion of long-term debt, net	26,486,000		26,486,000	21,486,000
Debt outstanding, long-term	66,719,000		66,719,000	103,125,000
Revolver
Long-term debt
Debt outstanding, long-term	35,000,000		35,000,000	$ 35,000,000
Amended Credit Agreement
Long-term debt
Prepayments required in current year	20,000,000		20,000,000
Prepayments made	5,000,000	$ 10,000,000
Scheduled quarterly principal payments			5,469,000
Prepayment amounts due	$ 5,000,000		$ 5,000,000

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Long-term Debt - Future Debt Payments (Details) $ in Thousands	Sep. 30, 2016 USD ($)
Debt Disclosure [Abstract]
2016 (remaining 3 months)	$ 10,469
2017	21,876
2018	21,876
2019	21,876
2020	52,497
Total	$ 128,594

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Long-term Debt - Interest Expense (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Debt Disclosure [Abstract]
Interest expense and amortization of debt issuance costs	$ 983	$ 75	$ 3,276	$ 223

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Commitments and Contingencies (Details) $ in Thousands	3 Months Ended	9 Months Ended
	Dec. 31, 2015 USD ($)	Sep. 30, 2016 USD ($)
Commitments and Contingencies
Period for the payment of additional consideration subject to the achievement of certain milestones		4 years
Number of employee positions eliminated	70
Employee Severance and Related Cost
Commitments and Contingencies
Restructuring charges accrued	$ 5,517	$ 1,035
Payments for Restructuring		4,682
Employee Severance and Related Cost | Operating expenses
Commitments and Contingencies
Restructuring charges		200
Maximum
Commitments and Contingencies
Potential milestone payments under certain contractual rights arrangements		$ 7,200

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Income Taxes (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Effective tax rate (as a percent)			41.00%	79.00%
Statutory federal rate (as a percent)			35.00%
Uncertain tax positions	$ 18,743		$ 18,743		$ 19,454
Withholding taxes	711	$ 632	2,522	$ 1,614
Other long-term liabilities
Uncertain tax positions	9,604		9,604		$ 9,112
Lapse of Applicable Statute of Limitations
Reasonably possible decrease in unrecognized tax benefits in the next twelve months	$ 300		$ 300

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Net Income (Loss) Per Common Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Numerator:
Net income (loss)	$ 570	$ (2,802)	$ 5,792	$ 539
Denominator:
Weighted average shares outstanding	17,701	17,255	17,560	17,431
Weighted average diluted shares outstanding	18,637	17,255	18,126	18,167
Basic net income (loss) per common share (in dollars per share)	$ 0.03	$ (0.16)	$ 0.33	$ 0.03
Diluted net income (loss) per common share (in dollars per share)	$ 0.03	$ (0.16)	$ 0.32	$ 0.03
Anti-dilutive shares excluded from the determination of diluted net income (loss) per share	305	3,779	1,475	535
Stock Options
Denominator:
Effect of dilutive securities	638	0	363	568
RSUs
Denominator:
Effect of dilutive securities	278	0	192	159
ESPP
Denominator:
Effect of dilutive securities	20	0	11	9

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Dividend (Details) - USD ($) $ / shares in Units, $ in Thousands		3 Months Ended		9 Months Ended
	Aug. 08, 2016	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Equity [Abstract]
Cash dividend declared per common share (in dollars per share)	$ 0.02	$ 0.02	$ 0	$ 0.02	$ 0
Dividend payments		$ (354)		$ (354)	$ 0