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Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-05 · 145 added, 130 removed, 164 unchanged (63% of the section changed)

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Throughout the following discussion and elsewhere in this Form 10-Q, we refer to “recurring revenues” and “non-recurring revenues.” Recurring revenues are comprised of “current patent royalties” and “current technology solutions revenue.” Non-recurring revenues are comprised of “non-current patent royalties,” which include past patent royalties and royalties from static agreements, as well as “patent sales.”

Throughout the following discussion and elsewhere in this Form 10-Q, we refer to the R&I Acquisition, in which we acquired Technicolor's R&I team.

Refer to Note 5, " Business Combinations and Other Transactions, " within the notes to the consolidated financial statements included in Part II, Item 8 of the 2020 Form 10-K for further information on the Technicolor transactions.

Xiaomi Patent License Agreement

New Agreements

On August 3, 2021, we announced that we have entered into a multi-year, worldwide, non-exclusive, royalty bearing license with a subsidiary of Xiaomi.

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As part of the agreement, we and Xiaomi have agreed to terminate all pending patent litigation and other proceedings between the companies.

Second quarter 2021 revenue did not include any impact from the Xiaomi agreement, which was executed in third quarter 2021.

We expect to recognize recurring and non-recurring revenue from this agreement, beginning in third quarter 2021, along with additional expenses to adjust our performance-based compensation accruals.

During third quarter 2021, we recognized a total of $45.0 million of revenue associated with the Xiaomi patent license agreement, including $30.0 million of non-recurring revenue.

During third quarter 2021, as part of the Madison Arrangement, we entered into a non-exclusive, per-unit royalty-bearing patent license agreement with a top ten global TV manufacturer, covering certain of the licensee’s sales of digital televisions.

During third quarter 2021, we recognized a total of $20.9 million of revenue associated with the patent license agreement, including $19.2 million of non-recurring revenue.

Recurring Revenue

Second quarter 2021 recurring revenue was $78.1 million, compared to recurring revenue of $85.2 million in second quarter 2020, an 8% year-over-year decrease.

The decrease in fixed-fee royalty revenue was primarily due to a reduction from the expired LG patent license agreement, partially offset by additional revenues from eight new patent license agreements signed in the last twelve months.

In April 2021, LG confirmed that it is exiting the smartphone market.

Refer to " Results of Operations --Second Quarter 2021 Compared to Second Quarter 2020 " for further discussion of our 2021 revenue.

Third quarter 2021 recurring revenue was $93.4 million, compared to recurring revenue of $87.0 million in third quarter 2020, a 7% year-over-year increase.

The increase in recurring revenue was primarily due to additional revenues from ten new patent license agreements signed in the last twelve months, including the Xiaomi and top ten global TV manufacturer patent license agreements signed in third quarter 2021, partially offset by a reduction in revenues resulting from LG's decision to exit the handset business.

Refer to " Results of Operations --Third Quarter 2021 Compared to Third Quarter 2020 " for further discussion of our 2021 revenue.

Restructuring Activities

On June 10, 2021, we announced that, as a result of a strategic review of our research and innovation priorities, we commenced the process of a collective economic layoff in which we proposed a reduction in force of 66 employees in our research and innovation unit, 60 of whom are based in France.

We have launched an information-consultation process with respect to the contemplated reorganization with the works council of certain of our French subsidiaries, as required by French law.

We anticipate the reduction in force being finalized in 2021.

Additionally, Chordant has begun the process of ceasing operations.

The Company implemented a reduction in workforce action in second quarter 2021, consisting of 18 employees.

During second quarter 2021, we recognized $13.2 million restructuring expenses including $11.1 million severance and other benefits, an $11.0 million impairment on our patents and $1.2 million outside services and other associated costs, offset by a $10.0 million reimbursement agreement, which are included within “ Restructuring Activities ” in the condensed consolidated statement of income.

Any remaining restructuring expenses are expected to be recognized in 2021.

We expect to recognize additional restructuring charges of $15 million - $20 million in the second half of 2021.

We expect these actions will drive annualized recurring expense savings of approximately $15 million beginning in fourth quarter 2021.

On June 10, 2021, we announced that, as a result of a strategic review of our research and innovation priorities, we commenced the process of a collective economic layoff in which we proposed a reduction in force of 66 positions in our research and innovation unit, 60 of whom are based in France.

We launched an information-consultation process with respect to the contemplated reorganization with the works council of certain of our French subsidiaries, as required by French law.

On September 28, 2021, the Company finalized an agreement with the representative trade unions of certain of its French subsidiaries to commence the reorganization of the research and innovation unit located in France as part of the reduction in force announced in June.

This agreement was validated by the Regional Director of Economy, Employment, Labor and Solidarity on October 25, 2021.

The majority of termination notices will be issued during the remainder of 2021.

During third quarter 2021, we recognized $7.0 million of restructuring expenses including $6.9 million of severance and other benefits and $0.1 million of outside services and other associated costs which are included within “Restructuring Activities” in the condensed consolidated statement of income.

In October 2021, we expanded our restructuring efforts to include general and administrative functions largely centered in the U.S., which will result in a further reduction in force of approximately 8% of total headcount as well as cuts to our non-labor expenses.

We expect to recognize additional restructuring charges of $5 million to $6 million in fourth quarter 2021.

Previously, we disclosed that our initial restructuring efforts would drive annualized recurring expense savings of approximately $15 million.

While the expanded actions will increase these savings, we have begun to reinvest in our research activities in wireless, video, and other fundamental technologies and will continue to evaluate the extent of re-investment through the end of the year.

Impact of COVID-19 Pandemic

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Though the COVID-19 pandemic and the measures taken to reduce its transmission, such as the imposition of social distancing and orders to work-from-home and shelter-in-place, have altered our business environment and overall working conditions, we continue to believe that our strategic strengths, including talent, our strong balance sheet, stable revenue base, and the strength of our patent portfolio, will allow us to weather a rapidly changing marketplace.

While the environment in which we conduct our business and our overall working conditions have changed as a result of the COVID-19 pandemic, we experienced a limited impact on our operations and financial position during three months ended June 30, 2021.

As discussed in our 2020 Form 10-K, fixed-fee royalties accounted for nearly 89% of our revenues in 2020.

To that end, in the six months ended June 30, 2021, we did not experience a significant impact on our revenue due to COVID-19.

To that end, in the nine months ended September 30, 2021, we did not experience a significant impact on our revenue due to COVID-19.

Meanwhile, we have taken steps to protect the health and safety of our employees and their families, with our entire worldwide workforce continuing to work remotely with limited exceptions.

We are currently planning for a return to in-person work as early as September 2021, however we continue to evaluate feasibility of this date based on the evolving environment and regulatory guidance.

Most of our locations are open on a limited and voluntary basis as of July 1, 2021.

We are currently planning for a return to in-person work as early as January 2022, however we continue to evaluate feasibility of this date based on the evolving environment and regulatory guidance.

All of our locations are open on a limited and voluntary basis.

Despite the remote working conditions, our business activities have continued to operate with minimal interruption, and we expect them to continue to operate efficiently.

Although we have resumed work-related travel on a limited basis, we have conducted the majority of our licensing negotiations, investor presentations and participation in standards organizations and industry events virtually.

Between March 12, 2020, when we began to work almost entirely remotely, and June 30, 2021, we successfully concluded ten new patent license agreements that we estimate will result in aggregate revenues exceeding $200.0 million over the terms of those agreements.

Between March 12, 2020, when we began to work almost entirely remotely, and September 30, 2021, we successfully concluded thirteen new patent license agreements that we estimate will result in aggregate revenues exceeding $500.0 million over the terms of those agreements.

Our financial position remains strong, we believe we have sufficient access to capital if needed, and we remain committed to our efforts around cost discipline.

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Share Repurchase Program

During second quarter 2021, we repurchased 0.1 million shares for $5.4 million under the 2014 Repurchase Program.

As of June 30, 2021, there was approximately $60.3 million remaining under the stock repurchase authorization.

In the period July 1, 2021 through August 3, 2021, we repurchased 0.1 million shares for $8.8 million under the 2014 Repurchase Program.

During third quarter 2021, we repurchased 0.2 million shares for $11.9 million under our share repurchase program (the "2014 Repurchase Program").

As of September 30, 2021, there was approximately $48.5 million remaining under the stock repurchase authorization.

Year-to-date through November 3, 2021, we repurchased 0.5 million shares for $30.0 million under the 2014 Repurchase Program.

Comparability of Financial Results

When comparing second quarter 2021 financial results against other periods, the following items should be taken into consideration:

• Our second quarter 2021 revenue includes $9.6 million of non-recurring revenue primarily related to a static fixed-fee patent licensing agreement signed in second quarter 2021.

• During second quarter 2021, we recognized $13.2 million restructuring expenses including $11.1 million severance and other benefits, an $11.0 million impairment on our patents and $1.2 million outside services and other associated costs, offset by a $10.0 million reimbursement agreement.

When comparing third quarter 2021 financial results against other periods, the following items should be taken into consideration:

• Our third quarter 2021 revenue includes $50.1 million of non-recurring revenue primarily related to the patent license agreements with Xiaomi and a top ten global TV manufacturer signed in third quarter 2021.

• During third quarter 2021, we incurred $11.1 million of one-time supplemental compensation costs driven by licensing success.

• During third quarter 2021, we recognized $7.0 million of restructuring expenses.

These costs resulted from our restructuring activities as described in Note 11, " Restructuring Activities ", within the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and are included within “ Restructuring activities ” expenses in the condensed consolidated statement of income.

The patents held for sale are recorded at fair value on June 30, 2021 and are included within " Prepaid and other current assets " in the consolidated balance sheet.

• During second quarter 2021, we incurred $2.0 million of additional non-recurring personnel-related costs expenses related to new employee agreements.

• Interest expense decreased in second quarter 2021 by $3.3 million primarily due to a reduction in non-cash interest expense resulting from the accounting adoption of ASU 2020-06, related to the accounting for convertible debts.

• In second quarter 2021 we recognized a $1.0 million gain resulting from observable price changes of one of our long-term strategic investments, which was included within “ Other Income, Net ” in the condensed consolidated statement of income.

• Interest expense decreased in third quarter 2021 by $4.6 million primarily due to a reduction in non-cash interest expense resulting from the accounting adoption of ASU 2020-06, related to the accounting for convertible debt.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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There have been no material changes to our existing critical accounting policies from the disclosures included in our 2020 Form 10-K.

In addition, we have analyzed the impact of COVID-19 on our financial statements as of June 30, 2021, and we have determined that the changes to our significant judgments and estimates did not have a material impact on our financial statements.

In addition, we have analyzed the impact of COVID-19 on our financial statements as of September 30, 2021, and we have determined that the changes to our significant judgments and estimates did not have a material impact on our financial statements.

Refer to Note 1, “ Basis of Presentation ,” in the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for updates related to new accounting pronouncements and changes in accounting policies.

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We believe we have the ability to obtain additional liquidity through debt and equity financings.

Based on our past performance and current expectations, we believe our available sources of funds, including cash, cash equivalents and short-term investments and cash generated from our operations, will be sufficient to finance our operations, capital requirements, debt obligations, existing stock repurchase program and dividend program for the next twelve months.

Based on our past performance and current expectations, we believe our available sources of funds, including cash, cash equivalents and short-term investments and cash generated from our operations, will be sufficient to finance our operations, capital requirements, debt obligations, existing share repurchase program and dividend program for the next twelve months.

Cash, cash equivalents, restricted cash and short-term investments

As of June 30, 2021 and December 31, 2020, we had the following amounts of cash, cash equivalents, restricted cash and short-term investments (in thousands):

June 30, 2021 December 31, 2020 Increase /

As of September 30, 2021 and December 31, 2020, we had the following amounts of cash, cash equivalents, restricted cash and short-term investments (in thousands):

September 30, 2021 December 31, 2020 Increase /

Cash and cash equivalents $ 467,606 $ 473,474 $ (5,868)

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Total cash, cash equivalents, restricted cash and short-term investments $ 903,187 $ 930,836 $ (27,649)

The net decrease in cash, cash equivalents, restricted cash and short-term investments was attributable to cash used in financing activities of $33.1 million, primarily related to dividend payments and repurchases of common stock, cash used in investing activities of $22.3 million, excluding sales and purchases of short-term investments, and cash used in operating activities of $37.1 million.

The net decrease in cash, cash equivalents, restricted cash and short-term investments was attributable to cash used in financing activities of $54.3 million, primarily related to dividend payments and repurchases of common stock and cash used in investing activities of $31.1 million, excluding sales and purchases of short-term investments, offset by cash provided by operating activities of $59.2 million.

Refer to the sections below for further discussion of these items.

Cash flows from operating activities

We used the following cash flows in our operating activities in first half 2021 and 2020 (in thousands):

Six months ended June 30,

We generated the following cash flows from operating activities in the first nine months 2021 and 2020 (in thousands):

Nine months ended September 30,

2021 2020 Increase /

Net cash provided by (used in) operating activities $ (37,101) $ 42,870 $ (79,971)

Our cash flows provided by (used in) operating activities are principally derived from cash receipts from patent license and technology solutions agreements, offset by cash operating expenses and income tax payments.

The $80.0 million change in net cash used in operating activities was primarily driven by lower cash receipts, primarily related to new patent license agreements signed over the last twelve months, as well as the timing of cash receipts related to existing patent license agreements.

The table below sets forth the significant items comprising our cash flows provided by (used in) operating activities during the six months ended June 30, 2021 and 2020 (in thousands):

Six months ended June 30,

Net cash provided by operating activities $ 59,163 $ 144,212 $ (85,049)

Our cash flows provided by operating activities are principally derived from cash receipts from patent license and technology solutions agreements, offset by cash operating expenses and income tax payments.

The $85.0 million change in net cash provided by operating activities was primarily driven by lower cash receipts, primarily attributable to the timing of cash receipts related to both new and existing patent license agreements.

The table below sets forth the significant items comprising our cash flows provided by operating activities during the nine months ended September 30, 2021 and 2020 (in thousands):

Nine months ended September 30,

2021 2020 Increase / (Decrease)

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Other working capital adjustments 16,358 1,137 15,221

Cash flows (used in) provided by operating activities $ (37,101) $ 42,870 $ (79,971)

Cash flows provided by operating activities $ 59,163 $ 144,212 $ (85,049)

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Cash flows from investing and financing activities

Net cash provided by in investing activities in first half 2021 was $4.5 million, a $10.7 million change from $6.2 million of net cash used in investing activities in first half 2020.

During first half 2021, we sold $26.7 million of short-term marketable securities, net of purchases, we capitalized $21.2 million of patent costs and property plant and equipment purchases, and invested $1.1 million in a new strategic investment.

During first half 2020, we sold $11.4 million of short-term marketable securities, net of purchases, and we capitalized $17.6 million of patent costs and property plant and equipment purchases.

Net cash used in financing activities for first half 2021 was $33.1 million, a change of $83.4 million from net cash used in financing activities of $116.5 million for first half 2020.

This change was primarily attributable to a $94.9 million payment on long-term debt related to the repayment of our 2020 Notes during the first quarter 2020 offset by $10.8 million of additional repurchases of common stock and a $1.1 million non-controlling interest distribution in first quarter 2021.

Our combined short-term and long-term deferred revenue balance as of June 30, 2021 was approximately $241.3 million, a net decrease of $86.7 million from December 31, 2020.

This decrease in deferred revenue was primarily attributable to timing of cash receipts from our dynamic fixed-fee royalty agreements and amortization of deferred revenue recognized in the period.

Based on current license agreements, we expect the amortization of dynamic fixed-fee royalty payments to reduce the June 30, 2021 deferred revenue balance of $241.3 million by $158.9 million over the next twelve months.

Net cash used in investing activities for the first nine months 2021 was $12.5 million, a $9.4 million change from $22.0 million of net cash used in investing activities in the first nine months 2020.

During the first nine months 2021, we sold $18.6 million of short-term marketable securities, net of purchases, we capitalized $30.0 million of patent costs and property plant and equipment purchases, and invested $1.1 million in a new strategic investment.

During the first nine months 2020, we sold $7.4 million of short-term marketable securities, net of purchases, and we capitalized $33.6 million of patent costs and property plant and equipment purchases and $4.3 million of cash receipts from the sale of one of our long-term strategic investments.

Net cash used in financing activities for the first nine months 2021 was $54.3 million, a change of $73.0 million from net cash used in financing activities of $127.3 million for the first nine months 2020.

This change was primarily attributable to a $94.9 million payment on long-term debt related to the repayment of our 2020 Notes during first quarter 2020 offset by $22.7 million of additional repurchases of common stock and a $1.1 million non-controlling interest distribution in first quarter 2021.

Our combined short-term and long-term deferred revenue balance as of September 30, 2021 was approximately $392.0 million, a net increase of $64.0 million from December 31, 2020.

This increase in deferred revenue was primarily attributable to timing of cash receipts from our dynamic fixed-fee royalty agreements and amortization of deferred revenue recognized in the period.

Based on current license agreements, we expect the amortization of dynamic fixed-fee royalty payments to reduce the September 30, 2021 deferred revenue balance of $392.0 million by $325.4 million over the next twelve months.

Convertible Notes

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However, under GAAP, since the impact of the 2024 Note Hedge Transactions is anti-dilutive, we exclude from the calculation of fully diluted shares the number of shares of our common stock that we would receive from the counterparties to these agreements upon settlement.

During periods in which the average market price of our common stock is above the applicable conversion price of the Convertible Notes ($81.29 per share for the 2024 Notes as of June 30, 2021) or above the strike price of the warrants ($109.43 per share for the 2024 Warrant Transactions as of June 30, 2021), the impact of conversion or exercise, as applicable, would be dilutive and such dilutive effect is reflected in diluted earnings per share.

During periods in which the average market price of our common stock is above the applicable conversion price of the Convertible Notes ($81.29 per share for the 2024 Notes as of September 30, 2021) or above the strike price of the warrants ($109.43 per share for the 2024 Warrant Transactions as of September 30, 2021), the impact of conversion or exercise, as applicable, would be dilutive and such dilutive effect is reflected in diluted earnings per share.

As a result, in periods where the average market price of our common stock is above the conversion price or strike price, as applicable, under the if-converted method, we calculate the number of shares issuable under the terms of the Convertible Notes and the warrants based on the average market price of the stock during the period, and include that number in the total diluted shares outstanding for the period.

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As described in Note 7, " Obligations, " we made the irrevocable election to settle all conversions of the 2024 Notes through combination settlements of cash and shares of our common stock, with a specified dollar amount of $1,000 per $1,000 principal amount of 2024 Notes and any remaining amounts in shares of our common stock ("net share settlement").

Assuming net share settlement upon conversion, the following table illustrates how, based on the $400.0 million aggregate principal amount of the 2024 Notes outstanding as of June 30, 2021, and the approximately 4.9 million warrants related to the 2024 Notes outstanding as of the same date, changes in our stock price would affect (i) the number of shares issuable upon conversion of the Convertible Notes, (ii) the number of shares issuable upon exercise of the warrants subject to the 2024 Warrant Transactions, (iii) the number of additional shares deemed outstanding with respect to the Convertible Notes, after applying the if-converted method, for purposes of calculating diluted earnings per share ("Total If-Converted Method Incremental Shares"), (iv) the number of shares of our common stock deliverable to us upon settlement of the 2024 Note Hedge Transactions and (v) the number of shares issuable upon concurrent conversion of the Convertible Notes, exercise of the warrants subject to the 2024 Warrant Transactions, and settlement of the 2024 Note Hedge Transactions:

Assuming net share settlement upon conversion, the following table illustrates how, based on the $400.0 million aggregate principal amount of the 2024 Notes outstanding as of September 30, 2021, and the approximately 4.9 million warrants related to the 2024 Notes outstanding as of the same date, changes in our stock price would affect (i) the number of shares issuable upon conversion of the Convertible Notes, (ii) the number of shares issuable upon exercise of the warrants subject to the 2024 Warrant Transactions, (iii) the number of additional shares deemed outstanding with respect to the Convertible Notes, after applying the if-converted method, for purposes of calculating diluted earnings per share ("Total If-Converted Method Incremental Shares"), (iv) the number of shares of our common stock deliverable to us upon settlement of the 2024 Note Hedge Transactions and (v) the number of shares issuable upon concurrent conversion of the Convertible Notes, exercise of the warrants subject to the 2024 Warrant Transactions, and settlement of the 2024 Note Hedge Transactions:

Market Price Per Share Shares Issuable Upon Conversion of the 2024 Notes Shares Issuable Upon Exercise of the 2024 Warrant Transactions Total If-Converted Method Incremental Shares Shares Deliverable to InterDigital upon Settlement of the 2024 Note Hedge Transactions Incremental Shares Issuable (a)

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RESULTS OF OPERATIONS

Second Quarter 2021 Compared to Second Quarter 2020

The following table compares second quarter 2021 revenues to second quarter 2020 revenues (in thousands):

Three months ended June 30,

Third Quarter 2021 Compared to Third Quarter 2020

The following table compares third quarter 2021 revenues to third quarter 2020 revenues (in thousands):

Three months ended September 30,

2021 2020 Total Increase/(Decrease)

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Total revenue $ 143,496 $ 87,493 $ 56,003 64 %

Recurring revenues are comprised of current patent royalties, inclusive of Dynamic Fixed-Fee Agreement royalties, and current technology solutions revenue.

Recurring revenues are comprised of current patent royalties, inclusive of dynamic fixed-fee royalty payments, and current technology solutions revenue.

Non-recurring revenues are comprised of non-current patent royalties, which include past patent royalties and royalties from static agreements, as well as patent sales.

The $16.8 million decrease in total revenue was primarily due to a $7.1 million decrease in recurring revenue and a $9.7 million decrease in non-current patent royalties.

The decrease in recurring revenue was primarily due to the expired LG patent license agreement, partially offset by additional revenues from eight new patent license agreements signed in the last twelve months.

The decrease in non-current patent royalties was driven by past sales royalties recognized from the Huawei patent license agreement signed in second quarter 2020, partially offset by royalties recognized from a static fixed-fee patent license agreement signed in second quarter 2021.

In second quarter 2021 and second quarter 2020, 79% and 75% of our total revenue, respectively, was attributable to companies that individually accounted for 10% or more of our total revenue.

In second quarter 2021 and second quarter 2020, the following companies accounted for 10% or more of our total revenue:

Three months ended June 30,

The $56.0 million increase in total revenue was primarily driven by additional revenues from ten new patent license agreements signed in the last twelve months, including agreements with Xiaomi and a top ten global TV manufacturer signed in third quarter 2021, which primarily drove both a $6.4 million increase in recurring revenue and a $49.6 million increase in non-current patent royalties.

These increases in revenue were partially offset by a reduction in revenues resulting from LG's decision to exit the handset business and a decrease in technology solutions revenues from a strategic partner.

In third quarter 2021 and third quarter 2020, 79% and 67% of our total revenue, respectively, was attributable to companies that individually accounted for 10% or more of our total revenue.

In third quarter 2021 and third quarter 2020, the following companies accounted for 10% or more of our total revenue:

Three months ended September 30,

Xiaomi 31% —%

Apple 19% 32%

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Huawei <10% 13%

Kyocera 12% <10%

Operating Expenses

The following table summarizes the changes in operating expenses between second quarter 2021 and second quarter 2020 by category (in thousands):

Three months ended June 30,

The following table summarizes the changes in operating expenses between third quarter 2021 and third quarter 2020 by category (in thousands):

Three months ended September 30,

2021 2020 Increase/(Decrease)

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Total operating expenses $ 106,719 $ 72,063 $ 34,656 48 %

Operating expenses increased to $90.9 million in second quarter 2021 from $72.6 million in second quarter 2020.

Operating expenses increased to $106.7 million in third quarter 2021 from $72.1 million in third quarter 2020.

The $34.7 million increase in total operating expenses was primarily due to changes in the following items (in thousands):

Increase/(Decrease)

Supplemental compensation $ 16,479

Revenue share 8,817

Restructuring activities 7,045

Personnel-related costs 3,373

Intellectual property enforcement and non-patent litigation 4,018

Other (1,703)

Total increase in operating expenses $ 34,656

The $18.3 million increase in operating expenses was primarily driven by $13.2 million of non-recurring restructuring costs incurred as part of our overall restructuring plan.

In addition, there was a $3.4 million increase in personnel-related costs, primarily driven by new employment agreements, and a $1.1 million increase in intellectual property enforcement costs, primarily driven by the ongoing Lenovo and Xiaomi litigations.

The $34.7 million increase in operating expenses was driven by supplemental compensation, including annual bonus and long-term compensation, and revenue share costs both driven by patent license agreements signed in third quarter 2021.

The supplemental compensation increase includes one-time charges of approximately $11.1 million to increase compensation accruals based on licensing success achieved to date, including $6.4 million related to the vesting of performance components of the previously disclosed new hire equity award granted to our CEO, and $2.4 million related to the goal modification associated with the 2019 performance based grant that was modified for all plan participants in the first half 2021 in order to reinforce pay-for-performance and drive employee retention.

The $8.8 million increase in revenue share costs related to the above-noted patent license agreement with a top ten global TV manufacturer.

In addition, $7.0 million of the increase related to non-recurring restructuring costs incurred as part of our overall restructuring plan.

Lastly, there was a $4.0 million increase in intellectual property enforcement costs, primarily driven by the ongoing Lenovo litigations.

Patent Administration and Licensing Expense:

The $2.3 million increase in patent administration and licensing expense primarily resulted from the increase in the intellectual property enforcement discussed above, as well as higher patent maintenance costs.

The $15.8 million increase in patent administration and licensing expense primarily resulted from the above noted $8.8 million increase in revenue share, as well as the supplemental compensation and, intellectual property enforcement costs discussed above.

Development Expense:

Development expense was relatively flat as compared to second quarter 2020.

Development expense increased $1.7 million primarily resulting from the increase in supplemental compensation costs discussed above.

Selling, General and Administrative Expense:

The $3.0 million increase in selling, general and administrative expense was primarily due to the increase in personnel-related costs discussed above.

The $10.1 million increase in selling, general and administrative expense was primarily due to the increase in supplemental compensation costs discussed above, partially offset by a decrease in costs from outside consultants.

Restructuring Activities:

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Non-Operating Expense

The following table compares second quarter 2021 non-operating expense to second quarter 2020 non-operating expense (in thousands):

Three months ended June 30,

The following table compares third quarter 2021 non-operating expense to third quarter 2020 non-operating expense (in thousands):

Three months ended September 30,

2021 2020 Increase/(Decrease)

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Interest and investment income 385 825 (440) (53) %

Other income, net 2,593 2,447 146 6 %

Other (expense) income, net (1,922) 3,169 (5,091) (161) %

Total non-operating expense $ (7,310) $ (6,371) $ (939) (15) %

The change in non-operating expense between periods was driven by $4.6 million of reduced non-cash interest expense due to the removal of the accretion of the debt discount on the 2024 Notes resulting from the adoption of ASU 2020-06.

Additionally, interest and investment income decreased $0.9 million in the three months ended June 30, 2021 due to reduced rates of return on our short-term investments.

In second quarter 2021 and 2020, we had an effective tax rate of (0.3)% and 20.0%, respectively.

The effective tax rate in both periods was impacted by losses in certain jurisdictions where the Company presently has recorded a valuation allowance against the related tax benefit.

Excluding this valuation allowance, our second quarter 2021 and 2020 effective tax rate would have been 26.3% and 12.2%, respectively.

First Half 2021 Compared to First Half 2020

The following table compares first half 2021 revenues to first half 2020 revenues (in thousands):

Six months ended June 30,

Additionally, Other (expense) income, net decreased $5.1 million primarily related to a foreign currency translation loss in the three months ended September 30, 2021, compared to a gain in three months ended September 30, 2020 arising from euro translation of our foreign subsidiaries.

In third quarter 2021 and 2020, we had an effective tax rate of 14.4% and (141.8)%, respectively.

The effective tax rate in both periods was impacted by losses in certain jurisdictions where the Company presently has recorded a valuation allowance against the related tax benefit, as well as by the foreign-derived intangible income deduction and non-deductible compensation.

Excluding this valuation allowance, our third quarter 2021 and 2020 effective tax rate would have been 11.8% and (156.4)%, respectively.

First Nine Months 2021 Compared to First Nine Months 2020

The following table compares first nine months 2021 revenues to first nine months 2020 revenues (in thousands):

Nine months ended September 30,

2021 2020 Total Increase/(Decrease)

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Total revenue $ 313,594 $ 268,201 $ 45,393 17 %

(a) Recurring revenues are comprised of current patent royalties, inclusive of Dynamic Fixed-Fee Agreement royalties, and current technology solutions revenue.

(a) Recurring revenues are comprised of current patent royalties, inclusive of dynamic fixed-fee royalty payments, and current technology solutions revenue.

(b) Non-recurring revenues are comprised of non-current patent royalties, which include past patent royalties and royalties from static agreements, as well as patent sales.

The $10.6 million decrease in total revenue was primarily driven by a $4.0 million decrease in recurring revenue and a $6.6 million decrease in non-current patent royalties.

The decrease in recurring royalty revenue was primarily due to the expired LG patent license agreement, and was partially offset by additional revenues from nine new patent license agreements signed in the last fifteen months, including the Huawei patent license agreement signed in second quarter 2020.

The decrease in non-current patent royalties was driven by past sales royalties recognized from the Huawei patent license agreement signed in second quarter 2020, partially offset by royalties recognized from two patent license agreement signed in first half 2021.

In first half 2021 and first half 2020, 69% and 70% of our total revenue, respectively, was attributable to companies that individually accounted for 10% or more of our total revenue.

In first half 2021 and first half 2020, the following companies accounted for 10% or more of our total revenue:

Six months ended June 30,

The $45.4 million increase in total revenue was primarily driven by the third quarter 2021 Xiaomi and top ten global TV manufacturer patent license agreements, which primarily drove both a $2.4 million increase in recurring revenue and a $43.0 million increase in non-current patent royalties.

Revenue from another ten patent license agreements signed in the last eighteen months contributed to the increase in recurring revenue.

These increases were partially offset by a reduction in revenues resulting from LG's decision to exit the handset business.

The increase in non-current patent royalties was also related to revenues from a static fixed-fee patent license agreement signed in second quarter 2021.

These increases in non-current patent royalties were partially offset by the prior period including past sales recognized from the Huawei patent license agreement signed in second quarter 2020.

The decrease in technology solutions revenue was primarily due to reduced revenue from a strategic partner.

In first nine months 2021 and first nine months 2020, 71% and 68% of our total revenue, respectively, was attributable to companies that individually accounted for 10% or more of our total revenue.

In first nine months 2021 and first nine months 2020, the following companies accounted for 10% or more of our total revenue:

Nine months ended September 30,

Apple 27% 31%

Samsung 19% 22%

Xiaomi 14% —%

Huawei 11% 15%

Operating Expenses

The following table summarizes the changes in operating expenses between first half 2021 and first half 2020 by category (in thousands):

Six months ended June 30,

The following table summarizes the changes in operating expenses between first nine months 2021 and first nine months 2020 by category (in thousands):

Nine months ended September 30,

2021 2020 Increase/(Decrease)

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Total operating expenses $ 267,977 $ 216,173 $ 51,804 24 %

Operating expenses increased 12% to $161.3 million in first half 2021 from $144.1 million in first half 2020.

Operating expenses increased 24% to $268.0 million in first nine months 2021 from $216.2 million in first nine months 2020.

The $51.8 million increase in total operating expenses was primarily due to changes in the following items (in thousands):

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Restructuring activities $ 20,290

Supplemental compensation

Revenue share 8,921

Personnel-related costs 7,358

Intellectual property enforcement and non-patent litigation 6,404

Patent maintenance (1,611)

Corporate initiatives (2,552)

Depreciation and amortization (1,466)

Other (2,445)

Total increase in operating expenses $ 51,804

The $17.1 million increase in operating expenses was primarily driven by $13.2 million of non-recurring restructuring costs incurred as part of our overall restructuring plan.

In addition, there was a $5.6 million increase in personnel-related costs, primarily driven by new employment agreements, and a $2.4 million increase in intellectual property enforcement costs, primarily driven by the ongoing Lenovo and Xiaomi litigations.

These increases were offset by a $1.6 million decrease in patent maintenance costs due to the ongoing efforts to effectively manage our patent portfolio size and a $2.0 million decrease due to ongoing efforts to optimize our cost structure, including the closing of our San Diego office.

The $51.8 million increase in operating expenses was driven by supplemental compensation, including annual bonus and long-term compensation, and revenue share costs related to the license agreements signed in third quarter 2021.

The $8.9 million increase in revenue share costs related to the above-noted patent license agreement with a top ten global TV manufacturer.

In addition, $20.3 million of the increase related to non-recurring restructuring costs incurred as part of our overall restructuring plan, $7.4 million related to increased personnel-related costs primarily driven by new employment agreements, and $6.4 million related to an increase in intellectual property enforcement costs, primarily driven by the Xiaomi and ongoing Lenovo litigations.

These increases were offset by a $1.5 million decrease in depreciation and patent amortization costs due to the ongoing efforts to effectively manage our patent portfolio size and a $2.6 million decrease due to ongoing efforts to optimize our cost structure, including the closure of our San Diego office.

Patent Administration and Licensing Expense:

The decrease in patent administration and licensing expense primarily resulted from the above-noted decrease in patent maintenance costs, slightly offset by an increase in intellectual property enforcement costs.

Additionally, lower personnel-related costs contributed to the decrease.

The $14.5 million increase in patent administration and licensing expense primarily resulted from the above noted $8.9 million increases in revenue share, as well as the supplemental compensation and intellectual property enforcement costs, discussed above.

These increases were partially offset by the decrease in patent amortization discussed above

Development Expense:

The increase in development expense primarily resulted from the above-noted increase in personnel-related expenses.

Development expense increased by $5.2 million primarily resulting from the increases in supplemental compensation and personnel-related costs discussed above.

Selling, General and Administrative Expense:

The increase in selling, general and administrative expense primarily resulted from the above-noted increase in personnel-related costs, and was partially offset by the above-noted corporate initiatives.

The $11.7 million increase in selling, general and administrative expense primarily resulted from the above-noted increases in supplemental compensation and personnel-related costs, partially offset by the above-noted corporate initiatives, as well as a decrease in outside consulting costs.

Restructuring Activities:

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Non-Operating Expense

The following table compares first half 2021 non-operating expense to first half 2020 non-operating expense (in thousands):

Six months ended June 30,

The following table compares first nine months 2021 non-operating expense to first nine months 2020 non-operating expense (in thousands):

Nine months ended September 30,

2021 2020 Increase/(Decrease)

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Total non-operating expense $ (17,203) $ (17,075) $ (128) (1) %

The change in non-operating expense between periods was primarily driven by a $5.5 million gain in 2020, resulting from observable price changes of one of our long-term strategic investments, $6.9 million of reduced non-cash interest expense due to the removal of the accretion of the debt discount on the 2024 Notes resulting from the adoption of ASU 2020-06, $1.0 million of reduced interest expense due to the repayment of the 2020 Notes in first quarter 2020, and a $1.9 million gain in first quarter 2021 on a contract termination.

Additionally, Interest and investment income decreased $3.2 million in the six months ended June 30, 2021 due to reduced rates of return on our short-term investments.

In first half 2021 and 2020, we had an effective tax rate of (169.6)% and 26.9%, respectively.

The effective tax rate in both periods was driven by losses in certain jurisdictions where the Company presently has recorded a valuation allowance against the related tax benefit.

Excluding this valuation allowance, our first half 2021 and 2020 effective tax rate would have been 104.3% and 12.5%, respectively.

In the first half of 2021 and 2020, we recorded a net discrete tax expense of $0.6 million and $0.3 million, respectively, primarily related to share-based compensation.

The change in non-operating expense between periods was driven by $11.5 million of reduced non-cash interest expense due to the removal of the accretion of the debt discount on the 2024 Notes resulting from the adoption of ASU 2020-06.

Additionally, interest and investment income decreased by $3.7 million in the nine months ended September 30, 2021 due to reduced rates of return on our short-term investments.

Lastly, the decrease in Other income, net was primarily driven by a decrease in gains resulting from observable price changes of our long-term strategic investments, which were $5.5 million during the nine months ended September 30, 2020 and $1.0 million during the nine months ended September 30, 2021.

This decrease was partially offset by a $1.9 million gain on a contract termination in first quarter 2021.

In first nine months 2021 and 2020, we had an effective tax rate of 21.3% and (16.8)%, respectively.

The effective tax rate in both periods was driven by losses in certain jurisdictions where the Company presently has recorded a valuation allowance against the related tax benefit, as well as by the foreign-derived intangible income deduction and non-deductible compensation.

Excluding this valuation allowance, our first nine months 2021 and 2020 effective tax rate would have been 8.4% and (31.3)%, respectively.

In the first nine months 2021 and 2020, we recorded a net discrete tax expense of $0.3 million and $18.2 million, respectively, primarily related to share-based compensation and the expected amendment of a prior year return to utilize a tax asset generated in the prior year.

STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 — FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.

Such statements include certain information under the heading “Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information regarding our current beliefs, plans and expectations, including without limitation the matters set forth below.

Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “forecast,” "believe," "could," "would," "should," "if," "may," "might," "future," "target," “goal,” "trend," "seek to," "will continue," "predict," "likely," "in the event," variations of any such words or similar expressions are intended to identify such forward-looking statements.

Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements regarding:

• Our expectations regarding the potential effects of new accounting standards on our financial position, results of operations or cash flows;

• Our expectation that the amortization of dynamic fixed-fee royalty payments will reduce our June 30, 2021 deferred revenue balance over the next twelve months;

• Our expectations with respect to revenue to be recognized based on contracts signed and committed Dynamic Fixed-Fee Agreement payments as of June 30, 2021;

• Our expectations and estimations regarding the income tax effects, and the impact on the Company, of the 2017 Tax Cuts and Jobs Act, including our forecasted net benefit related to our income qualifying as FDII;

• Our expectations with respect to anticipated tax refunds to be received from amending certain tax returns;

• The timing, outcome and impact of, and plans, expectations and beliefs with respect to, our various litigation, regulatory, administrative and legislative matters;

• Our belief that we have the ability to obtain additional liquidity through debt and equity financings;

• Our expectations with respect to the impact of the restructuring activities on our financial statements and our business;

• Our belief that our available sources of funds will be sufficient to finance our operations, capital requirements, debt obligations, existing stock repurchase program and dividend program for the next twelve months;

• Our expectation that we will continue to pay dividends comparable to our quarterly $0.35 per share cash dividend in the future;

• Our expectations regarding our customers’ ability to continue to pay fixed fee payments owed to us despite the ongoing COVID-19 pandemic;

• Our expectations regarding the potential effects of the ongoing COVID-19 pandemic on our business, financial position, results of operations and cash flows.

Forward-looking statements concerning our business, results of operations and financial condition are inherently subject to risks and uncertainties that could cause actual results, and actual events that occur, to differ materially from results contemplated by the forward-looking statements.

These risks and uncertainties include, but are not limited to, the risks and uncertainties outlined in greater detail in Part I, Item 1A of our 2020 Form 10-K and Part II, Item 1A " Risk Factors " in this Quarterly Report on Form 10-Q.

Such statements include our current beliefs, plans and expectations, including, without limitation, our belief that we will continue to be able to execute strongly on our business during the ongoing COVID-19 pandemic.

Words such as "believe," “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “forecast,” "goal," "could," "would," "should," "if," "may," "might," "future," "target," "trend," "seek to," "will continue," "predict," "likely," "in the event," and variations of any such words or similar expressions are intended to identify such forward-looking statements.

Forward-looking statements are made on the basis of management’s current views and assumptions and are not guarantees of future performance.

Forward-looking statements are inherently subject to risks and uncertainties that could cause actual results, and actual events that occur, to differ materially from results contemplated by the forward-looking statements.

These risks and uncertainties include, but are not limited to, the risks and uncertainties described in Part I, Item 1A of our 2020 Form 10-K and Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and the risks and uncertainties set forth below:

• unanticipated delays, difficulties or accelerations in the execution of patent license agreements;

• our ability to leverage our strategic relationships and secure new patent license agreements on acceptable terms;

• our ability to enter into sales and/or licensing partnering arrangements for certain of our patent assets;

• our ability to enter into partnerships with leading inventors and research organizations and identify and acquire technology and patent portfolios that align with our roadmap;

• our ability to commercialize our technologies and enter into customer agreements;

• the failure of the markets for our current or new technologies and products to materialize to the extent or at the rate that we expect;

• unexpected delays or difficulties related to the development of our technologies and products;

• changes in our interpretations of, and assumptions and calculations with respect to the impact on us of, the 2017 Tax Cuts and Jobs Act, as well as further guidance that may be issued regarding such act;

• risks related to the potential impact of new accounting standards on our financial position, results of operations or cash flows;

• failure to accurately forecast the impact of our restructuring activities on our financial statements and our business;

• the resolution of current legal proceedings, including any awards or judgments relating to such proceedings, additional legal proceedings, changes in the schedules or costs associated with legal proceedings or adverse rulings in such proceedings;

• the timing and impact of potential administrative and legislative matters;

• changes or inaccuracies in market projections;

• our ability to obtain liquidity though debt and equity financings;

• the potential effects that the ongoing COVID-19 pandemic and/or corresponding macroeconomic uncertainty could have on our financial position, results of operations and cash flows;

• changes in our business strategy.

We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis