Item 2. Management’s Discussion and Analysis
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .
OVERVIEW
The following discussion should be read in conjunction with the unaudited, condensed consolidated financial statements and notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, in addition to our 2020 Form 10-K, other reports filed with the SEC and the Statement Pursuant to the Private Securities Litigation Reform Act of 1995 — Forward-Looking Statements below.
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.”
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. The license covers Xiaomi’s cellular-enabled mobile devices under our standard essential patents related to cellular wireless (including 3G, 4G and 5G), WiFi and HEVC video technology. As part of the agreement, we and Xiaomi have agreed to terminate all pending patent litigation and other proceedings between the companies. 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
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 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.
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Impact of COVID-19 Pandemic
In March 2020, the World Health Organization categorized the novel coronavirus ("COVID-19") as a pandemic, and it continues to significantly impact the United States and the rest of the world. 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 September 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 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 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 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.
Despite our success thus far in navigating the challenging environment that COVID-19 has presented, as more fully discussed in Part II, Item 1A " Risk Factors " in this Quarterly Report on Form 10-Q, the extent to which COVID-19 will adversely impact our business, financial condition and results of operations is dependent upon numerous factors resulting therefrom, many of which are highly uncertain, rapidly changing and uncontrollable. However, with a strong balance sheet and the vast majority of our current revenue coming from fixed price agreements, we believe that we are well-positioned to continue to overcome and adapt to the challenges that we have been presented with thus far.
Share 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 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.
• 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.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 2, " Summary of Significant Accounting Policies and New Accounting Guidance ", in the notes to consolidated financial statements included in our 2020 Form 10-K. A discussion of our critical accounting policies, and the estimates related to them, are included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Form 10-K. 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 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.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash, cash equivalents and short-term investments, as well as cash generated from operations. 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 share repurchase program and dividend program for the next twelve months.
Cash, cash equivalents, restricted cash and short-term investments
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 /
(Decrease)
Cash and cash equivalents $ 467,606 $ 473,474 $ (5,868)
Restricted cash included within prepaid and other current assets 1,300 3,108 (1,808)
Restricted cash included within other non-current assets 1,081 1,081 —
Short-term investments 433,200 453,173 (19,973)
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 $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 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 /
(Decrease)
Net cash provided by operating activities $ 59,163 $ 144,212 $ (85,049)
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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)
Cash Receipts:
Patent royalties $ 225,914 $ 303,918 $ (78,004)
Technology solutions 3,722 4,678 (956)
Total cash receipts 229,636 308,596 (78,960)
Cash Outflows:
Cash operating expenses a
176,996 147,310 29,686
Income taxes paid b
9,835 18,211 (8,376)
Total cash outflows 186,831 165,521 21,310
Other working capital adjustments 16,358 1,137 15,221
Cash flows provided by operating activities $ 59,163 $ 144,212 $ (85,049)
______________________________
(a) Cash operating expenses include operating expenses less depreciation of fixed assets, amortization of patents, non-cash compensation and non-cash changes in fair value.
(b) Income taxes paid include foreign withholding taxes.
Cash flows from investing and financing activities
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.
Other
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
See Note 7, “ Obligations ” to the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for definitions of capitalized terms below.
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Our 2024 Notes, which for purposes of this discussion are also referred to as the "Convertible Notes", are included in the dilutive earnings per share calculation using the if-converted method, as required by the adoption of ASU 2020-06. Under the if-converted method, we must assume that conversion of convertible securities occurs at the beginning of the reporting period. As of December 31, 2020, 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 common stock. As the principal amount must be paid in cash and only the conversion spread is settled in shares, we only include the net number of incremental shares that would be issued upon conversion. We must calculate the number of shares of our common stock issuable under the terms of the Convertible Notes based on the average market price of our common stock during the applicable reporting period and include that number in the total diluted shares figure for the period.
At the time we issued the Convertible Notes, we entered into the 2024 Call Spread Transactions that together were designed to have the economic effect of reducing the net number of shares that will be issued in the event of conversion of the Convertible Notes by, in effect, increasing the conversion price of the Convertible Notes from our economic standpoint. 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 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.
Under the if-converted method, changes in the price per share of our common stock can have a significant impact on the number of shares that we must include in the fully diluted earnings per share calculation. 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 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:
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2024 Notes
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)
(Shares in thousands)
$85 215 — 215 (215) —
$90 476 — 476 (476) —
$95 710 — 710 (710) —
$100 921 — 921 (921) —
$105 1,111 — 1,111 (1,111) —
$110 1,284 25 1,309 (1,284) 25
$115 1,442 238 1,680 (1,442) 238
$120 1,587 433 2,020 (1,587) 433
$125 1,721 613 2,334 (1,721) 613
$130 1,844 779 2,623 (1,844) 779
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(a) Represents incremental shares issuable upon concurrent conversion of convertible notes, exercise of warrants and settlement of the hedge agreements.
RESULTS OF OPERATIONS
Third Quarter 2021 Compared to Third Quarter 2020
Revenues
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)
Variable patent royalty revenue $ 8,346 $ 7,377 $ 969 13 %
Fixed-fee royalty revenue 84,295 77,338 6,957 9 %
Current patent royalties a
92,641 84,715 7,926 9 %
Non-current patent royalties b
50,108 507 49,601 9,783 %
Total patent royalties 142,749 85,222 57,527 68 %
Current technology solutions revenue a
747 2,271 (1,524) (67) %
Total revenue $ 143,496 $ 87,493 $ 56,003 64 %
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 $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.
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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,
2021 2020
Xiaomi 31% —%
Apple 19% 32%
Vizio 15% —%
Samsung 14% 22%
Huawei <10% 13%
Operating Expenses
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)
Patent administration and licensing $ 56,150 $ 40,364 $ 15,786 39 %
Development 22,546 20,845 1,701 8 %
Selling, general and administrative 20,978 10,854 10,124 93 %
Restructuring activities 7,045 — 7,045 100 %
Total operating expenses $ 106,719 $ 72,063 $ 34,656 48 %
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
Intellectual property enforcement and non-patent litigation 4,018
Other (1,703)
Total increase in operating expenses $ 34,656
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 $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 increased $1.7 million primarily resulting from the increase in supplemental compensation costs discussed above.
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Selling, General and Administrative Expense: 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: We incurred $7.0 million of restructuring expenses associated with our overall restructuring plan, 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.
Non-Operating Expense
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)
Interest expense $ (5,773) $ (10,365) $ 4,592 44 %
Interest and investment income 385 825 (440) (53) %
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, 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.
Income taxes
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.
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First Nine Months 2021 Compared to First Nine Months 2020
Revenues
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)
Variable patent royalty revenue $ 22,765 $ 17,920 $ 4,845 27 %
Fixed-fee royalty revenue 222,887 221,023 1,864 1 %
Current patent royalties a
245,652 238,943 6,709 3 %
Non-current patent royalties b
63,475 20,461 43,014 210 %
Total patent royalties 309,127 259,404 49,723 19 %
Current technology solutions revenue a
4,467 8,797 (4,330) (49) %
Total revenue $ 313,594 $ 268,201 $ 45,393 17 %
(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 $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,
2021 2020
Apple 27% 31%
Samsung 19% 22%
Xiaomi 14% —%
Huawei 11% 15%
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Operating Expenses
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)
Patent administration and licensing $ 133,694 $ 119,167 $ 14,527 12 %
Development 66,999 61,755 5,244 8 %
Selling, general and administrative 46,994 35,251 11,743 33 %
Restructuring activities 20,290 — 20,290 100 %
Total operating expenses $ 267,977 $ 216,173 $ 51,804 24 %
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):
Increase/(Decrease)
Restructuring activities $ 20,290
Supplemental compensation
15,294
Revenue share 8,921
Personnel-related costs 7,358
Intellectual property enforcement and non-patent litigation 6,404
Corporate initiatives (2,552)
Depreciation and amortization (1,466)
Other (2,445)
Total increase in operating expenses $ 51,804
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 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 $8.9 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 $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: 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 $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.
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Restructuring Activities: The Company incurred $20.3 million of restructuring expenses associated with the Company's overall restructuring plan, 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.
Non-Operating Expense
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)
Interest expense $ (19,429) $ (30,881) $ 11,452 37 %
Interest and investment income 1,384 5,044 (3,660) (73) %
Other income, net 842 8,762 (7,920) 90 %
Total non-operating expense $ (17,203) $ (17,075) $ (128) (1) %
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.
Income taxes
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.
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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 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; and
• 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .
There have been no material changes in quantitative and qualitative market risk from the disclosures included in our 2020 Form 10-K.
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