What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-17 compared with 2021-02-18 · 221 added, 284 removed, 303 unchanged (63% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the Selected Financial Data, the Consolidated Financial Statements and the Notes thereto contained in this Form 10-K.

The following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto contained in this Form 10-K.

The following section generally discusses our financial condition and results of operations for our fiscal year ended December 31, 2021 compared to our fiscal year ended December 31, 2020.

A discussion regarding our financial condition and results of operations for December 31, 2020 compared to our fiscal year ended December 31, 2019 can be found in Part II, Item 7 of our Annual Report on Form 10-K for fiscal year 2020, filed with the Securities and Exchange Commission (the “SEC”) on February 18, 2021.

Throughout the following discussion and elsewhere in this Form 10-K, we refer to “recurring revenues” and “non-current patent royalties.” For all periods presented, recurring revenues are comprised of “current patent royalties” and “current technology solutions revenue,” while "non-current patent royalties" are comprised of past sales royalties and static fixed-fee agreement royalties.

InterDigital, Inc.

("InterDigital") is a research and development company that licenses its innovations to the global wireless and consumer electronics industries.

("InterDigital") is a global research and development company focused primarily on wireless, visual and related technologies.

We design and develop advanced technologies that enable connected, immersive experiences in a broad range of communications and entertainment products and services.

Since our founding in 1972, our engineers have designed and developed a wide range of innovations that are used in wireless products and networks, from the earliest digital cellular systems to 5G and, today, solutions that we believe will shape the world beyond 5G.

With the acquisition of the patent licensing business of visual technology industry leader Technicolor SA ("Technicolor") in 2018 (the "Technicolor Patent Acquisition"), followed by the acquisition of their Research & Innovation unit in 2019 (the "R&I Acquisition" and, together with the Technicolor Patent Acquisition, the "Technicolor Acquisitions"), we are now a leader in video processing, encoding/decoding, and display technology, with a significant Artificial Intelligence ("AI") research effort that intersects with both wireless and visual technologies.

InterDigital is one of the largest pure research & development and licensing companies in the world, with one of the most significant patent portfolios in the wireless and video industries.

We license our innovations worldwide to companies in a variety of industries, including wireless communications, consumer electronics, personal computer, and automotive.

Since our founding in 1972, our engineers have designed and developed a wide range of innovations that are used in wireless products and networks, from the earliest digital cellular systems to 5G.

With the acquisitions of the patent licensing business (the "Technicolor Patent Acquisition") and research and innovation unit of visual technology industry leader Technicolor SA ("Technicolor") (together, the "Technicolor Acquisitions"), we are a leader in video processing, encoding/decoding, and display technology, with a significant Artificial Intelligence ("AI") research effort that intersects with both wireless and visual technologies.

InterDigital is one of the largest pure research and development and licensing companies in the world, with one of the most significant patent portfolios of fundamental wireless and video technologies.

As of December 31, 2021, InterDigital's wholly owned subsidiaries held a portfolio of approximately 27,500 patents and patent applications related to wireless communications, video coding, display technology, and other areas relevant to the wireless and consumer electronics industries.

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Our wireless portfolio has largely been built through internal development, supplemented by joint development projects with other companies, and select acquisitions of patents and companies.

Products incorporating our patented inventions in wireless include:

Our video technology portfolio combines patents and applications that InterDigital obtained through the Technicolor Acquisitions and patents and applications created by internal development.

Our patented wireless inventions, our patented video inventions, or both have been implemented in a wide variety of products.

Products incorporating our patented inventions include:

mobile devices, such as cellular phones, tablets, notebook computers and wireless personal digital assistants;

televisions, gaming consoles, set-top boxes, streaming devices and other consumer electronics;

wireless infrastructure equipment, such as base stations;

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and Internet of Things ("IoT") devices and software platforms.

Our video technology portfolio largely represents patents and applications that InterDigital obtained through the Technicolor Patent Acquisition, supplemented by internal development.

Our patented inventions in video are incorporated in a range of products and services, including cellular phones, notebook computers, televisions, gaming consoles, set-top boxes, streaming devices and other consumer electronics.

In 2021, 2020, and 2019, our total revenues were $425.4 million, $359.0 million, and $318.9 million, respectively.

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New Agreements

During 2021, we entered into thirteen patent license agreements, including agreements with Xiaomi, Sony, and a top ten TV manufacturer discussed below.

We estimate these agreements will result in revenues exceeding $390 million over their respective lives.

Direct Licenses

During first quarter 2020, we entered into a multi-year, worldwide, non-exclusive, royalty bearing patent license agreement with Fairphone B.V.

(“Fairphone”).

The agreement covers Fairphone’s sale of its 3G and 4G handsets.

Also during first quarter 2020, we entered into a multi-year, worldwide, non-exclusive, royalty bearing patent license agreement with Humax Co., Ltd.

The agreement covers the sale of Humax’s HEVC digital set-top boxes.

During second quarter 2020, we entered into a multi-year, worldwide, non-exclusive, royalty-bearing patent license with Huawei Investment & Holding Co., Ltd.

In addition to agreement on terms for dismissal of the litigations and other proceedings between the parties, the agreement covers the sale of certain of Huawei’s 3G, 4G, and 5G terminal unit products, including the use of Wi-Fi and HEVC in those products.

During fourth quarter 2020, we entered into a multi-year, worldwide, non-exclusive, royalty-bearing patent license with a mobile handset company covering 3G and 4G handsets, as well as 802.11 and HEVC technologies incorporated into such products.

Also during fourth quarter 2020, we entered into a multi-year, worldwide, non-exclusive, royalty-bearing, patent license agreement with Blu Products, Inc.

The agreement covers Blu’s sale of its 3G, 4G and 5G handsets, including the use of Wi-Fi and HEVC in those products.

During third quarter 2021, we entered into a multi-year, worldwide, non-exclusive, royalty bearing license with Xiaomi.

The license covers Xiaomi’s cellular-enabled mobile devices under our standard essential patents related to 3G, 4G, 5G, WiFi and HEVC video technology.

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

During fourth quarter 2021, we renewed our multi-year, worldwide, non-exclusive patent license agreement with Sony.

In addition, we renewed our joint venture with Sony, Convida Wireless.

Licenses Through Platforms

During third quarter 2020, as part of the Madison Arrangement, we entered into a non-exclusive, royalty-bearing patent license agreement with a manufacturer covering certain of the licensee’s sales of digital televisions in U.S., Mexico, and Canada.

Refer to the " Critical Accounting Policies and Estimates — Revenue Recognition" section below for details of our revenue recognition accounting policies and additional information on agreements with multiple performance obligations, as well as the estimates and methods used to determine the fair value of patents acquired, when applicable.

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.

Expiration of License Agreements

Our patent license agreements with seven licensees expired during 2020, including LG.

Collectively, all seven agreements accounted for $38.0 million, or approximately 11% of our recurring revenue in 2020, including LG who contributed $31.8 million, or approximately 9%, of our recurring revenue in 2020.

In January 2021, it was reported that LG confirmed that it is considering exiting the smartphone market.

Our patent license agreements with six licensees are scheduled to expire during 2021.

Collectively, all six agreements expiring in 2021 accounted for $30.3 million, or approximately 9%, of our recurring revenue in 2020.

We are actively working to renew these agreements consistent with the licensees' current product utilization and market position.

We had six patent license agreements that were scheduled to expire between January 1, 2021 and December 31, 2021.

Of the six related customers, four were renewed during 2021.

The two patent license agreements that have not yet been renewed contributed $13.2 million of recurring revenue in 2021.

Nine of our patent license agreements are scheduled to expire during 2022.

Collectively, these agreements accounted for $211.5 million, or approximately 60%, of recurring revenue in 2021.

Among the customers licensed under these agreements are Apple and Samsung, each of which comprised 10% or more of our consolidated revenues in 2021, 2020, and 2019.

We are actively working to renew these agreements on terms consistent with the licensees' respective market positions and utilization of our technology.

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.

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.

During fourth quarter 2021, the list of impacted employees was finalized and included additional employees who voluntarily took the termination benefits.

The company formally notified the impacted employees in fourth quarter 2021.

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.

These employees were provided notification of termination during fourth quarter 2021.

During 2021, we recognized $27.9 million restructuring expenses including $22.6 million severance and other benefits, a $13.2 million asset impairment, and $1.7 million outside services and other associated costs, offset by a $9.6 million reimbursement agreement, which are included within “ Restructuring Activities ” in the consolidated statement of income.

We expect to recognize additional restructuring charges of approximately $1 million in first quarter 2022.

We began to see related cost savings in late 2021 and expect to see further cost savings of approximately $15 million in 2022.

However, such savings do not account for any changes in litigation, revenue share, or any new investments we may make.

Intellectual Property Rights Enforcement

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During 2020, we filed patent infringement actions against Xiaomi.

We negotiated resolutions to the matters involving ZTE, Huawei and Xiaomi in December 2019, April 2020 and July 2021, respectively, while our matters with Lenovo continue to proceed.

During 2021, we filed patent infringement actions against Oppo, OnePlus and realme.

The matters are more fully discussed in Note 11, “ Litigation and Legal Proceedings ,” to the Notes to Consolidated Financial Statements included below in Part II, Item 8 of this Form 10-K and/or our 2019 Form 10-K.

We filed these actions after lengthy periods of negotiation and after the refusal of our counterparties to accept our various proposals to them, including our proposal to have a third party adjudicator set a royalty rate and resolve certain other terms upon which we could not mutually agree.

We negotiated resolutions to the matters involving ZTE and Huawei in December 2019 and April 2020, respectively, while our matters with Lenovo and Xiaomi continue to proceed.

In 2021, our intellectual property enforcement costs increased to $34.3 million, from $28.6 million and $25.4 million in 2020 and 2019, respectively.

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Cash and Short-Term Investments

As of December 31, 2020, we had $0.9 billion of cash, restricted cash and short-term investments and up to an additional $227.8 million of payments due under signed agreements, including $16.0 million recorded in accounts receivable which includes estimates related to our fourth quarter 2020 variable patent royalty revenue.

A portion of our cash and short-term investments include fixed royalty payments we have received related to revenue we will record in the future.

As a result, our future cash receipts from existing licenses subject to fixed patent royalties will be lower than if the royalty payments were structured to coincide with the underlying sales.

During 2020, we recorded $377.8 million of cash receipts related to patent licensing and technology solutions agreements as follows (in thousands):

Patent royalties $ 366,237

Technology solutions 11,521

Total cash receipts $ 377,758

As of December 31, 2020, approximately $326.2 million of our $328.0 million deferred revenue balance as of December 31, 2020 related to dynamic fixed-fee royalty payments that were scheduled to amortize as follows (in thousands):

As of December 31, 2021, we had $948.6 million of cash, restricted cash and short-term investments and an additional $230.0 million of cash payments due under contracted fixed price agreements, including $9.6 million recorded in our $31.1 million accounts receivable balance.

The remaining accounts receivable is primarily related to variable patent royalty revenue.

Over 90% of our revenue comes from fixed price agreements.

Such agreements often have prescribed payment schedules that are uneven and sometimes front-loaded, resulting in timing differences between when we collect the cash payments and recognize the related revenue.

As a result, our cash receipts due in 2022 from existing agreements are expected to be lower than revenue to be recognized in 2022 from such agreements as noted in the deferred revenue amortization table below.

The following table reconciles the timing differences between cash receipts and recognized revenue on a quarterly basis for each of the last three years, including the resulting operating cash flow (in thousands):

Non-cash revenue:

Q1 Q2 Q3 Q4 YTD

Fixed fee cash receipts (a)

$ 47,312 $ 3,050 $ 143,050 $ 123,050 $ 316,462

Total fixed-fee royalty deferred revenue $ 326,211

Other cash receipts (b)

10,676 17,808 7,739 15,556 51,779

Change in deferred revenue 23,429 63,230 (150,703) 80,912 16,868

Change in receivables (3,507) (499) 129,655 (110,546) 15,103

Other 4,453 4,146 13,755 2,843 25,197

Total Revenue $ 82,363 $ 87,735 $ 143,496 $ 111,815 $ 425,409

Net cash (used in) provided by operating activities $ (9,842) $ (27,259) $ 96,264 $ 71,229 $ 130,392

Non-cash revenue:

Q1 Q2 Q3 Q4 YTD

Fixed fee cash receipts (a)

$ 20,019 $ 114,413 $ 142,019 $ 53,410 $ 329,861

Other cash receipts (b)

14,481 9,880 7,845 15,751 47,957

Change in deferred revenue 39,512 (16,829) (75,749) 28,669 (24,397)

Change in receivables (2,664) (6,228) 8,902 (11,364) (11,354)

Other 4,862 3,262 4,476 4,324 16,924

Total Revenue $ 76,210 $ 104,498 $ 87,493 $ 90,790 $ 358,991

Net cash (used in) provided by operating activities $ (26,885) $ 69,755 $ 101,342 $ 19,255 $ 163,467

Non-cash revenue:

Q1 Q2 Q3 Q4 YTD

Fixed fee cash receipts (a)

$ 22,617 $ 18,892 $ 150,450 $ 56,617 $ 248,576

Other cash receipts (b)

12,260 7,431 11,400 15,509 46,600

Change in deferred revenue 43,423 19,331 (63,629) 8,624 7,749

Change in receivables (1,725) 23,894 (33,828) 4,917 (6,742)

Other (7,944) 6,061 8,130 16,494 22,741

Total Revenue $ 68,631 $ 75,609 $ 72,523 $ 102,161 $ 318,924

Net cash (used in) provided by operating activities $ (30,781) $ (22,742) $ 125,499 $ 17,457 $ 89,433

(a) Fixed fee cash receipts are comprised of cash receipts from Dynamic Fixed-Fee Agreement royalties, including the associated past patent royalties

(b) Other cash receipts are comprised of cash receipts related to our variable patent royalty revenue, including the associated past patent royalties, current technology solutions revenue, royalties from static agreements, and patent sales.

When we collect payments on a front-loaded basis, we recognize a deferred revenue liability equal to the cash received and accounts receivable recorded which relate to revenue expected to be recognized in future periods.

That liability is then reduced as we recognize revenue over the balance of the agreement.

The following table shows the projected amortization of our current and long term deferred revenue as of December 31, 2021 (in thousands):

Deferred Revenue

2022 $ 294,235

Total $ 310,098

Return of Capital

In June 2014, our Board of Directors authorized a $300 million share repurchase program (the “2014 Repurchase Program”).

Subsequently our Board of Directors authorized four $100 million increases to the program, respectively, bringing the total amount of the 2014 Repurchase Program to $700 million.

The Company may repurchase shares under the 2014 Repurchase Program through open market purchases, pre-arranged trading plans or privately negotiated purchases.

Since 2014, we have repurchased $658.5 million of shares at an average price of $51.32, adjusted for dividends.

As of December 31, 2021, there was approximately $41.5 million remaining under the share repurchase authorization.

Since January 2014, we have paid $313.2 million in dividends, bringing our total return of capital over the last eight years to $971.7 million.

The table below sets forth the total number of shares repurchased and the dollar value of shares repurchased under the 2014 Repurchase Program, cash dividends on outstanding common stock declared, and the total capital returned to our shareholders (in thousands):

2014 Repurchase Program Cash Dividends Declared Total Capital Returned to Shareholders

# of Shares Value Per Share Value

2021 458 $ 30,000 $ 1.40 $ 43,041 $ 73,041

2020 6 349 1.40 43,111 43,460

2019 2,962 196,269 1.40 43,718 239,987

2018 1,478 110,505 1.40 47,922 158,427

2017 107 7,693 1.30 45,122 52,815

2016 1,304 64,685 1.00 34,359 99,044

2015 1,836 96,410 0.80 28,726 125,136

2014 3,554 152,625 0.70 27,153 179,778

Total 11,705 $ 658,536 $ 9.40 $ 313,152 $ 971,688

Impact of COVID-19 Pandemic

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These fixed-fee revenues are not directly affected by our related licensees’ success in the market or the general economic climate.

To that end, in fiscal year 2020, 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.

To that end, in fiscal year 2021, we did not experience a significant impact on our contracted revenue due to COVID-19.

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

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

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

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

Nearly all work-related travel continues to remain suspended, and we have conducted 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 December 31, 2020, we successfully concluded five new patent license agreements that we estimate will result in revenues exceeding $170.0 million over the two to four year terms of those agreements.

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 December 31, 2021, we successfully concluded eighteen new patent license agreements that we estimate will result in revenues exceeding $560.0 million over their respective lives.

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

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

• the Technicolor Patent Acquisition and the R&I Acquisition, which closed on July 30, 2018 and May 31, 2019, respectively, contributed $20.5 million to our 2020 revenue and $69.4 million to our 2020 operating expenses.

The $69.4 million of operating expenses is comprised of $64.6 million of recurring costs, of which $17.4 million relates to patent amortization, $2.3 million relates to one-time transaction-related and integration costs, and $2.5 million relates to revenue sharing from the Madison Arrangement;

• a net $5.6 million gain, primarily resulting from observable price changes in orderly transactions of our long-term strategic investments, which was included within “ Other Income, Net ” in the consolidated statement of income;

• a $8.1 million of charges related to disposal of assets, primarily patents as part of on-going patent portfolio management and shutting down our San Diego office, which is included in " Operating Expenses " in the consolidated statement of income;

• our 2020 revenue includes $21.6 million of non-recurring revenue, which primarily relates to the Huawei PLA discussed above;

• the 2020 tax provision includes discrete benefits of $20.9 million, which primarily relates to the expected amendment of a prior year tax return to utilize a tax asset generated in the current year, as well as the reversal of a tax reserve.

• Our 2021 revenue includes $73.7 million of non-recurring revenue primarily related to the patent license agreements with Xiaomi and a top ten global TV manufacturer signed, as discussed above.

• During 2021, we recognized $27.9 million restructuring expenses including $22.6 million of severance and other benefits, a $13.2 million asset impairment and $1.7 million of associated outside services and other costs, offset by a $9.6 million reimbursement agreement.

These costs resulted from our restructuring activities as described in Note 20, " Restructuring Activities " within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

The patents held for sale are recorded at fair value on December 31, 2021 and are included within " Prepaid and other current assets " in the consolidated balance sheet.

• During 2021, we incurred $10.1 million of one-time share-based compensation costs driven by the impact of licensing success achieved during 2021.

• Interest expense decreased in 2021 by $15.6 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.

• In 2021, " Other income, net " includes a $1.9 million gain on a contract termination, a $7.6 million gain resulting from observable price changes in orderly transactions of our long-term strategic investments, and a $2.3 million gain on the curtailment of our defined benefit plan.

Critical Accounting Policies and Estimates

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We derive the vast majority of our revenue from patent licensing.

The timing and amount of revenue recognized from each licensee depends upon a variety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations.

The timing and amount of revenue recognized from each licensee depend upon a variety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations.

Such agreements are often complex and include multiple performance obligations.

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We typically receive these royalty reports subsequent to the period in which our licensees’ underlying sales occurred.

As a result, we are required to estimate revenues, subject to the constraint on our ability to estimate such amounts.

As a result, we are required to estimate revenues, subject to the constraint on our ability to estimate such amounts and will record a true-up when we receive the actual royalty report from the licensee.

Estimating licensees’ quarterly royalties prior to receiving the royalty reports requires us to make assumptions and judgments related to forecasted trends and growth rates used to estimate our licensees’ sales, which could have an impact on the amount of revenue we report on a quarterly basis.

Technology Solutions

Technology solutions revenue consists of revenue from royalty payments, software licenses, engineering services and product sales.

Technology solutions revenue consists primarily of revenue from royalty payments, software licenses, and engineering services.

The nature of these contracts and timing of payments vary.

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Agreements with Multiple Performance Obligations

During 2020, we signed five new agreement that had multiple performance obligations.

During 2021, we signed three new fixed-fee agreements that had multiple performance obligations.

Consistent with the revenue recognition policies disclosed above, we (1) identified the contract with the customer, (2) identified the performance obligations, (3) determined the transaction price, (4) allocated the transaction price to the performance obligations, and (5) recognized revenue as we satisfy the performance obligations.

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Revenue from Non-financial Sources

During 2020, 2019 and 2018, our patent licensing royalties were derived from patent license agreements ("PLAs") with 76, 69 and 66 independent licensees, respectively.

We recognized revenue from five, four and three PLAs in 2020, 2019 and 2018, respectively, for which patents generally comprised less than forty-percent of the total consideration paid or due to us under those agreements.

In addition, during 2020, 2019 and 2018, we recognized revenue from one PLA that was executed in 2014 in connection with a patent purchase agreement ("PPA") with the licensee.

Total cash paid to our licensee under this PPA is approximately 56% of the total cash due to us under this licensee's PLA.

During 2020, 2019 and 2018, approximately 7%, 6% and 3%, respectively, of our total revenue was based on the estimated fair value of the patents in the above transactions.

During 2021, 2020 and 2019, approximately 5%, 7% and 6%, respectively, of our total revenue was based on the estimated fair value of patents.

The process for determining the value of revenue from non-financial sources requires estimating the fair value of patents received.

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We use a variety of compensation programs to attract, retain and motivate our employees, and to align employee compensation more closely with company performance.

These programs include, but are not limited to, short-term incentives tied to performance goals, cash awards to inventors for filed patent applications and patent issuances, and long-term incentives in the form of stock option awards, time-based restricted stock unit (“RSU”) awards, performance-based awards and cash awards, noting equity awards are granted pursuant to the terms and conditions of our Equity Plans (as defined within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K).

Our long-term incentives, including equity awards, typically include annual equity and cash award grants with three to five year vesting periods;

These programs include, but are not limited to, short-term incentives tied to performance goals, cash awards to inventors for filed patent applications and patent issuances, and long-term incentives in the form of stock option awards, time-based restricted stock unit (“RSU”) awards, performance-based RSU awards and cash awards, noting equity awards are granted pursuant to the terms and conditions of our Equity Plans (as defined within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K).

Our long-term incentives, including equity awards, typically include annual equity or cash award grants with three to five year vesting periods;

as a result, in any one year, we are typically accounting for at least three active cycles.

The aggregate amount of performance compensation expense we record in a period, under both short-term and long-term incentive compensation programs, requires the input of subjective assumptions and is a function of our estimated progress toward performance compensation goals at both the beginning and the end of the period.

Our estimated progress toward goals under performance equity grants is based on meeting a minimum confidence level in accordance with accounting rules for share-based compensation.

The aggregate amount of performance compensation expense we record in a period, under both short-term and long-term incentive compensation programs, requires the input of subjective assumptions and is a function of our estimated progress toward performance goals at both the beginning and the end of the period.

Our estimated progress toward goals under performance equity grants is based on meeting a minimum confidence level of achievement in accordance with accounting rules for share-based compensation.

Due to the binary nature of patent license agreements, performance awards with milestone goals are typically not expensed until the goal has been achieved.

Achievement rates can vary by performance cycle and from period to period, resulting in variability in our compensation expense.

If we had accrued all performance compensation costs throughout 2020 on the assumption that all plans and active cycles thereunder would be paid out at 100%, we would have recorded approximately $4.5 million more in compensation expense in 2020 than we actually recorded.

We account for compensation costs associated with share-based compensation based on the fair value of the instruments issued.

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The expected life of our stock option awards is based on the simplified method as prescribed by Staff Accounting Bulletin Topic 14.

In all periods, our policy has been to set the value of RSUs and restricted stock awards equal to the value of our underlying common stock on the date of measurement.

In all periods, our policy has been to set the value of RSUs awards equal to the value of our underlying common stock on the date of measurement.

For grants with graded vesting, we amortize the associated unrecognized compensation cost using an accelerated method.

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(a) For 2021, 2020 and 2019, approximately 7%, 12%, and 5%, respectively, of the aggregate expense associated with time-based and performance-based awards related to cash awards.

Business Combinations and Goodwill

Acquisitions that qualify as a business combination are accounted for using the acquisition method of accounting.

The fair value of consideration transferred for an acquisition is allocated to the assets acquired and liabilities assumed based on their fair value as of the acquisition date.

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and identified intangible assets acquired under a business combination.

Under the acquisition method of accounting, the Company completes valuation procedures for an acquisition to determine the fair value of the assets acquired and liabilities assumed.

These valuation procedures require management to make assumptions and apply significant judgment to estimate the fair value of the assets acquired and liabilities assumed.

If the estimates or assumptions used should significantly change, the resulting differences could materially affect the fair value of net assets.

We estimate the fair value of the intangible assets acquired generally through a combination of a discounted cash flow analysis (the income approach) and an analysis of comparable market transactions (the market approach).

For the income approach, we base the inputs and assumptions used to develop these estimates on a market participant perspective which includes estimates of projected revenues, discount rates, economic lives and income tax rates, among others, all of which require significant management judgment.

For the market approach, we apply judgment to identify the most comparable market transactions to the transaction.

Definite-lived intangible assets, which are primarily comprised of patents, are amortized over their estimated useful lives using the straight-line method and are assessed for impairment whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable.

Goodwill is not amortized but is reviewed for impairment annually on the first day of the fourth quarter, or when events or changes in the business environment indicate that the carrying value of a reporting unit may exceed its fair value.

We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether a quantitative goodwill impairment test is necessary.

If we conclude it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, we need not perform the quantitative assessment.

If based on the qualitative assessment we believe it is more likely than not that the fair value of a reporting unit is less than its carrying value, a quantitative assessment test is required to be performed.

This assessment requires us to compare the fair value of each reporting unit to its carrying value including allocated goodwill.

We determine the fair value of our reporting units generally using a combination of the income and market approaches.

If the carrying value of a reporting unit exceeds the reporting unit’s fair value, a goodwill impairment charge will be recorded for the difference up to the carrying value of goodwill.

Income taxes are accounted for under the asset and liability method.

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As a result of this agreement, the Company does not anticipate any tax consequences.

On July 24, 2018, the Company received notification that its request for competent authority pertaining to Article 27 (Mutual Agreement 14 Table of Contents Procedure) of the United States-Republic of Korea Income Tax Convention had been reviewed by the IRS and an agreement had been reached (the "Korea Competent Authority Proceeding").

As a result of this agreement, the Company received refunds of $97.4 million, inclusive of interest.

In addition, we have recorded a net tax benefit of $14.7 million in our full year 2018.

In September 2019, the amended tax returns for tax years covered by this agreement were filed and an additional benefit of $2.2 million was recorded related to the final refund the Company expects to receive.

New Accounting Guidance

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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.

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

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Total cash, cash equivalents, restricted cash and short-term investments $ 948,569 $ 930,836 $ 17,733

The net decrease in cash, cash equivalents, restricted cash and short-term investments was attributable to cash used in financing activities of $132.9 million and cash used in investing activities, excluding sales and purchases of short-term investments, of $37.2 million.

These uses were partially offset by cash provided by operating activities of $163.5 million.

Cash used in financing activities primarily related to repayment of our 2020 Notes, and dividend payments.

Cash used in investing activities, excluding sales and purchases of short-term investments, primarily related to capital investments for patents and fixed assets.

The net increase in cash, cash equivalents, restricted cash and short-term investments was attributable to cash provided by operating activities of $130.4 million.

This increase was partially offset by cash used in investing activities, excluding sales and purchases of short-term investments, of $36.9 million and cash used in financing activities of $74.5 million.

Cash used in investing activities, excluding sales and purchases of short-term investments, primarily related to capital investments for patents and fixed assets, and patent acquisitions, was partially offset by net cash receipts from sales of our long-term investments.

Cash used in financing activities primarily related to dividend payments and repurchases of common stock.

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

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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 $74.0 million change in net cash provided by operating activities was primarily driven by higher 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 patent license agreements.

The $33.1 million change in net cash provided by operating activities was primarily driven by an increase in cash operating expenses primarily due to restructuring activities and revenue share costs, along with other factors further discussed below in the " Results of Operations ".

Additionally, lower cash receipts contributed to the change, and was primarily attributable to the timing of cash receipts related to existing patent license agreements and reduction in cash receipts resulting from a handset manufacturer exiting the handset business, offset by cash receipts from new patent license agreements signed in 2021.

The table below sets forth the significant items comprising our cash flows provided by operating activities during the years ended December 31, 2021 and 2020 (in thousands):

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Total cash outflows (257,137) (231,034) (26,103)

Other working capital adjustments (c)

16,743 14,168 2,575

Other working capital adjustments 19,288 16,683 2,605

Cash flows provided by operating activities $ 130,392 $ 163,467 $ (33,075)

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(b) Income taxes paid include foreign withholding taxes.

(c) Working capital includes $69.6 million of tax receivables at December 31, 2020, compared to $38.0 million at December 31, 2019.

Cash provided by or used in investing and financing activities

Net cash used in investing activities in 2020 was $310.0 million, a $578.3 million change from $268.3 million net cash provided by investing activities in 2019.

During 2020, we purchased $272.8 million of short-term marketable securities, net of sales and received net proceeds of $4.3 million from our long-term strategic investments.

During 2019, we sold $296.6 million of short-term marketable securities, net of purchases and also received initial proceeds of $10.0 million related to the sale of our Hillcrest product business.

Net cash provided by investing activities in 2021 was $179.6 million, a $489.7 million change from $310.0 million net cash used in investing activities in 2020.

During 2021, we sold $216.6 million of short-term marketable securities, net of purchases, capitalized $35.9 million of patent costs and property plant and equipment purchases, acquired $2.4 million of patents, and received $1.4 million of net cash receipts from our long-term strategic investments.

During 2020, we purchased $272.8 million of short-term marketable securities, net of sales, capitalized $42.4 million of patent costs and property plant and equipment purchases, and received $4.3 million of net cash receipts from the sale of one of our long-term strategic investments.

Net cash used in financing activities for 2021 was $74.5 million, a $58.4 million change from net cash used in financing activities of $132.9 million in 2020.

This change was primarily attributable to net proceeds of $140.2 million from the debt refinancing (net of related expenses) and $15.7 million proceeds from non-controlling interests received in 2019.

These activities were partially offset by a reduction of $195.9 million in share repurchases, a $94.9 million payment on long-term debt related to the repayment of our 2020 Notes, and $5.3 million of proceeds from non-controlling interests received in 2020.

Our combined short-term and long-term deferred revenue balance at December 31, 2020 was approximately $328.0 million, an increase of $57.7 million from December 31, 2019.

Based on current license agreements, we expect the amortization of dynamic fixed-fee royalty payments to reduce the December 31, 2020 deferred revenue balance of $328.0 million by $192.1 million over the next twelve months.

This change was primarily attributable to a $94.9 million payment on long-term debt related to the repayment of our 2020 Notes in 2020, offset by $29.7 million of additional repurchases of common stock in 2021 compared to 2020.

Our combined short-term and long-term deferred revenue balance at December 31, 2021 was $311.1 million, a decrease of $16.9 million from December 31, 2020.

Based on current license agreements, we expect the amortization of dynamic fixed-fee royalty payments to reduce the December 31, 2021 deferred revenue balance by $291.7 million over the next twelve months.

Convertible Notes

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During periods in which the average market price of our common stock is above the applicable conversion price of the 2024 Notes ($81.29 per share as of December 31, 2021) or above the strike price of the warrants ($109.43 per share for the 2024 Warrant Transactions as of December 31, 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 treasury stock method, we calculate the number of shares issuable under the terms of the 2024 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.

As a result, in periods when the average market price of our common stock is above the conversion price or strike price, as applicable, under the treasury stock method, we calculate the number of shares issuable under the terms of the 2024 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 treasury stock 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.

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Contractual Obligations

We issued $400.0 million in aggregate principal amount of 2.00% Senior Convertible Notes due 2024 ("the 2024 Notes").

The 2024 Notes bear interest at a rate of 2.00% per year, payable in cash on June 1 and December 1 of each year, commencing on December 1, 2019, and mature on June 1, 2024, unless earlier converted or repurchased.

For more information on the 2024 Notes, see Note 10, “ Obligations ,” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

The following table summarizes our contractual obligations as of December 31, 2021 (in thousands).

As discussed above 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 these contractual obligations discussed below in both the short-term over the next twelve month, and the long-term beyond twelve months.

Payments Due by Period

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1 year 1-3 Years 3-5 Years Thereafter

2024 Notes $ 400,000 $ — $ — $ 400,000 $ —

Contractual interest payments on the 2024 Notes 27,356 8,000 16,000 3,356 —

2024 Notes (a)

$ 400,000 $ — $ 400,000 $ — $ —

Contractual interest payments on the 2024 Notes (a)

20,000 8,000 12,000 — —

Operating lease obligations 25,751 5,142 8,516 6,266 5,827

Defined benefit plan obligations (a) 4,693 229 928 837 2,699

Purchase obligations (b) 15,830 15,830 — — —

Defined benefit plan obligations (b)

3,012 200 298 248 2,266

Purchase obligations (c)

12,401 12,401 — — —

Total contractual obligations $ 461,164 $ 25,743 $ 420,814 $ 6,514 $ 8,093

(a) Refer to Note 5, " Business Combinations and Other Transactions ," within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for details of our defined benefit plan obligations.

(a) Refer to Note 9, “ Obligations ,” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for details of our 2024 Notes.

(b) Refer to Note 10, " Commitments ," within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for details of our defined benefit plan obligations.

Estimated future benefit payments included above are through 2030.

(b) Purchase obligations consist of agreements to purchase goods and services that are legally binding on us, as well as accounts payable.

(c) Purchase obligations consist of agreements to purchase goods and services that are legally binding on us, as well as accounts payable.

Our consolidated balance sheet as of December 31, 2021 includes a $15.7 million non-current liability for uncertain tax positions.

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There is no liability associated with the revenue-share agreement at December 31, 2021, as there are no minimum or maximum payments under the revenue-sharing arrangement, and, except in certain circumstances, the arrangement continues through December 31, 2038.

Refer to Note 5, " Business Combinations and Other Transactions ," within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further information.

Refer to Note 9, " Obligations ," within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further information.

Due to the uncertainty regarding the timing and amount of future payments related to these items, the amounts are excluded from the contractual obligations table above.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

RESULTS OF OPERATIONS

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

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

The $40.1 million increase in total revenue was primarily driven by a $38.6 million increase in recurring revenue and a $1.8 million a increase in non-current patent royalties both primarily driven by ten new patent license agreements signed over the last fifteen months, including Huawei and ZTE.

The increase in non-current patent royalties was also due to the inclusion of a $5.5 million net charge recorded as contra non-recurring revenue during 2019 related to a restructured licensing arrangement with a long-term customer.

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

The $66.4 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 $14.9 million increase in recurring revenue and a $52.1 million increase in non-current patent royalties.

The increase in recurring revenues was also driven by revenue other new patent license agreements, including the Huawei PLA signed in second quarter 2020.

These increases were partially offset by a reduction in recurring revenues due to a handset manufacturer exiting the handset business.

The increase in non-current patent royalties was also primarily related to revenues from a static fixed-fee patent license agreement signed in second quarter 2021, 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, whose contract was terminated in the first half of 2021.

In 2021 and 2020, 70% and 68% of our total revenues, respectively, were attributable to companies that individually accounted for 10% or more of our total revenues.

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For the Year Ended December 31,

Apple 31% 35%

Samsung 22% 25%

Huawei 15% —%

Customer A 28% 31%

Customer B 18% 22%

Customer C 14% —%

Customer D 10% 15%

Operating Expenses

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Selling, general and administrative 61,217 48,999 12,218 25 %

Restructuring activities 27,877 — 27,877 100 %

Total operating expenses $ 354,203 $ 303,823 $ 50,380 17 %

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Increase/(Decrease)

Recurring operations of the Technicolor Acquisitions $ 15,656

One-time costs related to the Technicolor Acquisitions (6,066)

Revenue sharing for Madison Arrangement (3,775)

Restructuring activities $ 27,877

Share-based compensation 18,294

Revenue share 9,442

Personnel-related costs 7,158

Intellectual property enforcement and non-patent litigation 5,820

Non-cash charge of patents disposed (7,539)

Performance-based incentive compensation 4,246

Corporate initiatives (4,017)

Intellectual property enforcement and non-patent litigation 3,182

Amortization 1,648

Personnel-related costs (4,524)

Patent maintenance (2,800)

Depreciation and amortization (2,625)

Other (1,230)

Total increase in operating expenses $ 50,380

The $22.7 million increase in operating expenses was primarily driven by the Technicolor Acquisitions, which contributed $69.4 million to 2020 operating expenses following our May 2019 R&I Acquisition and July 2018 Technicolor Patent Acquisition.

This compares to $63.0 million of operating expenses in 2019.

The $69.4 million of operating expenses in 2020 resulting from the Technicolor Acquisitions is comprised of $64.6 million of recurring costs, of which $17.4 million relates to patent amortization.

The remaining $4.8 million of operating expenses relates to $2.3 million of transaction and integration costs during 2020 and $2.5 million of revenue sharing for the Madison Arrangement.

The $63.0 million of operating expenses in 2019 resulting from the Technicolor Patent Acquisition was comprised of $48.3 million of recurring costs, of which $16.6 million related to patent amortization.

The remaining $14.7 million of operating expenses relates to $8.4 million of transaction and integration costs and $6.3 million of revenue sharing for the Madison Arrangement.

In 2020, we had a one-time $7.5 million non-cash charge to write-off the remaining book value of patents we disposed of as part of our on-going patent portfolio management.

Performance-based incentive compensation increased by $4.2 million, primarily due to increased performance accruals driven by the Huawei PLA signed in 2020.

We incurred $4.0 million of additional costs attributable to corporate initiatives as part of its on-going efforts to optimize its cost structure, including the closure of our San Diego office.

The $3.2 million increase in intellectual property enforcement costs was primarily driven by the on-going Lenovo and Xiaomi litigations.

Amortization expense increased by $1.6 million and was largely driven by patents acquired over the last twelve-months.

Lastly, corporate initiatives to optimize our cost structure drove a $4.5 million decrease in personnel-related costs.

The $50.4 million increase in operating expenses was driven by restructuring activities, share-based compensation, and revenue share costs related to the license agreements signed in 2021.

The share-based compensation increase was driven by the impact of licensing success achieved during 2021 on performance based equity awards, including previously granted awards, a new hire equity award granted to our CEO, and our 2019 grant for which we modified the goal for all participants in first half 2021.

The $9.4 million increase in revenue share costs related to the above-noted patent license agreement with a top ten global TV manufacturer.

In addition, $27.9 million of the increase related to non-recurring restructuring costs incurred as part of our overall restructuring plan, $5.8 million related to an increase in intellectual property enforcement costs, primarily driven by the Xiaomi and Lenovo litigations, and $7.2 million related to increased personnel-related costs primarily driven by new employment agreements.

These increases were primarily offset due a one-time $7.5 million non-cash charge to write-off the remaining book value of patents we disposed of in 2020 as part of our ongoing patent portfolio management and by a $4.0 million decrease due to 2020 efforts to optimize our cost structure in 2020, including the closure of our San Diego office.

Additionally, ongoing efforts to effectively manage our patent portfolio size drove the $2.8 million reduction in patent maintenance costs and the $2.6 million reduction in depreciation and amortization costs.

Patent administration and licensing expense:

The $15.2 million increase in patent administration and licensing expense primarily resulted from the above-noted increases related to the non-cash charge to write-off the remaining book value of patents we disposed of as part of our on-going patent portfolio management, intellectual property enforcement costs, patent amortization, and performance-based incentive compensation, as well as increased patent maintenance costs.

The $5.6 million increase in patent administration and licensing expense primarily resulted from the above noted $9.4 million increase in revenue share costs, $5.8 million increase in intellectual property enforcement costs, and share-based compensation costs.

These increases were partially offset by the above noted decrease in depreciation and amortization costs and the $7.5 million one-time non-cash charge to write-off the remaining book value of patents disposed in 2020.

Development expense:

The $9.8 million increase in development expense primarily resulted from the above-noted increases related to the Technicolor Acquisitions, performance-based compensation and corporate initiatives.

These increases were partially offset by lower personnel-related costs, primarily related to our second quarter 2019 sale of the Hillcrest product business and reductions in other non-cellular research areas.

Development expense increased by $4.7 million primarily resulting from the increases in share-based compensation discussed above.

Selling, general and administrative expense:

The $2.3 million decrease in selling, general and administrative expense primarily resulted from the above-noted reduction in personnel-related costs, as well as lower one-time costs associated with the Technicolor Acquisitions.

These decreases were partially offset by the above-noted increases in performance-based incentive compensation and corporate initiatives.

The $12.2 million increase in selling, general and administrative expense primarily resulted from the above-noted increases in share-based compensation and personnel-related costs, partially offset by the above-noted corporate initiatives, as well as a decrease in outside consulting costs.

Restructuring Activities:

The Company incurred $27.9 million of restructuring expenses associated with the Company's overall restructuring plan, as described in Note 20, " Restructuring Activities " within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further information.

Non-Operating Expense

The following table compares 2020 non-operating income (expense) to 2019 non-operating income (expense) (in thousands):

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

For the Year Ended December 31,

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Interest and investment income 1,690 5,661 (3,971) (70) %

Gain on asset acquisition and sale of business — 22,690 (22,690) (100) %

Loss on extinguishment of long-term debt — (5,488) 5,488 (100) %

Other income (expense), net 11,263 (1,598) 12,861 (805) %

Total non-operating expense $ (23,875) $ (11,893) $ (11,982) (101) %

The increase in non-operating expense between periods was primarily driven by the recognition of an aggregate $22.7 million gain on asset acquisition and sale of business during the year ended December 31, 2019, of which $14.2 million relates to the R&I Acquisition in second quarter 2019 and $8.5 million relates to the gain on sale of our Hillcrest product business in third quarter 2019.

These gains were partially offset by the recognition of a $5.5 million loss on extinguishment of debt recognized in connection with the settlement of a portion of our 2020 Notes in second quarter 2019.

Additionally, during the year ended December 31, 2020, we recognized $5.6 million of gains resulting from observable price changes in orderly transactions of one of our long-term strategic investments.

Comparatively, during the year ended December 31, 2019 we recognized a net loss of $2.6 million resulting from the partial impairment of one of our strategic investments partially offset by a gain on sale of a separate strategic investment.

These items are included in the " Other income (expense), net " caption in the table above.

Interest expense remained flat and relates to interest on the 2024 Notes and interest incurred on long-term debt resulting from the Technicolor Patent Acquisition.

In 2020, based on the statutory federal tax rate net of discrete federal and state taxes, our effective tax rate is a benefit of 21.2 %.

The negative effective tax rate was driven by a net benefit of $19.7 million that primarily relates to the expected amendment of a prior year tax return to utilize a tax asset generated in the current year, as well as the reversal of a tax reserve.

As a result of the difference in timing between deduction of certain expenses between US GAAP and the tax law, the Company’s estimate of current taxable income is zero.

The Company was unable to benefit from the favorable rates associated with Foreign Derived Intangible Income (“FDII”) as a result of having zero taxable income.

The current year tax benefit is compared to an effective tax rate provision of 42.4% in 2019.

The effective tax rate for 2019 was unfavorably impacted by an $8.0 million provision associated with valuation allowances on the Company’s losses in jurisdictions for which the Company receives no benefit.

As a result of the difference in timing between US GAAP revenue and tax revenue, the Company's estimate of current taxable income is zero.

The Company was unable to benefit from favorable rates associated with Foreign Derived Intangible Income ("FDII") as a result of having zero taxable income.

2019 Compared with 2018

The following table compares 2019 revenues to 2018 revenues (in thousands):

For the Year Ended December 31,

2019 2018 Total Increase/(Decrease)

Variable patent royalty revenue $ 30,428 $ 36,384 $ (5,956) (16) %

Fixed-fee royalty revenue 257,221 239,347 17,874 7 %

Current patent royalties a

287,649 275,731 11,918 4 %

Non-current patent royalties b

19,782 26,329 (6,547) (25) %

Total patent royalties 307,431 302,060 5,371 2 %

Current technology solutions revenue a

10,518 4,594 5,924 129 %

Patent sales b

975 750 225 30 %

Total revenue $ 318,924 $ 307,404 $ 11,520 4 %

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

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

The $11.5 million increase in total revenue was driven by an increase in recurring revenue of $17.8 million, primarily attributable to fixed-fee royalties and current technology solutions revenue.

Fixed-fee royalty revenue increased by $17.9 million, primarily resulting from a dynamic fixed-fee agreement signed in each of the fourth quarters of 2018 and 2019.

The increase in current technology solutions revenue related to the inclusion of engineering services revenue attributable to our on-going relationship with Technicolor.

These increases were partially offset by a decrease variable patent royalties, which was primarily due to a restructured licensing arrangement with a long-term customer in first quarter 2019 whose revenues are now classified as fixed-fee royalty revenue and have declined as compared to prior year.

This decrease in variable patent royalties was partially negated by the inclusion of variable patent royalties assumed as part of the Technicolor Patent Acquisition.

Additionally, non-current patent royalties decreased by $6.5 million primarily due to a $5.5 million net charge recorded as contra non-recurring revenue during first quarter 2019 related to a restructured licensing arrangement with a long-term customer.

In 2019 and 2018, 70% and 71% of our total revenues, respectively, were attributable to companies that individually accounted for 10% or more of our total revenues.

In 2019 and 2018, the following licensees or customers accounted for 10% or more of our total revenues:

For the Year Ended December 31,

Apple 35% 36%

Samsung 25% 25%

Operating Expenses

The following table summarizes the change in operating expenses by category (in thousands):

For the Year Ended December 31,

2019 2018 Increase/(Decrease)

Patent administration and licensing $ 154,940 $ 124,081 $ 30,859 25 %

Development 74,860 69,698 5,162 7 %

Selling, general and administrative 51,289 51,030 259 1 %

Total operating expenses $ 281,089 $ 244,809 $ 36,280 15 %

Operating expenses increased 15% to $281.1 million in 2019 from $244.8 million in 2018.

The $36.3 million increase in total operating expenses was primarily due to increases/(decreases) in the following items (in thousands):

Increase/(Decrease)

Recurring operations of the Technicolor Acquisitions $ 32,137

One-time costs related to the Technicolor Acquisitions (9,325)

Revenue sharing for Madison Arrangement 6,260

Intellectual property enforcement and non-patent litigation 7,089

Personnel-related costs 1,203

Other 9,885 11,263 (1,378) (12) %

Total increase in operating expenses $ 36,280

The $36.3 million increase in operating expenses was primarily driven by the Technicolor Acquisitions, which contributed $63.0 million to 2019 operating expenses following the R&I Acquisition.

This compares to $34.0 million of operating expenses in 2018 following our July 2018 Technicolor Patent Acquisition.

The $63.0 million of operating expenses in 2019 resulting from the Technicolor Acquisitions is comprised of $48.3 million of recurring costs, of which $16.6 million relates to patent amortization, $8.4 million relates to transaction and integration costs during 2019, and the remaining $6.3 million relates to revenue sharing for the Madison Arrangement.

The $34.0 million of operating expenses in 2018 resulting from the Technicolor Patent Acquisition was comprised of $16.2 million for five months of recurring costs, of which $6.8 million related to patent amortization, and the remaining $17.8 million related to transaction and integration costs.

The $7.1 million increase in intellectual property enforcement and non-patent litigation was primarily due to the enforcement proceedings we initiated against Lenovo and Huawei in second half 2019.

The increase in personnel-related costs was primarily related to severance and related expenses associated with ongoing efforts to optimize our cost structure, as well as one-time costs associated with the sale of our Hillcrest product business.

Patent administration and licensing expense:

The $30.9 million increase in patent administration and licensing expense primarily resulted from the above-noted increases related to the Technicolor Acquisitions and intellectual property enforcement costs.

Development expense:

The $5.2 million increase in development expense primarily resulted from the above-noted increases related to the Technicolor Acquisitions, as discussed above, partially offset by reduced spending on development of commercial solutions driven by the sale our Hillcrest product business.

Selling, general and administrative expense:

The $0.3 million increase in selling, general and administrative expense primarily resulted from the above-noted increases related to the Technicolor Acquisitions and increased personnel-related costs, discussed above.

Non-Operating Income (Expense)

The following table compares 2019 non-operating income (expense) to 2018 non-operating income (expense) (in thousands):

For the Year Ended December 31,

2019 2018 Change

Interest expense $ (40,955) $ (35,956) $ (4,999) (14) %

Interest and investment income 13,458 14,590 (1,132) (8) %

Gain on asset acquisition and sale of business 22,690 — 22,690 100 %

Loss on extinguishment of long-term debt (5,488) — (5,488) 100 %

Other income (expense), net (1,598) (9,171) 7,573 83 %

Total non-operating income (expense) $ (11,893) $ (30,537) $ 18,644 61 %

The change in non-operating income (expense) between periods was primarily driven by the recognition of an aggregate $22.7 million gain on asset acquisition and sale of business during the year ended December 31, 2019, of which $14.2 million relates to the R&I Acquisition in second quarter 2019 and $8.5 million relates to the gain on sale of our Hillcrest product business in third quarter 2019.

Additionally, during the year ended December 31, 2019, we recognized a net loss of $2.6 million resulting from the partial impairment of one of our strategic investments partially offset by a gain on sale of a separate strategic investment.

During the year ended December 31, 2018, we recognized an aggregate $8.4 million loss resulting from the sale of our entire ownership interest in one of our strategic investments and the impairment of a separate strategic investment.

These items are included in the "Other income (expense), net" caption in the table above.

Higher interest expense relates to interest on the 2024 Notes and interest incurred on long-term debt resulting from the Technicolor Patent Acquisition.

In 2019, based on the statutory federal tax rate net of discrete federal and state taxes, our effective tax rate was a provision of 42.4%.

As a result of the difference in timing between US GAAP revenue and tax revenue, the Company's estimate of current taxable income is zero.

The Company was unable to benefit from favorable rates associated with FDII as a result of having zero taxable income.

This is compared to an effective tax rate benefit of 85.5% in 2018, based on the statutory federal tax rate net of discrete federal and state taxes.

The effective tax rate for 2018 was impacted by an $18.0 million benefit associated with the FDII deduction provisions contained within the Tax Cuts and Jobs Act, or TCJA, and a $14.7 million benefit from expected amended returns related to the Korea Competent Authority Proceeding settlement discussed above.

Total non-operating expense $ (13,650) $ (23,875) $ 10,225 43 %

The change in non-operating expense between periods was primarily driven by $15.6 million of reduced non-cash interest expense primarily due to the removal of the accretion of the debt discount on the 2024 Notes resulting from the adoption of ASU 2020-06 and a decrease in interest and investment income of $4.0 million in 2021, primarily due to reduced rates of return on our short-term investments.

Other decreased $1.4 million driven primarily by a $3.0 million foreign currency translation loss in 2021, compared to a $4.6 million gain in 2020 arising from euro translation of our foreign subsidiaries.

This decrease was offset by gains recognized in 2021 including a $1.9 million gain on a contract termination and a $2.3 million gain on the curtailment of our defined benefit plan, as discussed further in Note 10, " Commitments ," within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

Additionally, during 2021 and 2020 we recognized $7.6 million and $5.6 million, respectively, of gains resulting from observable price changes of our long-term strategic investments.

All of these items are included in the " Other " caption in the table above.

In 2021, based on the statutory federal tax rate net of discrete federal and state taxes, our effective tax rate is 27.0%.

The effective tax rate was driven by a net expense of $10.8 million that primarily relates to non-deductible officer’s compensation and losses in certain jurisdictions where the Company presently has recorded a valuation allowance against the related tax benefit.

The current year effective tax rate is compared to an effective tax rate benefit of 21.2% in 2020.

The effective tax rate for 2020 was favorably impacted by a net benefit of $19.7 million associated with amendment of prior year tax returns to utilize a tax asset generated during the year, as well as the reversal of a tax reserve.

FORWARD-LOOKING STATEMENTS

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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 contained herein are intended to identify such forward-looking statements.

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

(i) our objective to continue to be a leading designer and developer of technology solutions and innovation for the mobile, video and consumer electronics industries and to monetize those solutions and innovations through a combination of licensing, sales and other revenue opportunities;

(ii) our plans for executing on our business strategy, including our plans to develop and source innovative technologies related to wireless and video, establish and grow our patent-based revenue, pursue commercial opportunities for our advanced platforms and solutions, and maintain a collaborative relationship with key industry players and worldwide standards bodies;

(iii) our belief that our portfolio includes a number of patents and patent applications that are or may be essential or may become essential to cellular, other wireless and video standards, including 3G, 4G, 5G, HEVC and the IEEE 802 suite of standards, as well as patents and patent applications that we believe may become essential to standards that are under development;

(iv) our belief that a number of our CDMA and OFDM/OFDMA inventions are, may be or may become essential to the implementation of CDMA and OFDM/OFDMA-based systems in use today;

(v) our belief that companies making, importing, using or selling products compliant with the standards covered by our patent portfolio require a license under our patents and will require licenses under patents that may issue from our pending patent applications;

(vi) our belief that our ongoing research efforts and associated patenting activities enable us to sell patent assets that are not vital to our core licensing programs, as well as to execute patent swaps that can strengthen our overall portfolio;

(vii) our belief that our commercial initiatives are potential revenue opportunities;

(viii) the estimated growth of the IoT market, including the size of the connected device installed base and number of connected device shipments, over the next several years;

(ix) the types of licensing arrangements and various royalty structure models that we anticipate using under our future license agreements;

(x) the possible outcome of audits of our license agreements when underreporting or underpayment is revealed;

(xi) our belief that our facilities are suitable and adequate for our present purposes and our needs in the near future;

(xii) our expectations and estimations regarding the income tax effects, and the impact on the Company, of the Tax Cuts and Jobs Act, or TCJA, and our belief that we currently expect a significant portion of our income to qualify as FDII and thus be subject to the 13.1% tax rate;

(xiii) our expectation that we will continue to pay a quarterly cash dividend on our common stock comparable to our quarterly $0.35 per share cash dividend in the future;

(xiv) our belief that intellectual property enforcement costs, including litigation costs, will likely continue to be a significant expense for us in the future;

(xv) our belief that we have the ability to obtain additional liquidity through debt and equity financings;

(xvi) 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;

(xvii) our expectations regarding the potential effects of new accounting standards on our financial statements or results of operations;

(xviii) our expectation that the amortization of fixed-fee royalty payments will reduce our deferred revenue balance over the next twelve months;

(xix) our belief in our ability to continue to expand into the consumer electronics market, and the opportunities that market presents;

(xx) our projections of amounts to be owed to Technicolor under our revenue sharing arrangement;

(xxi) the expected timing, outcome and impact of our various litigation, arbitration and administrative matters;

(xxii) our belief that there will be a level of concentration in worldwide shipments of 5G handsets similar to the current level of concentration in worldwide shipments of 3G and 4G handsets.

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," variations of any such words or similar expressions contained herein 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.

Although the forward-looking statements in this Form 10-K reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us.

Consequently, forward-looking statements concerning our business, results of operations and financial condition are inherently subject to risks and uncertainties.

We caution readers that actual results and outcomes could differ materially from those expressed in or anticipated by such forward-looking statements due to a variety of factors, including, without limitation, the following:

(i) uncertainty and decline in U.S.-China relations and/or increased economic uncertainty in China;

(ii) unanticipated difficulties or delays related to the further development of our technologies;

(iii) the failure of the markets for our technologies to materialize to the extent or at the rate that we expect;

(iv) changes in our plans, strategy or initiatives;

(v) the challenges related to entering into new and renewed patent license agreements and unanticipated delays, difficulties or acceleration in the negotiation and execution of patent license agreements;

(vi) our ability to leverage our strategic relationships and secure new patent license and technology solutions agreements on acceptable terms;

(vii) the impact of current trends in the industry that could result in reductions in and/or caps on royalty rates under new patent license agreements;

(viii) changes in the market share and sales performance of our primary licensees, delays in product shipments of our licensees, delays in the timely receipt and final reviews of quarterly royalty reports from our licensees, delays in payments from our licensees and related matters;

(ix) the timing and/or outcome of our various litigation, arbitration, regulatory or administrative 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 legal proceedings;

(x) the determination of royalty rates, or other terms, under our patent license agreements through arbitration or other third-party adjudications, or the establishment by arbitrators or other third-party adjudicators of patent royalty rates at levels lower than our agreed or historical rates;

(xi) the impact of potential patent legislation, USPTO rule changes and international patent rule changes on our patent prosecution and licensing strategies;

(xii) the impact of rulings in legal proceedings, potential legislation affecting the jurisdiction and authority of the USITC and potential changes to the IPR policies of worldwide standards bodies on our investments in research and development and our strategies for patent prosecution, licensing and enforcement;

(xiii) changes in our interpretations of, and assumptions and calculations with respect to the impact on the Company of, the Tax Cuts and Jobs Act, or TCJA, as well as further guidance that may be issued regarding the TCJA;

(xiv) the timing and/or outcome of any state or federal tax examinations or audits, changes in tax laws and the resulting impact on our tax assets and liabilities;

(xv) the effects of any dispositions, acquisitions or other strategic transactions by the Company;

(xvi) decreased liquidity in the capital markets;

(xvii) unanticipated increases in our cash needs or decreases in available cash.

You should carefully consider these factors as well as the risks and uncertainties outlined in greater detail in Part I, Item 1A, in this Form 10-K before making any investment decision with respect to our common stock.

• 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 through 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.

You should carefully consider these factors as well as the risks and uncertainties outlined in greater detail in Part I, Item 1A, of this Form 10-K before making any investment decision with respect to our common stock.

These factors, individually or in the aggregate, may cause our actual results to differ materially from our expected and historical results.

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What changed 10-K

Item 7. Management’s Discussion and Analysis