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 2021 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.”
2027 Senior Convertible Notes
On May 27, 2022, we issued the $460.0 million aggregate principal 2027 Notes. The net proceeds from the offering were approximately $450.0 million after deducting the initial purchasers' fees and estimated offering expenses. Additionally, on May 24 and May 25, 2022, in connection with the offering of the 2027 Notes, we entered into the 2027 Call Spread Transactions.
The net proceeds from the issuance of the 2027 Notes, after deducting fees and offering expenses, were used for the following: (i) $282.5 million was used to repurchase $273.8 million in aggregate principal amount of the 2024 Notes in privately negotiated transactions concurrently with the offering of the 2027 Notes (ii) $74.4 million was used to repurchase shares of common stock at $60.78 per share, the closing price of the stock on May 24, 2022; and (iii) $36.8 million, in addition to the proceeds from the 2027 Warrant Transactions, was used to fund the cost of the 2027 Call Spread Transactions.
The 2027 Notes will be convertible into cash up to the aggregate principal amount of the notes to be converted and in respect of the remainder, if any, of the Company’s obligation in excess of the aggregate principal amount of the notes being converted, pay or deliver, as the case may be, cash, shares of the Company’s common stock (“Common Stock”) or a combination thereof, at the Company’s election, at an initial conversion rate of 12.9041 shares of Common Stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $77.49 per share).
Refer to Note 7, “ Obligations ” in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion of the 2027 Notes and related 2027 Call Spread Transactions.
Share Repurchase Program
On May 6, 2022, the Board of Directors authorized a $100.0 million increase to the Company’s existing share repurchase program (the "2014 Repurchase Program"), bringing the total authorized amount of the 2014 Repurchase Program to $800.0 million. In connection with the issuance of the 2027 Notes, in May 2022 we repurchased 1.2 million shares of our common stock for $74.4 million under the share repurchase program.
Cash & Short-term Investments
As of June 30, 2022, we had $912.3 million of cash, cash equivalents, restricted cash and short-term investments and an additional $242.8 million of cash payments due under contracted fixed price agreements, including $26.0 million recorded in our $48.8 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.
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The following table reconciles the timing differences between cash receipts and recognized revenue during the three and six months ended June 30, 2022 and 2021, including the resulting operating cash flow (in thousands):
Three months ended June 30, Six months ended June 30,
Cash vs. Non-cash revenue: 2022 2021 2022 2021
Fixed fee cash receipts (a)
$ 3,339 $ 3,050 $ 47,142 $ 50,362
Other cash receipts (b)
16,620 17,808 25,212 28,484
Change in deferred revenue 76,959 63,230 127,700 86,659
Change in receivables 25,163 (499) 17,688 (4,006)
Other 2,576 4,146 8,233 8,599
Total Revenue $ 124,657 $ 87,735 $ 225,975 $ 170,098
Net cash used in operating activities $ (33,768) $ (27,259) $ (51,740) $ (37,101)
(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 June 30, 2022 (in thousands):
Deferred Revenue
Remainder of 2022 $ 137,683
2023 60,979
2024 7,738
2025 1,956
2026 and thereafter 5,180
Total Revenue $ 213,536
Revenue
Second quarter 2022 recurring revenue was $100.1 million, compared to recurring revenue of $78.1 million in second quarter 2021, a 28% year-over-year increase, primarily driven by two new patent license agreements. In second quarter 2022, revenues (in descending order) from Apple, Samsung, Amazon, and Xiaomi each comprised 10% or more of our consolidated revenues. Refer to " Results of Operations --Second Quarter 2022 Compared to Second Quarter 2021 " for further discussion of our 2022 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 our research and innovation unit. Additionally, in October 2021, we expanded our restructuring efforts to include general and administrative functions largely centered in the U.S. All impacted employees have been provided notification of termination.
As part of the Company’s ongoing evaluation of its flexible work policy and the impact of returning to the office, the Company has evaluated its current office space footprint and its expected needs going forward. As the result of this evaluation, during the second quarter 2022, we recognized a $2.4 million impairment, comprised of $0.4 million of property and equipment and $2.0 million of right of use assets, related to the abandonment of portions of three of our leased properties, which was included within “ Restructuring activities ” in the condensed consolidated statement of income.
The Company does not anticipate further significant restructuring charges, however these charges are estimated based on information available at the time such charges are recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts incurred for such activities may differ from amounts initially estimated.
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Impact of COVID-19 Pandemic
The COVID-19 pandemic 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 second quarter 2022. Fixed-fee royalties accounted for 89% of our recurring revenues in fiscal year 2021. 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 second quarter 2022, 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 or on a hybrid basis. We returned to in-person work as of April 2022 and all of our locations are open. Despite any 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, a portion of our licensing negotiations, investor presentations and participation in standards organizations and industry events have been virtually. Between March 12, 2020, when we began to work almost entirely remotely, and June 30, 2022, we successfully concluded twenty-one new patent license agreements that we estimate will result in revenues exceeding $620.0 million over their respective lives. 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.
Impact of Inflation and Market Factors
We have been actively monitoring the impact of the current macroeconomic environment in the U.S. and globally characterized by increasing inflation, supply chain issues, rising interest rates, labor shortages, and the potential for a recession. These market factors, as well as the impacts of the Russia and Ukraine conflict, have not had a material impact on our business to date. However, if these conditions continue or worsen, they could have an adverse effect on our operating results and our financial condition.
Comparability of Financial Results
When comparing second quarter 2022 financial results against other periods, the following items should be taken into consideration:
• Our second quarter 2022 revenue includes $24.6 million of non-recurring revenue related to two new agreements signed in second quarter 2022.
• In second quarter 2022, we repurchased approximately $273.8 million in aggregate principal amount of our 2024 Notes, which resulted in the recognition of a $11.2 million loss on the extinguishment of debt, which was included within “ Other (expense) income, net ” in the condensed consolidated statement of income. For more information on this transaction, refer to Note 7, " Obligations ", within the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
• In second quarter 2022, we recognized $2.7 million of restructuring expenses, primarily related to aligning our facilities with our current needs. 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 ” in the condensed consolidated statement of income.
• In second quarter 2022, we recognized a $1.6 million gain resulting from observable price changes of one of our long-term strategic investments, which was included within “ Other (expense) income, net ” in the condensed consolidated statement of income.
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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 2021 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 2021 Form 10-K. There have been no material changes to our existing critical accounting policies from the disclosures included in our 2021 Form 10-K. In addition, we have analyzed the impact of COVID-19 on our financial statements as of June 30, 2022, 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. From time to time, we may engage in a variety of transactions to augment our liquidity position as our business dictates and to take advantage of favorable interest rate environments or other market conditions, including the incurrence or issuance of debt and the refinancing or restructuring of existing debt. 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, dividend program, and other contractual obligations discussed below in both the short-term over the next twelve months, and the long-term beyond twelve months.
Cash, cash equivalents, restricted cash and short-term investments
As of June 30, 2022 and December 31, 2021, we had the following amounts of cash and cash equivalents, restricted cash and short-term investments (in thousands):
June 30, 2022 December 31, 2021 Increase /
(Decrease)
Cash and cash equivalents $ 833,533 $ 706,282 $ 127,251
Restricted cash included within prepaid and other current assets 10,578 5,861 4,717
Restricted cash included within other non-current assets 1,081 1,081 —
Short-term investments 67,076 235,345 (168,269)
Total cash, cash equivalents, restricted cash and short-term investments $ 912,268 $ 948,569 $ (36,301)
The net decrease in cash, cash equivalents, restricted cash and short-term investments was primarily attributable to cash used in operating activities of $51.7 million and cash used in investing activities of $22.1 million, excluding sales and purchases of short-term investments, partially offset by cash provided by financing activities of $41.0 million, primarily consisting of net proceeds from the debt refinancing. Refer to the sections below for further discussion of these items.
Cash flows used in operating activities
Cash flows used in operating activities in the first half 2022 and 2021 (in thousands) were as follows:
Six months ended June 30,
2022 2021 Change
Net cash used in operating activities $ (51,740) $ (37,101) $ (14,639)
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Our cash flows used in operating activities are principally derived from cash receipts from patent license and technology solutions agreements, offset by cash operating expenses and income tax payments. The $14.6 million change in net cash used in operating activities was primarily driven by non-cash revenue, partially offset by lower cash operating expenses benefiting from the cost-savings actions taken in 2021. The table below sets forth the significant items comprising our cash flows provided by operating activities during the six months ended June 30, 2022 and 2021 (in thousands):
Six months ended June 30,
2022 2021 Change
Cash Receipts:
Patent royalties $ 72,066 $ 75,435 $ (3,369)
Technology solutions 288 3,412 (3,124)
Total cash receipts 72,354 78,847 (6,493)
Cash Outflows:
Cash operating expenses a
93,664 105,729 (12,065)
Income taxes paid b
4,363 4,793 (430)
Total cash outflows 98,027 110,522 (12,495)
Other working capital adjustments (26,067) (5,426) (20,641)
Cash flows used in operating activities $ (51,740) $ (37,101) $ (14,639)
______________________________
(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 provided by investing activities for the first half 2022 was $142.7 million, a $138.2 million change from $4.5 million in the first half 2021. During the first half 2022, we sold $164.8 million of short-term marketable securities, net of purchases, and we capitalized $22.1 million of patent costs and property plant and equipment purchases. During the first half 2021, we sold $26.7 million of short-term marketable securities, net of purchases, we capitalized $21.2 million of patent costs and property plant and equipment purchases, and invested $1.1 million in a new strategic investment.
Net cash provided by financing activities for the first half 2022 was $41.0 million, a change of $74.1 million from $33.1 million net cash used in financing activities for the first half 2021. This change was primarily attributable to net proceeds of $140.0 million from the debt refinancing, partially offset by a $63.3 million increase in share repurchases.
Other
Our combined short-term and long-term deferred revenue balance as of June 30, 2022 was approximately $213.5 million, a net decrease of $97.6 million from December 31, 2021. This decrease in deferred revenue was primarily attributable amortization of deferred revenue recognized in the period, offset by cash receipts and non-cash patent acquisitions from previously disclosed patent license agreements.
Based on current license agreements, we expect the amortization of dynamic fixed-fee royalty payments to reduce the June 30, 2022 deferred revenue balance of $213.5 million by $168.5 million over the next twelve months.
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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.
Our 2027 and 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. Under the if-converted method, we must assume that conversion of convertible securities occurs at the beginning of the reporting period. The Convertible Notes are convertible into cash up to the aggregate principal amount of the Convertible Notes to be converted and any remaining obligation may be in cash, shares of the Company’s common stock or a combination thereof. 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 2027 Call Spread Transactions and 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 2027 Note Hedge Transactions and 2024 Note Hedge Transactions (together, the "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 ($77.49 per share for the 2027 Notes and $81.29 per share for the 2024 Notes as of June 30, 2022) or above the strike price of the warrants ($106.37 per share for the 2027 Warrant Transactions and $109.43 per share for the 2024 Warrant Transactions as of June 30, 2022), 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, " the Convertible Notes are convertible into cash up to the aggregate principal amount of the Convertible Notes to be converted and any remaining obligation may be in cash, shares of the Company’s common stock or a combination thereof. ("net share settlement"). Assuming net share settlement upon conversion, the following tables illustrate how, based on the $460.0 million aggregate principal amount of the 2027 Notes and the $126.2 million aggregate principal amount of the 2024 Notes outstanding as of June 30, 2022, and the approximately 5.9 million warrants related to the 2027 Notes and the 1.6 million warrants remaining 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 2027 Warrant Transactions and 2024 Warrant Transactions (together, the "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 Note Hedge Transactions and (v) the number of shares issuable upon concurrent conversion of the Convertible Notes, exercise of the warrants subject to the Warrant Transactions, and settlement of the Note Hedge Transactions:
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2027 Notes
Market Price Per Share Shares Issuable Upon Conversion of the 2027 Notes Shares Issuable Upon Exercise of the 2027 Warrant Transactions Total If-Converted Method Incremental Shares Shares Deliverable to InterDigital upon Settlement of the 2027 Note Hedge Transactions Incremental Shares Issuable (a)
(Shares in thousands)
$80 186 — 186 (186) —
$85 524 — 524 (524) —
$90 825 — 825 (825) —
$95 1,094 — 1,094 (1,094) —
$100 1,336 — 1,336 (1,336) —
$105 1,555 — 1,555 (1,555) —
$110 1,754 196 1,950 (1,754) 196
$115 1,936 445 2,381 (1,936) 445
$120 2,103 674 2,777 (2,103) 674
$125 2,256 885 3,141 (2,256) 885
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 68 — 68 (68) —
$90 150 — 150 (150) —
$95 224 — 224 (224) —
$100 290 — 290 (290) —
$105 351 — 351 (351) —
$110 405 8 413 (405) 8
$115 455 75 530 (455) 75
$120 501 137 638 (501) 137
$125 543 193 736 (543) 193
$130 582 246 828 (582) 246
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(a) Represents incremental shares issuable upon concurrent conversion of convertible notes, exercise of warrants and settlement of the hedge agreements.
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RESULTS OF OPERATIONS
Second Quarter 2022 Compared to Second Quarter 2021
Revenues
The following table compares second quarter 2022 revenues to second quarter 2021 revenues (in thousands):
Three months ended June 30,
2022 2021 Total Increase/(Decrease)
Variable patent royalty revenue $ 7,673 $ 7,323 $ 350 5 %
Fixed-fee royalty revenue 91,756 69,296 22,460 32 %
Current patent royalties a
99,429 76,619 22,810 30 %
Non-current patent royalties b
24,556 9,586 14,970 156 %
Total patent royalties 123,985 86,205 37,780 44 %
Current technology solutions revenue a
672 1,530 (858) (56) %
Total revenue $ 124,657 $ 87,735 $ 36,922 42 %
a. Recurring revenues are comprised of current patent royalties, inclusive of dynamic fixed-fee royalty payments, and current technology solutions revenue from the table above.
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 from the table above.
The increase in both total and recurring revenue was primarily driven by previously disclosed new patent license agreements, two new agreements signed in second quarter 2022, as well as revenues from connected automobile license agreements with GM and Ford Motor Company through a licensing platform. These increases were partially offset by a decrease in technology solutions revenues from a contract that was terminated in the first half of 2021. Non-recurring revenue in second quarter 2021 primarily related to a static fixed-fee patent licensing agreement signed in second quarter 2021.
In second quarter 2022 and second quarter 2021, 70% and 79% of our total revenue, respectively, was attributable to licensees that individually accounted for 10% or more of our total revenue. In second quarter 2022 and second quarter 2021, the following licensees accounted for 10% or more of our total revenue:
Three months ended June 30,
2022 2021
Customer A 28% 32%
Customer B 16% 22%
Customer C 14% —%
Customer D 12% —%
Customer E <10% 13%
Customer F <10% 12%
Operating Expenses
The following table summarizes the changes in operating expenses between second quarter 2022 and second quarter 2021 by category (in thousands):
Three months ended June 30,
2022 2021 Increase/(Decrease)
Patent administration and licensing $ 45,417 $ 40,970 $ 4,447 11 %
Development 17,086 21,870 (4,784) (22) %
Selling, general and administrative 9,516 14,799 (5,283) (36) %
Restructuring activities 2,738 13,245 (10,507) 100 %
Total operating expenses $ 74,757 $ 90,884 $ (16,127) (18) %
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Operating expenses decreased to $74.8 million in second quarter 2022 from $90.9 million in second quarter 2021. The $16.1 million decrease in total operating expenses was primarily due to changes in the following items (in thousands):
Increase/(Decrease)
Restructuring activities $ (10,507)
Personnel-related costs (9,204)
Intellectual property enforcement and non-patent litigation 3,392
Revenue share and commissions 1,157
Other (965)
Total decrease in operating expenses $ (16,127)
The $16.1 million decrease in operating expenses was primarily due to a $10.5 million reduction in non-recurring charges, substantially related to the company's previously announced restructuring plans, and a $9.2 million decrease in personnel-related costs primarily driven by cost-savings actions taken in 2021. These decreases were partially offset by $3.4 million of additional intellectual property enforcement costs related to the Lenovo and Oppo litigations and $1.2 million of additional revenue share and commissions costs due to the new licensing successes.
Patent Administration and Licensing Expense: The $4.4 million increase in patent administration and licensing expense was primarily due to the above noted increase in intellectual property enforcement costs, as well as an increase in patent amortization expense. These increases were partially offset by a decrease in personnel-related costs.
Development Expense: Development expense decreased $4.8 million primarily due to the above noted decrease in personnel-related costs, as well as a decrease in consulting costs.
Selling, General and Administrative Expense: Selling, general and administrative expense decreased $5.3 million primarily due to the above noted decrease in personnel-related costs.
Restructuring Activities: Restructuring expenses associated with our overall restructuring plan decreased due to the plan commencing and the initial accrual being recorded during second quarter 2021. For more information on the restructuring activities, refer to 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 second quarter 2022 non-operating expense to second quarter 2021 non-operating expense (in thousands):
Three months ended June 30,
2022 2021 Increase/(Decrease)
Interest expense $ (6,272) $ (6,666) $ 394 6 %
Interest and investment income 297 446 (149) (33) %
Loss on extinguishment of long-term debt (11,190) — (11,190) — %
Other (expense) income, net (4,123) 2,593 (6,716) (259) %
Total non-operating expense $ (21,288) $ (3,627) $ (17,661) (487) %
The $17.7 million change in non-operating expenses between the second quarter 2022 and 2021 was primarily due to the $11.2 million loss on extinguishment of the 2024 Notes, as described further in Note 7, " Obligations ", and due to a foreign currency translation loss of $3.6 million in the second quarter 2022 arising from euro translation of our foreign subsidiaries, compared to a foreign currency translation gain of $1.1 million in second quarter 2021.
Additionally, in both periods we recognized gains resulting from observable price changes of our long-term strategic investments, which were $1.6 million recognized in second quarter 2022 and $1.0 million recognized in second quarter 2021.
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Income taxes
In second quarter 2022 and 2021, based on the statutory federal tax rate net of discrete federal and state taxes, we had an effective tax rate of 28.1% and (0.3)%, 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. In the second quarter 2022, the Company recorded a net discrete tax expense of $2.3 million related to the extinguishment of long-term debt recognized during second quarter 2022. Excluding this valuation allowance, our second quarter 2022 and 2021 effective tax rate would have been 24.9% and 26.3%, respectively.
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First Half 2022 Compared to First Half 2021
Revenues
The following table compares first half 2022 revenues to first half 2021 revenues (in thousands):
Six months ended June 30,
2022 2021 Total Increase/(Decrease)
Variable patent royalty revenue $ 16,718 $ 14,419 $ 2,299 16 %
Fixed-fee royalty revenue 181,599 138,592 43,007 31 %
Current patent royalties a
198,317 153,011 45,306 30 %
Non-current patent royalties b
26,747 13,367 13,380 100 %
Total patent royalties 225,064 166,378 58,686 35 %
Current technology solutions revenue a
911 3,720 (2,809) (76) %
Total revenue $ 225,975 $ 170,098 $ 55,877 33 %
(a) Recurring revenues are comprised of current patent royalties, inclusive of dynamic fixed-fee royalty payments, and current technology solutions revenue from the table above.
(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 from the table above.
The increase in both total and recurring revenue was primarily driven by previously disclosed new patent license agreements, two additional new agreements signed in second quarter 2022, as well as revenues from connected automobile license agreements with GM and Ford Motor Company through a licensing platform. These increases were partially offset by a decrease in technology solutions revenues from a contract that was terminated in the first half of 2021 and a decrease in recurring revenues from a previously disclosed expired patent license agreement. Non-recurring revenue in first half 2021 primarily related two patent licensing agreement signed in second quarter 2021.
In first half 2022 and first half 2021, 71% and 69% of our total revenue, respectively, was attributable to companies that individually accounted for 10% or more of our total revenue. In first half 2022 and first half 2021, the following companies accounted for 10% or more of our total revenue:
Six months ended June 30,
2022 2021
Customer A 31% 33%
Customer B 17% 23%
Customer D 13% —%
Customer E 10% 13%
Operating Expenses
The following table summarizes the changes in operating expenses between first half 2022 and first half 2021 by category (in thousands):
Six months ended June 30,
2022 2021 Increase/(Decrease)
Patent administration and licensing $ 87,512 $ 77,544 $ 9,968 13 %
Development 34,698 44,453 (9,755) (22) %
Selling, general and administrative 20,400 26,016 (5,616) (22) %
Restructuring activities 3,280 13,245 (9,965) 100 %
Total operating expenses $ 145,890 $ 161,258 $ (15,368) (10) %
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Operating expenses decreased 10% to $145.9 million in first half 2022 from $161.3 million in first half 2021. The $15.4 million decrease in total operating expenses was primarily due to changes in the following items (in thousands):
Increase/(Decrease)
Personnel-related costs $ (14,051)
Restructuring activities
(9,966)
Consulting costs (3,640)
Intellectual property enforcement and non-patent litigation 7,711
Share-based compensation 3,440
Revenue share and commissions 1,770
Other (632)
Total decrease in operating expenses $ (15,368)
The $15.4 million decrease in operating expenses was primarily due to the company's previously announced restructuring plan, which drove the $10.0 million decrease in one-time restructuring expenses. These cost-savings actions taken in 2021 also drove a $14.1 million decrease in personnel-related costs and a $3.6 million decrease in consulting costs. These decreases were partially offset by $7.7 million of additional intellectual property enforcement costs related to the Lenovo and Oppo litigations. Additionally, share-based compensation costs increased $3.4 million and revenue share and commissions costs increased $1.8 million both driven by licensing successes.
Patent Administration and Licensing Expense: The $10.0 million increase in patent administration and licensing expense primarily resulted from the above noted increases in intellectual property enforcement costs, revenue share costs, and share-based compensation, as well as an increase in patent amortization. These increases were partially offset by a decrease in personnel-related costs.
Development Expense: Development expense decreased by $9.8 million primarily resulting from the above-noted decreases in personnel-related costs and consulting costs, partially offset by the above-noted increase in share-based compensation.
Selling, General and Administrative Expense: The $5.6 million decrease in selling, general and administrative expense primarily resulted from the above-noted decreases in personnel-related costs and consulting costs, partially offset by the above-noted increase in share-based compensation.
Restructuring Activities: Restructuring expenses associated with our overall restructuring plan decreased due to the plan commencing and the initial accrual being recorded during second quarter 2021. For more information on the restructuring activities, refer to 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 half 2022 non-operating expense to first half 2021 non-operating expense (in thousands):
Six months ended June 30,
2022 2021 Increase/(Decrease)
Interest expense $ (11,787) $ (13,656) $ 1,869 14 %
Interest and investment income 506 999 (493) (49) %
Loss on extinguishment of long-term debt (11,190) — (11,190) — %
Other income, net (5,337) 2,764 (8,101) 293 %
Total non-operating expense $ (27,808) $ (9,893) $ (17,915) (181) %
The $17.9 million change in non-operating expenses between the first half 2022 and first half 2021 was primarily due to the $11.2 million loss on extinguishment of the 2024 Notes, as described further in Note 7, " Obligations ", and due to a foreign currency translation loss of $4.0 million in the first half 2022 arising from euro translation of our foreign subsidiaries, compared to a foreign currency translation loss of $0.8 million in first half 2021.
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Additionally, we recognized a $1.9 million gain on a contract termination in first half 2021 and in both periods we recognized gains resulting from observable price changes of our long-term strategic investments, which were $1.6 million recognized in first half 2022 and $1.0 million recognized in first half 2021.
Income taxes
In first half 2022 and 2021, we had an effective tax rate of 26.8% and (169.6)%, 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 half 2022 and 2021 effective tax rate would have been 23.2% and 104.3%, respectively. In the first half 2022 and 2021, we recorded a net discrete tax benefit of $2.2 million and $0.6 million, respectively, primarily related to extinguishment of long-debt.
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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 the Private Securities Litigation Reform Act of 1995. Such statements include certain information in regarding our current beliefs, plans and expectations, including, without limitation, the matters set forth below. 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 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-Q 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. These risks and uncertainties include, but are not limited to, the risks and uncertainties described in Part I, Item 1A of our 2021 Form 10-K 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 to materialize to the extent or at the rate that we expect;
• unexpected delays or difficulties related to the development of our technologies;
• 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 general economic or other conditions could have on our financial position, results of operations and cash flows; and
• changes in our business strategy.
You should carefully consider these factors 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. You should understand that it is not possible to predict or identify all such factors. In addition, you should not place undue reliance on the forward-looking statements contained herein, which are made only as of the date of this Form 10-Q. 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 2021 Form 10-K.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.