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Item 2. Management’s Discussion and Analysis

2022-11-03 compared with 2022-08-04 · 121 added, 160 removed, 208 unchanged (57% of the section changed)

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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.

Throughout the following discussion and elsewhere in this Form 10-Q, we refer to “non-recurring revenues.” Non-recurring revenues are comprised of past patent royalties and revenues from static agreements.

New Revenue Agreement

On September 30, 2022, we renewed a patent license agreement with Apple Inc.

The Company expects to recognize approximately $134.0 million in revenue each year over the seven-year term of the license, which commenced on October 1, 2022.

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.

As of September 30, 2022, we had $872.8 million of cash, cash equivalents, restricted cash and short-term investments and an additional $1.1 billion of cash payments due under contracted fixed price agreements, including $365.1 million recorded in our $403.0 million accounts receivable balance.

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

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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,

Our accounts receivable balance of $403.0 million, as of September 30, 2022, includes an expected, partial, upfront payment associated with a recent license renewal.

The following table reconciles the timing differences between cash receipts and recognized revenue during the three and nine months ended September 30, 2022 and 2021, including the resulting operating cash flow (in thousands):

Three months ended September 30, Nine months ended September 30,

Non-cash revenue:

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(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.

(b) Other cash receipts are primarily comprised of cash receipts related to our variable patent royalty revenue and non-recurring revenues.

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):

The following table shows the projected amortization of our current and long term deferred revenue as of September 30, 2022 (in thousands):

Deferred Revenue

Remainder of 2022 $ 81,892

2026 and thereafter 5,180

Thereafter 4,697

Total Revenue $ 487,570

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.

Third quarter 2022 recurring revenue was $101.0 million, compared to recurring revenue of $93.4 million in third quarter 2021, a 8% year-over-year increase.

In third quarter 2022, revenues (in descending order) from Apple, Samsung, Xiaomi, and Huawei each comprised 10% or more of our consolidated revenues.

Refer to " Results of Operations --Third Quarter 2022 Compared to Third Quarter 2021 " for further discussion of our 2022 revenue.

Restructuring Activities

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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

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

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

To that end, in third 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.

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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.

Between March 12, 2020, when we began to work almost entirely remotely, and September 30, 2022, we successfully concluded twenty-two new patent license agreements that we estimate will result in revenues exceeding $1.7 billion 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.

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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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When comparing third quarter 2022 financial results against other periods, the following items should be taken into consideration:

• Our third quarter 2022 revenue includes $13.7 million of non-recurring revenue primarily related to new connected automobile license agreements.

• During third quarter 2022, we incurred $8.4 million of one-time supplemental compensation costs driven by licensing success.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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There have been no material changes to our existing critical accounting policies from the disclosures included in our 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.

In addition, we have analyzed the impact of COVID-19 on our financial statements as of September 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.

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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 /

As of September 30, 2022 and December 31, 2021, we had the following amounts of cash and cash equivalents, restricted cash and short-term investments (in thousands):

September 30, 2022 December 31, 2021 Increase /

Cash and cash equivalents $ 539,651 $ 706,282 $ (166,631)

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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,

Cash flows (used in) provided by operating activities

Cash flows used in operating activities in the first nine months 2022 and 2021 (in thousands) were as follows:

Nine months ended September 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,

Net cash (used in) provided by operating activities $ (70,469) $ 59,163 $ (129,632)

Our cash flows (used in) 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 $129.6 million change in net cash (used in) provided by 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 (used in) provided by operating activities during the nine months ended September 30, 2022 and 2021 (in thousands):

Nine months ended September 30,

2022 2021 Change

Cash Receipts:

Patent royalties $ 72,066 $ 75,435 $ (3,369)

Technology solutions 288 3,412 (3,124)

Total Cash Receipts $ 105,419 $ 229,636 $ (124,217)

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Other working capital adjustments (19,271) 16,358 (35,629)

Cash flows used in operating activities $ (51,740) $ (37,101) $ (14,639)

Cash flows (used in) provided by operating activities $ (70,469) $ 59,163 $ (129,632)

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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.

Net cash used in investing activities for the first nine months 2022 was $123.2 million, a $110.7 million change from $12.5 million in the first nine months 2021.

During the first nine months 2022, we purchased $92.1 million of short-term marketable securities, net of sales, and we capitalized $31.1 million of patent costs and property plant and equipment purchases.

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

Net cash provided by financing activities for the first nine months 2022 was $29.4 million, a change of $83.7 million from $54.3 million net cash used in financing activities for the first nine months 2021.

This change was primarily attributable to net proceeds of $139.2 million from the debt refinancing, partially offset by a $51.4 million increase in share repurchases.

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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Our combined short-term and long-term deferred revenue balance as of September 30, 2022 was approximately $487.6 million, a net increase of $176.4 million from December 31, 2021.

This increase in deferred revenue was primarily attributable to an increase in accounts receivable associated with a license renewal signed in third quarter 2022 and was partially offset by amortization of deferred revenue recognized in the period.

Based on current license agreements, we expect the amortization of dynamic fixed-fee royalty payments to reduce the September 30, 2022 deferred revenue balance of $487.6 million by $211.0 million over the next twelve months.

Convertible Notes

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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.

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 September 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 September 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.

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("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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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 September 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:

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)

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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

The following table compares second quarter 2022 revenues to second quarter 2021 revenues (in thousands):

Three months ended June 30,

Third Quarter 2022 Compared to Third Quarter 2021

The following table compares third quarter 2022 revenues to third quarter 2021 revenues (in thousands):

Three months ended September 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

Recurring revenues:

Smartphone $ 87,467 $ 84,143 $ 3,324 4 %

CE, IoT/Auto 13,579 8,498 5,081 60 %

Other — 747 (747) (100) %

Total recurring revenues 101,046 93,388 7,658 8 %

Non-recurring revenues a

13,718 50,108 (36,390) (73) %

Total revenue $ 124,657 $ 87,735 $ 36,922 42 %

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

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,

Total revenues $ 114,764 $ 143,496 (28,732) (20) %

(a) Non-recurring revenues are comprised of past patent royalties and revenues from static agreements.

Total revenues of $114.8 million, which includes both recurring and non-recurring revenues, decreased 20% from $143.5 million in third quarter 2021 primarily due to $50.1 million of non-recurring revenues recognized on three previously disclosed agreements signed in third quarter 2021.

Non-recurring revenues in third quarter 2022 were primarily attributable to revenues from new connected automobile license agreements.

Recurring revenue increased 8% to $101.0 million, compared to recurring revenue of $93.4 million in third quarter 2021.

The company increased recurring revenue in both its Smartphone (up 4%) and CE, IoT/Auto markets (up 60%) as a result of nine new agreements signed over the last twelve months.

In third quarter 2022 and third 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 third quarter 2022 and third quarter 2021, the following licensees accounted for 10% or more of our total revenue:

Three months ended September 30,

Customer A 30% 19%

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Customer E <10% 15%

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,

The following table summarizes the changes in operating expenses between third quarter 2022 and third quarter 2021 by category (in thousands):

Three months ended September 30,

2022 2021 Increase/(Decrease)

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Total operating expenses $ 82,927 $ 106,719 $ (23,792) (22) %

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Operating expenses decreased to $74.8 million in second quarter 2022 from $90.9 million in second quarter 2021.

Operating expenses decreased to $82.9 million in third quarter 2022 from $106.7 million in third quarter 2021.

The $23.8 million decrease in total operating expenses was primarily due to changes in the following items (in thousands):

Increase/(Decrease)

Revenue share $ (9,659)

Restructuring activities (7,045)

Personnel-related costs (9,204)

Intellectual property enforcement and non-patent litigation 3,392

Revenue share and commissions 1,157

Performance-based compensation (4,538)

Other (2,550)

Total decrease in operating expenses $ (23,792)

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.

The $23.8 million decrease in operating expenses was primarily due to a reduction of non-recurring costs, which were driven by a $9.7 million decrease in revenue share costs primarily attributable to a patent license agreement signed in third quarter 2021 and a $7.0 million reduction in restructuring costs associated with the Company’s ongoing restructuring efforts.

The remainder of the decrease was primarily attributable to a $4.5 million reduction in performance-based compensation.

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.

The $9.4 million decrease in patent administration and licensing expense was primarily due to the above-noted decrease in revenue share 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.

Development expense decreased $0.8 million primarily due to 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.

Selling, general and administrative expense decreased $6.6 million primarily due to the above-noted decrease in performance-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.

Restructuring expenses associated with our overall restructuring plan decreased due to the plan being substantially complete in 2022.

There were no significant restructuring activities in third quarter 2022.

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,

The following table compares third quarter 2022 non-operating expense to third quarter 2021 non-operating expense (in thousands):

Three months ended September 30,

2022 2021 Increase/(Decrease)

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Interest and investment income 4,421 385 4,036 1,048 %

Loss on extinguishment of long-term debt (11,190) — (11,190) — %

Other (expense) income, net (4,123) 2,593 (6,716) (259) %

Other expense (3,509) (1,922) (1,587) 83 %

Total non-operating expense $ (6,747) $ (7,310) $ 563 8 %

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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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 $4.0 million increase in interest and investment income was primarily due to market conditions driving higher yields on the Company's short-term investments.

Additionally, interest expense increased due to the additional interest on the 2027 Notes issued during second quarter 2022 and other expense increased primarily due to foreign currency translation loss arising from euro translation of our foreign subsidiaries.

In third 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 13.2% and 14.4%, 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

The following table compares first half 2022 revenues to first half 2021 revenues (in thousands):

Six months ended June 30,

Excluding this valuation allowance, our third quarter 2022 and 2021 effective tax rate would have been 7.5% and 11.8%, respectively.

First Nine Months 2022 Compared to First Nine Months 2021

The following table compares first nine months 2022 revenues to first nine months 2021 revenues (in thousands):

Nine months ended September 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

Recurring revenues:

Smartphone $ 262,908 $ 223,701 $ 39,207 18 %

CE, IoT/Auto 36,455 21,951 14,504 66 %

Other 911 4,467 (3,556) (80) %

Total recurring revenues 300,274 250,119 50,155 20 %

Non-recurring revenues a

40,465 63,475 (23,010) (36) %

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,

Total revenues $ 340,739 $ 313,594 27,145 9 %

(a) Non- recurring revenues are comprised of past patent royalties and revenues from static agreements.

Total revenues of $340.7 million, which includes both recurring and non-recurring revenues, increased 9% from $313.6 million in the first nine months of 2021 primarily due to recurring revenue increasing 20% to $300.3 million, compared to $250.1 million in 2021.

The company increased recurring revenue in both its Smartphone (up 18%) and CE, IoT/Auto markets (up 66%) as a result of sixteen new agreements signed over the last eighteen months.

Non-recurring revenues decreased $23.0 million primarily attributable to revenues recognized on five previously disclosed agreements signed in 2021.

Non-recurring revenues in 2022 were primarily attributable to three previously disclosed license agreements signed in the first nine months of 2022 and revenues from new connected automobile license agreements.

In first nine months 2022 and first nine months 2021, 71% and 71% of our total revenue, respectively, was attributable to companies that individually accounted for 10% or more of our total revenue.

In first nine months 2022 and first nine months 2021, the following companies accounted for 10% or more of our total revenue:

Nine months ended September 30,

Customer A 31% 27%

Customer B 17% 19%

Customer C 13% 14%

Customer D 10% 11%

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,

The following table summarizes the changes in operating expenses between first nine months 2022 and first nine months 2021 by category (in thousands):

Nine months ended September 30,

2022 2021 Increase/(Decrease)

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Total operating expenses $ 228,817 $ 267,977 $ (39,160) (15) %

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Operating expenses decreased 10% to $145.9 million in first half 2022 from $161.3 million in first half 2021.

Operating expenses decreased 15% to $228.8 million in first nine months 2022 from $268.0 million in first nine months 2021.

The $39.2 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 $ (17,010)

Personnel-related costs (16,683)

Revenue share (8,389)

Consulting costs (4,668)

Intellectual property enforcement and non-patent litigation 7,761

Share-based compensation 3,440

Revenue share and commissions 1,770

Total decrease in operating expenses $ (39,160)

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.

The $39.2 million decrease in operating expenses was primarily due to a reduction of non-recurring costs, which were driven by a $8.4 million decrease in revenue share costs primarily attributable to a patent license agreement signed in third quarter 2021 and a $17.0 million reduction in restructuring costs associated with the Company’s ongoing restructuring efforts.

Additionally, the cost-savings restructuring actions taken in 2021 drove a $16.7 million decrease in personnel-related costs and a $4.7 million decrease in consulting costs.

These decreases were partially offset by $7.8 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.

The $0.5 million increase in patent administration and licensing expense primarily resulted from the above-noted increase in intellectual property enforcement costs.

This increase was partially offset by the above-noted decreases in revenue share costs and consulting 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.

Development expense decreased by $10.5 million primarily resulting from the above-noted decreases in personnel-related costs and consulting costs.

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.

The $12.2 million decrease in selling, general and administrative expense primarily resulted from the above-noted decreases in personnel-related costs and consulting 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.

Restructuring expenses associated with our overall restructuring plan decreased due to the plan being substantially complete in 2022.

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,

The following table compares first nine months 2022 non-operating expense to first nine months 2021 non-operating expense (in thousands):

Nine months ended September 30,

2022 2021 Increase/(Decrease)

2 unchanged sentences

Loss on extinguishment of long-term debt (11,190) — (11,190) — %

Other income, net (5,337) 2,764 (8,101) 293 %

Other (expense) income, net (8,846) 842 (9,688) 1,151 %

Total non-operating expense $ (34,555) $ (17,203) $ (17,352) (101) %

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.

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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The $11.2 million loss on extinguishment of long-term debt was related to the partial repurchase of the 2024 Notes, as described further in Note 7, " Obligations ".

Other (expense) income, net increased primarily due to a foreign currency translation loss of $6.7 million in the first nine months 2022 arising from euro translation of our foreign subsidiaries, compared to a foreign currency translation loss of $2.6 million in first nine months 2021.

These changes were partially offset by an increase in interest and investment income primarily due to market conditions driving higher yields on the Company's short term investments.

Additionally, we recognized a $1.9 million gain on a contract termination in first nine months 2021 and in both periods we recognized gains resulting from observable price changes of our long-term strategic investments, which were $1.6 million in first nine months 2022 and $1.0 million in first nine months 2021.

In first nine months 2022 and 2021, we had an effective tax rate of 22.4% and 21.3%, respectively.

Excluding this valuation allowance, our nine months ended 2022 and 2021 effective tax rate would have been 18.1% and 8.4%, respectively.

In the nine months ended 2022 and 2021, we recorded a net discrete tax benefit of $2.3 million and $0.3 million, respectively, primarily related to extinguishment of long-debt and share-based compensation.

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

29 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis