InterDigital, Inc. 10-Q

Item 1. FINANCIAL STATEMENTS INTERDIGITAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) (unaudited) SEPTEMBER 30, 2022 DECEMBER 31, 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 539,651 $ 706,282 Short-term investments 323,772 235,345 Accounts receivable, less allowances of $ 0 and $ 322 403,043 31,113 Prepaid and other current assets 86,028 77,545 Total current assets 1,352,494 1,050,285 PROPERTY AND EQUIPMENT, NET 10,164 13,377 PATENTS, NET 363,631 363,585 DEFERRED TAX ASSETS 99,817 98,408 OTHER NON-CURRENT ASSETS, NET 102,109 102,501 Total non-current assets 575,721 577,871 TOTAL ASSETS $ 1,928,215 $ 1,628,156 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 7,413 $ 7,155 Accrued compensation and related expenses 34,573 32,638 Deferred revenue 210,981 291,673 Dividends payable 10,382 10,741 Other accrued expenses 27,112 29,354 Total current liabilities 290,461 371,561 LONG-TERM DEBT 605,859 422,745 LONG-TERM DEFERRED REVENUE 276,589 19,463 OTHER LONG-TERM LIABILITIES 53,511 61,470 TOTAL LIABILITIES 1,226,420 875,239 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY: Preferred Stock, $ 0.10 par value, 14,399 shares authorized, 0 shares issued and outstanding — — Common Stock, $ 0.01 par value, 100,000 shares authorized, 71,918 and 71,720 shares issued and 29,663 and 30,689 shares outstanding 719 717 Additional paid-in capital 710,007 713,599 Retained earnings 1,470,335 1,441,105 Accumulated other comprehensive loss ( 1,230 ) ( 571 ) 2,179,831 2,154,850 Treasury stock, 42,255 and 41,031 shares of common stock held at cost 1,484,056 1,409,611 Total InterDigital, Inc. shareholders’ equity 695,775 745,239 Noncontrolling interest 6,020 7,678 Total equity 701,795 752,917 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,928,215 $ 1,628,156 The accompanying notes are an integral part of these statements. 3 Table of Contents INTERDIGITAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (unaudited) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2022 2021 2022 2021 REVENUES $ 114,764 $ 143,496 $ 340,739 $ 313,594 OPERATING EXPENSES: Patent administration and licensing 46,720 56,150 134,232 133,694 Development 21,789 22,546 56,487 66,999 Selling, general and administrative 14,418 20,978 34,818 46,994 Restructuring activities — 7,045 3,280 20,290 Total Operating expenses 82,927 106,719 228,817 267,977 Income from operations 31,837 36,777 111,922 45,617 INTEREST EXPENSE ( 7,659 ) ( 5,773 ) ( 19,446 ) ( 19,429 ) OTHER INCOME (EXPENSE), NET 912 ( 1,537 ) ( 15,109 ) 2,226 Income before income taxes 25,090 29,467 77,367 28,414 INCOME TAX PROVISION ( 3,323 ) ( 4,253 ) ( 17,312 ) ( 6,039 ) NET INCOME $ 21,767 $ 25,214 $ 60,055 $ 22,375 Net loss attributable to noncontrolling interest ( 455 ) ( 1,014 ) ( 1,230 ) ( 11,042 ) NET INCOME ATTRIBUTABLE TO INTERDIGITAL, INC. $ 22,222 $ 26,228 $ 61,285 $ 33,417 NET INCOME PER COMMON SHARE — BASIC $ 0.75 $ 0.85 $ 2.03 $ 1.09 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — BASIC 29,659 30,737 30,255 30,792 NET INCOME PER COMMON SHARE — DILUTED $ 0.74 $ 0.83 $ 2.00 $ 1.07 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — DILUTED 29,940 31,431 30,638 31,272 The accompanying notes are an integral part of these statements. 4 Table of Contents INTERDIGITAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) (unaudited) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2022 2021 2022 2021 Net income $ 21,767 $ 25,214 $ 60,055 $ 22,375 Unrealized loss on investments, net of tax ( 292 ) ( 67 ) ( 659 ) ( 206 ) Comprehensive income $ 21,475 $ 25,147 $ 59,396 $ 22,169 Comprehensive loss attributable to noncontrolling interest ( 455 ) ( 1,014 ) ( 1,230 ) ( 11,042 ) Total comprehensive income attributable to InterDigital, Inc. $ 21,930 $ 26,161 $ 60,626 $ 33,211 The accompanying notes are an integral part of these statements. 5 Table of Contents INTERDIGITAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except per share data) (unaudited) Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Non-Controlling Interest Total Shareholders' Equity Shares Amount Shares Amount BALANCE, DECEMBER 31, 2020 71,389 $ 714 $ 738,481 $ 1,413,969 $ ( 184 ) 40,573 $ ( 1,379,611 ) $ 23,197 $ 796,566 Adjustment to Retained Earnings related to adoption of ASU 2020-06 — — ( 55,349 ) 15,587 — — — — ( 39,762 ) Net income attributable to InterDigital, Inc. — — — 5,571 — — — — 5,571 Net loss attributable to noncontrolling interest — — — — — — — ( 1,613 ) ( 1,613 ) Noncontrolling interest distribution — — — — — — — ( 1,109 ) ( 1,109 ) Net change in unrealized loss on short-term investments — — — — ( 70 ) — — — ( 70 ) Dividends declared ($ 0.35 per share) — — 210 ( 10,976 ) — — — — ( 10,766 ) Exercise of common stock options 32 — 737 — — — — — 737 Issuance of common stock, net 55 — ( 2,962 ) — — — — — ( 2,962 ) Amortization of unearned compensation — — 2,153 — — — — — 2,153 Repurchase of common stock — — — — — 91 ( 5,750 ) — ( 5,750 ) BALANCE, MARCH 31, 2021 71,476 $ 714 $ 683,270 $ 1,424,151 $ ( 254 ) 40,664 $ ( 1,385,361 ) $ 20,475 $ 742,995 Net income attributable to InterDigital, Inc. — — — 1,618 — — — — 1,618 Net loss attributable to noncontrolling interest — — — — — — — ( 8,415 ) ( 8,415 ) Net change in unrealized loss on short-term investments — — — — ( 69 ) — — — ( 69 ) Dividends declared ($ 0.35 per share) — — 158 ( 10,925 ) — — — — ( 10,767 ) Exercise of common stock options 71 1 3,631 — — — — — 3,632 Issuance of common stock, net 41 — ( 711 ) — — — — — ( 711 ) Amortization of unearned compensation — — 3,775 — — — — — 3,775 Repurchase of common stock — — — — — 82 ( 5,391 ) — ( 5,391 ) BALANCE, JUNE 30, 2021 71,588 $ 715 $ 690,123 $ 1,414,844 $ ( 323 ) 40,746 $ ( 1,390,752 ) $ 12,060 $ 726,667 Net income attributable to InterDigital, Inc. — — — 26,228 — — — — 26,228 Net loss attributable to noncontrolling interest — — — — — — — ( 1,014 ) ( 1,014 ) Net change in unrealized loss on short-term investments — — — — ( 67 ) — — — ( 67 ) Dividends declared ($ 0.35 per share) — — 183 ( 10,923 ) — — — — ( 10,740 ) Exercise of common stock options 23 1 1,515 — — — — — 1,516 Issuance of common stock, net 5 — ( 74 ) — — — — — ( 74 ) Amortization of unearned compensation — — 15,082 — — — — — 15,082 Repurchase of common stock — — — — — 181 ( 11,859 ) — ( 11,859 ) BALANCE, SEPTEMBER 30, 2021 71,616 $ 716 $ 706,829 $ 1,430,149 $ ( 390 ) 40,927 $ ( 1,402,611 ) $ 11,046 745,739 6 Table of Contents Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Non-Controlling Interest Total Shareholders' Equity Shares Amount Shares Amount BALANCE, DECEMBER 31, 2021 71,720 $ 717 $ 713,599 $ 1,441,105 $ ( 571 ) 41,031 $ ( 1,409,611 ) $ 7,678 $ 752,917 Net income attributable to InterDigital, Inc. — — — 17,994 — — — — 17,994 Net loss attributable to noncontrolling interest — — — — — — — ( 290 ) ( 290 ) Noncontrolling interest distribution — — — — — — — ( 1,928 ) ( 1,928 ) Noncontrolling interest contribution — — — — — — — 1,500 1,500 Net change in unrealized loss on short-term investments — — — — ( 310 ) — — — ( 310 ) Dividends declared ($ 0.35 per share) — — 158 ( 10,961 ) — — — — ( 10,803 ) Exercise of common stock options 24 — 1,226 — — — — — 1,226 Issuance of common stock, net 139 1 ( 5,027 ) — — — — — ( 5,026 ) Amortization of unearned compensation — — 5,386 — — — — — 5,386 BALANCE, MARCH 31, 2022 71,883 $ 718 $ 715,342 $ 1,448,138 $ ( 881 ) 41,031 $ ( 1,409,611 ) $ 6,960 $ 760,666 Net income attributable to InterDigital, Inc. — — — 21,069 — — — — 21,069 Net loss attributable to noncontrolling interest — — — — — — — ( 485 ) ( 485 ) Net change in unrealized loss on short-term investments — — — — ( 57 ) — — — ( 57 ) Dividends declared ($ 0.35 per share) — — 153 ( 10,533 ) — — — — ( 10,380 ) Issuance of common stock, net 29 1 ( 708 ) — — — — — ( 707 ) Amortization of unearned compensation — — 3,977 — — — — — 3,977 Repurchase of common stock — — — — — 1,224 ( 74,445 ) — ( 74,445 ) Net convertible note hedge transactions, net of tax — — ( 54,257 ) — — — — — ( 54,257 ) Net warrant transactions — — 39,863 — — — — — 39,863 BALANCE, JUNE 30, 2022 71,912 $ 719 $ 704,370 $ 1,458,674 $ ( 938 ) 42,255 $ ( 1,484,056 ) $ 6,475 $ 685,244 Net income attributable to InterDigital, Inc. — — — 22,222 — — — — 22,222 Net loss attributable to noncontrolling interest — — — — — — — ( 455 ) ( 455 ) Net change in unrealized gain (loss) on short-term investments — — — — ( 292 ) — — — ( 292 ) Dividends declared ($ 0.35 per share) — — 179 ( 10,561 ) — — — — ( 10,382 ) Issuance of common stock, net 6 — ( 388 ) — — — — — ( 388 ) Amortization of unearned compensation — — 5,846 — — — — — 5,846 BALANCE, SEPTEMBER 30, 2022 71,918 $ 719 $ 710,007 $ 1,470,335 $ ( 1,230 ) 42,255 $ ( 1,484,056 ) $ 6,020 $ 701,795 The accompanying notes are an integral part of these statements. 7 Table of Contents INTERDIGITAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) For the Nine Months Ended September 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 60,055 $ 22,375 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 59,149 58,971 Non-cash interest expense, net 3,742 5,240 Non-cash change in fair-value ( 1,404 ) ( 949 ) Change in deferred revenue 146,334 64,044 Loss on extinguishment of debt 11,190 — Deferred income taxes 13,158 ( 14,416 ) Share-based compensation 15,209 21,010 Impairment of assets 2,427 11,000 Increase in assets: Receivables ( 371,930 ) ( 125,649 ) Deferred charges and other assets ( 12,848 ) ( 13,464 ) Increase in liabilities: Accounts payable 3,485 2,266 Accrued compensation and other expenses 964 28,735 Net cash (used in) provided by operating activities ( 70,469 ) 59,163 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments ( 274,189 ) ( 498,151 ) Sales of short-term investments 182,129 516,715 Purchases of property and equipment ( 872 ) ( 1,877 ) Capitalized patent costs ( 30,267 ) ( 28,145 ) Long-term investments — ( 1,091 ) Net cash used in investing activities ( 123,199 ) ( 12,549 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of convertible senior notes 460,000 — Purchase of convertible bond hedge ( 80,500 ) — Proceeds from issuance of warrants 43,700 — Payments on long-term debt ( 282,499 ) — Proceeds from hedge unwind 11,851 — Payment for warrant unwind ( 3,837 ) — Payments of debt issuance costs ( 9,522 ) — Repurchase of common stock ( 74,445 ) ( 23,000 ) Net proceeds from exercise of stock options 1,226 5,885 Non-controlling interest contribution 1,500 — Non-controlling interest distribution — ( 1,109 ) Taxes withheld upon restricted stock unit vestings ( 6,121 ) ( 3,747 ) Dividends paid ( 31,924 ) ( 32,319 ) Net cash provided by (used in) financing activities 29,429 ( 54,290 ) NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH ( 164,239 ) ( 7,676 ) CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD 713,224 477,663 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD $ 548,985 $ 469,987 Refer to Note 1, " Basis of Presentation, " for additional supplemental cash flow information. Additionally, refer to Note 6, " Cash, Concentration of Credit Risk and Fair Value of Financial Instruments " for a reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets. The accompanying notes are an integral part of these statements. 8 Table of Contents INTERDIGITAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2022 (unaudited) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited, condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial position of InterDigital, Inc. (individually and/or collectively with its subsidiaries referred to as “InterDigital,” the “Company,” “we,” “us” or “our,” unless otherwise indicated) as of September 30, 2022, the results of our operations for the three and nine months ended September 30, 2022 and 2021 and our cash flows for the nine months ended September 30, 2022 and 2021. The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, accordingly, do not include all of the detailed schedules, information and notes necessary to state fairly the financial condition, results of operations and cash flows in conformity with United States generally accepted accounting principles (“GAAP”). The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP for year-end financial statements. Therefore, these financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (our “2021 Form 10-K”) as filed with the Securities and Exchange Commission (“SEC”) on February 17, 2022. Definitions of capitalized terms not defined herein appear within our 2021 Form 10-K. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. We have one reportable segment. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. InterDigital has analyzed the impact of the ongoing Coronavirus pandemic (“COVID-19”) on its financial statements as of September 30, 2022. InterDigital has determined that the changes to its significant judgments and estimates as a result of COVID-19 did not have a material impact on its financial statements. The potential impact of COVID-19 will continue to be analyzed going forward. Change in Accounting Policies There have been no material changes or updates to our existing accounting policies from the disclosures included in our 2021 Form 10-K, except as indicated below in " New Accounting Guidance ". Prior Periods' Financial Statement Revision As previously disclosed in our 2021 Form 10-K filed with the SEC on February 17, 2022, during the fourth quarter of 2021, we determined that in our first quarter 2021 adoption of ASU 2020-06, Accounting for Convertible Debt, we incorrectly accounted for the adoption by increasing debt and decreasing retained earnings by $ 50.2 million, which resulted in a $ 10.4 million understatement of deferred taxes, $ 65.8 million understatement of retained earnings and $ 55.4 million overstatement of additional paid-in capital. While we concluded that this error did not result in our previously issued 2021 interim financial statements being materially misstated, we have corrected the misstatement by revising the accompanying Condensed Consolidated Statement of Shareholders’ Equity as of and for the three months ended March 31, 2021, six months June 30, 2021, and nine months ended September 30, 2021, respectively. The accompanying annual footnotes have also been adjusted to reflect such correction. Reclassifications Certain reclassifications have been made to prior year amounts to conform to the current year presentation. Beginning in third quarter 2022, the Company updated the disaggregated revenue disclosures as described further in Note 2, " Revenue ". 9 Table of Contents Supplemental Cash Flow Information The following table presents additional supplemental cash flow information for the nine months ended September 30, 2022 and 2021 (in thousands): For the Nine Months Ended September 30, SUPPLEMENTAL CASH FLOW INFORMATION: 2022 2021 Interest paid $ 3,938 $ 4,000 Income taxes paid, including foreign withholding taxes 4,585 9,835 Non-cash investing and financing activities: Dividend payable 10,382 10,740 Accrued debt issuance costs 390 — Right-of-use assets obtained in exchange of operating lease liabilities 6,228 739 Non-cash acquisition of patents 30,100 — Non-cash distribution of patents 1,928 — Accrued capitalized patent costs and property and equipment purchases 3,227 3,690 Unsettled repurchase of common stock — 499 New Accounting Guidance Accounting Standards Update: Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity Classified Written Call Options In May 2021, the FASB issued ASU No. 2021-04. The amendments in this ASU are intended to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options, including warrants, that remain equity classified after modification or exchange. ASU 2021-04 is effective for fiscal years beginning after December 15, 2021, with early adoption allowed. We adopted this guidance as of January 1, 2022 and the adoption did not have a material impact on our consolidated financial statements. 10 Table of Contents 2. REVENUE Disaggregated Revenue We recently experienced significant growth in licensing our horizontal technologies from our foundational research across new vertical markets. Accordingly, beginning third quarter 2022, we have disaggregated revenue between Smartphone and Consumer Electronics ("CE"), IoT/Auto. We believe this better reflects both our current revenue sources and our growth opportunities across these vertical markets. The following table presents the disaggregation of our revenue for the three and nine months ended September 30, 2022 and 2021 (in thousands): Three months ended September 30, 2022 2021 Total Increase/(Decrease) 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 revenues $ 114,764 $ 143,496 ( 28,732 ) ( 20 ) % Nine months ended September 30, 2022 2021 Total Increase/(Decrease) 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 revenues $ 340,739 $ 313,594 27,145 9 % (a) Non-recurring revenues are comprised of past patent royalties and revenues from static agreements. During the nine months ended September 30, 2022, we recognized $ 244.8 million of revenue that had been included in deferred revenue as of the beginning of the period. As of September 30, 2022, we had contract assets of $ 402.4 million and $ 7.6 million included within " Accounts receivable " and " Other non-current assets, net " in the condensed consolidated balance sheet, respectively. As of December 31, 2021, we had contract assets of $ 18.9 million and $ 8.3 million included within " Accounts receivable " and " Other non-current assets, net " in the condensed consolidated balance sheet, respectively. Contracted Revenue Based on contracts signed and committed as of September 30, 2022, we expect to recognize the following revenue from dynamic fixed-fee royalty payments over the term of such contracts (in thousands): Revenue Remainder of 2022 $ 90,238 2023 263,292 2024 214,878 2025 202,501 2026 134,963 Thereafter 372,778 Total Revenue $ 1,278,650 11 Table of Contents 3. INCOME TAXES In the nine months ended September 30, 2022 and 2021, the Company had an effective tax rate of 22.4 % and 21.3 %, 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. Excluding this valuation allowance, our effective tax rate for the nine months ended September 30, 2022 and 2021 would have been 18.1 % and 8.4 % respectively. During both the nine months ended September 30, 2022 and 2021, the Company recorded discrete net benefits of $ 2.3 million and $ 0.3 million, respectively, primarily related to extinguishment of long-term debt and share-based compensation. The effective tax rate reported in any given year will continue to be influenced by a variety of factors, including timing differences between the recognition of book and tax revenue, the level of pre-tax income or loss, the foreign vs. domestic classification of the Company’s customers, and any discrete items that may occur. During the nine months ended September 30, 2022 and 2021, the Company paid approximately $ 3.7 million and $ 8.9 million, respectively, in foreign source creditable withholding tax. 4. NET INCOME PER SHARE Basic Earnings Per Share ("EPS") is calculated by dividing net income or loss available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if options or other securities with features that could result in the issuance of common stock were exercised or converted to common stock or resulting from the unvested outstanding restricted stock units ("RSUs"). The following tables reconcile the numerator and the denominator of the basic and diluted net income per share computation (in thousands, except for per share data): Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Net income applicable to InterDigital, Inc. $ 22,222 $ 26,228 $ 61,285 $ 33,417 Weighted-average shares outstanding: Basic 29,659 30,737 30,255 30,792 Dilutive effect of stock options, RSUs, convertible securities and warrants 281 694 383 480 Diluted 29,940 31,431 30,638 31,272 Earnings per share: Basic $ 0.75 $ 0.85 $ 2.03 $ 1.09 Dilutive effect of stock options, RSUs, convertible securities and warrants ( 0.01 ) ( 0.02 ) ( 0.03 ) ( 0.02 ) Diluted $ 0.74 $ 0.83 $ 2.00 $ 1.07 Shares of common stock issuable upon the exercise or conversion of certain securities have been excluded from our computation of EPS because the strike price or conversion rate, as applicable, of such securities was greater than the average market price of our common stock and, as a result, the effect of such exercise or conversion would have been anti-dilutive. Set forth below are the securities and the weighted average number of shares of common stock underlying such securities that were excluded from our computation of EPS for the periods presented (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Restricted stock units and stock options 537 441 493 289 Warrants 7,488 4,921 6,096 4,921 Total 8,025 5,362 6,589 5,210 12 Table of Contents Convertible Notes and Warrants Refer to Note 7, " Obligations ," for information about the Company's convertible notes and warrants and related conversion and strike prices. During periods in which the average market price of the Company's common stock is above the applicable conversion price of the Company's convertible notes, or above the strike price of the Company's outstanding warrants, the impact of conversion or exercise, as applicable, would be dilutive and such dilutive effect is reflected in diluted EPS. As a result, in periods where the average market price of the Company's common stock is above the conversion price or strike price, as applicable, under the if-converted method, the Company calculates 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 includes that number in the total diluted shares outstanding for the period. 5. LITIGATION AND LEGAL PROCEEDINGS COURT PROCEEDINGS Lenovo UK Proceedings On August 27, 2019, the Company and certain of its subsidiaries filed a claim in the UK High Court against Lenovo Group Limited and certain of its subsidiaries. The claim, as amended, alleges infringement of five of the Company's patents relating to 3G and/or 4G/LTE standards: European Patent (UK) Nos. 2,363,008; 2,421,318; 2,485,558; 2,557,714; and 3,355,537. The Company is seeking, among other relief, injunctive relief to prevent further infringement of the asserted patents. The UK High Court held case management conferences on October 6, 2020, and December 16, 2020, a disclosure hearing on January 19, 2021, and pre-trial review hearings for the first trial on January 28, 2021, and February 8, 2021. At those hearings, the UK High Court entered a schedule for the technical and non-technical FRAND proceedings. Two technical trials were scheduled for March 2021 and June 2021, and the non-technical FRAND trial was scheduled for January 2022. There are three additional technical trials scheduled for the remaining patents following the FRAND trial. The first and second technical trials were completed, and on July 29, 2021, the UK High Court issued its decision regarding the first technical trial finding European Patent (UK) No. 2,485,558 valid, infringed, and essential to Release 8 of LTE. Lenovo is appealing this decision which will be heard on December 14-15, 2022 before the Court of Appeal. On January 6, 2022, the UK High Court issued its decision regarding the second technical trial finding European Patent (UK) No. 3,355,537 invalid, but essential and infringed but for the finding of invalidity. On June 10, 2022, the Company sought permission from the Court of Appeal to appeal the second technical trial decision as legally erroneous, and was granted such permission on September 22, 2022. The FRAND trial commenced on January 11, 2022 and concluded on February 11, 2022. The third technical trial commenced on May 10, 2022 and concluded on May 18, 2022. The fourth technical trial commenced on October 5, 2022 and concluded on October 13, 2022. The fifth technical trial is currently being rescheduled per the court's availability. District of Delaware Patent Proceedings On August 28, 2019, the Company and certain of its subsidiaries filed a complaint in the United States District Court for the District of Delaware (the “Delaware District Court”) against Lenovo Holding Company, Inc. and certain of its subsidiaries alleging that Lenovo infringes eight of InterDigital’s U.S. patents-U.S. Patent Nos. 8,085,665; 8,199,726; 8,427,954; 8,619,747; 8,675,612; 8,797,873; 9,203,580; and 9,456,449-by making, using, offering for sale, and/or selling Lenovo wireless devices with 3G and/or 4G LTE capabilities. As relief, InterDigital is seeking: (a) a declaration that InterDigital is not in breach of its relevant FRAND commitments with respect to Lenovo; (b) to the extent Lenovo does not agree to negotiate a worldwide patent license, does not agree to enter into binding international arbitration to set the terms of a FRAND license, and does not agree to be bound by the FRAND terms to be set by the UK High Court in the separately filed UK proceedings described above, an injunction prohibiting Lenovo from continued infringement; (c) damages, including enhanced damages for willful infringement and supplemental damages; and (d) attorneys’ fees and costs. On September 16, 2020, the Delaware District Court entered a schedule for the case, setting a patent jury trial. On March 8, 2021, the Delaware District Court held a claim construction hearing, and the court issued its order on May 10, 2021, construing various disputed terms. On March 24, 2021, the Delaware District Court consolidated the antitrust proceeding discussed below with this patent proceeding. Trial for the consolidated proceedings is scheduled for March 6, 2023. On April 25, 2022, the parties filed a stipulation to stay only the claims relating to U.S. Patent No. 8,199,726. The stipulation was granted. 13 Table of Contents District of Delaware Antitrust Proceedings On April 9, 2020, Lenovo (United States) Inc. and Motorola Mobility LLC filed a complaint in the Delaware District Court against the Company and certain of its subsidiaries. The complaint alleges that the Company defendants have violated Sections 1 and 2 of the Sherman Act in connection with, among other things, their licensing of 3G and 4G standards essential patents ("SEPs"). The complaint further alleges that the Company defendants have violated their commitment to the ETSI with respect to the licensing of 3G and 4G SEPs on FRAND terms and conditions. The complaint seeks, among other things (i) rulings that the Company defendants have violated Sections 1 and 2 of the Sherman Act and are liable for breach of their ETSI FRAND commitments, (ii) a judgment that the plaintiffs are entitled to a license with respect to the Company's 3G and 4G SEPs on FRAND terms and conditions, and (iii) injunctions against any demand for allegedly excessive royalties or enforcement of the Company defendants' 3G and 4G U.S. SEPs against the plaintiffs or their customers via patent infringement proceedings. On June 22, 2020, the Company filed a motion to dismiss Lenovo's Sherman Act claims with prejudice, and to dismiss Lenovo's breach of contract claim with leave to re-file as a counterclaim in the Company's legal proceeding against Lenovo in the Delaware District Court discussed above. On March 24, 2021, the Delaware District Court ruled on the Company’s motion to dismiss. The Delaware District Court dismissed the Sherman Act Section 1 claim without prejudice, denied the motion to dismiss the Sherman Act Section 2 claim, and consolidated the Section 2 and breach of contract claims with Company’s Delaware patent proceeding discussed above. China Proceedings On April 10, 2020, Lenovo (Beijing) Ltd. and certain of its affiliates filed a complaint against the Company and certain of its subsidiaries in the Beijing Intellectual Property Court (the “Beijing IP Court”) seeking a determination of the FRAND royalty rates payable for the Company's Chinese 3G, 4G and 5G SEPs. On February 20, 2021, the Company filed an application challenging the jurisdiction of the Beijing IP Court to take up Lenovo’s complaint. On November 15, 2021, the Beijing IP Court denied the jurisdictional challenge, and the Company filed an appeal with the Supreme People’s Court of the People’s Republic of China (the “SPC”) on December 14, 2021. That appeal was denied by the SPC on September 5, 2022, and the case was sent back to the Beijing IP Court. On November 26, 2021, the Company was informed that Lenovo had purportedly filed an additional complaint against the Company in the Wuhan Intermediate People’s Court (the “Wuhan Court”) seeking a determination of a global FRAND royalty rate for the period from 2024 to 2029 for the Company’s 3G, 4G, and 5G SEPs. On April 16, 2022, the Company filed an application challenging, among other things, process of service and the jurisdiction of the Wuhan Court. The application remains pending. Germany Proceedings On March 25, 2022, March 28, 2022, and April 6, 2022, the Company and certain of its subsidiaries filed patent infringement claims in the Munich and Mannheim Regional Courts against Lenovo and certain of its affiliates, alleging infringement of European Patent Nos. 2,449,782; 2,452,498; 3,624,447 and 3,267,684 relating to HEVC standards. The Company is seeking, among other relief, injunctive relief to prevent further infringement of the asserted patents. The Mannheim Regional Court has scheduled hearings regarding European Patent Nos. 3,267,684 and 3,624,447 for April 21, 2023 and May 2, 2023, respectively.The Munich Regional Court has not yet scheduled the remaining hearings. Oppo, OnePlus and realme UK Proceedings On December 20, 2021, the Company filed a patent infringement claim in the UK High Court against Guangdong Oppo Mobile Telecommunications Corp., Ltd. (“Oppo”) and certain of its affiliates, OnePlus Technology (Shenzhen) Co., Ltd. (“OnePlus”) and certain of its affiliates, and realme Mobile Telecommunications (Shenzhen) Co., Ltd. (“realme”) and certain of its affiliates, alleging infringement of European Patent (UK) Nos. 2,127,420; 2,421,318; 2,485,558; and 3,355,537 relating to cellular 3G, 4G/LTE or 5G standards. The Company is seeking, among other relief, injunctive relief to prevent further infringement of the asserted patents. On January 19, 2022, Oppo filed a jurisdictional challenge with the UK High Court which the parties have agreed to adjourn pending the outcome of Oppo’s jurisdiction challenge before the UK Supreme Court in a case involving Nokia. The first technical trial is scheduled to commence on May 8, 2023. The second and third technical trials are scheduled to commence on June 26, 2023, and July 10, 2023, respectively. The willingness trial is expected to commence on October 23, 2023. The FRAND trial is scheduled to commence on February 26, 2024. The fourth technical trial is currently stayed pending the Company’s appeal of the results of the second technical trial in the Lenovo UK Proceeding. 14 Table of Contents India Proceedings On December 20, 2021 and December 22, 2021, the Company and certain of its subsidiaries filed patent infringement claims in the Delhi High Court in New Delhi, India against Oppo and certain of its affiliates, OnePlus and certain of its affiliates, and realme Mobile Telecommunication (India) Private Limited, alleging infringement of Indian Patent Nos. 262910, 295912, 313036, 320182, 319673, 242248, 299448, and 308108 relating to cellular 3G, 4G/LTE, and/or 5G, and HEVC standards. The Company is seeking, among other relief, injunctive relief to prevent further infringement of the asserted patents. Germany Proceedings On December 20, 2021, a subsidiary of the Company filed three patent infringement claims, two in the Munich Regional Court and one in the Mannheim Regional Court, against Oppo and certain of its affiliates, OnePlus and certain of its affiliates, and realme and certain of its affiliates, alleging infringement of European Patent Nos. 2,485,558; 2,127,420; and 2,421,318 relating to cellular 3G, 4G/LTE and/or 5G standards. The Company is seeking, among other relief, injunctive relief to prevent further infringement of the asserted patents. The Munich Regional Court has scheduled hearings for December 14, 2022 and March 16, 2023. The Mannheim Regional Court has scheduled a hearing for March 24, 2023. China Proceedings On January 19, 2022, the Company was informed that Oppo had purportedly filed a complaint against the Company in the Guangzhou Intellectual Property Court (the “Guangzhou IP Court”) seeking a determination of a global FRAND royalty rate for the Company’s 3G, 4G, 5G, 802.11 and HEVC SEPs. On May 20, 2022, the Company filed an application challenging, among other things, process of service and the jurisdiction of the Guangzhou IP Court. That application remains pending. Spain Proceedings On March 1, 2022, a subsidiary of the Company filed patent infringement claims in the Barcelona Commercial Courts against Oppo and certain of its affiliates, OnePlus and certain of its affiliates , and realme and certain of its affiliates. The Company filed its amended complaint on April 25, 2022, alleging infringement of European Patent Nos. 3,355,537; 2,485,558; 2,421,318; and 2,557,715 relating to cellular 3G, 4G/LTE and/or 5G standards. The Company is seeking, among other relief, injunctive relief to prevent further infringement of the asserted patents. OTHER We are party to certain other disputes and legal actions in the ordinary course of business, including arbitrations and legal proceedings with licensees regarding the terms of their agreements and the negotiation thereof. We do not currently believe that these matters, even if adversely adjudicated or settled, would have a material adverse effect on our financial condition, results of operations or cash flows. None of the preceding matters have met the requirements for accrual or disclosure of a potential range as of September 30, 2022. 6. CASH, CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS Cash, Cash Equivalents and Restricted Cash Cash, cash equivalents and restricted cash currently consists of money market and demand accounts. The following table provides a reconciliation of total cash, cash equivalents and restricted cash as of September 30, 2022, December 31, 2021 and September 30, 2021 to the captions within the condensed consolidated balance sheets and condensed consolidated statements of cash flows (in thousands): September 30, December 31, September 30, 2022 2021 2021 Cash and cash equivalents $ 539,651 $ 706,282 $ 467,606 Restricted cash included within prepaid and other current assets 8,253 5,861 1,300 Restricted cash included within other non-current assets 1,081 1,081 1,081 Total cash, cash equivalents and restricted cash $ 548,985 $ 713,224 $ 469,987 Concentration of Credit Risk and Fair Value of Financial Instruments Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash equivalents, short-term investments, and accounts receivable. We place our cash equivalents and short-term investments only in highly rated financial instruments and in United States government instruments. 15 Table of Contents Our accounts receivable and contract assets are derived principally from patent license and technology solutions agreements. As of September 30, 2022, one licensee comprised 89 % and as of December 31, 2021, four licensees comprised 66 % of our net accounts receivable balance. We perform ongoing credit evaluations of our licensees, who generally include large, multinational, wireless telecommunications equipment manufacturers. We believe that the book values of our financial instruments approximate their fair values. Fair Value Measurements We use various valuation techniques and assumptions when measuring the fair value of our assets and liabilities. We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. This guidance established a hierarchy that prioritizes fair value measurements based on the types of input used for the various valuation techniques (market approach, income approach and cost approach). The levels of the hierarchy are described below: Level 1 Inputs — Level 1 includes financial instruments for which quoted market prices for identical instruments are available in active markets. Level 2 Inputs — Level 2 includes financial instruments for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets with insufficient volume or infrequent transactions (less active markets) or model-driven valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data, including market interest rate curves, referenced credit spreads and pre-payment rates. Level 3 Inputs — Level 3 includes financial instruments for which fair value is derived from valuation techniques including pricing models and discounted cash flow models in which one or more significant inputs are unobservable, including the Company’s own assumptions. The pricing models incorporate transaction details such as contractual terms, maturity and, in certain instances, timing and amount of future cash flows, as well as assumptions related to liquidity and credit valuation adjustments of marketplace participants. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy. We use quoted market prices for similar assets to estimate the fair value of our Level 2 investments. 16 Table of Contents Recurring Fair Value Measurements Our financial assets are generally included within short-term investments on our condensed consolidated balance sheets, unless otherwise indicated. Our financial assets and liabilities that are accounted for at fair value on a recurring basis are presented in the tables below as of September 30, 2022 and December 31, 2021 (in thousands): Fair Value as of September 30, 2022 Level 1 Level 2 Level 3 Total Assets: Money market and demand accounts (a) $ 496,338 $ — $ — $ 496,338 Commercial paper (b) — 150,286 — 150,286 U.S. government securities — 130,093 — 130,093 Corporate bonds, asset backed and other securities (c) — 96,040 — 96,040 Total $ 496,338 $ 376,419 $ — $ 872,757 Fair Value as of December 31, 2021 Level 1 Level 2 Level 3 Total Assets: Money market and demand accounts (a) $ 705,725 $ — $ — $ 705,725 Commercial paper (b) — 158,452 — 158,452 U.S. government securities — 51,301 — 51,301 Corporate bonds, asset backed and other securities — 33,091 — 33,091 Total $ 705,725 $ 242,844 $ — $ 948,569 ______________________________ (a) Primarily included within cash and cash equivalents. (b) As of September 30, 2022 and December 31, 2021, $ 42.4 million and $ 7.5 million, respectively, of commercial paper was included within cash and cash equivalents. (c) As of September 30, 2022, $ 10.3 million of corporate bonds, asset backed and other securities was included within cash and cash equivalents. Non-Recurring Fair Value Measurements Investments in Other Entities During the second quarter 2022 and 2021, we recognized $ 1.6 million and $ 1.0 million, respectively, of gains resulting from observable price changes of our long-term strategic investments, which were included within “Other income (expense), net” in the condensed consolidated statement of income. Patents During second quarter 2021, a non-controlled subsidiary that we consolidate for financial statement purposes approved a plan to sell certain patent assets, which were classified as held-for sale. We determined the fair value based upon evaluation of market conditions and recognized an $ 11.0 million patent impairment during the second quarter 2021 and a $ 2.2 million impairment during the fourth quarter 2021. These patents held for sale are recorded at fair value on September 30, 2022 and are included within " Prepaid and other current assets " in the condensed consolidated balance sheet. During fourth quarter 2021, we renewed our multi-year, worldwide, non-exclusive patent license agreement with Sony Corporation of America ("Sony"). A portion of the consideration for the agreement was in the form of patents, which we received in March 2022. We have determined the fair value of the patents for determining the transaction price for revenue recognition purposes, which was estimated to be $ 30.1 million utilizing the income and market approaches. The value is amortized as a non-cash expense over the patents' estimated useful lives. 17 Table of Contents Fair Value of Long-Term Debt Convertible Notes The principal amount, carrying value and related estimated fair value of the Company's Convertible Notes reported as of September 30, 2022 and December 31, 2021 was as follows (in thousands). The aggregate fair value of the principal amount of the Convertible Notes is a Level 2 fair value measurement. September 30, 2022 December 31, 2021 Principal Amount Carrying Value Fair Value Principal Amount Carrying Value Fair Value 2027 Senior Convertible Long-Term Debt $ 460,000 $ 450,652 $ 401,240 $ — $ — $ — 2024 Senior Convertible Long-Term Debt $ 126,174 $ 125,203 $ 118,048 $ 400,000 $ 395,632 $ 437,760 Technicolor Patent Acquisition Long-term Debt The carrying value and related estimated fair value of the Technicolor Patent Acquisition long-term debt reported as of September 30, 2022 and December 31, 2021 was as follows (in thousands). The aggregate fair value of the Technicolor Patent Acquisition long-term debt is a Level 3 fair value measurement. September 30, 2022 December 31, 2021 Carrying Value Fair Value Carrying Value Fair Value Technicolor Patent Acquisition Long-Term Debt $ 30,004 $ 28,441 $ 27,113 $ 28,569 7. OBLIGATIONS 2027 Notes, and Related Note Hedge and Warrant Transactions On May 27, 2022 we issued $ 460.0 million in aggregate principal amount of 3.50 % Senior Convertible Notes due 2027 (the "2027 Notes"). The net proceeds from the issuance of the 2027 Notes, after deducting the initial purchasers' transaction fees and offering expenses, were approximately $ 450.0 million. The 2027 Notes bear interest at a rate of 3.50 % per year, payable in cash on June 1 and December 1 of each year, commencing on December 1, 2022, and mature on June 1, 2027, unless earlier redeemed, converted or repurchased. 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 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). The conversion rate, and thus the conversion price, may be adjusted under certain circumstances, including in connection with conversions made following fundamental changes and under other circumstances as set forth in the indenture governing the 2027 Notes. 18 Table of Contents Prior to 5:00 p.m., New York City time, on the business day immediately preceding March 1, 2027, the notes will be convertible only under the following circumstances: (1) on any date during any calendar quarter (and only during such calendar quarter) beginning after September 30, 2022 if the closing sale price of the Common Stock was more than 130 % of the applicable conversion price on each applicable trading day for at least 20 trading days (whether or not consecutive) in the period of the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter; (2) if the Company distributes to all or substantially all holders of the Common Stock any rights, options or warrants (other than in connection with a stockholder rights plan prior to separation of such rights from the shares of the Common Stock) entitling them to purchase, for a period of 45 calendar days or less from the issuance date for such distribution, shares of Common Stock at a price per share less than the average closing sale price for the ten consecutive trading day period ending on, and including, the trading day immediately preceding the declaration date for such distribution; (3) if the Company distributes to all or substantially all holders of the Common Stock any cash or other assets, debt securities or rights to purchase the Company’s securities (other than pursuant to a rights plan), which distribution has a per share value exceeding 10 % of the closing sale price of the Common Stock on the trading day immediately preceding the declaration date for such distribution; (4) if the Company engages in certain corporate transactions as described in the indenture governing the 2027 Notes; (5) if the Company calls the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; (6) during a specified period if a fundamental change (as defined in the indenture governing the 2027 Notes) occurs; or (7) during the five consecutive business day period following any five consecutive trading day period in which the trading price for the notes for each day during such five trading day period was less than 98 % of the closing sale price of the Common Stock multiplied by the applicable conversion rate on each such trading day. Commencing on March 1, 2027, the notes will be convertible in multiples of $ 1,000 principal amount, at any time prior to 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the maturity date of the notes. The Company may not redeem the notes prior to June 5, 2025. The Company may redeem for cash all or any portion of the notes, at the Company’s option, on or after June 5, 2025, if the last reported sale price of the Common Stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on and including the trading day preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest to, but excluding the redemption date. If a fundamental change (as defined in the indenture governing the 2027 Notes) occurs, holders may require the Company to purchase all or a portion of their Notes for cash at a repurchase price equal to 100 % of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The 2027 Notes are the Company’s senior unsecured obligations and rank equally in right of payment with any of the Company’s current and any future senior unsecured indebtedness, including its 2.00 % senior convertible notes due 2024 (the “2024 Notes” and together with the 2027 Notes, the "Convertible Notes"). The 2027 Notes are effectively subordinated to all of the Company’s future secured indebtedness to the extent of the value of the related collateral, and the 2027 Notes are structurally subordinated to indebtedness and other liabilities, including trade payables, of the Company’s subsidiaries. On May 24 and May 25, 2022, in connection with the offering of the 2027 Notes, we entered into convertible note hedge transactions (collectively, the “2027 Note Hedge Transactions”) that cover, subject to customary anti-dilution adjustments, approximately 5.9 million shares of common stock, in the aggregate, at a strike price that initially corresponds to the initial conversion price of the 2027 Notes, subject to adjustment, and are exercisable upon any conversion of the 2027 Notes. The aggregate cost of the 2027 Note Hedge Transactions was $ 80.5 million. Also on May 24 and May 25, 2022, we also entered into privately negotiated warrant transactions (collectively, the “2027 Warrant Transactions” and, together with the 2027 Note Hedge Transactions, the “2027 Call Spread Transactions”), whereby we sold warrants to acquire, subject to customary anti-dilution adjustments, approximately 5.9 million shares of common stock at an initial strike price of $ 106.37 per share, subject to adjustment. As consideration for the 2027 Warrant Transactions, we received aggregate proceeds of $ 43.7 million. The net cost of the 2027 Call Spread Transactions was $ 36.8 million, which was funded out of the net proceeds from the offering of the 2027 Notes. Accounting Treatment of the 2027 Notes and Related Convertible Note Hedge and Warrant Transactions The 2027 Call Spread Transactions were classified as equity and the 2027 Notes were classified as long-term debt. The effective interest rate is approximately 4.02 %. In connection with the above-noted transactions, the Company incurred approximately $ 9.9 million of directly related costs, which were capitalized as deferred financing costs and as a reduction of long-term debt. These costs are being amortized as interest expense over the term of the debt using the effective interest method. 19 Table of Contents 2024 Notes, and Related Note Hedge and Warrant Transactions On June 3, 2019, we issued $ 400.0 million in aggregate principal amount of 2024 Notes. The net proceeds from the issuance of the 2024 Notes, after deducting the initial purchasers' transaction fees and offering expenses, were approximately $ 391.6 million. The 2024 Notes (i) bear interest at a rate of 2.00 % per year, payable in cash on June 1 and December 1 of each year, commencing on December 1, 2019, and (ii) mature on June 1, 2024, unless earlier redeemed, converted or repurchased. The effective interest rate of the 2024 Notes is 2.46 %. The 2024 Notes are convertible into cash, shares of our common stock or a combination thereof, at our election, at an initial conversion rate of 12.3018 shares of our common stock per $1,000 principal amount of 2024 Notes (which is equivalent to an initial conversion price of approximately $ 81.29 per share), as adjusted pursuant to the terms of the indenture governing the 2024 Notes. The conversion rate of the 2024 Notes, and thus the conversion price, may be adjusted in certain circumstances, including in connection with a conversion of the 2024 Notes made following certain fundamental changes and under other circumstances set forth in the indenture governing the 2024 Notes. As of December 31, 2020, we made the irrevocable election to settle all conversions of the 2024 Notes through combination settlements of cash and shares of our common stock, with a specified dollar amount of $ 1,000 per $ 1,000 principal amount of 2024 Notes and any remaining amounts in shares of our common stock. The 2024 Notes are senior unsecured obligations of the Company and rank equally in right of payment with any of our current and any future senior unsecured indebtedness. The 2024 Notes are effectively subordinated to all of our future secured indebtedness to the extent of the value of the related collateral, and the 2024 Notes are structurally subordinated to indebtedness and other liabilities, including trade payables, of our subsidiaries. On May 29 and May 31, 2019, in connection with the offering of the 2024 Notes, we entered into convertible note hedge transactions (collectively, the "2024 Note Hedge Transactions") that cover, subject to customary anti-dilution adjustments, approximately 4.9 million shares of common stock, in the aggregate, at a strike price that initially corresponds to the initial conversion price of the 2024 Notes, subject to adjustment, and are exercisable upon any conversion of the 2024 Notes. On May 29 and May 31, 2019, we also entered into privately negotiated warrant transactions (collectively, the "2024 Warrant Transactions" and, together with the 2024 Note Hedge Transactions, the "2024 Call Spread Transactions"), whereby we sold warrants to acquire, subject to customary anti-dilution adjustments, approximately 4.9 million shares of common stock at an initial strike price of approximately $ 109.43 per share, subject to adjustment. During second quarter 2022, the Company repurchased $ 273.8 million in aggregate principal amount of the 2024 Notes in privately negotiated transactions concurrently with the offering of the 2027 Notes. We specifically negotiated the repurchase of the 2024 Notes with investors who concurrently purchased the 2027 Notes, such that their purchase of the 2027 Notes funded our repurchase of the 2024 Notes. As a result of the partial repurchase of the 2024 Notes, $ 126.2 million in aggregate principal amount of the 2024 Notes remained outstanding as of September 30, 2022. Additionally, in connection with the partial repurchase of the 2024 Notes, the Company entered into partial unwind agreements that amend the terms of the 2024 Note Hedge Transactions to reduce the number of options corresponding to the principal amount of the repurchased 2024 Notes. The unwind agreements also reduce the number of warrants exercisable under the 2024 Warrant Transactions. As a result of the partial unwind transactions, approximately 1.6 million shares of common stock in the aggregate were covered under each of the 2024 Note Hedge Transactions and the 2024 Warrant Transactions as of September 30, 2022. As of September 30, 2022, the warrants under the 2024 Warrant Transactions had a strike price of approximately $ 109.43 per share, as adjusted. Proceeds received from the unwind of the 2024 Note Hedge Transactions were $ 11.9 million, and consideration paid for the unwind of the 2024 Warrant Transactions was $ 3.8 million, resulting in net proceeds received of $ 8.0 million for the combined unwind transactions. Because the concurrent redemption of the 2024 Notes and a portion of issuance of the 2027 Notes were executed with the same investors, we evaluated the transaction as a debt restructuring, on a creditor by creditor basis. The accounting conclusion was based on whether the exchange was a contemporaneous exchange of cash between the same debtor and creditor in connection with the issuance of a new debt obligation and satisfaction of an existing debt obligation by the debtor and if it was determined to have substantially different terms. All creditors involved in the repurchase transaction also purchased 2027 Notes in approximately the same or greater amount as the 2024 Notes principal repurchased. Additionally, the repurchase of the 2024 Notes and issuance of the 2027 Notes were deemed to have substantially different terms on the basis that the fair value of the conversion feature increased by more than 10% of the carrying value of the 2024 Notes, and therefore, the repurchase of the 2024 Notes was accounted for as a debt extinguishment. We recognized a $ 11.2 million loss on extinguishment of debt during second quarter 2022 in connection with this repurchase, which is included within "Other income (expense), net" in the condensed consolidated statement of income. The loss on extinguishment represents the difference between the fair value of consideration paid to reacquire the 2024 Notes and the carrying amount of the debt, including any unamortized debt issuance costs attributable to the 2024 Notes redeemed. The remaining unamortized debt issuance costs of $ 1.2 million will continue to be amortized throughout the remaining life of the 2024 Notes. 20 Table of Contents The following table reflects the carrying value of our Convertible Notes long-term debt as of September 30, 2022 and December 31, 2021 (in thousands): September 30, 2022 December 31, 2021 2027 Notes 2024 Notes Total 2024 Notes Principal $ 460,000 $ 126,174 $ 586,174 $ 400,000 Less: Deferred financing costs ( 9,348 ) ( 971 ) ( 10,319 ) ( 4,368 ) Net carrying amount of the Convertible Notes $ 450,652 $ 125,203 $ 575,855 $ 395,632 The following table presents the amount of interest cost recognized, which is included within " Interest Expense" in our condensed consolidated statements of income, for the three and nine months ended September 30, 2022 and 2021 relating to the contractual interest coupon and the amortization of deferred financing costs of the Convertible Notes (in thousands): Three months ended September 30, 2022 2021 2027 Notes 2024 Notes Total 2024 Notes Contractual coupon interest $ 4,025 $ 631 $ 4,656 $ 2,000 Amortization of deferred financing costs 422 138 560 411 Total $ 4,447 $ 769 $ 5,216 $ 2,411 Nine months ended September 30, 2022 2021 2027 Notes 2024 Notes Total 2024 Notes Contractual coupon interest $ 5,501 $ 4,129 $ 9,630 $ 6,000 Amortization of deferred financing costs 564 880 1,444 1,211 Total $ 6,065 $ 5,009 $ 11,074 $ 7,211 Technicolor Patent Acquisition Long-Term Debt On July 30, 2018, we completed our acquisition of the patent licensing business of Technicolor SA ("Technicolor"), a worldwide technology leader in the media and entertainment sector (the "Technicolor Patent Acquisition"). In conjunction with the Technicolor Patent Acquisition we assumed Technicolor’s rights and obligations under a joint licensing program with Sony relating to digital televisions and standalone computer display monitors, which commenced in 2015 and is referred to as the "Madison Arrangement." An affiliate of CPPIB Credit Investments Inc. ("CPPIB Credit"), a wholly owned subsidiary of Canada Pension Plan Investment Board, is a third-party investor in the Madison Arrangement. CPPIB Credit has made certain payments to Technicolor and Sony and has agreed to contribute cash to fund certain capital reserve obligations under the arrangement in exchange for a percentage of future revenues, specifically through September 11, 2030 in regard to the Technicolor patents. Upon our assumption of Technicolor’s rights and obligations under the Madison Arrangement, our relationship with CPPIB Credit meets the criteria in ASC 470-10-25 - Sales of Future Revenues or Various Other Measures of Income ("ASC 470"), which relates to cash received from an investor in exchange for a specified percentage or amount of revenue or other measure of income of a particular product line, business segment, trademark, patent, or contractual right for a defined period. Under this guidance, we recognized the fair value of our contingent obligation to CPPIB Credit, as of the acquisition date, as long-term debt in our condensed consolidated balance sheet. This initial fair value measurement was based on the perspective of a market participant and included significant unobservable inputs which are classified as Level 3 inputs within the fair value hierarchy. The fair value of the long-term debt as of September 30, 2022 and December 31, 2021 is disclosed within Note 6, " Cash, Concentration of Credit Risk and Fair Value of Financial Instruments. " Our repayment obligations are contingent upon future royalty revenues generated from the Madison Arrangement and there are no minimum or maximum payments under the arrangement. 21 Table of Contents Under ASC 470, amounts recorded as debt are amortized under the interest method. At each reporting period, we will review the discounted expected future cash flows over the life of the obligation. The Company made an accounting policy election to utilize the catch-up method when there is a change in the estimated future cash flows, whereby we will adjust the carrying amount of the debt to the present value of the revised estimated future cash flows, discounted at the original effective interest rate, with a corresponding adjustment recognized as interest expense within “ Interest Expense ” in the condensed consolidated statements of income. The effective interest rate as of the acquisition date was approximately 14.5 %. This rate represents the discount rate that equates the estimated future cash flows with the fair value of the debt as of the acquisition date, and is used to compute the amount of interest to be recognized each period based on the estimated life of the future revenue streams. During the three and nine months ended September 30, 2022, we recognized $ 1.0 million and $ 2.9 million, respectively, of interest expense related to this debt, compared to $ 0.4 million and $ 2.0 million during the three and nine months ended September 30, 2021, respectively. This was included within “ Interest Expense ” in the condensed consolidated statements of income. Any future payments made to CPPIB Credit, or additional proceeds received from CPPIB Credit, will decrease or increase the long-term debt balance accordingly. Technicolor Contingent Consideration As part of the Technicolor Patent Acquisition, we entered into a revenue-sharing arrangement with Technicolor that created a contingent consideration liability. Under the revenue-sharing arrangement, Technicolor receives 42.5 % of future cash receipts from new licensing efforts from the Madison Arrangement only, subject to certain conditions and hurdles. As of September 30, 2022, the contingent consideration liability from the revenue-sharing arrangement was deemed not probable and is therefore not reflected within the consolidated financial statements. 8. VARIABLE INTEREST ENTITIES As further discussed below, we are the primary beneficiary of three variable interest entities. As of September 30, 2022, the combined book values of the assets and liabilities associated with these variable interest entities included in our condensed consolidated balance sheet were $ 17.9 million and $ 0.6 million, respectively. Assets included $ 4.7 million of cash and cash equivalents, $ 4.0 million of prepaid and other current assets, and $ 9.1 million of patents, net. As of December 31, 2021, the combined book values of the assets and liabilities associated with these variable interest entities included in our condensed consolidated balance sheet were $ 27.1 million and $ 2.5 million, respectively. Assets included $ 5.1 million of cash and cash equivalents, $ 4.0 million of accounts receivable and prepaid and other current assets, and $ 18.0 million of patents, net. Convida Wireless Convida Wireless was launched in 2013 and most recently renewed in 2021 to combine Sony's consumer electronics expertise with our pioneering IoT expertise to drive IoT communications and connectivity. Based on the terms of the agreement, the parties will contribute funding and resources for additional research and platform development, which we will perform. Convida Wireless is a variable interest entity. Based on our provision of research and platform development services to Convida Wireless, we have determined that we remain the primary beneficiary for accounting purposes and will continue to consolidate Convida Wireless. For the three and nine months ended September 30, 2022, we allocated approximately $ 0.5 million and $ 1.2 million, respectively, of Convida Wireless's net loss to noncontrolling interests held by other parties and for the three and nine months ended September 30, 2021, we allocated $ 1.0 million and $ 8.7 million, respectively. Chordant On January 31, 2019, we launched the Company’s Chordant™ business as a standalone company. Chordant is a variable interest entity, and we have determined that we are the primary beneficiary for accounting purposes and consolidate Chordant. For each of the three and nine months ended September 30, 2022, we allocated $ 0.0 million of Chordant's net loss to noncontrolling interests held by other parties, and for the three and nine months ended September 30, 2021, we allocated $ 0.0 million and $ 2.3 million, respectively. Chordant ceased operations during 2021. Signal Trust for Wireless Innovation During 2013, we announced the establishment of the Signal Trust for Wireless Innovation (the “Trust”), the goal of which was to monetize a patent portfolio primarily related to 3G and LTE cellular infrastructure. During fourth quarter 2021, the Trust was fully dissolved and all remaining assets were transferred to us as majority beneficiary. The Trust was accounted for as a variable interest entity. Based on the terms of the trust agreement, we determined that we were the primary beneficiary for accounting purposes and included the Trust in our consolidated financial statements up to the date of dissolution. 22 Table of Contents 9. OTHER INCOME (EXPENSE), NET The amounts included in " Other income (expense), net " in the condensed consolidated statements of income for the three and nine months ended September 30, 2022 and 2021 were as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Interest and investment income $ 4,421 $ 385 $ 4,927 $ 1,384 Loss on extinguishment of long-term debt — — ( 11,190 ) — Other ( 3,509 ) ( 1,922 ) ( 8,846 ) 842 Other income (expense), net $ 912 $ ( 1,537 ) $ ( 15,109 ) $ 2,226 Interest and investment income increased $ 4.0 million and $ 3.5 million during the three and nine months ended September 30, 2022, respectively, compared to same periods in 2021 primarily due to market conditions driving higher yields on the Company's short-term investments. 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 ". The change in Other was primarily due to a foreign currency translation loss arising from euro translation of our foreign subsidiaries. Additionally, Other included 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, and a $ 1.9 million gain on a contract termination recognized in first quarter 2021. 10. OTHER ASSETS The amounts included in " Prepaid and other current assets " in the consolidated balance sheet as of September 30, 2022 and December 31, 2021 were as follows (in thousands): September 30, 2022 December 31, 2021 Tax receivables $ 64,103 $ 57,127 Restricted cash 8,253 5,861 Prepaid assets 6,737 5,479 Patents held for sale 4,000 4,000 Other current assets 2,935 5,078 Total Prepaid and other current assets $ 86,028 $ 77,545 The amounts included in " Other non-current assets, net " in the consolidated balance sheet as of September 30, 2022 and December 31, 2021 were as follows (in thousands): September 30, 2022 December 31, 2021 Tax receivables $ 24,892 $ 30,026 Long-term investments 22,603 21,280 Goodwill 22,421 22,421 Right-of-use assets 20,341 17,851 Other non-current assets 11,852 10,923 Total Other non-current assets, net $ 102,109 $ 102,501 11. RESTRUCTURING ACTIVITIES During second quarter 2021, the Company began the process of a strategic review and undertook certain actions in order to increase focus on core technologies and markets. On June 10, 2021, the Company announced that, as a result of a strategic review of its research and innovation priorities, it commenced the process of a collective economic layoff in which it proposed a reduction in force of its research and innovation unit. All notices of termination have been issued to the impacted employees. 23 Table of Contents During 2021, Chordant ceased operations. The Company implemented a reduction in workforce action in second quarter 2021. Additionally, in June 2021, a non-controlled subsidiary that we consolidate for financial statement purposes approved a plan to sell certain patents. The proceeds from the sale of these patents will contribute to funding the non-controlled subsidiary's operations. These assets were evaluated as a separate asset group and reclassified as assets held for sale. We determined the fair value based upon evaluation of market conditions. The patents held for sale are included within " Prepaid and other current assets " in the consolidated balance sheet. In October 2021, we expanded our restructuring efforts to include general and administrative functions largely centered in the U.S., which resulted in a further reduction in force as well as cuts to our non-labor expenses. These employees were provided notification of termination during fourth quarter 2021. 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. Restructuring 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. The Company may also incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, the reduction in force or other restructuring activities. As of September 30, 2022, the Company's restructuring liability was $ 5.5 million, which was included in " Other accrued expenses " on our condensed consolidated balance sheet. As of December 31, 2021, the Company's restructuring liability was $ 18.3 million, of which $ 12.5 million was included in " Other accrued expenses " and $ 5.8 million was included in " Other long-term liabilities " on our condensed consolidated balance sheet. The following table presents the change in our restructuring liability during the period (in thousands): Totals Balance as of December 31, 2021 $ 18,281 Accrual 542 Cash payments ( 4,519 ) Other 42 Balance as of March 31, 2022 $ 14,346 Accrual 310 Cash payments ( 5,199 ) Other ( 639 ) Balance as of June 30, 2022 $ 8,818 Accrual — Cash payments ( 2,775 ) Other ( 499 ) Balance as of September 30, 2022 $ 5,544 The restructuring expenses included in " Restructuring activities " in the condensed consolidated statements of income for the three and nine months ended September 30, 2022 and 2021 were as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Asset impairment $ — $ — $ 2,427 $ 11,000 Severance and other benefits — 6,998 305 18,084 Outside services and other associated costs — 47 548 1,246 Reimbursement arrangements — — — ( 10,040 ) Total $ — $ 7,045 $ 3,280 $ 20,290 24 Table of Contents