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Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-11-03 · 110 added, 184 removed, 145 unchanged (67% 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 2022 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 “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.

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

Previously we referred to catch-up revenues as non-recurring revenues.

On January 1, 2023, we agreed to renew our patent license agreement with Samsung and enter into binding arbitration to determine the final terms of the license, including the amount payable by Samsung under the new agreement.

In first quarter 2023, we began recognizing revenue for Samsung at a conservative level consistent with the revenue we recognized from our patent license agreement that expired on December 31, 2022.

We believe that it is likely the arbitration award will exceed the conservative estimate and require a true-up at that time.

Lenovo Proceedings

On March 16, 2023, the UK’s High Court handed down its judgment in the company’s licensing dispute with Lenovo.

The Court ruled that Lenovo should pay a total of $138.7 million for a license to InterDigital’s portfolio of 3G, 4G and 5G patents, including past sales.

We recognized $101.3 million of revenue in first quarter 2023, including $98.8 million of catch-up revenues based on conservative estimates of the minimum revenue that we expect to recognize under a patent license agreement.

See Note 5, “ Litigation and Legal Proceedings ,” to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding the Lenovo proceedings.

Share Repurchases

On December 31, 2022, we announced an increase to the share repurchase program to a total of $400 million outstanding at the beginning of 2023.

On January 23, 2023, we commenced a modified “Dutch auction” tender offer (the “Tender Offer”) to purchase for cash up to $200.0 million of our common stock.

On February 23, 2023 we announced the final results of the Tender Offer, which resulted in the repurchase of 2.7 million shares of our common stock at a price of $72.98 per share, for an aggregate cost of $199.9 million, excluding fees, expenses and excise tax relating to the Tender Offer.

During the period April 1, 2023 to April 30, 2023, we repurchased 0.3 million shares for $24.7 million.

As of April 30, 2023, there was $175.4 million remaining under the share repurchase authorization, which we plan to utilize to periodically repurchase additional common shares.

Cash & Short-term Investments

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.

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

As of March 31, 2023, we had $962.8 million of cash, restricted cash and short-term investments and an additional $1.4 billion of cash payments due under contracted fixed price agreements, which includes our conservative estimates of the minimum cash receipts that we expect to receive under patent license agreements with Samsung and Lenovo.

In addition, it includes $118.7 million of fixed-fee accounts receivable.

89% of our recurring revenue comes from fixed-fee royalties.

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.

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,

The following table reconciles the timing differences between cash receipts and recognized revenue during the three months ended March 31, 2023 and 2022, including the resulting operating cash flow (in thousands):

Three months ended March 31,

Non-cash revenue:

2022 2021 2022 2021

Fixed fee cash receipts (a)

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Other cash receipts (b)

6,403 7,739 31,615 36,223

Change in deferred revenue 42,766 50,741

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Net cash used in operating activities $ (27,852) $ (17,972)

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

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

(b) Other cash receipts are primarily comprised of cash receipts related to our variable patent royalty revenue and catch-up 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 September 30, 2022 (in thousands):

The following table shows the projected amortization of our current and long term deferred revenue as of March 31, 2023 (in thousands):

Deferred Revenue

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Total Revenue $ 383,873

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

On June 10, 2021, we announced that, as a result of a strategic review of our research and innovation priorities, we commenced the process of a collective economic layoff in which we proposed a reduction in force of our research and innovation unit.

Additionally, in October 2021, we expanded our restructuring efforts to include general and administrative functions largely centered in the U.S.

All impacted employees have been provided notification of termination.

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.

Impact of COVID-19 Pandemic

The COVID-19 pandemic continues to significantly impact the United States and the rest of the world.

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

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

We returned to in-person work as of April 2022 and all of our locations are open.

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

Although we have resumed work-related travel, a portion of our licensing negotiations, investor presentations and participation in standards organizations and industry events have been virtually.

Between March 12, 2020, when we began to work almost entirely remotely, and 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.

Impact of Inflation and Market Factors

Total revenues of $202.4 million, which includes both recurring and catch-up revenues, nearly doubled from first quarter 2022 primarily due to catch-up revenues from the Lenovo proceedings recognized in first quarter 2023.

First quarter 2023 recurring revenues were $101.6 million, compared to recurring revenues of $99.1 million in first quarter 2022, a 2% year-over-year increase.

In first quarter 2023, revenues (in descending order) from Lenovo and Apple each comprised 10% or more of our consolidated revenues.

Refer to " Results of Operations --First Quarter 2023 Compared to First Quarter 2022 " for further discussion of our 2023 revenue.

Impact of Inflation and Other Market Factors

We have been actively monitoring the impact of the current macroeconomic environment in the U.S.

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However, if these conditions continue or worsen, they could have an adverse effect on our operating results and our financial condition.

See the section titled “Risk Factors” in the 2022 Form 10-K.

Comparability of Financial Results

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.

When comparing first quarter 2023 financial results against other periods, the following items should be taken into consideration:

• Our first quarter 2023 revenues include $100.8 million of catch-up revenues primarily related to estimates associated with the Lenovo proceedings.

• In first quarter 2023, we accrued a $5.7 million one-time charge for a net litigation fee reimbursement associated with the Lenovo proceedings.

• In first quarter 2023, we incurred a $2.5 million one-time impairment on our patents held for sale.

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 2022 Form 10-K.

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.

In addition, we have analyzed the impact of COVID-19 on our financial statements as of March 31, 2023, 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 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 /

As of March 31, 2023 and December 31, 2022, we had the following amounts of cash and cash equivalents, restricted cash and short-term investments (in thousands):

March 31, 2023 December 31, 2022 Increase /

Cash and cash equivalents $ 430,625 $ 693,479 $ (262,854)

Restricted cash included within prepaid and other current assets 12,085 9,682 2,403

Restricted cash included within other non-current assets 1,081 1,081 —

Short-term investments 520,059 508,298 11,761

Total cash, cash equivalents, restricted cash and short-term investments $ 962,769 $ 1,211,459 $ (248,690)

The net decrease in cash, cash equivalents, restricted cash and short-term investments was primarily attributable to cash used in operating activities of $70.5 million and cash used in investing activities of $31.1 million, excluding sales and purchases of short-term investments, partially offset by cash provided by financing activities of $29.4 million, primarily consisting of net proceeds from the debt refinancing.

The net decrease in cash, cash equivalents, restricted cash and short-term investments was attributable to cash used in financing activities of $218.1 million, cash used in operating activities of $27.9 million, and cash used in investing activities of $8.5 million, excluding sales and purchases of short-term investments.

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

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,

Cash flows used in operating activities

Cash flows used in operating activities in the first quarter 2023 and 2022 (in thousands) were as follows:

Three months ended March 31,

2023 2022 Change

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,

Net cash used in operating activities $ (27,852) $ (17,972) $ (9,880)

Our cash flows used in operating activities are principally derived from cash operating expenses and income tax payments, offset by cash receipts from patent license agreements.

The $9.9 million change in net cash used in operating activities was primarily driven by lower cash receipts due to the timing of cash receipts related to existing patent license agreements.

The table below sets forth the significant items comprising our cash flows used in operating activities during the three months ended March 31, 2023 and 2022 (in thousands):

Three months ended March 31,

2023 2022 Change

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Other working capital adjustments (14,256) (20,553) 6,297

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

Cash flows used in operating activities $ (27,852) $ (17,972) $ (9,880)

______________________________

(a) Cash operating expenses include operating expenses less depreciation of fixed assets, amortization of patents, non-cash compensation and non-cash changes in fair value.

(a) Cash operating expenses include operating expenses less depreciation and disposals of fixed assets, amortization of patents, non-cash compensation and non-cash changes in fair value.

(b) Income taxes paid include foreign withholding taxes.

Cash flows from investing and financing activities

Net cash used in investing activities for the first nine months 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 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.

Net cash used in investing activities for first quarter 2023 was $14.5 million, a $122.1 million change from $107.6 million of net cash provided by investing activities in first quarter 2022.

During first quarter 2023, we purchased $6.0 million of short-term marketable securities, net of sales, and capitalized $8.5 million of patent costs and property and equipment purchases.

During first quarter 2022, we sold $117.8 million of short-term marketable securities, net of purchases, and capitalized $10.2 million of patent costs and property and equipment purchases.

Net cash used in financing activities for first quarter 2023 was $218.1 million, a change of $205.1 million from $13.0 million the first quarter 2022.

This change was primarily attributable to a $203.4 million increase in share repurchases in first quarter 2023.

Our combined short-term and long-term deferred revenue balance as of March 31, 2023 was approximately $383.9 million, a net decrease of $42.8 million from December 31, 2022.

This decrease in deferred revenue was primarily due to amortization of deferred revenue recognized in the period, partially offset by cash receipts on existing patent license agreements.

Based on current license agreements, we expect the amortization of dynamic fixed-fee royalty payments to reduce the March 31, 2023 deferred revenue balance of $383.9 million by $178.8 million over the next twelve months.

Convertible Notes

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Under the if-converted method, we must assume that conversion of convertible securities occurs at the beginning of the reporting period.

The Convertible Notes are convertible into cash up to the aggregate principal amount of the Convertible Notes to be converted and any remaining obligation may be in cash, shares of the Company’s common stock or a combination thereof.

The Convertible Notes are convertible into cash up to the aggregate principal amount of the Convertible Notes to be converted.

Any remaining obligation of the 2027 Notes may be settled in cash, shares of the Company’s common stock or a combination thereof and any remaining obligation of the 2024 Notes is settled in shares of our common stock.

As the principal amount must be paid in cash and only the conversion spread is settled in shares, we only include the net number of incremental shares that would be issued upon conversion.

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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 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.

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 March 31, 2023) 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 March 31, 2023), the impact of conversion or exercise, as applicable, would be dilutive and such dilutive effect is reflected in diluted earnings per share.

As a result, in periods where the average market price of our common stock is above the conversion price or strike price, as applicable, under the if-converted method, we calculate the number of shares issuable under the terms of the Convertible Notes and the warrants based on the average market price of the stock during the period, and include that number in the total diluted shares outstanding for the period.

Under the if-converted method, changes in the price per share of our common stock can have a significant impact on the number of shares that we must include in the fully diluted earnings per share calculation.

As described in Note 7, " Obligations, " the Convertible Notes are convertible into cash up to the aggregate principal amount of the Convertible Notes to be converted and any remaining obligation may be in cash, shares of the Company’s common stock or a combination thereof.

("net share settlement").

Assuming net share settlement upon conversion, the following tables illustrate how, based on the $460.0 million aggregate principal amount of the 2027 Notes and the $126.2 million aggregate principal amount of the 2024 Notes outstanding as of 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:

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 March 31, 2023, 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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RESULTS OF OPERATIONS

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)

First Quarter 2023 Compared to First Quarter 2022

The following table compares first quarter 2023 revenues to first quarter 2022 revenues (in thousands):

Three months ended March 31,

2023 2022 Increase/(Decrease)

Recurring revenues:

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Total recurring revenues 101,573 99,127 2,446 2 %

Non-recurring revenues a

Catch-up revenues a

100,800 2,191 98,609 4,501 %

Total revenues $ 202,373 $ 101,318 $ 101,055 100 %

(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,

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

Recurring revenues increased 2% to $101.6 million, compared to recurring revenue of $99.1 million in first quarter 2022.

The increase was primarily driven by CE, IoT/Auto recurring revenue resulting from six new patent license agreements and new connected automobile license agreements signed over the last twelve months.

In first quarter 2023 and 2022, 67% and 80%, respectively, of our total revenue was attributable to licensees that individually accounted for 10% or more of our total revenue.

In first quarter 2023 and 2022, the following licensees accounted for 10% or more of our total revenue:

Three months ended March 31,

Customer A 50% —%

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Operating Expenses

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,

The following table summarizes the changes in operating expenses between first quarter 2023 and first quarter 2022 by category (in thousands):

Three months ended March 31,

2023 2022 Increase/(Decrease)

Patent administration and licensing $ 46,720 $ 56,150 $ (9,430) (17) %

Development 21,789 22,546 (757) (3) %

Selling, general and administrative 14,418 20,978 (6,560) (31) %

Research and portfolio development $ 49,429 $ 44,177 $ 5,252 12 %

Licensing 21,368 15,530 5,838 38 %

General and administrative 12,315 10,884 1,431 13 %

Restructuring activities — 542 (542) (100) %

Total Operating expenses $ 83,112 $ 71,133 $ 11,979 17 %

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):

Operating expenses increased to $83.1 million in first quarter 2023 from $71.1 million in first quarter 2022.

The $12.0 million increase 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)

Performance-based compensation (4,538)

Other (2,550)

Total decrease in operating expenses $ (23,792)

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 $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 $0.8 million primarily due to a decrease in consulting costs.

Selling, General and Administrative Expense:

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

One-time net litigation fee reimbursement

Personnel-related costs 3,376

Patent impairment 2,500

Share-based compensation 2,396

Restructuring activities (542)

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 third quarter 2022 non-operating expense to third quarter 2021 non-operating expense (in thousands):

Three months ended September 30,

2022 2021 Increase/(Decrease)

Interest expense $ (7,659) $ (5,773) $ (1,886) (33) %

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

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

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

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.

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)

Recurring revenues:

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

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

Other (1,488)

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.

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%

Operating Expenses

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)

Patent administration and licensing $ 134,232 $ 133,694 $ 538 — %

Development 56,487 66,999 (10,512) (16) %

Selling, general and administrative 34,818 46,994 (12,176) (26) %

Restructuring activities 3,280 20,290 (17,010) (84) %

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

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)

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

Total decrease in operating expenses $ (39,160)

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.

Patent Administration and Licensing Expense:

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

Selling, General and Administrative Expense:

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.

Total increase in operating expenses $ 11,979

The $12.0 million increase in operating expenses was driven by one-time items, including a $5.7 million net litigation fee reimbursement and a $2.5 million patent impairment on our patents held for sale.

A $3.4 million increase in personnel-related costs was driven by fair value changes of our deferred compensation liability, which was offset by a related gain recorded within "O ther income (expense), net " on the investments that we hold under this plan.

Additionally, share-based compensation increased $2.4 million driven by both higher accrual rates and higher award levels to non-executive employees.

These increases were partially offset by a $0.5 million decrease in non-recurring restructuring activities recognized in first quarter 2022.

Research and portfolio development expense:

The $5.3 million increase in research and portfolio development expense was primarily driven by the above-noted increased personnel-related costs and patent impairment.

Licensing expense:

Licensing expense increased $5.8 million primarily driven by the above-noted one-time net litigation fee reimbursement.

General and administrative expense:

General and administrative expense increased $1.4 million primarily due to the above-noted increased share-based compensation costs.

Restructuring activities:

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 nine months 2022 non-operating expense to first nine months 2021 non-operating expense (in thousands):

Nine months ended September 30,

Non-Operating Income (Expense), net

The following table compares first quarter 2023 non-operating income (expense), net to first quarter 2022 non-operating income (expense), net (in thousands):

Three months ended March 31,

2023 2022 Increase/(Decrease)

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Interest and investment income 11,680 209 11,471 5,489 %

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

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

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

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.

Other income (expense), net 1,511 (1,214) 2,725 (224) %

Total non-operating income (expense), net $ 1,104 $ (6,520) $ 7,624 117 %

Interest expense increased primarily due to the additional interest on the 2027 Notes issued during second quarter 2022 and significant financing expense resulting from a previously announced patent license agreement.

The $11.5 million increase in interest and investment income was primarily due to market conditions driving higher yields on our short-term investments.

Lastly, the change in Other income (expense), net was primarily due to fair value adjustments of our investments resulting in a $1.0 million net gain in 2023, compared to a $0.8 million net loss in 2022 and due to a foreign currency translation net gain arising from euro translation of our foreign subsidiaries of $0.7 million in first quarter 2023, compared to a $0.4 million net loss in first quarter 2022.

In first quarter 2023 and 2022, based on the statutory federal tax rate net of discrete federal and state taxes, we had an effective tax rate of 14.0% and 25.2%, respectively.

The change in effective tax rate is due to an increase in the amount of Foreign Derived Intangible Income deduction benefit available to the Company due to an increase in taxable income for the timing difference between the recognition of book and tax revenue.

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.

Excluding this valuation allowance, our first quarter 2023 and 2022 effective tax rate would have been 13.8% and 19.2%, respectively.

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

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• our ability to obtain liquidity through debt and equity financings;

• the potential effects that the ongoing COVID-19 pandemic and/or general economic or other conditions could have on our financial position, results of operations and cash flows;

• the potential effects that macroeconomic uncertainty could have on our financial position, results of operations and cash flows

• changes in our business strategy;

• changes or inaccuracies in our expectations with respect to royalty payments by our customers;

• risks related to our assumptions and application of relevant accounting standards, including with respect to revenue recognition.

You should carefully consider these factors before making any investment decision with respect to our common stock.

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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