InterDigital, Inc. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . OVERVIEW The following discussion should be read in conjunction with the unaudited, condensed consolidated financial statements and notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, in addition to our 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 “catch-up revenues.” Catch-up revenues are comprised of past patent royalties and revenues from static agreements. Lenovo HEVC Agreement During third quarter 2023, we signed a multi-year, worldwide, non-exclusive, royalty bearing license with Lenovo ("Lenovo HEVC PLA"), covering InterDigital’s HEVC video patents. The new license resolves all related HEVC litigation. During third quarter 2023, we recognized a total of $40.8 million of revenue from Lenovo, including amounts received under the Lenovo HEVC PLA. Return of Capital to Shareholders During the third quarter 2023, the Company returned $66.1 million to shareholders, including $9.3 million, or $0.35 per share, of cash dividends paid and $56.9 million through the repurchase of 0.7 million shares of common stock. Additionally, we announced an increase to the quarterly cash dividend from $0.35 to $0.40 per share, beginning with the dividend paid in fourth quarter 2023. During the period October 1, 2023 to October 31, 2023, we repurchased an additional 0.3 million shares for $21.9 million under our share repurchase program. As of October 31, 2023, there was $79.9 million remaining under the share repurchase authorization, which we plan to utilize to repurchase additional common shares. Cash & Short-term Investments As of September 30, 2023, we had $1.1 billion of cash, restricted cash and short-term investments and an additional $1.2 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 a patent license agreement with Samsung. 88% of our recurring revenue comes from fixed-fee royalties. Our fixed-fee 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. The following table reconciles the timing differences between cash receipts and recognized revenue during the three and nine months ended September 30, 2023 and 2022, including the resulting operating cash flow (in thousands): Three months ended September 30, Nine months ended September 30, Cash vs. Non-cash revenue: 2023 2022 2023 2022 Fixed fee cash receipts (a) $ 368,608 $ 26,662 $ 402,683 $ 73,804 Other cash receipts (b) 3,684 6,403 34,816 31,615 Change in deferred revenue (77,474) (274,034) 3,933 (146,334) Change in receivables (167,222) 354,242 16,390 371,930 Other (c) 12,510 1,491 (13,752) 9,724 Total Revenue $ 140,106 $ 114,764 $ 444,070 $ 340,739 Net cash provided by (used in) operating activities $ 310,610 $ (18,729) $ 237,318 $ (70,469) (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. (c) The changes in other are primarily driven by customer deposits partially offset by long-term contract assets associated with revenue estimates. 24 Table of Contents When we collect payments on a front-loaded basis, we recognize a deferred revenue liability equal to the cash received and accounts receivable recorded that 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, 2023 (in thousands): Deferred Revenue (a) Remainder of 2023 $ 64,137 2024 134,934 2025 128,791 2026 78,777 2027 12,450 2028 and Thereafter 3,617 Total Revenue $ 422,706 (a) This table includes our estimated amortization of deferred revenue related to the Lenovo UK proceedings. In accordance with ASC 606, these estimates are limited to the amount of revenue we expect to recognize only to the extent it is probable that a subsequent change in the estimate would not result in a significant revenue reversal. Revenue Third quarter 2023 total revenues of $140.1 million increased 22% from third quarter 2022 primarily due to catch-up revenues recognized from the Lenovo HEVC PLA and one other new agreement signed during third quarter 2023. Third quarter 2023 recurring revenues were $104.5 million, compared to recurring revenues of $101.0 million in third quarter 2022, a 3% year-over-year increase. In third quarter 2023, revenues (in descending order) from Lenovo, Apple, Samsung, and Xiaomi each comprised 10% or more of our consolidated revenues. Refer to " Results of Operations --Third Quarter 2023 Compared to Third Quarter 2022 " for further discussion of our 2023 revenue. Impact of Macroeconomic and Geopolitical Factors We have been actively monitoring the impact of the current macroeconomic environment in the U.S. and globally characterized by inflation, supply chain issues, rising interest rates, labor shortages, and the potential for a recession. These market factors, as well as the impacts of the Ukraine-Russia and Israel-Hamas conflicts, have not had a material impact on our business to date. However, if these conditions continue or worsen, they could have an adverse effect on our operating results and our financial condition. See the section titled “Risk Factors” in the 2022 Form 10-K. Comparability of Financial Results When comparing third quarter 2023 financial results against other periods, the following items should be taken into consideration: • Our third quarter 2023 revenues include $35.6 million of catch-up revenues related to the Lenovo HEVC PLA and one other new agreement signed in third quarter 2023. • During third quarter 2023, we recognized a $6.1 million gain resulting from an observable price change of a long-term strategic investment, which was included within “O ther income (expense), net ” in the condensed consolidated statement of income. • During third quarter 2023, we incurred $5.1 million of one-time supplemental compensation costs driven by licensing success. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our significant accounting policies are described in Note 2, " Summary of Significant Accounting Policies and New Accounting Guidance ", in the notes to consolidated financial statements included in our 2022 Form 10-K. A discussion of our critical accounting policies, and the estimates related to them, are included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Form 10-K. There have been no material changes to our existing critical accounting policies from the disclosures included in our 2022 Form 10-K. 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. 25 Table of Contents FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity are cash, cash equivalents and short-term investments, as well as cash generated from operations. We believe we have the ability to obtain additional liquidity through debt and equity financings. From time to time, we may engage in a variety of transactions to augment our liquidity position as our business dictates and to take advantage of favorable interest rate environments or other market conditions, including the incurrence or issuance of debt and the refinancing or restructuring of existing debt. Based on our past performance and current expectations, we believe our available sources of funds, including cash, cash equivalents and short-term investments and cash generated from our operations, will be sufficient to finance our operations, capital requirements, debt obligations, existing stock repurchase program, dividend program, and other contractual obligations discussed below in both the short-term over the next twelve months, and the long-term beyond twelve months. Cash, cash equivalents, restricted cash and short-term investments As of September 30, 2023 and December 31, 2022, we had the following amounts of cash and cash equivalents, restricted cash and short-term investments (in thousands): September 30, 2023 December 31, 2022 Increase /(Decrease) Cash and cash equivalents $ 518,483 $ 693,479 $ (174,996) Restricted cash included within prepaid and other current assets 7,229 9,682 (2,453) Short-term investments 565,436 508,298 57,138 Total cash, cash equivalents, restricted cash and short-term investments $ 1,091,148 $ 1,211,459 $ (120,311) The net decrease in cash, cash equivalents, restricted cash and short-term investments was attributable to cash used in financing activities of $340.5 million and cash used in investing activities of $30.6 million, excluding sales and purchases of short-term investments, partially offset by cash provided by operating activities of $237.3 million. Refer to the sections below for further discussion of these items. Cash flows from operating activities Cash flows provided by (used in) operating activities in the first nine months 2023 and 2022 were as follows (in thousands): Nine months ended September 30, 2023 2022 Change Net cash provided by (used in) operating activities $ 237,318 $ (70,469) $ 307,787 26 Table of Contents Our cash flows provided by (used in) operating activities are principally driven by cash receipts from patent license agreements, offset by cash operating expenses and income tax payments. The $307.8 million change in net cash provided by (used in) operating activities was primarily driven by cash receipts from the Lenovo UK proceedings, Lenovo HEVC PLA, and seven other new patent license agreements signed in the last twelve months, as well as timing of cash receipts under existing agreements. The increase in cash receipts was partially offset by tax payments made in first nine months 2023 and an increase in cash operating expenses. The table below sets forth the significant items comprising our cash flows provided by (used in) operating activities during the nine months ended September 30, 2023 and 2022 (in thousands): Nine months ended September 30, 2023 2022 Change Total Cash Receipts $ 437,499 $ 105,419 $ 332,080 Cash Outflows: Cash operating expenses a 159,601 152,032 7,569 Income taxes paid b 30,117 4,585 25,532 Total cash outflows 189,718 156,617 33,101 Other working capital adjustments (10,463) (19,271) 8,808 Cash flows provided by (used in) operating activities $ 237,318 $ (70,469) $ 307,787 ______________________________ (a) Cash operating expenses include operating expenses less depreciation and disposals of fixed assets, amortization of patents, non-cash compensation and non-cash impairment charges. (b) Income taxes paid include foreign withholding taxes. Cash flows from investing and financing activities Net cash used in investing activities for first nine months 2023 was $74.3 million, a $48.9 million decrease from $123.2 million in first nine months 2022. During first nine months 2023, we purchased $43.7 million of short-term marketable securities, net of sales, and capitalized $31.2 million of patent costs and property and equipment purchases. During first nine months 2022, we purchased $92.1 million of short-term marketable securities, net of sales, and capitalized $31.1 million of patent costs and property and equipment purchases. Net cash used in financing activities for first nine months 2023 was $340.5 million, a change of $369.9 million from net cash provided by financing activities of $29.4 million the first nine months 2022. This change was primarily attributable to a $228.3 million increase in share repurchases in first nine months 2023 compared to first nine months 2022, of which $203.4 million was related to the Company's modified "Dutch auction" tender offer in first quarter 2023. The change was also due to net proceeds of $139.2 million from the debt refinancing during second quarter 2022. Other Our combined short-term and long-term deferred revenue balance as of September 30, 2023 was approximately $422.7 million, a net decrease of $3.9 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 new and existing patent license agreements. Based on current license agreements, we expect the amortization of dynamic fixed-fee royalty payments to reduce the September 30, 2023 deferred revenue balance of $422.7 million by $167.6 million over the next twelve months. 27 Table of Contents Convertible Notes See Note 7, “ Obligations ” to the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for definitions of capitalized terms below. Our 2027 and 2024 Notes, which for purposes of this discussion are also referred to as the "Convertible Notes", are included in the dilutive earnings per share calculation using the if-converted method. Under the if-converted method, we must assume that conversion of convertible securities occurs at the beginning of the reporting period. The Convertible Notes are convertible into cash up to the aggregate principal amount of the Convertible Notes to be converted. 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. We must calculate the number of shares of our common stock issuable under the terms of the Convertible Notes based on the average market price of our common stock during the applicable reporting period and include that number in the total diluted shares figure for the period. At the time we issued the Convertible Notes, we entered into the 2027 Call Spread Transactions and 2024 Call Spread Transactions that together were designed to have the economic effect of reducing the net number of shares that will be issued in the event of conversion of the Convertible Notes by, in effect, increasing the conversion price of the Convertible Notes from our economic standpoint. However, under GAAP, since the impact of the 2027 Note Hedge Transactions and 2024 Note Hedge Transactions (together, the "Note Hedge Transactions") is anti-dilutive, we exclude from the calculation of fully diluted shares the number of shares of our common stock that we would receive from the counterparties to these agreements upon settlement. During periods in which the average market price of our common stock is above the applicable conversion price of the Convertible Notes ($77.49 per share for the 2027 Notes and $81.29 per share for the 2024 Notes as of September 30, 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 September 30, 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, 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: 28 Table of Contents 2027 Notes Market Price Per Share Shares Issuable Upon Conversion of the 2027 Notes Shares Issuable Upon Exercise of the 2027 Warrant Transactions Total If-Converted Method Incremental Shares Shares Deliverable to InterDigital upon Settlement of the 2027 Note Hedge Transactions Incremental Shares Issuable (a) (Shares in thousands) $80 186 — 186 (186) — $85 524 — 524 (524) — $90 825 — 825 (825) — $95 1,094 — 1,094 (1,094) — $100 1,336 — 1,336 (1,336) — $105 1,555 — 1,555 (1,555) — $110 1,754 196 1,950 (1,754) 196 $115 1,936 445 2,381 (1,936) 445 $120 2,103 674 2,777 (2,103) 674 $125 2,256 885 3,141 (2,256) 885 2024 Notes Market Price Per Share Shares Issuable Upon Conversion of the 2024 Notes Shares Issuable Upon Exercise of the 2024 Warrant Transactions Total If-Converted Method Incremental Shares Shares Deliverable to InterDigital upon Settlement of the 2024 Note Hedge Transactions Incremental Shares Issuable (a) (Shares in thousands) $85 68 — 68 (68) — $90 150 — 150 (150) — $95 224 — 224 (224) — $100 290 — 290 (290) — $105 351 — 351 (351) — $110 405 8 413 (405) 8 $115 455 75 530 (455) 75 $120 501 137 638 (501) 137 $125 543 193 736 (543) 193 $130 582 246 828 (582) 246 ______________________________ (a) Represents incremental shares issuable upon concurrent conversion of convertible notes, exercise of warrants and settlement of the hedge agreements. 29 Table of Contents RESULTS OF OPERATIONS Third Quarter 2023 Compared to Third Quarter 2022 Revenues The following table compares third quarter 2023 revenues to third quarter 2022 revenues (in thousands): Three months ended September 30, 2023 2022 Increase/(Decrease) Recurring revenues: Smartphone $ 88,376 $ 87,141 $ 1,235 1 % CE, IoT/Auto 15,659 13,905 1,754 13 % Other 441 — 441 100 % Total recurring revenues 104,476 101,046 3,430 3 % Catch-up revenues a 35,630 13,718 21,912 160 % Total revenues $ 140,106 $ 114,764 $ 25,342 22 % (a) Catch-up revenues are comprised of past patent royalties and revenues from static agreements. Total revenues of $140.1 million increased $25.3 million primarily due to catch-up revenues related to the Lenovo HEVC PLA and one other new agreement, partially offset by catch-up revenues from connected automobile license agreements recognized in third quarter 2022. Recurring revenues were relatively flat compared to third quarter 2022. In third quarter 2023 and 2022, 78% and 70%, respectively, of our total revenue was attributable to licensees that individually accounted for 10% or more of our total revenue. In third quarter 2023 and 2022, the following licensees accounted for 10% or more of our total revenue: Three months ended September 30, 2023 2022 Customer A 29% —% Customer B 24% 30% Customer C 14% 17% Customer D 11% 13% Customer E <10% 10% Operating Expenses The following table summarizes the changes in operating expenses between third quarter 2023 and third quarter 2022 by category (in thousands): Three months ended September 30, 2023 2022 Increase/(Decrease) Research and portfolio development $ 50,253 $ 50,116 $ 137 — % Licensing 21,522 18,393 3,129 17 % General and administrative 14,678 14,418 260 2 % Total Operating expenses $ 86,453 $ 82,927 $ 3,526 4 % 30 Table of Contents Operating expenses increased to $86.5 million in third quarter 2023 from $82.9 million in third quarter 2022. The $3.5 million increase in total operating expenses was primarily due to changes in the following items (in thousands): Increase/(Decrease) Intellectual property enforcement $ 2,320 Other 1,206 Total increase in operating expenses $ 3,526 The $3.5 million increase in operating expenses was primarily due to a $2.3 million increase in intellectual property enforcement costs driven by costs from the Samsung arbitration and Oppo proceedings, partially offset by decreased costs from the Lenovo proceedings. Research and portfolio development expense: Research and portfolio development expense was relatively flat compared to third quarter 2022. Licensing expense: Licensing expense increased $3.1 million primarily due to the above-noted increase in intellectual property enforcement costs. General and administrative expense: General and administrative expense was relatively flat compared to third quarter 2022. Non-Operating Income (Expense), net The following table compares third quarter 2023 non-operating income (expense), net to third quarter 2022 non-operating income (expense), net (in thousands): Three months ended September 30, 2023 2022 Increase/(Decrease) Interest expense $ (12,683) $ (7,659) $ (5,024) (66) % Interest and investment income 11,763 4,421 7,342 166 % Other 2,962 (3,509) 6,471 184 % Total non-operating income (expense), net $ 2,042 $ (6,747) $ 8,789 130 % Interest expense increased $5.0 million primarily due to significant financing expense resulting from a previously announced patent license agreement. The $7.3 million increase in interest and investment income was primarily due to increased short-term investments made by the Company and market conditions driving higher yields from the short-term investments. The change in Other was primarily due to a $6.1 million gain resulting from an observable price change of a long-term strategic investment. Income taxes In third 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 15.3% and 13.2%, respectively. The change in effective tax rate is due to a change in the amount of Foreign Derived Intangible Income deduction available to the Company due to an increase in taxable income for the timing difference between the recognition of book and tax revenue. 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 2023 and 2022 effective tax rate would have been 14.4% and 7.5%, respectively. 31 Table of Contents First Nine Months 2023 Compared to First Nine Months 2022 Revenues The following table compares first nine months 2023 revenues to first nine months 2022 revenues (in thousands): Nine months ended September 30, 2023 2022 Total Increase/(Decrease) Recurring revenues: Smartphone $ 260,882 $ 262,323 $ (1,441) (1) % CE, IoT/Auto 43,177 37,040 6,137 17 % Other 1,063 911 152 17 % Total recurring revenues 305,122 300,274 4,848 2 % Catch-up revenues a 138,948 40,465 98,483 243 % Total revenues $ 444,070 $ 340,739 $ 103,331 30 % (a) Catch-up revenues are comprised of past patent royalties and revenues from static agreements. Total revenues of $444.1 million increased 30% from $340.7 million in the first nine months of 2022 primarily due to catch-up revenues from Lenovo. Recurring revenues were relatively flat compared to first nine months 2022. In first nine months 2023 and first nine months 2022, 79% and 71% of our total revenue, respectively, was attributable to licensees that individually accounted for 10% or more of our total revenue. In first nine months 2023 and first nine months 2022, the following licensees accounted for 10% or more of our total revenue: Nine months ended September 30, 2023 2022 Customer A 33% —% Customer B 23% 31% Customer C 13% 17% Customer D 10% 13% Customer E <10% 10% Operating Expenses The following table summarizes the changes in operating expenses between first nine months 2023 and first nine months 2022 by category (in thousands): Nine months ended September 30, 2023 2022 Increase/(Decrease) Research and portfolio development $ 149,560 $ 139,470 $ 10,090 7 % Licensing 59,534 51,249 8,285 16 % General and administrative 38,686 34,818 3,868 11 % Restructuring activities — 3,280 (3,280) (100) % Total Operating expenses $ 247,780 $ 228,817 $ 18,963 8 % 32 Table of Contents Operating expenses increased 8% to $247.8 million in first nine months 2023 from $228.8 million in first nine months 2022. The $19.0 million increase in total operating expenses was primarily due to changes in the following items (in thousands): Increase/(Decrease) Share-based compensation $ 11,640 One-time net litigation fee reimbursement 7,537 Fair value changes of deferred compensation liability 4,403 Patent impairment 2,500 Intellectual property enforcement (3,927) Restructuring activities (3,279) Other 89 Total increase in operating expenses $ 18,963 The $19.0 million increase in operating expenses was primarily due to a $11.6 million increase in share-based compensation costs driven by both higher accrual rates and higher award levels to non-executive employees and a $4.4 million increase from 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 the plan. Additionally, first nine months 2023 included one-time items, including a $7.5 million net litigation fee reimbursement related to the Lenovo proceedings and a $2.5 million impairment on our patents held for sale. These increases were partially offset by a $3.9 million decrease in intellectual property enforcement costs primarily driven by decreased costs from the Lenovo proceedings and a $3.3 million decrease in non-recurring restructuring activities recognized in first nine months 2022. Research and portfolio development expense: The $10.1 million increase in research and portfolio development expense primarily resulted from the above-noted increases in share-based compensation, fair value changes of our deferred compensation liability, and patent impairment. Licensing expense: Licensing expense increased by $8.3 million primarily resulting from the above-noted one-time litigation fee reimbursement and increases in share-based compensation, partially offset by the decrease in intellectual property enforcement costs. General and administrative expense: The $3.9 million increase in general and administrative expense was primarily driven by the above-noted increases in share-based compensation and fair value changes of our deferred compensation liability. Restructuring activities: Restructuring expenses associated with our overall restructuring plan decreased due to the plan being substantially complete in 2022. Non-Operating Income (Expense), net The following table compares first nine months 2023 non-operating income (expense), net to first nine months 2022 non-operating income (expense), net: Nine months ended September 30, 2023 2022 Increase/(Decrease) Interest expense $ (36,911) $ (19,446) $ (17,465) (90) % Interest and investment income 33,697 4,927 28,770 584 % Loss on extinguishment of long-term debt — (11,190) 11,190 (100) % Other 8,606 (8,846) 17,452 197 % Total non-operating income (expense), net $ 5,392 $ (34,555) $ 39,947 116 % Interest expense increased primarily due to significant financing expense resulting from a previously announced patent license agreement and additional interest on the 2027 Notes that were issued during second quarter 2022. Also in second quarter 2022, there was a $11.2 million loss on extinguishment of the 2024 Notes, as described further Note 7, " Obligations " within the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 33 Table of Contents The $28.8 million increase in interest and investment income was primarily due to increased short-term investments made by the Company and market conditions driving higher yields from the short-term investments. The change in Other was primarily due to fair value adjustments of our investments resulting in a $10.5 million net gain in first nine months 2023, compared to a $1.8 million net loss in first nine months 2022 and due to a foreign currency translation net loss arising from euro translation of our foreign subsidiaries of $1.0 million in first nine months 2023, compared to a $6.7 million net loss in first nine months 2022. Income taxes In first nine months 2023 and 2022, we had an effective tax rate of 14.7% and 22.4%, 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 higher taxable income inclusive of timing difference between the recognition of book and tax revenue. Additionally, 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 nine months ended September 30, 2023 and 2022 effective tax rate would have been 13.4% and 18.1%, respectively. In the nine months ended September 30, 2023, we recorded a net discrete tax benefit of $2.9 million primarily related to share-based compensation. The prior period included a net discrete tax expense of $2.3 million primarily related to the extinguishment of long-term debt recognized during second quarter of 2022. 34 Table of Contents STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 — FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include certain information in regarding our current beliefs, plans and expectations, including, without limitation, the matters set forth below. Words such as "believe," “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “forecast,” "goal," "could," "would," "should," "if," "may," "might," "future," "target," "trend," "seek to," "will continue," "predict," "likely," "in the event," and variations of any such words or similar expressions contained herein are intended to identify such forward-looking statements. Forward-looking statements are made on the basis of management’s current views and assumptions and are not guarantees of future performance. Although the forward-looking statements in this Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements concerning our business, results of operations and financial condition are inherently subject to risks and uncertainties. These risks and uncertainties include, but are not limited to, the risks and uncertainties described in Part I, Item 1A of our 2022 Form 10-K and the risks and uncertainties set forth below: • unanticipated delays, difficulties or accelerations in the execution of patent license agreements; • the resolution of current legal proceedings, including any awards or judgments relating to such proceedings, additional or related legal proceedings, including appeals, changes in the schedules or costs associated with such proceedings or adverse rulings; • our ability to leverage our strategic relationships and secure new patent license agreements on acceptable terms; • our ability to enter into sales and/or licensing partnering arrangements for certain of our patent assets; • our ability to enter into partnerships with leading inventors and research organizations and identify and acquire technology and patent portfolios that align with our roadmap; • our ability to commercialize our technologies and enter into customer agreements; • the failure of the markets for our current or new technologies to materialize to the extent or at the rate that we expect; • our continued ability to develop new technologies and secure new patents, including the risk of unexpected delays or difficulties related to the development of our technologies; • risks associated with our capital allocation strategies, including risks associated with our planned dividend payments and share repurchases; • changes in our interpretations of, and assumptions and calculations with respect to the impact on us of, the 2017 Tax Cuts and Jobs Act, as well as further guidance that may be issued regarding such act; • risks related to the potential impact of new accounting standards on our financial position, results of operations or cash flows; • failure to accurately forecast the impact of our restructuring activities on our financial statements and our business; • the timing and impact of potential administrative and legislative matters; • changes or inaccuracies in market projections; • our ability to obtain liquidity through debt and equity financings; • the potential effects that macroeconomic uncertainty could have on our financial position, results of operations and cash flows • impacts from acts of terrorism, war or political or civil unrest, or any responses thereto, in the United States or elsewhere; • changes in our business strategy; • changes or inaccuracies in our expectations with respect to royalty payments by our customers; and • risks related to our assumptions and application of relevant accounting standards, including with respect to revenue recognition. 35 Table of Contents You should carefully consider these factors before making any investment decision with respect to our common stock. These factors, individually or in the aggregate, may cause our actual results to differ materially from our expected and historical results. You should understand that it is not possible to predict or identify all such factors. In addition, you should not place undue reliance on the forward-looking statements contained herein, which are made only as of the date of this Form 10-Q. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . There have been no material changes in quantitative and qualitative market risk from the disclosures included in our 2022 Form 10-K.