5. LITIGATION AND LEGAL PROCEEDINGS
COURT PROCEEDINGS
Lenovo
UK Proceeding
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. 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. 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 is scheduled to commence on October 3, 2022 and expected to be completed by October 17, 2022.
District of Delaware Patent Proceeding
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.
District of Delaware Antitrust Proceeding
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. Oral argument on the Company's motion to dismiss was held on October 27, 2020.
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 (SPC) on December 14, 2021. The appeal remains pending.
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. That 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.
Oppo, OnePlus and realme
UK Proceeding
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 is scheduled for a two-day hearing starting October 25, 2022.
India Proceeding
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 Proceeding
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 November 17, 2022, and December 14, 2022. The Mannheim Regional Court has scheduled a hearing for December 16, 2022.
China Proceeding
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 Proceeding
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 June 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 June 30, 2022, December 31, 2021 and June 30, 2021 to the captions within the condensed consolidated balance sheets and condensed consolidated statements of cash flows (in thousands):
| | | | | | | | | | | | | | | | | | | |
| | June 30, | | December 31, | | June 30, | | |
| | 2022 | | 2021 | | 2021 | | |
| Cash and cash equivalents | $ | 833,533 | | | $ | 706,282 | | | $ | 410,144 | | | |
| Restricted cash included within prepaid and other current assets | 10,578 | | | 5,861 | | | 741 | | | |
| Restricted cash included within other non-current assets | 1,081 | | | 1,081 | | | 1,081 | | | |
| Total cash, cash equivalents and restricted cash | $ | 845,192 | | | $ | 713,224 | | | $ | 411,966 | | | |
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.
Our accounts receivable and contract assets are derived principally from patent license and technology solutions agreements. As of June 30, 2022 three licensees comprised 84% 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.
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 June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value as of June 30, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
Money market and demand accounts (a) | $ | 845,192 | | | $ | — | | | $ | — | | | $ | 845,192 | |
Commercial paper (b) | — | | | 9,993 | | | — | | | 9,993 | |
| U.S. government securities | — | | | 43,188 | | | — | | | 43,188 | |
| Corporate bonds, asset backed and other securities | — | | | 13,895 | | | — | | | 13,895 | |
| Total | $ | 845,192 | | | $ | 67,076 | | | $ | — | | | $ | 912,268 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 June 30, 2022 and December 31, 2021, $0.0 million and $7.5 million, respectively, of commercial paper 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 (expense) income, 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. These patents held for sale are recorded at fair value on June 30, 2022 and are included within "Prepaid and other current assets" in the condensed consolidated balance sheet. We determined the fair value based upon evaluation of market conditions and recognized an $11.0 million patent impairment during the second quarter 2021.
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.
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 in the condensed consolidated balance sheets as of June 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 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 | | | $ | 450,183 | | | $ | 467,452 | | | $ | — | | | $ | — | | | $ | — | |
| 2024 Senior Convertible Long-Term Debt | $ | 126,174 | | | $ | 125,065 | | | $ | 123,259 | | | $ | 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 in the condensed consolidated balance sheets as of June 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
| Technicolor Patent Acquisition Long-Term Debt | $ | 28,997 | | | $ | 28,103 | | | $ | 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.
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 $10.0 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.
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 June 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 June 30, 2022. As of June 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 (expense) income, 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.
The following table reflects the carrying value of our Convertible Notes long-term debt as of June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| June 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 | (9,817) | | | (1,109) | | | (10,926) | | | (4,368) | |
| Net carrying amount of the Convertible Notes | $ | 450,183 | | | $ | 125,065 | | | $ | 575,248 | | | $ | 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 six months ended June 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 June 30, |
| 2022 | | 2021 |
| 2027 Notes | | 2024 Notes | | Total | | 2024 Notes |
| Contractual coupon interest | $ | 1,476 | | | $ | 1,498 | | | $ | 2,974 | | | $ | 2,000 | |
| Amortization of deferred financing costs | 142 | | | 318 | | | 460 | | | 402 | |
| Total | $ | 1,618 | | | $ | 1,816 | | | $ | 3,434 | | | $ | 2,402 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, |
| 2022 | | 2021 |
| 2027 Notes | | 2024 Notes | | Total | | 2024 Notes |
| Contractual coupon interest | $ | 1,476 | | | $ | 3,498 | | | $ | 4,974 | | | $ | 4,000 | |
| Amortization of deferred financing costs | 142 | | | 742 | | | 884 | | | 800 | |
| Total | $ | 1,618 | | | $ | 4,240 | | | $ | 5,858 | | | $ | 4,800 | |
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 June 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.
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 six months ended June 30, 2022, we recognized $1.0 million and $1.9 million, respectively, of interest expense related to this debt, compared to $0.8 million and $1.6 million during the three and six months ended June 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 June 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 June 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 $19.7 million and $0.5 million, respectively. Assets included $6.5 million of cash and cash equivalents, $4.0 million of accounts receivable and 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 six months ended June 30, 2022, we allocated approximately $0.5 million and $0.8 million, respectively, of Convida Wireless's net loss to noncontrolling interests held by other parties and for the three and six months ended June 30, 2021, we allocated $6.2 million and $7.7 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 six months ended June 30, 2022, we allocated $0.0 million of Chordant's net loss to noncontrolling interests held by other parties, and for the three and six months ended June 30, 2021, we allocated $2.2 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.
9. OTHER (EXPENSE) INCOME, NET
The amounts included in "Other (expense) income, net" in the condensed consolidated statements of income for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Interest and investment income | $ | 297 | | | $ | 446 | | | $ | 506 | | | $ | 999 | |
| | | | | | | |
| Loss on extinguishment of long-term debt | (11,190) | | | — | | | (11,190) | | | — | |
| Other | (4,123) | | | 2,593 | | | (5,337) | | | 2,764 | |
| Other (expense) income, net | $ | (15,016) | | | $ | 3,039 | | | $ | (16,021) | | | $ | 3,763 | |
The change in Other (expense) income, net for the three and six months ended June 30, 2022 and 2021 was $18.1 million and $19.8 million, respectively. The changes between both the three months ended June 30, 2022 and 2021 and the six months ended June 30, 2022 and 2021 were primarily due to the $11.2 million loss on extinguishment of the 2024 Notes, as described further in Note 7, "Obligations", and due to a foreign currency translation loss in the three and six months ended June 30, 2022 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 June 30, 2022 and December 31, 2021 were as follows (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Tax receivables | $ | 63,183 | | | $ | 57,127 | |
| Restricted cash | 10,578 | | | 5,861 | |
| Prepaid assets | 6,085 | | | 5,479 | |
| Patents held for sale | 4,000 | | | 4,000 | |
| | | |
| | | |
| Other current assets | 2,547 | | | 5,078 | |
| Total Prepaid and other current assets | $ | 86,393 | | | $ | 77,545 | |
The amounts included in "Other non-current assets, net" in the consolidated balance sheet as of June 30, 2022 and December 31, 2021 were as follows (in thousands):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Tax receivables | $ | 24,654 | | | $ | 30,026 | |
| Long-term investments | 22,684 | | | 21,280 | |
| Goodwill | 22,421 | | | 22,421 | |
| Right-of-use assets | 14,692 | | | 17,851 | |
| Other non-current assets | 11,246 | | | 10,923 | |
| Total Other non-current assets, net | $ | 95,697 | | | $ | 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.
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 June 30, 2022, the Company's restructuring liability was $8.8 million, of which $0.6 million was included in "Accounts payable", $0.9 million was included in "Accrued compensation and related expenses", and $7.3 million 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):
| | | | | |
| |
| 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 | |
The restructuring expenses included in "Restructuring activities" in the condensed consolidated statements of income for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Asset impairment | $ | 2,427 | | | $ | 11,000 | | | $ | 2,427 | | | $ | 11,000 | |
| Severance and other benefits | (221) | | | 11,086 | | | 305 | | | 11,086 | |
| Outside services and other associated costs | 532 | | | 1,199 | | | 548 | | | 1,199 | |
| Reimbursement arrangements | — | | | (10,040) | | | — | | | (10,040) | |
| Total | $ | 2,738 | | | $ | 13,245 | | | $ | 3,280 | | | $ | 13,245 | |
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
The following discussion should be read in conjunction with the unaudited, condensed consolidated financial statements and notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, in addition to our 2021 Form 10-K, other reports filed with the SEC and the Statement Pursuant to the Private Securities Litigation Reform Act of 1995 — Forward-Looking Statements below.
Throughout the following discussion and elsewhere in this Form 10-Q, we refer to “recurring revenues” and “non-recurring revenues.” Recurring revenues are comprised of “current patent royalties” and “current technology solutions revenue.” Non-recurring revenues are comprised of “non-current patent royalties,” which include past patent royalties and royalties from static agreements, as well as “patent sales.”
2027 Senior Convertible Notes
On May 27, 2022, we issued the $460.0 million aggregate principal 2027 Notes. The net proceeds from the offering were approximately $450.0 million after deducting the initial purchasers' fees and estimated offering expenses. Additionally, on May 24 and May 25, 2022, in connection with the offering of the 2027 Notes, we entered into the 2027 Call Spread Transactions.
The net proceeds from the issuance of the 2027 Notes, after deducting fees and offering expenses, were used for the following: (i) $282.5 million was used to repurchase $273.8 million in aggregate principal amount of the 2024 Notes in privately negotiated transactions concurrently with the offering of the 2027 Notes (ii) $74.4 million was used to repurchase shares of common stock at $60.78 per share, the closing price of the stock on May 24, 2022; and (iii) $36.8 million, in addition to the proceeds from the 2027 Warrant Transactions, was used to fund the cost of the 2027 Call Spread Transactions.
The 2027 Notes will be convertible into cash up to the aggregate principal amount of the notes to be converted and in respect of the remainder, if any, of the Company’s obligation in excess of the aggregate principal amount of the notes being converted, pay or deliver, as the case may be, cash, shares of the Company’s common stock (“Common Stock”) or a combination thereof, at the Company’s election, at an initial conversion rate of 12.9041 shares of Common Stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $77.49 per share).
Refer to Note 7, “Obligations” in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion of the 2027 Notes and related 2027 Call Spread Transactions.
Share Repurchase Program
On May 6, 2022, the Board of Directors authorized a $100.0 million increase to the Company’s existing share repurchase program (the "2014 Repurchase Program"), bringing the total authorized amount of the 2014 Repurchase Program to $800.0 million. In connection with the issuance of the 2027 Notes, in May 2022 we repurchased 1.2 million shares of our common stock for $74.4 million under the share repurchase program.
Cash & Short-term Investments
As of June 30, 2022, we had $912.3 million of cash, cash equivalents, restricted cash and short-term investments and an additional $242.8 million of cash payments due under contracted fixed price agreements, including $26.0 million recorded in our $48.8 million accounts receivable balance. The remaining accounts receivable is primarily related to variable patent royalty revenue.
Over 90% of our revenue comes from fixed price agreements. Such agreements often have prescribed payment schedules that are uneven and sometimes front-loaded, resulting in timing differences between when we collect the cash payments and recognize the related revenue. As a result, our cash receipts due in 2022 from existing agreements are expected to be lower than revenue to be recognized in 2022 from such agreements as noted in the deferred revenue amortization table below.
The following table reconciles the timing differences between cash receipts and recognized revenue during the three and six months ended June 30, 2022 and 2021, including the resulting operating cash flow (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| Cash vs. Non-cash revenue: | 2022 | | 2021 | | 2022 | | 2021 |
Fixed fee cash receipts (a) | $ | 3,339 | | | $ | 3,050 | | | $ | 47,142 | | | $ | 50,362 | |
Other cash receipts (b) | 16,620 | | | 17,808 | | | 25,212 | | | 28,484 | |
| Change in deferred revenue | 76,959 | | | 63,230 | | | 127,700 | | | 86,659 | |
| Change in receivables | 25,163 | | | (499) | | | 17,688 | | | (4,006) | |
| Other | 2,576 | | | 4,146 | | | 8,233 | | | 8,599 | |
| Total Revenue | $ | 124,657 | | | $ | 87,735 | | | $ | 225,975 | | | $ | 170,098 | |
| Net cash used in operating activities | $ | (33,768) | | | $ | (27,259) | | | $ | (51,740) | | | $ | (37,101) | |
(a) Fixed fee cash receipts are comprised of cash receipts from Dynamic Fixed-Fee Agreement royalties, including the associated past patent royalties
(b) Other cash receipts are comprised of cash receipts related to our variable patent royalty revenue, including the associated past patent royalties, current technology solutions revenue, royalties from static agreements, and patent sales.
When we collect payments on a front-loaded basis, we recognize a deferred revenue liability equal to the cash received and accounts receivable recorded which relate to revenue expected to be recognized in future periods. That liability is then reduced as we recognize revenue over the balance of the agreement. The following table shows the projected amortization of our current and long term deferred revenue as of June 30, 2022 (in thousands):
| | | | | |
| Deferred Revenue |
| Remainder of 2022 | $ | 137,683 | |
| 2023 | 60,979 | |
| 2024 | 7,738 | |
| 2025 | 1,956 | |
| 2026 and thereafter | 5,180 | |
| Total Revenue | $ | 213,536 | |
Revenue
Second quarter 2022 recurring revenue was $100.1 million, compared to recurring revenue of $78.1 million in second quarter 2021, a 28% year-over-year increase, primarily driven by two new patent license agreements. In second quarter 2022, revenues (in descending order) from Apple, Samsung, Amazon, and Xiaomi each comprised 10% or more of our consolidated revenues. Refer to "Results of Operations --Second Quarter 2022 Compared to Second Quarter 2021" for further discussion of our 2022 revenue.
Restructuring Activities
On June 10, 2021, we announced that, as a result of a strategic review of our research and innovation priorities, we commenced the process of a collective economic layoff in which we proposed a reduction in force of our research and innovation unit. Additionally, in October 2021, we expanded our restructuring efforts to include general and administrative functions largely centered in the U.S. All impacted employees have been provided notification of termination.
As part of the Company’s ongoing evaluation of its flexible work policy and the impact of returning to the office, the Company has evaluated its current office space footprint and its expected needs going forward. As the result of this evaluation, during the second quarter 2022, we recognized a $2.4 million impairment, comprised of $0.4 million of property and equipment and $2.0 million of right of use assets, related to the abandonment of portions of three of our leased properties, which was included within “Restructuring activities” in the condensed consolidated statement of income.
The Company does not anticipate further significant restructuring charges, however these charges are estimated based on information available at the time such charges are recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts incurred for such activities may differ from amounts initially estimated.
Impact of COVID-19 Pandemic
The COVID-19 pandemic continues to significantly impact the United States and the rest of the world. Though the COVID-19 pandemic and the measures taken to reduce its transmission, such as the imposition of social distancing and orders to work-from-home and shelter-in-place, have altered our business environment and overall working conditions, we continue to believe that our strategic strengths, including talent, our strong balance sheet, stable revenue base, and the strength of our patent portfolio, will allow us to weather a rapidly changing marketplace.
While the environment in which we conduct our business and our overall working conditions have changed as a result of the COVID-19 pandemic, we experienced a limited impact on our operations and financial position during second quarter 2022. Fixed-fee royalties accounted for 89% of our recurring revenues in fiscal year 2021. These fixed-fee revenues are not directly affected by our related licensees’ success in the market or the general economic climate. To that end, in second quarter 2022, we did not experience a significant impact on our contracted revenue due to COVID-19. Meanwhile, we have taken steps to protect the health and safety of our employees and their families, with the majority of our workforce continuing to work remotely or on a hybrid basis. We returned to in-person work as of April 2022 and all of our locations are open. Despite any remote working conditions, our business activities have continued to operate with minimal interruption, and we expect them to continue to operate efficiently. Although we have resumed work-related travel, a portion of our licensing negotiations, investor presentations and participation in standards organizations and industry events have been virtually. Between March 12, 2020, when we began to work almost entirely remotely, and June 30, 2022, we successfully concluded twenty-one new patent license agreements that we estimate will result in revenues exceeding $620.0 million over their respective lives. Our financial position remains strong, we believe we have sufficient access to capital if needed, and we remain committed to our efforts around cost discipline.
Impact of Inflation and Market Factors
We have been actively monitoring the impact of the current macroeconomic environment in the U.S. and globally characterized by increasing inflation, supply chain issues, rising interest rates, labor shortages, and the potential for a recession. These market factors, as well as the impacts of the Russia and Ukraine conflict, have not had a material impact on our business to date. However, if these conditions continue or worsen, they could have an adverse effect on our operating results and our financial condition.
Comparability of Financial Results
When comparing second quarter 2022 financial results against other periods, the following items should be taken into consideration:
•Our second quarter 2022 revenue includes $24.6 million of non-recurring revenue related to two new agreements signed in second quarter 2022.
•In second quarter 2022, we repurchased approximately $273.8 million in aggregate principal amount of our 2024 Notes, which resulted in the recognition of a $11.2 million loss on the extinguishment of debt, which was included within “Other (expense) income, net” in the condensed consolidated statement of income. For more information on this transaction, refer to Note 7, "Obligations", within the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
•In second quarter 2022, we recognized $2.7 million of restructuring expenses, primarily related to aligning our facilities with our current needs. These costs resulted from our restructuring activities as described in Note 11, "Restructuring Activities", within the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and are included within “Restructuring activities” in the condensed consolidated statement of income.
•In second quarter 2022, we recognized a $1.6 million gain resulting from observable price changes of one of our long-term strategic investments, which was included within “Other (expense) income, net” in the condensed consolidated statement of income.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 2, "Summary of Significant Accounting Policies and New Accounting Guidance", in the notes to consolidated financial statements included in our 2021 Form 10-K. A discussion of our critical accounting policies, and the estimates related to them, are included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Form 10-K. There have been no material changes to our existing critical accounting policies from the disclosures included in our 2021 Form 10-K. In addition, we have analyzed the impact of COVID-19 on our financial statements as of June 30, 2022, and we have determined that the changes to our significant judgments and estimates did not have a material impact on our financial statements. Refer to Note 1, “Basis of Presentation,” in the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for updates related to new accounting pronouncements and changes in accounting policies.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash, cash equivalents and short-term investments, as well as cash generated from operations. We believe we have the ability to obtain additional liquidity through debt and equity financings. From time to time, we may engage in a variety of transactions to augment our liquidity position as our business dictates and to take advantage of favorable interest rate environments or other market conditions, including the incurrence or issuance of debt and the refinancing or restructuring of existing debt. Based on our past performance and current expectations, we believe our available sources of funds, including cash, cash equivalents and short-term investments and cash generated from our operations, will be sufficient to finance our operations, capital requirements, debt obligations, existing stock repurchase program, dividend program, and other contractual obligations discussed below in both the short-term over the next twelve months, and the long-term beyond twelve months.
Cash, cash equivalents, restricted cash and short-term investments
As of June 30, 2022 and December 31, 2021, we had the following amounts of cash and cash equivalents, restricted cash and short-term investments (in thousands):
| | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | | Increase /
(Decrease) |
| Cash and cash equivalents | $ | 833,533 | | | $ | 706,282 | | | $ | 127,251 | |
| Restricted cash included within prepaid and other current assets | 10,578 | | | 5,861 | | | 4,717 | |
| Restricted cash included within other non-current assets | 1,081 | | | 1,081 | | | — | |
| Short-term investments | 67,076 | | | 235,345 | | | (168,269) | |
| Total cash, cash equivalents, restricted cash and short-term investments | $ | 912,268 | | | $ | 948,569 | | | $ | (36,301) | |
The net decrease in cash, cash equivalents, restricted cash and short-term investments was primarily attributable to cash used in operating activities of $51.7 million and cash used in investing activities of $22.1 million, excluding sales and purchases of short-term investments, partially offset by cash provided by financing activities of $41.0 million, primarily consisting of net proceeds from the debt refinancing. Refer to the sections below for further discussion of these items.
Cash flows used in operating activities
Cash flows used in operating activities in the first half 2022 and 2021 (in thousands) were as follows:
| | | | | | | | | | | | | | | | | |
| Six months ended June 30, |
| 2022 | | 2021 | | Change |
| Net cash used in operating activities | $ | (51,740) | | | $ | (37,101) | | | $ | (14,639) | |
Our cash flows used in operating activities are principally derived from cash receipts from patent license and technology solutions agreements, offset by cash operating expenses and income tax payments. The $14.6 million change in net cash used in operating activities was primarily driven by non-cash revenue, partially offset by lower cash operating expenses benefiting from the cost-savings actions taken in 2021. The table below sets forth the significant items comprising our cash flows provided by operating activities during the six months ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Six months ended June 30, |
| | 2022 | | 2021 | | Change |
| Cash Receipts: | | | | | |
| Patent royalties | $ | 72,066 | | | $ | 75,435 | | | $ | (3,369) | |
| Technology solutions | 288 | | | 3,412 | | | (3,124) | |
| Total cash receipts | 72,354 | | | 78,847 | | | (6,493) | |
| | | | | |
| Cash Outflows: | | | | | |
Cash operating expenses a | 93,664 | | | 105,729 | | | (12,065) | |
Income taxes paid b | 4,363 | | | 4,793 | | | (430) | |
| Total cash outflows | 98,027 | | | 110,522 | | | (12,495) | |
| | | | | |
| Other working capital adjustments | (26,067) | | | (5,426) | | | (20,641) | |
| | | | | |
| Cash flows used in operating activities | $ | (51,740) | | | $ | (37,101) | | | $ | (14,639) | |
______________________________
(a) Cash operating expenses include operating expenses less depreciation of fixed assets, amortization of patents, non-cash compensation and non-cash changes in fair value.
(b) Income taxes paid include foreign withholding taxes.
Cash flows from investing and financing activities
Net cash provided by investing activities for the first half 2022 was $142.7 million, a $138.2 million change from $4.5 million in the first half 2021. During the first half 2022, we sold $164.8 million of short-term marketable securities, net of purchases, and we capitalized $22.1 million of patent costs and property plant and equipment purchases. During the first half 2021, we sold $26.7 million of short-term marketable securities, net of purchases, we capitalized $21.2 million of patent costs and property plant and equipment purchases, and invested $1.1 million in a new strategic investment.
Net cash provided by financing activities for the first half 2022 was $41.0 million, a change of $74.1 million from $33.1 million net cash used in financing activities for the first half 2021. This change was primarily attributable to net proceeds of $140.0 million from the debt refinancing, partially offset by a $63.3 million increase in share repurchases.
Other
Our combined short-term and long-term deferred revenue balance as of June 30, 2022 was approximately $213.5 million, a net decrease of $97.6 million from December 31, 2021. This decrease in deferred revenue was primarily attributable amortization of deferred revenue recognized in the period, offset by cash receipts and non-cash patent acquisitions from previously disclosed patent license agreements.
Based on current license agreements, we expect the amortization of dynamic fixed-fee royalty payments to reduce the June 30, 2022 deferred revenue balance of $213.5 million by $168.5 million over the next twelve months.
Convertible Notes
See Note 7, “Obligations” to the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for definitions of capitalized terms below.
Our 2027 and 2024 Notes, which for purposes of this discussion are also referred to as the "Convertible Notes", are included in the dilutive earnings per share calculation using the if-converted method. Under the if-converted method, we must assume that conversion of convertible securities occurs at the beginning of the reporting period. The Convertible Notes are convertible into cash up to the aggregate principal amount of the Convertible Notes to be converted and any remaining obligation may be in cash, shares of the Company’s common stock or a combination thereof. As the principal amount must be paid in cash and only the conversion spread is settled in shares, we only include the net number of incremental shares that would be issued upon conversion. We must calculate the number of shares of our common stock issuable under the terms of the Convertible Notes based on the average market price of our common stock during the applicable reporting period and include that number in the total diluted shares figure for the period.
At the time we issued the Convertible Notes, we entered into the 2027 Call Spread Transactions and 2024 Call Spread Transactions that together were designed to have the economic effect of reducing the net number of shares that will be issued in the event of conversion of the Convertible Notes by, in effect, increasing the conversion price of the Convertible Notes from our economic standpoint. However, under GAAP, since the impact of the 2027 Note Hedge Transactions and 2024 Note Hedge Transactions (together, the "Note Hedge Transactions") is anti-dilutive, we exclude from the calculation of fully diluted shares the number of shares of our common stock that we would receive from the counterparties to these agreements upon settlement.
During periods in which the average market price of our common stock is above the applicable conversion price of the Convertible Notes ($77.49 per share for the 2027 Notes and $81.29 per share for the 2024 Notes as of June 30, 2022) or above the strike price of the warrants ($106.37 per share for the 2027 Warrant Transactions and $109.43 per share for the 2024 Warrant Transactions as of June 30, 2022), the impact of conversion or exercise, as applicable, would be dilutive and such dilutive effect is reflected in diluted earnings per share. As a result, in periods where the average market price of our common stock is above the conversion price or strike price, as applicable, under the if-converted method, we calculate the number of shares issuable under the terms of the Convertible Notes and the warrants based on the average market price of the stock during the period, and include that number in the total diluted shares outstanding for the period.
Under the if-converted method, changes in the price per share of our common stock can have a significant impact on the number of shares that we must include in the fully diluted earnings per share calculation. As described in Note 7, "Obligations," the Convertible Notes are convertible into cash up to the aggregate principal amount of the Convertible Notes to be converted and any remaining obligation may be in cash, shares of the Company’s common stock or a combination thereof. ("net share settlement"). Assuming net share settlement upon conversion, the following tables illustrate how, based on the $460.0 million aggregate principal amount of the 2027 Notes and the $126.2 million aggregate principal amount of the 2024 Notes outstanding as of June 30, 2022, and the approximately 5.9 million warrants related to the 2027 Notes and the 1.6 million warrants remaining related to the 2024 Notes, outstanding as of the same date, changes in our stock price would affect (i) the number of shares issuable upon conversion of the Convertible Notes, (ii) the number of shares issuable upon exercise of the warrants subject to the 2027 Warrant Transactions and 2024 Warrant Transactions (together, the "Warrant Transactions"), (iii) the number of additional shares deemed outstanding with respect to the Convertible Notes, after applying the if-converted method, for purposes of calculating diluted earnings per share ("Total If-Converted Method Incremental Shares"), (iv) the number of shares of our common stock deliverable to us upon settlement of the Note Hedge Transactions and (v) the number of shares issuable upon concurrent conversion of the Convertible Notes, exercise of the warrants subject to the Warrant Transactions, and settlement of the Note Hedge Transactions:
| | | | | | | | | | | | | | | | | |
| 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.
RESULTS OF OPERATIONS
Second Quarter 2022 Compared to Second Quarter 2021
Revenues
The following table compares second quarter 2022 revenues to second quarter 2021 revenues (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | |
| | 2022 | | 2021 | | Total Increase/(Decrease) |
| Variable patent royalty revenue | $ | 7,673 | | | $ | 7,323 | | | $ | 350 | | | 5 | % |
| Fixed-fee royalty revenue | 91,756 | | | 69,296 | | | 22,460 | | | 32 | % |
Current patent royalties a | 99,429 | | | 76,619 | | | 22,810 | | | 30 | % |
Non-current patent royalties b | 24,556 | | | 9,586 | | | 14,970 | | | 156 | % |
| Total patent royalties | 123,985 | | | 86,205 | | | 37,780 | | | 44 | % |
Current technology solutions revenue a | 672 | | | 1,530 | | | (858) | | | (56) | % |
| | | | | | | |
| Total revenue | $ | 124,657 | | | $ | 87,735 | | | $ | 36,922 | | | 42 | % |
a. Recurring revenues are comprised of current patent royalties, inclusive of dynamic fixed-fee royalty payments, and current technology solutions revenue from the table above.
b. Non-recurring revenues are comprised of non-current patent royalties, which include past patent royalties and royalties from static agreements, as well as patent sales from the table above.
The increase in both total and recurring revenue was primarily driven by previously disclosed new patent license agreements, two new agreements signed in second quarter 2022, as well as revenues from connected automobile license agreements with GM and Ford Motor Company through a licensing platform. These increases were partially offset by a decrease in technology solutions revenues from a contract that was terminated in the first half of 2021. Non-recurring revenue in second quarter 2021 primarily related to a static fixed-fee patent licensing agreement signed in second quarter 2021.
In second quarter 2022 and second quarter 2021, 70% and 79% of our total revenue, respectively, was attributable to licensees that individually accounted for 10% or more of our total revenue. In second quarter 2022 and second quarter 2021, the following licensees accounted for 10% or more of our total revenue:
| | | | | | | | | | | |
| Three months ended June 30, |
| | 2022 | | 2021 |
| Customer A | 28% | | 32% |
| Customer B | 16% | | 22% |
| Customer C | 14% | | —% |
| Customer D | 12% | | —% |
| Customer E | <10% | | 13% |
| Customer F | <10% | | 12% |
Operating Expenses
The following table summarizes the changes in operating expenses between second quarter 2022 and second quarter 2021 by category (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | |
| | 2022 | | 2021 | | Increase/(Decrease) |
| Patent administration and licensing | $ | 45,417 | | | $ | 40,970 | | | $ | 4,447 | | | 11 | % |
| Development | 17,086 | | | 21,870 | | | (4,784) | | | (22) | % |
| Selling, general and administrative | 9,516 | | | 14,799 | | | (5,283) | | | (36) | % |
| Restructuring activities | 2,738 | | | 13,245 | | | (10,507) | | | 100 | % |
| Total operating expenses | $ | 74,757 | | | $ | 90,884 | | | $ | (16,127) | | | (18) | % |
Operating expenses decreased to $74.8 million in second quarter 2022 from $90.9 million in second quarter 2021. The $16.1 million decrease in total operating expenses was primarily due to changes in the following items (in thousands):
| | | | | |
| | Increase/(Decrease) |
| Restructuring activities | $ | (10,507) | |
| Personnel-related costs | (9,204) | |
| Intellectual property enforcement and non-patent litigation | 3,392 | |
| Revenue share and commissions | 1,157 | |
| Other | (965) | |
| Total decrease in operating expenses | $ | (16,127) | |
The $16.1 million decrease in operating expenses was primarily due to a $10.5 million reduction in non-recurring charges, substantially related to the company's previously announced restructuring plans, and a $9.2 million decrease in personnel-related costs primarily driven by cost-savings actions taken in 2021. These decreases were partially offset by $3.4 million of additional intellectual property enforcement costs related to the Lenovo and Oppo litigations and $1.2 million of additional revenue share and commissions costs due to the new licensing successes.
Patent Administration and Licensing Expense: The $4.4 million increase in patent administration and licensing expense was primarily due to the above noted increase in intellectual property enforcement costs, as well as an increase in patent amortization expense. These increases were partially offset by a decrease in personnel-related costs.
Development Expense: Development expense decreased $4.8 million primarily due to the above noted decrease in personnel-related costs, as well as a decrease in consulting costs.
Selling, General and Administrative Expense: Selling, general and administrative expense decreased $5.3 million primarily due to the above noted decrease in personnel-related costs.
Restructuring Activities: Restructuring expenses associated with our overall restructuring plan decreased due to the plan commencing and the initial accrual being recorded during second quarter 2021. For more information on the restructuring activities, refer to Note 11, "Restructuring Activities" within the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Non-Operating Expense
The following table compares second quarter 2022 non-operating expense to second quarter 2021 non-operating expense (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | |
| 2022 | | 2021 | | Increase/(Decrease) |
| Interest expense | $ | (6,272) | | | $ | (6,666) | | | $ | 394 | | | 6 | % |
| Interest and investment income | 297 | | | 446 | | | (149) | | | (33) | % |
| | | | | | | |
| Loss on extinguishment of long-term debt | (11,190) | | | — | | | (11,190) | | | — | % |
| Other (expense) income, net | (4,123) | | | 2,593 | | | (6,716) | | | (259) | % |
| Total non-operating expense | $ | (21,288) | | | $ | (3,627) | | | $ | (17,661) | | | (487) | % |
The $17.7 million change in non-operating expenses between the second quarter 2022 and 2021 was primarily due to the $11.2 million loss on extinguishment of the 2024 Notes, as described further in Note 7, "Obligations", and due to a foreign currency translation loss of $3.6 million in the second quarter 2022 arising from euro translation of our foreign subsidiaries, compared to a foreign currency translation gain of $1.1 million in second quarter 2021.
Additionally, in both periods we recognized gains resulting from observable price changes of our long-term strategic investments, which were $1.6 million recognized in second quarter 2022 and $1.0 million recognized in second quarter 2021.
Income taxes
In second quarter 2022 and 2021, based on the statutory federal tax rate net of discrete federal and state taxes, we had an effective tax rate of 28.1% and (0.3)%, respectively. The effective tax rate in both periods was impacted by losses in certain jurisdictions where the Company presently has recorded a valuation allowance against the related tax benefit, as well as by the foreign-derived intangible income deduction and non-deductible compensation. In the second quarter 2022, the Company recorded a net discrete tax expense of $2.3 million related to the extinguishment of long-term debt recognized during second quarter 2022. Excluding this valuation allowance, our second quarter 2022 and 2021 effective tax rate would have been 24.9% and 26.3%, respectively.
First Half 2022 Compared to First Half 2021
Revenues
The following table compares first half 2022 revenues to first half 2021 revenues (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, | | | | |
| | 2022 | | 2021 | | Total Increase/(Decrease) |
| Variable patent royalty revenue | $ | 16,718 | | | $ | 14,419 | | | $ | 2,299 | | | 16 | % |
| Fixed-fee royalty revenue | 181,599 | | | 138,592 | | | 43,007 | | | 31 | % |
Current patent royalties a | 198,317 | | | 153,011 | | | 45,306 | | | 30 | % |
Non-current patent royalties b | 26,747 | | | 13,367 | | | 13,380 | | | 100 | % |
| Total patent royalties | 225,064 | | | 166,378 | | | 58,686 | | | 35 | % |
Current technology solutions revenue a | 911 | | | 3,720 | | | (2,809) | | | (76) | % |
| | | | | | | |
| Total revenue | $ | 225,975 | | | $ | 170,098 | | | $ | 55,877 | | | 33 | % |
(a) Recurring revenues are comprised of current patent royalties, inclusive of dynamic fixed-fee royalty payments, and current technology solutions revenue from the table above.
(b) Non-recurring revenues are comprised of non-current patent royalties, which include past patent royalties and royalties from static agreements, as well as patent sales from the table above.
The increase in both total and recurring revenue was primarily driven by previously disclosed new patent license agreements, two additional new agreements signed in second quarter 2022, as well as revenues from connected automobile license agreements with GM and Ford Motor Company through a licensing platform. These increases were partially offset by a decrease in technology solutions revenues from a contract that was terminated in the first half of 2021 and a decrease in recurring revenues from a previously disclosed expired patent license agreement. Non-recurring revenue in first half 2021 primarily related two patent licensing agreement signed in second quarter 2021.
In first half 2022 and first half 2021, 71% and 69% of our total revenue, respectively, was attributable to companies that individually accounted for 10% or more of our total revenue. In first half 2022 and first half 2021, the following companies accounted for 10% or more of our total revenue:
| | | | | | | | | | | |
| Six months ended June 30, |
| | 2022 | | 2021 |
| Customer A | 31% | | 33% |
| Customer B | 17% | | 23% |
| Customer D | 13% | | —% |
| Customer E | 10% | | 13% |
| | | |
| | | |
Operating Expenses
The following table summarizes the changes in operating expenses between first half 2022 and first half 2021 by category (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, | | |
| | 2022 | | 2021 | | Increase/(Decrease) |
| Patent administration and licensing | $ | 87,512 | | | $ | 77,544 | | | $ | 9,968 | | | 13 | % |
| Development | 34,698 | | | 44,453 | | | (9,755) | | | (22) | % |
| Selling, general and administrative | 20,400 | | | 26,016 | | | (5,616) | | | (22) | % |
| Restructuring activities | 3,280 | | | 13,245 | | | (9,965) | | | 100 | % |
| Total operating expenses | $ | 145,890 | | | $ | 161,258 | | | $ | (15,368) | | | (10) | % |
Operating expenses decreased 10% to $145.9 million in first half 2022 from $161.3 million in first half 2021. The $15.4 million decrease in total operating expenses was primarily due to changes in the following items (in thousands):
| | | | | |
| | Increase/(Decrease) |
| Personnel-related costs | $ | (14,051) | |
Restructuring activities | (9,966) | |
| Consulting costs | (3,640) | |
| Intellectual property enforcement and non-patent litigation | 7,711 | |
| Share-based compensation | 3,440 | |
| Revenue share and commissions | 1,770 | |
| Other | (632) | |
| Total decrease in operating expenses | $ | (15,368) | |
The $15.4 million decrease in operating expenses was primarily due to the company's previously announced restructuring plan, which drove the $10.0 million decrease in one-time restructuring expenses. These cost-savings actions taken in 2021 also drove a $14.1 million decrease in personnel-related costs and a $3.6 million decrease in consulting costs. These decreases were partially offset by $7.7 million of additional intellectual property enforcement costs related to the Lenovo and Oppo litigations. Additionally, share-based compensation costs increased $3.4 million and revenue share and commissions costs increased $1.8 million both driven by licensing successes.
Patent Administration and Licensing Expense: The $10.0 million increase in patent administration and licensing expense primarily resulted from the above noted increases in intellectual property enforcement costs, revenue share costs, and share-based compensation, as well as an increase in patent amortization. These increases were partially offset by a decrease in personnel-related costs.
Development Expense: Development expense decreased by $9.8 million primarily resulting from the above-noted decreases in personnel-related costs and consulting costs, partially offset by the above-noted increase in share-based compensation.
Selling, General and Administrative Expense: The $5.6 million decrease in selling, general and administrative expense primarily resulted from the above-noted decreases in personnel-related costs and consulting costs, partially offset by the above-noted increase in share-based compensation.
Restructuring Activities: Restructuring expenses associated with our overall restructuring plan decreased due to the plan commencing and the initial accrual being recorded during second quarter 2021. For more information on the restructuring activities, refer to Note 11, "Restructuring Activities" within the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Non-Operating Expense
The following table compares first half 2022 non-operating expense to first half 2021 non-operating expense (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, | | | | |
| 2022 | | 2021 | | Increase/(Decrease) |
| Interest expense | $ | (11,787) | | | $ | (13,656) | | | $ | 1,869 | | | 14 | % |
| Interest and investment income | 506 | | | 999 | | | (493) | | | (49) | % |
| Loss on extinguishment of long-term debt | (11,190) | | | — | | | (11,190) | | | — | % |
| Other income, net | (5,337) | | | 2,764 | | | (8,101) | | | 293 | % |
| Total non-operating expense | $ | (27,808) | | | $ | (9,893) | | | $ | (17,915) | | | (181) | % |
The $17.9 million change in non-operating expenses between the first half 2022 and first half 2021 was primarily due to the $11.2 million loss on extinguishment of the 2024 Notes, as described further in Note 7, "Obligations", and due to a foreign currency translation loss of $4.0 million in the first half 2022 arising from euro translation of our foreign subsidiaries, compared to a foreign currency translation loss of $0.8 million in first half 2021.
Additionally, we recognized a $1.9 million gain on a contract termination in first half 2021 and in both periods we recognized gains resulting from observable price changes of our long-term strategic investments, which were $1.6 million recognized in first half 2022 and $1.0 million recognized in first half 2021.
Income taxes
In first half 2022 and 2021, we had an effective tax rate of 26.8% and (169.6)%, respectively. The effective tax rate in both periods was driven by losses in certain jurisdictions where the Company presently has recorded a valuation allowance against the related tax benefit, as well as by the foreign-derived intangible income deduction and non-deductible compensation. Excluding this valuation allowance, our first half 2022 and 2021 effective tax rate would have been 23.2% and 104.3%, respectively. In the first half 2022 and 2021, we recorded a net discrete tax benefit of $2.2 million and $0.6 million, respectively, primarily related to extinguishment of long-debt.
STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 — FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include certain information in regarding our current beliefs, plans and expectations, including, without limitation, the matters set forth below. Words such as "believe," “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “forecast,” "goal," "could," "would," "should," "if," "may," "might," "future," "target," "trend," "seek to," "will continue," "predict," "likely," "in the event," and variations of any such words or similar expressions contained herein are intended to identify such forward-looking statements. Forward-looking statements are made on the basis of management’s current views and assumptions and are not guarantees of future performance. Although the forward-looking statements in this Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements concerning our business, results of operations and financial condition are inherently subject to risks and uncertainties. These risks and uncertainties include, but are not limited to, the risks and uncertainties described in Part I, Item 1A of our 2021 Form 10-K and the risks and uncertainties set forth below:
•unanticipated delays, difficulties or accelerations in the execution of patent license agreements;
•our ability to leverage our strategic relationships and secure new patent license agreements on acceptable terms;
•our ability to enter into sales and/or licensing partnering arrangements for certain of our patent assets;
•our ability to enter into partnerships with leading inventors and research organizations and identify and acquire technology and patent portfolios that align with our roadmap;
•our ability to commercialize our technologies and enter into customer agreements;
•the failure of the markets for our current or new technologies to materialize to the extent or at the rate that we expect;
•unexpected delays or difficulties related to the development of our technologies;
•changes in our interpretations of, and assumptions and calculations with respect to the impact on us of, the 2017 Tax Cuts and Jobs Act, as well as further guidance that may be issued regarding such act;
•risks related to the potential impact of new accounting standards on our financial position, results of operations or cash flows;
•failure to accurately forecast the impact of our restructuring activities on our financial statements and our business;
•the resolution of current legal proceedings, including any awards or judgments relating to such proceedings, additional legal proceedings, changes in the schedules or costs associated with legal proceedings or adverse rulings in such proceedings;
•the timing and impact of potential administrative and legislative matters;
•changes or inaccuracies in market projections;
•our ability to obtain liquidity through debt and equity financings;
•the potential effects that the ongoing COVID-19 pandemic and/or general economic or other conditions could have on our financial position, results of operations and cash flows; and
•changes in our business strategy.
You should carefully consider these factors before making any investment decision with respect to our common stock. These factors, individually or in the aggregate, may cause our actual results to differ materially from our expected and historical results. You should understand that it is not possible to predict or identify all such factors. In addition, you should not place undue reliance on the forward-looking statements contained herein, which are made only as of the date of this Form 10-Q. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law.