QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
Commission File Number 1-33579
INTERDIGITAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania
82-4936666
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
200 Bellevue Parkway, Suite 300, Wilmington, DE19809-3727
(Address of Principal Executive Offices and Zip Code)
(302) 281-3600
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
IDCC
Nasdaq Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
InterDigital® is a registered trademark of InterDigital, Inc. All other trademarks, service marks and/or trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization
19,526
19,282
Non-cash interest (income) expense, net
(3,434)
1,498
Non-cash change in fair-value
(158)
—
Change in deferred revenue
(42,766)
(50,741)
Deferred income taxes
12,471
2,492
Share-based compensation
7,790
5,386
Impairment of assets
2,500
—
Other
67
—
(Increase) decrease in assets:
Receivables
(90,856)
7,475
Deferred charges and other assets
(31,091)
(2,772)
(Decrease) increase in liabilities:
Accounts payable
(2,807)
420
Accrued compensation and other expenses
(2,614)
(18,716)
Net cash used in operating activities
(27,852)
(17,972)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments
(309,393)
(2,139)
Sales of short-term investments
303,411
119,950
Purchases of property and equipment
(1,209)
(337)
Capitalized patent costs
(7,272)
(9,872)
Net cash (used in) provided by investing activities
(14,463)
107,602
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt issuance costs
(100)
—
Repurchase of common stock
(203,381)
—
Net proceeds from exercise of stock options
687
1,226
Non-controlling interest contribution
1,750
1,500
Taxes withheld upon restricted stock unit vestings
(6,708)
(5,026)
Dividends paid
(10,384)
(10,741)
Net cash used in financing activities
(218,136)
(13,041)
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(260,451)
76,589
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
703,161
713,224
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
$
442,710
$
789,813
Refer to Note 1, "Basis of Presentation," for additional supplemental cash flow information. Additionally, refer to Note 6, "Cash, Concentration of Credit Risk and Fair Value of Financial Instruments" for a reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets.
The accompanying notes are an integral part of these statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited, condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial position of InterDigital, Inc. (individually and/or collectively with its subsidiaries referred to as “InterDigital,” the “Company,” “we,” “us” or “our,” unless otherwise indicated) as of March 31, 2023, the results of our operations for the three months ended March 31, 2023 and 2022 and our cash flows for the three months ended March 31, 2023 and 2022. The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, accordingly, do not include all of the detailed schedules, information and notes necessary to state fairly the financial condition, results of operations and cash flows in conformity with United States generally accepted accounting principles (“GAAP”). The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP for year-end financial statements. Therefore, these financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (our “2022 Form 10-K”) as filed with the Securities and Exchange Commission (“SEC”) on February 15, 2023. Definitions of capitalized terms not defined herein appear within our 2022 Form 10-K. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. We have one reportable segment.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Change in Accounting Policies
There have been no material changes or updates to our existing accounting policies from the disclosures included in our 2022 Form 10-K, except as indicated below in "New Accounting Guidance".
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
During 2022, the Company made reclassifications between the operating expenses lines on the consolidated income statement in order to more clearly reflect the Company’s investments to create and protect the value of our innovations. The Company grouped research and portfolio related costs within the line "Research and portfolio development", previously referred to as "Development", which resulted in reclassifying certain portfolio related costs out of the "Licensing" line, previously referred to as "Patent administration and licensing", and into "Research and portfolio development." The impact of this reclassification was $26.6 million for the three months ended March 31, 2022. Additionally, the previous "Selling, general, and administrative" line is now referred to as "General and administrative".
Beginning in third quarter 2022, we updated our disaggregated revenue disclosures to provide information to enable investors to better understand the composition of revenue from contracts with customers. As a result, variable patent royalty revenue and fixed-fee royalty revenue was combined and disaggregated into the Smartphone and CE, IoT/Auto groupings. Additionally, the Other category includes current technology solutions revenues and catch-up revenues is comprised of past patent royalties and revenues from static agreements. We believe this better reflects both our current revenue sources and our growth opportunities across these vertical markets.
The following table presents additional supplemental cash flow information for the three months ended March 31, 2023 and 2022 (in thousands):
Three months ended March 31,
SUPPLEMENTAL CASH FLOW INFORMATION:
2023
2022
Income taxes paid, including foreign withholding taxes
$
4,942
$
3,349
Non-cash investing and financing activities:
Dividend payable
9,449
10,803
Non-cash acquisition of patents
—
30,100
Non-cash distribution of patents
—
1,928
Accrued capitalized patent costs and property and equipment purchases
(1,274)
1,562
New Accounting Guidance
No new accounting pronouncement issued or effective during the quarter had or is expected to have a material impact on our condensed consolidated interim financial statements.
2. REVENUE
Disaggregated Revenue
The following table presents the disaggregation of our revenue for the three months ended March 31, 2023 and 2022 (in thousands):
Three months ended March 31,
2023
2022
Total Increase/(Decrease)
Recurring revenues:
Smartphone
$
87,431
$
87,698
$
(267)
—
%
CE, IoT/Auto
14,086
11,190
2,896
26
%
Other
56
239
(183)
(77)
%
Total recurring revenues
101,573
99,127
2,446
2
%
Catch-up revenues a
100,800
2,191
98,609
4,501
%
Total revenues
$
202,373
$
101,318
$
101,055
100
%
(a) Catch-up revenues are comprised of past patent royalties and revenues from static agreements.
During the three months ended March 31, 2023, we recognized $59.1 million of revenue that had been included in deferred revenue as of the beginning of the period. As of March 31, 2023, we had contract assets of $133.1 million and $19.6 million included within "Accounts receivable" and "Other non-current assets, net" in the condensed consolidated balance sheet, respectively. As of December 31, 2022, we had contract assets of $32.9 million and $2.5 million included within "Accounts receivable" and "Other non-current assets, net" in the condensed consolidated balance sheet, respectively.
Based on contracts signed and committed as of March 31, 2023, we expect to recognize the following revenue from dynamic fixed-fee royalty payments over the term of such contracts (in thousands):
Revenue (a)
Remainder of 2023
$
267,055
2024
295,464
2025
282,709
2026
215,487
2027
213,257
Thereafter
472,696
Total Revenue
$
1,746,668
(a) This table includes our estimated revenue related to Samsung and Lenovo. In accordance with ASC 606, these estimates are limited to the amount of revenue we expect to recognize only to the extent it is probable that a subsequent change in the estimate would not result in a significant revenue reversal.
3.INCOME TAXES
In the three months ended March 31, 2023 and 2022, the Company had an estimated annual effective tax rate of 14.0% and 25.2%, respectively. The change in effective tax rate is due to an increase in the amount of Foreign Derived Intangible Income deduction benefit available to the Company due to higher taxable income and as well as timing difference between the recognition of book and tax revenue. Additionally, the effective tax rate in both periods was impacted by losses in certain jurisdictions where the Company presently has recorded a valuation allowance against the related tax benefit. Excluding this valuation allowance, our effective tax rate for the three months ended March 31, 2023 and 2022 would have been 13.8% and 19.2% respectively. During both the three months ended March 31, 2023 and 2022, the Company recorded discrete net benefits of $1.0 million and $0.3 million, respectively, primarily related to share-based compensation.
The effective tax rate reported in any given year will continue to be influenced by a variety of factors, including timing differences between the recognition of book and tax revenue, the level of pre-tax income or loss, the foreign vs. domestic classification of the Company’s customers, and any discrete items that may occur.
During the three months ended March 31, 2023 and 2022, the Company paid approximately $4.4 million and $3.2 million, respectively, in foreign source creditable withholding tax.
Basic Earnings Per Share ("EPS") is calculated by dividing net income or loss available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if options or other securities with features that could result in the issuance of common stock were exercised or converted to common stock or resulting from the unvested outstanding restricted stock units ("RSUs"). The following tables reconcile the numerator and the denominator of the basic and diluted net income per share computation (in thousands, except for per share data):
Three months ended March 31,
2023
2022
Net income applicable to InterDigital, Inc.
$
105,259
$
17,994
Weighted-average shares outstanding:
Basic
28,780
30,703
Dilutive effect of stock options, RSUs, convertible securities and warrants
592
572
Diluted
29,372
31,275
Earnings per share:
Basic
$
3.66
$
0.59
Dilutive effect of stock options, RSUs, convertible securities and warrants
(0.08)
(0.01)
Diluted
$
3.58
$
0.58
Shares of common stock issuable upon the exercise or conversion of certain securities have been excluded from our computation of EPS because the strike price or conversion rate, as applicable, of such securities was greater than the average market price of our common stock and, as a result, the effect of such exercise or conversion would have been anti-dilutive. Set forth below are the securities and the weighted average number of shares of common stock underlying such securities that were excluded from our computation of EPS for the periods presented (in thousands):
Three months ended March 31,
2023
2022
Restricted stock units and stock options
420
414
Warrants
7,488
4,921
Total
7,908
5,335
Convertible Notes and Warrants
Refer to Note 7, "Obligations," for information about the Company's convertible notes and warrants and related conversion and strike prices. During periods in which the average market price of the Company's common stock is above the applicable conversion price of the Company's convertible notes, or above the strike price of the Company's outstanding warrants, the impact of conversion or exercise, as applicable, would be dilutive and such dilutive effect is reflected in diluted EPS. As a result, in periods where the average market price of the Company's common stock is above the conversion price or strike price, as applicable, under the if-converted method, the Company calculates the number of shares issuable under the terms of the convertible notes and the warrants based on the average market price of the stock during the period, and includes that number in the total diluted shares outstanding for the period.
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 sought, among other relief, injunctive relief to prevent further infringement of the asserted patents or, in the alternative, a determination of the terms of a FRAND license.
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 appealed this decision, and on January 19, 2023, the UK Court of Appeal upheld the UK High Court’s findings that Lenovo is infringing on InterDigital’s valid and essential patent. 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. The Company appealed this decision as legally erroneous, and on February 9, 2023, the UK Court of Appeal allowed the appeal, finding that Lenovo is infringing on InterDigital’s valid and essential patent. On January 31, 2023, the UK High Court issued its decision regarding the third technical trial finding European Patent (UK) No. 2,421,318 valid, essential, and infringed. On March 7, 2023, the UK High Court issued an order staying all deadlines with respect to the fourth and fifth technical trials. On March 16, 2023, the UK High Court issued its order regarding judgement in the trial to determine how much Lenovo must pay for a license to the Company's portfolio of cellular assets, awarding the Company a lump sum of $138.7 million for such license through December 31, 2023. A form of order hearing took place in May 2023 regarding the license terms, interest, costs, and permission to appeal. The Company is awaiting the decision from that hearing. We have accrued an estimated net one-time litigation fee reimbursement of $5.7 million in first quarter 2023 within the Licensing line in our Consolidated Statement of Income.
District of Delaware Patent Proceedings
On August 28, 2019, the Company and certain of its subsidiaries filed a complaint in the United States District Court for the District of Delaware (the "Delaware District Court") against Lenovo Holding Company, Inc. and certain of its subsidiaries alleging that Lenovo infringes eight of the Company'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 the Company 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 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 has been rescheduled from March 6, 2023 to July 10, 2023, and once again to December 4, 2023. On April 25, 2022, the parties filed a stipulation to stay only the claims relating to U.S. Patent No. 8,199,726. The stipulation was granted. On January 13, 2023, Lenovo filed a motion to sever and stay the Company’s patent infringement claims, requesting that its Sherman Act and breach of FRAND claims proceed to trial. That motion is currently pending.
District of Delaware Antitrust Proceedings
On April 9, 2020, Lenovo (United States) Inc. and Motorola Mobility LLC filed a complaint in the Delaware District Court against the Company and certain of its subsidiaries. The complaint alleges that the Company defendants have violated Sections 1 and 2 of the Sherman Act in connection with, among other things, their licensing of 3G and 4G standards essential patents ("SEPs"). The complaint further alleges that the Company defendants have violated their commitment to the ETSI with respect to the licensing of 3G and 4G SEPs on FRAND terms and conditions. The complaint seeks, among other things (i) rulings that the Company defendants have violated Sections 1 and 2 of the Sherman Act and are liable for breach of their ETSI FRAND commitments, (ii) a judgment that the plaintiffs are entitled to a license with respect to the Company's 3G and 4G SEPs on FRAND terms and conditions, and (iii) injunctions against any demand for allegedly excessive royalties or enforcement of the Company defendants' 3G and 4G U.S. SEPs against the plaintiffs or their customers via patent infringement proceedings.
On June 22, 2020, the Company filed a motion to dismiss Lenovo's Sherman Act claims with prejudice, and to dismiss Lenovo's breach of contract claim with leave to re-file as a counterclaim in the Company's legal proceeding against Lenovo in the Delaware District Court discussed above.
On March 24, 2021, the Delaware District Court ruled on the Company’s motion to dismiss. The Delaware District Court dismissed the Sherman Act Section 1 claim without prejudice, denied the motion to dismiss the Sherman Act Section 2 claim, and consolidated the Section 2 and breach of contract claims with Company’s Delaware patent proceeding discussed above.
China Proceedings
On April 10, 2020, Lenovo (Beijing) Ltd. and certain of its affiliates filed a complaint against the Company and certain of its subsidiaries in the Beijing Intellectual Property Court (the “Beijing IP Court”) seeking a determination of the FRAND royalty rates payable for the Company's Chinese 3G, 4G and 5G SEPs. On February 20, 2021, the Company filed an application challenging the jurisdiction of the Beijing IP Court to take up Lenovo’s complaint. On November 15, 2021, the Beijing IP Court denied the jurisdictional challenge, and the Company filed an appeal with the Supreme People’s Court of the People’s Republic of China (the “SPC”) on December 14, 2021. That appeal was denied by the SPC on September 5, 2022, and the case was sent back to the Beijing IP Court. On November 9, 2022, the Company filed a petition to stay the case. That petition is currently 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. The application remains pending.
Germany Proceedings
On March 25, 2022, March 28, 2022, and April 6, 2022, the Company and certain of its subsidiaries filed patent infringement claims in the Munich and Mannheim Regional Courts against Lenovo and certain of its affiliates, alleging infringement of European Patent Nos. 2,449,782; 2,452,498; 3,624,447 and 3,267,684 relating to HEVC standards. The Company is seeking, among other relief, injunctive relief to prevent further infringement of the asserted patents. The Mannheim Regional Court held a hearing on April 21, 2023 regarding European Patent No. 3,267,684. The Mannheim Regional Court held a hearing regarding European Patent No. 3,624,447 on May 2, 2023. The Munich Regional Court has scheduled hearings regarding European Patent Nos. 2,449,782 and 2,452,498 for September 14, 2023 and June 20, 2024, respectively.
Oppo, OnePlus and realme
UK Proceedings
On December 20, 2021, the Company filed a patent infringement claim in the UK High Court against Guangdong Oppo Mobile Telecommunications Corp., Ltd. (“Oppo”) and certain of its affiliates, OnePlus Technology (Shenzhen) Co., Ltd. (“OnePlus”) and certain of its affiliates, and realme Mobile Telecommunications (Shenzhen) Co., Ltd. (“realme”) and certain of its affiliates, alleging infringement of European Patent (UK) Nos. 2,127,420; 2,421,318; 2,485,558; and 3,355,537 relating to cellular 3G, 4G/LTE or 5G standards. The Company is seeking, among other relief, injunctive relief to prevent further infringement of the asserted patents.
On January 19, 2022, Oppo filed a jurisdictional challenge with the UK High Court which the parties have agreed to adjourn pending the outcome of Oppo’s jurisdiction challenge before the UK Supreme Court in a case involving Nokia. On December 8, 2022, the Company received confirmation that Oppo had dropped its jurisdictional challenge with the UK High Court.
On March 24, 2023, the parties agreed to stay all technical trials on the basis that European Patent No. 2,485,558 is valid and essential based on the result of Technical Trial A in the Lenovo UK proceedings. The willingness trial is expected to commence on October 23, 2023. The rate determination trial is scheduled to commence on February 26, 2024.
India Proceedings
On December 20, 2021 and December 22, 2021, the Company and certain of its subsidiaries filed patent infringement claims in the Delhi High Court in New Delhi, India against Oppo and certain of its affiliates, OnePlus and certain of its affiliates, and realme Mobile Telecommunication (India) Private Limited, alleging infringement of Indian Patent Nos. 262910, 295912, 313036, 320182, 319673, 242248, 299448, and 308108 relating to cellular 3G, 4G/LTE, and/or 5G, and HEVC standards. The Company is seeking, among other relief, injunctive relief to prevent further infringement of the asserted patents.
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 held a hearing on December 14, 2022 regarding European Patent No. 2,421,318, with a second hearing scheduled for October 18, 2023. The Munich Regional Court held a hearing on March 2, 2023 regarding European Patent No. 2,127,420, with a second hearing scheduled for September 15, 2023. The Munich Regional Court has also scheduled a hearing for September 19, 2024 on European Patent No. 2,485,558.
China Proceedings
On January 19, 2022, the Company was informed that Oppo had purportedly filed a complaint against the Company in the Guangzhou Intellectual Property Court (the “Guangzhou IP Court”) seeking a determination of a global FRAND royalty rate for the Company’s 3G, 4G, 5G, 802.11 and HEVC SEPs. On May 20, 2022, the Company filed an application challenging, among other things, process of service and the jurisdiction of the Guangzhou IP Court. On January 12, 2023, the Guangzhou IP Court denied the application. On February 28, 2023, the Company filed an appeal to the decision.
Spain Proceedings
On March 1, 2022, a subsidiary of the Company filed patent infringement claims in the Barcelona Commercial Courts against Oppo and certain of its affiliates, OnePlus and certain of its affiliates, and realme and certain of its affiliates. The Company filed its amended complaint on April 25, 2022, alleging infringement of European Patent Nos. 3,355,537; 2,485,558; 2,421,318; and 2,557,715 relating to cellular 3G, 4G/LTE and/or 5G standards. The Company is seeking, among other relief, injunctive relief to prevent further infringement of the asserted patents.
Samsung
The Company reached an agreement with Samsung Electronics Co. Ltd. (“Samsung”) to enter into binding arbitration to determine the final terms of a renewed patent license agreement to certain of the Company’s patents, which will be effective from January 1, 2023. The Company and Samsung have also agreed not to initiate certain claims against the other during the arbitration. On March 31, 2023, the Company filed a request for arbitration with the International Chamber of Commerce.
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 oftheiragreements 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 March 31, 2023, except as noted above.
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 March 31, 2023, December 31, 2022 and March 31, 2022 to the captions within the condensed consolidated balance sheets and condensed consolidated statements of cash flows (in thousands):
March 31,
December 31,
March 31,
2023
2022
2022
Cash and cash equivalents
$
430,625
$
693,479
$
783,016
Restricted cash included within prepaid and other current assets
12,085
9,682
5,716
Restricted cash included within other non-current assets
—
—
1,081
Total cash, cash equivalents and restricted cash
$
442,710
$
703,161
$
789,813
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. Four licensees comprised 94% and 76% of our net accounts receivable balance, as of March 31, 2023 and December 31, 2022, respectively. 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.
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 March 31, 2023 and December 31, 2022 (in thousands):
Fair Value as of March 31, 2023
Level 1
Level 2
Level 3
Total
Assets:
Money market and demand accounts (a)
$
375,375
$
—
$
—
$
375,375
Commercial paper (b)
—
174,601
—
174,601
U.S. government securities(c)
—
227,745
—
227,745
Corporate bonds, asset backed and other securities (d)
—
185,048
—
185,048
Total
$
375,375
$
587,394
$
—
$
962,769
Fair Value as of December 31, 2022
Level 1
Level 2
Level 3
Total
Assets:
Money market and demand accounts (a)
$
643,825
$
—
$
—
$
643,825
Commercial paper (b)
—
209,956
—
209,956
U.S. government securities(c)
—
243,840
—
243,840
Corporate bonds, asset backed and other securities (d)
—
113,838
—
113,838
Total
$
643,825
$
567,634
$
—
$
1,211,459
______________________________
(a)Primarily included within cash and cash equivalents.
(b)As of March 31, 2023 and December 31, 2022, $0.0 million and $26.7 million of commercial paper was included within cash and cash equivalents, respectively.
(c)As of March 31, 2023 and December 31, 2022, $57.9 million and $15.7 million of U.S. government securities was included within cash and cash equivalents, respectively.
(d)As of March 31, 2023 and December 31, 2022, $9.4 million and $16.9 million of corporate bonds, asset backed and other securities was included within cash and cash equivalents, respectively.
Non-Recurring Fair Value Measurements
Patents
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.
During first quarter 2023, we incurred a one-time impairment of $2.5 million on our patents 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.
Fair Value of Long-Term Debt
Convertible Notes
The principal amount, carrying value and related estimated fair value of the Company's Convertible Notes reported as of March 31, 2023 and December 31, 2022 was as follows (in thousands). The aggregate fair value of the principal amount of the Convertible Notes is a Level 2 fair value measurement.
The carrying value and related estimated fair value of the Technicolor Patent Acquisition long-term debt reported as of March 31, 2023 and December 31, 2022 was as follows (in thousands). The aggregate fair value of the Technicolor Patent Acquisition long-term debt is a Level 3 fair value measurement.
March 31, 2023
December 31, 2022
Carrying Value
Fair Value
Carrying Value
Fair Value
Technicolor Patent Acquisition Long-Term Debt
$
30,937
$
29,140
$
30,662
$
28,048
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 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 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. Also on May 24 and May 25, 2022, we entered into privately negotiated warrant 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.
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 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 mature on June 1, 2024, unless earlier redeemed, converted or repurchased.
The 2024 Notes are convertible into 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, 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).
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. 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 March 31, 2023. 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 March 31, 2023. As of March 31, 2023, the warrants under the 2024 Warrant Transactions had a strike price of approximately $109.43 per share, as adjusted.
The following table reflects the carrying value of our Convertible Notes long-term debt as of March 31, 2023 and December 31, 2022 (in thousands):
March 31, 2023
December 31, 2022
3.50% Senior Convertible Notes due 2027
$
460,000
$
460,000
2.00% Senior Convertible Notes due 2024
126,174
126,174
Less:
Deferred financing costs
(9,197)
(9,770)
Net carrying amount of the Convertible Notes
$
576,977
$
576,404
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 months ended March 31, 2023 and 2022 relating to the contractual interest coupon and the amortization of deferred financing costs of the Convertible Notes (in thousands):
Three months ended March 31,
2023
2022
2027 Notes
2024 Notes
Total
2024 Notes
Contractual coupon interest
$
4,025
$
631
$
4,656
$
2,000
Amortization of deferred financing costs
431
142
573
424
Total
$
4,456
$
773
$
5,229
$
2,424
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 March 31, 2023 and December 31, 2022 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 months ended March 31, 2023 and 2022, we recognized $0.3 million and $0.9 million of interest expense related to this debt. 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 March 31, 2023, 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 one variable interest entity. As of March 31, 2023, the book value of the assets and liabilities associated with this variable interest entity included in our condensed consolidated balance sheet were $14.6 million and $0.3 million, respectively. Assets included $4.2 million of cash and cash equivalents, $1.5 million of prepaid and other current assets, and $8.9 million of patents, net. As of December 31, 2022, the book value of the assets and liabilities associated with this variable interest entity included in our condensed consolidated balance sheet were $17.5 million and $1.8 million, respectively. Assets included $4.4 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.
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 months ended March 31, 2023 and 2022 we allocated approximately $1.7 million and $0.3 million, respectively, of Convida Wireless's net loss to noncontrolling interests held by other parties.
The amounts included in "Other income (expense), net" in the condensed consolidated statements of income for the three months ended March 31, 2023 and 2022 were as follows (in thousands):
Three months ended March 31,
2023
2022
Interest and investment income
$
11,680
$
209
Other
1,511
(1,214)
Other income (expense), net
$
13,191
$
(1,005)
Interest and investment income of $11.7 million increased $11.5 million compared to first quarter 2022 primarily due to market conditions driving higher yields on our short-term investments. The change in Other was primarily due to fair value adjustments of our investments resulting in a $1.0 million net gain in first quarter 2023, compared to a $0.8 million net loss in first quarter 2022, and a foreign currency translation net gain arising from euro translation of our foreign subsidiaries of $0.7 million in first quarter 2023, compared to a $0.4 million net loss in first quarter 2022.
10. OTHER ASSETS
The amounts included in "Prepaid and other current assets" in the consolidated balance sheet as of March 31, 2023 and December 31, 2022 were as follows (in thousands):
March 31, 2023
December 31, 2022
Tax receivables
$
66,854
$
64,117
Prepaid assets
13,447
9,044
Restricted cash
12,085
9,682
Patents held for sale
1,500
4,000
Other current assets
7,806
2,873
Total Prepaid and other current assets
$
101,692
$
89,716
The amounts included in "Other non-current assets, net" in the consolidated balance sheet as of March 31, 2023 and December 31, 2022 were as follows (in thousands):
March 31, 2023
December 31, 2022
Tax receivables
$
31,967
$
29,370
Goodwill
22,421
22,421
Long-term investments
19,715
19,593
Contract asset
19,573
2,544
Right-of-use assets
17,431
18,034
Other non-current assets
3,639
3,758
Total Other non-current assets, net
$
114,746
$
95,720
11. RESTRUCTURING ACTIVITIES
During second quarter 2021, the Company 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.
The Company does not anticipate further restructuring costs at this time, 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.
As of March 31, 2023 and December 31, 2022, the Company's restructuring liability was $3.1 million and $4.5 million, respectively, and is included in "Other accrued expenses" 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, 2022
$
4,495
Cash payments
(1,487)
Other
52
Balance as of March 31, 2023
$
3,060
The restructuring expenses included in "Restructuring activities" in the condensed consolidated statements of income for the three months ended March 31, 2023 and 2022 were as follows (in thousands):
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
The following discussion should be read in conjunction with the unaudited, condensed consolidated financial statements and notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, in addition to our 2022 Form 10-K, other reports filed with the SEC and the Statement Pursuant to the Private Securities Litigation Reform Act of 1995 — Forward-Looking Statements below.
Throughout the following discussion and elsewhere in this Form 10-Q, we refer to “catch-up revenues.” Catch-up revenues are comprised of past patent royalties and revenues from static agreements. Previously we referred to catch-up revenues as non-recurring revenues.
Samsung
On January 1, 2023, we agreed to renew our patent license agreement with Samsung and enter into binding arbitration to determine the final terms of the license, including the amount payable by Samsung under the new agreement. In first quarter 2023, we began recognizing revenue for Samsung at a conservative level consistent with the revenue we recognized from our patent license agreement that expired on December 31, 2022. We believe that it is likely the arbitration award will exceed the conservative estimate and require a true-up at that time.
Lenovo Proceedings
On March 16, 2023, the UK’s High Court handed down its judgment in the company’s licensing dispute with Lenovo. The Court ruled that Lenovo should pay a total of $138.7 million for a license to InterDigital’s portfolio of 3G, 4G and 5G patents, including past sales. We recognized $101.3 million of revenue in first quarter 2023, including $98.8 million of catch-up revenues based on conservative estimates of the minimum revenue that we expect to recognize under a patent license agreement. See Note 5, “Litigation and Legal Proceedings,” to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding the Lenovo proceedings.
Share Repurchases
On December 31, 2022, we announced an increase to the share repurchase program to a total of $400 million outstanding at the beginning of 2023. On January 23, 2023, we commenced a modified “Dutch auction” tender offer (the “Tender Offer”) to purchase for cash up to $200.0 million of our common stock. On February 23, 2023 we announced the final results of the Tender Offer, which resulted in the repurchase of 2.7 million shares of our common stock at a price of $72.98 per share, for an aggregate cost of $199.9 million, excluding fees, expenses and excise tax relating to the Tender Offer.
During the period April 1, 2023 to April 30, 2023, we repurchased 0.3 million shares for $24.7 million. As of April 30, 2023, there was $175.4 million remaining under the share repurchase authorization, which we plan to utilize to periodically repurchase additional common shares.
Cash & Short-term Investments
As of March 31, 2023, we had $962.8 million of cash, restricted cash and short-term investments and an additional $1.4 billion of cash payments due under contracted fixed price agreements, which includes our conservative estimates of the minimum cash receipts that we expect to receive under patent license agreements with Samsung and Lenovo. In addition, it includes $118.7 million of fixed-fee accounts receivable.
89% of our recurring revenue comes from fixed-fee royalties. Such agreements often have prescribed payment schedules that are uneven and sometimes front-loaded, resulting in timing differences between when we collect the cash payments and recognize the related revenue.
The following table reconciles the timing differences between cash receipts and recognized revenue during the three months ended March 31, 2023 and 2022, including the resulting operating cash flow (in thousands):
Three months ended March 31,
Cash vs. Non-cash revenue:
2023
2022
Fixed fee cash receipts (a)
$
24,669
$
43,803
Other cash receipts (b)
19,972
8,592
Change in deferred revenue
42,766
50,741
Change in receivables
90,856
(7,475)
Other
24,110
5,657
Total Revenue
$
202,373
$
101,318
Net cash used in operating activities
$
(27,852)
$
(17,972)
(a) Fixed fee cash receipts are comprised of cash receipts from Dynamic Fixed-Fee Agreement royalties, including the associated catch-up patent royalties
(b) Other cash receipts are primarily comprised of cash receipts related to our variable patent royalty revenue and catch-up revenues.
When we collect payments on a front-loaded basis, we recognize a deferred revenue liability equal to the cash received and accounts receivable recorded which relate to revenue expected to be recognized in future periods. That liability is then reduced as we recognize revenue over the balance of the agreement. The following table shows the projected amortization of our current and long term deferred revenue as of March 31, 2023 (in thousands):
Deferred Revenue
Remainder of 2023
$
146,478
2024
125,467
2025
106,224
2026
1,011
2027
1,076
Thereafter
3,617
Total Revenue
$
383,873
Revenue
Total revenues of $202.4 million, which includes both recurring and catch-up revenues, nearly doubled from first quarter 2022 primarily due to catch-up revenues from the Lenovo proceedings recognized in first quarter 2023. First quarter 2023 recurring revenues were $101.6 million, compared to recurring revenues of $99.1 million in first quarter 2022, a 2% year-over-year increase. In first quarter 2023, revenues (in descending order) from Lenovo and Apple each comprised 10% or more of our consolidated revenues. Refer to "Results of Operations --First Quarter 2023 Compared to First Quarter 2022" for further discussion of our 2023 revenue.
Impact of Inflation and Other Market Factors
We have been actively monitoring the impact of the current macroeconomic environment in the U.S. 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. See the section titled “Risk Factors” in the 2022 Form 10-K.
When comparing first quarter 2023 financial results against other periods, the following items should be taken into consideration:
•Our first quarter 2023 revenues include $100.8 million of catch-up revenues primarily related to estimates associated with the Lenovo proceedings.
•In first quarter 2023, we accrued a $5.7 million one-time charge for a net litigation fee reimbursement associated with the Lenovo proceedings. See Note 5, “Litigation and Legal Proceedings,” to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding the Lenovo litigation.
•In first quarter 2023, we incurred a $2.5 million one-time impairment on our patents held for sale.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 2, "Summary of Significant Accounting Policies and New Accounting Guidance", in the notes to consolidated financial statements included in our 2022 Form 10-K. A discussion of our critical accounting policies, and the estimates related to them, are included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Form 10-K. There have been no material changes to our existing critical accounting policies from the disclosures included in our 2022 Form 10-K. In addition, we have analyzed the impact of COVID-19 on our financial statements as of March 31, 2023, and we have determined that the changes to our significant judgments and estimates did not have a material impact on our financial statements. Refer to Note 1, “Basis of Presentation,” in the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for updates related to new accounting pronouncements and changes in accounting policies.
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 March 31, 2023 and December 31, 2022, we had the following amounts of cash and cash equivalents, restricted cash and short-term investments (in thousands):
March 31, 2023
December 31, 2022
Increase / (Decrease)
Cash and cash equivalents
$
430,625
$
693,479
$
(262,854)
Restricted cash included within prepaid and other current assets
12,085
9,682
2,403
Short-term investments
520,059
508,298
11,761
Total cash, cash equivalents, restricted cash and short-term investments
$
962,769
$
1,211,459
$
(248,690)
The net decrease in cash, cash equivalents, restricted cash and short-term investments was attributable to cash used in financing activities of $218.1 million, cash used in operating activities of $27.9 million, and cash used in investing activities of $8.5 million, excluding sales and purchases of short-term investments. Refer to the sections below for further discussion of these items.
Cash flows used in operating activities
Cash flows used in operating activities in the first quarter 2023 and 2022 (in thousands) were as follows:
Our cash flows used in operating activities are principally derived from cash operating expenses and income tax payments, offset by cash receipts from patent license agreements. The $9.9 million change in net cash used in operating activities was primarily driven by lower cash receipts due to the timing of cash receipts related to existing patent license agreements. The table below sets forth the significant items comprising our cash flows used in operating activities during the three months ended March 31, 2023 and 2022 (in thousands):
Three months ended March 31,
2023
2022
Change
Total Cash Receipts
$
44,642
$
52,395
$
(7,753)
Cash Outflows:
Cash operating expenses a
53,296
46,465
6,831
Income taxes paid b
4,942
3,349
1,593
Total cash outflows
58,238
49,814
8,424
Other working capital adjustments
(14,256)
(20,553)
6,297
Cash flows used in operating activities
$
(27,852)
$
(17,972)
$
(9,880)
______________________________
(a) Cash operating expenses include operating expenses less depreciation and disposals of fixed assets, amortization of patents, non-cash compensation and non-cash changes in fair value.
(b) Income taxes paid include foreign withholding taxes.
Cash flows from investing and financing activities
Net cash used in investing activities for first quarter 2023 was $14.5 million, a $122.1 million change from $107.6 million of net cash provided by investing activities in first quarter 2022. During first quarter 2023, we purchased $6.0 million of short-term marketable securities, net of sales, and capitalized $8.5 million of patent costs and property and equipment purchases. During first quarter 2022, we sold $117.8 million of short-term marketable securities, net of purchases, and capitalized $10.2 million of patent costs and property and equipment purchases.
Net cash used in financing activities for first quarter 2023 was $218.1 million, a change of $205.1 million from $13.0 million the first quarter 2022. This change was primarily attributable to a $203.4 million increase in share repurchases in first quarter 2023.
Other
Our combined short-term and long-term deferred revenue balance as of March 31, 2023 was approximately $383.9 million, a net decrease of $42.8 million from December 31, 2022. This decrease in deferred revenue was primarily due to amortization of deferred revenue recognized in the period, partially offset by cash receipts on existing patent license agreements.
Based on current license agreements, we expect the amortization of dynamic fixed-fee royalty payments to reduce the March 31, 2023 deferred revenue balance of $383.9 million by $178.8 million over the next twelve months.
Convertible Notes
See Note 7, “Obligations” to the notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for definitions of capitalized terms below.
Our 2027 and 2024 Notes, which for purposes of this discussion are also referred to as the "Convertible Notes", are included in the dilutive earnings per share calculation using the if-converted method. Under the if-converted method, we must assume that conversion of convertible securities occurs at the beginning of the reporting period. The Convertible Notes are convertible into cash up to the aggregate principal amount of the Convertible Notes to be converted. Any remaining obligation of the 2027 Notes may be settled in cash, shares of the Company’s common stock or a combination thereof and any remaining obligation of the 2024 Notes is settled in shares of our common stock. As the principal amount must be paid in cash and only the conversion spread is settled in shares, we only include the net number of incremental shares that would be issued upon conversion. We must calculate the number of shares of our common stock issuable under the terms of the Convertible Notes based on the average market price of our common stock during the applicable reporting period and include that number in the total diluted shares figure for the period.
At the time we issued the Convertible Notes, we entered into the 2027 Call Spread Transactions and 2024 Call Spread Transactions that together were designed to have the economic effect of reducing the net number of shares that will be issued in the event of conversion of the Convertible Notes by, in effect, increasing the conversion price of the Convertible Notes from our economic standpoint. However, under GAAP, since the impact of the 2027 Note Hedge Transactions and 2024 Note Hedge Transactions (together, the "Note Hedge Transactions") is anti-dilutive, we exclude from the calculation of fully diluted shares the number of shares of our common stock that we would receive from the counterparties to these agreements upon settlement.
During periods in which the average market price of our common stock is above the applicable conversion price of the Convertible Notes ($77.49 per share for the 2027 Notes and $81.29 per share for the 2024 Notes as of March 31, 2023) or above the strike price of the warrants ($106.37 per share for the 2027 Warrant Transactions and $109.43 per share for the 2024 Warrant Transactions as of March 31, 2023), the impact of conversion or exercise, as applicable, would be dilutive and such dilutive effect is reflected in diluted earnings per share. As a result, in periods where the average market price of our common stock is above the conversion price or strike price, as applicable, under the if-converted method, we calculate the number of shares issuable under the terms of the Convertible Notes and the warrants based on the average market price of the stock during the period, and include that number in the total diluted shares outstanding for the period.
Under the if-converted method, changes in the price per share of our common stock can have a significant impact on the number of shares that we must include in the fully diluted earnings per share calculation. As described in Note 7, "Obligations," the Convertible Notes are convertible into cash up to the aggregate principal amount of the Convertible Notes to be converted and any remaining obligation may be in cash, shares of the Company’s common stock or a combination thereof ("net share settlement"). Assuming net share settlement upon conversion, the following tables illustrate how, based on the $460.0 million aggregate principal amount of the 2027 Notes and the $126.2 million aggregate principal amount of the 2024 Notes outstanding as of March 31, 2023, and the approximately 5.9 million warrants related to the 2027 Notes and the 1.6 million warrants remaining related to the 2024 Notes, outstanding as of the same date, changes in our stock price would affect (i) the number of shares issuable upon conversion of the Convertible Notes, (ii) the number of shares issuable upon exercise of the warrants subject to the 2027 Warrant Transactions and 2024 Warrant Transactions (together, the "Warrant Transactions"), (iii) the number of additional shares deemed outstanding with respect to the Convertible Notes, after applying the if-converted method, for purposes of calculating diluted earnings per share ("Total If-Converted Method Incremental Shares"), (iv) the number of shares of our common stock deliverable to us upon settlement of the Note Hedge Transactions and (v) the number of shares issuable upon concurrent conversion of the Convertible Notes, exercise of the warrants subject to the Warrant Transactions, and settlement of the Note Hedge Transactions:
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
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.
The following table compares first quarter 2023 revenues to first quarter 2022 revenues (in thousands):
Three months ended March 31,
2023
2022
Increase/(Decrease)
Recurring revenues:
Smartphone
$
87,431
$
87,698
$
(267)
—
%
CE, IoT/Auto
14,086
11,190
2,896
26
%
Other
56
239
(183)
(77)
%
Total recurring revenues
101,573
99,127
2,446
2
%
Catch-up revenues a
100,800
2,191
98,609
4,501
%
Total revenues
$
202,373
$
101,318
$
101,055
100
%
(a) Catch-up revenues are comprised of past patent royalties and revenues from static agreements.
Total revenues of $202.4 million, which includes both recurring and catch-up revenues, nearly doubled from first quarter 2022 primarily due to catch-up revenues from the Lenovo proceedings recognized in first quarter 2023.
Recurring revenues increased 2% to $101.6 million, compared to recurring revenue of $99.1 million in first quarter 2022. The increase was primarily driven by CE, IoT/Auto recurring revenue resulting from six new patent license agreements and new connected automobile license agreements signed over the last twelve months.
In first quarter 2023 and 2022, 67% and 80%, respectively, of our total revenue was attributable to licensees that individually accounted for 10% or more of our total revenue. In first quarter 2023 and 2022, the following licensees accounted for 10% or more of our total revenue:
Three months ended March 31,
2023
2022
Customer A
50%
—%
Customer B
17%
35%
Customer C
<10%
19%
Customer D
<10%
15%
Customer E
<10%
11%
Operating Expenses
The following table summarizes the changes in operating expenses between first quarter 2023 and first quarter 2022 by category (in thousands):
Operating expenses increased to $83.1 million in first quarter 2023 from $71.1 million in first quarter 2022. The $12.0 million increase in total operating expenses was primarily due to changes in the following items (in thousands):
Increase/(Decrease)
One-time net litigation fee reimbursement
$
5,737
Personnel-related costs
3,376
Patent impairment
2,500
Share-based compensation
2,396
Restructuring activities
(542)
Other
(1,488)
Total increase in operating expenses
$
11,979
The $12.0 million increase in operating expenses was driven by one-time items, including a $5.7 million net litigation fee reimbursement and a $2.5 million patent impairment on our patents held for sale. A $3.4 million increase in personnel-related costs was driven by fair value changes of our deferred compensation liability, which was offset by a related gain recorded within "Other income (expense), net" on the investments that we hold under this plan. Additionally, share-based compensation increased $2.4 million driven by both higher accrual rates and higher award levels to non-executive employees. These increases were partially offset by a $0.5 million decrease in non-recurring restructuring activities recognized in first quarter 2022.
Research and portfolio development expense: The $5.3 million increase in research and portfolio development expense was primarily driven by the above-noted increased personnel-related costs and patent impairment.
Licensing expense: Licensing expense increased $5.8 million primarily driven by the above-noted one-time net litigation fee reimbursement.
General and administrative expense: General and administrative expense increased $1.4 million primarily due to the above-noted increased share-based compensation costs.
Restructuring activities: Restructuring expenses associated with our overall restructuring plan decreased due to the plan being substantially complete in 2022.
Non-Operating Income (Expense), net
The following table compares first quarter 2023 non-operating income (expense), net to first quarter 2022 non-operating income (expense), net (in thousands):
Three months ended March 31,
2023
2022
Increase/(Decrease)
Interest expense
$
(12,087)
$
(5,515)
$
(6,572)
(119)
%
Interest and investment income
11,680
209
11,471
5,489
%
Other income (expense), net
1,511
(1,214)
2,725
(224)
%
Total non-operating income (expense), net
$
1,104
$
(6,520)
$
7,624
117
%
Interest expense increased primarily due to the additional interest on the 2027 Notes issued during second quarter 2022 and significant financing expense resulting from a previously announced patent license agreement. The $11.5 million increase in interest and investment income was primarily due to market conditions driving higher yields on our short-term investments. Lastly, the change in Other income (expense), net was primarily due to fair value adjustments of our investments resulting in a $1.0 million net gain in 2023, compared to a $0.8 million net loss in 2022 and due to a foreign currency translation net gain arising from euro translation of our foreign subsidiaries of $0.7 million in first quarter 2023, compared to a $0.4 million net loss in first quarter 2022.
In first quarter 2023 and 2022, based on the statutory federal tax rate net of discrete federal and state taxes, we had an effective tax rate of 14.0% and 25.2%, respectively. The change in effective tax rate is due to an increase in the amount of Foreign Derived Intangible Income deduction benefit available to the Company due to an increase in taxable income for the timing difference between the recognition of book and tax revenue. The effective tax rate in both periods was impacted by losses in certain jurisdictions where the Company presently has recorded a valuation allowance against the related tax benefit, as well as by the foreign-derived intangible income deduction and non-deductible compensation. Excluding this valuation allowance, our first quarter 2023 and 2022 effective tax rate would have been 13.8% and 19.2%, respectively.
STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 — FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include certain information in regarding our current beliefs, plans and expectations, including, without limitation, the matters set forth below. Words such as "believe," “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “forecast,” "goal," "could," "would," "should," "if," "may," "might," "future," "target," "trend," "seek to," "will continue," "predict," "likely," "in the event," and variations of any such words or similar expressions contained herein are intended to identify such forward-looking statements. Forward-looking statements are made on the basis of management’s current views and assumptions and are not guarantees of future performance. Although the forward-looking statements in this Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements concerning our business, results of operations and financial condition are inherently subject to risks and uncertainties. These risks and uncertainties include, but are not limited to, the risks and uncertainties described in Part I, Item 1A of our 2022 Form 10-K and the risks and uncertainties set forth below:
•unanticipated delays, difficulties or accelerations in the execution of patent license agreements;
•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 macroeconomic uncertainty could have on our financial position, results of operations and cash flows
•changes in our business strategy;
•changes or inaccuracies in our expectations with respect to royalty payments by our customers; and
•risks related to our assumptions and application of relevant accounting standards, including with respect to revenue recognition.
You should carefully consider these factors before making any investment decision with respect to our common stock. These factors, individually or in the aggregate, may cause our actual results to differ materially from our expected and historical results. You should understand that it is not possible to predict or identify all such factors. In addition, you should not place undue reliance on the forward-looking statements contained herein, which are made only as of the date of this Form 10-Q. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in quantitative and qualitative market risk from the disclosures included in our 2022 Form 10-K.
Item 4. CONTROLS AND PROCEDURES.
The Company’s principal executive officer and principal financial officer, with the assistance of other members of management, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2023, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
See Note 5, “Litigation and Legal Proceedings,” to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of legal proceedings, which is incorporated herein by reference.
Item 1A.RISK FACTORS.
Reference is made to Part I, Item 1A, “Risk Factors” included in our 2022 Form 10-K for information concerning risk factors, which should be read in conjunction with the factors set forth in the Statement Pursuant to the Private Securities Litigation Reform Act of 1995 -- Forward-Looking Statements in Part I, Item 2 of this Quarterly Report on Form 10-Q. There have been no material changes with respect to the risk factors disclosed in our 2022 Form 10-K. You should carefully consider such factors, which could materially affect our business, financial condition or future results. The risks described in the 2022 Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Issuer Purchases of Equity Securities
The following table provides information regarding the Company’s purchases of its common stock during first quarter 2023.
Period
Total Number of Shares Purchased (1)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs (3)
January 1, 2023 - January 31, 2023
—
$
—
—
$
400,000,000
February 1, 2023 - February 28, 2023
2,739,542
$
72.98
2,739,542
$
200,062,928
March 1, 2023 - March 31, 2023
—
$
—
—
$
200,062,928
Total
2,739,542
$
72.98
2,739,542
(1) Total number of shares purchased during each period reflects share purchase transactions that were completed (i.e., settled) during the period indicated.
(2) Shares were purchased pursuant to the Company’s share repurchase program (the “Share Repurchase Program”), $300 million of which was authorized by the Company’s Board of Directors in June 2014, with an additional $100 million authorized by the Company’s Board of Directors in each of June 2015, September 2017, December 2018, May 2019, and May 2022, respectively, and an additional $333 million in December 2022. The Share Repurchase Program has no expiration date.
(3) Amounts shown in this column reflect the amounts remaining under the Share Repurchase Program at the end of the period.
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101.SCH
Inline Schema Document
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Inline Calculation Linkbase Document
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Inline Definition Linkbase Document
101.LAB
Inline Labels Linkbase Document
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Inline Presentation Linkbase Document
104
Inline Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)
______________________________
+
This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that InterDigital, Inc. specifically incorporates it by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
