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Section 1: 10-Q (10-Q)

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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     

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, DE 19809-3727
(Address of Principal Executive Offices and Zip Code)
(302281-3600
(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.


Table of Contents

Common Stock, par value $0.01 per share
31,127,273
Title of Class
Outstanding at July 30, 2019
 



INDEX

 
 
 
PAGES
 
 
 
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.




Table of Contents

PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
 
JUNE 30,
2019
 
DECEMBER 31,
2018
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
531,698

 
$
475,056

Short-term investments
299,461

 
470,724

Accounts receivable, less allowances of $537 and $693
57,183


35,032

Prepaid and other current assets
52,656


43,438

Total current assets
940,998

 
1,024,250

PROPERTY AND EQUIPMENT, NET
10,736


10,051

PATENTS, NET
438,732

 
454,567

DEFERRED TAX ASSETS
83,202

 
77,225

OTHER NON-CURRENT ASSETS
71,398


60,465

 
604,068

 
602,308

TOTAL ASSETS
$
1,545,066

 
$
1,626,558

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt
$
91,954

 
$

Accounts payable
14,455

 
19,367

Accrued compensation and related expenses
25,214

 
26,838

Deferred revenue
82,575


111,672

Taxes payable
637

 
1,508

Dividends payable
10,895

 
11,627

Other accrued expenses
17,168

 
8,383

Total current liabilities
242,898

 
179,395

LONG-TERM DEBT
342,417

 
317,377

LONG-TERM DEFERRED REVENUE
121,477


157,634

OTHER LONG-TERM LIABILITIES
38,034

 
34,139

TOTAL LIABILITIES
744,826

 
688,545

COMMITMENTS AND CONTINGENCIES

 

SHAREHOLDERS’ EQUITY:
 
 
 
Preferred Stock, $0.10 par value, 14,399 shares authorized, 0 shares issued and outstanding

 

Common Stock, $0.01 par value, 100,000 shares authorized, 71,260 and 71,134 shares issued and 31,126 and 33,529 shares outstanding
712

 
711

Additional paid-in capital
724,170

 
685,512

Retained earnings
1,418,628

 
1,435,970

Accumulated other comprehensive loss
(350
)
 
(2,471
)
 
2,143,160

 
2,119,722

Treasury stock, 40,134 and 37,605 shares of common held at cost
1,354,262

 
1,182,993

Total InterDigital, Inc. shareholders’ equity
788,898

 
936,729

Noncontrolling interest
11,342

 
1,284

Total equity
800,240

 
938,013

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,545,066

 
$
1,626,558


The accompanying notes are an integral part of these statements.

3

Table of Contents

INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
 
FOR THE THREE MONTHS ENDED JUNE 30,
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
 
2019
 
2018
 
2019
 
2018
 
REVENUES:
 
 
 
 
 
 
 
 
Patent licensing royalties
$
73,567

 
$
68,875

 
$
139,945

 
$
155,973

 
Technology solutions
2,042

 
680

 
4,070

 
1,026

 
Patent sales

 

 
225

 

 
 
75,609

 
69,555

 
144,240

 
156,999

 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 
 
 
 
 
 
 
Patent administration and licensing
37,353

 
26,487

 
73,424

 
53,403

 
Development
17,027

 
15,829

 
35,522

 
32,003

 
Selling, general and administrative
12,314

 
11,559

 
26,529

 
25,763

 
 
66,694

 
53,875

 
135,475

 
111,169

 

 
 
 
 
 
 
 
 
Income from operations
8,915

 
15,680

 
8,765

 
45,830

 

 
 
 
 
 
 
 
 
INTEREST EXPENSE
(9,907
)
 
(8,960
)
 
(19,385
)
 
(18,203
)
 
OTHER INCOME (NET)
12,354

 
4,113

 
15,969

 
7,020

 
Income before income taxes
11,362

 
10,833

 
5,349

 
34,647

 
INCOME TAX BENEFIT (PROVISION)
(4,984
)
 
(1,057
)
 
(3,185
)
 
3,858

 
NET INCOME
$
6,378


$
9,776

 
$
2,164

 
$
38,505

 
Net loss attributable to noncontrolling interest
(1,365
)
 
(1,190
)
 
(2,776
)
 
(2,691
)
 
NET INCOME ATTRIBUTABLE TO INTERDIGITAL, INC.
$
7,743

 
$
10,966

 
$
4,940

 
$
41,196

 
NET INCOME PER COMMON SHARE — BASIC
$
0.25

 
$
0.32

 
$
0.15

 
$
1.19

 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — BASIC
31,547

 
34,769

 
32,076

 
34,705

 
NET INCOME PER COMMON SHARE — DILUTED
$
0.24

 
$
0.31

 
$
0.15

 
$
1.16

 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING — DILUTED
31,776

 
35,631

 
32,366

 
35,619

 

The accompanying notes are an integral part of these statements.

4

Table of Contents

INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

 
FOR THE THREE MONTHS ENDED JUNE 30,
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
6,378

 
$
9,776

 
$
2,164

 
$
38,505

Unrealized gain (loss) on investments, net of tax
1,076

 
376

 
2,121

 
(1,371
)
Comprehensive income
$
7,454

 
$
10,152

 
$
4,285

 
$
37,134

Comprehensive loss attributable to noncontrolling interest
(1,365
)
 
(1,190
)
 
(2,776
)
 
(2,691
)
Total comprehensive income attributable to InterDigital, Inc.
$
8,819

 
$
11,342

 
$
7,061

 
$
39,825


The accompanying notes are an integral part of these statements.


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INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share data)
(unaudited)
 
 
 
 
 
 
 
 
 
Accumulated
Other
Comprehensive
 Income (Loss)
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
 Paid-In Capital
 
Retained Earnings
 
 
Treasury Stock
 
Non-Controlling
Interest
 
Total
Shareholders'
Equity
 
Shares
 
Amount
 
 
 
 
 Shares
 
Amount
 
BALANCE, DECEMBER 31, 2017
70,749

 
$
707

 
$
680,040

 
$
1,257,632

 
$
(2,083
)
 
36,127

 
$
(1,072,488
)
 
$
9,340


873,148

Cumulative effect of change in accounting principle

 

 

 
161,701

 
(449
)
 

 

 

 
161,252

Net income attributable to InterDigital, Inc.

 

 

 
30,230

 

 

 

 

 
30,230

Net loss attributable to noncontrolling interest

 

 

 

 

 

 

 
(1,501
)
 
(1,501
)
Net change in unrealized gain (loss) on short-term investments

 

 

 

 
(1,747
)
 

 

 

 
(1,747
)
Dividends declared ($0.35 per share)

 

 
115

 
(12,280
)
 

 

 

 

 
(12,165
)
Issuance of common stock, net
208

 
2

 
(8,279
)
 

 

 

 

 

 
(8,277
)
Amortization of unearned compensation

 

 
816

 

 

 

 

 

 
816

Repurchase of common stock

 

 

 

 

 
84

 
(6,024
)
 

 
(6,024
)
BALANCE, MARCH 31, 2018
70,957

 
$
709

 
$
672,692

 
$
1,437,283

 
$
(4,279
)
 
36,211

 
$
(1,078,512
)
 
$
7,839

 
1,035,732

Net income attributable to InterDigital, Inc.

 

 

 
10,966

 

 

 

 

 
10,966

Net loss attributable to noncontrolling interest

 

 

 

 

 

 

 
(1,190
)
 
(1,190
)
Net change in unrealized gain (loss) on short-term investments

 

 

 

 
376

 

 

 

 
376

Dividends declared ($0.35 per share)

 

 
102

 
(12,255
)
 

 

 

 

 
(12,153
)
Exercise of common stock options
90

 
1

 
3,930

 

 

 

 

 

 
3,931

Issuance of common stock, net
12

 

 
(111
)
 

 

 

 

 

 
(111
)
Amortization of unearned compensation

 

 
1,821

 

 

 

 

 

 
1,821

Repurchase of common stock

 

 

 

 

 
40

 
(3,148
)
 

 
(3,148
)
BALANCE, JUNE 30, 2018
71,059

 
$
710

 
$
678,434

 
$
1,435,994

 
$
(3,903
)
 
36,251

 
$
(1,081,660
)
 
$
6,649

 
1,036,224



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Accumulated
Other
Comprehensive
 Income (Loss)
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
 Paid-In Capital
 
Retained Earnings
 
 
Treasury Stock
 
Non-Controlling
Interest
 
Total
Shareholders'
Equity
 
Shares
 
Amount
 
 
 
 
 Shares
 
Amount
 
BALANCE, DECEMBER 31, 2018
71,134

 
$
711

 
$
685,512

 
$
1,435,970

 
$
(2,471
)
 
37,605

 
$
(1,182,993
)
 
$
1,284

 
$
938,013

Net loss attributable to InterDigital, Inc.

 

 

 
(2,803
)
 

 

 

 

 
(2,803
)
Proceeds from and increases in noncontrolling interests

 

 

 

 

 

 

 
12,834

 
12,834

Net loss attributable to noncontrolling interest

 

 

 

 

 

 

 
(1,411
)
 
(1,411
)
Net change in unrealized gain (loss) on short-term investments

 

 

 

 
1,045

 

 

 

 
1,045

Dividends declared ($0.35 per share)

 

 
103

 
(11,283
)
 

 

 

 

 
(11,180
)
Exercise of common stock options

 

 
2

 

 

 

 

 

 
2

Issuance of common stock, net
116

 
1

 
(4,098
)
 

 

 

 

 

 
(4,097
)
Amortization of unearned compensation

 

 
2,096

 

 

 

 

 

 
2,096

Repurchase of common stock

 

 

 

 

 
1,585

 
(108,986
)
 

 
(108,986
)
BALANCE, MARCH 31, 2019
71,250

 
$
712

 
$
683,615

 
$
1,421,884

 
$
(1,426
)
 
39,190

 
$
(1,291,979
)
 
$
12,707

 
$
825,513

Net income attributable to InterDigital, Inc.

 

 

 
7,743

 

 

 

 

 
7,743

Net loss attributable to noncontrolling interest

 

 

 

 

 

 

 
(1,365
)
 
(1,365
)
Net change in unrealized gain (loss) on short-term investments

 

 

 

 
1,076

 

 

 

 
1,076

Dividends declared ($0.35 per share)

 

 
104

 
(10,999
)
 

 

 

 

 
(10,895
)
Issuance of common stock, net
10

 

 
(40
)
 

 

 

 

 

 
(40
)
Amortization of unearned compensation

 

 
2,116

 

 

 

 

 

 
2,116

Repurchase of common stock

 

 

 

 

 
944

 
(62,283
)
 

 
(62,283
)
Equity component of debt, net of tax

 

 
56,917

 

 

 

 

 

 
56,917

Net convertible note hedge transactions, net of tax

 

 
(49,740
)
 

 

 

 

 

 
(49,740
)
Net warrant transactions

 

 
43,416

 

 

 

 

 

 
43,416

Deferred financing costs allocated to equity, net of tax

 

 
(1,569
)
 

 

 

 

 

 
(1,569
)
Reacquisition of equity component of debt due to prepayment, net of tax

 

 
(10,649
)
 

 

 

 

 

 
(10,649
)
BALANCE, JUNE 30, 2019
71,260

 
$
712

 
$
724,170

 
$
1,418,628

 
$
(350
)
 
40,134

 
$
(1,354,262
)
 
$
11,342

 
$
800,240


The accompanying notes are an integral part of these statements.


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INTERDIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
FOR THE SIX MONTHS ENDED JUNE 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
2,164


$
38,505

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
37,642

 
29,338

Non-cash interest expense, net
8,563

 
6,821

Non-cash change in fair-value
710

 

Gain on asset acquisition
(14,175
)
 

Change in deferred revenue
(62,754
)
 
(27,167
)
Loss on extinguishment of debt
5,488

 

Deferred income taxes
(5,714
)
 
(9,367
)
Share-based compensation
4,212

 
2,637

Other
623

 
29

(Increase) decrease in assets:
 
 
 
Receivables
(22,169
)
 
(16,473
)
Deferred charges and other assets
(6,463
)
 
(6,793
)
Increase (decrease) in liabilities:
 
 
 
Accounts payable
(3,105
)
 
(2,858
)
Accrued compensation and other expenses
2,326

 
(2,905
)
Accrued taxes payable and other tax contingencies
(871
)
 
(5,535
)
Net cash provided by (used in) operating activities
(53,523
)

6,232

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of short-term investments
(92,074
)
 
(101,159
)
Sales of short-term investments
267,289

 
248,190

Purchases of property and equipment
(2,862
)

(1,542
)
Capitalized patent costs
(17,840
)
 
(14,507
)
Acquisition of patents

 
(2,250
)
Long-term investments

 
(6,250
)
Net cash provided by investing activities
154,513

 
122,482

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from exercise of stock options
2

 
3,930

Payments on long-term debt
(221,091
)
 

Proceeds from issuance of convertible senior notes
400,000

 

Purchase of convertible bond hedge
(72,000
)
 

Payment for warrant unwind
(4,184
)
 

Prepayment penalty on long-term debt
(10,763
)
 

Proceeds from hedge unwind
9,038

 

Proceeds from issuance of warrants
47,600

 

Payments of debt issuance costs
(7,300
)
 

Proceeds from non-controlling interests
10,333

 

Dividends paid
(22,789
)

(24,319
)
Taxes withheld upon restricted stock unit vestings
(4,137
)
 
(8,388
)
Repurchase of common stock
(171,269
)
 
(9,172
)
Net cash used in financing activities
(46,560
)
 
(37,949
)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
54,430

 
90,765

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
488,733

 
433,014

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
$
543,163

 
$
523,779

                                   
Refer to Note 1, "Basis of Presentation," for additional supplemental cash flow information. Additionally, refer to Note 2, "Leases" for information regarding the impact of our adoption of the new leases accounting standard, ASC 842, and Note 8, "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.

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INTERDIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(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 June 30, 2019, and the results of our operations for the three and six months ended June 30, 2019, and 2018 and our cash flows for the six months ended June 30, 2019, and 2018. The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with the instructions for 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, 2018 (our “2018 Form 10-K”) as filed with the Securities and Exchange Commission (“SEC”) on February 21, 2019. Definitions of capitalized terms not defined herein appear within our 2018 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 2018 Form 10-K, except as indicated in Note 2, "Leases".
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Prior Periods Financial Statement Revision
In connection with the preparation of the condensed consolidated financial statements for first quarter 2019, it was identified that we incorrectly attributed tax benefit to the net loss attributable to noncontrolling interest in our presentation of noncontrolling interest.
We assessed the materiality of this misstatement on prior periods’ financial statements in accordance with ASC Topic 250, Accounting Changes and Error Corrections, (“ASC 250”) and concluded it was not material to any prior annual or interim periods. In accordance with ASC 250, we have corrected our presentation of noncontrolling interest for all prior periods presented in this Form 10-Q by revising the condensed consolidated financial statements and other consolidated financial information included herein. We will continue to present the prior periods on this revised basis to the extent we present such prior periods in future filings. Refer to Note 12, "Revision to Noncontrolling Interest" for additional information on the revision.
Supplemental Cash Flow Information
The following table presents additional supplemental cash flow information for the six months ended June 30, 2019 and 2018:

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FOR THE SIX MONTHS ENDED JUNE 30,
SUPPLEMENTAL CASH FLOW INFORMATION:
2019
 
2018
Interest paid
3,218

 
2,370

Income taxes paid, including foreign withholding taxes
9,770

 
10,799

Non-cash investing and financing activities:
 
 
 
Dividend payable
10,895

 
12,193

Increases in noncontrolling interests
2,500

 

Accrued debt issuance costs
(1,075
)
 

Accrued capitalized patent costs, acquisition of patents and property and equipment
(1,910
)
 
(1,991
)
New Accounting Guidance
Accounting Standards Update: Leases
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" or ("ASC 842"), which outlines a comprehensive change to the lease accounting model and supersedes prior lease guidance. Refer to Note 2, "Leases," for information regarding our adoption of this guidance effective January 1, 2019 and a discussion of the impact to information presented herein, as well as additional required disclosures under the new guidance.
Accounting Standards Update: Improvements to Nonemployee Share-Based Payment Accounting
In June 2018, the FASB issued ASU No. 2018-07, "Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to nonemployees. The guidance is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. We adopted this guidance in first quarter 2019 and it did not have a material impact on our consolidated financial statements.
Accounting Standards Update: Cloud Computing Arrangements
In August 2018, the FASB issued ASU No. 2018-15 “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract”. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. We are in the process of determining the effect the adoption will have on our consolidated financial statements.
Accounting Standards Update: Collaborative Arrangements
In November 2018, the FASB issued ASU No. 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606".  The amendments in this ASU provide guidance on how to assess whether certain transactions between collaborative arrangement participants should be accounted for within the revenue recognition standard. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted for entities who have previously adopted the new revenue recognition guidance. We are in the process of determining the effect the adoption will have on our consolidated financial statements.
2. LEASES
In February 2016, the FASB issued ASC 842, which outlines a comprehensive change to the lease accounting model and supersedes prior lease guidance ("ASC 840"). The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months, and also changes the definition of a lease and expands the disclosure requirements of lease arrangements.
The Company adopted this guidance on January 1, 2019 using the modified retrospective transition effective date method. As part of that adoption, we have elected the package of three practical expedients, which includes the following: an entity may elect not to reassess whether expired or existing contracts contain a lease under the revised definition of a lease; an entity may elect not to reassess the lease classification for expired or existing leases; and an entity may elect not to reassess whether previously capitalized initial direct costs would qualify for capitalization. The Company has elected not to utilize the hindsight expedient in determining the lease term, and to not record leases with an initial term of 12 months or less on our balance sheet. Additionally, the Company has elected to account for lease components and non-lease components as a single lease component for all asset classes. Lease expense is recognized over the expected term on a straight-line basis. The

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adoption did not have a material impact on the Company's condensed consolidated statements of income or cash flows.
The Company enters into operating leases primarily for real estate to support research and development ("R&D") sites and general office space in North America, with additional locations in Europe and Asia. The Company does not currently have any finance leases. Certain of our leases include options to extend the lease at our discretion at the end of the lease term, or terminate the lease early subject to certain conditions and penalties. We do not include any renewal options in our lease terms for calculating our lease liabilities, as the renewal options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these options.
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the specific facts and circumstances present. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable, and, as such, the Company utilizes its incremental borrowing rate as the discount rate based on information available on the lease commencement date. Our incremental borrowing rate represents the rate we would incur to borrow on a collateralized basis over a similar term for an amount equal to the lease payments in a similar economic environment. We utilized the incremental borrowing rate as of January 1, 2019, our adoption date, for operating leases that commenced prior to that date. Upon our adoption of ASU 2016-02, the Company recorded the following operating lease right-of-use assets and operating lease liabilities as of January 1, 2019. Additionally, the table below includes the balances of operating lease right-of-use assets and operating lease liabilities as of June 30, 2019 (in thousands):
 
Balance Sheet Classification
 
January 1, 2019
 
June 30, 2019
Assets
 
 
 
 
 
  Operating lease right-of-use assets, net
Other Non-current Assets
 
$
13,634

 
$
17,530

Total Lease Assets
 
 
$
13,634

 
$
17,530

 
 
 
 
 
 
Liabilities
 
 
 
 
 
  Operating lease liabilities - Current
Other Accrued Expenses
 
$
3,519

 
$
3,963

  Operating lease liabilities - Noncurrent
Other Long-Term Liabilities
 
13,652

 
16,920

Total Lease Liabilities
 
 
$
17,171

 
$
20,883

The components of lease costs which were included within operating expenses in our condensed consolidated statements of income were as follows (in thousands):

 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2019
Operating lease cost
$
1,105

 
$
2,115

Short-term lease cost
310

 
520

Variable lease cost
381

 
692

For the three and six months ended June 30, 2019, sublease income was insignificant. Cash paid for amounts included in the measurement of operating lease liabilities for the three and six months ended June 30, 2019 was $1.3 million and $2.4 million, respectively, and was included in net cash used in operating activities in our condensed consolidated statements of cash flows. Operating lease right-of-use assets obtained in exchange for operating lease obligations totaled $5.5 million during the three and six months ended June 30, 2019. As of June 30, 2019, the weighted average remaining operating lease term was 5.7 years and the weighted average discount rate used to determine the operating lease liabilities was 6.2%. The maturities of our operating lease liabilities as of June 30, 2019 under ASC 842, excluding short-term leases with terms less than 12 months, were as follows (in thousands): 

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Maturity of Operating Lease Liabilities
June 30, 2019
Remainder 2019
$
2,803

2020
4,498

2021
3,989

2022
4,021

2023
3,285

Thereafter
6,384

Total lease payments
$
24,980

Less: Imputed interest
(4,097
)
Present value of lease liabilities
$
20,883


The undiscounted maturities of our operating leases as of December 31, 2018 under ASC 840, including short-term leases with terms less than 12 months, were as follows (in thousands):
Maturity of Operating Leases
December 31, 2018
2019
$
5,362

2020
3,386

2021
2,883

2022
2,920

2023
2,184

Thereafter
5,582



3. REVENUE
Disaggregated Revenue
The following table presents the disaggregation of our revenue for the three and six months ended June 30, 2019 and 2018 (in thousands):

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Three months ended June 30,
 
 
 
 
 
2019
 
2018
 
 Increase/(Decrease)
Variable patent royalty revenue
$
8,594

 
$
6,594

 
$
2,000

 
30
 %
Fixed-fee royalty revenue
63,736

 
60,264

 
3,472

 
6
 %
Current patent royalties a
72,330

 
66,858

 
5,472

 
8
 %
Non-current patent royalties b
1,237

 
2,017

 
(780
)
 
(39
)%
Total patent royalties
73,567

 
68,875

 
4,692

 
7
 %
Current technology solutions revenue a
2,042

 
680

 
1,362

 
200
 %
Total revenue
$
75,609

 
$
69,555

 
$
6,054

 
9
 %
 
Six months ended June 30,
 
 
 
 
 
2019
 
2018
 
 Increase/(Decrease)
Variable patent royalty revenue
$
17,874

 
$
12,677

 
$
5,197

 
41
 %
Fixed-fee royalty revenue
126,609

 
117,935

 
8,674

 
7
 %
Current patent royalties a
144,483

 
130,612

 
13,871

 
11
 %
Non-current patent royalties b
(4,538
)
 
25,361

 
(29,899
)
 
(118
)%
Total patent royalties
139,945

 
155,973

 
(16,028
)
 
(10
)%
Current technology solutions revenue a
4,070

 
1,026

 
3,044

 
297
 %
Patent sales b
225

 

 
225

 
 %
Total revenue
$
144,240

 
$
156,999

 
$
(12,759
)
 
(8
)%

a.
Recurring revenues are comprised of current patent royalties, inclusive of Dynamic Fixed-Fee Agreement royalties, and current technology solutions revenue.
b.
Non-recurring revenues are comprised of non-current patent royalties, which primarily include past patent royalties and royalties from static agreements, as well as patent sales.
    During first half 2019, we recognized $79.9 million of revenue that had been included in deferred revenue as of the beginning of the period. As of June 30, 2019, we had contract assets of $49.7 million and $1.3 million included within accounts receivable and other non-current assets, respectively. As of December 31, 2018, we had contract assets of $19.7 million and $5.5 million included within accounts receivable and other non-current assets, respectively.
Contracted Revenue
Based on contracts signed and committed as of June 30, 2019, we expect to recognize the following revenue from Dynamic Fixed-Fee Agreement payments over the term of such contracts (in thousands):
 
Revenue
Remainder 2019
$
128,221

2020
248,250

2021
178,583

2022
85,228

2023


4. INCOME TAXES
In first half 2019, based on the statutory federal tax rate net of discrete federal and state taxes, we had an effective tax rate of 59.5%. The first half 2019 rate 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 first half 2019 effective tax rate would have been 20.4%. In first half 2019, the Company recorded a net discrete tax expense of $3.4 million related to both the acquisition of the Research & Innovation ("R&I") unit of Technicolor SA and the extinguishment of long-term debt recognized during second quarter 2019. Refer to Note 7, "Business Combinations and Other Transactions" and Note 9, "Long-

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Term Debt" for further discussion of these transactions. This is compared to an effective tax rate benefit of 11.1% based on the statutory federal tax rate net of discrete federal and state taxes during first half 2018. During first half 2018, we recorded discrete benefits of $3.7 million related to excess tax benefits in connection with share-based compensation and our sale of a commercial initiative.  Excluding these discrete benefits, the effective tax rate would have been a benefit of 0.6%.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Tax Reform Act") was signed into law. The Tax Reform Act imposes a 13.125% tax rate on income that qualifies as Foreign Derived Intangible Income ("FDII"). The reduction in benefit is primarily related to the differences in our FDII deduction between the periods. The difference in the FDII deduction between the periods was driven by the timing of income between book and tax mostly related to revenue recognition. On March 6, 2019, the IRS issued proposed regulations for FDII. The Company is currently evaluating the impact of the proposed regulations and will record the impact, if any, as applicable. 
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. The Company further notes that its tax positions could be altered by pending IRS regulations that could clarify certain provisions of the Tax Reform Act.
During first half 2019 and 2018, we paid approximately $5.1 million and $9.5 million, respectively, of foreign source withholding tax. Additionally, as of June 30, 2019 and December 31, 2018, we included approximately $0.6 million and $1.5 million, respectively, of foreign source withholding tax within our taxes payable and deferred tax asset balances. These amounts are related to receivables from foreign licensees.
5. NET INCOME (LOSS) PER SHARE
Basic Earnings Per Share ("EPS") is calculated by dividing net income or loss available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if options or other securities with features that could result in the issuance of common stock were exercised or converted to common stock. The following tables reconcile the numerator and the denominator of the basic and diluted net income (loss) per share computation (in thousands, except for per share data):
 
Three months ended June 30,
 
2019
 
2018
 
Basic
 
Diluted
 
Basic
 
Diluted
Numerator:
 
 
 
 
 
 
 
Net income applicable to InterDigital, Inc.
$
7,743

 
$
7,743

 
$
10,966

 
$
10,966

Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding: Basic
31,547

 
31,547

 
34,769

 
34,769

Dilutive effect of stock options, RSUs, convertible securities and warrants
 
 
229

 
 
 
862

Weighted-average shares outstanding: Diluted
 
 
31,776

 
 
 
35,631

Earnings Per Share:
 
 
 
 
 
 
 
Net income per common share: Basic
$
0.25

 
$
0.25

 
$
0.32

 
$
0.32

Dilutive effect of stock options, RSUs, convertible securities and warrants
 
 
(0.01
)
 
 
 
(0.01
)
Net income per common share: Diluted
 
 
$
0.24

 
 
 
$
0.31



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Table of Contents

 
Six months ended June 30,
 
2019