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PTNT > SEC Filings for PTNT > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for INTERNET PATENTS CORP

Form 10-Q for INTERNET PATENTS CORP


6-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q, and in particular Management's Discussion and Analysis of Financial Condition and Results of Operations, contains "forward-looking statements" with respect to IPC's future financial performance. The words or phrases "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and similar expressions are generally intended to identify forward-looking statements. Such forward-looking statements are subject to various known and unknown risks and uncertainties, and IPC cautions you that any forward-looking information provided by, or on behalf of, IPC is not a guarantee of future performance. Actual results could differ materially from those anticipated in such forward-looking statements due to a number of factors, some of which are beyond IPC's control, including, but not limited to, the unpredictable nature of patent licensing and patent litigation; potential changes in the laws and regulations relating to patents and patent litigation; the risk that we are not currently engaged in the patent licensing business, and our patent portfolio has never generated revenues; future changes we may make in our patent licensing strategy; changes in the taxation of income due to the disallowance or expiration of the Company's net operating losses ; and litigation in which IPC is a party. These risks and uncertainties, as well as other risks and uncertainties, which are described in greater detail in IPC's Annual Report on Form 10-K for the year ended December 31, 2011 and other documents filed with the Securities and Exchange Commission, could cause IPC's actual results to differ materially from historical results or those currently anticipated. All forward-looking statements are based on information available to IPC on the date hereof, and IPC assumes no obligation to update such statements.

Overview

From its inception through December 21, 2011 (the "Disposition Date"), IPC operated an online insurance marketplace that electronically matched consumers and providers of automobile, property, health, term life, and small business insurance. IPC discontinued this business in connection with the sale of substantially all of its assets related to its lead generation business to Bankrate, Inc. in a transaction that closed on December 21, 2011 (the "Disposition"). IPC retained certain assets generally not related to its insurance lead generation business which included cash, short-term investments and its patent portfolio. On the Disposition Date, Bankrate acquired certain assets and assumed certain liabilities associated with the operation of the lead generation business. Bankrate did not assume certain liabilities related to real property leases, obligations related to IPC's employees that arose prior to the Disposition Date, or obligations for employees that remained employed by IPC after the Disposition Date. IPC is also generally responsible for the tax obligations or entitled to tax refunds associated with the Disposition and for the taxes related to the income or loss generated by the insurance lead generation prior to the Disposition Date.

Since the Disposition Date, IPC's business consists solely of licensing or otherwise enforcing its portfolio of six e-commerce patents ("Patent Licensing Business"). From its original incorporation, IPC was in the forefront of companies operating exclusively online, and we employed a significant staff of software and systems engineers to develop technology leveraging the power of the internet. Although our principal business focus at that time was online insurance lead generation, the problems that our technology experts faced were common to many e-commerce companies. IPC's innovative solutions to these problems are now covered by patents that we believe apply to many e-commerce activities, including:
personalized product recommendations to web site visitors;

retargeting or remarketing to web site visitors;

online registration and application processes and forms;

maintaining consistent look and feel of web pages in multiple languages; and

generating quick or even real time product rate requests.

Our future revenues are expected to consist of the royalties from licensing the patents and damages for past infringement, however, none of the Company's patents have generated revenues in the past or been subject to a final adjudication of its validity. Patent infringement litigation is inherently uncertain and can be expensive and often takes several years to reach the trial stage, and the appeals process could result in further delays in receiving royalties or damage awards. For these reasons, IPC does not anticipate receiving any revenues in 2012. In addition to general and administrative expenses, including salaries and benefits, rent and utilities, we will incur expenses associated with patent infringement litigation and being a public company. We expect that we will not be profitable in 2012.

The sale of assets to Bankrate, Inc. resulted in aggregate cash proceeds of $63.8 million to IPC. IPC did not retain an interest in the insurance lead generation business and will not receive future compensation relating to the insurance lead generation business or the assets sold. IPC is not required to indemnify Bankrate for any matter relating to the asset sale, other than indemnification for tax liabilities that pertain to periods prior to the asset sale.


Results of Operations

Reclassifications

Certain amounts in our 2011 consolidated financial statements have been
reclassified to conform to the presentation of our 2012 consolidated financial
statements, relating to the effects of reclassifications of our insurance and
lead generation business as discontinued operations. As a result of the
Disposition, all of the Company's revenues and certain significant costs related
to the Company's insurance lead generation business are accumulated into
discontinued operations.

Operating Expenses

                                        Three months ended        Percentage
                                           September 30,          change from
(in thousands, except percentages)     2012            2011      prior period

Operating expenses:

Technology                           $       -       $      24
General and administrative                 473             716
Total operating expenses             $     473       $     740           (36) %




                                       Nine months ended       Percentage
                                         September 30,         change from
(in thousands, except percentages)      2012         2011     prior period

Operating expenses:

Technology                           $        -     $    72
General and administrative                2,289       2,430
Total operating expenses             $    2,289     $ 2,502            (9) %

Technology. Technology expenses consist primarily of payroll and related expenses, including employee benefits. Technology expenses decreased to $0 for the three and nine months ended September 30, 2012 from $24,000 and $72,000 for the comparable periods in 2011, as full-time technology personnel are no longer necessary for IPC's business operations.

General and Administrative. General and administrative expenses consist primarily of payroll and related expenses, including employee benefits, facility costs, accounting and legal services and insurance for our general management, administrative and accounting personnel, as well as other general corporate expenses. General and administrative expenses decreased to $473,000 and $2.3 million for the three and nine months ended September 30, 2012 from $716,000 and $2.4 million for the comparable periods in 2011. For the three months ended September 30, 2012 the decrease was primarily due to a reduction in administrative headcount and reduced accounting services, offset by an increase in legal fees. For the nine months ended September 30, 2012 the decrease was primarily due to a reduction in administrative headcount and decreases in rent expense and accounting services, offset by increases in retention bonuses, severance and legal fees. General and administrative expenses are expected to remain at or near current levels for the remainder of 2012.

Other Income. Other income was $1,000 and $169,000, for the three and nine months ended September 30, 2012 as compared to $1,000 and $11,000 for the comparable periods in 2011. Other Income for the three months ended September 30, 2012, a nominal amount for the nine months ended September 30, 2012 and for the comparable periods in 2011 consists of interest earned on IPC's investment portfolio of cash, cash equivalents and short-term investments. For the nine months ended, September 30, 2012, other income also included a one-time payment of $99,000 received by IPC following the settlement of commercial litigation and a supplemental payment from Bankrate of $67,000 related to the collection of outstanding accounts receivable at the Disposition Date. IPC expects that Other Income will consist entirely of returns received from its investment portfolio in the near future, which will be negligible given current economic conditions in the United States.

Income Taxes. Internet Patents Corporation recognized federal and state income tax benefits of $61,000 for the three and nine months ended September 30, 2012, due to the difference between the income tax expense recognized for the year ended December 31, 2011 and the actual tax liability incurred when the income tax returns were filed during the quarter ended, September 30, 2012. IPC did not recognize an expense or benefit from income taxes for the comparable periods in 2011.


Critical Accounting Policies

IPC's discussion and analysis of its financial condition and results of operations are based on IPC's consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires IPC to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. IPC bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. IPC believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Income Taxes.

Under the asset and liability method prescribed under ASC 740, "Income Taxes", IPC recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled.

For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. At September 30, 2012 and September 30, 2011, IPC had unrecognized tax benefits of approximately $0.3 million and $0.3 million, respectively ($0.1 million of which, if recognized, would affect IPC's effective tax rate). IPC does not believe there will be any material changes in its unrecognized tax positions over the next twelve months.

For tax return purposes, IPC had net operating loss carry forwards at September 30, 2012 of approximately $140.6 million and $83.7 million for federal income tax and state income tax purposes, respectively. Included in these amounts are unrealized federal and state net operating loss deductions resulting from stock option exercises of approximately $10.1 million each. The benefit of these unrealized stock option-related deductions has not been included in deferred tax assets and will be recognized as a credit to additional paid-in capital when realized. Federal and state net operating loss carry forwards begin expiring in 2012.

The carrying value of our deferred tax assets, which was approximately $49.9 million at September 30, 2012, is dependent upon our ability to generate sufficient future taxable income. We have established a full valuation allowance against our net deferred tax assets to reflect the uncertainty of realizing the deferred tax benefits, given historical losses. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. This assessment requires a review and consideration of all available positive and negative evidence, including our past and future performance, the market environment in which we operate, the utilization of tax attributes in the past, and the length of carryforward periods and evaluation of potential tax planning strategies. We expect to continue to maintain a full valuation allowance until an appropriate level of profitability is sustained or we are able to develop tax strategies that would enable us to conclude that it is more likely than not that a portion of our deferred tax assets would be realizable.

Liquidity and Capital Resources

Summarized cash flow information is as follows (in thousands):

                                                    Nine months ended
                                                       September 30,
                                                     2012          2011
Cash provided by (used in) operating activities
Continuing operations                             $   (4,197 )   $ (1,773 )
Discontinued operations                                    -        2,673
Cash provided by (used in) investing activities
Continuing operations                                 (1,284 )        900
Discontinued operations                                    -       (2,174 )
Cash provided by (used in) financing activities
Continuing operations                                (33,485 )      1,536
Discontinued operations                                    -            -


At September 30, 2012, IPC's principal source of liquidity was $31.4 million in cash and cash equivalents and $1.5 million in short-term investments. IPC adheres to an investment policy with minimal market or settlement risk with its current holdings. There are no restrictions or limitations regarding access to the $31.4 million in cash and cash equivalents and $1.5 million in short-term investments. Since inception, IPC has financed its operations primarily through the sale of preferred and common stock.

For the nine months ended September 30, 2012, net cash used in operating activities was $4.2 million, primarily consisting of our net loss of $2.1 million and cash used of $4.1 million, primarily due to payment of accounts payable, income taxes, accrued expenses and other liabilities. This was partially offset by decrease in prepaid expenses and other current assets of $1.0 million and other assets of $1.0 million.

For the nine months ended September 30, 2011, net cash used in operating activities was $0.9 million, consisting of cash used in operations of $1.8 million and cash provided from discontinued operations of $2.7 million.

For the nine months ended September 30, 2012, net cash used in investing activities was $1.3 million representing $2.2 million relating to the purchases of short-term investments and $1.0 million relating to purchases of restricted short-term investments, offset by redemptions of short-term investments of $1.9 million.

For the comparable nine months ended September 30, 2011, net cash used in investing activities was $1.3 million representing $2.2 million relating to the purchases of short-term investments and net cash used in discontinued operations of $2.2 million. This was offset by redemptions of short-term investments of $2.3 million, redemptions of restricted short-term investments of $0.6 million and payments from related parties of $0.2 million.

For the nine months ended September 30, 2012, net cash used in financing activities was $33.5 million, consisting of an aggregate $38.6 million cash distribution paid to shareholders on March 9, 2012, offset by proceeds from employee stock plans of $5.1 million.

For the three months ended September 30, 2011, net cash provided by financing activities was $1.5 million due to proceeds from employee stock plans.

IPC has a non-cancelable lease through February 14, 2017 for approximately 16,000 square feet of office space in the Sacramento area which houses its corporate headquarters. IPC has two, consecutive options to extend the term for five years each at the prevailing market rent. A portion of the premises is currently subleased to Bankrate, Inc. through December 21, 2012.

As a result of its acquisition of Potrero Media in October 2010, IPC also leases approximately 10,000 square feet of office space in San Francisco, California under a non-cancelable lease expiring in October 2014. A portion of the premises is sublet to an unrelated party for the remainder of IPC's lease term. The Company disposed of the operations of Potrero Media in conjunction with the Disposition.

Future minimum lease commitments as of September 30, 2012 are summarized as follows (in thousands):

                               Future
                            minimum lease
Years ending December 31     commitments
2012                                    76
2013                                   443
2014                                   422
2015                                   342
2016                                   350
Thereafter                              58
                           $         1,691

IPC currently anticipates that its cash and cash equivalents will be sufficient to meet its anticipated cash needs to fund operations and capital expenditures for at least the next 12 months.


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