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RPXC > SEC Filings for RPXC > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for RPX CORP


8-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2013.

This Quarterly Report on Form 10-Q contains "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are often identified by the use of words such as, but not limited to, "anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend," "may," "will," "plan," "project," "seek," "should," "target," "will," "would," and similar expressions or variations intended to identify forward-looking statements. Forward-looking statements include statements regarding our business strategies and business model, products, benefits to our clients, future financial results and expenses and patent acquisition spending. These statements are based on the beliefs and assumptions of our management based on information currently available. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included in Part II, Item 1A of this Quarterly Report on Form 10-Q and elsewhere in this filing and our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2013. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview
We help companies reduce patent-related risk and expense by providing a subscription-based patent risk management solution that facilitates more efficient exchanges of value between owners and users of patents compared to transactions driven by actual or threatened litigation.

The core of our solution is defensive patent aggregation, in which we acquire patent assets that are being or may be asserted against our current or prospective clients. We then provide our clients with licenses to our patent assets to protect them from potential patent infringement assertions. We also provide our clients access to our proprietary patent market intelligence and data.

Our business model aligns our interests with those of our clients. We have not asserted and will not assert our patents, which enables us to develop strong and trusted relationships with our clients. Our clients include companies that design, make or sell technology-based products and services as well as companies that use technology in their businesses.

During the three months ended March 31, 2013, revenue grew to $61.2 million from $43.8 million for the three months ended March 31, 2012. Our client count increased by 6 clients bringing our total client network to 146 as of March 31, 2013. At March 31, 2013, we had deferred revenue of $118.2 million.

We believe that our acquisitions of patent assets are a key driver of the value that we create for our clients. We measure patent asset acquisition spend on both a "gross" and a "net" basis, whereby the "gross spend" represents the aggregate amount spent including amounts contributed by our clients in syndicated and structured acquisitions above and beyond their subscription fees and the "net spend" represents only the net incremental investment of our own capital. During the three months ended March 31, 2013, we completed 11 acquisitions of patent assets and our gross and net acquisition spend totaled $29.4 million. From our inception through March 31, 2013, we have completed 131 acquisitions of patent assets with gross and net acquisition spend of $652.9 million and $435.8 million, respectively.

Insuring against the costs of non-practicing entity ("NPE") litigation is a natural extension of our core defensive patent acquisition service. In 2012, we started to offer NPE patent infringement liability insurance, which is a liability insurance policy for operating companies that covers certain costs associated with patent infringement lawsuits by NPEs. The insurance product complements our core defensive patent acquisition service, enabling policyholders, who must be members of our client network, to better manage and mitigate the risk of NPE patent litigation. For the three months ended March 31, 2013, the effect of the insurance policies that have been issued was not material to our results of operations or financial condition.


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Key Components of Results of Operations
Revenue
Historically, the majority of our revenue has consisted of fees paid by our clients under subscription agreements. We expect that subscription fee revenue will increase with the growth of our client network. Subscription revenue will be positively or negatively impacted by the financial performance of our clients since their subscription fees are typically reset annually based upon their most recently reported annual financial results. In 2012, we launched our insurance product and we started to recognize revenue from insurance premiums. Although we expect this revenue to increase as we sell more policies in the future, for the three months ended March 31, 2013, revenue from insurance premiums was not material to the Company's results of operations. From time to time, we also recognize revenue from the sale of licenses and advisory fee income in connection with structured acquisitions. In the future, we may receive other revenue and fee income from newly introduced products and services. While we expect to continue to experience revenue growth, we do not believe that our rate of growth since inception is representative of anticipated future revenue growth.

Cost of Revenue
Cost of revenue primarily consists of amortization expenses related to acquired patent assets. Acquired patent assets are capitalized and amortized ratably over their estimated useful lives. Also included in the cost of revenue are expenses incurred to maintain our patents and prosecute our patent applications and amortization expense for acquired intangible assets and internally developed software. With the launch of our insurance offering in 2012, cost of revenue also includes premiums ceded to reinsurers and loss reserves. We expect our cost of revenue to increase in the future as we add additional patent assets to our existing portfolio to support our existing and future clients and as our insurance business grows.

Selling, General and Administrative Expenses Selling, general and administrative expenses consist of salaries and related expenses, including stock-based compensation expenses, costs of marketing programs, legal costs, professional fees, travel costs, facility costs and other corporate expenses. We expect that in the foreseeable future, as we seek to serve more clients and develop new products and services, selling, general and administrative expenses will increase.

Provision for Income Taxes
Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Based on available information, we believe it is likely that our deferred tax assets will be fully realized. Accordingly, we have not applied a valuation allowance against our net deferred tax assets.

Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures.

There have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2013, as compared to those described in our Annual Report on Form 10-K filed with the SEC on March 11, 2013.


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Results of Operations
The following table sets forth selected consolidated statements of operations
data for each of the periods indicated (in thousands). Our historical results
are not necessarily indicative of our results of operations to be expected for
any future period.
                                                   Three Months Ended March 31,
                                                        2013                  2012
Revenue                                      $       61,194                $ 43,849
Cost of revenue                                      23,670                  18,017
Selling, general and administrative expenses         14,473                  13,223
Gain on sale of patent assets, net                        -                    (177 )
Operating income                                     23,051                  12,786
Other income (expense), net                              51                     (20 )
Income before provision for income taxes             23,102                  12,766
Provision for income taxes                            8,407                   4,685
Net income                                   $       14,695                $  8,081

The following table sets forth, for the periods indicated, consolidated statements of operations data as a percentage of revenue.

                                                Three Months Ended March 31,
                                                 2013                2012
Revenue                                            100 %             100  %
Cost of revenue                                     39                41
Selling, general and administrative expenses        24                30
Gain on sale of patent assets, net                   -                 -
Operating income                                    37                29
Other income (expense), net                          -                 -
Income before provision for income taxes            37                29
Provision for income taxes                          14                11
Net income                                          23 %              18  %

Revenue
Our revenue for the three months ended March 31, 2013 was $61.2 million compared to $43.8 million during the same period a year ago, an increase of $17.3 million, or 40%. Subscription revenue, which includes membership subscription services and premiums earned from insurance policies, for the three months ended March 31, 2013 was $54.0 million compared to $43.8 million for the three months ended March 31, 2012. The increase in subscription revenue was attributable to an increase in membership fees, which was composed of $7.2 million from new clients who joined our network subsequent to March 31, 2012, $0.3 million from clients who joined our network during the three month period ended March 31, 2012, and $2.7 million from clients who joined our network prior to March 31, 2012. As of March 31, 2013 we had a total client network of 146 companies as compared to 116 as of March 31, 2012. Revenue for the three months ended March 31, 2013 also included $3.6 million from advisory fees and $3.6 million from the sale of perpetual licenses, as compared to nil in the same period in 2012.

Cost of Revenue
Our cost of revenue for the three months ended March 31, 2013 was $23.7 million compared to $18.0 million during the same period a year ago, an increase of $5.7 million, or 31%. The increase was primarily attributable to a $4.9 million increase in patent amortization expense as result of an increase in our patent assets. Cost of revenue for the three months ended March 31, 2013 also included $0.5 million of fees paid to a third-party service provider in connection with our performance of advisory services.

Selling, General and Administrative Expenses Our selling, general and administrative expenses for the three months ended March 31, 2013 were $14.5 million compared to $13.2 million during the same period a year ago, an increase of $1.3 million or 9%. The increase was primarily due to a $1.2 million increase in stock-based compensation. We expect that in the foreseeable future, selling, general and administrative expenses will


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increase as we seek to serve more clients, develop new products and services, and support our operations and compliance requirements as a public company.

Other Income (Expense), Net
Other income (expense), net for the three months ended March 31, 2013 was $51,000 compared to other income (expense), net of ($20,000) during the same period a year ago, a change of $71,000. The change was primarily due to the payoff of our outstanding deferred payment obligations in July 2012, which resulted in lower interest expense.

Provision for Income Taxes
Our tax provision for the three months ended March 31, 2013 was $8.4 million compared to $4.7 million for the three months ended March 31, 2012. Our effective tax rate for three months ended March 31, 2013 was 36% compared to 37% for the three months ended March 31, 2012. Our effective tax rate remained consistent with prior period changing only 1%.

Liquidity and Capital Resources
We have financed substantially all of our operations and patent asset acquisitions through the sale of equity securities, subscription fees collected from our clients and patent-seller financing. As of March 31, 2013, we had $135.7 million of cash and cash equivalents and $147.7 million in short-term investments. We believe our existing cash, cash equivalents and short-term investments will be sufficient to meet our working capital and capital expenditure needs for the foreseeable future. Our future capital needs will depend on many factors, including, among other things, our acquisition of patent assets, addition and renewal of client membership agreements and development of new products and services. We anticipate an increased level of patent acquisition spending as our business grows. Additionally, we may enter into potential investments in, or acquisitions of, complementary businesses which could require us to seek additional debt or equity financing. Additional funds may not be available on terms favorable to us or at all.

The following table sets forth a summary of our cash flows for the periods indicated (in thousands):

                                                     Three Months Ended March 31,
                                                       2013                2012
Net cash provided by operating activities        $      100,197       $      25,990
Net cash used in investing activities                   (40,077 )           (34,141 )
Net cash provided by financing activities                 1,987               2,971
Increase (decrease) in cash and cash equivalents $       62,107       $      (5,180 )

Cash Flows from Operating Activities
Cash provided by operating activities for the three months ended March 31, 2013 was $100.2 million, consisting of changes in working capital and non-current assets and liabilities of $59.3 million, adjustments for non-cash items totaling $26.2 million, and net income of $14.7 million. The change in working capital resulted primarily from a $33.8 million decrease in other receivables representing the collection of client contributions outstanding as a result of the completion of a syndicated patent acquisition and licensing transaction, a $12.0 million decrease in accounts receivable and a $13.8 million increase in deferred revenue. The increase in deferred revenue was due to $67.8 million in revenue billings to new and existing clients and was partially offset by revenue recognized during the period of $54.0 million. The amount of deferred revenue in any given period varies with the addition of new clients, the mix of payment terms that we offer and the timing of invoicing existing clients. Non-cash adjustments to net income primarily consisted of $23.3 million of depreciation and amortization, $3.7 million of stock-based compensation, a reduction of $1.0 million due to excess tax benefit from stock-based compensation, $1.3 million of amortization of premium on investments and a $1.2 million net increase in our deferred tax liabilities.

Cash provided by operating activities for the three months ended March 31, 2012 was $26.0 million, consisting of adjustments for non-cash items of $17.0 million, net income of $8.1 million and changes in working capital and non-current assets and liabilities totaling $0.9 million. The change in working capital resulted primarily from a decrease in accounts receivable of $9.7 million, a decrease in accrued liabilities of $5.0 million, and a decrease in deferred revenue of $2.5 million. The decrease in deferred revenue was due to $44.1 million of revenue and other adjustments recognized during the period and was partially offset by revenue billings to new and existing clients of $41.6 million.

Cash Flows from Investing Activities
Cash used in investing activities for the three months ended March 31, 2013 was $40.1 million, of which $20.2 million represented net purchases of short-term marketable securities, $19.4 million represented our acquisitions of patent assets and $0.4 million represented our acquisitions of property and equipment. We expect our cash used in investing activities to increase in the future as we acquire additional patents.


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Cash used in investing activities for the three months ended March 31, 2012 was $34.1 million, of which $21.4 million represented net purchases of short-term investments, $12.5 million represented our acquisitions of patent assets and $0.9 million represented acquisitions of property and equipment.

Cash Flows from Financing Activities
Cash provided by financing activities for the three months ended March 31, 2013 was $2.0 million, the result of excess tax benefit from stock-based compensation of $1.0 million and proceeds from exercise of stock options of $1.0 million.

Cash provided by financing activities for the three months ended March 31, 2012 was $3.0 million, the result of excess tax benefit from stock-based compensation of $4.5 million and proceeds from exercise of stock options of $1.7 million, which were partially offset by $3.3 million of principal payments on our deferred payment obligations.

Contractual Obligations and Commitments
We generally do not enter into long-term minimum purchase commitments. Our principal commitments consist of obligations under operating leases for office space. There were no substantial changes to our contractual obligations or commitments during the three months ended March 31, 2013 as presented under the heading "Contractual Obligations and Commitments" in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" or the heading "Commitments and Contingencies" in Note 14 of the Notes to Consolidated Financial Statements in Part II, Item 8. "Consolidated Financial Statements and Supplementary Data" included in our Annual Report on Form 10-K for our fiscal year ended December 31, 2012.

Off Balance Sheet Arrangements
At March 31, 2013, we did not have any relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance-sheet arrangements or other contractually narrow or limited purposes.

Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In February 2013, the FASB issued Accounting Standards Update ("ASU") 2013-02, Reporting of Amounts of Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"), which amends Comprehensive Income (Topic 220) in the Accounting Standards Codification ("ASC"). These amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amendments in ASU 2013-02 are effective for our interim and annual fiscal periods beginning January 1, 2013. The adoption of ASU 2013-02 did not have a material impact on our financial position or results of operations.

In October 2012, the FASB issued ASU 2012-04, Technical Corrections and Improvements ("ASU 2012-04"), which amends a wide range of topics in the ASC. These amendments include technical corrections and improvements to the ASC and conforming amendments related to fair value measurements. The amendments in ASU 2012-04 are effective for our interim and annual fiscal periods beginning January 1, 2013. The adoption of ASU 2012-04 did not have a material impact on our financial position or results of operations.

In July 2012, the FASB issued ASU 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"), which amends ASU 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment and permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other than Goodwill. The amendments in ASU 2012-02 are effective for our interim and annual fiscal periods beginning January 1, 2013. The adoption of ASU 2012-02 did not have a material impact on our financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.

Foreign Currency Exchange Risk
Our subscription agreements are denominated in U.S. Dollars, and therefore, our revenue is not currently subject to significant foreign currency risk. Our expenses are incurred primarily in the United States, with a small portion of expenses


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incurred and denominated in the currencies where our other international offices are located. Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Japanese Yen and the European Euro relative to the U.S. Dollar. To date, we have not entered into any foreign currency hedging contracts.

Interest Rate Sensitivity
We had cash, cash equivalents and short-term investments of $283.4 million as of March 31, 2013. Our cash balances deposited in U.S. banks are non-interest bearing and insured up to the FDIC limits. Cash equivalents consist of institutional money market funds, U.S. government and agency securities, municipal bonds and commercial paper denominated primarily in U.S. Dollars. Interest rate fluctuations affect the returns on our invested funds.

As of March 31, 2013, our short-term investments of $147.7 million were primarily invested in U.S. government and agency securities, commercial paper and corporate and municipal bonds maturing between 90 days and 12 months. As of March 31, 2013, our investments were classified as available-for-sale and, consequently, were recorded at fair value in the condensed consolidated balance sheets with unrealized gains or losses reported as a separate component of stockholders' equity. We review our investments for impairment when events and circumstances indicate that a decline in the fair value of an asset below its carrying value is other-than-temporary. As of March 31, 2013, we had not recorded an impairment related to our investments in the condensed consolidated statement of operations.

If overall interest rates had changed by 10% during the three months ended March 31, 2013, the fair value of our investments would not have been materially affected.

Effect of Inflation
We believe that inflation has not had a material impact on our consolidated results of operations for the three months ended March 31, 2013. There can be no assurance that future inflation will not have an adverse impact on our condensed consolidated results of operations or financial condition.

Fair Value of Financial Instruments
We do not have material exposure to market risk with respect to investments, as our investments consist primarily of highly liquid investments that approximate their fair values due to their short period of time to maturity. We do not use derivative financial instruments.


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