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RPXC > SEC Filings for RPXC > Form 10-Q on 7-Aug-2013All Recent SEC Filings

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Form 10-Q for RPX CORP


7-Aug-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 six months ended June 30, 2013, our revenue grew to $118.7 million from $99.1 million for the six months ended June 30, 2012. Our client count increased by 17 clients bringing our total client network to 157 as of June 30, 2013. At June 30, 2013, we had deferred revenue of $117.6 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 six months ended June 30, 2013, we completed 19 acquisitions of patent assets and our gross and net acquisition spend totaled $70.5 million and $68.5 million, respectively. From our inception through June 30, 2013, we have completed 139 acquisitions of patent assets with gross and net acquisition spend of $694.0 million and $474.9 million, respectively.

During the three months ended June 30, 2013, we completed a divestiture of a patent asset portfolio in the open market. This divestiture had an immaterial impact to our results of operations and financial condition. We do expect to divest patent portfolios as a normal part of our business, and these divestitures will result in a gain or loss in the period in which the transaction occurs. The gain or loss is based on the sale price relative to the carrying value of the patent assets divested.

Insuring against the costs of non-practicing entity ("NPE") litigation is a natural extension of our core defensive patent acquisition service. In August 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


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better manage and mitigate the risk of NPE patent litigation. For the three and six months ended June 30, 2013, the effect of the insurance policies that have been issued was not material to our results of operations or financial condition.

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 typically reset annually based upon their most recently reported annual financial results. In August 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 and six months ended June 30, 2013, revenue from insurance premiums was not material to the Company's results of operations. We also recognize revenue from the sale of licenses and advisory fee income in connection with structured acquisitions, which we collectively refer to as fee-related revenue. 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 August 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 and six months ended June 30, 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 June 30,        Six Months Ended June 30,
                                             2013             2012             2013             2012
Revenue                                $       57,481     $   55,238     $      118,675     $   99,087
Cost of revenue                                24,694         20,511             48,364         38,528
Selling, general and administrative
expenses                                       15,736         13,533             30,209         26,756
(Gain) loss on sale of patent assets,
net                                               126              -                126           (177 )
Operating income                               16,925         21,194             39,976         33,980
Other income, net                                  63             47                114             27
Income before provision for income
taxes                                          16,988         21,241             40,090         34,007
Provision for income taxes                      6,291          8,053             14,698         12,738
Net income                             $       10,697     $   13,188     $       25,392     $   21,269

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

                                               Three Months Ended June 30,        Six Months Ended June 30,
                                                 2013              2012            2013              2012
Revenue                                            100 %             100 %          100 %            100  %
Cost of revenue                                     43                37             41               39
Selling, general and administrative expenses        27                24             25               27
(Gain) loss on sale of patent assets, net            -                 -              -                -
Operating income                                    30                39             34               34
Other income, net                                    -                 -              -                -
Income before provision for income taxes            30                39             34               34
Provision for income taxes                          11                15             12               13
Net income                                          19 %              24 %           22 %             21  %

Revenue
Our revenue for the three months ended June 30, 2013 was $57.5 million compared to $55.2 million during the same period a year ago, an increase of $2.2 million, or 4%. Subscription revenue, which includes membership subscription services and premiums earned from insurance policies, for the three months ended June 30, 2013 was $55.0 million compared to $45.8 million for the three months ended June 30, 2012, an increase of $9.2 million, or 20%. The increase in subscription revenue was attributable to an increase in membership fees, which was composed of $6.9 million from new clients who joined our network subsequent to June 30, 2012 and $2.3 million from clients who joined our network prior to June 30, 2012. As of June 30, 2013 we had a total client network of 157 companies as compared to 120 as of June 30, 2012. Revenue for the three months ended June 30, 2013 also included $2.5 million of fee-related revenue, as compared to $9.4 million in the same period in 2012.

Our revenue for the six months ended June 30, 2013 was $118.7 million compared to $99.1 million during the same period a year ago, an increase of $19.6 million, or 20%. Subscription revenue for the six months ended June 30, 2013 was $109.0 million compared to $89.7 million for the six months ended June 30, 2012, an increase of $19.3 million, or 22%. The increase in subscription revenue was attributable to an increase in membership fees, which was composed of $12.0 million from new clients who joined our network subsequent to June 30, 2012 and $7.3 million from clients who joined our network prior to June 30, 2012. Revenue for the six months ended June 30, 2013 also included $9.7 million of fee-related revenue, as compared to $9.4 million in the same period in 2012.

Cost of Revenue
Our cost of revenue for the three months ended June 30, 2013 was $24.7 million compared to $20.5 million during the same period a year ago, an increase of $4.2 million, or 20%. The increase was primarily attributable to a $3.6 million increase in patent amortization expense as a result of an increase in our patent assets and a shorter weighted-average amortization period. The weighted-average estimated economic useful life of the patent assets acquired during the three months ended June 30, 2013 was 43 months


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compared to the 45 month weighted-average estimated economic useful life of the patent assets acquired since inception, excluding fully amortized patent assets.

Our cost of revenue for the six months ended June 30, 2013 was $48.4 million compared to $38.5 million during the same period a year ago, an increase of $9.8 million, or 26%. The increase was primarily attributable to a $8.6 million increase in patent amortization expense as result of an increase in our patent assets. Cost of revenue for the six months ended June 30, 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 June 30, 2013 were $15.7 million compared to $13.5 million during the same period a year ago, an increase of $2.2 million, or 16%. The increase was primarily due to a $2.0 million increase in stock-based compensation.

Our selling, general and administrative expenses for the six months ended June 30, 2013 were $30.2 million compared to $26.8 million during the same period a year ago, an increase of $3.5 million, or 13%. The increase was primarily due to a $3.2 million increase in stock-based compensation.

We expect that in the foreseeable future, selling, general and administrative expenses will increase as we seek to serve more clients, develop new products and services, and support our operations.

Provision for Income Taxes
Our provision for income taxes was $6.3 million and $8.1 million for the three months ended June 30, 2013 and 2012, respectively, and $14.7 million and $12.7 million for the six months ended June 30, 2013 and 2012, respectively. Our effective tax rate, including the impact of discrete benefit items, was 37% and 38% for the three months ended June 30, 2013 and 2012, respectively, and 37% for both the six months ended June 30, 2013 and 2012.

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 June 30, 2013, we had $99.3 million of cash and cash equivalents and $160.0 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, growth of our insurance business 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):

                                                    Six Months Ended June 30,
                                                       2013             2012
Net cash provided by operating activities        $     123,379       $  62,562
Net cash used in investing activities                 (102,475 )      (105,145 )
Net cash provided by financing activities                4,736           3,893
Increase (decrease) in cash and cash equivalents $      25,640       $ (38,690 )

Cash Flows from Operating Activities
Cash provided by operating activities for the six months ended June 30, 2013 was $123.4 million, consisting of adjustments for non-cash items totaling $55.2 million, changes in working capital and non-current assets and liabilities of $42.8 million, and net income of $25.4 million. Non-cash adjustments to net income primarily consisted of $47.8 million of depreciation and amortization, $8.2 million of stock-based compensation, a reduction of $2.0 million due to excess tax benefit from stock-based compensation, $3.0 million of amortization of premium on investments and a $1.9 million net decrease in our deferred tax liabilities. 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 and a $13.2 million increase in deferred revenue. The increase in deferred revenue was due to $122.2 million in revenue billings to new and existing clients and was partially offset by revenue recognized during the period of $109.0 million. The amount of deferred revenue in any given period varies with the addition of new clients and the timing of invoicing existing clients.


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Cash provided by operating activities for the six months ended June 30, 2012 was $62.6 million, primarily consisting of adjustments for non-cash items of $41.5 million and net income of $21.3 million. Non-cash adjustments to net income primarily consisted of $38.9 million of depreciation and amortization, $5.0 million of stock-based compensation, $2.5 million of amortization of premium on investments and a reduction of $5.4 million due to excess tax benefit from stock-based compensation.

Cash Flows from Investing Activities
Cash used in investing activities for the six months ended June 30, 2013 was $102.5 million, of which $69.6 million represented our acquisitions of patent assets, $32.1 million represented net purchases of short-term marketable securities and $0.9 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.

Cash used in investing activities for the six months ended June 30, 2012 was $105.1 million, of which $45.8 million represented our business acquisition of Altitude Capital, $36.7 million represented our acquisitions of patent assets and $22.0 million represented our net purchases of short-term marketable securities.

Cash Flows from Financing Activities
Cash provided by financing activities for the six months ended June 30, 2013 was $4.7 million, the result of proceeds from exercise of stock options of $2.7 million and excess tax benefit from stock-based compensation of $2.0 million.

Cash provided by financing activities for the six months ended June 30, 2012 was $3.9 million, of which $5.4 million was due to excess tax benefit from stock-based compensation and $2.5 million represented proceeds from exercise of stock options, partially offset by $4.1 million of payments for 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 six months ended June 30, 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 June 30, 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 consolidated financial statements.

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 consolidated financial statements.

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


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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 consolidated financial statements. 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 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 $259.3 million as of June 30, 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 June 30, 2013, our short-term investments of $160.0 million were primarily invested in municipal bonds, U.S. government and agency securities and corporate bonds maturing between 90 days and 12 months. As of June 30, 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 June 30, 2013, we had not recorded an impairment related to our investments in the condensed consolidated statement of operations.

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