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ACACIA RESEARCH CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Cautionary Statement Regarding Forward Looking Statements You should read the following discussion and analysis in conjunction with the consolidated financial statements and related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 28, 2013. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this Quarterly Report on Form 10-Q. Such statements may be identified by the use of forward-looking terminology such as "may," "will," "should," "could," "expect," "plan," "believe," "estimate," "anticipate," "intend," "predict," "potential," "continue" or similar terms, variations of such terms or the negative of such terms, although not all forward-looking statements contain these terms. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements address future events and conditions concerning intellectual property acquisition and development, licensing and enforcement activities, capital expenditures, earnings, litigation, regulatory matters, markets for our services, liquidity and capital resources and accounting matters. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, changes in demand for our services, legislative, regulatory and competitive developments in markets in which we and our subsidiaries operate, results of litigation and other circumstances affecting anticipated revenues and costs. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements contained herein to conform such statements to actual results or to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, including without limitation the disclosures made under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements" in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and disclosures made under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Risk Factors" and "Financial Statements and Supplementary Data" included in our Annual Report on Form 10-K for the year ended December 31, 2012. General As used in this Quarterly Report on Form 10-Q, "we," "us" and "our" refer to Acacia Research Corporation, a Delaware corporation, and/or its wholly and majority-owned and controlled operating subsidiaries. All intellectual property acquisition, development, licensing and enforcement activities are conducted solely by certain of Acacia Research Corporation's wholly and majority-owned and controlled operating subsidiaries. Our operating subsidiaries acquire, develop, license and otherwise enforce patented technologies. Our operating subsidiaries generate revenues and related cash flows from the granting of intellectual property rights for the use of, or pertaining to, patented technologies that our operating subsidiaries own or control. Our operating subsidiaries assist patent owners with the prosecution and development of their patent portfolios, the protection of their patented inventions from unauthorized use, the generation of licensing revenue from users of their patented technologies and, if necessary, with the enforcement against unauthorized users of their patented technologies. We are a leader in licensing patented technologies and have established a proven track record of licensing success with over 1,250 license agreements executed to date across 154 of our technology licensing and enforcement programs. Currently, on a consolidated basis, our operating subsidiaries own or control the rights to over 268 patent portfolios, which include U.S. patents, and certain foreign counterparts covering technologies used in a wide variety of industries. We were originally incorporated in California in January 1993 and reincorporated in Delaware in December 1999. 13 --------------------------------------------------------------------------------Executive Summary Our operating activities for the periods presented were principally focused on continuing to build our market leadership position in patent acquisitions, development, licensing and enforcement. During the three months ended March 31, 2013, we reported revenues of $76.9 million, the second highest quarterly revenues in our company's history, from 29 new revenue agreements covering 31 different licensing programs, including 11 licensing programs generating initial revenues in the quarter. We increased our cash and investments to $327.4 million as of March 31, 2013 from $311.3 million as of December 31, 2012. During the three months ended March 31, 2013, we acquired control of 9 new patent portfolios and invested $4.0 million in patent portfolio acquisition up-front advances and payments. In the first quarter of 2013, we expanded our patent licensing business into the energy sector, acquiring control of our first patent portfolios in the sector. One of the portfolios relates to polymer based drilling fluids used in oil and gas well drilling and the other relates to solids separation technology used in oil and gas wells. We have a pipeline of additional portfolios we are evaluating in the energy sector which could be an area of future growth for our licensing business. We also acquired control of an additional medical technology sector patent portfolio relating to vascular device technology, and 6 additional patent portfolios in the technology sector, including patents relating to broadband technology, such as DSL modems and voice over internet protocol phones, fiber optic network architectures, and display technologies used in smartphones, tablets, computers, HDTV's and other devices. We continue to see an acceleration in opportunities for partnering with companies in the technology, energy and medical technology sectors for the licensing of their patented technologies, and are also expanding our partnering activity in international markets, both of which we expect will expand and diversify our future revenue generating opportunities. Operating activities during the periods presented included the following: Three Months Ended March 31, 2013 2012 Revenues (in thousands) $ 76,861 $ 99,040 New agreements executed 29 40 Licensing and enforcement programs generating revenues 31 32 Licensing and enforcement programs with initial revenues 11 6 New patent portfolios 9 5 Cumulative number of licensing and enforcement programs generating revenues - inception to date 154 118 Our revenues historically have fluctuated quarterly, and can vary significantly, based on a number of factors including the following: • the dollar amount of agreements executed each period, which can be driven by the nature and characteristics of the technology or technologies being licensed and the magnitude of infringement associated with a specific licensee; • the specific terms and conditions of agreements executed each period including the nature and characteristics of rights granted, and the periods of infringement or term of use contemplated by the respective payments; • fluctuations in the total number of agreements executed each period; • the timing, results and uncertainties associated with patent filings and other enforcement proceedings relating to our intellectual property rights; • the relative maturity of licensing programs during the applicable periods; and • other external factors. Although revenues from one or more of our patents or patent portfolios may be significant in a specific reporting period, we believe that none of our individual patents or patent portfolios is individually significant to our licensing and enforcement business as a whole. 14 -------------------------------------------------------------------------------- We measure and assess the performance and growth of the patent licensing and enforcement businesses conducted by our operating subsidiaries based on consolidated revenues (including other operating income) recognized across all of our technology licensing and enforcement programs on a trailing twelve-month basis. Trailing twelve-month revenues were as follows (in thousands): As of Date: Trailing Twelve -Month Revenues % Change March 31, 2013 $ 228,548 (9 )% December 31, 2012 250,727 22 % September 30, 2012 205,258 (12 )% June 30, 2012 233,355 5 % March 31, 2012 222,617 - % Revenues for the three months ended March 31, 2013 included fees from the following technology licensing and enforcement programs: • • Memory Circuit and Packaging 4G Wireless Handsets technology(1) technology(1) • Audio Communications Fraud Detection • technology Messaging technology • • Mobile Computer Synchronization Camera Support technology technology • Computer Architecture and Power • NOR Flash technology Management technology • Digital Imaging technology(1) • Online Auction Guarantee technology • Digital Signal Processing • Architecture technology Online Gaming technology • DMT® technology • Pop-up Internet Advertising technology • • Power Management Within Integrated Domain Name Redirection technology Circuits technology • Electronic spreadsheet, data • Prescription Lens technology(1) analysis and software development technology(1) • Enhanced Mobile Communications • Semiconductor Memory and Process technology technology(1) • Facilities Operation Management • System technology Surgical Access technology • Gas Modulation Control Systems • technology(1) Suture Anchors technology • Greeting Card technology(1) • Telematics technology • Improved Memory Manufacturing • Wireless Data Synchronization & Data technology Transfer technology(1) • • Wireless Location Based Services Intercarrier SMS technology(1) technology(1) • Location Based Services technology __________________________________________ (1) Initial revenues recognized during the three months ended March 31, 2013. Revenues for the three months ended March 31, 2012 included fees from the following technology licensing and enforcement programs: • 4G Wireless technology(1) • Medical Monitoring technology • Audio Communications Fraud Detection • technology Messaging technology • Camera Support technology • Network Monitoring technology • Consumer Rewards technology(1) • NOR Flash technology • Data Compression technology • Online Auction Guarantee technology • DDR SDRAM technology • Optical Recording technology • Digital Signal Processing • Architecture technology Pop-up Internet Advertising technology• Disk Array Systems & Storage Area • Network technology Power-over-Ethernet technology 15-------------------------------------------------------------------------------- • DMT® technology • Rule Based Monitoring technology • • Semiconductor Memory and Process Document Generation technology Patents technology(1) • Impact Instrument technology • Shape Memory Alloys technology • Improved Anti-Trap Safety Technology • Telematics technology for Vehicles technology(1) • • User Programmable Engine Control Improved Lighting technology technology • Improved Memory Manufacturing • technology(1) Video Encoding technology • Lighting Ballast technology • Visual Data Evaluation technology • Location Based Services technology • Voice-Over-IP technology(1) __________________________________________ (1) Initial revenues recognized during the three months ended March 31, 2012. Summary of Results of Operations - Overview For the Three Months Ended March 31, 2013 and 2012 (In thousands, except percentage change values) Three Months Ended March 31, % 2013 2012 Change Revenues $ 76,861 $ 99,040 (22 )% Operating costs and expenses 69,766 34,696 101 % Operating income 7,095 64,344 (89 )% Provision for income taxes (3,272 ) (14,747 ) (78 )% Net income attributable to Acacia Research Corporation 5,113 49,928 (90 )% Overview - Three months ended March 31, 2013 compared with the three months ended March 31, 2012 • Revenues decreased $22.2 million, or 22%, to $76.9 million, as compared to $99.0 million in the comparable prior year quarter. • Cost of Revenues and Other Operating Expenses: Inventor royalties and contingent legal fees, on a combined basis, increased $22.2 million, or 195%, as compared to the 22%decrease in related revenues for the same periods, due primarily to a significantly higher percentage of revenues generated during the three months ended March 31, 2012 having no inventor royalty obligations (i.e. patent portfolio owned outright without back-end royalty obligation) or contingent legal fee arrangementobligations (i.e. revenues generated without litigation), as compared to the revenues generated during the three months ended March 31, 2013. Litigation and licensing expenses-patents increased $6.3million, or 185%, to $9.6 million, due primarily to higher net levels of patent portfolio litigation, litigation support, prosecution, third-party technical consulting and professional expert expenses associated with our continued investment in ongoing and new licensing andenforcement programs commenced since the end of the comparable prior year quarter. Amortization of patents increased $6.6 million, or 129%, to $11.7 million, due primarily to amortization expense related to new patent portfolios acquired since March 31, 2012 totaling $6.3 million. Marketing, general and administrative expenses remainedrelatively flat for the three month periods presented. Our effective tax rate was approximately 39% and 23% for the three months ended March 31, 2013 and 2012, respectively. Theeffective tax rate for the three months ended March 31, 2012 includes a benefit of $10.2 million associated with the release of valuation allowance resulting from the acquisition of ADAPTIX, as described at Note 2 to the consolidated financial statements elsewhere herein. 16--------------------------------------------------------------------------------Acquisition of ADAPTIX, Inc. On January 12, 2012, pursuant to the terms and conditions of the Agreement and Plan of Merger dated as of November 22, 2011 among Acacia Research Group LLC, or ARG, a wholly-owned subsidiary of Acacia Research Corporation, Apollo Patent Corp., a newly-formed, wholly-owned subsidiary of ARG, or Merger Sub, ADAPTIX and Baker Communications Fund II (QP), L.P., solely in its capacity as shareholder representative, ARG completed its acquisition of ADAPTIX, which held no material assets other than its portfolio of patents and $10 million in cash, through a merger of Merger Sub with and into ADAPTIX, with ADAPTIX as the surviving corporation. Upon completion of the merger, the separate corporate existence of Merger Sub ceased and ADAPTIX became a wholly-owned subsidiary of ARG. The total consideration paid by ARG in connection with the merger was approximately $160 million, paid in cash. ADAPTIX, a pioneer in the development of 4G technologies for wireless systems, is an award-winning technology company long recognized in the industry as one of the first developers of cutting edge 4G wireless systems. With patents filed as early as 2000, ADAPTIX's research and development efforts have resulted in one of the world's most significant intellectual property portfolios focused on 4G technologies. With its rapidly growing portfolio of 230 issued and pending patents in 13 countries, ADAPTIX's innovations extend across a broad range of 4G technologies including OFDMA and MIMO. Investments in Patent Portfolios We also measure and assess the performance and growth of the patent licensing and enforcement businesses conducted by our operating subsidiaries based on the number of patent portfolios owned or controlled by our operating subsidiaries on a consolidated basis. As of March 31, 2013, December 31, 2012, and March 31, 2012, on a consolidated basis, our operating subsidiaries owned or controlled the rights to approximately 268, 250 and 212 patent portfolios, respectively, which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries. During the three months ended March 31, 2013, certain of our operating subsidiaries continued to execute their business strategy in the area of patent portfolio acquisitions, including the acquisition of, or the acquisition of the rights to, 9 patent portfolios covering a variety of applications, including the following: • In January 2013, obtained a patent relating to core fiber optic network architectures. • In January 2013, obtained rights to a patent portfolio relating to oil and gas production and will share licensing revenue with the patent owner. The portfolio is comprised of 4 U.S. and 27 foreign patents that relate to polymer based drilling fluids which are widely used in the drilling of oil and gas wells. • In January 2013, acquired patents relating to vascular device technology. • In January 2013, acquired patents relating to oil and gas production. The patents relate to solids separation technology which addresses removal of solids from drilling fluids used in oil and gas wells. • In February 2013, obtained rights to a portfolio of patent assets covering display technologies. The set of patents involved in this transaction relate to certain display technologies used in smartphones, tablets, computers, HDTVs and other devices. Refer to "Liquidity and Capital Resources" below for information regarding the impact of patent and patent rights acquisitions on the consolidated financial statements for the periods presented. As of March 31, 2013, certain of our operating subsidiaries had several option agreements with third-party patent portfolio owners regarding the potential acquisition of additional patent portfolios. Future patent portfolio acquisitions will continue to expand and diversify our future revenue generating opportunities. Enforcement Considerations The pursuit of enforcement actions in connection with our licensing and enforcement programs can involve certain risks and uncertainties, including the following: • Increases in patent-related legal expenses, including, but not limited to, increases in costs billed by outside legal counsel for discovery, depositions, economic analyses, damages assessments, expert witnesses and other 17-------------------------------------------------------------------------------- consultants, case-related audio/video presentations and other litigation support and administrative costs, could increase our operating costs and decrease our revenue generating opportunities; • Our patented technologies and enforcement actions are complex, and, as a result, we may be required to appeal adverse decisions by trial courts in order to successfully enforce our patents; • New legislation, regulations or rules related to enforcement actions could significantly increase our operating costs and decrease our revenue generating opportunities; and • Courts may rule that our subsidiaries have violated certain statutory, regulatory, federal, local or governing rules or standards by pursuing such enforcement actions, which may expose us and our operating subsidiaries to material liabilities, which could harm our operating results and our financial position. Critical Accounting Estimates Our unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these consolidated statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these consolidated financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in the audited consolidated financial statements and notes thereto and under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" included in our Annual Report on Form 10-K for the year ended December 31, 2012. Refer to Note 2 to the consolidated financial statements included in this report. Consolidated Results of Operations Comparison of the Results of Operations for the Three Months Ended March 31, 2013 and 2012 Revenues (in thousands) Revenues. In general, revenue arrangements provide for the payment of contractually determined fees in consideration for the grant of certain intellectual property rights for patented technologies owned or controlled by our operating subsidiaries. These rights typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patented technologies owned or controlled by our operating subsidiaries, (ii) covenants-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. Revenue related information for the periods presented is as follows: Three Months Ended March 31, $ % 2013 2012 Change Change (in thousands, except percentage change values) Revenues $ 76,861 $ 99,040 $ (22,179 ) (22 )% New agreements executed 29 40 - - Average revenue per agreement (in thousands) $ 2,650 2,476 - - A reconciliation of the change in revenues for the periods presented, in relation to the revenues reported for the comparable prior year period, is as follows: Three Months Ended March 31, 2013 vs. 2012 (in thousands) Decrease in number of agreements executed $ (27,236 ) Increase in average revenue per agreement executed 5,057 Total change in revenues $ (22,179 ) 18-------------------------------------------------------------------------------- Three licensees individually accounted for 65%, 14% and 13% of revenues recognized during the three months ended March 31, 2013, and three licensees individually accounted for 54%, 20% and 18% of revenues recognized during the three months ended March 31, 2012. On a consolidated basis, as of March 31, 2013, 154 of our licensing programs had begun generating revenues, up from 143 as of December 31, 2012, and 118 as of March 31, 2012. Cost of Revenues Three Months Ended March 31, $ % 2013 2012 Change Change (in thousands, except percentage change values) Inventor royalties $ 18,481 $ 7,594 $ 10,887 143 % Contingent legal fees 15,032 3,748 11,284 301 % Total $ 33,513 $ 11,342 $ 22,171 195 % Inventor Royalties and Contingent Legal Fees Expense. The economic terms of the inventor agreements, operating agreements and contingent legal fee arrangements associated with the patent portfolios owned or controlled by our operating subsidiaries, if any, including royalty rates, if any, contingent fee rates, if any, and other terms, vary across the patent portfolios owned or controlled by our operating subsidiaries. As such, inventor royalties and contingent legal fee expenses fluctuate period to period, based on the amount of revenues recognized each period, the terms and conditions of agreements executed each period and the mix of specific patent portfolios with varying economic terms and obligations generating revenues each period. Inventor royalties and contingent legal fees, on a combined basis, increased due primarily to a significantly higher percentage of revenues generated during the three months ended March 31, 2012 having no inventor royalty obligations (i.e. patent portfolio owned outright without back-end royalty obligation) or contingent legal fee arrangement obligations (i.e. revenues generated without litigation), as compared to the revenues generated during the three months ended March 31, 2013. A summary of the main drivers of the change in inventor royalties expense and contingent legal fees expense for the interim periods presented is as follows (in thousands, except percentage change values): Three Months Ended March 31, % of Prior Period 2013 vs. 2012 Balance Inventor Royalties: Decrease in inventor royalty rates $ (14,731 ) (135 )% Decrease in total revenues (9,853 ) (91 )% Decrease in revenues without inventor royalty obligations 35,471 326 % Total change in inventor royalties expense $ 10,887 100 % Contingent Legal Fees: Decrease in contingent legal fee rates $ (483 ) (4 )% Decrease in total revenues (4,703 ) (42 )% Decrease in revenues without contingent legal fee obligations 16,470 146 % Total change in contingent legal fees $ 11,284 100 % 19-------------------------------------------------------------------------------- Three Months Ended March 31, $ % 2013 2012 Change Change (in thousands, except percentage change values) Litigation and licensing expenses - patents $ 9,648 $ 3,381 $ 6,267 185 % Amortization of patents 11,730 5,126 6,604 129 % Litigation and Licensing Expenses - Patents. Litigation and licensing expenses-patents include patent-related prosecution and enforcement costs incurred by outside patent attorneys engaged on an hourly basis and the out-of-pocket expenses incurred by law firms engaged on a contingent fee basis. Litigation and licensing expenses-patents also includes licensing and enforcement related third-party patent research, development, consulting, and other costs incurred in connection with the licensing and enforcement of patent portfolios. Litigation and licensing expenses-patents fluctuate from period to period based on patent litigation, enforcement and prosecution activity associated with ongoing licensing and enforcement programs and the timing of the commencement of new licensing and enforcement programs in each period. Litigation and licensing expenses-patents increased for the periods presented due primarily to higher net levels of patent portfolio litigation, litigation support, prosecution, third-party technical consulting and professional expert expenses associated with our continued investment in ongoing and new licensing and enforcement programs commenced since the end of the comparable prior year quarter. We expect patent-related legal expenses to continue to fluctuate period to period based on the factors summarized above, in connection with upcoming scheduled and/or anticipated trial dates and our current and future patent acquisition, development, licensing and enforcement activities. Amortization of Patents. The increase for the periods presented was due primarily to amortization expense related to new patent portfolios acquired since March 31, 2012, totaling $6.3 million. Accelerated amortization expense related to the recovery of up-front patent acquisition costs totaled $483,000 and $442,000 for the three months ended March 31, 2013 and 2012, respectively. Operating Expenses (in thousands) Three Months Ended March 31, $ % 2013 2012 Change Change (in thousands) Marketing, general and administrative expenses $ 8,693 $ 8,641 $ 52 1 % Non-cash stock compensation expense included in marketing, general and administrative expense 5,158 5,090 68 1 % Total marketing, general and administrative expenses $ 13,851 $ 13,731 $ 120 1 % Research, consulting and other expenses - business development 1,024 1,116 (92 ) (8 )% Marketing, General and Administrative Expenses. Marketing, general and administrative expenses include employee compensation and related personnel costs, including non-cash stock compensation expenses, office and facilities costs, legal and accounting professional fees, public relations, marketing, stock administration, gross receipts based state taxes and other corporate costs. A summary of the main drivers of the change in marketing, general and administrative expenses, including the impact of non-cash stock compensation charges, for the periods presented, is as follows: Three Months Ended March 31, 2013 vs. 2012 (in thousands)Licensing, business development, engineering and other personnel costs $ (294 ) Variable performance-based compensation costs and other corporate, general and administrative costs 346 Non-cash stock compensation expense 68 Total change in marketing, general and administrative expenses $ 120 20-------------------------------------------------------------------------------- Income Taxes Three Months Ended March 31, 2013 2012 Provision for income taxes (in thousands) $ (3,272 ) $ (14,747 ) Effective tax rate 39 % 23 % Provision for Income Taxes. Tax expense for the periods presented included the impact of the following: • Our effective tax rate for the three months ended March 31, 2013 was approximately 39%, mainly comprised of U.S. federal and state incomes taxes, foreign withholding taxes and nondeductible permanent expenses. The effective tax rate for the three months ended March 31, 2012, including the impact of discrete items, was 23%. Discrete items were primarily comprised of $10.2 million of tax benefits recognized resulting from the release of valuation allowance on the majority of our net deferred tax assets in the first quarter of 2012, as described at Note 2 to the consolidated financial statements elsewhere herein. • Noncash tax expense calculated without the excess benefit related to the exercise and vesting of equity-based incentive awards, which was credited to additional paid-in capital, not taxes payable, totaled approximately $709,000 and $7.6 million for the three months ended March 31, 2013 and 2012, respectively. • As of March 31, 2013, taxes paid or payable totaled approximately $3.4 million, primarily comprised of $2.2 million of foreign withholding taxes withheld by the applicable foreign tax authority on revenue agreements executed with third party licensees domiciled in certain foreign jurisdictions, and federal and other state related taxes payable. The 2012 tax provision contemplates utilization of the $2.2 million in foreign taxes withheld in the first quarter of 2013 as a credit against income tax expense calculated for financial statement purposes. Liquidity and Capital Resources General Our primary sources of liquidity are cash, cash equivalents and investments on hand generated from our operating activities and proceeds from recent equity financings. Refer to "Cash Flows from Financing Activities" below for information regarding recent equity financings. We retain broad discretion over the use of the net proceeds from recent offerings and intend to use the net proceeds for operations and for other general corporate purposes, including, but not limited to, working capital, strategic acquisitions and other transactions. Our management believes that our cash and cash equivalent balances, investments, anticipated cash flows from operations, and other external sources of available credit, will be sufficient to meet our cash requirements through at least May 2014 and for the foreseeable future. We may, however, encounter unforeseen difficulties that may deplete our capital resources more rapidly than anticipated, including those set forth under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012. Any efforts to seek additional funding could be made through issuances of equity or debt, or other external financing. However, additional funding may not be available on favorable terms, or at all. The capital and credit markets have experienced extreme volatility and disruption since late 2007, and the volatility and impact of the disruption has continued into 2013. At times during this period, the volatility and disruption has reached unprecedented levels. In several cases, the markets have exerted downward pressure on stock prices and credit capacity for certain issuers, and there can be no assurance that the commercial paper markets will be a reliable source of short-term financing for us. If we fail to obtain additional financing when needed, we may not be able to execute our business plans and our business, conducted by our operating subsidiaries, may suffer. 21--------------------------------------------------------------------------------Cash, Cash Equivalents and Investments Our consolidated cash and cash equivalents and investments on hand totaled $327.4 million at March 31, 2013, compared to $311.3 million at December 31, 2012. The net change in cash and cash equivalents for the periods presented was comprised of the following (in thousands): Three Months Ended March 31, 2013 2012 Net cash provided by (used in): Operating activities $ 16,825 $ 48,952 Investing activities (48,214 ) (276,886 ) Financing activities 2,746 228,699 Cash Flows from Operating Activities. Cash receipts from licensees for the three months ended March 31, 2013 decreased to $41.4 million, from $100.7 million in the comparable 2012 period, primarily reflecting the net decrease in revenues for the same periods, as discussed above, and an increase in quarter end accounts receivable from licensees related to agreements executed during the three months ended March 31, 2013. Cash outflows from operations for the three months ended March 31, 2013 decreased to $24.5 million, as compared to $44.1 million in the comparable 2012 period, primarily due to the net impact of the timing of cash receipts from licensees and related payments of inventor royalties and contingent legal fees, and the timing of payments to other third-parties in the ordinary course, for the same periods. Refer to "Working Capital" below for additional information. Cash Flows from Investing Activities. Cash flows from investing activities and related changes were comprised of the following for the periods presented (in thousands): Three Months Ended March 31, 2013 2012 Purchases of property and equipment $ (241 ) $ (24 ) Purchases of available-for-sale investments (97,225 ) (144,762 ) Maturities and sales of available-for-sale investments 53,262 20,000 Purchase of ADAPTIX, Inc., net of cash acquired - (150,000 ) Patent acquisition costs (4,010 ) (2,100 ) Net cash used in investing activities $ (48,214 ) $ (276,886 ) Cash Flows from Financing Activities. Cash flows from financing activities and related changes included the following for the periods presented (in thousands): Three Months Ended March 31, 2013 2012 Proceeds from sale of common stock, net of issuance costs $ - $ 219,084 Contributions from noncontrolling interests in operating subsidiary 1,920 1,920 Excess tax benefits from stock-based compensation 709 7,611 Proceeds from exercises of stock options 117 84 Net cash provided by financing activities $ 2,746 $ 228,699 In February 2012, we raised net proceeds of $219.0 million through the sale of 6,122,000 shares of our common stock at a price of $36.75 per share in a private placement offering with certain institutional accredited investors. The net proceeds will continue to be used to finance future acquisitions of patents, other patent licensing vehicles and companies with patent assets, and for working capital and general corporate purposes. 22--------------------------------------------------------------------------------Working Capital Working capital at March 31, 2013 increased to $324.0 million, compared to $302.6 million at December 31, 2012. Consolidated accounts receivable from licensees increased to $45.4 million at March 31, 2013, compared to $9.8 million at December 31, 2012. Consolidated royalties and contingent legal fees payable increased to $36.7 million at March 31, 2013, compared to $12.5 million at December 31, 2012. The majority of accounts receivable from licensees at March 31, 2013 were collected or scheduled to be collected in the second quarter of 2013, in accordance with the terms of the related underlying agreements. The majority of royalties and contingent legal fees payable are scheduled to be paid in the second or third quarter of 2013, subsequent to receipt by us of the related fee payments from licensees, in accordance with the underlying contractual arrangements. Share Repurchase Program. On November 16, 2012, we announced that our Board of Directors authorized a program for repurchases of shares of our outstanding common stock. Under the stock repurchase program, effective November 16, 2012, we are authorized to purchase in the aggregate up to $100 million of our common stock through the period ending May 15, 2013. Repurchases may be made from time to time by us in the open market or in block purchases in compliance with applicable SEC rules. From the effective date through December 31, 2012, we acquired 1,129,408 shares of our common stock at an average price of $23.65 per share. Repurchases to date were made using existing cash resources and occurred in the open market. No shares were repurchased during the three months ended March 31, 2013. On April 23, 2013, our Board of Directors approved an extension of the stock repurchase program from May 15, 2013 until August 15, 2013. Subsequent Event. On April 23, 2013, we announced that our Board of Directors approved the adoption of a cash dividend policy that calls for the payment of an expected total annual cash dividend of $0.50 per common share, payable in the amount of $0.125 per share per quarter. Under the policy, the first of the quarterly cash dividends will be paid on May 30, 2013 to shareholders of record at close of business on May 3, 2013. Future cash dividends are expected to be paid on a quarterly basis and will be at the discretion of our Board of Directors. Off-Balance Sheet Arrangements We have not entered into off-balance sheet financing arrangements, other than operating leases. We have no significant commitments for capital expenditures in 2013. We have no committed lines of credit or other committed funding or long-term debt. The following table lists our known contractual obligations and future cash commitments as of March 31, 2013 (in thousands): Payments Due by Period (In thousands) Less than 1 More than 5 Contractual Obligations Total year 1-3 years 3-5 years years Operating leases $ 5,233 $ 802 $ 2,495 $ 1,114 $ 822 Scheduled patent acquisition related payments 500 250 250 - - Total contractual obligations $ 5,733 $ 1,052 $ 2,745 $ 1,114 $ 822 Uncertain Tax Positions. At March 31, 2013, we had total unrecognized tax benefits of approximately $2,127,000, including a recorded noncurrent liability of $85,000, related to unrecognized tax benefits primarily associated with state taxes. No interest and penalties have been recorded for the unrecognized tax benefits as of December 31, 2012. If recognized, approximately $2,127,000 would impact our effective tax rate. We do not expect that the liability for unrecognized tax benefits will change significantly within the next 12 months. Activity related to the gross unrecognized tax benefits for the year ended December 31, 2012 was as follows (in thousands): Balance at January 1, 2012 $ 85 Additions based on tax positions related to the current year - Additions for tax positions related to prior years 772 Additions resulting from the acquisition of ADAPTIX 1,270 Reductions - Balance at December 31, 2012 $ 2,127 23--------------------------------------------------------------------------------Recent Accounting Pronouncements Refer to Note 9 to the consolidated financial statements included in this report. |