RPX Corporation
RPX Corp (Form: 10-Q, Received: 08/05/2016 14:48:45)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
————————————————
FORM 10-Q
————————————————
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
            
For the transition period from _____to_____       
Commission File Number: 001-35146
————————————————
RPX Corporation

(Exact Name of Registrant as Specified in Its Charter)
————————————————
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
26-2990113
(I.R.S. Employer
Identification No.)
ONE MARKET PLAZA, SUITE 800
SAN FRANCISCO, CALIFORNIA 94105
(Address of Principal Executive Offices and Zip Code)
Registrant’s Telephone Number, Including Area Code: (866) 779-7641
————————————————

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  [ x ]     NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  [ x ]     NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
[ x ]
 
Accelerated filer
 
[ ]
 
 
 
 
 
 
 
Non-accelerated filer
 
[ ]
(Do not check if a smaller reporting company)
Smaller reporting company
 
[ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   YES [ ]    NO [ x ]
There were 49,559,900 shares of the registrant’s common stock issued and outstanding as of July 29, 2016.


Table of Contents

RPX Corporation
Form 10-Q Quarterly Report
————————————————
TABLE OF CONTENTS
 
 
 
  
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 




Table of Contents

PART I. FINANCIAL INFORMATION

Item1.
Financial Statements (unaudited)

RPX Corporation
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
 
 
June 30,
2016
 
December 31,
2015
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
130,040

 
$
94,983

Short-term investments
 
69,051

 
231,015

Restricted cash
 
476

 
701

Accounts receivable, net
 
41,714

 
13,905

Prepaid expenses and other current assets
 
17,221

 
12,643

Total current assets
 
258,502

 
353,247

Patent assets, net
 
212,245

 
254,560

Property and equipment, net
 
8,033

 
4,733

Intangible assets, net
 
63,130

 
1,801

Goodwill
 
160,122

 
19,978

Restricted cash, less current portion
 
1,062

 
727

Deferred tax assets
 
25,504

 
16,619

Other assets
 
8,503

 
6,896

Total assets
 
$
737,101

 
$
658,561

Liabilities and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
2,964

 
$
959

Accrued liabilities
 
11,456

 
14,842

Deferred revenue
 
119,856

 
110,921

Deferred payment obligations
 
1,301

 
2,383

Current portion of long-term debt
 
5,224

 

Other current liabilities
 
1,587

 
467

Total current liabilities
 
142,388

 
129,572

Deferred revenue, less current portion
 
3,277

 
4,731

Deferred tax liabilities
 
4,837

 

Long-term debt
 
91,660

 

Other liabilities
 
8,410

 
7,779

Total liabilities
 
250,572

 
142,082

Commitments and contingencies (Note 12)
 

 

Stockholders’ equity:
 
 
 
 
Common stock
 
5

 
5

Additional paid-in capital
 
351,577

 
344,610

Retained earnings
 
141,431

 
172,115

Accumulated other comprehensive loss
 
(6,484
)
 
(251
)
Total stockholders’ equity
 
486,529

 
516,479

Total liabilities and stockholders’ equity
 
$
737,101

 
$
658,561

The accompanying notes are an integral part of these condensed consolidated financial statements.

1

Table of Contents

RPX Corporation
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Revenue
 
$
83,109

 
$
67,551

 
$
162,844

 
$
150,838

Cost of revenue
 
49,070

 
36,985

 
96,736

 
71,744

Selling, general and administrative expenses
 
25,904

 
18,997

 
52,799

 
38,456

Gain on sale of patent assets, net
 

 
(592
)
 

 
(592
)
Operating income
 
8,135

 
12,161

 
13,309

 
41,230

Interest and other income (expense), net:
 
 
 
 
 
 
 
 
Interest income
 
102

 
181

 
186

 
320

Interest expense
 
(883
)
 

 
(1,233
)
 

Other income (expense), net
 
(768
)
 
753

 
1,303

 
735

Total interest and other income (expense), net
 
(1,549
)
 
934

 
256

 
1,055

Income before provision for income taxes
 
6,586

 
13,095

 
13,565

 
42,285

Provision for income taxes
 
2,436

 
5,065

 
5,178

 
16,224

Net income
 
$
4,150

 
$
8,030

 
$
8,387

 
$
26,061

 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.08

 
$
0.15

 
$
0.16

 
$
0.48

Diluted
 
$
0.08

 
$
0.14

 
$
0.16

 
$
0.47

Weighted-average shares used in computing net income per share:
 
 
 
 
 
 
 
 
Basic
 
51,034

 
54,490

 
51,548

 
54,334

Diluted
 
51,557

 
55,687

 
52,089

 
55,457


The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Table of Contents

RPX Corporation
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
4,150

 
$
8,030

 
$
8,387

 
$
26,061

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized holding gains (losses) on available-for-sale securities arising during the period, net of tax
96

 
(216
)
 
247

 
(132
)
Foreign currency translation adjustments
(7,411
)
 

 
(6,480
)
 

Comprehensive income (loss)
$
(3,165
)
 
$
7,814

 
$
2,154

 
$
25,929


The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents

RPX Corporation
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Six Months Ended June 30,
 
2016
 
2015
Operating activities
 
 
 
Net income
$
8,387

 
$
26,061

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
85,585

 
69,991

Stock-based compensation
9,828

 
8,525

Excess tax benefit from stock-based compensation
(33
)
 
(1,195
)
Gain on sale of patent assets, net

 
(592
)
Amortization of premium on investments
972

 
3,181

Deferred taxes
198

 
(186
)
Unrealized foreign currency loss
1,213

 

Fair value adjustments on deferred payment obligation
(1,920
)
 
(705
)
Gain on extinguishment of deferred payment obligation
(463
)
 

Realized loss on exchange of short-term investments
290

 

Other
169

 

Changes in assets and liabilities, net of business acquired:
 
 
 
Accounts receivable, net
(15,207
)
 
13,203

Prepaid expenses and other assets
(1,281
)
 
(12,097
)
Accounts payable
211

 
418

Accrued and other liabilities
(6,097
)
 
(4,850
)
Deferred revenue
7,379

 
6,314

Net cash provided by operating activities
89,231

 
108,068

Investing activities
 
 
 
Purchases of investments
(31,150
)
 
(137,663
)
Maturities of investments
42,393

 
100,548

Sales of investments
145,925

 

Business acquisition, net of cash acquired
(228,453
)
 
(425
)
Decrease in restricted cash
225

 
269

Purchases of property and equipment
(2,087
)
 
(1,134
)
Acquisitions of patent assets
(36,546
)
 
(48,936
)
Proceeds from sale of patent assets

 
650

Acquisition of other assets

 
(2,500
)
Net cash used in investing activities
(109,693
)
 
(89,191
)
Financing activities
 
 
 
Repayment of principal on deferred payment obligations

 
(935
)
Proceeds from deferred payment obligations

 
6,270

Proceeds from issuance of term debt
100,000

 

Payment of debt issuance costs
(2,003
)
 

Repayment of principal on term debt
(1,250
)
 

Proceeds from exercise of stock options
247

 
4,294

Taxes paid related to net-share settlements of restricted stock units
(2,048
)
 
(2,307
)
Excess tax benefit from stock-based compensation
33

 
1,195

Payments of capital leases
(236
)
 

Repurchase of common stock
(39,072
)
 
(3,541
)
Net cash provided by financing activities
55,671

 
4,976

Foreign-currency effect on cash and cash equivalents
(152
)
 

Net increase in cash and cash equivalents
35,057

 
23,853

Cash and cash equivalents at beginning of period
94,983

 
78,019

Cash and cash equivalents at end of period
$
130,040

 
$
101,872


The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Table of Contents

RPX Corporation
Condensed Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)
 
Six Months Ended June 30,
 
2016
 
2015
 
 
 
 
Non-cash investing and financing activities
 
 
 
Change in patent assets purchased and accrued but not paid
$
(233
)
 
$
200

Change in fixed assets purchased and accrued but not paid
$
158

 
$

Patent assets received in barter transactions
$
381

 
$

Nonmonetary exchange for investments
$

 
$
5,935


The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Table of Contents


RPX Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)

1.
Nature of Business
RPX Corporation (also referred to herein as “RPX” or the “Company”) helps 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 the Company’s solution is defensive patent aggregation, in which it acquires patents or licenses to patents that are being or may be asserted against the Company’s current or prospective clients. The Company occasionally enters into agreements to acquire covenants not to sue in order to further mitigate its clients’ litigation risk. The acquired patents, licenses to patents, patent rights and agreements for covenants not to sue are collectively referred to as “patent assets.” The Company’s patent risk management clients pay an annual subscription fee and in return, receive a license from the Company to substantially all of its patent assets and access to its proprietary patent market intelligence and data. In some instances, the Company accepts a payment from a client to finance part or all of an acquisition involving patent assets that may cost more than the Company is prepared to spend with its own capital resources or that are relevant only to a very small number of clients. In these instances, the Company facilitates syndicated transactions that include cash contributions from participating clients in addition to their annual subscription fees.

In addition to the Company’s core solution, in August 2012, the Company began underwriting patent infringement liability insurance policies to insure against certain costs of litigation. In March 2014, the Company formed a reinsurance company to assume a portion of the underwriting risk on insurance policies that the Company issues on behalf of a Lloyd’s of London underwriting syndicate. The Company began placing new policies under the reinsurance model in May 2014. As of and for the six months ended June 30, 2016 , the effect of the insurance policies that the Company has issued or assumed through its reinsurance business was not material to the Company’s results of operations, financial condition or cash flows.

In January 2016 the Company acquired Inventus Solutions, Inc. ("Inventus"), now a wholly-owned subsidiary of the Company, and began offering its discovery services solution which provides technology-enabled services to assist leading law firms and corporate legal departments manage costs and risks related to the litigation discovery process. The Company's discovery services solution includes data hosting and backup, data processing and collection, project management, document review, and traditional document production. All of these services are designed to streamline the administration of litigation, investigations, and regulatory compliance.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated balance sheet as of June 30, 2016 , the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2016 and 2015 , and the condensed consolidated statements of cash flows for the six months ended June 30, 2016 and 2015 , are unaudited. The condensed consolidated balance sheet as of December 31, 2015 was derived from the audited consolidated financial statements which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 , which was filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26, 2016. The unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 .

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and with the instructions for Form 10-Q and Regulation S-X for interim financial statements. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring items, necessary to state fairly the results of the interim periods have been included in the accompanying financial statements. Operating results for the three or six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for any subsequent interim period or for the year ending December 31, 2016.

Significant Accounting Policies
Other than the adoption of the revenue recognition policies related to the acquired discovery services solution disclosed below, there have been no material changes to the Company’s significant accounting policies during the six  months ended  June 30, 2016 , as compared to the significant accounting policies presented under the heading “Basis of Presentation and Significant Accounting Policies” in Note 2 of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s Annual Report on Form 10-K filed with the SEC on February 26, 2016.


6


The Company recognizes revenue from its discovery services solution in accordance with Accounting Standards Codification 605, Revenue Recognition ("ASC 605"). Under ASC 605, revenue is recognized when persuasive evidence of an arrangement exists, the related services are provided, the price is fixed or determinable, and collectability is reasonably assured.

The following is a description of the Company's significant sources of revenue from its discovery services solution:

data hosting fees based on data stored and number of users;
fees for month-to-month delivery of services, such as data processing (conversion of data into organized, searchable electronic database), project management and data collection services;
document review services which assist clients in the manual review of data responsive to a legal matter; and
printing and binding services (paper-based services).

The Company enters into agreements pursuant to which the Company offers various discovery services. Clients are generally billed monthly based on contractual unit prices and volumes for services delivered. The agreements are typically for an indefinite period of time, however, they are cancelable at will by either party. The Company is entitled to all fees incurred for services performed. The majority of the Company's discovery services revenue comes from two types of billing arrangements: usage based and fixed fee.

Usage-based arrangements require the client to pay based upon predetermined unit prices and volumes for data hosing, data processing and paper-based services. Project management and review hours are billed based upon the number of hours worked by certain client service processionals at agreed upon rates.

In fixed-fee billing arrangements, the Company agrees to a pre-established monthly fee over a specified term in exchange for various services. The fees are not tied to the attainment of any contractually defined objectives and the monthly fee is nonrefundable.

Based on an evaluation of the discovery services delivered to each client, the Company has determined that each deliverable has stand-alone value to the client as each of the Company’s discovery services can be sold on a stand-alone basis by the Company and the discovery services are available from other vendors. Additionally, discovery services do not carry a significant degree of risk or unique acceptance criteria that would require a dependency on the performance of future services. The Company recognizes revenue from these arrangements based on contractually stated prices. The Company allocates revenue to the various units of accounting in its arrangements based on the best estimate of selling price for each unit of accounting, which are consistent with the stated prices in those arrangements.

The Company’s discovery services arrangements do not include any substantive general rights of return or other contingencies.

Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments -- Credit Losses ("ASU 2016-13") on measurement of credit losses on financial instruments. This ASU requires financial assets measured at amortized cost to be presented at the net amount expected to be collected and available-for-sale debt securities to record credit losses through an allowance for credit losses. ASU 2016-13 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted as early as of the fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09,  Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). This ASU affects entities that issue share-based payment awards to their employees. ASU 2016-09 is designed to simplify several aspects of accounting for share-based payment award transactions that include the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and forfeiture rate calculations. ASU 2016-09 will become effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted in any interim or annual period. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In February 2016 the FASB issued ASU 2016-02,  Leases (Topic 842)  (“ASU 2016-02”), which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The new standard is effective for interim and annual periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.


7


In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"), which amends guidance related to certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments. This update is effective for fiscal years beginning after December 15, 2018, and interim periods in those years. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which will supersede most existing revenue recognition guidance in U.S. generally accepted accounting principles (“U.S. GAAP”) once it becomes effective. ASU 2014-09 requires an entity to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance for gross versus net considerations in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing , which amends the guidance in ASU 2014-09 related to identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients , which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for noncash consideration, and completed contracts at transition. These ASUs will be effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted for annual and interim periods beginning after December 15, 2016. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
3.
Net Income Per Share
Basic and diluted net income per share are computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by using the weighted-average number of shares of common stock outstanding during the period, including potentially dilutive shares. Potentially dilutive shares include outstanding stock options and restricted stock units ("RSUs"). The dilutive effect of potentially dilutive shares is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair value of the Company's common stock can result in a greater dilutive effect from potentially dilutive shares.

The following table presents the calculation of basic and diluted net income per share (in thousands, except per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net income
$
4,150

 
$
8,030

 
$
8,387

 
$
26,061

Denominator:
 
 
 
 
 
 
 
Basic shares:
 
 
 
 
 
 
 
Weighted-average shares used in computing basic net income per share
51,034

 
54,490

 
51,548

 
54,334

Diluted shares:
 
 
 
 
 
 
 
Weighted-average shares used in computing basic net income per share
51,034

 
54,490

 
51,548

 
54,334

Dilutive effect of stock options and restricted stock units using the treasury-stock method
523

 
1,197

 
541

 
1,123

Weighted-average shares used in computing diluted net income per share
51,557

 
55,687

 
52,089

 
55,457

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.08

 
$
0.15

 
$
0.16

 
$
0.48

Diluted
$
0.08

 
$
0.14

 
$
0.16

 
$
0.47



8


The following securities were not included in the calculation of diluted shares outstanding as the effect would have been anti-dilutive (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Outstanding weighted-average:
 
 
 
 
 
 
 
Stock options
803

 
530

 
804

 
694

Restricted stock units
2,838

 
139

 
2,714

 
190

4.     Financial Instruments
The following tables present the Company's financial assets and liabilities measured at fair value on a recurring basis (in thousands):
 
June 30, 2016
 
Amortized Cost
 
Unrealized
 
Estimated Fair Value
 
Level 1
 
Level 2
 
 
Gains
 
Losses
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
$
15,096

 
$

 
$

 
$
15,096

 
$

 
$
15,096

Money market funds
10,341

 

 

 
10,341

 
10,341

 

Municipal bonds
11,601

 

 

 
11,601

 

 
11,601

U.S. government and agency securities
30,946

 

 

 
30,946

 
30,946

 

Corporate bonds
2,012

 

 

 
2,012

 

 
2,012

 
$
69,996

 
$

 
$

 
$
69,996

 
$
41,287

 
$
28,709

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
16,582

 
$
20

 
$

 
$
16,602

 
$
16,602

 
$

Municipal bonds
47,657

 
10

 
(8
)
 
47,659

 

 
47,659

Corporate bonds
2,505

 

 
(5
)
 
2,500

 

 
2,500

Commercial paper
2,188

 

 

 
2,188

 

 
2,188

Equity securities
123

 

 
(21
)
 
102

 
102

 

 
$
69,055

 
$
30

 
$
(34
)
 
$
69,051

 
$
16,704

 
$
52,347


9


 
December 31, 2015
 
Amortized Cost
 
Unrealized
 
Estimated Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
Gains
 
Losses
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
$
7,997

 
$

 
$

 
$
7,997

 
$

 
$
7,997

 
$

Municipal bonds
1,635

 

 

 
1,635

 

 
1,635

 

Money market funds
54,663

 

 

 
54,663

 
54,663

 

 

 
$
64,295

 
$

 
$

 
$
64,295

 
$
54,663

 
$
9,632

 
$

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
$
133,033

 
$

 
$
(96
)
 
$
132,937

 
$

 
$
132,937

 
$

Commercial paper
5,493

 

 
(3
)
 
5,490

 

 
5,490

 

Corporate bonds
30,488

 
3

 
(93
)
 
30,398

 

 
30,398

 

U.S. government and agency securities
61,559

 

 
(62
)
 
61,497

 

 
61,497

 

Equity securities
123

 

 

 
123

 
123

 

 

 
$
230,696

 
$
3

 
$
(254
)
 
$
230,445

 
$
123

 
$
230,322

 
$

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred payment obligations
$
6,270

 
$
3,887

 
$

 
$
2,383

 
$

 
$

 
$
2,383


The Company's financial assets are generally classified as available-for-sale. Available-for-sale securities are reported at fair value, with unrealized gains and losses, net of tax, included as a separate component of stockholders’ equity within accumulated other comprehensive loss. Realized gains and losses on these securities are included in other income (expense), net in the Company’s condensed consolidated statements of operations and have not been material for all periods presented.

As of June 30, 2016 and December 31, 2015 , approximately 92% and 87% , respectively, of the Company's marketable security investments mature within one year and 8% and 13% , respectively, mature within one to five years. As of June 30, 2016 , no individual securities incurred continuous unrealized losses for greater than 12 months .

As of June 30, 2016 and December 31, 2015 , the Company had short-term cost method investments of nil and $0.6 million , respectively, which were recorded at amortized cost in short-term investments in the Company's condensed consolidated balance sheets.

In connection with the Rockstar Transaction (see Note 12, "Commitments and Contingencies"), the Company received funding of $6.3 million from a syndicate participant. During the three months ended June 30, 2016 , the Company settled the loan from the syndicate participant.

Level 3 Valuation Techniques
Level 3 financial liabilities as of December 31, 2015 consisted of a repayment obligation to a third party for which determination of fair value required significant judgment and estimation. Balances categorized within Level 3 of the fair value hierarchy were analyzed each period for changes in estimates or assumptions and recorded as the Company deemed appropriate.

As of December 31, 2015 , the Company used the Black-Scholes option valuation model to estimate the fair value of the deferred payment obligation entered into in the Rockstar Transaction. This model incorporated assumptions about details such as the value of underlying securities, expected terms, maturity, risk-free interest rates, as well as volatility. A significant change in volatility and expected term could result in a significant change in fair value. The risk-free interest rate was based on the implied yield currently available on U.S. Treasury zero coupon issues with an equivalent remaining term at the measurement date. The expected volatility was calculated using the standard deviation of the underlying security's weekly returns over the estimated period of time to take to settle the liability. The expected term of the liability was determined by the estimated settlement date of the liability. Changes in the fair value were recorded in other income (expense), net in the Company's condensed consolidated statements of operations. As of June 30, 2016 , the Company no longer holds Level 3 financial assets or liabilities (see Note 12, "Commitments and Contingencies").

10


5.
Patent Assets, Net
Patent assets, net, consisted of the following (in thousands):
 
December 31,
2015
 
Additions
 
Disposals
 
June 30,
2016
Patent assets
$
824,258

 
$
37,160

 
$
(3,867
)
 
$
857,551

Accumulated amortization
(569,698
)
 
(79,430
)
 
3,822

 
(645,306
)
Patent assets, net
$
254,560

 
 
 
 
 
$
212,245


The Company’s acquired patent assets relate to technologies used or supplied by companies in a variety of market sectors, including consumer electronics, e-commerce, financial services, media distribution, mobile communications, networking, semiconductors and software. The Company amortizes each acquired patent asset portfolio on a straight-line basis over its estimated economic useful life. As of June 30, 2016 , the estimated economic useful lives of the Company’s patent assets generally ranged from 24 to 60 months . As of June 30, 2016 , the weighted-average estimated economic useful life at the time of acquisition of all patent assets acquired since the Company’s inception was 43 months .

As of June 30, 2016 , the Company expects amortization expense in future periods to be as follows (in thousands):
2016 (remainder)
$
69,839

2017
89,922

2018
34,798

2019
14,674

2020
3,012

Total estimated future amortization expense
$
212,245


Amortization expense related to the Company's patent assets was $37.7 million and $35.1 million for the three months ended June 30, 2016 and 2015 , respectively, and $79.5 million and $68.2 million for the six months ended June 30, 2016 and 2015 , respectively.
6.
Property and Equipment, Net
Property and equipment, net, consisted of the following (in thousands):
 
June 30,
2016
 
December 31,
2015
Internal-use software
$
8,329

 
$
7,654

Leasehold improvements
2,072

 
1,799

Computer, equipment and software
4,558

 
1,387

Furniture and fixtures
935

 
818

Construction-in-progress
398

 

Total property and equipment, gross
16,292

 
11,658

Less: Accumulated depreciation and amortization
(8,259
)
 
(6,925
)
Total property and equipment, net
$
8,033

 
$
4,733


Depreciation and amortization expense related to the Company's property and equipment was $0.8 million and $0.4 million for the three months ended June 30, 2016 and 2015 , respectively, and $1.4 million and $0.9 million for the six months ended June 30, 2016 and 2015 , respectively.

11


7.
Business Combinations
On January 22, 2016, the Company completed its acquisition of all of the issued and outstanding shares of Inventus, to expand into the litigation discovery services market. The final purchase price for Inventus was approximately $232 million , net of working capital adjustments, which the Company paid during the six months ended June 30, 2016 . The following table summarizes the cash paid and the preliminary estimated fair values of the assets and the liabilities assumed (in thousands) and the estimated useful lives of the acquired identifiable intangible assets:
 
Preliminary Estimated Fair Value
 
Estimated useful life
Current assets
$
19,357

 
 
Intangible assets:
 
 
 
Customer relationships
58,000

 
9 - 10 years
Trademarks
3,200

 
1 - 6 years
Developed technology
6,400

 
3 years
Goodwill
145,984

 
 
Property, plant, equipment and other long term assets
3,347

 
 
Deferred tax asset
10,595

 
 
Current liabilities
(7,280
)
 
 
Deferred tax liability
(5,477
)
 
 
Other long term liabilities
(826
)
 
 
Cash purchase consideration paid
$
233,300

 
 

The Company’s purchase price allocation for its acquisition of Inventus is preliminary and subject to revision as additional information about fair value of assets and liabilities becomes available. Additional information that existed as of the acquisition date but at that time was unknown to the Company may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. 

The intangible assets acquired are amortized on a straight-line basis which reflects the pattern in which the economic benefits of the intangible assets are expected to be utilized. The goodwill recorded is primarily attributable to the Company's opportunity to expand into the litigation discovery services market and is not expected to be deductible for tax purposes. For the six months ended June 30, 2016 , the Company recorded acquisition-related costs of $1.2 million which were expensed as incurred and included in selling, general and administrative expenses in the Company's condensed consolidated statements of operations. The Company has included the financial results of Inventus in its condensed consolidated financial statements from the acquisition date which includes revenue of $19.3 million and $29.8 million and operating income of $3.0 million and $3.6 million attributable to Inventus in the Company's condensed consolidated statement of operations for the three and six months ended June 30, 2016 , respectively.

The unaudited pro forma financial information in the table below summarizes the combined results of operations for the Company and Inventus as though the companies had been consolidated as of January 1, 2015, and includes the accounting effects resulting from the acquisition including amortization charges from the acquired intangible assets, $13.5 million of transaction costs incurred which were directly attributable to the acquisition of Inventus, and elimination of interest expenses and debt issuance and extinguishment costs associated with Inventus's historical debt which was extinguished upon the Company's acquisition of Inventus. This unaudited pro forma information also adjusts for Inventus's acquisition of London-based Unified OS Limited and certain of its affiliates as well as certain assets of Kooby LLP ("Unified"). The following unaudited pro forma financial information is for information purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place as of January 1, 2015 (in thousands, except per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
83,109

 
$
80,747

 
$
165,784

 
$
176,298

Net income
4,150

 
9,752

 
8,976

 
12,974

Basic net income per share
0.08

 
0.18

 
0.17

 
0.24

Diluted net income per share
0.08

 
0.18

 
0.17

 
0.23


12


8.
Goodwill
The changes in the carrying amounts of goodwill by operating segment were as follows (in thousands):
 
Patent Risk Management
 
Discovery Services
 
Total
Balance as of December 31, 2015
$
19,978

 
$

 
$
19,978

Goodwill from business acquisition

 
145,984

 
145,984

Foreign currency translation adjustments

 
(5,840
)
 
(5,840
)
Balance as of June 30, 2016
$
19,978

 
$
140,144

 
$
160,122

9.
Intangible Assets, Net
Intangible assets, net, consisted of the following (in thousands):
 
 
 
June 30, 2016
 
December 31, 2015
 
Weighted-average Life (years)
 
Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Covenant not to compete
3.0
 
$
1,900

 
$
(1,288
)
 
$
612

 
$
1,900

 
$
(971
)
 
$
929

Proprietary data and models
3.7
 
2,100

 
(1,906
)
 
194

 
2,100

 
(1,694
)
 
406

Customer relationships
9.3
 
57,718

 
(3,517
)
 
54,201

 
1,050

 
(659
)
 
391

Trademarks
4.9
 
4,904

 
(1,970
)
 
2,934

 
1,720

 
(1,645
)
 
75

Developed technology
3.0
 
6,233

 
(1,044
)
 
5,189

 
120

 
(120
)
 

 
 
 
$
72,855

 
$
(9,725
)
 
$
63,130

 
$
6,890

 
$
(5,089
)
 
$
1,801


As of June 30, 2016 , the Company expects amortization expense in future periods to be as follows (in thousands):
2016 (remainder)
$
4,971

2017
9,089

2018
8,559

2019
6,642

2020
6,521

Thereafter
27,348

Total estimated future amortization expense
$
63,130


Amortization expense related to the Company's intangible assets was $2.6 million and $0.4 million for the three months ended June 30, 2016 and 2015 , respectively, and $4.8 million and $0.9 million for the six months ended June 30, 2016 and 2015 , respectively.
10.
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
 
June 30,
2016
 
December 31,
2015
Accrued payroll-related expenses
$
7,618

 
$
11,105

Accrued expenses
3,838

 
3,737

Total accrued liabilities
$
11,456

 
$
14,842


13


11.
Debt
On February 26, 2016, the Company entered into a Credit Agreement (the "Credit Agreement") which provided for a $100 million five -year term facility (the "Term Facility") and a $50 million five -year revolving credit facility (the "Revolving Credit Facility"), which remains undrawn as of June 30, 2016 . The Term Facility bears interest which is payable quarterly in arrears at the Company's option equal to either a base rate plus a margin ranging from 1.25% to 1.75% per annum or, at the Company's election, the one-, two-, three-, or six-month London interbank offered rate ("LIBOR") plus a margin ranging from 2.25% to 2.75% per annum, based upon the ratio of the Company's debt to consolidated EBITDA ratio. The outstanding balance on the Term Facility bore interest during the six months ended June 30, 2016 at an average interest rate of 2.9% during the period which approximates fair value. The Revolving Credit Facility bears a commitment fee on undrawn balances of 0.35% to 0.45% per annum, also based upon the Company's debt to consolidated adjusted EBITDA ratio, that are expensed as incurred. The Credit Agreement contains financial covenants requiring the Company to maintain certain leverage and fixed charge ratios. The Company is compliant with these covenants as of June 30, 2016 . The Credit Agreement also includes limitations on the Company's debt incurrence, dividend payments, and disposal activities.

As of June 30, 2016 , the Term Facility requires principal repayments in accordance with the following schedule (in thousands):
2016 (remainder)
 
$
2,500

2017
 
6,875

2018
 
9,375

2019
 
11,875

2020
 
18,125

2021
 
50,000

Long-term debt, gross
 
98,750

Unamortized debt issuance costs
 
(1,866
)
Long-term debt, net
 
$
96,884

 
 
 
Reported as:
 
 
Current portion of long-term debt
 
$
5,224

Long-term debt
 
91,660

Total
 
$
96,884

12.
Commitments and Contingencies
Commitments
The Company generally does not enter into long-term minimum purchase commitments. Its principal long-term commitments consist of obligations under operating leases for office space. Other than certain commitments obtained through the Company's acquisition of Inventus as shown below, there were no substantial changes to the Company’s contractual obligations or commitments during the  six  months ended  June 30, 2016  as compared to those presented under the heading “Commitments and Contingencies” in Note 10 of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s Annual Report on Form 10-K filed with the SEC on February 26, 2016.

Rent expense related to non-cancelable operating leases was $1.2 million and $0.8 million for the three months ended June 30, 2016 and 2015 , respectively, net of sublease income of $0.2 million earned during each period. Rent expense related to non-cancelable operating leases was $2.4 million and $1.7 million for the six months ended June 30, 2016 and 2015 , respectively, net of sublease income of $0.4 million and $0.3 million , respectively.


14


As of June 30, 2016 , the aggregate future non-cancelable minimum lease payments from the Company's operating leases acquired through its acquisition of Inventus are as follows (in thousands):
2016
$
505

2017
1,148

2018
1,135

2019
904

2020
619

Thereafter
838

Future non-cancelable minimum operating lease payments
$
5,149

Less: minimum payments to be received from non-cancelable subleases
(597
)
Total future non-cancelable minimum operating lease payments, net
$
4,552


Through its acquisition of Inventus, the Company also acquired a three-year contractual commitment totaling $5.3 million related to its third-party discovery service software license, of which $1.8 million remains unpaid and will be paid within twelve months.

Deferred Payment Obligations
On December 22, 2014, the Company and RPX Clearinghouse LLC (a wholly-owned subsidiary of the Company) entered into an Asset Purchase Agreement by and among Rockstar Consortium US LP, Rockstar Consortium LLC, Bockstar Technologies LLC, Constellation Technologies LLC, MobileStar Technologies LLC, and NetStar Technologies LLC (the “Sellers”), for the purchase of substantially all of the patent assets owned or controlled by the Sellers (the “Rockstar Transaction”). In connection with the Rockstar Transaction, the Company acquired certain common stock, convertible preferred stock, and redeemable convertible preferred stock investments held by the Sellers. To fund the acquisition of these securities, the Company received funding of $6.3 million from a syndicate participant and seller financing of $5.9 million . The seller financing was settled during the year ended December 31, 2015.

The loan received from the syndicate participant bore no interest. The terms of the obligation required repayment up to the $6.3 million received only to the extent proceeds are received from the sale of the common and convertible preferred stock securities, which resulted in a difference between the funding received and the fair value of the loan. The Company elected to carry this loan at fair value and categorized it as a Level 3 instrument due to the significance of unobservable inputs developed using company-specific information to estimate the loan’s fair value. Changes in fair value are reported in other income (expense), net in the Company's condensed consolidated statements of operations. This loan was settled without payment during the three months ended June 30, 2016 which resulted in a gain on extinguishment of $0.5 million recognized in other income (expense), net in the condensed consolidated statements of operations during the three months ended June 30, 2016 . This loan decreased from $2.4 million to nil during the six months ended June 30, 2016 due to a $1.9 million fair value adjustment and a $0.5 million gain on extinguishment which were recognized in other income (expense), net in the condensed consolidated statement of operations.

Litigation
From time to time, the Company may be a party to various litigation claims in the normal course of business. Legal fees and other costs associated with such actions are expensed as incurred. The Company assesses, in conjunction with its legal counsel, the need to record a liability for litigation or contingencies. A liability is recorded when and if it is determined that such a liability for litigation or contingencies is both probable and reasonably estimable. No liability for litigation or contingencies was recorded as of June 30, 2016 or December 31, 2015 .

In April 2016, Sourceprose Corporation filed a complaint in the U.S. District Court for the Western District of Texas against the Company alleging breach of an agreement with the plaintiff to purchase certain patent assets and breach of a non-disclosure agreement with plaintiff.  In July 2016, the Court transferred the litigation to the U.S. District Court for the Northern District of California. The plaintiff seeks monetary damages and injunctive relief.  The Company is not currently able to determine whether there is a reasonable possibility that a loss has been incurred, nor can we estimate the potential loss or range of the potential loss that may result from this litigation.

In June 2013, Kevin O’Halloran, as Trustee of the Liquidating Trust of Teltronics, Inc. (the “Debtor”), filed a complaint in the U.S. Bankruptcy Court for the Middle District of Florida against the Company and Harris Corporation (the “Defendants”). The complaint alleges that the Defendants are liable under federal and state bankruptcy law regarding fraudulent transfers for the value of a patent portfolio purchased by the Company from Harris Corporation pursuant to an agreement entered into in January 2009, and within four years of the date the Debtor filed its petition in bankruptcy. In February 2015, the Court held a trial and in November 2015

15


entered judgment in favor of the Defendants. In December 2015, the Debtor filed an appeal of the judgment. The Company is not currently able to determine whether there is a reasonable possibility that a loss has been incurred, nor can it estimate the potential loss or range of the potential loss that may result from this litigation.

In March 2012, Cascades Computer Innovations LLC filed a complaint in U.S. District Court for the Northern District of California (the “Court”) against the Company and five of its clients (collectively the “Defendants”). The complaint alleges that the Defendants violated federal antitrust law, California antitrust law and California unfair competition law. The complaint further alleges that after the Company terminated its negotiations with the plaintiff to license certain patents held by the plaintiff, the Defendants violated the law by jointly refusing to negotiate or accept licenses under the plaintiff’s patents. The plaintiff seeks unspecified monetary damages and injunctive relief. In January 2013, the Court dismissed the complaint against the Defendants and granted the plaintiff leave to amend its complaint. In February 2013, the plaintiff filed an amended lawsuit alleging that the Defendants violated federal antitrust law, California antitrust law and California unfair competition law. In April 2016, the Court entered a final judgment in favor of the Defendants on all the plaintiff's claims. In April 2016, the plaintiff filed an appeal of the judgment. The Company is not currently able to determine whether there is a reasonable possibility that a loss has been incurred, nor can it estimate the potential loss or range of the potential loss that may result from this litigation.

Guarantees and Indemnifications
The Company has, in connection with the sale of patent assets, agreed to indemnify and hold harmless the buyer of such patent assets for losses resulting from breaches of representations and warranties made by the Company. The terms of these indemnification agreements are generally perpetual. The maximum amount of potential future indemnification is unlimited. To date, the Company has not paid any amount to settle claims or defend lawsuits. The Company is unable to reasonably estimate the maximum amount that could be payable under these arrangements since these obligations are not capped but are conditional to the unique facts and circumstances involved. The Company had no liabilities recorded for these agreements as of June 30, 2016 or December 31, 2015 . The Company has no reason to believe that there is any material liability related to such indemnification provisions. The Company does not indemnify its clients for patent infringement.

In accordance with its amended and restated bylaws, the Company also indemnifies certain officers and employees for losses incurred in connection with actions, suits or proceedings threatened or brought against such officer or employee arising from his or her service to the Company as an officer or employee, subject to certain limitations. The term of the indemnification period is indefinite. The maximum amount of potential future indemnification is unspecified. The Company has no reason to believe that there is any material liability for actions, events or occurrences that have occurred to date.

Reserves for Known and Incurred but not Reported Claims
In August 2012, the Company began offering insurance to cover certain costs of litigation brought against its insured clients. In March 2014, the Company formed a reinsurance company to assume a portion of the underwriting risk on insurance policies that the Company issues on behalf of a Lloyd's of London underwriting syndicate. As of June 30, 2016 , the Company recorded a reserve of $0.7 million for known and incurred but not reported claims that represents estimated claim costs and related expenses for the policies underwritten and its portion of the underwriting risk on policies that the Company issued on behalf of the Lloyd's of London underwriting syndicate. The Company regularly reviews loss reserves using a variety of actuarial techniques and updates them as its loss experience develops.

16


13.
Stockholders’ Equity
Equity Plans
A summary of the Company’s activity under its equity-settled award plans and related information is as follows (in thousands, except per share data):
 
 
 
Options Outstanding
 
Shares Available for Grant
 
Number of Shares
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Life in Years
 
Aggregate Intrinsic Value
Balance - December 31, 2015
3,159

 
2,340

 
$
11.11

 
 
 
 
Shares authorized (1)
2,000

 

 

 
 
 
 
Options exercised

 
(60
)
 
4.28

 
 
 
 
Options forfeited/canceled
77

 
(77
)
 
13.18

 
 
 
 
Restricted stock units granted
(2,466
)
 

 

 
 
 
 
Restricted stock units forfeited
366

 

 

 
 
 
 
Restricted stock units withheld related to net-share settlement of restricted stock units
218

 

 

 
 
 
 
Balance - June 30, 2016
3,354

 
2,203

 
11.22

 
4.5
 
$
1,940

Vested and exercisable - June 30, 2016
 
 
2,148

 
11.30

 
4.5
 
1,867

Vested and expected to vest - June 30, 2016
 
 
2,202

 
11.23

 
4.5
 
1,938

( 1) In the first quarter of 2016 , the Company reserved an additional 2.0 million shares of its common stock for future issuance under the 2011 Plan.

The aggregate intrinsic value of stock options exercised during the three months ended June 30, 2016 and 2015 was $0.2 million and $4.3 million , respectively, and $0.4 million and $5.9 million for stock options exercised during the six months ended June 30, 2016 and 2015 , respectively. The total grant date fair value of stock options vested during the three months ended June 30, 2016 and 2015 was $0.5 million and $0.8 million , respectively, and $1.1 million and $1.8 million for stock options vested during the six months ended June 30, 2016 and 2015 , respectively.

Restricted Stock Units
The summary of RSU activity, which includes performance-based restricted stock units (“PBRSUs”), is as follows (in thousands, except per share data):
 
 Number of Shares
 
Weighted-Average Grant Date Fair Value
 
Aggregate Intrinsic Value
Non-vested units - December 31, 2015
2,490

 
$
13.35

 
 
Granted
2,466

 
11.03

 
 
Vested
(644
)
 
13.55

 
 
Forfeited
(366
)
 
13.55

 
 
Non-vested units - June 30, 2016
3,946

 
11.81

 
$
36,178


The total grant date fair value of RSUs vested during the three months ended June 30, 2016 and 2015 was $3.4 million and $4.8 million , respectively, and $6.2 million and $7.1 million during the six months ended June 30, 2016 and 2015 , respectively.

In October 2013, the Board of Directors approved net-share settlement for tax withholdings on RSU vesting. During the six months ended June 30, 2016 , the Company withheld issuing 217,530 shares of its common stock based on the value of the RSUs on their vesting dates as determined by the Company’s closing common stock price. Total payments to taxing authorities for employees’ minimum tax obligations were $2.0 million for the six months ended June 30, 2016 , and were recorded as a reduction to additional paid-in capital and reflected as a financing activity within the condensed consolidated statements of cash flows. The net-share settlements reduced the number of shares that would have otherwise been issued on the vesting date and increased the number of shares reserved for future issuance under the 2011 Plan.


17


Stock-Based Compensation Related to Employees and Directors
The fair value of RSUs granted to employees and directors is measured by reference to the fair value of the underlying shares on the date of grant.

PBRSUs granted during the six months ended June 30, 2016 contain service, performance, and market conditions that affect the quantity of awards that will vest. PBRSUs granted during the six months ended June 30, 2015 contain both service and performance conditions that affect the quantity of awards that will vest. During the three months ended June 30, 2016 and 2015 , the Company granted 96,282 and 54,375 PBRSUs, respectively. During the six months ended June 30, 2016 and 2015 , the Company granted 96,282 and 54,375 PBRSUs, respectively. The Company estimates the grant date fair value of PBRSUs which include market conditions using the Monte Carlo simulation model which are only applicable to the PBRSUs granted during the six months ended June 30, 2016 . The weighted-average assumptions used to estimate the fair value of PBRSUs with market conditions and the resulting fair values are as follows:
 
Three and Six Months Ended June 30,
 
2016
Dividend yield
%
Risk-free rate
1.08
%
Expected volatility
38
%
Expected term - in years
4

Grant date fair value
$
6.28


Stock-based compensation expense related to stock options granted to employees and directors was $0.4 million and $0.7 million for the three months ended June 30, 2016 and 2015 , respectively, and $0.8 million and $1.5 million for the six months ended June 30, 2016 and 2015 , respectively. Stock-based compensation expense related to RSUs granted to employees and directors was $4.5 million and $3.7 million for the three months ended June 30, 2016 and 2015 , respectively, and $8.7 million and $6.8 million for the six months ended June 30, 2016 and 2015 , respectively. Stock-based compensation expense related to PBRSUs granted to employees was nil and $0.2 million for the three month periods ended June 30, 2016 and 2015 , respectively, and $0.3 million and $0.3 million for the six months ended June 30, 2016 and 2015 , respectively.

As of June 30, 2016 , there was $0.2 million and $43.4 million of unrecognized compensation cost related to stock options and RSUs, including PBRSUs, respectively, which is expected to be recognized over a weighted-average period of 0.2 and 2.9 , respectively. Future grants of equity awards will increase the amount of stock-based compensation expense to be recorded.

Stock Repurchase Program
On February 10, 2015, the Company announced that its Board of Directors had authorized a share repurchase program under which the Company is authorized to repurchase up to  $75.0 million  of its outstanding common stock with no expiration date from the date of authorization. In March 2016 and May 2016, the Company increased its share repurchase program by $25 million and $50 million , respectively, for a total amount authorized of $150 million . As of  June 30, 2016 , the Company repurchased  $65.2 million of the outstanding common stock. Under the program, shares may be purchased in open market transactions, including through block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The share repurchase program does not have an expiration date and may be suspended, terminated or modified at any time for any reason. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. The Company repurchased shares of its common stock in the open market, which were retired upon repurchase. The purchase price for the repurchased shares is reflected as a reduction to common stock and retained earnings in the Company's condensed consolidated balance sheet. Share repurchase activity during the period presented was as follows (in thousands, except per share data):
 
Shares Repurchased
 
Average Price per Share
 
Value of Shares Repurchased
Cumulative repurchase activity as of December 31, 2015
1,993

 
$
13.12

 
$
26,175

Repurchase activity during the period
3,873

 
10.09

 
39,072

Cumulative repurchase activity as of June 30, 2016
5,866

 
$
11.12

 
$
65,247



18


14.
Income Taxes
The Company uses an estimated annual effective tax rate based upon a projection of its annual fiscal year results to measure the income tax benefit or expense recognized in each interim period. The Company’s effective tax rate, including the impact of discrete benefit items, was  37% and 39% for the three months ended  June 30, 2016  and  2015 , respectively, and 38% for each six month period ended June 30, 2016 and 2015 .

The Company's 2012 through 2015 tax periods are open to examination by the Internal Revenue Service and the 2011 through 2015 tax periods are open to examination by most state tax authorities. Inventus's federal income tax return for fiscal year 2013 is currently under examination by the Internal Revenue Service and at this time, although the outcome is subject to significant uncertainty, the Company believes it has valid positions supporting its tax return and does not expect that proposed adjustments, if any, would be material to the Company's consolidated financial statements.
15.
Related-Party Transactions
During each of the three month periods ended June 30, 2016 and 2015 , four members of the Company’s Board of Directors also served on the boards of directors of RPX clients. During the six months ended June 30, 2016 and 2015 , four and five members, respectively, of the Company's Board of Directors also served on the boards of directors of RPX clients. The Company recognized subscription revenue from these clients in the amount of $2.5 million and $2.3 million for the three month periods ended June 30, 2016 and 2015 , respectively, and $4.8 million and $4.7 million for the six month periods ended June 30, 2016 and 2015 , respectively. The Company recognized selling, general, and administrative expenses from products and services provided by one of these clients of $0.1 million for each three month period ended June 30, 2016 and 2015 , and $0.2 million for each six month period ended June 30, 2016 and 2015 . As of June 30, 2016 and December 31, 2015 , there were $0.1 million and nil receivables, respectively, due from these clients. These transactions with related-parties were conducted on terms equivalent to those prevailing in arm's length transactions.
16.
Segment Reporting
Operating segments are components of an enterprise about which separate financial information is available. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. Prior to the acquisition of Inventus in January 2016, the Company’s Chief Executive Officer reviewed financial information presented on a consolidated basis and, as a result, the Company concluded that there was only one operating and reportable segment. Subsequent to the acquisition of Inventus (see Note 7, Business Combinations), the Company's Chief Executive Officer reviews separate financial information for the patent risk management and discovery services businesses. Therefore as of January 2016, the Company has two reportable segments: 1) Patent risk management which generates its revenues primarily from membership subscriptions, premiums earned from insurance policies, and management fees for marketing, underwriting, and claim management and 2) Discovery services which generates its revenues primarily from fees generated for data collection, hosting and processing, project management, and document review services. There are no significant internal revenue transactions between these two reportable segments.

Although Adjusted EBITDA is not a measure of financial performance determined in accordance with GAAP, the Company's chief operating decision maker evaluates segment financial performance by utilizing the segment's Adjusted EBITDA because the Company believes it is a useful supplemental measure that reflects core operating performance and provides an indicator of the segment's ability to generate cash. The Company defines Adjusted EBITDA as net income exclusive of provision for income taxes, interest and other income (expense), net, stock-based compensation and related employer payroll taxes, depreciation, and amortization. There are limitations in using the Company's measures of financial performance that are not determined in accordance with GAAP and these may be different from other financial measures not determined in accordance with GAAP used by other companies. These financial measures are limited in value because they exclude certain items that may have a material impact on the Company's reported financial results. In addition, they are subject to inherent limitations as they reflect the exercise of judgment by the Company about which items are adjusted to calculate its financial measures not determined in accordance with GAAP. The presentation of financial measures not determined in accordance with GAAP should not be considered in isolation or as a substitute for or superior to financial results determined in accordance with GAAP.


19


Summarized financial information by segment for the three and six months ended June 30, 2016 utilized by the Company's chief operating decision maker is as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2016
 
 
 
 
Patent Risk Management
 
 
 
Revenue
$
63,851

 
$
133,008

Cost of revenue
39,150

 
81,782

Selling, general and administrative expenses
19,603

 
41,537

Operating income
5,098

 
9,689

Stock-based compensation, including related taxes
4,835

 
9,769

Depreciation and amortization
38,519

 
81,176

Adjusted EBTIDA
$
48,452

 
$
100,634

 
 
 
 
Discovery Services
 
 
 
Revenue
$
19,258

 
$
29,836

Cost of revenue
9,920

 
14,954

Selling, general and administrative expenses
6,301

 
11,262

Operating income
3,037

 
3,620

Stock-based compensation, including related taxes
141

 
229

Depreciation and amortization
2,511

 
4,409

Adjusted EBTIDA
$
5,689

 
$
8,258

 
 
 
 
Consolidated
 
 
 
Revenue
$
83,109

 
$
162,844

Cost of revenue
49,070

 
96,736

Selling, general and administrative expenses
25,904

 
52,799

Operating income
$
8,135

 
$
13,309


The Company markets its solutions to companies around the world. Revenue is generally attributed to geographic areas based on the country in which the client is domiciled. The following table presents revenue by location and revenue generated by country as a percentage of total revenue for the applicable period, for countries representing 10% or more of revenues for one or more of the periods presented (dollars in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
United States
$
47,127

 
57
%
 
$
41,949

 
62
%
 
$
94,652

 
58
%
 
$
96,995

 
65
%
Japan
8,908

 
11

 
9,153

 
13

 
17,913

 
11

 
18,485

 
12

Korea
6,895

 
8

 
7,282

 
11

 
14,339

 
9

 
13,969

 
9

Rest of world
20,179

 
24

 
9,167

 
14

 
35,940

 
22

 
21,389

 
14

Total revenue
$
83,109

 
100
%
 
$
67,551

 
100
%
 
$
162,844

 
100
%
 
$
150,838

 
100
%


20


The following table reconciles the Company's subtotal segment Adjusted EBITDA to consolidated net income:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2016
 
 
 
 
Subtotal segment adjusted EBITDA
$
54,141

 
$
108,892

Depreciation and amortization
(41,030
)
 
(85,585
)
Stock-based compensation, including related taxes
(4,976
)
 
(9,998
)
Interest and other income (expense), net
(1,549
)
 
256

Provision for income taxes
(2,436
)
 
(5,178
)
Net income
$
4,150

 
$
8,387



21


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 (“SEC”) on February 26, 2016.

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 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, patent acquisition spending, our acquisition of Inventus, and our competitive position. These statements are based on the beliefs and assumptions of our management based on information that is 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 SEC on February 26, 2016. 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
Since our founding in 2008, we have been providing a rational alternative to litigation through our patent risk management solution. In January 2016 through our acquisition of Inventus, we began offering technology-enabled discovery services to our clients.

Patent Risk Management
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 patent risk management 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 patent risk management clients include companies that design, make or sell technology-based products and services as well as companies that use technology in their businesses.

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 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, 2016 , we completed 43 acquisitions of patent assets and our gross and net patent acquisition spend totaled $37.4 million and $37.1 million , respectively. From our inception through June 30, 2016 , we have completed 350 acquisitions of patent assets with gross and net patent acquisition spend of $2.1 billion and $867.1 million , respectively.

Insuring against the costs of patent litigation is a natural extension of our core defensive patent acquisition service. In August 2012, we started to offer patent infringement liability insurance, which is a liability insurance policy for operating companies that covers certain costs associated with patent infringement lawsuits. The insurance product complements our core defensive patent acquisition service, enabling policyholders to better manage and mitigate the risk of patent litigation. In connection with an evolution in the way that we sell insurance policies, during March 2014 we formed a reinsurance company to assume a portion of the underwriting risk on insurance policies that we issue on behalf of a Lloyd’s of London underwriting syndicate. We began issuing new policies under the reinsurance model in May 2014. As of June 30, 2016 , we had a total of 153 active insurance policies. The effect of the insurance policies that we have issued or assumed through our reinsurance business was not material to our results of operations or financial condition for the six months ended June 30, 2016 or 2015 .


22

Table of Contents

During the six months ended June 30, 2016 and 2015 , revenue from our patent risk management solution was $133.0 million and $150.8 million , respectively. Our patent risk management client count, which includes both clients who receive our defensive patent acquisition service and our insurance service, increased by 63 clients during the six months ended June 30, 2016 , bringing our total client network to 317 as of June 30, 2016 .

Discovery Services
In January 2016, through our wholly-owned subsidiary Inventus, we began offering technology-enabled discovery services to assist leading law firms and corporate legal departments manage costs and risks related to the litigation discovery process. Our more than 1,000 discovery services clients in nearly a dozen countries benefit from our discovery services solution, which includes data hosting and backup, data processing and collection, project management, document review, and traditional document production. All of these services are designed to streamline the administration of litigation, investigations, and regulatory compliance. Certain of our discovery services operations are denominated in currencies other than the U.S. Dollar, primarily the British Pound and the European Euro, and therefore these operations are exposed to foreign exchange rate fluctuations.

Our discovery services solution focuses on the process of consolidation and organization of data into meaningful discovery information powered by a mix of third-party and proprietary software. This allows our discovery services clients to efficiently and effectively manage a portfolio of litigation discovery matters in a central location.
Key Components of Results of Operations
Revenue
Subscription revenue includes membership subscriptions to our defensive patent aggregation services, premiums earned from insurance policies, and management fees. Historically, the majority of our revenue has consisted of fees paid by our clients under subscription agreements. Subscription revenue will be positively or negatively impacted by the financial performance of our patent risk management clients since their subscription fees typically reset annually based upon their most recently reported annual financial results. Additionally, in August 2012, we launched our insurance product and started to recognize insurance premium revenue from the insurance policies that we underwrite. As the primary insurer, we had been recognizing the full insurance premium as revenue. In May 2014, we began to assume a portion of the underwriting risk on insurance policies that we issue on behalf of a Lloyd's of London underwriting syndicate, and as a result we recognize only the portion of the underwriting risk that we assume. In addition, we receive management fees for marketing, underwriting, and claims management services. Although we expect this revenue to increase as we sell more insurance policies in the future, for the six months ended June 30, 2016 and 2015 , insurance premium revenue was not material to our results of operations.

Discovery revenue represents fees generated from services rendered in connection with our discovery services solution. These services are typically comprised of data collection, hosting and processing, project management, and document review services, and are generally billed in arrears based on the number of users, amount of data stored, and/or number of consulting hours. Our discovery revenue may fluctuate significantly based on the project-oriented nature of the discovery services we provide.

We recognize revenue from the sale of licenses and advisory fee income in connection with syndicated 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 may continue to experience revenue growth on an annual basis, we do not believe that our rate of growth since inception is representative of anticipated future revenue growth.

Cost of Revenue
Cost of revenue from our patent risk management solution primarily consists of amortization expenses related to acquired patent assets. Acquired patent assets are capitalized and amortized ratably over their estimated useful lives, which typically relates to the anticipated cash flows from clients and prospects that will benefit from the transaction. Also included in the cost of revenue from our patent risk management solution are expenses incurred to maintain our patents, prosecute our patent applications, conduct inter partes reviews and prior art searches, and amortization expense for acquired intangible assets and internally developed software. With the launch of our insurance offering in August 2012, cost of revenue from our patent risk management solution began to include premiums ceded to reinsurers and loss reserves. We began to issue new policies under the reinsurance model in May 2014 and under this model we do not cede premiums.

Our cost of revenue for the patent risk management solution is primarily driven by the amortization of previously acquired patent assets, which are typically amortized over an estimated useful life of 24 to 60 months. From time to time, we may acquire patent assets that are valuable to our clients and prospects with an estimated useful life that is significantly less than the historical weighted-average of patent assets previously acquired, resulting in increased patent asset amortization expense in immediate periods following acquisition. Estimating the economic useful lives of our patent assets depends on various factors including whether we acquire patents or licenses to patents, and the remaining statutory life of the underlying patents, either of which could result in shorter amortization periods. We believe that amortization periods of patent assets to be acquired in future periods may be

23

Table of Contents

amortized over shorter periods than the historical weighted-average of 43 months . We expect our cost of revenue from our patent risk management solution 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.

Cost of revenue from our discovery services consists primarily of compensation costs for employees and third-party contractors who deliver services to our clients, costs incurred to maintain, secure, and store hosted data, license fees for the software we utilize in our discovery services process, and amortization of our identifiable intangible assets for technology used to provide our discovery services to our clients. Our cost of revenue related to hosting data and software license fees is primarily fixed but can fluctuate based on levels of data hosted and number of users our clients choose to have access to the software.

Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of salaries and related expenses, including stock-based compensation expense, amortization related to our intangible assets, cost 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.

Other Income (Expense), Net
Other income (expense), net consists of interest income earned on our cash, cash equivalents and short-term investments, interest expense incurred on our term debt, gains or losses due to foreign currency fluctuations, as well as changes in fair value of our deferred payment obligations.

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.
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.

Other than the adoption of the revenue recognition policies related to the acquired discovery services solution, there have been no material changes to the Company’s significant accounting policies during the six  months ended  June 30, 2016 , as compared to the significant accounting policies presented under the heading “Basis of Presentation and Significant Accounting Policies” in Note 2 of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s Annual Report on Form 10-K filed with the SEC on February 26, 2016.

We recognize revenue from our discovery services solution in accordance with Accounting Standards Codification 605, Revenue Recognition ("ASC 605"). Under ASC 605, revenue is recognized when persuasive evidence of an arrangement exists, the related services are provided, the price is fixed or determinable, and collectability is reasonably assured. Our revenue recognition policies related to our discovery services are described in more detail in Note 2, "Basis of Presentation and Significant Accounting Policies," in Notes to Condensed Consolidated Financial Statements (unaudited) in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Recent Accounting Pronouncements
Our recent accounting pronouncements are described in more detail in Note 2, "Basis of Presentation and Significant Accounting Policies," in Notes to Condensed Consolidated Financial Statements (unaudited) in Part I, Item 1 of this Quarterly Report on Form 10-Q.


24

Table of Contents

Results of Operations
The following table sets forth our condensed consolidated statement 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,
 
 
2016
 
2015
 
2016
 
2015
Revenue
 
$
83,109

 
$
67,551

 
$
162,844

 
$
150,838

Cost of revenue
 
49,070

 
36,985

 
96,736

 
71,744

Selling, general and administrative expenses
 
25,904

 
18,997

 
52,799

 
38,456

Gain on sale of patent assets, net
 

 
(592
)
 

 
(592
)
Operating income
 
8,135

 
12,161

 
13,309

 
41,230

Other income (expense), net
 
(768
)
 
753

 
1,303

 
735

Income before provision for income taxes
 
6,586

 
13,095

 
13,565

 
42,285

Provision for income taxes
 
2,436

 
5,065

 
5,178

 
16,224

Net income
 
$
4,150

 
$
8,030

 
$
8,387

 
$
26,061


The following table sets forth our condensed consolidated statement of operations data as a percentage of revenue.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Revenue
 
100
 %
 
100
 %
 
100
%
 
100
 %
Cost of revenue
 
59

 
55

 
59

 
48

Selling, general and administrative expenses
 
31

 
28

 
32

 
25

Gain on sale of patent assets, net
 

 
(1
)
 

 

Operating income
 
10

 
18

 
9


27

Other income (expense), net
 
(1
)
 
1

 
1

 

Income before provision for income taxes
 
9

 
19

 
10

 
27

Provision for income taxes
 
3

 
7

 
3

 
11

Net income
 
6
 %
 
12
 %
 
7
%
 
16
 %

Revenue
Our revenue for the three months ended June 30, 2016 was $83.1 million compared to $67.6 million during the same period a year prior, an increase of $15.5 million , or 23% . Subscription revenue, which includes membership subscriptions to our defensive patent aggregation services, premiums earned from insurance policies, and management fees, for the three months ended June 30, 2016 was $63.2 million