ACTG 201312.31 10-K




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________ 

FORM 10-K

x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013

OR

  o  TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM            TO           .

Commission File Number 0-26068
____________________
(Exact name of registrant as specified in its charter)
 
DELAWARE
95-4405754
(State or other jurisdiction of
(I.R.S. Employer
incorporation organization)
Identification No.)
 
 
500 NEWPORT CENTER DRIVE,
 
NEWPORT BEACH, CA
92660
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code: (949) 480-8300

Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 Name of Each Exchange on Which Registered
Common Stock, $0.001 par value
The NASDAQ Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: None
____________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.   Yes R No £
   
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes £  No  R

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 filing requirements for the past 90 days.   Yes R  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 R No £

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  R

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    R
  
      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 Act).   Yes  £  No  R

The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant on June 30, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, computed by reference to the last sale price of the registrant’s common stock as reported by The Nasdaq Global Select Market on such date, was approximately $1,084,840,000. This computation assumes that all executive officers and directors are affiliates of the registrant. Such assumption should not be deemed conclusive for any other purpose.
As of February 25, 2014, 50,640,123 shares of common stock were issued and outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
In accordance with General Instruction G(3) to Form 10-K, portions of the registrant’s Definitive Proxy Statement on Schedule 14A for its Annual Meeting of Stockholders to be filed with the Commission within 120 days after the close of the fiscal year covered by this Annual Report on Form 10-K are incorporated by reference into Part III of this Annual Report on Form 10-K. Only those portions of the proxy statement that are specifically incorporated by reference herein shall constitute a part of this Annual Report on Form 10-K.






ACACIA RESEARCH CORPORATION
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2013
TABLE OF CONTENTS

 
 
Page
PART I
 
 
 
Item 1.
Item 1A.
Item 1B.  
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
PART II
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
 
PART III
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
 
PART IV
 
 
 
Item 15.


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PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

As used in this Annual Report on Form 10-K, “we,” “us” and “our” refer to Acacia Research Corporation and/or its wholly and majority-owned operating subsidiaries.  All patent acquisition, development, licensing and enforcement activities are conducted solely by certain of our wholly owned operating subsidiaries.

This Annual Report on Form 10-K, or the annual report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which include, without limitation, statements about our future business operations and results, our strategies and competition, and other forward-looking statements included in this annual report. Such statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms, variations of such terms or the negative of such terms. Such statements are based on management’s current expectations and are subject to a number of risks 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 earnings, capital expenditures, litigation, competition, regulatory matters, stock price volatility, 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, legislative, regulatory and competitive developments in markets in which we and our subsidiaries operate, and other circumstances affecting anticipated revenues and costs, as more fully disclosed in our discussion of “Risk Factors” in Item 1A of Part I of this annual report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein 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. Additional factors that could cause such results to differ materially from those described in the forward-looking statements are set forth in connection with the forward-looking statements.


ITEM 1.  BUSINESS

General

Our operating subsidiaries partner with inventors and patent owners, applying our legal and technology expertise to patent assets to unlock the financial value in their patented inventions. We are an intermediary in the patent marketplace, bridging the gap between invention and application, facilitating efficiency and delivering monetary rewards to patent owners.

Our operating subsidiaries generate revenues and related cash flows from the granting of intellectual property rights for the use of patented technologies that our operating subsidiaries control or own. 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, where necessary, with the enforcement against unauthorized users of their patented technologies through the filing of patent infringement litigation. Currently, on a consolidated basis, our operating subsidiaries own or control the rights to over 200 patent portfolios, which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries.

We are a leader in licensing and enforcing patented technologies and have established a proven track record of licensing success with over 1,345 license agreements executed to date, across 166 of our patent licensing programs. To date, Acacia has generated gross licensing revenue of approximately $1 billion, and has returned more than $455 million to our patent partners.

Other
 
We were originally incorporated in California in January 1993 and reincorporated in Delaware in December 1999. Our website address is www.acaciaresearch.com. Reference in this annual report to this website address does not constitute incorporation by reference of the information contained on the website. We make our filings with the Securities and Exchange Commission, or the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and amendments to the foregoing reports, available free of charge on or through our website as soon as reasonably practicable after we file these reports with, or furnish such reports to, the SEC. In addition, we post the following information on our website:
 
our corporate code of conduct, our code of conduct for our board of directors and our fraud policy; and

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charters for our audit committee, nominating and corporate governance committee, disclosure committee and compensation committee.
 
The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
  
Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.

Patent Licensing and Enforcement Business

Our operating subsidiaries acquire rights in, license and enforce patented technologies. Our operating subsidiaries partner with inventors and patent owners, applying our legal and technology expertise to patent assets to unlock the financial value in their patented inventions. We are an intermediary in the patent marketplace, bridging the gap between invention and application, facilitating efficiency and delivering monetary rewards to patent owners.

Our operating subsidiaries generate revenues and related cash flows from the granting of intellectual property rights for the use of patented technologies that our operating subsidiaries control or own. 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, where necessary, with the enforcement against unauthorized users of their patented technologies through the filing of patent infringement litigation.

Refer to the section entitled “Patented Technologies” below for a partial summary of patent portfolios owned or controlled by certain of our operating subsidiaries.

Patents are an important asset class worldwide. Due to legislative and regulatory changes, licensing and enforcing patents has become increasingly difficult for patent holders, necessitating an experienced, well-capitalized, licensing partner. We focus solely on the patent marketplace, and have emerged as the leading outsource patent licensing and enforcement company for patent owners that have made the important choice to outsource their patent licensing and enforcement activities.

We are a leader in patent licensing and enforcement and our operating subsidiaries have established a proven track record of licensing success with more than 1,345 license agreements executed to date. To date, on a consolidated basis, we have generated revenues from 166 of our patent licensing and enforcement programs. Our professional staff includes in-house patent attorneys, licensing executives, engineers and business development executives.

We partner with the disenfranchised patent owner, including individual inventors, universities, and large multi-national corporations in the technology, medical technology, energy, and industrial sectors. A disenfranchised patent owner owns patents that are being infringed by third-parties in connection with the design, manufacture, use, or distribution of products and/or services, but is not receiving fair compensation for the unauthorized use of his or her patented inventions by third-parties. We strive to reward inventors and patent owners for their creative technological contributions. We also partner with patent owners, including individual inventors, universities, and domestic and multi-national corporations who may have limited internal resources and/or expertise to effectively address the unauthorized use of their patented technologies, and those that are seeking to effectively and efficiently monetize their portfolio of patented technologies on an outsourced basis. In a typical arrangement, our operating subsidiary will partner with a patent portfolio owner, acquiring rights in the patent portfolio or acquiring the patent portfolio outright, and in exchange, the original patent portfolio owner receives (i) a percentage of our operating subsidiary’s net recoveries from the licensing and enforcement of the patent portfolio, which we refer to as our Partnering Model, or (ii) an upfront payment for the purchase of the patent portfolio rights or the patent portfolio, which we refer to as our Purchasing Model, or (iii) a combination of the two, which we refer to as our Hybrid Partnering Model.

Under U.S. law, a patent owner has the right to exclude others from making, selling or using their patented invention. In situations where a third-party produces, sells or uses the patented invention without authorization, that third-party is infringing the patent. Unfortunately, in the majority of cases, infringers are generally unwilling, at least initially, to negotiate or pay reasonable license fees for their unauthorized use of third-party patents and will typically fight any allegations of patent infringement. Inventors and/or patent holders without sufficient legal, financial and/or expert technical resources to bring and continue the pursuit of costly and complex patent infringement actions are often blatantly ignored.

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As a result of the common reluctance of patent infringers to negotiate and ultimately take a patent license for the use of third-party patented technologies without at least the threat of legal action, patent licensing and enforcement often begins with the filing of patent enforcement litigation. Most patent infringement litigation settles out of court, however, at values that are based on the strength of the patent and use of the invention in the infringer’s products or services. We execute agreements that grant rights in our patents to users of our patented technologies. Our agreements can be negotiated without the filing of patent litigation, or negotiated in the shadow of ongoing patent litigation, depending on the specific facts and circumstances.

Patents are a complex and highly technical subject area. Our professionals actively seek to identify high-quality but undervalued patent portfolios in a variety of industries. We combine our legal expertise, technology expertise, and our extensive knowledge of, and experience in, the patent licensing ecosystem, to continually uncover important patent assets and bring needed proficiency to patent licensing and enforcement.

Our partnership with patent owners is the cornerstone of our operating subsidiaries’ corporate strategy. We assume all responsibility for fronting operational expenses while pursuing a patent licensing and enforcement program, and then share net licensing revenue with our patent partners as that program matures, on a pre-arranged and negotiated basis. We may also provide upfront capital to the patent owner as an advance against future licensing revenue. We are a principal in the licensing and enforcement effort, with our operating subsidiaries obtaining control of the rights in the patent portfolio, or control of the patent portfolio outright.

Business Model and Strategy - Overview

We have the flexibility to structure arrangements in a number of ways to address the needs and specific sets of circumstances presented by each of our unique patent partners, including the following:


Partnering Model:

50/50 net profit sharing of revenue after legal costs and other licensing and enforcement costs.
Typical partners include major corporations, research labs and universities and individual inventors.
Upon return of advanced costs, net profit revenue share with patent partner commences.

Hybrid Partnering Model:

Hybrid Partnership with up-front capital infusion to our patent partners as an advance on future licensing revenue streams.
Increases our total addressable market providing an advantage over competitors.
Typical partners include major corporations seeking to effectively and efficiently monetize their patent portfolios.
We maintain 100% preferred rate of return until all deployed capital is returned.
Upon return of capital infusion, net profit revenue share with patent partner commences.
Target recovery of advanced capital in 18 months.

Purchasing Model:

We acquire 100% of the patents for 100% of the profits, with no backed participation for patent owner.
Typical partners include, distressed corporations, corporations with limited success controlled by venture capitalists.
Target recovery of advanced capital in 18 months.

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Key Elements of Business Strategy

Patent licensing and enforcement can be an effective and efficient way to maximize the profit potential of a patent. A patent license agreement grants a third-party user of an invention specific patent rights to the patented invention in exchange for patent license fees. Patent licensing is especially suitable for patents that are owned by the patent-disenfranchised. Patent disenfranchised owners of patents are those that have not successfully converted their patented invention into a profitable product or service, and therefore, are not generating revenues from their patented inventions. The patent-disenfranchised, for example, include owners of the following categories of patented inventions:

Inventions that were so far ahead of the technology curve that there is no existing ecosystem to support the patented products or services at the time they are introduced to market;

Inventions that can only be deployed in very capital-intensive industries, such as semiconductor fabrication, energy, or medical sectors, but whose owners do not have sufficient amounts of capital to deploy; and

Inventions that, for one reason or another, including the shifting of cost-effective manufacturing overseas, are no longer being practiced by the patent owner.

Our patent licensing business provides patent holders with an opportunity to generate income from their patented inventions being practiced by third-parties without authorization. Our patent licensing and enforcement business strategy, conducted solely by our operating subsidiaries, includes three fundamental elements, as follows:

Patent Discovery - Discover potentially valuable patents or patent portfolios.
  
Assessment of Economic Value - Work with experts to evaluate the use of the patented invention(s) in the relevant marketplace and assess patents or patent portfolios’ expected economic value.

Licensing and Enforcement - For unauthorized users of the patented invention, enter into license negotiations and, if necessary, litigation to monetize the patent based on its assessed value.

Patent Discovery. The patent process breeds, encourages and sustains innovation and invention by granting a limited monopoly to the inventor in exchange for sharing the invention with the public. Certain technologies, including several of the technologies controlled by our operating subsidiaries, some of which are summarized below, become core technologies in the way products and services are manufactured, sold and delivered by companies across a wide array of industries. Our operating subsidiaries identify core, patented technologies that have been or are anticipated to be widely adopted by third-parties in connection with the manufacture or sale of products and services. Patent discovery occurs when we reach out to patent holders who may be disenfranchised, or when patent holders approach us seeking assistance with the monetization and enforcement of their patent portfolios.

Assessment of Economic Value. Subsequent to the patent discovery process, our executives work internally and/or with external industry experts in the specific technology field, to evaluate the patented invention and its adoption and implementation in the marketplace. There are several key factors to consider when analyzing a patent and determining a patent’s value: (1) Infringement, (2) Validity and (3) Enforceability.

Infringement. To determine infringement, we must first identify third-parties that are practicing the invention(s) covered by the patent without obtaining permission from the patent owner to do so. A key tool in determining whether or not a company is infringing a patent is a claim chart. A claim chart demonstrates how the manufacture and sale of an existing product compares against the claims of the patent.

Invalidity. The three main factors analyzed to determine invalidity are (1) anticipation, (2) obviousness, and (3) the existence of non-patentable subject matter. Anticipation occurs when the claims of the patent are entirely revealed within a single piece of prior art. “Prior art” is a technical term that generally refers to an invention that existed prior to the grant of the patent being analyzed. Even if the claims of the patent are not entirely revealed within a single piece of prior art, the patent may still be invalid if determined to be “obvious” under the law. “Obvious” essentially means that the differences between prior art and the patented invention are so slight such that they would have been obvious at the time of invention to one who is skilled in the subject matter being patented. Even if the patent lacks anticipation and obviousness, it may still be invalid if its subject matter is un-patentable by law. Un-patentable subject matter includes naturally occurring things, abstract concepts, or algorithms that perform an ordinary function.

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Enforceability. A myriad of factors are analyzed to determine whether or not a patent is enforceable, including whether or not there has been patent misuse, or whether or not there are antitrust violations associated with the patent. Due to the inherently complex nature of patent law, only a court or specific administrative body, such as the International Trade Commission, can make a decision whether a patent is infringed, valid and enforceable; however, we employ our wealth of expertise to make the best assessment possible given a specific fact pattern and set of circumstances.

We estimate a patent’s economic value by evaluating the expected value of the license revenue stream based on past, present and future revenue of infringing products or services, and the risk that a court will disagree with our infringement, validity or enforcement assessments of the patent.

The processes and procedures employed in connection with the evaluation of a specific patent portfolio for acquisition, licensing and enforcement are tailored and unique to each specific situation and can vary widely based on the specific facts and circumstances of a specific patent portfolio, such as the related technology, related industry and certain other factors. Some of the key components of our processes and procedures may include:

Utilizing our staff of in-house business development executives, patent attorneys, patent licensing executives, and technology engineers to conduct our tailored patent acquisition and evaluation processes and procedures. We may also leverage the expertise of external specialists and technology consultants.
Identifying emerging growth areas where patented technologies will play a vital role in connection with the manufacture or sale of products and services.
Identifying core, patented technologies that have been or are anticipated to be widely adopted by third-parties in connection with the manufacture or sale of products and services.
Considering the impact of subtleties in the language of a patent, recorded interactions with the patent office, evaluating prior art and literature and considering the impact on the potential licensing and enforcement revenue that can be derived from a patent or patent portfolio.
Evaluating the strength of a patent portfolio, including consideration of the types of claims and the number of claims potentially infringed by third-parties, and the results of any prior art searches or analysis, before the decision is made to allocate resources to an acquisition or an effective licensing and enforcement effort.
Identifying and considering potential problem areas, if any, and determining whether potential problem areas can be overcome prior to acquiring a patent portfolio or launching an effective licensing program.
Identifying potential infringers, industries within which the potential infringers exist, longevity of the patented technology, and a variety of other factors that directly impact the magnitude and potential success of a licensing and enforcement program.

Licensing and Enforcement. The final step in the patent licensing and enforcement process is to monetize the patent by securing license agreements based on the patents estimated value. While we prefer to convince unauthorized users of our patented inventions of the value of the patented invention and secure a license agreement in a non-litigious manner, many infringers refuse to take such licenses even when confronted with substantial and persuasive evidence of infringement, validity, enforceability and significant economic value. As a result, often we must resort to litigation to demonstrate and prove infringement and ultimately induce infringers to take a license. We have found it effective to negotiate licenses concurrently with litigation due to the fact that litigation necessitates and facilitates an information exchange that helps both sides assess the value of a patent and make informed decisions. Also, litigation eventually leads to a court’s judgment. When a court agrees with our assessment of a patent, this judgment stops recalcitrant infringers from indefinitely profiting from the patent they are infringing.

Our operating subsidiaries engage highly competent and experienced patent lawyers to prosecute their patent portfolio litigation. It is imperative to be persistent and patient throughout the litigation process as it typically takes 18-36 months from the filing date of a lawsuit to yield a license agreement from a potential licensee. Often, it takes longer to secure a final court judgment.

Patent license negotiations and litigation initiated by our operating subsidiaries usually lead to serious and thoughtful discussions with the unauthorized users of the patented inventions.  The result can be quite favorable with the user being granted rights under the patents for the patented invention in its products and services in exchange for financial remuneration. This remuneration is typically shared between our operating subsidiary and the patent holder.

Concurrent with our patent litigation and licensing negotiation activities, we often assist patent holders with the acquisition of additional rights associated with their inventions both in the United States and across the globe. This is referred

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to as “continued prosecution,” and is done to further define the boundaries of an invention. It can also be effective to correct technical deficiencies discovered within a patent that may have been identified in the negotiation and litigation process. These deficiencies, if not appropriately addressed, can limit the value of patents that are otherwise infringed, valid, enforceable.

Our specialists, along with third-party experts that we engage, are trained and skilled in the areas of patent discovery, assessment of a patent or patent portfolios expected economic value, and patent licensing and enforcement. In applying our legal and technology expertise to high quality patent assets, we bridge the gap between invention and application, facilitating efficiency and delivering monetary rewards to the patent disenfranchised and other patent owners with whom we partner.

Patented Technologies

Currently, on a consolidated basis, our operating subsidiaries own or control the rights to patent portfolios with future patent expiration dates ranging from 2014 to approximately 2031, covering technologies used in a wide variety of industries, a sample of which includes the following:
Operating Subsidiary
Industry
Description
 
 
 
3D Design Solutions, LLC
Software
Patents relating to Computer-Aided Design Technology.
Adaptix, Inc.
Telecommunications / Smartphones
Portfolio relates to air interface technology used in modern 4G wireless networks. The patents relate to both infrastructure and user equipment.
American Vehicular Sciences, LLC
Transportation And Automotive
Patents from Automotive Technologies International, or ATI and Intelligent Technologies International, or ITI, relating to numerous automotive safety, navigation and diagnostics technologies.
Auto-Dimensions, LLC
Software
Patents relating to Computer Aided Design Tools and Product Lifecycle Management.
Automated Facilities Management Corporation
Software
Patent relating to Facilities Operation Management System.
Battle Toys, LLC
Mechanical
Patent relates to a Jousting Toy used in children’s games.
Beverage Dispensing Solutions, LLC
Software
Patents for Computerized Beverage Dispensing Technology.
Body Science, LLC
Peripheral Vascular Devices
Patents relating to apparatus for use in wireless physiological monitoring.
Bolt MRI Technologies, LLC
Imaging And Diagnostics
Patents and applications relating to apparatus and methods for use in medical imaging, including, but not limited to stand up or inclined MRI.
Bonutti Skeletal Innovations, LLC
Orthopedic Implants And Sports Medicine Market
Issued and pending patents and applications in the orthopedic field covering, among other things, suture anchors, biologics, total knee replacements, total hip replacements, minimally invasive surgery, partial knee and hip replacement, spinal implants, and surgical instruments and methods of use.
Brandywine Communications Technologies, LLC
Communications
Patents related to Broadband Communications Technology.
Brilliant Optical Solutions, LLC
Semiconductor/MEMS
Patent relates to Core Fiber Optic Network Architectures.
Cell and Network Selection, LLC
Telecommunications / Smartphones
Patent family generally relates to LTE user equipment (phones, tablets, dongles).
Cellular Communications Equipment, LLC
Telecommunications / Smartphones
Portfolio covers Wireless Infrastructure and User Equipment Technology relating to second (2G), third (3G) and fourth (4G) generation wireless technologies and to air interface technology used in 2G, 3G and 4G wireless networks.
CeraMedic, LLC
Medical
U.S. patent plus foreign patent relating to Ceramic Hip Replacement technology.
Computer Software Protection, LLC
Software
Patent for Software Activation Technology, which generally relates to preventing software from running on unlicensed systems.
Criminal Activity Surveillance, LLC
Security
Patents relating to Video Analytics for Security Technology.
Data Engine Technologies, LLC
Software
Patent portfolio covering a wide range of Software Technology.
Database Sync Solutions, LLC
Internet/Ecommerce/Business Methods
Patent generally relates to the distributed management and synchronization of select data elements between applications based on pre-defined permissions.
Delaware Display Group, LLC
Transportation And Automotive
Portfolio relates to certain display technologies used in smartphones, tablets, computers, HDTVs and other devices.
Dynamic 3D Geosolutions, LLC
Software
Patent related to Geological Interpretation and Modeling Technology.

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Endotach, LLC
Peripheral Vascular Devices
Patents relating to stent grafts.
EVM Systems, LLC
Peripheral Vascular Devices
Patents and applications covering a series of medical instruments utilizing a slotted, shape memory tube.
Express Card Systems, LLC
Internet/Ecommerce/Business Methods
Patents for Greeting Card Technology, which generally relates to the processing and printing of greeting cards and can be used by online merchants.
GT Gaming, LLC
Internet/Ecommerce/Business Methods
Patent relating to Online Gaming Technology.
In-Depth Test, LLC
Semiconductor/MEMS
Patent portfolio relating to Semiconductor Testing Technology.
Industrial Print Technologies, LLC
Computers/Peripherals/Printers
Patent portfolio covering ink jet printer and ink jet printing technologies and other printer and printing technologies.
Innovative Display Technologies, LLC
Telecommunications / Smartphones
Portfolio generally relates to back-lighting for displays and the patented technology covers various improvements to LCD displays.
InterCarrier Communications, LLC
Telecommunications / Smartphones
The Intercarrier SMS technology relates to sending SMS messages between different carriers and networks. This includes traditional SMS and OTT messaging.
Labyrinth Optical Technologies, LLC
Communications
Patents relating to Optical Networking Technology.
Lambda Optical Solutions, LLC
Communications
Patents relating to Optical Switching Technology.
LifePort Sciences, LLC
Peripheral Vascular Devices
Multiple patents and applications relating to, among other things, stent grafts, stent graft delivery systems and stent placement procedures.
LifeScreen Sciences, LLC
Peripheral Vascular Devices
Portfolio consists of multiple patents and applications relating to, among other things, vena cava filters, embolic protection and associated delivery systems.
LifeShield Sciences, LLC
Peripheral Vascular Devices
Portfolio consists of multiple patents and applications relating to stent grafts, and stent graft delivery systems.
Light Transformation Technologies, LLC
Energy/Lighting
Patents relating to Improved Lighting Technology.
Mobile Enhancement Solutions, LLC
Telecommunications / Smartphones
This portfolio relates to enhanced mobile communications and covers many features found in smartphones today.
Online News Link, LLC
Internet/Ecommerce/Business Methods
Patents relate to embedded links in on-line newsletters.
Optimum Content Protection, LLC and Super Interconnect Technologies, LLC
Telecommunications / Smartphones
Portfolios relate to high speed circuit interconnect, display control technology and content security used in consumer electronics, PCs and mobile devices such as smartphones, tablets, and laptops.
Progressive Semiconductor Solutions, LLC
Semiconductor/MEMS
Patent portfolio covering Microprocessor and Memory Technology.
Promethean Insulation Technology, LLC
Energy/Lighting
Patent relates to insulation material used in building construction.
Saint Lawrence Communications, LLC
Wireless
Patents relating to Speech Codecs used in Wireless and Wireline Systems.
Signal Enhancement Technologies, LLC
Telecommunications / Smartphones
Portfolio covers radio frequency modulation technology used in mobile devices such as smartphones, tablets, and laptops from a major technology company.
Smartphone Technologies, LLC
Telecommunications / Smartphones
Portfolio includes patents from Palmsource and Geoworks, amongst others, that resulted from the merging of personal digital assistants and cell phones, a space in which Palm was the undisputed leader. Specifically, the patents are directed towards various interface and synchronization technologies which are used on modern smartphones today.
Super Resolution Technologies, LLC
Imaging And Diagnostics
Portfolio comprises U.S. and foreign patents relating to super resolution microscopy, also referred to as nanoscopy. 
Unified Messaging Solutions, LLC
Communications
Patent for Messaging Technology.
Vertical Analytics, LLC
Medical
Patents for X-ray Powder Diffraction Technology.
Video Streaming Solutions, LLC
Digital Media
Patent portfolios related to video delivery & processing technology.
Wireless Mobile Devices, LLC
Telecommunications / Smartphones
Portfolio includes patents that cover a wide range of wireless services such as Location Based Services technology and navigation that can be found on all smartphones today.
    

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Revenues for the periods presented include revenues generated from several of the portfolios summarized above and other technology patent portfolios owned or controlled by us. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview” for a summary of patent portfolios generating revenues for the applicable periods presented.

Patent Enforcement Litigation

Our operating subsidiaries are often required to engage in litigation to enforce their patents and patent rights. Certain of our operating subsidiaries are parties to ongoing patent enforcement related litigation, alleging infringement by third-parties of certain of the patented technologies owned or controlled by our operating subsidiaries.
 
Competition

We expect to encounter increased competition in the area of patent acquisitions and enforcement. This includes an increase in the number of competitors seeking to acquire the same or similar patents and technologies that we may seek to acquire. Non-practicing entities such as RPX, AST, Intellectual Ventures, Wi-LAN, MOSAID, Round Rock Research LLC, IPvalue Management Inc., Vringo Inc. and Pendrell Corporation compete in acquiring rights to patents, and we expect more entities to enter the market.

We also compete with financial firms, corporate buyers and others acquiring IP. Many of these competitors may have more financial and human resources than our operating subsidiaries. As we become more successful, we may find more companies entering the market for similar technology opportunities, which may reduce our market share in one or more technology industries that we currently rely upon to generate future revenue.
 
Companies or other entities may develop competing technologies that offer better or less expensive alternatives to our patented technologies that we may acquire and license. Many potential competitors may have significantly greater resources than the resources that our operating subsidiaries possess. Such technological advances or entirely different approaches developed by one or more of our competitors could render certain of the technologies owned or controlled by our operating subsidiaries obsolete and/or uneconomical.

Employees
 
As of December 31, 2013, on a consolidated basis, we had 68 full-time employees. Neither we, nor any of our subsidiaries, are a party to any collective bargaining agreement. We consider our employee relations to be good.


ITEM 1A.  RISK FACTORS

The following is a summary of certain risks we face in our business. They are not the only risks we face. Additional risks that we do not yet know of or that we currently believe are immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition and results of operations could be materially adversely affected, and the trading price of our common stock could decline significantly. All patent acquisition, development, licensing and enforcement activities are conducted solely by certain of our wholly and majority-owned operating subsidiaries.
Risks Related to Our Business
     
We have a history of losses and may incur additional losses in the future.
 
Despite reporting net income of $59.5 million and $21.1 million for the years ended December 31, 2012 and 2011, respectively, we reported a net loss of $56.4 million for the year ended December 31, 2013 and, on a cumulative basis, we have sustained substantial losses since our inception. As of December 31, 2013, our accumulated deficit was $62.1 million. As of December 31, 2013, we had approximately $256.7 million in cash and cash equivalents and short-term investments and working capital of $247.7 million. We expect to continue incurring significant legal, marketing and general and administrative expenses in connection with our operations. As a result, we anticipate that we may incur losses in the future. We believe, however, that our current cash and cash equivalents and investments will be sufficient to finance our anticipated capital and operating requirements for at least the next twelve months.
 
If we encounter unforeseen difficulties with our business or operations in the future that require us to obtain additional working capital, and we cannot obtain additional working capital on favorable terms, or at all, our business may suffer.

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Our consolidated cash and cash equivalents and short-term investments totaled $256.7 million and $311.3 million at December 31, 2013 and 2012, respectively. To date, we have relied primarily upon net cash flows from our operations and from the public and private sale of equity securities to generate the working capital needed to finance our operations.
 
We may encounter unforeseen difficulties with our business or operations in the future that may deplete our capital resources more rapidly than anticipated. As a result, we may be required to obtain additional working capital in the future through bank credit facilities, public or private debt or equity financings, or otherwise. If we are required to raise additional working capital in the future, such financing may be unavailable to us on favorable terms, if at all, or may be dilutive to our existing stockholders. If we fail to obtain additional working capital, as and when needed, such failure could have a material adverse impact on our business, results of operations and financial condition.
 
Failure to effectively manage our growth could place strains on our managerial, operational and financial resources and could adversely affect our business and operating results.
 
Our growth has placed, and is expected to continue to place, a strain on our managerial, operational and financial resources and systems. Further, as our subsidiary companies’ businesses grow, we will be required to continue to manage multiple relationships. Any further growth by us or our subsidiary companies, or an increase in the number of our strategic relationships, may place additional strain on our managerial, operational and financial resources and systems. Although we may not grow as we expect, if we fail to manage our growth effectively or to develop and expand our managerial, operational and financial resources and systems, our business and financial results will be materially harmed.
 
Our future success depends on our ability to expand our organization to match the growth of our subsidiaries.
 
As our operating subsidiaries grow, the administrative demands upon us and our operating subsidiaries will grow, and our success will depend upon our ability to meet those demands. These demands include increased accounting, management, legal services, staff support, and general office services. We may need to hire additional qualified personnel to meet these demands, the cost and quality of which is dependent in part upon market factors outside of our control. Further, we will need to effectively manage the training and growth of our staff to maintain an efficient and effective workforce, and our failure to do so could adversely affect our business and operating results.
Potential acquisitions may present risks, and we may be unable to achieve the financial or other goals intended at the time of any potential acquisition.
Our future growth depends, in part, on our ability to acquire patented technologies, patent portfolios, or companies holding such patented technologies and patent portfolios. Accordingly, we have engaged in acquisitions to expand our patent portfolios and we intend to continue to explore such acquisitions. Such acquisitions are subject to numerous risks, including the following:
our inability to enter into a definitive agreement with respect to any potential acquisition, or if we are able to enter into such agreement, our inability to consummate the potential acquisition;

difficulty integrating the operations, technology and personnel of the acquired entity;

our inability to achieve the anticipated financial and other benefits of the specific acquisition;

our inability to retain key personnel from the acquired company, if necessary;

difficulty in maintaining controls, procedures and policies during the transition and integration process;
 
diversion of our management’s attention from other business concerns; and

failure of our due diligence process to identify significant issues, including issues with respect to patented technologies and patent portfolios, and other legal and financial contingencies.

If we are unable to manage these risks effectively as part of any acquisition, our business could be adversely affected.


Our revenues are unpredictable, and this may harm our financial condition.
 

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From January 2005 to the present, our operating subsidiaries have executed our business strategy of acquiring patent portfolios and accompanying patent rights. Currently, on a consolidated basis, our operating subsidiaries own or control the rights to over 200 patent portfolios which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries. These acquisitions continue to expand and diversify our revenue generating opportunities. We believe that our cash and cash equivalents and short-term investment balances, anticipated cash flow from operations, proceeds from prior offerings of our common stock (refer to “Liquidity and Capital Resources” below) and other external sources of available credit, will be sufficient to meet our cash requirements through at least March 2015 and for the foreseeable future. However, due to the nature of our licensing business and uncertainties regarding the amount and timing of the receipt of license and other fees from potential infringers, stemming primarily from uncertainties regarding the outcome of enforcement actions, rates of adoption of our patented technologies, the growth rates of our existing licensees and certain other factors, our revenues may vary significantly from quarter to quarter, which could make our business difficult to manage, adversely affect our business and operating results, cause our quarterly results to fall below market expectations and adversely affect the market price of our common stock.
 
Our operating subsidiaries depend upon relationships with others to provide technology-based opportunities that can develop into profitable royalty-bearing licenses, and if they are unable to maintain and generate new relationships, then they may not be able to sustain existing levels of revenue or increase revenue.
 
Neither we nor our operating subsidiaries invent new technologies or products; rather, we depend upon the identification and acquisition of new patents and inventions through our relationships with inventors, universities, research institutions, technology companies and others. If our operating subsidiaries are unable to maintain those relationships and to continue to grow new relationships, then they may not be able to identify new technology-based opportunities for sustainable revenue and growth.
 
Our current or future relationships may not provide the volume or quality of technologies necessary to sustain our business. In some cases, universities and other technology sources may compete against us as they seek to develop and commercialize technologies. Universities may receive financing for basic research in exchange for the exclusive right to commercialize resulting inventions. These and other strategies may reduce the number of technology sources and potential clients to whom we can market our services. If we are unable to maintain current relationships and sources of technology or to secure new relationships and sources of technology, such inability may have a material adverse effect on our operating results and financial condition.
 
The success of our operating subsidiaries depends in part upon their ability to retain the best legal counsel to represent them in patent enforcement litigation.
 
The success of our licensing business depends upon our operating subsidiaries’ ability to retain the best legal counsel to prosecute patent infringement litigation. As our operating subsidiaries’ patent enforcement actions increase, it will become more difficult to find the best legal counsel to handle all of our cases because many of the best law firms may have a conflict of interest that prevents their representation of our subsidiaries.

We spend a significant amount of our financial and management resources to pursue our current litigation matters. We believe that these litigation matters and others that we may in the future determine to pursue could continue for years and continue to consume significant financial and management resources. The counterparties to our litigation are sometimes large, well-financed companies with substantially greater resources than us. We cannot assure that any of our current or future litigation matters will result in a favorable outcome for us. In addition, even if we obtain favorable interim rulings or verdicts in particular litigation matters, they may not be predictive of the ultimate resolution of the dispute. Also, we cannot assure that we will not be exposed to claims or sanctions against us which may be costly or impossible for us to defend. Unfavorable or adverse outcomes may result in losses, exhaustion of financial resources or other adverse effects which could encumber our ability to develop and commercialize products.
 
Our operating subsidiaries, in certain circumstances, rely on representations, warranties and opinions made by third-parties that, if determined to be false or inaccurate, may expose us and our operating subsidiaries to certain material liabilities.
 
From time to time, our operating subsidiaries may rely upon representations and warranties made by third-parties from whom our operating subsidiaries acquired patents or the exclusive rights to license and enforce patents. We also may rely upon the opinions of purported experts. In certain instances, we may not have the opportunity to independently investigate and verify the facts upon which such representations, warranties, and opinions are made. By relying on these representations, warranties and opinions, our operating subsidiaries may be exposed to liabilities in connection with the licensing and enforcement of certain patents and patent rights which could have a material adverse effect on our operating results and financial condition.

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In connection with patent enforcement actions conducted by certain of our subsidiaries, a court may rule that we or our subsidiaries have violated certain statutory, regulatory, federal, local or governing rules or standards, which may expose us and our operating subsidiaries to certain material liabilities.
 
In connection with any of our patent enforcement actions, it is possible that a defendant may request and/or a court may rule that we have violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or our operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material, and if we or our operating subsidiaries are required to pay such monetary sanctions, attorneys’ fees and/or expenses, such payment could materially harm our operating results and our financial position.
 
Our licensing cycle is lengthy and costly, and our marketing, legal and sales efforts may be unsuccessful.

We expect our operating subsidiaries to incur significant marketing, legal and sales expenses prior to entering into license agreements and generating license revenues. We will also spend considerable resources educating prospective licensees on the benefits of a license arrangement with us. As such, we may incur significant losses in any particular period before any associated revenue stream begins.

If our efforts to educate prospective licensees on the benefits of a license arrangement are unsuccessful, we may need to pursue litigation or other enforcement action to protect our patent rights. We may also need to litigate to enforce the terms of our existing license agreements, protect our trade secrets, or determine the validity and scope of the proprietary rights of others. Enforcement proceedings are typically protracted and complex. The costs are typically substantial, and the outcomes are unpredictable. Enforcement actions will divert our managerial, technical, legal and financial resources from business operations.


Risks Related to Our Industry
 
Our exposure to uncontrollable outside influences, including new legislation, court rulings or actions by the United States Patent and Trademark Office, could adversely affect our licensing and enforcement business and results of operations.
 
Our licensing and enforcement business is subject to numerous risks from outside influences, including the following:
 
New legislation, regulations or rules related to obtaining patents or enforcing patents could significantly increase our operating costs and decrease our revenue.
 
Our operating subsidiaries acquire patents with enforcement opportunities and spend a significant amount of resources to enforce those patents. If new legislation, regulations or rules are implemented either by Congress, the U.S. Patent and Trademark Office, or USPTO, or the courts that impact the patent application process, the patent enforcement process or the rights of patent holders, such changes could negatively affect our expenses and revenue. Recently, United States patent laws were amended with the enactment of the Leahy-Smith America Invents Act, or the America Invents Act, which took effect on March 16, 2013. The America Invents Act includes a number of significant changes to U.S. patent law. In general, the legislation attempts to address issues surrounding the enforceability of patents and the increase in patent litigation by, among other things, establishing new procedures for patent litigation. For example, the America Invents Act changes the way that parties may be joined in patent infringement actions, increasing the likelihood that such actions will need to be brought against individual allegedly-infringing parties by their respective individual actions or activities. In addition, the America Invents Act enacted a new inter-partes review (“IPR”) process at the USPTO which can be used by defendants, and other individuals and entities, to separately challenge the validity of any patent. At this time, it is not clear what, if any, impact the America Invents Act will have on the operation of our enforcement business. However, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the enforcement of our patented technologies, which could have a material adverse effect on our business and financial condition.

In addition, the U.S. Department of Justice, or the DOJ, has conducted reviews of the patent system to evaluate the impact of patent assertion entities on industries in which those patents relate. It is possible that the findings and

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recommendations of the DOJ could impact the ability to effectively license and enforce standards-essential patents and could increase the uncertainties and costs surrounding the enforcement of any such patented technologies. Also, the Federal Trade Commission, or FTC, has published its intent to initiate a proposed study under Section 6(b) of the Federal Trade Commission Act to evaluate the patent assertion practice and market impact of Patent Assertion Entities, or PAEs.  The FTC’s notice and request for public comment relating to the PAE study appeared in the Federal Register on October 3rd, 2013.  It is anticipated that Acacia Research Corporation and/or certain of its subsidiaries will be subject to this FTC study which would require the collection of certain information as detailed in notice published by the FTC.  It is expected that the results of the PAE study by the FTC will be provided to Congress and other agencies, such as the DOJ, who could take action, including legislative proposals, based on the results of the study.

     Finally, new rules regarding the burden of proof in patent enforcement actions could significantly increase the cost of our enforcement actions, and new standards or limitations on liability for patent infringement could negatively impact our revenue derived from such enforcement actions.
 
Changes in patent law could adversely impact our business.

Patent laws may continue to change, and may alter the historically consistent protections afforded to owners of patent rights. Such changes may not be advantageous for us and may make it more difficult to obtain adequate patent protection to enforce our patents against infringing parties. Increased focus on the growing number of patent-related lawsuits may result in legislative changes which increase our costs and related risks of asserting patent enforcement actions. For instance, the United States House of Representatives passed a bill that would require non-practicing entities that bring patent infringement lawsuits to pay legal costs of the defendants, if the lawsuits are unsuccessful and certain standards are not met.

Trial judges and juries often find it difficult to understand complex patent enforcement litigation, and as a result, we may need to appeal adverse decisions by lower courts in order to successfully enforce our patents.
 
It is difficult to predict the outcome of patent enforcement litigation at the trial level. It is often difficult for juries and trial judges to understand complex, patented technologies, and as a result, there is a higher rate of successful appeals in patent enforcement litigation than more standard business litigation. Such appeals are expensive and time consuming, resulting in increased costs and delayed revenue. Although we diligently pursue enforcement litigation, we cannot predict with significant reliability the decisions made by juries and trial courts.
 
More patent applications are filed each year resulting in longer delays in getting patents issued by the USPTO.
 
Certain of our operating subsidiaries hold and continue to acquire pending patents. We have identified a trend of increasing patent applications each year, which we believe is resulting in longer delays in obtaining approval of pending patent applications. The application delays could cause delays in recognizing revenue from these patents and could cause us to miss opportunities to license patents before other competing technologies are developed or introduced into the market.
 
Federal courts are becoming more crowded, and as a result, patent enforcement litigation is taking longer.
 
Our patent enforcement actions are almost exclusively prosecuted in federal court. Federal trial courts that hear our patent enforcement actions also hear criminal cases. Criminal cases always take priority over our actions. As a result, it is difficult to predict the length of time it will take to complete an enforcement action. Moreover, we believe there is a trend in increasing numbers of civil lawsuits and criminal proceedings before federal judges and, as a result, we believe that the risk of delays in our patent enforcement actions will have a greater effect on our business in the future unless this trend changes.
 
Any reductions in the funding of the USPTO could have an adverse impact on the cost of processing pending patent applications and the value of those pending patent applications.
 
The assets of our operating subsidiaries consist of patent portfolios, including pending patent applications before the USPTO. The value of our patent portfolios is dependent upon the issuance of patents in a timely manner, and any reductions in the funding of the USPTO could negatively impact the value of our assets. Further, reductions in funding from Congress could result in higher patent application filing and maintenance fees charged by the USPTO, causing an unexpected increase in our expenses.
 

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Competition is intense in the industries in which our subsidiaries do business and as a result, we may not be able to grow or maintain our market share for our technologies and patents.
 
We expect to encounter competition in the area of patent acquisition and enforcement as the number of companies entering this market is increasing. This includes competitors seeking to acquire the same or similar patents and technologies that we may seek to acquire. Entities including RPX, AST, Intellectual Ventures, Wi-LAN, MOSAID, Round Rock Research LLC, IPvalue Management Inc., Vringo Inc. and Pendrell Corporation compete in acquiring rights to patents, and we expect more entities to enter the market. As new technological advances occur, many of our patented technologies may become obsolete before they are completely monetized. If we are unable to replace obsolete technologies with more technologically advanced patented technologies, then this obsolescence could have a negative effect on our ability to generate future revenues.
 
Our licensing business also competes with venture capital firms and various industry leaders for patent licensing opportunities. Many of these competitors may have more financial and human resources than we do. As we become more successful, we may find more companies entering the market for similar technology opportunities, which may reduce our market share in one or more technology industries that we currently rely upon to generate future revenue.
 
Our patented technologies face uncertain market value.
 
Our operating subsidiaries have acquired patents and technologies that are in the early stages of adoption in the commercial and consumer markets. Demand for some of these technologies is untested and is subject to fluctuation based upon the rate at which our licensees will adopt our patents and technologies in their products and services.
 
As patent enforcement litigation becomes more prevalent, it may become more difficult for us to voluntarily license our patents.
 
We believe that the more prevalent patent enforcement actions become, the more difficult it will be for us to voluntarily license our patents. As a result, we may need to increase the number of our patent enforcement actions to cause infringing companies to license the patent or pay damages for lost royalties. This may increase the risks associated with an investment in our company.
 
The markets served by our operating subsidiaries are subject to rapid technological change, and if our operating subsidiaries are unable to develop and acquire new technologies and patents, our ability to generate revenues could be substantially impaired.
 
The markets served by our operating subsidiaries and their licensees frequently undergo transitions in which products rapidly incorporate new features and performance standards on an industry-wide basis. Products for communications applications and high-speed computing applications, as well as other applications covered by our operating subsidiaries’ intellectual property, are based on continually evolving industry standards. In addition, the communications industry is intensely competitive and has been impacted by price erosion, rapid technological change, short product life cycles, cyclical market patterns and increasing foreign and domestic competition. Our ability to compete in the future will depend on our ability to identify and ensure compliance with evolving industry standards. This will require our continued efforts and success in acquiring new patent portfolios with licensing and enforcement opportunities. While we expect for the foreseeable future to have sufficient liquidity and capital resources to maintain the level of acquisitions necessary to keep pace with these technological advances, various factors may require us to have greater liquidity and capital resources than we currently expect. If we are unable to acquire new patented technologies and patent portfolios, or to identify and ensure compliance with evolving industry standards, our ability to generate revenues could be substantially impaired and our business and financial condition could be materially harmed.
 
Uncertainty in global economic conditions could negatively affect our business, results of operations and financial condition.
 
Our revenue-generating opportunities depend on the use of our patented technologies by existing and prospective licensees, the overall demand for the products and services of our licensees, and on the overall economic and financial health of our licensees. Although economic conditions appear to be improving, recent uncertainties in global economic conditions have resulted in the tightening of the credit markets, a low level of liquidity in many financial markets, and extreme volatility in the credit, equity and fixed income markets. If economic conditions do not continue to improve, or if they further deteriorate, many of our licensees’ customers, which may rely on credit financing, may delay or reduce their purchases of our licensees’ products and services. In addition, the use or adoption of our patented technologies is often based on current and forecasted demand for our licensees’ products and services in the marketplace and may require companies to make significant initial commitments of

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capital and other resources. If negative conditions in the global credit markets delay or prevent our licensees’ and their customers’ access to credit, overall consumer spending on the products and services of our licensees may decrease and the adoption or use of our patented technologies may slow, respectively. Further, if the markets in which our licensees’ participate do not continue to improve, or deteriorate further, this could negatively impact our licensees’ long-term sales and revenue generation, margins and operating expenses, which could in turn have an adverse effect on our business, results of operations and financial condition.
 
In addition, we have significant patent-related intangible assets recorded on our consolidated balance sheets. We will continue to evaluate the recoverability of the carrying amount of our patent-related intangible assets on an ongoing basis, and we may incur substantial impairment charges, which would adversely affect our consolidated financial results. There can be no assurance that the outcome of such reviews in the future will not result in substantial impairment charges. Impairment assessment inherently involves judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact our assumptions as to prices, costs, holding periods or other factors that may result in changes in our estimates of future cash flows. Although we believe the assumptions we used in testing for impairment are reasonable, significant changes in any one of our assumptions could produce a significantly different result.
 

Risks Related to Our Common Stock
 
The availability of shares for sale in the future could reduce the market price of our common stock.
 
In the future, we may issue securities to raise cash for operations and acquisitions. We may also pay for interests in additional subsidiary companies by using shares of our common stock or a combination of cash and shares of our common stock. We may also issue securities convertible into our common stock. Any of these events may dilute stockholders’ ownership interests in our company and have an adverse impact on the price of our common stock.
 
In addition, sales of a substantial amount of our common stock in the public market, or the perception that these sales may occur, could reduce the market price of our common stock. This could also impair our ability to raise additional capital through the sale of our securities.
 
Delaware law and our charter documents contain provisions that could discourage or prevent a potential takeover of our company that might otherwise result in our stockholders receiving a premium over the market price of their shares.
 
Provisions of Delaware law and our certificate of incorporation and bylaws could make the acquisition of our company by means of a tender offer, proxy contest or otherwise, and the removal of incumbent officers and directors, more difficult. These provisions include:
 
Section 203 of the Delaware General Corporation Law, which prohibits a merger with a 15%-or-greater stockholder, such as a party that has completed a successful tender offer, until three years after that party became a 15%-or-greater stockholder;
 
amendment of our bylaws by the stockholders requires a two-thirds approval of the outstanding shares;
 
the authorization in our certificate of incorporation of undesignated preferred stock, which could be issued without stockholder approval in a manner designed to prevent or discourage a takeover;
  
provisions in our bylaws eliminating stockholders’ rights to call a special meeting of stockholders, which could make it more difficult for stockholders to wage a proxy contest for control of our board of directors or to vote to repeal any of the anti-takeover provisions contained in our certificate of incorporation and bylaws; and
  
the division of our board of directors into three classes with staggered terms for each class, which could make it more difficult for an outsider to gain control of our board of directors.
 
Together, these provisions may make the removal of management more difficult and may discourage transactions that could otherwise involve payment of a premium over prevailing market prices for our common stock.
  


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We may fail to meet market expectations because of fluctuations in quarterly operating results, which could cause the price of our common stock to decline.
 
Our reported revenues and operating results have fluctuated in the past and may continue to fluctuate significantly from quarter to quarter in the future. It is possible that in future periods, revenues could fall below the expectations of securities analysts or investors, which could cause the market price of our common stock to decline. The following are among the factors that could cause our operating results to fluctuate significantly from period to period:
 
the dollar amount of agreements executed in each period, which is primarily driven by the nature and characteristics of the technology being licensed and the magnitude of infringement associated with a specific licensee;
   
the specific terms and conditions of agreements executed in each period and the periods of infringement contemplated by the respective payments;
   
fluctuations in the total number of agreements executed;
   
fluctuations in the sales results or other royalty-per-unit activities of our licensees that impact the calculation of license fees due; 
  
the timing of the receipt of periodic license fee payments and/or reports from licensees; 
  
fluctuations in the net number of active licensees period to period; 
  
costs related to acquisitions, alliances, licenses and other efforts to expand our operations;
 
the timing of payments under the terms of any customer or license agreements into which our operating subsidiaries may enter;
  
expenses related to, and the timing and results of, patent filings and other enforcement proceedings relating to intellectual property rights, as more fully described in this section; and

new litigation or developments in current litigation and the unpredictability of litigation results or settlements.
   
Technology company stock prices are especially volatile, and this volatility may depress the price of our common stock.
 
The stock market has experienced significant price and volume fluctuations, and the market prices of technology companies have been highly volatile. We believe that various factors may cause the market price of our common stock to fluctuate, perhaps substantially, including, among others, the following:
 
announcements of developments in our patent enforcement actions;
   
developments or disputes concerning our patents;
   
our or our competitors’ technological innovations;
 
developments in relationships with licensees;
   
variations in our quarterly operating results;
 
our failure to meet or exceed securities analysts’ expectations of our financial results;
  
a change in financial estimates or securities analysts’ recommendations;
   
changes in management’s or securities analysts’ estimates of our financial performance;
   
changes in market valuations of similar companies;

the current sovereign debt crises affecting several countries in the European Union and concerns about sovereign debt of the United States;

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announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, capital commitments, new technologies, or patents; and
 
failure to complete significant transactions.

      For example, the NASDAQ-100 Technology Sector Index (NDXT) had a range of $1,421.19 - $1,911.53 during the 52-weeks ended December 31, 2013 and the NASDAQ Composite Index (IXIC) had a range of $3,076.60-$4,177.73 over the same period. Over the same period, our common stock fluctuated within a range of $12.23 - $32.59.
 
The recent financial crisis affecting the banking system and financial markets and the uncertainty in global economic conditions have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in the credit, equity and fixed income markets. As noted above, our stock price, like many others, has fluctuated significantly in recent periods and if investors have concerns that our business, operating results and financial condition will be negatively impacted by global economic conditions, our stock price could continue to fluctuate significantly in future periods.
 
In addition, we believe that fluctuations in our stock price during applicable periods can also be impacted by court rulings and/or other developments in our patent licensing and enforcement actions. Court rulings in patent enforcement actions are often difficult to understand, even when favorable or neutral to the value of our patents and our overall business, and we believe that investors in the market may overreact, causing fluctuations in our stock prices that may not accurately reflect the impact of court rulings on our business operations and assets.
 
In the past, companies that have experienced volatility in the market price of their stock have been the objects of securities class action litigation. If our common stock was the object of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could materially harm our business and financial results.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.


ITEM 2. PROPERTIES

Our principal executive, corporate and administrative offices are located in Newport Beach, California, where we lease approximately 20,170 square feet of office space, under a lease agreement that expires in June 2016. Our primary operating subsidiary, Acacia Research Group, LLC, and its subsidiaries, are headquartered in Plano, Texas, where we lease approximately 12,137 square feet of office space, under a lease agreement that expires in June 2020. Certain of our operating subsidiaries also maintain additional leased office space in Carrollton, Texas, Woodcliff Lake, New Jersey, Houston, Texas and Tokyo, Japan. We believe that our facilities are adequate, suitable and of sufficient capacity to support our immediate needs.


ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of business, we are the subject of, or party to, various pending or threatened legal actions, including various counterclaims in connection with our patent enforcement activities. We believe that any liability arising from these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

In connection with any of our patent enforcement actions, it is possible that a defendant may request and/or a court may rule that we have violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or our operating subsidiaries or award attorney’s fees and/or expenses to a defendant(s), which could be material, and if required to be paid by us or our operating subsidiaries, could materially harm our operating results and our financial position.
    
ITEM 4. MINE SAFETY DISCLOSURES

None.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


General

Our common stock trades on The NASDAQ Global Select Market under the symbol “ACTG.” Prior to December 16, 2002, our only class of common stock traded on the NASDAQ National Market System under the symbol “ACRI.”

Price Range of Common Stock
 
The high and low sales prices for our common stock as reported by The NASDAQ Global Select Market for the periods indicated are shown in the table below. Such prices are inter-dealer prices without retail markups, markdowns or commissions and may not necessarily represent actual transactions.

 
 
2013
 
2012
 
 
Fourth
Quarter
 
Third
Quarter
 
Second
Quarter
 
First
Quarter
 
Fourth
Quarter
 
Third
Quarter
 
Second
Quarter
 
First
Quarter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High                                           
 
$23.21
 
$25.74
 
$30.74
 
$32.59
 
$27.80
 
$40.32
 
$44.98
 
$43.82
Low                                           
 
$12.23
 
$21.26
 
$20.37
 
$24.52
 
$19.86
 
$23.24
 
$32.44
 
$34.75

Dividend Policy

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, we paid quarterly cash dividends totaling $18.6 million during 2013. In addition, on February 20, 2014, we announced that our Board of Directors approved a fourth quarterly cash dividend payable in the amount of $0.125 per share. The quarterly cash dividend will be paid on March 31, 2014 to shareholders of record at close of business on March 3, 2014. While we paid dividends to holders of our common stock on a quarterly basis during fiscal year 2013, the declaration and payment of future dividends will depend on many factors, including, but not limited to, our earnings and financial condition, and any future dividends will be made solely at the discretion of our Board of Directors.
    
Holders of Common Stock

On February 25, 2014, there were approximately 125 owners of record of our common stock. The majority of the outstanding shares of our common stock are held by a nominee holder on behalf of an indeterminable number of ultimate beneficial owners.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

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 were authorized to purchase in the aggregate up to $100 million of our common stock through the period ended August 15, 2013.

On November 15, 2013, Acacia’s Board of Directors authorized a program for repurchases of shares of our outstanding common stock. We were authorized to purchase in the aggregate up to $70 million of our outstanding common stock through the period ending May 14, 2014. Repurchases may be made from time to time by us in the open market or in block purchases in compliance with applicable SEC rules. The following are our monthly stock repurchases for the periods presented, all of which were purchased as part of publicly announced plans or programs:

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Total Number of Shares Purchased
Average Price paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of
Shares that May Yet be
Purchased under  the Plans or Programs
Plan Expiration
 
 
 
 
 
 
Plan Announced November 2012
 
 
 
 
 
November 16, 2012 - November 30, 2012
256,262

$
21.58

256,262

$

August 15, 2013
December 1, 2012 - December 31, 2012
873,146

$
24.26

873,146

$

August 15, 2013
Totals for 2012
1,129,408

 
1,129,408

 
 
 
 
 
 
 
 
Plan Announced November 2013
 
 
 
 
 
December 4, 2013 - December 11, 2013
600,000

$
13.18

600,000

$
62,074,000

May 14, 2014
Totals for 2013
600,000

 
600,000

 
 
   
The repurchases were made using existing cash resources and occurred in the open market.

Stock Price Performance Graph
 
The following stock price performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act.
 
The Stock Performance Graph depicted below compares the yearly change in our cumulative total stockholder return for the last five fiscal years with the cumulative total return of The NASDAQ Stock Market (U.S.) Composite Index and the NASDAQ-100 Technology Sector Index.
 
 
2009
 
2010
 
2011
 
2012
 
2013
 
 
 
 
 
 
 
 
 
 
 
Acacia Research Corporation common stock
 
$300
 
$853
 
$1,201
 
$844
 
$478
Nasdaq Composite Index (IXIC)
 
$144
 
$168
 
$165
 
$191
 
$265
NASDAQ-100 Technology Sector Index (NDXT)
 
$180
 
$218
 
$205
 
$220
 
$302

The graph covers the period from December 31, 2008 to December 31, 2013. Cumulative total returns are calculated assuming that $100 was invested on December 31, 2008, in our common stock, in the NASDAQ Composite Index, and in the NASDAQ-100 Technology Sector Index, and that all dividends, if any, were reinvested. Stockholder returns over the indicated period should not be considered indicative of future stock prices or shareholder returns.

20





 ITEM 6. SELECTED FINANCIAL DATA

The consolidated selected balance sheet data as of December 31, 2013 and 2012 and the consolidated selected statements of operations data for the years ended December 31, 2013, 2012 and 2011 set forth below have been derived from our audited consolidated financial statements included elsewhere herein, and should be read in conjunction with those financial statements (including notes thereto). The consolidated selected balance sheet data as of December 31, 2011, 2010 and 2009 and the consolidated selected statements operations data for the years ended December 31, 2010 and 2009 have been derived from audited consolidated financial statements not included herein, but which were previously filed with the SEC.

Consolidated Statements of Operations Data
(In thousands, except share and per share data)
 
 
For the Years Ended December 31,
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
Revenues and other operating income(1)
 
$
130,556

 
$
250,727

 
$
184,707

 
$
131,829

 
$
67,340

Inventor royalties and contingent legal fees expense(1)
 
54,508

 
50,679

 
91,669

 
45,198

 
31,618

Litigation and licensing expenses - patents
 
39,335

 
21,591

 
13,005

 
13,891

 
14,055

Amortization of patents
 
53,658

 
39,019

 
9,745

 
6,931

 
4,634

Marketing, general and administrative expenses (including non-cash stock compensation expense)
 
59,229

 
54,083

 
35,693

 
25,067

 
21,070

Research, consulting and other expenses - business development
 
3,251

 
4,943

 
4,338

 
2,121

 
1,689

Operating income (loss)
 
(82,931
)
 
80,412

 
30,257

 
38,621

 
(5,726
)
Income (loss) from continuing operations before benefit from (provision for) income taxes
 
(80,800
)
 
81,349

 
30,353

 
38,756

 
(5,424
)
Benefit from (provision for) income taxes
 
21,958

 
(22,060
)
 
(8,708
)
 
(1,740
)
 
(209
)
Net income (loss) from continuing operations including noncontrolling interests in operating subsidiaries
 
(58,842
)
 
59,289

 
21,645

 
37,016

 
(5,633
)
Net income (loss) attributable to Acacia Research Corporation
 
(56,434
)
 
59,453

 
21,106

 
34,051

 
(11,290
)
 
 
 
 
 
 
 
 
 
 
 
Diluted income (loss) per common share
 
$
(1.18
)
 
$
1.21

 
$
0.50

 
$
0.95

 
$
(0.37
)
Cash dividends declared per common share
 
$
0.375

 

 

 

 


Consolidated Balance Sheet Data (In thousands)
 
 
At December 31,
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents and investments
 
$
256,702

 
$
311,279

 
$
323,286

 
$
104,516

 
$
53,887

Total assets
 
$
593,393

 
$
668,717

 
$
352,877

 
$
134,784

 
$
78,256

Total liabilities
 
$
31,195

 
$
50,239

 
$
30,765

 
$
20,931

 
$
22,287

Noncontrolling interests in operating subsidiaries
 
$
6,488

 
$
6,976

 
$
2,163

 
$
2,982

 
$
2,507

Acacia Research Corporation stockholders’ equity
 
$
555,710

 
$
611,502

 
$
319,949

 
$
110,871

 
$
53,462

 __________________________________
(1) Includes verdict insurance proceeds and related costs as described under “Consolidated Results of Operations” below.

Factors Affecting Comparability:

As a result of the pre-tax loss for fiscal year 2013, we recorded a benefit from income taxes totaling $22.0 million.

In fiscal years 2013, 2012, 2011 and 2010, amortization of patents included the acceleration of patent amortization related to recoupable up-front patent portfolio acquisition costs that were recovered, pursuant to the provisions of the underlying inventor agreements, totaling $592,000, $10.6 million and $3.1 million, $1.2 million, respectively. Amortization of patents also included acceleration related to the sale or termination on existing portfolios totaling $1.7 million, $3.0 million, $1,103,000 and $275,000 in fiscal years 2013, 2012, 2011 and 2010, respectively. Included in amortization of patents for the year ended December 31, 2013 are patent impairment charges totaling $4.6 million.
 

21





Marketing, general and administrative expenses included non-cash stock compensation expense totaling $27.9 million, $25.7 million, $13.6 million, $7.1 million and $7.1 million in 2013, 2012, 2011, 2010 and 2009, respectively.



22





ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including the risks we discuss in Item 1A, “Risk Factors,” and elsewhere herein.

General

Our operating subsidiaries acquire rights in, license and enforce patented technologies. Our operating subsidiaries partner with inventors and patent owners, applying our legal and technology expertise to patent assets to unlock the financial value in their patented inventions. We are an intermediary in the patent marketplace, bridging the gap between invention and application, facilitating efficiency and delivering monetary rewards to patent owners.

Our operating subsidiaries generate revenues and related cash flows from the granting of patent rights for the use of patented technologies that our operating subsidiaries control or own. 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, where necessary, with the enforcement against unauthorized users of their patented technologies through the filing of patent infringement litigation.

We are a leader in licensing patented technologies and have established a proven track record of licensing success with over 1,345 license agreements executed to date, across 166 of our patent licensing and enforcement programs. Currently, on a consolidated basis, our operating subsidiaries own or control the rights to over 200 patent portfolios, which include U.S. patents and certain foreign counterparts, covering technologies used in a wide variety of industries.

The patent acquisition, development, licensing and enforcement business conducted by our operating subsidiaries, is described more fully in Item 1, “Business,” of this annual report.

Executive Overview

During the periods presented, we continued our business of empowering patent owners and rewarding invention by providing a path to patent monetization for the people and companies who have contributed valuable patented inventions to an industry, but who require a professional, experienced independent third-party licensing partner to get rewarded for those inventions. These people and companies are our customers, and in many cases, components of the patent disenfranchised. In so doing, we have placed ourselves at the forefront of an emerging secondary market in patent assets under which holders of high quality patents, including the patent disenfranchised, may be rewarded for the use of their patented inventions by others, even if they do not have the capital and expertise to engage in lengthy, costly and risky patent litigation.

Our operating activities for the periods presented were principally focused on the continued investment in and development of our patent licensing and enforcement business, including the continued pursuit of our ongoing patent licensing and enforcement programs and the commencement of new patent licensing and enforcement programs. In addition, we continued our focus on business development, including the acquisition of several additional high quality patent portfolios by certain of our operating subsidiaries and the continued pursuit of additional opportunities to partner with patent owners or acquire patent portfolios, and continue our industry leading patent licensing and enforcement activities.
    
Operating activities during the periods presented included the following:
 
2013
 
2012
 
2011
 
 
 
 
 
 
Revenues and other operating income (in thousands)
$
130,556

 
$
250,727

 
$
184,707

New agreements executed
120

 
138

 
125

Licensing and enforcement programs generating revenues - during the respective period
53

 
68

 
56

Licensing and enforcement programs with initial revenues
23

 
31

 
21

New patent portfolios
25

 
55

 
40

Cumulative number of licensing and enforcement programs generating revenues - inception to date
166

 
143

 
112


23






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 patent licensing and enforcement programs on a trailing twelve-month basis. Trailing twelve-month revenues during the periods presented were as follows (in thousands, except percentage change values):
As of Date:
 
Trailing Twelve -Month Revenues
 
% Change
 
 
 
 
 
December 31, 2013
 
$
130,556

 
(28
)%
September 30, 2013
 
181,755

 
(10
)%
June 30, 2013
 
201,174

 
(12
)%
March 31, 2013
 
228,548

 
(9
)%
December 31, 2012
 
250,727

 
36
 %
December 31, 2011
 
184,707

 


Our revenues historically have fluctuated period to period, 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 licensing negotiations, mediations, patent infringement actions, trial dates and other enforcement proceedings relating to our patent licensing and enforcement programs;
the relative maturity of licensing programs during the applicable periods; and
other external factors, including the periodic status or results of ongoing negotiations, the status of ongoing litigations, actual or perceived shifts in the regulatory environment, impact of unrelated patent related judicial proceedings and other macroeconomic factors.
  
Management does not attempt to manage for smooth sequential periodic growth in revenues period to period, and therefore, periodic results can be uneven. Unlike most operating businesses and industries, licensing revenues not generated in a current period are not necessarily foregone but, most likely, depending on whether negotiations, litigation or both continue into subsequent periods, and depending on a number of other factors, such potential revenues may be pushed into subsequent fiscal periods.

Historically, based on the merits and strength of our operating subsidiary’s patent infringement claims and other factors, many prospective licensees have elected to settle significant patent infringement cases and pay reasonable license fees for the use of our patented technology, as those patent infringement cases approached a court determined trial date. In 2013, we had three such trial dates, occurring in the first half of 2013. We believe there is a direct correlation between this relatively low number of trial dates in 2013 and (1) our prospective licensee’s reduced settlement compulsion throughout fiscal 2013, (2) the timing of our revenue generation during fiscal 2013, and (3) consequently, the overall decline in our fiscal 2013 revenue, as compared to fiscal 2012.

Based on current scheduling information available as of February 28th, 2014, the number of trial dates increases to approximately 10 trial dates in fiscal 2014. Based on information available as of February 28th, 2014, in the first half of 2015, we currently expect to have between 10 and 15 trial dates. Many of these trials will involve our higher quality, higher revenue potential patent portfolios. In patent licensing and enforcement, these trial dates, though not perfect predictors of revenue, are closely correlated to potential future revenue events.

Going forward, we have strategically chosen to shift the focus of our operating business to increasingly serve a smaller number of customers each having higher quality patent portfolios. High quality patent portfolios are typically associated with higher numbers of varied defensible claims, higher revenue potential, originating from high-pedigreed patent owners and/or possessing a relatively large number of prospective licensees. In this regard, during the later portion of 2013 and early 2014, we have continued, and even accelerated the shift in our focus at our point of patent intake, from quantity to quality.


24





We continue to identify and explore numerous opportunities for partnering with companies in the technology, energy, medical technology and other sectors for the licensing and enforcement of their high quality patented technologies, and are also expanding our activity in international markets, both of which we expect will expand and diversify our future revenue generating opportunities. During fiscal year 2013, we expanded our management team with key hires of experienced patent acquisition and licensing executives from industry that we expect will facilitate our continued development of these growth areas.

Summary of Results of Operations - For Fiscal Years 2013, 2012 and 2011
(In thousands, except percentage change values)
 
Fiscal Year
 
% Change
 
2013
 
2012
 
2011
 
2013 vs. 2012
 
2012 vs. 2011
 
 
 
 
 
 
 
 
 
 
Revenues
$
130,556

 
$
250,727

 
$
172,256

 
(48
)%
 
46
 %
Verdict insurance proceeds

 

 
12,451

 
 %
 
(100
)%
Total revenues and other operating income
130,556

 
250,727

 
184,707

 
(48
)%
 
36
 %
 
 
 
 
 
 
 
 
 
 
Inventor royalties and contingent legal fees(3)
54,508

 
50,679

 
91,669

 
8
 %
 
(45
)%
Amortization expense
53,658

 
39,019

 
9,745

 
38
 %
 
300
 %
Other operating costs and expenses(1)
105,321

 
80,617

 
53,036

 
31
 %
 
52
 %
Operating income (loss)
(82,931
)
 
80,412

 
30,257

 
(203
)%
 
166
 %
Benefit from (provision for) income taxes
21,958

 
(22,060
)
 
(8,708
)
 
(200
)%
 
153
 %
Net loss (income) attributable to noncontrolling interests(2)
2,408

 
164

 
(539
)
 
*

 
(130
)%
Net income (loss) attributable to Acacia Research Corporation
(56,434
)
 
59,453

 
21,106

 
(195
)%
 
182
 %
    
* Percentage change in excess of 300%
(1) Includes non-cash stock compensation charges of $27.9 million, $25.7 million and $13.6 million in fiscal years 2013, 2012 and 2011, respectively, included in Marketing, general and administrative expense in the statements of operations.
(2) Refer to Note 1 to the notes to consolidated financial statements included elsewhere in this annual report for additional information.
(3) Includes inventor royalties and contingent legal fees (fiscal year 2011 only) associated with the verdict insurance policy and related proceeds received, as described below.

Overview - Fiscal year 2013 compared with Fiscal Year 2012

Revenues decreased $120.2 million, or 48%, due primarily to a decrease in the average revenue per executed agreement and a decrease in the total number of agreements executed in fiscal year 2013.
In fiscal year 2013, $9.9 million, or 7.6%, of revenues were generated from our patent portfolios in the medical technology industry sector, as compared to $41.2 million, or 16.5%, in fiscal year 2012.
Cost of Revenues and Other Operating Expenses:
Inventor royalties and contingent legal fees, on a combined basis, increased $3.8 million, or 8%, as compared to the 48% decrease in related revenues for the same periods, due primarily to a greater percentage of revenues generated in fiscal year 2012 having no inventor royalty or contingent legal fee arrangement obligations, and lower average inventor royalty and contingent legal fee rates as compared to the portfolios generating revenues in fiscal year 2013.
Litigation and licensing expenses-patents increased $17.7 million, or 82%, to $39.3 million, due primarily to an increase in international enforcement costs, an increase in strategic patent portfolio prosecution costs, and a net increase in litigation support and third-party technical consulting expenses associated with ongoing and new licensing and enforcement programs commenced during 2013.
Marketing, general and administrative expenses increased $5.1 million, or 10%, to $59.2 million, due primarily to a net increase in personnel costs in connection with the enhancement of our business development, licensing and engineering teams, an increase in other non-recurring personnel severance costs including the impact of non-recurring cash and non-cash charges associated with Paul Ryan’s retirement severance package, approved by the board of directors, and a net increase in corporate legal, facilities, general and administrative costs, partially offset by a decrease in variable performance-based compensation costs.
Patent amortization increased $14.6 million, or 38%, to $53.7 million, due primarily to amortization expense related to new patent portfolios acquired during the fourth quarter of 2012 and a net increase in accelerated

25





patent amortization related to patent portfolio impairment charges totaling $4.6 million and other dispositions during fiscal year 2013, partially offset by a decrease in accelerated patent amortization related to recoupable up-front patent portfolio acquisition costs recovered during fiscal year 2013.
We recorded a pre-tax net loss and a tax benefit for fiscal year 2013, compared to pre-tax net income and tax expense for fiscal year 2012, as shown above. Our effective tax rate was 27% for fiscal years 2013 and 2012, respectively. The fiscal year 2013 effective tax benefit rate was lower than the U.S. Federal statutory rate primarily due to an increase in the valuation allowance related to foreign tax credits generated in 2013 and certain permanent nondeductible items. The fiscal year 2012 effective tax rate was lower than the U.S. federal statutory rate primarily due to $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 discussed below.
Operating expenses for fiscal year 2013 included a one-time, non-recurring charge related to the resolution of a dispute concerning legal fees associated with a prior matter totaling $3.5 million.

Overview - Fiscal year 2012 compared with Fiscal Year 2011

Revenues and other operating income increased $66.0 million, or 36%, due primarily to an increase in the average revenue per executed agreement and an increase in the total number of agreements executed in fiscal year 2012.
In fiscal year 2012, $41.2 million, or 16.5%, of revenues were generated from our patent portfolios in the medical technology industry sector, as compared to $8.6 million, or 4.7%, in fiscal year 2011.
Other operating income in fiscal year 2011 includes verdict insurance proceeds totaling $12.5 million, as described below under “Consolidated Results of Operations.”
Cost of Revenues and Other Operating Expenses:
Inventor royalties, net income attributable to noncontrolling interests, contingent legal fees, and applicable verdict insurance proceeds related costs, on a combined basis, decreased $41.0 million, or 45%, compared to the 36% increase in related revenues and other operating income for the same periods, due primarily to a greater percentage of revenues generated in fiscal year 2012 having no inventor royalty or contingent legal fee arrangement obligations, and lower average inventor royalty and contingent legal fee rates for the portfolios generating revenues in fiscal year 2012.
Litigation and licensing expenses-patents decreased $8.6 million, or 66%, to $21.6 million, due primarily to a higher net level of patent prosecution, litigation support, third-party technical consulting and professional expert expenses associated with our investment in ongoing licensing and enforcement programs and new licensing and enforcement programs commenced since the end of fiscal year 2012.
Marketing, general and administrative expenses increased $18.4 million, or 52% to $54.1 million, due primarily to an increase in non-cash stock compensation charges resulting from an increase in the average grant date fair value of restricted shares expensed and an increase in restricted shares vesting in 2012, a net increase in licensing, business development, and engineering personnel since the end of fiscal year 2011, an increase in variable performance-based compensation costs and a net increase in corporate general and administrative costs.
Patent amortization increased $29.3 million, or 300% to $39.0 million, due primarily to amortization expense related to an increase in amortization related to new patent portfolios acquired in fiscal year 2012 and a net increase in accelerated patent amortization related to recoupable up-front patent portfolio acquisition costs recovered during fiscal year 2012.
Our effective tax rate remained relatively flat at 27% and 29% for fiscal years 2012 and 2011, respectively.







26






Revenues in fiscal year 2013 included fees from the following licensing and enforcement programs:
3G & 4G Wireless technology(1)
 
Memory Circuit and Packaging technology(1)
Audio Communications Fraud Detection technology
 
Messaging technology
Automotive Safety, Navigation and Diagnostics technology
 
Mobile Computer Synchronization technology
Broadband Communications technology(1)
 
Mobile Enhancement Solutions technology
Business Process Modeling technology(2)
 
MRI technology(1)(2)
Camera Support technology
 
NOR Flash technology
Catheter Ablation technology(1)(2)
 
Online Auction Guarantees technology
Computer Aided Design Tools technology(1)
 
Online Gaming technology
Computer Architecture and Power Management technology
 
Online newsletters with links technology
Core Fiber Optic Network Architectures technology(1)
 
Optical Networking technology(1)(2)
Digital Imaging technology(1)
 
Power Management within Integrated Circuits technology
Digital Signal Processing Architecture technology
 
Prescription Lens technology(1)(2)
DMT® technology
 
Reflective and Radiant Barrier Insulation technology(1)
Domain Name Redirection technology
 
Semiconductor Memory and Process technology(1)
Dynamic Transmissions technology(1)
 
Semiconductor Packaging technology(1)
Electronic spreadsheet, data analysis and software development technology(1)
 
Software Activation technology
Facilities Operation Management System technology
 
Surgical Access technology(2)
Gas Modulation Control Systems technology(1)
 
Suture Anchors technology(2)
Greeting Card technology(1)
 
Telematics technology
Improved Memory Manufacturing technology
 
User Programmable Engine Control technology
Information Portal Software technology
 
Video Analytics for Security technology
Information Storage, Searching & Retrieval technology
 
Video Delivery and Processing technology
Inhaler Drug Delivery technology(1)(2)
 
Web Collaboration technology(1)
Intercarrier SMS technology(1)
 
Wireless Data Synchronization & Data Transfer technology(1)
Interstitial and Pop-Up Internet Advertising technology
 
Wireless Location Based Services technology(1)
Lighting Ballast technology
 
X-Ray Powder Diffraction technology(1)
Location Based Services technology
 
 
 

Revenues in fiscal year 2012 included fees from the following licensing and enforcement programs:
4G Wireless technology(1)
 
Messaging technology
Application Authentication technology(1)
 
Minimally Invasive Surgery technology(1)(2)
Audio Communications Fraud Detection technology
 
Mobile Computer Synchronization technology
Automotive Safety, Navigation and Diagnostics technology(1)
 
Network Monitoring technology
Bone Graft Harvesting technology(1)(2)
 
NOR Flash technology
Bone Spacer Devices technology(1)(2)
 
Online Ad Tracking technology
Bone Wedge technology(1)(2)
 
Online Auction Guarantee technology
Camera Support technology
 
Online Gaming technology(1)
Consumer Rewards technology(1)
 
Optical Networking technology
Data Compression technology
 
Optical Recording technology
DDR SDRAM technology
 
Optical Switching technology
Digital Signal Processing Architecture technology
 
Pop-up Internet Advertising technology
Disk Array Systems & Storage Area Network technology
 
Power Management Within Integrated Circuits technology
DMT® technology
 
Power-over-Ethernet technology
Document Assembly Technology for Printers(1)
 
Radiation Therapy technology(1)(2)
Document Generation technology
 
Rule Based Monitoring technology
Domain Name Redirection technology(1)
 
Semiconductor Memory and Process Patents(1)
Dynamic Random Access Memory technology(1)
 
Shape Memory Alloys technology(2)
Enhanced Mobile Communications technology(1)
 
Software Activation technology(1)

27





Facilities Operation Management System technology
 
Storage technology
Hearing Aid technology(1)(2)
 
Surgical Access technology(1)(2)
Impact Instrument technology
 
Suture Anchors technology(1)(2)
Improved Anti-Trap Safety Technology for Vehicles(1)
 
Targeted Content Delivery & Network File Transfer technology
Improved Lighting technology
 
Telematics technology
Improved Memory Manufacturing technology(1)
 
Unicondylar Knee Replacement technology(1)(2)
Information Portal Software technology
 
User Programmable Engine Control technology
Information Storage, Searching and Retrieval technology(1)
 
Video Analytics for Security technology(1)
Integrated Access technology(1)
 
Video Delivery and Processing technology(1)
Intraluminal Device technology(1)(2)
 
Video Encoding technology
Lighting Ballast technology
 
Videoconferencing technology(1)
Location Based Services technology
 
Visual Data Evaluation technology
Medical Image Manipulation technology(1)(2)
 
Voice-Over-IP Technology(1)
Medical Monitoring technology(2)
 
Website Crawling technology
MEMS technology
 
Wireless Monitoring technology(1)(2)

Revenues in fiscal year 2011 included fees from the following licensing and enforcement programs:
Audio Communications Fraud Detection technology
 
Magnetic Storage technology(1)
Biosensor technology(1)(2)
 
Manufacturing Data Transfer technology
Camera Support technology
 
MEMS technology(1)
Catheter Insertion technology(1)(2)
 
Messaging technology(1)
Computer Architecture and Power Management technology(1)
 
Microprocessor Enhancement technology
Computer Graphics technology
 
Mobile Computer Synchronization technology
Data Compression technology(1)
 
Network Monitoring technology
Database Retrieval technology(1)
 
Network Remote Access technology
DDR SDRAM technology(1)
 
NOR Flash technology(1)
Digital Signal Processing Architecture technology
 
Online Auction Guarantee technology
Digital Video Enhancement technology
 
Optical Recording technology(1)
Disk Array Systems & Storage Area Network technology
 
Optical Switching technology
DMT® technology
 
Pop-up Internet Advertising technology
Document Generation technology(2)
 
Power Management Within Integrated Circuits technology(1)
DRAM Memory architecture technology
 
 
Power-over-Ethernet technology(1)
Electronic Message Advertising technology
 
Rule Based Monitoring technology
Facilities Operation Management System technology
 
Semiconductor Manufacture technology(1)
High Performance Computer Architecture technology
 
Shape Memory Alloys technology(1)(2)
Image Resolution Enhancement technology
 
Short Messaging in Cellular Telephony technology
Impact Instrument technology(1)
 
Software Installation technology
Improved Commercial Print technology
 
Storage technology
Improved Lighting technology
 
Targeted Content Delivery technology(1)
Interactive Content in a Cable Distribution System technology(1)
 
Telematics technology
Interactive Mapping technology
 
User Programmable Engine Control technology(1)
Item Identification technology
 
Video Encoding technology(1)
Lighting Ballast technology
 
Virtual Server technology
Lighting Control technology(1)
 
Visual Data Evaluation technology
Location Based Services technology
 
Website Crawling technology
_________________________________________
(1) 
Initial revenues recognized during the applicable period.
(2) 
Revenues were generated from our patent portfolios in the medical technology industry sector.


28





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.

Patent Licensing and Enforcement

We expect patent-related legal expenses to continue to fluctuate from period to period based on the factors summarized herein, in connection with future trial dates, international enforcement, strategic patent portfolio prosecution and our current and future patent acquisition, prosecution, licensing and enforcement activities. 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 associated with patent infringement litigation, including, but not limited to, increases in costs billed by outside legal counsel for discovery, depositions, economic analyses, damages assessments, expert witnesses and other consultants, re-exam and inter partes review costs, case-related audio/video presentations and other litigation support and administrative costs could increase our operating costs and decrease our profit 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, including any fee or cost shifting provisions, could significantly increase our operating costs and decrease our profit generating opportunities. Increased focus on the growing number of patent-related lawsuits may result in legislative changes which increase our costs and related risks of asserting patent enforcement actions. For instance, the United States House of Representatives passed a bill that would require non-practicing entities that bring patent infringement lawsuits to pay legal costs of the defendants, if the lawsuits are unsuccessful and certain standards are not met;

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; and

The complexity of negotiations and potential magnitude of exposure for potential infringers associated with higher quality patent portfolios may lead to increased intervals of time between the filing of litigation and potential revenue events (i.e. markman dates, trial dates), which may lead to increased legal expenses, consistent with the higher revenue potential of such portfolios.

Investments in Patent Portfolios

Our operating subsidiaries intend to sustain the long term growth of our patent licensing and enforcement business through the continued identification of opportunities to partner with patent owners with high-quality patent assets, across a wide range of technology areas that have been, or are anticipated to be, widely adopted by third-parties in connection with the manufacture or sale of products and services. Going forward, we have strategically chosen to shift the focus of the company to increasingly serve a smaller number of customers each having higher quality patent portfolios. In this regard, during the later portion of 2013 and early 2014, we continued, and even accelerated the shift in our focus at our point of patent intake, from quantity to quality.

In fiscal year 2013, we obtained control, primarily through partnering arrangements, of 25 new patent portfolios with applications over a wide range of technology areas, compared to 55 (including the acquisition of ADAPTIX) new patent portfolios, and 40 new patent portfolios in fiscal years 2012 and 2011, respectively. Patent portfolio acquisition costs in fiscal year 2013 totaled $25.1 million, compared to $328.3 million (including the $150.0 million acquisition of ADAPTIX) and $14.7 million in fiscal years 2012 and 2011, respectively.









29





Patent portfolio intake in fiscal years 2013, 2012 and 2011 were comprised of the following:
 
 
Number of Patent Portfolios
 
 
2013
 
%
 
2012
 
%
 
2011
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Partnering - revenue share with upfront cash advance and preferred returns
 
18

 
72
%
 
25

 
45
%
 
7

 
18
%
Partnering - revenue share with no upfront cash advance
 
4

 
16
%
 
19

 
35
%
 
20

 
50
%
Outright purchase
 
3

 
12
%
 
10

 
18
%
 
13

 
32
%
Acquisition of ADAPTIX, Inc.
 

 
%
 
1

 
2
%
 

 
%
 
 
25

 
100
%
 
55

 
100
%
 
40

 
100
%

ADAPTIX, Inc. Acquisition. In January 2012, we acquired ADAPTIX, Inc., or ADAPTIX, a pioneer in the development of 4G technologies for wireless systems, for $150 million, net of cash acquired, as described below and at Note 8 to the consolidated financial statements elsewhere herein. With patents filed as early as 2000, ADAPTIX’s research and development efforts have resulted in one of the 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.

In general, the majority of acquisition costs incurred for patent portfolios with future inventor royalty obligations are subject to contractual provisions providing for higher percentage returns to our operating subsidiaries early in the licensing and enforcement program until such initial upfront acquisition costs are fully recovered.

The level of costs incurred in the periods presented in part, reflects our continued identification of opportunities to partner with patent owners, including individual inventors, small technology companies, research laboratories, universities, and major technology companies and exchange upfront and / or advanced royalty payments to patent owners, for no or a reduced future inventor royalty percentages, resulting in the potential for higher returns on our investments in connection with future licensing and enforcement activities.

Fiscal year 2013 patent portfolio intake included 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, obtained patents relating to vascular device technology.

In January 2013, obtained 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.

In April 2013, obtained over 40 issued patents relating to microprocessor and memory technology and will share licensing revenue with the patent owner.

In April 2013, obtained the rights to an automotive illumination patent portfolio from Rambus Inc., or Rambus (Nasdaq: RMBS), the innovative technology solutions company. The portfolio relates to automotive and vehicular illumination applications including headlights, taillights, and internal and external lighting. As part of this transaction, Rambus received an initial upfront payment and is expected to receive subsequent payments.

In June 2013, obtained patents for high speed circuit interconnect and display control technology used in consumer electronics, PCs and mobile devices such as smartphones, tablets, and laptops from a major semiconductor technology company.

30






In June 2013, obtained patents for content security used in consumer electronics and mobile devices such as smartphones, tablets, and laptops from a major semiconductor technology company.

In June 2013, obtained the rights to a patent portfolio covering ink jet printer and ink jet printing technologies.

In June 2013, obtained the rights to a patent portfolio covering printer and printing technologies.

In June 2013, obtained U.S. and Canadian patents relating to energy efficiency in commercial and residential building markets. The portfolio broadly covers reflective and radiant barrier insulation technology which dramatically improves heating and cooling efficiency.
In August 2013, obtained a patent portfolio relating to semiconductor testing technology.
In August 2013, obtained 13 U.S. and foreign patents and applications on fluorescence microscopy.
In September 2013, obtained a patent portfolio of over 20 U.S. patents and applications relating to post market sales data, multiple coordinated viewing devices and progressive deletion.
In September 2013, obtained a patent portfolio relating to power managed security system technology.
In September 2013, obtained a patent portfolio relating to professional and social media networking technology.
In November 2013, obtained patents for wideband speech and audio compression technology.
In November 2013, obtained rights to one issued U.S. patent and U.S. and foreign patent applications relating to methods and systems for performing dynamic, 3-D geological and geophysical modeling used in oil and gas exploration and production.
In November 2013, obtained U.S. patents and foreign counterparts related to cellular HSPA and LTE technology.

As of December 31, 2013, certain of our operating subsidiaries have entered into option agreements with third-party patent portfolio owners regarding the potential partnering and / or the acquisition of additional patent portfolios for future licensing and enforcement. Future patent portfolio acquisitions will continue to expand and diversify our future revenue generating opportunities.

Acacia Intellectual Property Fund, L.P. In August 2010, one of our wholly owned subsidiaries became the general partner of the Acacia Intellectual Property Fund, L.P., or the Acacia IP Fund, which was formed in August 2010. The Acacia IP Fund is authorized to raise up to $250 million. The Acacia IP Fund acquires, licenses and enforces intellectual property consisting primarily of patents, patent rights, and patented technologies.

Critical Accounting Policies

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing these financial statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly.

We believe that, of the significant accounting policies discussed in Note 2 to our notes to consolidated financial statements, the following accounting policies require our most difficult, subjective or complex judgments:

revenue recognition;
stock-based compensation expense;
valuation of long-lived and intangible assets;
accounting for business combinations - acquisition method of accounting; and
accounting for income taxes.

We discuss below the critical accounting assumptions, judgments and estimates associated with these policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially

31





from actual results. For further information on our critical accounting policies, refer to Note 2 to the notes to consolidated financial statements included herein.

Revenue Recognition

As described below, significant management judgments must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of revenue recognized or deferred for any period, if management made different judgments.

Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been performed pursuant to the terms of the agreement, (iii) amounts are fixed or determinable and (iv) collectibility of amounts is reasonably assured.

We make estimates and judgments when determining whether the collectibility of fees receivable from licensees is reasonably assured. We assess the collectibility of fees receivable based on a number of factors, including past transaction history and the credit-worthiness of licensees. If it is determined that collection is not reasonably assured, the fee is recognized when collectibility becomes reasonably assured, assuming all other revenue recognition criteria have been met, which is generally upon receipt of cash for transactions where collectibility may have been an issue. Management’s estimates regarding collectibility impact the actual revenues recognized each period and the timing of the recognition of revenues. Our assumptions and judgments regarding future collectibility could differ from actual events and thus materially impact our financial position and results of operations.

In general, our 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) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the dismissal of any pending litigation. The intellectual property rights granted may be perpetual in nature, extending until the expiration of the related patents, or can be granted for a defined, relatively short period of time, with the licensee possessing the right to renew the agreement at the end of each contractual term for an additional minimum upfront payment. Pursuant to the terms of these agreements, our operating subsidiaries have no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on our operating subsidiaries’ part to maintain or upgrade the technology, or provide future support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement, or upon receipt of the minimum upfront payment for term agreement renewals. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, when collectibility is reasonably assured, or upon receipt of the minimum upfront fee for term agreement renewals, and when all other revenue recognition criteria have been met.

Depending on the complexity of the underlying revenue arrangement and related terms and conditions, significant judgments, assumptions and estimates may be required to determine when substantial delivery of contract elements has occurred, whether any significant ongoing obligations exist subsequent to contract execution, whether amounts due are collectible and the appropriate period or periods in which, or during which, the completion of the earnings process occurs. Depending on the magnitude of specific revenue arrangements, if different judgments, assumptions and estimates are made regarding contracts executed in any specific period, our periodic financial results may be materially affected.
 
Our operating subsidiaries are responsible for the licensing and enforcement of their respective patented technologies and pursue third-parties that are utilizing their intellectual property without a license or who have under-reported the amount of royalties owed under a license agreement. As a result of these activities, from time to time, our operating subsidiaries may recognize revenues in a current period that relate to infringements by licensees that occurred in prior periods. These recoveries may cause revenues to be higher than expected during a particular reporting period and may not occur in subsequent periods. Differences between amounts initially recognized and amounts subsequently audited or reported as an adjustment to those amounts, are recognized in the period such adjustment is determined as a change in accounting estimate.

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, contingent fee rates and other terms, vary across the patent portfolios owned or controlled by our operating subsidiaries. Inventor royalties, noncontrolling interests and contingent legal fees expenses fluctuate period to period, based on the amount of revenues recognized each period, the terms and conditions of revenue agreements executed each period and the mix of specific patent portfolios with varying economic terms and obligations generating revenues each period. Inventor royalties,

32





noncontrolling interests and contingent legal fees expenses will continue to fluctuate and may continue to vary significantly period to period, based primarily on these factors.

For fiscal years 2013, 2012 and 2011, the majority of our revenue agreements provided for the payment to us of one-time, paid-up license fees in consideration for the grant of certain intellectual property rights for patented technology rights owned by our operating subsidiaries. These rights were primarily granted on a perpetual basis, extending until the expiration of the underlying patents. Pursuant to the terms of these agreements, our operating subsidiaries have no further obligation with respect to the grant of the non-exclusive licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on our operating subsidiaries’ part to maintain or upgrade the technology, or provide future support or services. The agreements provided for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement. As such, the earnings process was determined to be complete and revenue was recognized upon the execution of the agreements, when all other revenue recognition criteria were met. Historically, term license agreements have not been a material component of our operating revenues, with the majority of license agreements being paid-up, perpetual license agreements.

During the years ended December 31, 2013, 2012 and 2011, we entered into significant agreements with unrelated third-parties resolving pending patent matters that resulted in the grant of certain intellectual property rights and recognition of revenues, portions of which were not subject to inventor royalty and contingent legal fee arrangements, as well as the grant of licenses from certain of our operating subsidiaries and recognition of revenues that were subject to inventor royalties and contingent legal fee arrangements. Revenues recognized subject to inventor royalties and contingent legal fees are based on a determination by the respective operating subsidiaries. Depending on the magnitude of specific revenue arrangements, if different judgments are made regarding revenues subject to inventor royalties and contingent legal fees in any specific period, our periodic financial results may be materially affected.

Stock-based Compensation Expense

Stock-based compensation payments to employees and non-employee directors are recognized as expense in the statements of operations. The compensation cost for all stock-based awards is measured at the grant date, based on the fair value of the award (determined using a Black-Scholes option pricing model for stock options and intrinsic value on the date of grant for nonvested restricted stock), and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). Determining the fair value of stock-based awards at the grant date requires significant estimates and judgments, including estimating the market price volatility of our common stock, future employee stock option exercise behavior and requisite service periods.
 
Stock-based compensation expense is recorded only for those awards expected to vest using an estimated pre-vesting forfeiture rate. As such, we are required to estimate pre-vesting option forfeitures at the time of grant and reflect the impact of estimated pre-vesting option forfeitures on compensation expense recognized. Estimates of pre-vesting forfeitures must be periodically revised in subsequent periods if actual forfeitures differ from those estimates. We consider several factors in connection with our estimate of pre-vesting forfeitures, including types of awards, employee class, and historical pre-vesting forfeiture data. The estimation of stock awards that will ultimately vest requires judgment, and to the extent that actual results differ from our estimates, such amounts will be recorded as cumulative adjustments in the period the estimates are revised. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted. Refer to Notes 2 and 11 to our notes to consolidated financial statements included elsewhere herein.

Valuation of Long-lived and Intangible Assets
 
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors we consider important, which could trigger an impairment review, include the following:
 
significant underperformance relative to expected historical or projected future operating results;

significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
 
significant negative industry or economic trends;
 
significant adverse changes in legal factors or in the business climate, including adverse regulatory actions or assessments; and
 

33





significant decline in our stock price for a sustained period.
 
If a potential impairment exists, a calculation is performed to determine the fair value of the long-lived asset. This calculation is based on a valuation model, which considers the estimated future undiscounted cash flows resulting from the use of the asset, and a discount rate commensurate with the risks involved. Third party appraised values may also be used in determining whether impairment potentially exists. The estimated fair value is compared to the long-lived asset’s carrying value to determine whether impairment exists.

Fair value is generally estimated using the “Income Approach,” as described by ASC 820, “Fair Value Measurements and Disclosures,” focusing on the estimated future income-producing capability of the patent portfolios over the remaining economic useful life of the patent portfolios. The underlying premise of this approach is that the value of an asset can be measured by the present worth of the net economic benefit (cash receipts less cash outlays) to be received over the remaining life of the asset. The steps followed in applying this approach include estimating the expected after-tax cash flows attributable to the asset over its remaining life and converting these after-tax cash flows to present value through “discounting.” The discounting process contemplates an estimated rate of return that accounts for both the time value of money and investment risk factors. The cash inflows considered are comprised of an estimate of licensee fees expected to be generated over the remaining estimated economic useful life of the patent portfolio from potential future licensees. Estimated license fees are typically estimated based on a general estimated reasonable royalty rate for the applicable technology applied to estimated market share data for potential future licensees. Estimated cash outflows are based on existing contractual obligations, such as contingent legal fee and inventor royalty obligations, applied to estimated license fee revenues, in addition to other estimates of out-of-pocket expenses associated with a specific patent portfolio’s licensing and enforcement program. The analysis also contemplates consideration of current information about the patent portfolio including, status and stage of litigation, periodic results of the litigation process, strength of the patent portfolio, technology coverage and other pertinent information that could impact future net cash flows.
 
As described above, in assessing the recoverability of intangible assets, significant judgment is required in connection with estimates of market values, estimates of the amount and timing of future cash flows, and estimates of other factors that are used to determine the fair value of the respective assets. If these estimates or related projections change in future periods, future intangible asset impairment tests may result in charges to earnings.

Accounting for Business Combinations - Acquisition Method of Accounting

Acquisitions are accounted for in accordance with the acquisition method of accounting under Financial Accounting Standards Board, or FASB, ASC Topic 805, “Business Combinations,” or Topic 805. Topic 805 requires, among other things, that identifiable assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Under the acquisition method of accounting, the purchase consideration is allocated to the assets acquired, including tangible assets, patents and other identifiable intangible assets and liabilities assumed, based on their estimated fair market values on the date of acquisition. Any excess purchase price after the initial allocation to identifiable net tangible and identifiable intangible assets is assigned to goodwill. Amounts attributable to patents are amortized using the straight-line method over the estimated economic useful life of the underlying patents. Acquisition accounting includes the establishment of a net deferred tax asset or liability resulting from book tax basis differences related to assets acquired and liabilities assumed on the date of acquisition.

We assess fair value for financial statement purposes using a variety of methods, including the use of present value models and may also reference independent analyses. Amounts recorded as intangible assets, including patents and patent rights, are based on assumptions and estimates, as of the date of acquisition, regarding the amount and timing of projected revenues and costs associated with the licensing and enforcement of patents and patent rights acquired, appropriate risk-adjusted discount rates, rates of technology adoption, market penetration, technological obsolescence, product launch timing, the impact of competition or lack of competition in the market place, tax implications and other factors. Also, upon acquisition, based on several of the estimates and assumptions previously described, we determine the estimated economic useful lives of the acquired intangible assets for amortization purposes.

Management is responsible for determining the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed as of the acquisition date, solely for purposes of allocating the purchase price to the assets acquired and liabilities assumed. Fair value measurements can be highly subjective, and it is possible that other professionals for other purposes, applying reasonable judgment and criteria to the same facts and circumstances, could develop and support a range of alternative estimated amounts. Actual results may vary from projected results.




34





Accounting for Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves the estimating of our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, amortization of intangibles and asset depreciation for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statements of operations.     

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and our valuation allowance. Due to uncertainties related to our ability to utilize certain deferred tax assets in future periods, we have recorded a full valuation allowance against certain of those deferred tax assets totaling $7.6 million as of December 31, 2013. These assets primarily consist of foreign tax credits, capital loss carryforwards, and certain net operating loss carryforwards.

In assessing the need for a valuation allowance, management has considered both the positive and negative evidence available, including but not limited to, estimates of future taxable income and related probabilities, estimates surrounding the character of future income and the timing of realization, consideration of the period over which our deferred tax assets may be recoverable, our recent history of net income and prior history of losses, projected future outcomes, industry and market trends and the nature of existing deferred tax assets. In management’s estimate, any positive indicators, including forecasts of potential future profitability of our businesses, are outweighed by the uncertainties surrounding our estimates and judgments of potential future taxable income, primarily due to uncertainties surrounding the timing of realization of future taxable income and the character of such income in particular future periods (i.e. foreign or domestic). In the event that actual results differ from these estimates or we adjust these estimates should we believe we would be able to realize these deferred tax assets in the future, an adjustment to the valuation allowance would increase income in the period such determination was made. For example, a similar analysis was performed in the first quarter of 2012, resulting in the release of the valuation on the majority of our net deferred tax assets totaling $10.7 million for the year ended December 31, 2012. The release of the valuation allowance contemplated the net deferred tax liability resulting from the acquisition of ADAPTIX in January 2012, which created an additional source of income to utilize against the majority of the existing consolidated net deferred tax assets, and our estimate that certain other deferred tax assets related to foreign tax credits and other state related deferreds were more likely than not realizable in future periods.

Any changes in the judgments, assumptions and estimates associated with our analysis of the need for a valuation allowance in any future periods could materially impact our financial position and results of operations in the periods in which those determinations are made.

Consolidated Results of Operations
Comparison of the Results of Operations for Fiscal Years 2013, 2012 and 2011

Revenues and Other Operating Income
 
 
 
 
 
 
 
 
2013 vs. 2012
 
2012 vs. 2011
 
 
2013
 
2012
 
2011
 
$ Change
 
% Change
 
$ Change
 
% Change
 
 
(in thousands, except percentages)
Revenues
 
$
130,556

 
$
250,727

 
$
172,256

 
$
(120,171
)
 
(48
)%
 
$
78,471

 
46
 %
Verdict insurance proceeds
 

 

 
12,451

 

 
 %
 
(12,451
)
 
(100
)%
 
 
$
130,556

 
$
250,727

 
$
184,707

 
$
(120,171
)
 
(48
)%
 
$
66,020

 
36
 %

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.

35





 
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
New revenue agreements executed
 
120

 
138

 
125

Licensing and enforcement programs with initial revenues
 
23

 
31

 
21

Average revenue per agreement (in thousands)
 
$
1,088

 
$
1,817

 
$
1,378


A summary of the main drivers of the change in revenues for the periods presented is as follows:
 
 
2013 vs. 2012
 
2012 vs. 2011
 
 
(in thousands)
Increase (decrease) in number of agreements executed
 
$
(32,706
)
 
$
17,912

Increase (decrease) in average revenue per agreement executed
 
(87,465
)
 
60,559

Total
 
$
(120,171
)
 
$
78,471


Two licensees individually accounted for 38% and 16%, respectively, of revenues recognized in fiscal year 2013, four licensees individually accounted for 21%, 14%, 10% and 10%, respectively, of revenues recognized in fiscal year 2012, and three licensees individually accounted for 26%, 17% and 15%, respectively, of revenues recognized in fiscal year 2011.

Management does not attempt to manage for smooth sequential periodic growth in revenues, and therefore, periodic results can be uneven. Unlike most operating businesses and industries, licensing revenues not generated in a current period are not necessarily foregone, but most likely, depending on whether negotiations, litigation or both continue into subsequent periods, and depending on a number of other factors, such potential revenues may be pushed into subsequent fiscal periods.

In previous periods, based on the merits of our subsidiary’s patent infringement claims and other factors, many prospective licensees have elected to settle significant patent infringement cases and pay reasonable license fees for the use of our patented technology, as those patent infringement cases approached a court determined trial date. In 2013, we had three such trial dates, occurring in the first half of 2013. We believe there is a direct correlation between this relatively low number of trial dates in 2013 and (1) our prospective licensee’s reduced settlement compulsion throughout fiscal 2013, (2) the timing of our revenue generation during fiscal 2013, and (3) consequently, the overall decline in our 2013 revenue as compared to 2012. The existence of trial dates, though not perfect predictors of revenue, are closely correlated to potential future revenue events.

Other Operating Income - Verdict Insurance Proceeds (Fiscal 2011 only). Our operating subsidiary, received a $12.5 million final judgment stemming from its May 2009 trial verdict and corresponding damages award in its patent infringement lawsuit with Yahoo! Inc. Yahoo! Inc. appealed the verdict, and in April 2011, a three Judge panel of the United States Court of Appeals for the Federal Circuit reversed the District Court’s judgment of infringement in a 2 to 1 decision. As a result of the reversal of the District Court’s judgment, in September 2011, our subsidiary submitted a claim under a specific contingency insurance policy previously purchased and received $12.5 million in verdict insurance proceeds.

Cost of Revenues and Other Operating Income
 
 
 
 
 
 
 
2013 vs. 2012
 
2012 vs. 2011
 
2013
 
2012
 
2011
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(in thousands, except percentages)
Inventor royalties*
$
29,724

 
$
26,028

 
$
46,614

 
$
3,696

 
14
%
 
$
(20,586
)
 
(44
)%
Contingent legal fees*
24,784

 
24,651

 
44,247

 
133

 
1
%
 
(19,596
)
 
(44
)%
Other verdict insurance related costs

 

 
808

 

 
%
 
(808
)
 
(100
)%
*Includes inventor royalties and contingent legal fees associated with the verdict insurance policy and related proceeds received, as described below (fiscal year 2011 only).

Inventor Royalties and Contingent Legal Fees Expense.  The economic terms of patent partnering agreements, operating agreements and contingent legal fee arrangements, associated with the patent portfolios owned or controlled by our operating subsidiaries, if any, including royalty obligations, if any, royalty rates, contingent fee rates and other terms and conditions, vary across the patent portfolios owned or controlled by our operating subsidiaries. In certain instances, we have acquired certain patent portfolios outright without future inventor royalty obligations. These costs fluctuate period to period, based on the amount of revenues recognized each period, the terms and conditions of revenue agreements executed each period

36





and the mix of specific patent portfolios with varying economic terms, conditions and obligations generating revenues each period.

Verdict Insurance Proceeds Related Costs. Verdict insurance proceeds related costs include $2.9 million of inventor royalties, $4.0 million of contingent legal fees and $808,000 in other costs associated with the verdict insurance policy and related proceeds received, as described above.

A summary of the main drivers of the change in inventor royalties expense and contingent legal fees expense, in relation to the change in total revenues, for the periods presented, is as follows:
 
2013 vs. 2012
 
% of Prior Period Balance
 
2012 vs. 2011
 
% of Prior Period Balance
 
(in thousands, except percentage change values)
Increase (decrease) in inventor royalty rates
$
4,499

 
17
 %
 
$
(6,326
)
 
(14
)%
Increase (decrease) in total revenues
(26,382
)
 
(101
)%
 
18,016

 
39
 %
Decrease (increase) in revenues without inventor royalty obligations
25,579

 
98
 %
 
(32,276
)
 
(69
)%
Total change - inventor royalties expense
$
3,696

 
14
 %
 
$
(20,586
)
 
(44
)%

 
2013 vs. 2012
 
% of Prior Period Balance
 
2012 vs. 2011
 
% of Prior Period Balance
 
(in thousands, except percentage change values)
Increase (decrease) in contingent legal fee rates
$
10,355

 
42
 %
 
$
(30,483
)
 
(68
)%
Increase (decrease) in total revenues
(13,463
)
 
(55
)%
 
16,542

 
37
 %
Decrease (increase) in revenues without contingent legal fee obligations
3,241

 
14
 %
 
(5,655
)
 
(13
)%
Total change - contingent legal fees
$
133

 
1
 %
 
$
(19,596
)
 
(44
)%

Certain revenue agreements with unrelated third-parties entered into during fiscal 2012 and 2011 resulted in the grant of certain intellectual property rights and recognition of revenues, portions of which were not subject to inventor royalty and contingent legal fee arrangements, as well as the grant of licenses from certain of our operating subsidiaries and recognition of revenues that were subject to inventor royalties and contingent legal fee arrangements. Certain of the revenues recognized subject to inventor royalties and contingent legal fees are based on a determination by the respective operating subsidiaries.
 
 
 
 
 
 
 
2013 vs. 2012
 
2012 vs. 2011
 
2013
 
2012
 
2011
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(in thousands, except percentages)
Litigation and licensing expenses - patents
$
39,335

 
$
21,591

 
$
13,005

 
$
17,744

 
82
%
 
$
8,586

 
66
%
Amortization of patents
53,658

 
39,019

 
9,745

 
14,639

 
38
%
 
29,274

 
300
%

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 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. 

Fiscal Year 2013 versus 2012. Litigation and licensing expenses-patents increased due primarily to an increase in international enforcement costs, an increase in strategic patent portfolio prosecution costs, and a net increase in litigation support and third-party technical consulting expenses associated with ongoing and new licensing and enforcement programs commenced during fiscal year 2013.


37





Fiscal Year 2012 versus 2011. Litigation and licensing expenses-patents increased due primarily to higher net levels of patent prosecution, litigation support, third-party technical consulting and professional expert expenses associated with ongoing licensing and enforcement programs and our investment in new licensing and enforcement programs commenced since the end of the prior year period.

We expect patent-related legal expenses to continue to fluctuate period to period as we incur increased costs related to upcoming scheduled and/or anticipated trial dates, international enforcement activities and strategic patent portfolio prosecution activities over the next several fiscal quarters, as we continue to focus on our investments in these areas.

Amortization of Patents.  The change in amortization expense for the comparable periods presented was due to the following:
 
2013 vs. 2012
 
2012 vs. 2011
 
(in thousands)
Amortization of patent portfolios acquired since the end of the prior year
$
1,790

 
$
5,916

Scheduled amortization related to patent portfolios acquired during the prior year
19,088

 
(613
)
Accelerated amortization related to recovery of upfront advances
(9,982
)
 
7,463

Acquisition of Adaptix, Inc.
411

 
14,577

Patent portfolio dispositions
(1,287
)
 
1,931

Patent portfolio impairment charges
4,619

 

Total change in patent amortization expense
$
14,639

 
$
29,274


Patent portfolio impairment charges included in patent amortization expense in the statement of operations totaled $4.6 million in fiscal year 2013. The impairment charges related to certain patent portfolios that management, in the fourth quarter of 2013, determined it would no longer allocate future resources to in connection with the licensing and enforcement of such portfolios, due primarily to potential prior art related complexities in two of the programs and/or the overall determination that future resources would be allocated to other licensing and enforcement programs with higher potential return profiles.

Operating Costs and Expenses
 
 
 
 
 
 
 
 
2013 vs. 2012
 
2012 vs. 2011
 
 
2013
 
2012
 
2011
 
$ Change
 
% Change
 
$ Change
 
% Change
 
 
(in thousands, except percentages)
Marketing, general and administrative
 
$
31,335

 
$
28,426

 
$
22,114

 
$
2,909

 
10
 %
 
$
6,312

 
29
%
Non-cash stock compensation
 
27,894

 
25,657

 
13,579

 
2,237

 
9
 %
 
12,078

 
89
%
Total marketing, general and administrative expenses
 
$
59,229

 
$
54,083

 
$
35,693

 
$
5,146

 
10
 %
 
$
18,390

 
52
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research, consulting and other expenses - business development
 
3,251

 
4,943

 
4,338

 
(1,692
)
 
(34
)%
 
605

 
14
%
 
Marketing, General and Administrative Expenses.  Marketing, general and administrative expenses include employee compensation and related personnel costs, including variable performance based compensation and non-cash stock compensation expenses, office and facilities costs, legal and accounting professional fees, public relations, marketing, stock administration, state taxes based on gross receipts and other corporate costs. A summary of the main drivers of the change in marketing, general and administrative expenses for the periods presented, is as follows (in thousands):

38





 
2013 vs. 2012
 
2012 vs. 2011
 
(in thousands)
Net increase in licensing, business development, engineering related personnel costs and other personnel costs
$
1,715

 
$
2,083

Variable performance-based compensation costs
(4,019
)
 
2,728

Corporate, general and administrative costs
2,764

 
1,222

Non-cash stock compensation expense
414

 
12,078

Non-recurring CEO retirement and other employee severance costs
1,131

 

Nonrecurring non-cash stock compensation - CEO retirement package
1,823

 

Other
1,318

 
279

Total change in marketing, general and administrative expenses
$
5,146

 
$
18,390


The change in non-cash stock compensation expense for fiscal year 2012, as compared to fiscal year 2011, was due primarily to an increase in the average grant date fair value of restricted shares expensed and an increase in the number of restricted shares expensed period to period. Refer to Note 11 to the consolidated financial statements elsewhere herein.

Research, Consulting and Other Expenses - Business Development.  Research, consulting and other expenses include third-party business development related research, development, consulting, and other costs incurred in connection with business development activities. These costs fluctuate period to period based on business development related activities in each period.
 
Benefit from (Provision for) Income Taxes
 
2013
 
2012
 
2011
Benefit from (provision for) income taxes (in thousands)
$
21,958

 
$
(22,060
)
 
$
(8,708
)
Effective tax rate
27
%
 
27
%
 
29
%

Fiscal Year 2013 versus 2012. Excluding the impact of changes in the valuation allowance, our annual effective tax rates for fiscal years 2013 and 2012 were 31% (benefit) and 40% (expense), respectively. In 2013, the rate at which we recorded the tax benefit associated with the pretax loss for the period was reduced from the statutory rate primarily due to certain nondeductible permanent items and expired capital loss carryforwards.  In addition, in fiscal year 2013, we recorded a valuation allowance against foreign tax credits generated in fiscal 2013 totaling $4.6 million, as discussed below, and therefore, did not recognize the related tax benefit in our fiscal 2013 statement of operations. 

We generated pretax income in 2012 resulting in tax expense for the period. The fiscal year 2012 effective tax rate was lower than the U.S. federal statutory rate primarily due to $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 discussed below.

Tax benefit (expense) for fiscal 2013 and 2012 also included the impact of the following:

For financial reporting purposes, tax expense is calculated without the excess tax benefit related to the exercise and vesting of equity-based incentive awards resulting in higher tax expense for financial reporting purposes. The deductions related to the exercise and vesting of equity-based incentive awards are available to offset taxable income on our consolidated tax returns. Noncash tax expense calculated as a result of excluding excess tax benefits related to the exercise and vesting of equity-based incentive awards from the calculation of tax expense for financial reporting purposes, totaled approximately $13.2 million for fiscal year 2012, and were credited to additional paid-in capital, not taxes payable, as the expense does not reflect cash taxes payable. For the year ended December 31, 2013, we incurred approximately $1.4 million of net shortfall (taxable compensation is less than expense for financial reporting purposes) from the exercise and vesting of equity-based incentive awards, which was recorded against our additional paid-in capital pool with no impact to the statement of operations.
Foreign withholding taxes, totaling $4.6 million and $11.9 million for fiscal years 2013 and 2012, respectively, withheld by the applicable foreign tax authority on revenue agreements executed with third-party licensees domiciled in certain foreign jurisdictions. In general, foreign taxes withheld may be claimed as a deduction on future U.S. corporate income tax returns, or as a credit against future U.S. income tax liabilities, subject to certain limitations. At

39





December 31, 2013, we established a full valuation allowance against the $4.6 million of deferred tax assets related to foreign tax credits generated in fiscal year 2013, due to uncertainty regarding future realizability. The tax provision for fiscal year 2012 provides for the utilization of the foreign taxes withheld as a credit against fiscal year 2012 income tax expense calculated for financial statement purposes.
Fiscal Year 2012 versus 2011. Excluding the impact of changes in the valuation allowance, our effective tax rates for fiscal 2012 and 2011 were 40% and 41%, respectively. The fluctuation in tax expense included the impact of the following:

Noncash tax expense (resulting from the calculation of tax expense for financial statement purposes as discussed above) calculated without the excess tax benefit related to the exercise and vesting of equity-based incentive awards, totaling approximately $13.2 million and $583,000 for fiscal years 2012 and 2011, respectively, which were credited to additional paid-in capital, not taxes payable.
Foreign withholding taxes, totaling $11.9 million and $7.6 million for fiscal years 2012 and 2011, respectively, withheld by the applicable foreign tax authority on revenue agreements executed with third party licensees domiciled in certain foreign jurisdictions. The tax provisions for the respective periods provide for the utilization of the foreign taxes withheld as a credit against income tax expense calculated for financial statement purposes.
As of December 31, 2011, we maintained a full valuation allowance against our net deferred tax assets. The net deferred tax liability resulting from the acquisition of ADAPTIX created an additional source of income to utilize against the majority of our existing consolidated net deferred tax assets. In addition, we estimated that certain other deferred tax assets related to foreign tax credits and other state related deferreds were more likely than not realizable in future periods. Accordingly, the valuation allowance on the majority of our net deferred tax assets was released, resulting in a first quarter 2012 financial statement income tax benefit of approximately $10.7 million.

Inflation

Inflation has not had a significant impact on us or any of our subsidiaries in the current or prior periods.

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 equity 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 flow from operations and other external sources of available credit, will be sufficient to meet our cash requirements through at least March 2015 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 Item 1A, “Risk Factors”, above. 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, if 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 funding when needed, we may not be able to execute our business plans and our business, conducted by our operating subsidiaries, may suffer.

Cash, Cash Equivalents and Investments

Our consolidated cash, cash equivalents and investments on hand totaled $256.7 million at December 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):

40





 
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
(3,509
)
 
$
104,603

 
$
60,590

Investing activities
 
(66,059
)
 
(408,792
)
 
(23,237
)
Financing activities
 
(25,551
)
 
211,260

 
174,865

 
Cash Flows from Operating Activities.  Cash receipts from licensees totaled $133.5 million, $243.8 million and $189.9 million in fiscal years 2013, 2012 and 2011, respectively. The fluctuations in cash receipts for the periods presented primarily reflects the corresponding fluctuations in revenues recognized during the same periods, as described above. Cash outflows from operations totaled $137.0 million, $139.2 million and $129.3 million in fiscal years 2013, 2012 and 2011, respectively. The fluctuations in cash outflows for the periods presented reflects the fluctuations in revenue related inventor royalties and contingent legal fees and other operating costs and expenses during the same periods, as discussed above, and the impact of the timing of payments to inventors, attorneys and other vendors.

Cash Flows from Investing Activities. Cash flows from investing activities and related changes were comprised of the following for the periods presented (in thousands):
 
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase of ADAPTIX, Inc., net of cash acquired
 
$

 
$
(150,000
)
 
$

Patent acquisition costs
 
(25,061
)
 
(178,260
)
 
(14,680
)
Net purchases of available-for-sale investments
 
(40,323
)
 
(80,264
)
 
(8,367
)
Other
 
(675
)
 
(268
)
 
(190
)
Net cash used in investing activities
 
$
(66,059
)
 
$
(408,792
)
 
$
(23,237
)

Cash Flows from Financing Activities. Cash flows from financing activities and related changes included the following for the periods presented (in thousands):
 
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from sale of common stock, net of issuance costs
 
$

 
$
218,961

 
$
175,229

Repurchases of common stock
 
(7,926
)
 
(26,732
)
 

Dividends paid to shareholders
 
(18,633
)
 

 

Distributions to noncontrolling interests - Acacia IP Fund
 

 
(312
)
 
(2,897