Pendrell Corporation
Pendrell Corp (Form: 10-K, Received: 03/15/2017 16:06:02)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

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

For the fiscal year ended December 31, 2016

Or

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

For the transition period from            to            

Commission File Number 001-33008

 

 

PENDRELL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Washington

98-0221142

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

2300 Carillon Point, Kirkland, Washington 98033

(Address of principal executive offices including zip code)

(425) 278-7100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Name of each exchange on which registered

Class A common stock, par value $0.01 per share

The Nasdaq Capital Market

 

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       No   .

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes       No   .

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       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       No   .

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.    

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

Accelerated filer

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No   .

As of June 30, 2016, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $88,766,026

As of March 13, 2017, the registrant had 19,274,244 shares of Class A common stock and 5,366,000 shares of Class B common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Definitive Proxy Statement for its 2017 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.

 


 

PENDRELL CORPORATION

2016 ANNUAL REPORT ON FORM 10-K

INDEX

 

 

 

Page

PART I.

 

Item 1.

Business

1

Item 1A.

Risk Factors

3

Item 1B.

Unresolved Staff Comments

10

Item 2.

Properties

10

Item 3.

Legal Proceedings

11

Item 4.

Mine Safety Disclosures

11

 

 

 

PART II.

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

12

Item 6.

Selected Financial Data

14

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

24

Item 8.

Financial Statements and Supplementary Data

25

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

52

Item 9A.

Controls and Procedures

52

Item 9B.

Other Information

54

 

 

 

PART III.

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

54

Item 11.

Executive Compensation

54

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

54

Item 13.

Certain Relationships and Related Transactions, and Director Independence

54

Item 14.

Principal Accounting Fees and Services

54

 

 

 

PART IV.

 

 

Item 15.

Exhibits, Financial Statement Schedules

55

Item 16.

Form 10-K Summary

55

Signatures

56

 

 

 

 


 

PART I

This Annual Report on Form 10-K (“Form 10-K”) contains certain forward-looking statements regarding future events and our future operating results that are subject to the safe harbors created under the Securities Act of 1933, as amended (“Securities Act”), and the Securities Exchange Act of 1934, as amended (“Exchange Act”). These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. All of these forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those contemplated by the relevant forward-looking statements. Factors that might cause or contribute to such a difference include, but are not limited to, those discussed under “Item 1A of Part I – Risk Factors” and elsewhere in this Form 10-K. The forward-looking statements included in this document are made only as of the date of this report, and we undertake no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances.

Item 1.

Business.

Overview

Pendrell Corporation (“Pendrell”), with its consolidated subsidiaries, is referred to as “us,” “we,” or the “Company.” Pendrell has, for the past five years, invested in, acquired and monetized intellectual property (“IP”) rights. We are continuing our efforts to monetize our IP assets. We are also evaluating our IP investments to determine whether retention or disposition is appropriate. We no longer advise clients on IP strategies and transactions.

Pendrell was originally incorporated in 2000 as New ICO Global Communications (Holdings) Limited, a Delaware corporation. In July 2011, we changed our name to Pendrell Corporation. On November 14, 2012, we reincorporated from Delaware to Washington. Our principal executive office is located at 2300 Carillon Point, Kirkland, Washington 98033, and our telephone number is (425) 278-7100. Our website address is www.pendrell.com. The information contained in or that can be accessed through our website is not part of this Form 10-K.

Our Business

Revenue Generating Activities

We generate revenues by licensing and selling our IP rights to others. Our subsidiaries hold patents that support four IP licensing programs that we own and manage: (i) memory and storage technologies, (ii) digital media, (iii) digital cinema and (iv) wireless technologies.

We acquired most of our memory and storage patents and patent applications from Nokia Inc. in March 2013, many of which have been declared essential to standards that are applicable to memory and storage technologies used in electronic devices. These patents cover embedded memory components and storage subsystems. Potential licensees include flash memory component suppliers, solid state disk manufacturers and device vendors. Since 2014, we have entered into license agreements with four leading technology companies. We are in active license discussions with other memory component manufacturers and, in late 2016, filed litigation against SanDisk at the International Trade Commission (the “ITC”) and in federal district court alleging infringement of certain of our memory and storage patents (“SanDisk Litigation”).

Our digital media program is supported by patents and patent applications designed to protect against unauthorized duplication and use of digital content that is transferred from a source to one or more electronic devices. The majority of our digital media patents and patent applications came to us through our October 2011 purchase of a 90.1% interest in ContentGuard Holdings, Inc., where we partnered with Time Warner to expand the development and licensing of ContentGuard’s portfolio of digital rights management (“DRM”) technologies. We have entered into digital media licenses with manufacturers, distributors and providers of consumer products, including Amazon, DirecTV, Fujitsu, LG Electronics, Microsoft Corporation, Nokia, Panasonic, Pantech, Sharp,

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Sony, Toshiba, Time Warner and Xerox Corporation. Other companies that manufacture, distribute or provide DRM-enabled consumer products and that we believe use ContentGuard’s innovations, including Apple, Goog le, HTC, Huawei, Motorola Mobility and Samsung (the “ContentGuard Defendants”), did not take a license to our digital media assets, which prompted us to file claims against them for patent infringement.

Our digital cinema program is supported by DRM patents and patent applications designed to protect against unauthorized creation, duplication and use of digital cinema content that is authored and distributed to movie theaters globally, many of which also came to us through our acquisition of ContentGuard. Potential digital cinema licensees include distributors and exhibitors of digital content, including motion picture producers, motion picture distributors and equipment vendors. We launched our digital cinema program in June 2013, and we are actively engaged in licensing discussions with leading feature film studios.

Our wireless technologies program is supported by U.S. and foreign patents, referred to as our “Pendragon portfolio,” many of which relate to key functionality in cellular and digital wireless devices and infrastructure. These patents were developed by leading innovators in the wireless space, including Philips, IBM and ETRI.  We acquired the bulk of our Pendragon portfolio in 2012, but have not yet generated material revenue from the portfolio. As such, in addition to continuing our licensing discussions, we are actively seeking a buyer for the portfolio that may be better positioned to capitalize on its potential.

We typically license our patents via agreements that cover entire patent portfolios or large segments of portfolios. We expect licensing negotiations with prospective licensees to take approximately 12 to 24 months, and perhaps longer, measured from inception of technical discussions regarding the scope of our patents. If we are unable to secure reasonable, negotiated licenses, we may resort to litigation to enforce our IP rights, as evidenced by ContentGuard’s ongoing litigation against device makers and our recently-filed claims against SanDisk at the ITC and in federal district court.  

Our IP revenue generation activities are not limited to licensing and litigation. Patents that we believe may generate greater value through a sales transaction, such as the Pendragon portfolio, may be sold. Although our revenue may occur in different forms, we regard our IP monetization activities as integrated and not separate revenue streams.

Our IP portfolio currently consists of patents that have already expired and others that expire between 2017 and 2035. We have no plans to develop or acquire new patentable inventions prior to the expiration of our patents and patent applications.  See “Revenue opportunities from our IP monetization efforts are limited” under “Item 1A of Part I—Risk Factors.”

Business Outlook

From 2011 through 2015, we focused on acquiring and growing companies that developed or possessed unique, innovative technologies that could be licensed to third parties or could provide a competitive advantage to products we were developing. During the past two years, we moderated those efforts and reduced our costs by eliminating certain positions, abandoning certain patent assets that do not support our existing licensing programs, and lowering facilities costs.

We have explored and continue to explore investment opportunities that are not premised on the value of IP, with the goal of investing our capital in operating companies that can generate solid, stable income streams. Due to high valuations that we attribute to inexpensive and widely available capital, we did not acquire any such operating companies in 2015 or 2016. We may encounter more suitable opportunities in the future as the cost of capital increases, and we therefore intend to continue our exploratory activity while keeping our costs contained.

Although our focus may evolve away from companies that develop or possess unique, innovative technologies, we will continue to dedicate effort and resources to generate revenue from our existing IP assets.

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Competition

Due to the unique nature of our IP rights, we do not compete directly with other patent holders or patent applicants. However, to the extent that multiple parties seek royalties on the same product or service, we might as a practical matter compete for a share of reasonable royalties from manufacturers and distributors.

As we pursue opportunities that are not premised on the value of IP, we may compete with well-capitalized companies pursuing those same opportunities.

Divestiture of Satellite Assets

When we were formed in 2000, our intent was to develop and operate a next generation global mobile satellite communications system.  In 2011, we started selling assets associated with the satellite business and, during 2012, we divested the remaining vestiges of our satellite business, including the sale of our remaining medium earth orbit (“MEO”) satellites and related equipment and our real property in Brazil, the transfer to a liquidating trust (the “Liquidating Trust”) of certain former subsidiaries associated with the satellite business (the “International Subsidiaries”) to address the winding down of the International Subsidiaries, and the settlement of our litigation with The Boeing Company (“Boeing”).  

The 2012 divestiture and the corresponding transfer to the Liquidating Trust of the International Subsidiaries triggered tax losses of approximately $2.4 billion, which we believe can be carried forward for up to twenty years.  Under the sales agreement for the MEO assets, the Company is entitled to a substantial portion of any proceeds generated from the resale of the MEO assets. In January 2015, the party that acquired the MEO assets from the Company resold the MEO assets and as a result, the Company received $3.9 million during 2015, which has been recorded in gain on contingencies in the statement of operations for the year ended December 31, 2015. On February 23, 2016, that party received the final scheduled payment for the MEO assets, which resulted in the Company’s recognition of an additional $2.0 million gain on contingency in 2016.

Employees

As of December 31, 2016, on a consolidated basis, we had the equivalent of 14 full-time employees located in Washington, California, Finland and Texas.

Available Information

The address of our website is www.pendrell.com. You can find additional information about us and our business on our website. We make available on this website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange Commission (“SEC”). You may read and copy this Form 10-K at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549-0102. Information on the operation of the public reference room can be obtained by calling the SEC at 1-800-SEC-0330. These filings are also accessible on the SEC’s website at www.sec.gov.

We also make available on our website in a printable format the charters for certain of our various Board of Director committees, including the Audit Committee, the Compensation Committee and the Nominating and Governance Committee, and our Code of Conduct and Ethics in addition to our Articles of Incorporation, Bylaws and Tax Benefits Preservation Plan. This information is available in print without charge to any shareholder who requests it by sending a request to Pendrell Corporation, 2300 Carillon Point, Kirkland, Washington 98033, Attn: Corporate Secretary. The material on our website is not incorporated into or part of this Form 10-K.

Item 1A.

Risk Factors.

The risks below address some of the factors that may affect our future operating results and financial performance. If any of the following risks develop into actual events, then our business, financial condition, results of operations or prospects could be materially adversely affected.

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Risks Related to our Patents and Monetization Activities

Success of our licensing efforts depends on our ability to sign new license agreements or otherwise enforce our intellectual property rights.

IP licensing revenues are dependent on our ability to sign new license agreements with, or otherwise enforce our intellectual property rights against, users of our patented inventions. If users refuse to sign license agreements, we may need to resort to litigation or other measures to compel the payment of fair consideration, which to date has not been effective, and may not be effective in the future. This risk applies not only to new license agreements, but to existing license agreements with fixed expiration dates. If we fail to sign or renew license agreements on terms that are favorable to us or obtain favorable outcomes through litigation or other enforcement actions, the value of our IP could be further impaired.

We may have a limited number of prospective licensees.

We are actively pursuing licenses for our portfolios, including our DRM portfolio. However, our portfolios are applicable to only a limited number of prospective licensees. Moreover, many device makers who are prospective DRM licensees are currently shielded by adverse jury verdicts in the Apple Litigation and Google Litigation that we are appealing. In the memory and storage space, we believe we have licensed more products than remain unlicensed. As such, we have a limited number of prospective licensees, and if we are unable to sign licenses with this limited group, licensing revenue will be adversely impacted. Moreover, if our portfolios are not demonstrably applicable to prospective licensees’ products or services, whether due to poor quality, lack of breadth or otherwise, parties may refuse to sign license agreements.

Revenue opportunities from our IP monetization efforts are limited.

Patents have finite lives. Our IP portfolio currently consists of patents that have already expired, and others that expire between 2017 and 2035. With no plans to develop or acquire new patentable inventions prior to the expiration of our patents and patent applications, our IP revenue opportunities are limited.

Our licensing cycle is lengthy, costly and our licensing efforts may be unsuccessful.

Licensing our patents takes time, with some license negotiations spanning many years. We have incurred and expect to incur significant legal and sales expenses in our efforts to sign license agreements and generate license revenues. We also expect to spend considerable resources educating prospective licensees on the benefits of a license arrangement with us. As such, we may incur significant costs and losses before any associated revenue is generated.

Enforcement proceedings may be costly and ineffective and could lead to impairment of our IP assets.

We may choose to pursue litigation or other enforcement action to protect our intellectual property rights, such as the Apple Litigation, Google Litigation and SanDisk Litigation. Enforcement proceedings are typically protracted and complex, and might require cooperation of inventors and others who are unwilling or unable to assist with enforcement. Litigation also involves several stages, including the potential for a prolonged appeals process. The costs are typically substantial, and the outcomes are unpredictable. As evidenced in the Apple Litigation and Google Litigation, we might receive rulings or judgments, or sign licenses or settlement agreements, that compel us to revalue the IP assets that we are enforcing, which in turn might result in a reduction to the financial statement carrying value of such assets through a corresponding impairment charge. Enforcement actions will likely divert our managerial, technical, legal and financial resources from business operations. In certain cases, we may conclude that these costs and risks outweigh the potential benefits that would arise from successful enforcement, in which event we may opt not to pursue enforcement.

Our business could be negatively impacted by product composition and future innovation.

Our licensing revenues have been generated from manufacturers and distributors of products that use our patented inventions. Our business prospects could be negatively impacted if prospective licensees do not use our

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inventions in their products, or if they later modify their products to eliminate use of our inventions. Moreover, changes in technology or customer requirements could alter product composition and render our patented inventions obs olete or unmarketable.

Our patent management activities could impact the value of our IP.

We assess our IP portfolio to identify patents and patent applications that are worth preserving and patents and patent applications that are not worth preserving. Our assessment is driven by numerous factors, many of which are not scientific. Our assessment drives decisions to maintain or abandon patents and patent applications. If we make decisions that prompt abandonment of patents and patent applications with value, we could materially impact the value of our IP portfolio and our ability to generate revenue from our IP portfolio.

Challenges to the validity or enforceability of our key patents could significantly harm our business.

Any third party may challenge the validity, scope, enforceability and ownership of our patents. Challenges may include review requests to patent authorities, such as inter partes review and covered business method proceedings that have been initiated by ZTE, Apple, Google and SanDisk. Review proceedings are costly and time-consuming, and we cannot predict their outcome or consequences. Such proceedings may narrow the scope of our claims or may cancel some or all claims. If patent claims are canceled, we could be prevented from enforcing or earning future revenues from the canceled claims. Even if our claims are not canceled, our enforcement actions against alleged infringers may be stayed pending resolution of reviews, or courts or tribunals reviewing our patent claims could make findings adverse to our interests. Irrespective of outcome, review challenges may result in substantial legal expenses and diversion of management’s time and attention away from our other business operations, including our ability to evaluate and acquire other businesses. Adverse decisions could impair the value of our inventions or result in a loss of our proprietary rights and may adversely affect our results of operations and our financial position.

Changes in patent law could adversely impact our business.

Patent laws may continue to change, and may alter protections afforded to owners of patent rights, impose additional enforcement risks, increase the costs of enforcement, or increase our licensing cycles. For instance, during 2013 and 2015, legislative initiatives were introduced to address perceived patent abuses by non-practicing entities. Some legislators have announced their intention to sponsor and introduce similar legislation in 2017. Even if legislative initiatives do not directly impact our business, such initiatives might encourage manufacturers to infringe our IP rights, lengthen our licensing cycles, increase the likelihood that we will litigate to enforce our IP rights, or make it more difficult and expensive to license our patents or enforce our patents against parties using our inventions without a license. Moreover, 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.

Changes of interpretations of patent law could adversely impact our business.

Our success in review and enforcement proceedings relies in part on the historically consistent application of patent laws and regulations. Interpretations of patent laws and regulations by the courts and applicable regulatory bodies have evolved, and may continue to evolve, particularly with the introduction of new laws and regulations. Changes or potential changes in judicial interpretation could have a negative impact on our ability to monetize our patent rights.

Risks Related to our Acquisition Activities

We may over-estimate the value of assets or businesses we acquire.

We make investments from which we intend to generate a return. We estimate the value of these investments prior to acquisition, using both objective and subjective methodologies. If we over-estimate such value, we may not generate desired returns on our investment, or we may need to adjust the value of the investments to fair value and record a corresponding impairment charge, either of which could adversely affect our results of operations and our financial position.

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We may not generate a return on acquired assets.

Even if we accurately value the investments we make, we must succeed in generating a return on the investments. Our success in generating a return depends on effective efforts of our employees and outside professionals. If we do not generate desired returns on our investments or if we are compelled to adjust the value of the investments to fair value and record a corresponding impairment charge, it could adversely affect our results of operations and our financial position.

We may pursue acquisition or investment opportunities that do not yield desired results.

We intend to continue investigating potential acquisitions that support our business objectives and strategy. Acquisitions are time-consuming, complex and costly. The terms of acquisition agreements tend to be heavily negotiated. We may incur significant transactional expenses, regardless of whether acquisitions are consummated. Moreover, the integration of acquired companies may create significant challenges, and we can provide no assurances that the integration of acquired businesses with our business will result in the realization of the full benefits we anticipate from such acquisitions. Investigating businesses and assets and integrating newly acquired businesses or assets may be costly and time-consuming, and such activities could divert our attention from other business concerns. In addition, we might lose key employees while integrating new organizations. Acquisitions could also result in potentially dilutive issuances of equity securities or the incurrence of debt, the assumption or incurrence of contingent liabilities, possible impairment charges related to goodwill or other intangible assets or other unanticipated events or circumstances, any of which could negatively impact our financial position. We might not be successful in integrating acquired businesses and might not achieve desired revenues and cost benefits.

The financing of our acquisition activities could threaten our ability to use NOLs to offset future taxable income.

We have substantial historical net operating losses (“NOLs”) for United States federal income tax purposes. As explained in greater detail below, our use of our NOLs will be significantly limited if we undergo a “Tax Ownership Change,” as defined in Section 382 of the Internal Revenue Code. If and to the extent we finance acquisitions through the sale or issuance of stock, we will likely cause an ownership shift that increases the possibility that a future Tax Ownership Change might occur. If a Tax Ownership Change occurs, we will be permanently unable to use most of our NOLs.  

Avoiding a Tax Ownership Change may limit our ability to use our shares in an acquisition which could limit our ability to execute a transaction.  

The use of our NOLs will be significantly limited if we undergo a Tax Ownership Change.  Given the potential economic benefit of our NOL, we have taken steps to reduce the risk of a Tax Ownership Change including our Tax Benefit Preservation Plan.  Issuing new shares in an acquisition transaction could cause or would increase the risk of a Tax Ownership Change.  As a result, if a potential seller or partner requires a large number of shares as part of an acquisition transaction, we may choose not to execute that transaction.

We rely on representations, warranties and opinions from third parties that might not be accurate.

When we acquire assets or businesses or establish relationships with inventors or strategic partners, we may rely on representations and warranties made by third parties. We also may rely on opinions of lawyers and other professionals. 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, we may be exposed to unforeseen liabilities that could have a material adverse effect on our operating results and financial condition.

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Risks Related to our Operations

Our financial and operating results have been and may continue to be uneven.

Our operating results may fluctuate and, as such, our operating results are difficult to predict. Quarterly or annual comparisons of our results of operations should not be relied upon as an indication of our future performance. Factors that could cause our operating results to fluctuate during any period or that could adversely affect our operating results include the timing of license and sales agreements, compliance with such agreements, the terms and conditions for payment under those agreements, our ability to protect and enforce our intellectual property rights, costs of enforcement, changes in demand for products that incorporate our inventions, the time period between commencement and completion of license negotiations or enforcement proceedings, revenue recognition principles, and changes in accounting policies.

Our revenues may not offset our operating expenses.

2016 was the first year we reported operating income.  Although we have taken steps to reduce our operating expenses, revenue from our IP licensing business continues to be inconsistent.  If we are unable to generate revenue that is sufficient to cover these costs, we will report a net operating loss in future years.  

Failure to effectively manage the composition of our employee base could strain our business.

Our success depends, in large part, on continued contributions of our small group of key managers and employees, many of whom are highly skilled and would be difficult to replace. Our success also depends on the ability of our personnel to function effectively, both individually and as a group. At the end of 2015, we terminated the employment of numerous IP professionals whose roles we believe were unnecessary to advance our current and anticipated business strategies. If we misjudged our ongoing personnel needs or lose any of our remaining senior managers or key personnel, it could lead to dissatisfaction among our clients or licensees, which could slow our growth or result in a loss of business. Moreover, if we fail to manage the composition of our employee base effectively or otherwise strain our relationships with our personnel, our business and financial results may be materially harmed.

If we need financing and cannot obtain financing on favorable terms, our business may suffer.

If we deploy a significant portion of our capital or encounter unforeseen difficulties in the future that deplete our capital resources more rapidly than anticipated, we may need to obtain additional financing. Financing might not be available on favorable terms, if at all, may dilute our existing shareholders, and may prompt us to pursue structural changes that could impact shareholder concentration and liquidity. If we fail to obtain additional capital as and when needed, such failure could have a material adverse impact on our business, results of operations and financial condition.

Future changes in standards, rules, practices or interpretation may impact our financial results.

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. These principles are subject to interpretations by the SEC and various accounting bodies. In addition, we are subject to various taxation rules in many jurisdictions. The existing taxation rules are generally complex, voluminous, frequently changing and often ambiguous. Changes to existing taxation rules, changes to the financial accounting standards, or any changes to the interpretations of these standards or rules, or changes in practices under these standards and rules, may adversely affect our reported financial results or the way we conduct our business.

Unauthorized use or disclosure of our confidential information could adversely affect our business.

We rely primarily on a combination of license agreements, nondisclosure agreements, other contractual relationships and patent, trademark, trade secret and copyright laws to protect our confidential and proprietary information, our technology and our intellectual property. We cannot be certain that these protections have not been and will not be breached, that we will be able to timely detect unauthorized use or transfer of our trade secrets or

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intellectual property, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise becom e known or be independently discovered by competitors. If we are unable to detect in a timely manner the unauthorized use or disclosure of our proprietary or other confidential information or if we are unable to enforce our rights under our agreements or a pplicable laws, the misappropriation of such information could harm our business.

Our company has an evolving business model, which raises doubt about our ability to increase our revenues and grow our business.

We have shifted our principal focus away from the IP business and are evaluating opportunities that generate solid, stable income streams with greater growth potential. Those opportunities must be considered in light of the risks, expenses, and difficulties frequently encountered by companies in an early stage of development.  We may not be successful in addressing such risks, and the failure to do so could have a material adverse effect on our business, operating results and financial condition.  There can be no assurance that we will be able to increase our revenues and otherwise grow our business as we execute on new business opportunities in the future.

Risks Related to our Tax Losses

We cannot be certain that our tax losses will be available to offset future taxable income.

A significant portion of our NOLs were triggered when we disposed of our satellite assets. We believe these NOLs can be carried forward to offset certain future taxable income. However, the NOLs have not been audited or otherwise validated by the Internal Revenue Service (“IRS”).  We cannot assure you that we would prevail if the IRS were to challenge the amount or our use of the NOLs.  If the IRS were successful in challenging our NOLs, all or some amount of our NOLs would not be available to offset future taxable income which would result in an increase to our future income tax liability.  The NOL carryforward period begins to expire in 2025 with the bulk of our NOLs expiring in 2032. If the tax laws are amended to limit or eliminate our ability to carry forward our NOLs for any reason, or to lower income tax rates, the value of our NOLs may be significantly reduced.

An Ownership Change under Section 382 of the Internal Revenue Code may significantly limit our ability to use NOLs to offset future taxable income.

Our use of our NOLs will be significantly limited if we undergo a Tax Ownership Change. Broadly, a Tax Ownership Change will occur if, over a three-year testing period, the percentage of our stock, by value, owned by one or more 5% shareholder increases by more than 50 percentage points.  For purposes of this test, shareholders that own less than 5% of our stock are aggregated into one or more separate “public groups,” each of which is treated as a 5% shareholder.  In general, shares traded within a public group are not included in the Tax Ownership Change test.  Despite our adoption of certain protections against a Tax Ownership Change (such as our Tax Benefits Preservation Plan), we cannot control the trading activity of our significant shareholders. If shareholders acquire or divest their shares in a manner or at times that do not account for the loss-limiting provisions of the Internal Revenue Code or regulations adopted thereunder, a Tax Ownership Change could occur. If a Tax Ownership Change occurs, we will be permanently unable to use most of our NOLs.  

Our NOLs cannot be used to offset the Personal Holding Company tax.

The Internal Revenue Code imposes an additional tax on the undistributed income of a Personal Holding Company (“PHC”). In general, a corporation is classified as a PHC if 50% or more of its outstanding shares, measured by value, are owned directly or indirectly by five or fewer individual shareholders at any time during the second half of a calendar year (“Concentrated Ownership”) and at least 60% of its adjusted ordinary gross income is Personal Holding Company Income (“PHCI”). Broadly, PHCI includes items such as dividends, interest, rents and royalties, among others. Pendrell met the Concentrated Ownership test in 2016, and it is likely that Pendrell will meet the Concentrated Ownership test in 2017. We have determined that in 2016 ContentGuard had not yet met the Concentrated Ownership test due to the interest held by its minority shareholder, but it is possible that ContentGuard could meet the Concentrated Ownership test in 2017. If Pendrell or ContentGuard meets the Concentrated Ownership test and generates positive net PHCI, Pendrell or ContentGuard will be subject to the PHC tax on undistributed net PHCI. The PHC tax, which is in addition to the income tax and cannot be offset by our NOL, is currently levied at 20% of the net PHCI not distributed to the corporation’s shareholders.

8


 

Our NOLs cannot be used to completely offset the Alternative Minimum Tax or other taxes.

We may also be subject to the corporate Alternative Minimum Tax (“AMT”) in a year in which we have net taxable income because the AMT cannot be completely offset by available NOLs, as losses carried forward generally can offset no more than 90% of a corporation’s AMT liability. In addition, our federal NOLs will not shield us from foreign withholding taxes, state and local income taxes, or revenue-based taxes incurred in jurisdictions that impose such taxes.  

Our ability to utilize our NOLs is dependent on the generation of future taxable income.

Our ability to utilize our NOLs is dependent upon the generation of future taxable income before the expiration of the carry forward period attributable to the NOLs, which begin to expire in 2025. We generated taxable income in 2016, but we may not generate sufficient taxable income in future years to use the NOLs before they begin expiring.

Risks Related to Our Class A Common Stock

A sale of shares by our larger shareholders could depress the market price of our Class A common stock.

A small number of our shareholders hold a majority of our Class A common stock and our Class B common stock, which is convertible at the option of the holders into Class A common stock. The sale or prospect of the sale of a substantial number of these shares could have an adverse effect on the market price of our Class A common stock.

The interests of our controlling shareholder may conflict with the interests of other Class A holders.

Eagle River Satellite Holdings, LLC (“ERSH”), together with its affiliates Eagle River Investments, LLC (“ERI”), Eagle River, Inc. and Eagle River Partners, LLC (“ERP”) (collectively, “Eagle River”) controls approximately 67% of the voting power of our outstanding capital stock. Craig O. McCaw, our Executive Chairman, is the sole manager and beneficial member of ERI, which is the sole member of ERSH. Mr. McCaw is the sole shareholder of Eagle River, Inc. and the beneficial member of ERP. Accordingly, Eagle River has control over the outcome of matters requiring shareholder approval, including the election of directors, amendments to our governing documents, the adoption or prevention of mergers, consolidations or sales of all or substantially all of our assets, or control changes. Eagle River is not restricted or prohibited from competing with us.

We are a “controlled company” within the meaning of the Nasdaq Marketplace Rules and therefore qualify for, and may rely on, exemptions from certain corporate governance requirements.

Eagle River controls approximately 67% of the voting power of our outstanding capital stock. As a result, we are a “controlled company” within the meaning of the Nasdaq corporate governance standards, and therefore may elect not to comply with certain Nasdaq corporate governance requirements, including (i) the requirement that a majority of the board of directors consist of independent directors, (ii) the requirement that the compensation of officers be determined, or recommended to the board of directors for determination, by a majority of the independent directors or a compensation committee comprised solely of independent directors, and (iii) the requirement that director nominees be selected, or recommended for the board of directors’ selection, by a majority of the independent directors or a nominating committee comprised solely of independent directors with a written charter or board resolution addressing the nomination process. We do not currently rely on any of these exemptions, but reserve the right to do so in the future. If we choose to do so, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all Nasdaq corporate governance requirements.

Our Tax Benefits Preservation Plan (“Tax Benefits Plan”), as well as certain provisions in our restated articles of incorporation, may discourage takeovers, which could affect the rights of holders of our Class A common stock.

Our Tax Benefits Plan is intended to act as a deterrent against any person or group acquiring or otherwise obtaining beneficial ownership of more than 4.9% of our securities without the approval of our board of directors. In addition, our articles of incorporation require us to take all necessary and appropriate action to protect certain rights

9


 

of our common shareholders, including votin g, dividend and conversion rights and rights in the event of a liquidation, merger, consolidation or sale of substantially all of our assets. Our articles of incorporation also provide that we will not avoid or seek to avoid the observance or performance o f those rights by charter amendment, entry into an inconsistent agreement or reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution or the issuance or sale of securities. The rights protected by these provisions of the art icles of incorporation include our Class B common shareholders’ right to ten votes per share on matters submitted to a vote of our shareholders and option to convert each share of Class B common stock into one share of Class A common stock. The provisions of the Tax Benefits Plan and our articles of incorporation could discourage takeovers of our company, which could adversely affect the rights of our shareholders.

If we delist from Nasdaq, our ability to access the capital markets could be negatively impacted.

Our common stock is listed for trading on the Nasdaq Capital Market. However, our Board of Directors has proposed to our shareholders that we engage in a reverse stock split to reduce our number of record holders to less than 300 and thereafter eliminate our SEC reporting obligations and our Nasdaq listing. Elimination of our SEC reporting obligations and delisting could harm our ability to raise capital through financing sources on terms acceptable to us, or at all, and result in the potential loss of confidence by investors, increased employee turnover, and fewer business development opportunities.

If we delist from Nasdaq, our trading volume and common stock price may be depressed.

Our trading volume is relatively low. If we are no longer required to fulfill SEC reporting obligations and no longer listed on Nasdaq, trading volume may further decrease, in which case the market price of our Class A common stock could decline. More specifically, our stock (i) may be more thinly traded, making it more difficult for our shareholders to sell shares, (ii) may experience greater price volatility, and (iii) may not attract analyst coverage, all of which may result in a lower stock price. For these reasons and others, shareholders may not receive what they view as a fair price for their shares.

If we delist from Nasdaq, it may be more difficult to trade our stock in compliance with applicable laws.

If we are no longer required to fulfill SEC reporting obligations and no longer listed on Nasdaq, we may choose not to file current or periodic reports. Even if we choose to file reports, they likely will not be audited. The absence of those reports or the absence of an audit may mean that material information regarding the Company is not in the public domain, which may make it more difficult to buy or sell shares in compliance with applicable securities laws. For these reasons and others, shareholders may not receive what they view as a fair price for their shares.

If our number of record holders increases, we may be subject to SEC reporting obligations.

We have limited ability to control our shareholders’ acquisition or disposition of shares. If we engage in a reverse stock split to reduce our number of record holders to less than 300 so that we can terminate our SEC reporting obligations and delist from Nasdaq, we could lose the corresponding cost-saving benefits if our number of record holders thereafter increases to more than 300, in which case we will again be required to fulfill SEC reporting obligations.

Item 1B.

Unresolved Staff Comments.

None.

Item 2.

Properties.

 

Our corporate headquarters are located in Kirkland, Washington, where we lease 8,050 square feet in Kirkland under a lease which expires on July 31, 2019.  We currently sublease 2,882 square feet of that space and occupy the remaining 5,168 square feet. 

We believe our facilities are adequate for our current business and operations.

10


 

Item 3.

Legal P roceedings.  

See Note 8 – “Commitments and Contingencies” of the Notes to the Consolidated Financial Statements included in Item 8 of this report.

 

 

Item 4.

Mine Safety Disclosures.

Not Applicable.

 

11


 

PAR T II

Item  5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market for Our Class A Common Stock

Our Class A common stock trades on the Nasdaq Capital Market under the symbol “PCO.”

Prior to October 1, 2016, the closing bid price of our Class A common stock price remained below the $1.00 price required by Nasdaq’s continued listing requirements.  For continued listing, the stock price deficiency was required to be remediated prior to October 31, 2016. To address this stock price deficiency, we completed a 1-for-10 reverse stock split on September 30, 2016.  As a result of the reverse stock split, our share count, per share data and price per share reported in this annual report on Form 10-K have been adjusted retrospectively as if the reverse stock split had been in effect for all periods presented.

The table below sets forth the high and low sales prices of our Class A common stock in U.S. dollars for each of the periods presented. Stock prices represent amounts published by Nasdaq. As of March 13, 2017, the closing sales price of our Class A common stock was $7.39 per share.

 

 

 

2016

 

 

2015

 

Period

 

High

 

 

Low

 

 

High

 

 

Low

 

First Quarter

 

$

6.55

 

 

$

4.61

 

 

$

13.60

 

 

$

9.90

 

Second Quarter

 

$

6.93

 

 

$

4.85

 

 

$

14.50

 

 

$

9.56

 

Third Quarter

 

$

7.33

 

 

$

5.00

 

 

$

16.10

 

 

$

7.20

 

Fourth Quarter

 

$

7.23

 

 

$

6.05

 

 

$

8.03

 

 

$

5.00

 

 

As of March 13, 2017, there were approximately 300 record holders of our Class A common stock.

Market for Our Class B Common Stock

There is no established trading market for our Class B common stock, of which we have 5,366,000 shares outstanding with two holders of record. Each share of Class B common stock is convertible at any time at the option of its holder into one share of Class A common stock.

Dividends

We have never paid a cash dividend on shares of our equity securities. Unless we become subject to personal holding company tax, we do not intend to pay any cash dividends on our common shares during the foreseeable future. It is anticipated that future earnings, if any, from our operations will be used to finance growth.

12


 

Performance Measurement Comparison

The following graph shows the total shareholder return as of the dates indicated of an investment of $100 in cash on December 31, 2011 for: (i) our Class A common stock; (ii) the Nasdaq Composite Index; and (iii) the Nasdaq 100 Technology Sector Index.

The stock price performance graph below is not necessarily indicative of future performance.

 

 

 

 

12/11

 

12/12

 

12/13

 

12/14

 

12/15

 

12/16

Pendrell Corporation

 

100.00

 

49.61

 

78.52

 

53.91

 

19.57

 

26.37

NASDAQ Composite

 

100.00

 

116.41

 

165.47

 

188.69

 

200.32

 

216.54

NASDAQ 100 Technology Sector

 

100.00

 

114.75

 

154.25

 

192.47

 

208.75

 

237.51

 

13


 

Item 6.

Selected Financial Data.

The following selected consolidated financial data should be read in conjunction with “Item 7— Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and accompanying notes included in this Form 10-K.

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

 

(in thousands, except per share data)

 

Revenue

 

$

59,018

 

 

$

43,519

 

 

$

42,534

 

 

$

13,128

 

 

$

33,775

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues(1)

 

 

18,156

 

 

 

10,215

 

 

 

14,170

 

 

 

7,872

 

 

 

314

 

Patent administration and related costs(1)

 

 

1,046

 

 

 

2,668

 

 

 

6,386

 

 

 

4,405

 

 

 

3,655

 

Patent litigation(1)

 

 

4,169

 

 

 

13,076

 

 

 

9,880

 

 

 

4,564

 

 

 

2,538

 

General and administrative(1)

 

 

7,508

 

 

 

16,750

 

 

 

27,467

 

 

 

25,939

 

 

 

29,844

 

Stock-based compensation

 

 

3,424

 

 

 

4,507

 

 

 

9,405

 

 

 

12,345

 

 

 

8,597

 

Amortization of intangibles

 

 

9,498

 

 

 

13,939

 

 

 

15,929

 

 

 

15,864

 

 

 

13,471

 

Impairment of intangibles and goodwill(2)

 

 

 

 

 

103,499

 

 

 

11,013

 

 

 

 

 

 

 

Operating expenses, net

 

 

43,801

 

 

 

164,654

 

 

 

94,250

 

 

 

70,989

 

 

 

58,419

 

Operating income (loss)

 

 

15,217

 

 

 

(121,135

)

 

 

(51,716

)

 

 

(57,861

)

 

 

(24,644

)

Net interest income (expense)(3)

 

 

696

 

 

 

103

 

 

 

(99

)

 

 

(64

)

 

 

(2,245

)

Gain on deconsolidation of subsidiaries(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

48,685

 

Gain on settlement of Boeing litigation(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,000

 

Gain associated with disposition of assets(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,599

 

Gain on contingencies (6)

 

 

2,047

 

 

 

6,095

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

(11

)

 

 

(14

)

 

 

(16

)

 

 

(55

)

 

 

1,588

 

Income (loss) before income taxes

 

 

17,949

 

 

 

(114,951

)

 

 

(51,831

)

 

 

(57,980

)

 

 

38,983

 

Income tax benefit (expense)(7)

 

 

 

 

 

(2,631

)

 

 

(6,303

)

 

 

 

 

 

1,034

 

Net income (loss)

 

 

17,949

 

 

 

(117,582

)

 

 

(58,134

)

 

 

(57,980

)

 

 

40,017

 

Net income (loss) attributable to noncontrolling

   interest

 

 

186

 

 

 

(7,902

)

 

 

(7,132

)

 

 

(2,918

)

 

 

(67

)

Net income (loss) attributable to Pendrell

 

$

17,763

 

 

$

(109,680

)

 

$

(51,002

)

 

$

(55,062

)

 

$

40,084

 

Basic income (loss) per share attributable to

   Pendrell

 

$

0.66

 

 

$

(4.13

)

 

$

(1.93

)

 

$

(2.10

)

 

$

1.56

 

Diluted income (loss) per share attributable to

   Pendrell

 

$

0.64

 

 

$

(4.13

)

 

$

(1.93

)

 

$

(2.10

)

 

$

1.52

 

Total assets

 

$

212,393

 

 

$

180,892

 

 

$

304,104

 

 

$

351,994

 

 

$

381,415

 

Long-term obligations, including current portion of

   capital lease obligations(8)

 

$

7,796

 

 

 

 

 

$

1,521

 

 

$

6,695

 

 

$

2,241

 

 

(1)

Certain prior period amounts have been reclassified to conform to the current year presentation of expenses in our consolidated statements of operations, including the presentation of “cost of revenues” and “patent litigation” as separate captions; as such costs were previously included in “patent administration, litigation and related costs” and “general and administrative” in 2013 and prior years.

(2)

During the fourth quarter of the year ended December 31, 2015, we recorded a non-cash impairment charge of $103.5 million related to our patents, other intangible assets and goodwill.  During the fourth quarter of the year ended December 31, 2014, we recorded a non-cash impairment charge of $11.0 million related to the goodwill and proprietary micro-propagation technology of Provitro Biosciences LLC (“Provitro”). In early 2015, we suspended further development of the Provitro™ proprietary micro-propagation technology and related laboratory processes that were designed to facilitate production on a commercial scale of certain plants, particularly timber bamboo.

14


 

(3)

Prior to 2013, certain of our subsidiaries had agreements with operators of gateways for our MEO satellit e system, some of which were capital leases. We continued to accrue expenses according to our subsidiaries’ contractual obligations until the liabilities, including interest costs resulting from capital lease obligations, were transferred to the Liquidatin g Trust on June 29, 2012, resulting in a recognized a gain of $48.7 million upon their deconsolidation.

(4)

We had been in litigation with Boeing regarding the development and launch of our former MEO satellites and related launch vehicles. On June 25, 2012, we settled our litigation against Boeing for $10.0 million. The settlement agreement and mutual release between ourselves and Boeing fully released and discharged any and all claims between us and Boeing. As a result of the settlement agreement, we recorded a gain of $10.0 million during the year ended December 31, 2012.

(5)

During the year ended December 31, 2012, we sold real property located in Brazil for approximately $5.6 million.

(6)

During the years ended December 31, 2016 and 2015, we recorded gain on contingencies of $2.0 million and $3.9 million, respectively, due to the receipt of contingent payments associated with the disposition of MEO satellites and related launch vehicles of our prior satellite business. During the year ended December 31, 2015, we also recorded a gain on contingency associated with a $1.6 million settlement received from the J&J Group. See Note 10 - “Gain on Contingencies” for further discussion.

(7)

During the years ended December 31, 2015 and 2014, we recorded tax provisions of $4.1 million and $6.3 million, respectively, related to foreign taxes withheld on revenue generated from license agreements executed with third party licensees domiciled in foreign jurisdictions. Additionally, during the year ended December 31, 2015, as a result of the impairment of certain indefinite-lived intangible assets, the deferred tax liability associated with the intangibles was decreased, resulting in a tax benefit of $1.5 million.

(8)

Prior to 2015, long-term obligations consisted primarily of deferred tax liabilities. Long-term obligations at December 31, 2013 also included an installment payment obligation arising from the 2013 acquisition of our memory and storage technologies portfolio and expense related to restricted stock awards that is required to be treated as a liability.  Long-term obligations at December 31, 2016 consist primarily of revenue share obligations.

15


 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying notes included elsewhere in this Form 10-K.

Special Note Regarding Forward-Looking Statements

With the exception of historical facts, the statements contained in this management’s discussion and analysis are “forward-looking” statements. All of these forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those contemplated by the relevant forward-looking statements. Factors that might cause or contribute to such a difference include, but are not limited to, those discussed under “Item 1A of Part I—Risk Factors” and elsewhere in this Form 10-K. The forward-looking statements included in this document are made only as of the date of this report, and we undertake no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances.

Overview

For the past five years, through our consolidated subsidiaries, we have invested in, acquired and monetized IP rights. We have generated positive returns on our patents applicable to memory and storage technologies (our “Memory Patents”), but not our digital rights management patents (“DRM Patents”) or the wireless, digital and other patents held in our Pendragon subsidiaries.

During 2016, we licensed our Memory Patents to Toshiba Corporation. The Toshiba license was the fourth significant Memory Patent license signed since we acquired the Memory Patents in 2013. Through those four licenses, we have generated aggregate license fees of approximately $110 million. Prior to 2017, pursuant to the agreement under which we acquired the Memory Patents, we shared a significant portion of those license fees with the seller. In early 2017, the seller agreed to relinquish its future revenue share rights in exchange for an up-front payment and future installment payments. This will result in a one-time charge of $3.2 million to expense in our first quarter of 2017 and will significantly reduce our “cost of revenues” on future revenue from our Memory Patents. Our 2017 buyout of future revenue share rights reflects our confidence in the value of our memory portfolio and our belief that standard compliant unlicensed flash memory component suppliers, solid state disk manufacturers and device vendors will ultimately need to obtain a license from us to continue their commercial activities.

In that regard, our licensing discussions with SanDisk reached impasse in 2016, leading to our filing of two actions against SanDisk: an International Trade Commission (“ITC”) proceeding, in which we seek an exclusionary order that prevents SanDisk from importing infringing products into the United States, and a patent infringement suit in the federal district court for the Central District of California, in which we seek monetary damages for SanDisk’s infringement. Due to the accelerated pace of ITC proceedings, we anticipate a trial with an administrative law judge as early as October 2017.

While we continue to work on monetizing our Memory Patents, we are also pursuing our appeal of two adverse jury decisions in 2015 relating to our DRM Patents. Briefing for those two appeals is complete, with oral argument in front of the federal district court scheduled for early June 2017. If we succeed on appeal, we intend to re-open licensing discussions with numerous device makers who are currently shielded by the adverse verdicts. Meanwhile, we have continued our dialogue with participants in the digital cinema initiative to address our view that modern-day digital delivery of motion pictures from studios to theaters implicates our DRM Patents.

Management of our IP portfolio is not detracting us from our primary mission, which is identification of business opportunities that generate solid, stable income streams and greater growth potential. We have evaluated several opportunities with business owners and investment partners who see the benefits of working with a well-established, well-funded organization. Although we have not reached agreement with any of these potential owners or partners, we continue to identify and evaluate new business opportunities. During the course of our evaluations, we have learned that many of these potential targets are better suited for an organization that is not encumbered by the additional infrastructure required of an SEC reporting company. That knowledge, combined with our current costs and regulatory burdens of being a reporting company, our inability to provide robust confidentiality commitments (due to reporting obligations), and limited flexibility resulting from SEC and Nasdaq corporate

16


 

governance mandates, prompted our board of directors to appoint a special committee of our independent directo rs (the “Special Committee”) to determine whether the Company should de-register and de-list.

Following months of assessment and deliberation, the Special Committee determined that it is in our best interests and the best interests of shareholders to de-register and de-list. Therefore, the Special Committee recommended, and our board of directors endorsed, a reverse stock split (“Reverse Split”) of our common stock that transforms each one hundred shares of common stock into one share of common stock, with fractionalized shares redeemed for cash. Our shareholders will be asked to approve the reverse stock split at the 2017 annual meeting of shareholders and, if approved, will be implemented promptly thereafter. We anticipate that the Reverse Split will reduce our number of record holders to substantially less than 300, which will entitle us to de-register and de-list.

In conjunction with approval and recommendation of the reverse stock split, and consistent with a recommendation from the Special Committee, our board of directors also approved a stock repurchase plan for up to one million shares of our common stock. The Special Committee designed the repurchase plan to provide shareholders with an opportunity for liquidity prior to the effective date of the reverse stock split. The repurchase plan contemplates the repurchase of shares from time to time at prevailing market prices, through open market or privately negotiated transactions, pursuant to one or more plans established pursuant to Rule 10b5-1 under the Exchange Act. The repurchase plan does not require the Company to repurchase any minimum number of shares, and may be suspended, discontinued or modified at any time, for any reason and without notice.

Additionally, our board of directors assessed and continues to assess potential redemptions of outstanding shares of common stock, which led to discussions with Highland Crusader Offshore Partners, L.P., one of our largest minority shareholders (the “Crusader Fund”). The discussions with the Crusader Fund culminated in an agreement to repurchase all 2,432,923 of the Crusader Fund’s shares of Class A common stock at a price per share of $6.55, subject to possible adjustment if, on or before August 15, 2017, the Company buys or sells a substantial number of shares of Class A Stock for a higher price. Although we deployed significant cash to complete the Crusader Fund redemption, we believe the redemption will benefit our remaining shareholders in both the short and long term.

Critical Accounting Policies  

Critical accounting policies require difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our estimates and judgments are based on information available at the time the estimates and judgments are made. Actual results could differ materially from those estimates. We make estimates and judgments when accounting for, among other matters, intangible assets, revenue recognition, stock-based compensation, income taxes and contingencies, as more fully described below.

Intangible Assets . We amortize finite-lived intangible assets, including patents, acquired in purchase transactions over their expected useful lives. We evaluate finite-lived intangible assets when events or circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. These events or circumstances could include: a significant change in the business climate, legal factors, operating performance indicators, or changes in technology or customer requirements. Recoverability of an asset or asset group is measured by a comparison of the carrying amount to the future undiscounted net cash flows expected to be generated by the asset or asset group over its life. This comparison requires management to make judgments regarding estimated future cash flows. Our ability to realize the estimated future cash flows may be affected by factors such as changes in operating performance, changes in business strategy, invalidation of patents, unfavorable judgments in legal proceedings and changes in economic conditions. If our estimates of the undiscounted cash flows do not equal or exceed the carrying value of the asset or asset group, we recognize an impairment charge equal to the amount by which the recorded value of the asset or asset group exceeds its fair value.

Revenue Recognition. We derive our operating revenue from IP monetization activities, including patent licensing and patent sales. Additionally, prior to our sale of the Ovidian Group LLC in December 2015, we also derived revenue from IP consulting services. Although our revenue may occur in different forms, we regard our IP monetization activities as integrated and not separate revenue streams. For example, a third party relationship could involve consulting and licensing activities, or the acquisition of a patent portfolio can lead to licensing, consulting and patent sales revenue.

17


 

Our patent licensing agreements often provide for the payment of contractually determined upfron t license fees representing all or a majority of the revenues that will be generated from such agreements for nonexclusive, nontransferable, limited duration licenses. These agreements typically grant (i) a nonexclusive license to make, sell, distribute, a nd use certain specified products that read on our patents, (ii) a covenant not to enforce patent rights against the licensee based on such activities, and (iii) the release of the licensee from certain claims. Generally, the agreements provide no further obligation for the Company upon receipt of the minimum upfront license fee. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, when collectability is reasonably assured, or upon receipt of the minimum u pfront license fee, and when all other revenue recognition criteria have been met.

Certain of our patent licensing agreements provide for future royalties or future payment obligations triggered upon satisfaction of conditions.  Future royalties and future payments are recognized in revenue upon satisfaction of any related conditions, provided that all revenue recognition criteria, as described below, have been met.

We sell patents from our portfolios from time to time. These sales are part of our ongoing operations. Consequently, the related proceeds are recorded as revenue. We recognize the revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) amounts are fixed or determinable, and (iv) collectability is reasonably assured.

Fees earned from IP consulting services were generally recognized as the services were performed.

The timing and amount of revenue recognized from IP monetization activities depend on the specific terms of each agreement and the nature of the deliverables and obligations. For agreements that are deemed to contain multiple elements, consideration is allocated to each element of an agreement that has stand-alone value using the relative fair value method. We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) all material obligations have been substantially performed pursuant to agreement terms or services have been rendered to the customer, (iii) amounts are fixed or determinable, and (iv) collectability is reasonably assured. As a result of the contractual terms of our patent monetization agreements and the unpredictable nature, form and frequency of monetizing transactions, our revenue may fluctuate substantially from period to period.

Stock-Based Compensation.   We record stock-based compensation on stock options, performance stock awards, restricted stock awards, restricted stock units and other stock awards issued to employees, directors, consultants and/or advisors based on the estimated fair value on the date of grant and recognize compensation cost over the requisite service period for awards expected to vest. The fair value of stock options are estimated on the date of grant using the Black-Scholes option pricing model (“Black-Scholes Model”) based on the single option award approach. The fair value of restricted stock awards and restricted stock units is determined based on the number of shares granted and either the quoted market price of our Class A common stock on the date of grant for time-based and performance-based awards, or the fair value on the date of grant using the Monte Carlo Simulation model (“Monte Carlo Simulation”) for market-based awards. The fair value of stock options, restricted stock awards and restricted stock units with service conditions are typically amortized to expense on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The fair value of stock options, restricted stock awards and restricted stock units with performance conditions deemed probable of being achieved and cliff vesting are amortized to expense over the requisite service period using the straight-line method of expense recognition. The fair value of restricted stock awards and restricted stock units with performance and market conditions are amortized to expense over the requisite service period using the straight-line method of expense recognition. The fair value of stock-based payment awards as determined by the Black-Scholes Model and the Monte Carlo Simulation are affected by our stock price as well as other assumptions. These assumptions include, but are not limited to, the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Forfeitures are estimated at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Income Taxes. We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, tax benefits and deductions. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

18


 

We must assess the likelihoo d that we will be able to recover our deferred tax assets. If recovery is not likely, we must record a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. Since our utilization of our deferred tax assets is dependent upon future taxable income that is not assured, we have recorded a valuation allowance sufficient to reduce the deferred tax assets to an amount that is more likely than not to be realized. However, should there be a change in our ability to recover our deferred tax assets, our tax provision would decrease or may result in a tax benefit in the period in which we determined that the recovery was more likely than not to occur.

The application of income tax law is inherently complex. As such, we are required to make many assumptions and judgments regarding our income tax positions and the likelihood whether such tax positions would be sustained if challenged. Interpretations and guidance surrounding income tax laws and regulations change over time, and changes in our assumptions and judgments can materially affect amounts recognized in our consolidated financial statements.

Contingencies. The outcomes of legal proceedings and claims brought by and against us are subject to significant uncertainty. We accrue an estimated loss from a loss contingency, such as a legal claim against us, by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We disclose a contingency if there is at least a reasonable possibility that a loss has been incurred. In determining whether a contingent loss should be accrued or disclosed, we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position, results of operations or cash flows. For contingencies that might result in a gain, we do not record the gain until realized.

New Accounting Pronouncements

See Note 2 – “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.

Key Components of Results of Operations

Revenue— We derive our operating revenue from IP monetization activities, including patent licensing, patent sales and, prior to 2016, from IP consulting services, or a combination thereof. Although our revenue may occur in different forms, we regard our IP monetization activities as integrated and not separate revenue streams. Our revenues from IP monetization activities continue to depend in large part on our ability to enter into new license agreements with third parties. Because our licensing agreements often provide for the payment of upfront license fees rather than a royalty stream and as a result of the unpredictable nature, form and frequency of our transactions, our revenue may fluctuate substantially from period to period.

Cost of revenue— Cost of revenue consists of certain costs that are variable in nature and are directly attributable to our revenue generating activities including (i) payments to third parties to whom we have an obligation to share revenue, (ii) commissions, and (iii) success fees. Additionally, in periods when patent sales occur, cost of revenue includes the net book value and other related costs associated with the sold patents. Depending on the patents being monetized, revenue share payments as a percentage of revenues may vary significantly.

Patent administration and related costs— Patent administration and related costs are comprised of (i) patent-related maintenance and prosecution costs incurred to maintain our patents, (ii) other costs that support our patent monetization efforts, and (iii) costs associated with the abandonment of patents, including the write-off of any remaining net book value.

Patent litigation— Patent litigation costs consist of costs and expenses incurred in connection with our patent-related enforcement and litigation activities. These may include non-contingent or contingent fee obligations to external counsel.

19


 

General and administrative General and administrative expenses are primarily comprised of (i) personnel costs, (ii) general legal fees, (iii) professiona l fees, (iv) acquisition investigation costs, and (v) general office related costs.

Stock-based compensation— Stock-based compensation expense includes expense associated with the granting of stock options, restricted stock awards, restricted stock units and other stock awards issued to employees, directors, consultants and/or advisors based on the estimated fair value on the date of grant and expensed over the requisite service period for awards expected to vest.

Amortization of intangible assets— Amortization of intangible assets reflects the expensing of the cost to acquire intangible assets which are capitalized and amortized ratably over their estimated useful lives. Estimating the economic useful lives of our intangible assets depends on various factors including the remaining statutory life of the underlying assets as well as their expected period of benefit.

Results of Operations

The following table is provided to facilitate the discussion of our results of operations for the years ended December 31, 2016, 2015 and 2014 (in thousands):

 

 

 

Year ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Revenue

 

$

59,018

 

 

$

43,519

 

 

$

42,534

 

Cost of revenues

 

 

18,156

 

 

 

10,215

 

 

 

14,170

 

Patent administration and related costs

 

 

1,046

 

 

 

2,668

 

 

 

6,386

 

Patent litigation

 

 

4,169

 

 

 

13,076

 

 

 

9,880

 

General and administrative

 

 

7,508

 

 

 

16,750

 

 

 

27,467

 

Stock-based compensation

 

 

3,424

 

 

 

4,507

 

 

 

9,405

 

Amortization of intangibles

 

 

9,498

 

 

 

13,939

 

 

 

15,929

 

Impairment of intangibles and goodwill

 

 

 

 

 

103,499

 

 

 

11,013

 

Interest income

 

 

696

 

 

 

156

 

 

 

94

 

Interest expense

 

 

 

 

 

53

 

 

 

193

 

Gain on contingencies

 

 

2,047

 

 

 

6,095

 

 

 

 

Other expense

 

 

11

 

 

 

14

 

 

 

16

 

Income tax expense

 

 

 

 

 

2,631

 

 

 

6,303

 

 

Revenue. Our revenue of $59.0 million for the year ended December 31, 2016 increased by $15.5 million, or 36%, as compared to $43.5 million for the year ended December 31, 2015. Revenue of $43.5 million for the year ended December 31, 2015 increased by $1.0 million, or 2%, as compared to $42.5 million for the year ended December 31, 2014. The year over year increase in all instances was due to an increase in licensing revenue, primarily licenses of our Memory Patents including our May 2016 license agreement with Toshiba.

Cost of Revenues. Cost of revenues of $18.2 million for the year ended December 31, 2016 increased by $8.0 million, or 78%, as compared to $10.2 million for the year ended December 31, 2015. This increase was primarily due to costs associated with our May 2016 license agreement with Toshiba, including payments to third parties to whom we have an obligation to share revenue.  

Cost of revenues of $10.2 million for the year ended December 31, 2015 decreased by $4.0 million, or 28%, as compared to $14.2 million for the year ended December 31, 2014. This decrease was primarily due to lower revenue share obligations in the year ended December 31, 2015 as compared to 2014.

In future periods, cost of revenues as a percentage of revenue may vary significantly, depending upon related revenue share obligations arising from licensing arrangements and the sales price realized compared to the net book value of patents sold.  Additionally, our buyout of future revenue share rights in early 2017 will significantly reduce our cost of revenues on future revenue from our Memory Patents.

20


 

Patent Administration and Related Costs. Patent administration and related costs of $ 1.0 million for the year ended December 31, 201 6 decreased by $ 1 .7 million, or 61 %, as compared to $ 2.7 million for the ye ar ended December 31, 2015. Patent administration and related costs of $2.7 million for the year en ded December 31, 2015 decreased by $3.7 million, or 58%, as compared to $6.4 million for the year ended December 31, 2014. The year over year decrease in all instances was primarily due to a decline in the cost of patents abandoned each year as compared to the prior year; as well as a reduction in patent maintenance and prosecution costs resulting from the abandonment of certain patents and applications d uring prior years that were not part of existing licensing programs.

Patent Litigation. Patent litigation expenses of $4.2 million for the year ended December 31, 2016 decreased by $8.9 million, or 68%, as compared to $13.1 million for the year ended December 31, 2015. The higher patent litigation expenses in 2015 included costs incurred by our subsidiary, ContentGuard, as it prepared for its March 2015 claim construction hearing and jury trials in September 2015 and November 2015 in the Google Litigation and Apple Litigation, as well as trial cost reimbursements, and contingent fees associated with our settlement and license agreement with Amazon. Patent litigation expenses for 2016 included costs and fees associated with our settlement and license agreement with DirecTV and costs incurred to pursue enforcement actions against certain companies with whom we have been unable to secure negotiated licenses.

Patent litigation expenses of $13.1 million for the year ended December 31, 2015 increased by $3.2 million, or 32%, as compared to $9.9 million for the year ended December 31, 2014. The increase in patent litigation expenses was primarily due to litigation expenses and trial cost reimbursements in the Google Litigation and Apple Litigation which commenced in 2014 and contingent fees associated with our settlement and license agreement with Amazon.

General and Administrative. General and administrative expenses of $7.5 million for the year ended December 31, 2016 decreased by $9.3 million, or 55%, as compared to $16.8 million for the year ended December 31, 2015. The decrease was primarily due to (i) $5.5 million reduction in employment expenses resulting from a lower headcount, (ii) $1.0 million loss on the sale of Provitro’s assets and the disposal of corporate office assets incurred in 2015, (iii) $0.7 million reduction in expenses associated with Provitro, (iv) $0.9 million reduction in facilities costs and $0.3 million decrease in depreciation expense due to the closure of office locations, and (v) $0.9 million reduction in professional fees and other expenses.

General and administrative expenses of $16.8 million for the year ended December 31, 2015 decreased $10.7 million, or 39%, as compared to $27.5 million for the year ended December 31, 2014. The decrease was primarily due to (i) $3.6 million reduction in employment expenses resulting from a lower headcount in 2015, (ii) a 2014 charge of $3.2 million for a lump-sum severance payment to our CEO who departed in November 2014, (iii) $1.5 million reduction in expenses associated with Provitro, (iv) $1.4 million reduction in amortized prepaid compensation expense associated with the acquisition of Ovidian in June 2011 (which was fully amortized as of June 2014), (v) $1.2 million decrease in expense associated with researching acquisition opportunities, and (vi) $0.8 million reduction in professional fees and other expenses partially offset by $1.0 million loss on the sale of the Provitro tangible assets and the disposal of corporate office assets.

Stock-based Compensation. Stock-based compensation of $3.4 million for the year ended December 31, 2016 decreased by $1.1 million, or 24%, as compared to $4.5 million for the year ended December 31, 2015. The decrease was primarily due to a lower headcount in 2016 versus 2015, partially offset by expense associated with awards issued in June 2015 to our CEO.

Stock-based compensation of $4.5 million for the year ended December 31, 2015 decreased by $4.9 million, or 52%, as compared to $9.4 million for the year ended December 31, 2014. The decrease in stock-based compensation expense was primarily due to the vesting of awards during the second quarter of 2014 and the accelerated vesting of awards in November 2014 associated with the departure of our former CEO for which no expense was incurred in 2015, partially offset by expense associated with awards issued in June 2015 to our new CEO.

Amortization of Intangibles. Amortization of intangible assets of $9.5 million for the year ended December 31, 2016 decreased by $4.4 million, or 32%, as compared to $13.9 million for the year ended December 31, 2015 due to a reduction in value of our intangible assets as a result of their impairment during the fourth quarter of 2015, partially offset by a change in their estimated useful lives.

21


 

Amortization of intangibles of $13.9 million for the year ended December 31, 2015 decreased by $2.0 million, or 12%, as compared to $15.9 million for the year ended December 31, 2014. The decrease in amortization was primarily due to the abandonm ents of certain patents in 2015 and 2014 that do not support our existing licensing programs, the elimination of the amortization of the Provitro™ technology that was written down to zero in the fourth quarter of fiscal 2014, as well as the elimination of the amortization of the intangible assets that were impaired in the fourth quarter of 2015.

Impairment of Intangibles and Goodwill. During the fourth quarter of the year ended December 31, 2015, we recorded an impairment charge of $103.5 million due to a reduction in the carrying value of our IP and goodwill as a result of the non-infringement verdicts in the Google Litigation and Apple Litigation.

During the year ended December 31, 2014, we took an impairment charge of approximately $11.0 million, which was equal to our unamortized investment in the Provitro™ technology and related goodwill. The impairment resulted from the inability to identify near-term opportunities to commercialize the technology.

The Company recorded no such impairment charges during the year ended December 31, 2016.

Interest Income. Interest income for the years ended December 31, 2016, 2015 and 2014 primarily related to interest earned on money market funds.

Interest Expense. Interest expense of $0.1 million for the year ended December 31, 2015 and $0.2 million for the year ended December 31, 2014, consisted primarily of interest expense resulting from the installment payment obligations associated with intangible assets acquired during 2013. The payment obligation was satisfied in March 2015 and no further interest expense is being incurred.

Gain on Contingencies. Gain on contingencies of $2.0 million for the year ended December 31, 2016 was due to the receipt of contingent payments associated with the disposition of assets of our prior satellite business. Gain on contingencies of $6.1 million for the year ended December 31, 2015 was due to (i) $3.9 million from the disposition of assets associated with our former satellite business, (ii) $1.6 million, net of collection costs, upon the full and final settlement of all claims against the J&J Group, and (iii) $0.5 million from the release of a tax indemnification liability associated with our acquisition of Ovidian in June 2011.

Other Expense. Other expense for the year ended December 31, 2016, 2015 and 2014 was due to losses on foreign currency transactions.

Income Tax Expense. We did not have a U.S. federal income tax liability for the years ended December 31, 2016, 2015 or 2014. However, we recorded tax provisions of $4.1 million and $6.3 million for the years ended December 31, 2015 and 2014, respectively, related to foreign taxes withheld on revenue generated from a license agreement executed with a licensee domiciled in a foreign jurisdiction. 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. federal income tax liabilities, subject to certain limitations. However, due to uncertainty regarding our ability to utilize the deduction or credit resulting from the foreign withholding, at December 31, 2016 and 2015, we established a full valuation allowance against this deferred tax asset. Additionally, during the year ended December 31, 2015, as a result of the impairment of certain indefinite-lived intangible assets, the deferred tax liability associated with these intangibles was decreased, resulting in a tax benefit of $1.5 million, resulting in a net tax provision for the year ended December 31, 2015 of $2.6 million.

Liquidity and Capital Resources

Overview. As of December 31, 2016, we had cash and cash equivalents of $174.6 million. Our primary expected cash needs for the next twelve months include repurchases of shares from our shareholders, ongoing operating costs associated with commercialization of our IP assets, expenses in connection with legal proceedings, expenses associated with researching new business opportunities and other general corporate purposes. We may also use our cash, and may incur debt or issue equity, to acquire or invest in other businesses or assets.

22


 

We believe our current balances of cash and cash equivalents and cash flows from operations will be adequate to meet our liquidity needs for the foreseeable future. Cash an d cash equivalents in excess of our immediate needs are held in interest bearing accounts with financial institutions.

Cash and Cash Equivalents . Cash and cash equivalents were $174.6 million at December 31, 2016, compared to $162.5 million at December 31, 2015.  The following table is provided to facilitate the discussion of our liquidity and capital resources for the years ended December 31, 2016 and 2015 (in thousands):  

 

 

 

Year ended December 31,

 

 

 

2016

 

 

2015

 

Net cash provided (used) in:

 

 

 

 

 

 

 

 

Operating activities

 

$

10,926

 

 

$

(47

)

Investing activities

 

 

1,288

 

 

 

(1,968

)

Financing activities

 

 

(40

)

 

 

(4,321

)

Net increase (decrease) in cash and cash

   equivalents

 

 

12,174

 

 

 

(6,336

)

Cash and cash equivalents—beginning of period

 

 

162,457

 

 

 

168,793

 

Cash and cash equivalents—end of period

 

$

174,631

 

 

$

162,457

 

 

The increase in cash and cash equivalents for the year ended December 31, 2016 of $12.2 million was primarily due to $28.6 million of collected revenue, $2.0 million received from the disposition of assets associated with our former satellite business and the receipt of $1.3 million in installment payments on a note receivable, partially offset by $13.7 million of general corporate expenditures and $6.0 million paid on revenue share obligations.

The decrease in cash and cash equivalents for the year ended December 31, 2015 of $6.3 million was primarily due to $2.0 million utilized to acquire additional intangible assets in February 2015 and a $4.0 million payment in March 2015 of an accrued obligation associated with the 2013 acquisition of our memory and storage technologies portfolio.

Cash Flows from Operating Activities . Cash provided by operating activities of $10.9 million for the year ended December 31, 2016 consisted primarily of (i) revenue generated by operations of $59.0 million, (ii) $2.0 million received from the disposition of assets associated with our former satellite business, and (iii) $0.7 million of interest income, partially offset by a $30.4 million increase in accounts receivable and operating expenses of $43.8 million adjusted for various non-cash items including (a) $9.5 million of amortization expense associated with intangibles, (b) $3.4 million of stock-based compensation expense, and (c) $0.3 million of depreciation and costs associated with abandonment of patents, as well as a $10.2 million increase in accounts payable, accrued expenses and other current/non-current liabilities.

For the year ended December 31, 2015, the $47,000 of cash used in operating activities consisted primarily of (i) revenue generated by operations of $43.5 million, (ii) $3.9 million from the disposition of assets associated with our former satellite business, and (iii) $1.6 million, net of collection costs, upon the full and final settlement of all claims against the J&J Group, partially offset by (a) foreign taxes paid of $4.1 million, (b) $3.6 million decrease in accounts payable, accrued expenses and other liabilities, (c) $1.1 million increase in accounts receivable, prepaids and other current/non-current assets, and (d) operating expenses of $164.7 million adjusted for various non-cash items including (i) $103.5 million of impairment of intangibles and goodwill, (ii) $13.9 million of amortization expense associated with patents and other intangibles, (iii) $4.5 million of stock-based compensation expense, (iv) $1.0 million of loss on the sale of the Provitro assets and the disposal of corporate office assets, (v) $1.0 million of non-cash loss associated with the abandonment of patents, (vi) $0.4 million of depreciation expense, and (vii) $0.1 million of cost associated with patents sold.

Cash Flows from Investing Activities . Cash provided by investing activities of $1.3 million for the year ended December 31, 2016 was due to the receipt of installment payments associated with the sale of the Provitro assets in 2015.

23


 

For the year ended December 31, 2015, the $1.9 million of cash used in investi ng activities was primarily due to the $2.0 million acquisition of intangible assets in February 2015, partially offset by $0.1 million of proceeds associated with the disposition of property and intangible assets.

Cash Flows from Financing Activities . Cash used in financing activities of $40,000 for the year ended December 31, 2016, relates to statutory taxes paid as a result of the vesting of restricted stock awards.

For the year ended December 31, 2015, the $4.3 million of cash used in financing activities consisted of a $4.0 million payment of an accrued obligation associated with the 2013 purchase of property and intangible assets and $0.4 million payment to acquire the minority partner’s interest in Provitro, partially offset by net proceeds of $0.1 million related to stock option/award activities.

Contractual Obligations. Our primary contractual obligations relate to an operating lease agreement for our main office location in Kirkland, Washington. Our contractual obligations as of December 31, 2016, were as follows (in thousands):  

 

 

 

Years ending December 31,

 

 

 

Total

 

 

2017

 

 

2018

 

 

2019

 

 

2020 and

Thereafter

 

Operating lease obligations

 

$

892

 

 

$

339

 

 

$

348

 

 

$

205

 

 

$

 

 

Inflation

The impact of inflation on our consolidated financial condition and results of operations was not significant during any of the years presented.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

We have assessed our vulnerability to certain market risks, including interest rate risk associated with our accounts receivable, accounts payable, other liabilities, and cash and cash equivalents and foreign currency risk associated with our cash held in foreign currencies.

As of December 31, 2016, our cash and investment portfolio consisted of both cash and money market funds with a fair value of $174.6 million. The primary objective of our investments in money market funds is to preserve principal while optimizing returns and minimizing risk, and our policies require, at the time of purchase, that we make these investments in short-term, high rated securities which currently yield between zero to 100 basis points.

 

 

 

December 31,

2016

 

Cash

 

$

13,485

 

Money market funds

 

 

161,146

 

 

 

$

174,631

 

 

Our primary foreign currency exposure relates to cash balances in foreign currencies. Due to the small balances we hold, we have determined that the risk associated with foreign currency fluctuations is not material to us.

24


 

Item 8.

Financial Statemen ts and Supplementary Data.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Pendrell Corporation

We have audited the accompanying consolidated balance sheets of Pendrell Corporation (a Washington corporation) and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pendrell Corporation and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2017, expressed an unqualified opinion.

 

/s/ GRANT THORNTON LLP

 

Seattle, Washington

March 15, 2017

25


 

Pendrell Corporation

Consolidated Balance Sheets

(In thousands, except share data)

 

 

 

December 31,

2016

 

 

December 31,

2015

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

174,631

 

 

$

162,457

 

Accounts receivable

 

 

15,457

 

 

 

87

 

Other receivables

 

 

669

 

 

 

1,329

 

Prepaid expenses and other current assets

 

 

262

 

 

 

384

 

Total current assets

 

 

191,019

 

 

 

164,257

 

Property in service – net of accumulated depreciation of $531 and $512,

   respectively

 

 

74

 

 

 

118

 

Non-current accounts receivable

 

 

16,555

 

 

 

1,502

 

Other assets

 

 

29

 

 

 

638

 

Intangible assets – net of accumulated amortization of $62,884 and $54,523,

   respectively

 

 

4,716

 

 

 

14,377

 

Total

 

$

212,393

 

 

$

180,892

 

LIABILITIES, SHAREHOLDERS’ EQUITY AND

NONCONTROLLING INTEREST

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

125

 

 

$

140

 

Accrued expenses

 

 

6,278

 

 

 

4,292

 

Other liabilities

 

 

95

 

 

 

119

 

Total current liabilities

 

 

6,498

 

 

 

4,551

 

Other non-current liabilities

 

 

7,796

 

 

 

 

Total liabilities

 

 

14,294

 

 

 

4,551

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Shareholders’ equity and noncontrolling interest:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 75,000,000 shares authorized, no shares

   issued or outstanding

 

 

 

 

 

 

Class A common stock, $0.01 par value, 900,000,000 shares authorized

   27,268,261 and 27,187,911 shares issued, and 21,491,373 and

   21,410,896 shares outstanding

 

 

2,151

 

 

 

2,144

 

Class B convertible common stock, $0.01 par value, 150,000,000 shares

   authorized, 8,466,338 shares issued and 5,366,000 shares outstanding

 

 

537

 

 

 

537

 

Additional paid-in capital

 

 

1,962,178

 

 

 

1,958,376

 

Accumulated deficit

 

 

(1,763,060

)

 

 

(1,780,823

)

Total Pendrell shareholders’ equity

 

 

201,806

 

 

 

180,234

 

Noncontrolling interest

 

 

(3,707

)

 

 

(3,893

)

Total shareholders’ equity and noncontrolling interest

 

 

198,099

 

 

 

176,341

 

Total

 

$

212,393

 

 

$

180,892

 

 

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

26


 

Pendrell Corporation

Consolidated Statements of Operations

(In thousands, except share and per share data)

 

 

 

Year ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Revenue

 

$

59,018

 

 

$

43,519

 

 

$

42,534

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

18,156

 

 

 

10,215

 

 

 

14,170

 

Patent administration and related costs

 

 

1,046

 

 

 

2,668

 

 

 

6,386

 

Patent litigation

 

 

4,169

 

 

 

13,076

 

 

 

9,880

 

General and administrative

 

 

7,508

 

 

 

16,750

 

 

 

27,467

 

Stock-based compensation

 

 

3,424

 

 

 

4,507

 

 

 

9,405

 

Amortization of intangibles

 

 

9,498

 

 

 

13,939

 

 

 

15,929

 

Impairment of intangibles and goodwill

 

 

 

 

 

103,499

 

 

 

11,013

 

Total operating expenses

 

 

43,801

 

 

 

164,654

 

 

 

94,250

 

Operating income (loss)

 

 

15,217

 

 

 

(121,135

)

 

 

(51,716

)

Interest income

 

 

696

 

 

 

156

 

 

 

94

 

Interest expense

 

 

 

 

 

(53

)

 

 

(193

)

Gain on contingencies

 

 

2,047

 

 

 

6,095

 

 

 

 

Other expense

 

 

(11

)

 

 

(14

)

 

 

(16

)

Income (loss) before income taxes

 

 

17,949

 

 

 

(114,951

)

 

 

(51,831

)

Income tax expense

 

 

 

 

 

(2,631

)

 

 

(6,303

)

Net income (loss)

 

 

17,949

 

 

 

(117,582

)

 

 

(58,134

)

Net income (loss) attributable to noncontrolling interests

 

 

186

 

 

 

(7,902

)

 

 

(7,132

)

Net income (loss) attributable to Pendrell

 

$

17,763

 

 

$

(109,680

)

 

$

(51,002

)

Basic income (loss) per share attributable to Pendrell

 

$

0.66

 

 

$

(4.13

)

 

$

(1.93

)

Diluted income (loss) per share attributable to Pendrell

 

$

0.64

 

 

$

(4.13

)

 

$

(1.93

)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

26,758,985

 

 

 

26,570,733

 

 

 

26,440,750

 

Diluted

 

 

27,691,866

 

 

 

26,570,733

 

 

 

26,440,750

 

 

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

 

 

 

27


 

Pendrell Corporation

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except share data)

 

 

 

Common stock

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class B

 

 

 

 

 

paid-in

 

 

Accumulated

 

 

Shareholder’s

 

 

Noncontrolling

 

 

 

 

 

 

shares

 

 

shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

Equity

 

 

interests

 

 

Total

 

Balance, January 1, 2014

 

 

21,244,998

 

 

 

5,366,000

 

 

$

2,663

 

 

$

1,941,818

 

 

$

(1,619,993

)

 

$

324,488

 

 

$

12,305

 

 

$

336,793

 

Vesting of Class A common stock issued for

   Ovidian acquisition

 

 

 

 

 

 

 

 

 

 

 

2,229

 

 

 

 

 

 

2,229

 

 

 

 

 

 

2,229

 

Issuance of Class A common stock from

   exercise of stock options

 

 

51,493

 

 

 

 

 

 

5

 

 

 

424

 

 

 

 

 

 

429

 

 

 

 

 

 

429

 

Class A common stock withheld at  vesting to

   cover statutory tax obligations

 

 

(16,182

)

 

 

 

 

 

(2

)

 

 

(633

)

 

 

(140

)

 

 

(775

)

 

 

 

 

 

(775

)

Stock-based compensation and issuance of

   restricted stock, net of forfeitures

 

 

17,215

 

 

 

 

 

 

3

 

 

 

9,042

 

 

 

 

 

 

9,045

 

 

 

 

 

 

9,045

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(51,002

)

 

 

(51,002

)

 

 

(7,132

)

 

 

(58,134

)

Balance, December 31, 2014

 

 

21,297,524

 

 

 

5,366,000

 

 

$

2,669

 

 

$

1,952,880

 

 

$

(1,671,135

)

 

$

284,414

 

 

$

5,173

 

 

$

289,587

 

Issuance of Class A common stock  from

   exercise of stock options

 

 

35,835

 

 

 

 

 

 

4

 

 

 

215