UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended March 31, 2016

or

For the transition period from      to             

Commission File Number: 001-16073

 

UNWIRED PLANET, INC.

(Exact name of registrant as specified in its charter)

 

 

 

(650) 518-7111

(Registrant’s telephone number, including area code)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No   o

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.

 

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

As of May 3, 2016 there were 9,440,191 shares of the registrant’s Common Stock outstanding.

 

 

 

 

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UNWIRED PLANET, INC.

Table of Contents

 

 

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PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

UNWIRED PLANET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

Unaudited

 

 

See accompanying notes to condensed consolidated financial statements

 

 

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UNWIRED PLANET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

Unaudited

 

 

See accompanying notes to condensed consolidated financial statements

 

 

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UNWIRED PLANET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

Unaudited

 

 

See accompanying notes to condensed consolidated financial statements

 

 

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UNWIRED PLANET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Unaudited

 

 

See accompanying notes to condensed consolidated financial statements

 

 

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UNWIRED PLANET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

 

 

(1) Organization and Basis of Presentation

Organization

Unwired Planet, Inc. (referred to as “Unwired Planet” or the “Company”) is an intellectual property licensing company with a portfolio of worldwide mobile technology patents and patent applications. Our patents are held in two subsidiaries, Unwired Planet LLC, a Nevada corporation, and Unwired Planet International Limited, an Irish company, and cover a wide range of technology in the mobile ecosystem.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of March 31, 2016 and June 30, 2015, and the results of its operations for the three and nine months ended March 31, 2016 and 2015, and cash flows for the nine months ended March 31, 2016 and 2015. The following information should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

On December 4, 2015, the Company’s stockholders approved a one-for-twelve (1:12) reverse stock split of its common stock.  The reverse stock split was effective on January 5, 2016. The number of authorized shares of common stock was reduced from one billion to 350 million with the effectiveness of the reverse stock split. All per share amounts in these unaudited condensed consolidated financial statements and accompanying notes have been retroactively adjusted to the earliest period presented for the effect of this reverse stock split.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with the accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents are comprised of cash and highly liquid investments with remaining maturities of 90 days or less at the date of purchase. Cash equivalents consist primarily of exchange traded money market funds. The Company is exposed to credit risk in the event of default by the financial institutions or the issuers of these investments to the extent the amounts on deposit or invested are in excess of amounts that are insured by the FDIC or SIPC.

 

 

(2) Stockholders’ Equity

Common Stock

As of March 31, 2016, the Company had  9,444,490 shares of common stock issued and 9,440,191 shares of common stock outstanding.

During the nine months ended March 31, 2016, the Company:

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Options

During the nine months ended March 31, 2016, the Company granted stock options to both employees and non-employees.  The fair value of options is estimated on the date of grant using a Black-Scholes-Merton option pricing model.

The following table illustrates the assumptions used in estimating the fair value of the options during the nine month period ended March 31, 2016:

 

 

A summary of option activity is presented below (in thousands except per share and year amounts):

 

 

The estimated grant date fair value of options granted during the nine months ended March 31, 2016 was $0.7 million. No options were granted during the nine months ended March 31, 2015. As of March 31, 2016, there was $2.0 million of unrecognized compensation costs related to outstanding options.

Restricted Stock Awards and Units

During the nine months ended March 31, 2016 and 2015, the Company granted 50,000 and 1,151,000 restricted stock units, respectively, with a grant date fair value of $0.6 million and $1.8 million, respectively.  As of March 31, 2016 the Company had 62,000 outstanding restricted stock units with unrecognized compensation cost totaling $0.8 million.

During both of the three months ended March 31, 2016 and 2015, the Company recognized stock based compensation of $0.5 million;and $1.7 and $1.5 million for the nine months ended March 31, 2016, and 2015, respectively.

 

 

(3) Borrowings

Senior Secured Notes

The Company’s Senior Secured Notes (“Notes”) are summarized below (in thousands):

 

 

For the nine months ended March 31, 2016 and 2015, the Company recognized interest expense of $3.7 million and $3.2 million, respectively, inclusive of in-kind note issuances, and discount and issuance cost amortization.  Interest expense of $1.2 million and $1.1 million was recognized during the three months ended March 31, 2016 and 2015, respectively.

 

In December 2015, the Company extended the maturity date of the Notes from June 30, 2018 to June 30, 2019.  The extension of the maturity date did not result in a material modification to the present value of the cash flows associated with the payment due at maturity.

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(4) Net Loss Per Share

The following table sets forth potential shares of Company common stock that are not included in the diluted net loss per share calculation because to do so would reduce net loss per share for the periods indicated below (in thousands): 

 

 

 

(5) Financial Instruments

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements do not include transaction costs.  A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values.  Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  The fair value hierarchy is defined into the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity and is based on Level 1 fair value hierarchy inputs.  The carrying amount of the Company’s other current assets and liabilities, with the exception of short-term investments, approximate fair value based on the short-term maturity of the instruments using Level 2 inputs.

Investments - the Company’s investment policy is consistent with the definition of available-for-sale securities. From time to time, the Company may sell certain securities but the objectives are generally not to generate profits on short-term differences in price.  The fair value of the Company’s short-term investments, which approximate amortized cost using Level 1 inputs, was zero and $11.7 million at March 31, 2016 and June 30, 2015, respectively.

Long-Term Notes Payable - The Company’s long-term notes payable were recognized on a fair value basis using Level 3 inputs on the date of entry into the obligation and are not subject to fair value estimation on a recurring basis.

 

 

(6) Commitments and Contingencies

Contingent Legal Expenses

In connection with patent infringement litigation filed by the Company in the U.S. and Europe, the Company entered into two engagement agreements for legal services rendered to Unwired Planet, Inc. and its subsidiaries, both of which included a blended fixed fee and contingent “success fee” arrangement.  In both cases, the fixed fee element of both engagement agreements concluded on June 30, 2015, but the contingent fee arrangement continues.  In the case of the European litigation engagement agreement, the contingent fee arrangement was payable upon the first finding of validity and infringement in the United Kingdom, which occurred in December 2015 and was paid during the three months ended March 31, 2016.  With respect to the U.S. litigation, the engagement letter with the law firm provides that the contingency fee is based upon proceeds net of Ericsson’s fee share under the terms of the Master Sale Agreement by and among Telefonaktiebolaget L M Ericsson, Cluster LLC, Unwired Planet, Inc., Unwired Planet IP Holdings, Inc., Unwired Planet IP Manager, LLC, and Unwired Planet, LLC dated January 10, 2013, as amended (the “MSA”).  

Under court rules in the United Kingdom, parties to litigation are entitled to reimbursement of their attorney’s fees with respect to portions of the case on which they prevail.  The Company will become liable for the opposing parties’ attorney fees and costs if it loses all or a portion of the pending litigation in the United Kingdom.  During the three months ended March 31, 2016, the Company paid approximately $3.1 million in partial attorneys’ fees reimbursements to defendants in the United Kingdom litigation in compliance with the court’s order as a result of losing a trial held in February 2016.  The Company has not accrued for any additional losses as of March 31, 2016 because the amount of such additional loss was not reasonably estimable nor was a further obligation to pay such loss in the pending United Kingdom litigation probable as of March 31, 2016.  Rather, as a result of the judgment announced

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on March 22, 2016, the other parties will be responsible for reimbursing approximately $1.7 million in legal costs previously incurred by the Company which is recognized in prepaid and other current assets in the accompanying condensed consolidated balance sheets.

In August 2015, the Company engaged a consultant to assist in the progression of its international patent enforcement litigation efforts, primarily focused in the United Kingdom (“UK”).  As part of this engagement, the Company agreed to pay the consultant for various types of favorable outcomes as mutually agreed by the Company and the consultant.  The fees, paid on a per outcome basis, range from $100,000 to $200,000 depending on the various components of the litigation.    The Company cannot reasonably determine the likelihood of additional favorable outcomes related to other on-going litigation and has recognized success fees payable of $125,000 as of March 31, 2016.

Other Legal Matters

From time to time, the Company may be involved in litigation or other legal proceedings, including those noted above, relating to or arising out of its day-to-day operations or otherwise. Litigation is inherently uncertain and the Company could experience unfavorable rulings. Should the Company experience an unfavorable ruling, there exists the possibility of a material adverse impact on its financial condition, results of operations, cash flows, or on its business for the period in which the ruling occurs and/or in future periods.

Operating Lease

In September 2015, the Company entered into a three year lease with a base monthly rent of $11,250 to move its corporate headquarters to Los Altos, California. Upon execution of the lease, the Company paid a $50,000 refundable deposit. For the periods ended March 31, 2016, 2017, and 2018 the Company is obligated to pay approximately $100,000 per year.

 

 

(7) Patent License and Patent Purchase Agreements

In March 2014, the Company entered into a Patent License Agreement (“License Agreement”) with a subsidiary of Lenovo Group Limited (“Lenovo”). License fee revenue is recognized ratably over the estimated licensing term of seven years and the Ericsson fee share is 20% of the gross licensing revenue.

The following table summarizes gross license revenue, fee share, and net revenue for the nine month period ended March 31, 2016 (in thousands):

 

 

The following table summarizes the licensing revenue recognition and Ericsson fee share for the License Agreement over the remaining term of the License Agreement:

 

 

The net revenue amounts above are recorded as deferred revenue on the Condensed Consolidated Balance Sheets.

 

 

(8) Subsequent Events

 

 

Purchase and Sale Agreement

 

On April 6, 2016, the Company entered into Purchase and Sale Agreement (the “PSA”) with Optis UP Holdings, LLC (“Optis”), pursuant to which Optis will acquire all of the outstanding capital stock of selected subsidiaries of the Company, including Unwired Planet IP Holdings, Inc., a Delaware corporation (“Sub 1”), and all of the outstanding membership interests of Unwired Planet IP Manager, LLC, a Delaware limited liability company (“Sub 2”, and together with Sub 1, the “Holding Companies”) (collectively, the

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“Divestiture”). The Holding Companies own all of the outstanding membership interests of Unwired Planet, LLC, a Nevada limited liability company (“UPLLC”), and UPLLC owns all of the outstanding shares of Unwired Planet International Limited, an Irish company limited by shares (“Unwired Planet Ireland” and together with Sub 1, Sub 2 and UPLLC, the “Unwired Planet Companies”). UPLLC and Unwired Planet Ireland collectively own all of the Company’s patent assets. The aggregate purchase price for the Divestiture will be a total of up to $40,000,000; as specified in the PSA, Optis will pay the Company $30,000,000 less certain adjustments upon the closing of the Divestiture, and $10,000,000 less certain other potential adjustments upon the second anniversary of the closing.

The completion of the Divestiture is subject to certain conditions, including, among others: (i) the Company stockholders’ approval, (ii) the absence of an order or law prohibiting consummation of the transactions (including without limitation a stop order issued by the Securities and Exchange Commission suspending the use of the proxy statement sent to stockholders in connection with meeting scheduled to approve the Divestiture), (iii) the consent of the holders of the Company’s Senior Secured Notes due 2019 and (iv) the consents of Telefonaktiebolaget L M Ericsson (“Ericsson”) and Cluster LLC.

 

The PSA contains specified termination rights for both Optis and the Company, including that, in general, either party may terminate if the Divestiture is not consummated on or before July 31, 2016. If the PSA is terminated under certain specified circumstances, including in connection with the Company’s entry into a definitive agreement for a superior proposal, the Company must pay Optis a termination fee of $2.0 million.  Upon closing the transaction, the Company will be required to pay $4.6 million to its counsel McKool Smith PC as settlement for the cancellation of the service agreement with that firm.  Similarly, the Company will be required to pay $200,000 to the Company’s European counsel for the cancellation of their contract.  In addition, the Company continues to bear all the risk of paying Microsoft’s legal fees in the event it is not successful and the Company will be required to share one-half of any recovery with Optis in the event the litigation is successful.

 

The patent assets contemplated by the Divesture have not previously been capitalized in the accompanying condensed consolidated balance sheets.  Additionally, there are no other assets with a material carrying value as presented in the accompanying condensed consolidated balance sheet that will be disposed of upon closing of the Divesture.

 

Finally, the Company is currently evaluating the financial statement presentation of the Divesture entities in future periods. Historically, the Divesture entities’ have comprised over 90% of total expenses for each period presented in the accompanying condensed consolidated statements of operations and cash flows.

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

 

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are based upon current expectations and beliefs of our management and are subject to risks and uncertainties that may cause actual events and results of performance to differ materially from those indicated by these statements. Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, and similar expressions identify such forward-looking statements. Such statements address future events and conditions concerning intellectual property acquisition and development, licensing and enforcement activities, investment plans, capital expenditures, earnings, litigation, regulatory matters, markets for our services, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, changes in demand for our technology, legislative, regulatory and competitive developments in markets in which we and our subsidiaries operate, results of litigation, and other circumstances affecting anticipated revenues and costs. The occurrence of the events described above or below could harm our business, results of operations, and financial condition. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements except as required by law. Readers should carefully review the risk factors described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015, and additional risk factors disclosed in Part II., Other Information, Item 1A., Risk Factors in this Form 10-Q. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015 and the unaudited condensed consolidated financial statements and related notes contained in this Quarterly Report on Form 10-Q.

 

Overview of Our Business

 

Unwired Planet, Inc. and, along with our subsidiaries, reporting on a consolidated basis, (referred to as “Unwired Planet”, the “Company”, “our”, “we”, or “us”) is an intellectual property licensing company with a portfolio of mobile technology patents and patent applications.

 

Through the period ended March 31, 2016, our strategy included direct licensing, litigation when necessary, sale of our patents, joint ventures, and partnering with one or more intellectual property specialists. We intended to generate revenue by licensing our patented innovations and technologies to companies that develop mobile communications, software infrastructure, or hardware, and/or develop mobile communications products. Our goal was to obtain compensation for the use of our patented ideas through fair and reasonable royalties on our intellectual property.  Recently, a number of factors have made implementing our direct licensing strategy more challenging, including on-going uncertainty for intellectual property rights created largely by conflicting and evolving patent case law, such as the U.S. Supreme Court’s decision in Alice Corporation Pty. Ltd. v. CLS Bank International, which has resulted in divergent opinions regarding the validity of certain types of patents and has created uncertainty as to the enforceability of our patents.

On April 6, 2016, we entered into the PSA which, subject to the satisfaction or waiver of the conditions in the PSA, will result in the Divesture.  The closing of the Divesture is subject to the approval of the transactions contemplated by the PSA by the affirmative vote of the holders of a majority in voting power of the outstanding shares of the Company’s common stock, as well as certain third-party consents.

 

Significant Accounting Policies and Judgments

There have not been any material changes to the significant accounting policies and estimates previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

Results of Operations

Overview of Financial Results During the Three and Nine Months Ended March 31, 2016, and March 31, 2015

Revenues

We anticipate generating revenue primarily from licensing our intellectual property.

We recognized $1.3 million and $3.8 million in net revenue during the three and nine months ended March 31, 2016, respectively, consisting of amounts previously recorded as deferred revenue under the Lenovo Licensing Agreement, net of the fee share under the Ericsson MSA. These amounts were consistent with the Lenovo Licensing revenue recognized in prior comparable periods.

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Operating Expenses

The following table represents operating costs and expenses for the three and nine months ended March 31, 2016 and 2015, respectively (in thousands):

 

 

Patent Licensing Expenses

Patent licensing expenses include legal and consulting costs related to technical and economic evaluation, licensing, maintaining, and defending or asserting our patents, as well as salary and benefit expenses and travel expenses for our employees engaged in these activities on a full-time basis. We need to react to legal developments as they occur and some of our licensing expenses are and will be related to the actions taken by defendant companies. Since our strategy focuses on enforcing our patent rights as necessary, we incur significant costs defending our patents and initiating litigation against entities we believe have infringed our patents.

During the three and nine months ended March 31, 2016, patent licensing expenses decreased by 18% and 2%, respectively, compared with the same periods of the 2015 fiscal year. The decrease in patent licensing expenses during the three and nine months ended March 31, 2016 compared with the same periods of the 2015 fiscal year is primarily due to certain successes in our European litigation efforts resulting in the re-imbursement of approximately $3.8 million of legal expenses from the defendants.

On November 23, 2015 the UK High Court – the UK trial court of first instance – issued its judgment that cell phone manufacturers Samsung and Huawei infringe an LTE standards-essential patent (SEP) held by us. As a result of the favorable judgement we have accrued a liability for a success fee of $4.3 million; however, under the terms of our engagement with our UK legal counsel, the exact amount due remains unclear and subject to negotiation. At a hearing on December 16, 2015, the Court ordered the defendants to make an initial payment to the Company of £1,270,800 (approximately $1.9 million) as partial reimbursement for our costs of litigating the case. If the parties are unable to agree upon the remaining fees that the defendants must reimburse us, the Court will hold a further hearing; that hearing has not yet been scheduled.  In addition, the defendants have appealed the High Court’s decision; no date has been set for a hearing on the defendants’ appeal.  

The second UK trial commenced on December 1, 2015.  On January 29, 2016, the court handed down its judgment ruling in favor of defendants, finding that patents EP (UK) 2,119,287 and EP (UK) 2,485,514 were invalid in the United Kingdom due to prior art. As part of this ruling, we made an interim payment of approximately $3.1 million in legal fees to the defendants.  The amount of any further payment, and the timing of the obligation to make such further payment, if any, are not known to the Company at this time.  We have been granted the right to appeal the ruling, but no date has been scheduled for an appeal hearing.

The third UK trial was held in February 2016, and on March 22, 2016, the UK High Court ruled that our patent EP (UK) 1 230 818 is valid and is infringed by Samsung and Huawei’s wireless telecommunication networks which operate in accordance with the relevant GSM standards, 3GPP TS 45.008 release 5 (dated April 2006), and release 8 (dated September 2011). The court specifically held that the patent is essential to these standards.  A post-judgment hearing was held on April 27, 2016, at which the Court ordered defendants to make an interim costs payment of £1.18 million, or approximately $1.7 million.  Defendants were also granted permission to appeal the judgment.

As previously announced by Unwired Planet, this is the third of five UK patent infringement trials scheduled to continue into the summer of 2016. The next UK trial is scheduled to begin the week of May 2, 2016.

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A sixth trial is scheduled for October 2016 in which the court will consider commercial law questions, including the question of how to apply “fair, reasonable and non-discriminatory,” or “FRAND,” licensing principles to the standards-essential patents at issue in this series of cases. The outcome of the commercial case will establish the measure of damages to be awarded.

Additionally, a parallel trial on three patents, EP (DE) 2,119,287, EP (DE) 2,485,514, and EP (DE) 1 230 818, commenced on November 26, 2015, in Germany. On January 21, 2016, the German court published its order in that case.  The court held Samsung, Huawei and LG Electronics’ cellular handsets infringe all three patents, which read to the LTE and UMTS standards.  In addition, the Court ruled that Samsung and Huawei infringe EP (DE) 2,119,287, which covers LTE infrastructure equipment.  Two further infringement trials are scheduled in Germany, one is currently scheduled to begin on June 30, 2016, and the other is scheduled to begin on February 7, 2017.

The decrease in patent licensing expense during the nine months ended March 31, 2016 compared with the same period of the 2015 fiscal year was partially off-set by the same events associated with our ongoing litigation in the UK described above. In addition, prosecution and maintenance expense in the current period was $1.0 million lower and licensing support expense was $0.5 million lower compared with the same expenses in the prior period.

 

In the event that we close the Divesture transaction with Optis, we expect our quarterly patent licensing expenses to significantly decline and be reclassified to a component of discontinued operations in future periods. 

 

General and Administrative Expenses

 

General and administrative expenses consist principally of salary and benefit expenses, travel expenses, and facility costs for our finance, legal, information services, and executive personnel. General and administrative expenses also include outside accounting and corporate legal fees, public company costs, and expenses associated with the board of directors.

 

General and administrative expense for the three and nine months ended March 31, 2016, increased approximately 59% and decreased approximately 6% from the same periods of the 2015 fiscal year. The increase in general and administrative expense during the three months ended March 31, 2016 compared with the same period of the 2015 fiscal year is primarily attributable to increases related to additional consulting expenses associated with our proposed Divesture transaction including obtaining a fairness opinion, additional legal fees, and other consultant engagement.  Additionally, we incurred increases in other employee expenses and travel reimbursements in the current period associated with the changes on our board of directors and new executive management.

 

The decrease in general and administrative expense during the nine months ended March 31, 2016, compared with the same period of the 2015 fiscal year is primarily attributable to $1.9 million expense related to the evaluation of several strategic options and plans to raise additional capital in the prior period, partially off-set by diligence related expenses incurred with the Divesture transaction in the current period.

 

We expect our quarterly general and administrative expenses to increase during the next several quarters based on the changing nature of our future activities.

 

Interest Expense

 

During the three and nine months ended March 31, 2016, we incurred interest expense of $1.2 million and $3.7 million compared to $1.1 million and $3.2 million in the same periods of the 2015 fiscal year. Interest expense on our Senior Secured Notes consists of in-kind interest payments and amortization of debt discounts and deferred issue costs. For the remainder of the 2016 fiscal year, we expect our interest expense to increase as compared to the prior periods based upon the compounding nature of the in-kind interest payments.

 

Working Capital and Capital Resources

 

As of March 31, 2016, our working capital was approximately $42.8 million, a decrease of approximately $32.6 million from June 30, 2015. The decrease in our working capital was primarily the result of our patent litigation expenses and the use of cash to pay other operational expenses.  We do not expect our working capital to stabilize or increase until we enter into additional cash generating transactions or complete of the Divesture.

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The following table presents our cash flows for the nine months ended March 31, 2016 and 2015 (in thousands):

 

 

Cash Used In Operating Activities

 

Cash used in operating activities during the nine months ended March 31, 2016, was approximately $29.5 million compared to cash used by operating activities of $49.8 million during the prior period.  The decrease is primarily related the settlement of a non-recurring fee obligation of approximately $20.0 million incurred during the period ended March 31, 2015.  We expect our future cash used in operations to fluctuate significantly due to the proposed Divesture transaction and our other business plans.

 

Cash Provided by Investing Activities

 

Cash provided by investing activities during the nine months ended March 31, 2016, was approximately $11.7 million compared to cash provided by investing activities of $30.0 million during the same period of the 2015 fiscal year. The decrease during the current period is primarily related to the Company’s depletion of investments available for conversion to cash.

 

Cash Flows Provided by Financing Activities

During the nine months ended March 31, 2016 and 2015, the Company did not conduct significant financing activities.  Throughout the remainder of fiscal 2016 the Company expects to incur immaterial cash outflows associated with purchases of treasury stock.

While we believe that our current working capital and anticipated cash flows from operations will be adequate to meet our cash needs for daily operations and capital expenditures for at least the next 12 months, we may elect to raise additional capital through the sale of additional equity or debt securities to fund growth activities. If additional funds are raised through the issuance of additional debt securities, these securities could have rights, preferences and privileges, senior to current holders of our common stock and the terms of any debt could impose restrictions on our operations. The sale of additional equity or convertible debt securities could result in additional dilution to our current stockholders and additional financing may not be available in amounts or on terms acceptable to us. We also may pursue contingency arrangements related to our legal cases and/or alternative litigation financing contracts.

There is no assurance that we will be able to raise additional capital in amounts sufficient to meet our long-term requirements, if at all. If additional financing is necessary and we are unable to obtain the additional financing, we may be required to reduce the scope of our planned intellectual property activities, which could harm our business, financial condition, and operating results.

Long-Term Debt Obligations and Commitments

As of March 31, 2016, our principal long-term debt obligation consisted of our outstanding notes payable obligation initially entered into on June 28, 2013.  The Company is not obligated to make any payments and is incurring in-kind interest charges at an annual rate of 12.875%.

Since June 2015, we have had the option to redeem some or all of the Notes using net cash proceeds from the sale, lease, conveyance, transfer or other disposition of its patents at a redemption price equal to 110% of principal and accrued and unpaid interest or redeem some or all of the Notes at a redemption price initially equal to 110% of principal and declining over time plus accrued and unpaid interest.  As of the date of this report, we did not elect any of our available redemption options.

In May of 2015, the Company was notified that Indaba Capital Fund LP, the initial holder of the notes, sold our Notes in their entirety to MAST Capital Management, LLC as part of a private transaction. Upon subsequent correspondence, we identified MAST Capital Management, LLC as a significant shareholder. The sale of the Notes did not have any impact on the original terms including the maturity date, in-kind interest accruals, or principal amount.

 

In December 2015, we and funds managed by MAST Capital Management LLC agreed to extend the maturity date of the Notes from June 30, 2018 to June 30, 2019, and that agreement was memorialized in a supplemental indenture that we have previously filed with the SEC.

 

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

Corporate Transformation

We are reinventing ourselves to safeguard investor equity.  We are seeking opportunities to create value for our stockholders by leveraging our existing resources through strategic acquisitions and other potential transactions. As part of this strategy, we embarked on a process to divest our patent business and, subsequent to the anticipated closing of the Divesture, to acquire one or more other operating businesses that we believe offer the opportunity for more attractive returns on equity than our patent business. In evaluating potential acquisition candidates we will consider various factors, including among other things:

financial characteristics, including, but not limited to, recurring revenue streams and free cash flow;

operating characteristics, including the team that will run the business and relationships with customers and other parties in that business’ eco-system;

growth potential;

our ability to finance the acquired business;

capital market and investor perceptions of the acquired business and its industry; and

potential return on investment incorporating appropriate financial leverage, including the target’s existing indebtedness and opportunities to restructure some or all of that indebtedness.

We consider acquisitions for cash, leveraged acquisitions, and acquisitions using our stock. In addition to acquisitions, we consider majority ownership positions, minority equity investments and, in appropriate circumstances, senior debt investments that we believe provide either a path to full ownership or control, the possibility for high returns on investment, or significant strategic benefits.

 

While there can be no assurances about any transactions, we have made multiple proposals in the investment management industry, some of which involve acquiring an existing business, and some of which involve creating a new business. Our board of directors believes that each of these opportunities offers the potential to create an attractive stream of earnings, while effectively leveraging our existing capital resources.

Our board is currently evaluating our post-divestiture capital structure, and may attempt to secure additional cash to use as acquisition currency.  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the market risks discussed in Item 7A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2015

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

Our management has evaluated, under the supervision and with the participation of our President as Principal Executive Officer and our Chief Financial Officer, as Principal Financial Officer, the effectiveness of our disclosure controls and procedures as of March 31, 2016. We identified a significant deficiency in our internal control over financial reporting during the period ending September 30, 2015, which we have taken steps that we believe will remediate the cause of the significant deficiency. We believe this significant deficiency does not change the effectiveness of our disclosure controls and procedures covered in this report. Based on the above evaluation, our President and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this Quarterly Report was (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and regulations and (ii) accumulated and communicated to our management, including our President and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) is a process designed by,

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or under the supervision of, our Principal Executive and Principal Financial Officer and affected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.

 

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. Other Information

 

 

Item 1. Legal Proceedings

 

From time to time, the Company may be involved in litigation or other legal proceedings, including those noted below, relating to or arising out of its day-to-day operations or otherwise. Litigation is inherently uncertain and the Company could experience unfavorable rulings. Should the Company experience an unfavorable ruling, there exists the possibility of a material adverse impact on its financial condition, results of operations, cash flows, or on its business for the period in which the ruling occurs and/or in future periods.

 

Unwired Planet LLC v. Apple Inc. (“Apple”)

 

In September 2012, the Company filed a complaint in the U.S. District Court for the District of Nevada. The case charges infringement of ten patents related to smart mobile devices, cloud computing, digital content stores, push notification technologies, and location-based services such as mapping and advertising. Five of these patents were dismissed without prejudice to simplify the case. In August 2013, the U.S. District Court for the District of Nevada granted Apple’s motion to transfer venue from the District of Nevada to the Northern District of California. A Markman hearing was held in August 2014 and a claim construction order was issued in November 2014. Based upon the claim construction order, the parties stipulated to non-infringement on one patent. A hearing on motions for summary judgment and other pre-trial motions was held in April 2015. On May 26, 2015, the Court granted summary judgment of non-infringement on three of the remaining four patents in the case, and partial summary judgment of non-infringement on the fourth patent in the case. Unwired Planet and Apple stipulated to dismiss the remaining elements of infringement related to the fourth patent. The Company has appealed the summary judgment ruling and Markman order to the Federal Circuit. The Federal Circuit held a hearing on the Company’s appeal on April 7, 2016 and took the matter under submission.  A ruling on the appeal has not yet been published.

 

Unwired Planet LLC v. Google, Inc. (“Google”)

 

In September 2012, the Company filed a complaint in the U.S. District Court for the District of Nevada. The case charges infringement of ten patents related to cloud computing, digital content stores, push notification technologies, and location-based services such as mapping and advertising. Google filed an application in August 2013 for inter partes reexamination with the USPTO relating to three patents and sought and obtained a partial stay on those patents. In July 2014, the Company voluntarily dismissed infringement claims on three of ten patents (one of which was stayed pending reexamination). A Markman hearing on five patents was held in August 2014 and the Court issued a Markman order in December of 2014. Unwired Planet and Google stipulated to non- infringement on four of the patents based on the Markman results. Unwired Planet has appealed the Markman order to the Federal Circuit. The remaining two patents that were stayed have been invalidated by the Patent Trial and Appeal Board (PTAB). The Company is also appealing the invalidations to the Court of Appeals for the Federal Circuit.

 

Unwired Planet LLC v. Square Inc. (“Square”)

 

In October 2013, the Company filed a complaint in the U.S. District Court for the District of Nevada, charging Square with infringing three patents related to mobile payment technologies, and seeking unspecified monetary damages. A Markman hearing was held on September 22, 2014 and a claim construction order was issued in October of 2014. Square petitioned for inter partes review of two of the asserted patents, and covered business method review of the third asserted patent. The USPTO/PTAB instituted the requested reviews, and Unwired Planet and Square agreed to stay the Nevada litigation pending the outcome of the PTAB reviews. The final hearings at the PTAB were conducted in August and September 2015. On October 30, 2015, the PTAB issued a final decision invalidating all of the challenged claims of one of the three asserted patents (US Patent No. 8,275,359). The PTAB held that all patent claims challenged by Square were invalid. The Company timely filed a notice of appeal on December 31, 2015 and subsequently decided to withdraw the appeal on February 25, 2016.

 

Unwired Planet International Ltd v. Samsung, Google, Huawei, et.al (collectively “EU Defendants”)

 

In March 2014, the Company filed parallel patent infringement actions in the United Kingdom (“UK”) and Germany, alleging that the EU Defendants infringe six patents originally granted by the European Patent Office and now effective in both the UK and Germany, and seeking unspecified monetary damages. Four of the patents at issue in both cases were acquired by the Company from Ericsson

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pursuant to the MSA; one patent lists Openwave Systems as the assignee and the last patent lists Unwired Planet as the assignee. The UK lawsuit alleges that Samsung, Google, and Huawei infringe all six UK patents related to technologies fundamental to wireless communications found in mobile devices and network equipment, including the use of LTE telecommunication standards and push notification technology underpinning the Android ecosystem. The German lawsuit alleges that Samsung, Google, Huawei, LG, and HTC infringe the six German equivalents. Due to the number of defendants and the number of patents, both the UK and German courts have scheduled several trial dates rather than litigating all of the patents against all of the defendants in one trial.

The first German trial took place in June 2015. Following the hearing, the court dismissed the action against Huawei only with respect to one patent (EP (DE) 2,229,744). A second trial took place in Germany beginning on November 26, 2015. On January 21, the Court published its order, finding that cellular handsets made by LG Electronics, Samsung and Huawei infringed EP (DE) 2,119,287; 2,385,514; and 1,230,818. In addition, the Court found that cellular infrastructure equipment made by Samsung and Huawei infringed the ‘287 patent. Two additional trials are scheduled in Germany, one will begin June 30, 2016, and the other will begin on February 16, 2017.

The first patent infringement case in the UK was held in October 2015. The trial addressed Huawei and Samsung’s infringement of Patent No. EP (UK) 2,229,744. On November 23, 2015, the Court handed down its judgment that Huawei and Samsung infringed the ‘744 patent. At a subsequent hearing on January 16, 2016, the Court awarded the Company an initial payment of £1,270,800, or approximately $1.9 million, as partial reimbursement of our cost of litigating the case. If the parties are unable to agree upon the remaining fee that defendants must reimburse the Company, the Court will hold a further hearing to rule on the fees; that hearing has not yet been scheduled. In addition, defendants have filed an appeal of the High Court’s decision; a date for the appeal hearing has not been scheduled.

A second trial in the UK commenced on December 30, 2015, with respect to two patents EP(UK) 2,119,287 and 2,485,514. After a multi-day trial the Court entered judgment on January 29, 2016, finding that the two patents were invalid based upon prior art. The Company has been granted permission to appeal the Court’s judgment. In addition the Company was ordered to make an initial payment of £2.1 million, or approximately $3.1 million to defendants as partial reimbursement of their litigation costs.

A third UK trial commenced on February 3, 2016 on our patent EP (UK) 1,230,818.  On March 22, 2016, the UK High Court ruled that the is valid and is infringed by Samsung and Huawei’s wireless telecommunication networks which operate in accordance with the relevant GSM standards, 3GPP TS 45.008 release 5 (dated April 2006), and release 8 (dated September 2011). The court specifically held that the patent is essential to these standards.  A post-judgment hearing was held on April 27, 2016, at which the Court ordered defendants to make an interim costs payment of £1.18 million, or approximately $1.7 million.  Defendants were also granted permission to appeal the judgment.

Two further patent infringement trials remain to be heard in the UK.  One trial will commence on May 4, 2016, on our patent EP (UK) 1,105,991, and the other trial is scheduled for early July 2016 on our patent EP (UK) 0,989,712.

 

The defendants in both the German and UK actions have filed defenses and counterclaims against the Company in both courts alleging that the original transaction under the Ericsson MSA violates EU competition law and is void. Further, the defendants allege that the Company engaged in anticompetitive business practices that did not adhere to fair, reasonable and non-discriminatory (FRAND) standards. Samsung further alleges that even if the MSA is valid, it has a license to certain patents because of its existing license agreement with Ericsson. The claims by the defendants in the German lawsuit are currently expected to be adjudicated in the same proceedings as the underlying patent infringement cases. In the UK, these defenses and counterclaims will be adjudicated separately from the underlying infringement claims, in a trial scheduled for October 2016.

 

HTC has filed an appeal with the German Supreme Court seeking to overturn a decision by the trial court, which the decision has been affirmed by the regional appellate court, that Unwired Planet is not required to post a bond as security for costs in the event HTC is ultimately successful on the merits.

 

For a further discussion of the UK and German litigation, and the possible effects on the Company’s results, see the risk factors described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

 

Unwired Planet, Inc. v. Microsoft

 

In July 2014, the Company filed suit in the U.S. District Court of Delaware alleging Microsoft breached a patent license agreement the two companies entered into in September 2011. The Company is seeking a declaratory judgment and damages for breach of contract. The parties have stipulated to simplify the case and reduce some of the issues, and discovery is now underway with respect to the issues remaining in the case. Summary judgment motions are due to be filed with the Court in the fall of 2015. A hearing on Unwired Planet’s motion for summary judgement was heard on February 12, 2016. The Court has not yet published its ruling on the parties’ motions.

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Item 1A. Risk Factors

 

Except as set forth below, there have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015 and those disclosed on our Quarterly Report on Form 10-Q for the period ended September 30, 2015, and December 31, 2015.

 

If we are unable to substantially utilize our net operating loss carry-forwards, our financial results may be adversely affected, and protections implemented by us to preserve our NOLs may have unintended anti-takeover effects.

 

As of June 30, 2015, we had net operating loss, or NOL, carry-forwards for U.S. federal and state income tax purposes of approximately $1.69 billion and $290.0 million, respectively. In order to preserve our substantial tax assets associated with NOLs and built-in-losses under Section 382 of the Internal Revenue Code, we adopted a Tax Benefits Preservation Agreement (“Rights Agreement”). Under Section 382 of the Internal Revenue Code, a corporation that undergoes an “ownership change” may be subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders (generally 5% stockholders, applying certain look-through and aggregation rules) increases by more than 50% over such stockholders’ lowest percentage ownership during the testing period (generally three years). Purchases of our common stock in amounts greater than specified levels, which will be beyond our control, could create a limitation on our ability to utilize our NOLs for tax purposes in the future. The Rights Agreement is intended to impose certain ownership limitations to prevent the purchase of our common stock in amounts that could jeopardize our ability to utilize our NOLs. While we entered into the Rights Agreement in order to preserve our NOLs, the Rights Agreement could inhibit acquisitions of significant stake in us and may prevent a change in our control. As a result, the Rights Agreement may have an “anti-takeover” effect. Similarly, the limits on the amount of common stock that a stockholder may own may make it more difficult for stockholders to replace current management or members of the board of directors. Although we have taken steps intended to preserve our ability to utilize our NOLs, including the adoption of the Rights Agreement, such efforts may not be successful.

 

This and other limitations imposed on our ability to utilize NOLs could cause U.S. federal and state income taxes to be paid earlier than they would be paid if such limitations were not in effect and could cause such NOLs to expire unused, in each case reducing or eliminating the benefit of such NOLs. For example, if and when we seek to apply our NOL carry-forwards to reduce our tax liability, we will have the burden of proof with respect to the losses we incurred —in some cases up to 20 years ago. We may not meet our burden of proof if these records are difficult to locate or otherwise are unavailable, which could diminish the value of the available NOL carry-forwards. Furthermore, we may not be able to generate sufficient taxable income to utilize our NOLs before they expire. If any of these events occur, we may not derive some or all of the expected benefits from our NOLs. In addition, at the state level there may be periods during which the use of NOLs is suspended or otherwise limited, which would accelerate or may permanently increase state taxes owed. See Note 12 of the Notes to the Consolidated Financial Statements contained in our Annual Report filed on Form 10-K for the fiscal year ended June 30, 2015 for more details.

 

Our alternative fee arrangements with litigation counsel could limit our net proceeds derived from any successful patent enforcement actions.

We have entered into agreements for legal services in which we have agreed to pay our outside counsel a combination of fixed or hourly fees and a success fee for our patent enforcement matters. These agreements typically require payment of a fixed fee for a period of time, hourly fees, and payment of a contingency fee upon a settlement or collection of a judgment. Contingency fees in our agreements are usually based upon a percentage of the amount of a settlement or a judgment. Some of the agreements contain dollar limits on the total contingency fee that may be earned. We are responsible for the current payment of out of pocket expenses incurred in connection with the patent enforcement matters.

 

The following risk factors relate to the entry into the Purchase and Sale Agreement with Optis; the anticipated closing of the Divesture contemplated on or before July 31, 2016; and our subsequent corporate transformation plans.

 

The Purchase and Sale Agreement (“PSA”) contains significant closing conditions that may result in the incurrence of additional obligations even if the sale is not successful.

 

The PSA contains certain provisions that we must pay to the Purchaser a termination fee of $2 million, if the Purchase Agreement is terminated under certain circumstances.  The PSA also includes restrictions, which our board of directors regards as customary for transactions of this type, on our ability to solicit offers for alternative proposals or engage in discussions regarding such proposals, subject to exceptions, which could have the effect of discouraging such proposals from being made or pursued, even if potentially more favorable to our stockholders than the Optis transaction.  Further, the Purchaser has the right to set off claims for breaches of our representations and warranties, taxes and pre-closing operation of our business against the $10 million back-end payment for a period of two years.

 

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Upon closing the transaction, we will be required to pay $4.6 million to our counsel McKool Smith PC as settlement for the cancelation of our service agreement with them.  Similarly, we will be required to pay $200,000 to our European counsel for the cancellation of their contract.  In addition, as between Optis and the Company, we continue to bear all the risk of paying Microsoft’s legal fees in the event we do not prevail, and we will be required to share one-half of any recovery with Optis in the event our litigation is successful.  The license to Microsoft provides that the losing party will reimburse the prevailing parties’ legal fees and costs.  Although Microsoft’s legal fees are likely to be substantial, we do not know what they are.  Accordingly, if we do not prevail in that case, our obligation to pay Microsoft’s legal fees would likely have a substantial negative effect on our operating results.  

 

 

There can be no assurances that we will be successful in investing the proceeds of the Divestiture.

 

The process to identify potential investment opportunities and acquisition targets, to investigate and evaluate the future returns therefrom and business prospects thereof and to negotiate definitive agreements with respect to such transactions on mutually acceptable terms can be time consuming and costly. We are likely to encounter intense competition from other companies with similar business objectives to ours, including private equity and venture capital funds, leveraged buyout funds, investment firms with significantly greater financial and other resources and operating businesses competing for acquisitions. Many of these companies are well established and have extensive experience in identifying and effecting business combinations.

In addition, we will incur operating expenses, resulting from payroll, rent and other overhead and professional fees, while we are searching for appropriate opportunities to invest the proceeds of the Divestiture.

Because we will consider potential acquisition candidates in a different industry, you have no basis at this time to ascertain the merits or risks of any business that we may ultimately operate.

Our business strategy contemplates the potential acquisition of one or more operating businesses or other investments that we believe will provide better returns on equity than our patent business that we are divesting, and we are not limited to acquisitions and/or investments in any particular industry or type of business. Accordingly, there is no current basis for you to evaluate the possible merits or risks of the particular industry in which we may ultimately operate or the target business or businesses with which we may ultimately effect a business combination or other investment. Although we will seek to evaluate the risks inherent in a particular investment or acquisition opportunity, we cannot assure you that all of the significant risks present in that opportunity will be properly assessed. Even if we properly assess those risks, some of them may be outside of our control or ability to affect. We will not seek stockholder approval for any business combination or other investment that we may pursue, so you will most likely not be provided with an opportunity to evaluate the specific merits or risks of such a transaction before we become committed to the transaction.

Resources will be expended in researching potential acquisitions and investments that might not be consummated.

The investigation of target businesses and the negotiation, drafting and execution of relevant agreements, disclosure documents, and other instruments will require substantial management time and attention in addition to costs for accountants, attorneys and others. If a decision is made not to complete a specific business combination or other investment the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific opportunity, we may fail to consummate the transaction for any number of reasons, including those beyond our control.

Subsequent to an acquisition, we may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and our share price, which could cause you to lose some or all of your investment.

Even if we conduct extensive due diligence on a target business with which we combine, we cannot assure you that this diligence will identify all material issues that may be present inside a particular target business, that it would be possible to uncover all material issues through a customary reasonable amount of due diligence, or that factors outside of the target business and outside of our control will not later arise. As a result of these factors, we may be forced to later write-down or write-off assets, restructure our operations, or incur impairment or other charges that could result in our reporting losses. Even if our due diligence successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with our preliminary risk analysis. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our securities. In addition, charges of this nature may cause us to violate net worth or other covenants to which we may be subject as a result of assuming pre-existing debt held by a target business or by virtue of our obtaining post-Divestiture debt financing. Accordingly, you could suffer a significant reduction in the value of your shares.

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If we are deemed to be an investment company under the Investment Company Act, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to complete our business combination.

If we are deemed to be an investment company under the Investment Company Act of 1940, our activities may be restricted, including:

In addition, the law may impose upon us burdensome requirements, including:

We do not believe that our anticipated principal activities will subject us to the Investment Company Act. However, if we were deemed to be subject to the Investment Company Act, compliance with these additional regulatory burdens would require additional expenses for which we have not allotted funds and which may hinder our ability to consummate a business combination. If we were deemed to be subject to the Investment Company Act, compliance with these additional regulatory burdens would require additional expenses for which we have not allotted funds and may hinder our ability to complete a business combination.

We are not required to obtain an opinion from an independent investment banking or from an independent accounting firm in connection with any of the acquisitions we are considering, and consequently, you may have no assurance from an independent source that the price we are paying for a target business is fair to our company from a financial point of view.

With respect to our new potential acquisitions, we are not required to obtain an opinion from an independent investment banking firm that is a member of the Financial Industry Regulatory Authority, or from an independent accounting firm, that the price we are paying for a target business is fair to our company from a financial point of view. If no opinion is obtained, you will be relying on the judgment of our board of directors, who will determine fair market value.

We may issue additional shares of common stock or shares of our preferred stock to complete business combinations or under employee incentive plans. Any such issuances would dilute the interest of our stockholders and likely present other risks.

Our amended and restated certificate of incorporation authorizes our board of directors to issue shares of our common stock or preferred stock from time to time in their business judgement up to the amount of our then authorized capitalization. We may issue a substantial number of additional shares of our common stock, and may issue shares of our preferred stock, in order to complete business combinations or under employee incentive plans. These issuances:

Our ability to successfully grow our new business and to be successful thereafter will be totally dependent upon the efforts of our key personnel, some of whom may become our employees. The loss of key personnel could negatively impact the operations and profitability of our post-Divestiture business.

Our ability to successfully effect our growth strategy is dependent upon the efforts of our key personnel. The role of our key personnel in the target business, however, cannot presently be ascertained. Although some of our key personnel may remain with the target business in senior management or advisory positions following our business combination, it is likely that some or all of the management of the target business will remain in place. While we intend to closely scrutinize any individuals we engage after the Divestiture, we cannot assure you that our assessment of these individuals will prove to be correct. These individuals may be

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unfamiliar with the requirements of operating a company regulated by the SEC, which could cause us to have to expend time and resources helping them become familiar with such requirements.

We may have a limited ability to assess the management of a prospective target business and, as a result, may effect a business combination with a target business whose management may not have the skills, qualifications or abilities to manage a public company.

When evaluating the desirability of effecting a business combination with a prospective target business, our ability to assess the target business's management may be limited due to a lack of time, resources or information. Our assessment of the capabilities of the target's management, therefore, may prove to be incorrect and such management may lack the skills, qualifications or abilities we suspected. Should the target's management not possess the skills, qualifications or abilities necessary to manage a public company, the operations and profitability of the post-combination business may be negatively impacted.

The officers and directors of an acquisition candidate may resign upon completion of our business combination. The departure of a business combination target's key personnel could negatively impact the operations and profitability of our post-combination business.

The role of an acquisition candidate's key personnel upon the completion of our initial business combination cannot be ascertained at this time. The departure of a business combination target's key personnel could negatively impact the operations and profitability of our post-combination business.

Our directors will allocate their time to other businesses thereby causing conflicts of interest in their determination as to how much time to devote to our affairs. This conflict of interest could have a negative impact on our ability to complete our business combination.

Our directors are not required to, and will not, commit their full time to our affairs, which may result in a conflict of interest in allocating their time between our operations and our search for a business combination and their other businesses. We do not intend to have any full-time corporate development or investment management personnel upon completion of the Divestiture. Each of our directors is engaged in several other business endeavors for which he may be entitled to substantial compensation. Our independent directors also serve as officers and board members for other entities. If our executive officers' and directors' other business affairs require them to devote substantial amounts of time to such affairs in excess of their current commitment levels, it could limit their ability to devote time to our affairs which may have a negative impact on our ability to execute on our growth plans. Moreover, certain of our directors have time and attention requirements for private investment funds managed by MAST Capital, affiliates of which are collectively our largest stockholder.

Certain of our executive officers and directors are now, and all of them may in the future become, affiliated with entities engaged in business activities similar to those intended to be conducted by us and, accordingly, may have conflicts of interest in determining to which entity a particular business opportunity should be presented.

Following the completion of the Divestiture and for the foreseeable future, we intend to engage in the business of identifying and combining with one or more businesses. Our executive officers and directors are, or may in the future become, affiliated with entities that are engaged in a similar business. Moreover, certain of our executive officers and directors have time and attention requirements for private investment funds of which affiliates of our largest stockholder, MAST Capital Management, are the investment manager.

We have made proposals to investment management firms that involve joint ventures between us and MAST Capital Management LLC. Peter A. Reed, a partner and portfolio manager of MAST Capital Management LLC, is a member of our board of directors and chairman of our Strategic Committee and Nominating and Corporate Governance Committee and a member of our Compensation Committee. Mr. Reed's and MAST Capital Management's roles may cause conflicts of interest or the appearance of conflicts of interest and result in terms that could be challenged as to whether they are in fact the same or superior for us to those that we could obtain in arms-length negotiation for similar activities and value propositions.

Jess Ravich, a member of our board of directors, is an executive at TCW, which is also engaged in the investment management business. We and TCW may be bidding against each other in potential acquisitions.

Our officers and directors also may become aware of business opportunities which may be appropriate for presentation to us and the other entities to which they owe certain fiduciary or contractual duties. Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. These conflicts may not be resolved in our favor and a potential target business may be presented to another entity prior to its presentation to us, subject to their fiduciary duties under applicable law.

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Our executive officers, directors, security holders and their respective affiliates may have competitive pecuniary interests that conflict with our interests.

We have not adopted a policy that expressly prohibits our directors, executive officers, security holders or affiliates from having a direct or indirect pecuniary or financial interest in any investment to be acquired or disposed of by us or in any transaction to which we are a party or have an interest. In fact, we may enter into a business combination with a target business that is affiliated with our directors, executive officers or stockholders. Nor do we have a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted by us. Accordingly, such persons or entities may have a conflict between their interests and ours.

In particular, we have proposed investment company acquisitions that involve a joint venture between us and MAST Capital Management and its affiliates. Such transaction could result in significant compensation to MAST Capital Management and its employees, including ownership of interests in our joint venture companies, employment with the joint venture companies and awarding of equity compensation in the form of, or based upon, our shares.

We may engage in a business combination with one or more target businesses that have relationships with entities that may be affiliated with our executive officers, directors or existing holders which may raise potential conflicts of interest.

In light of the involvement of our executive officers and directors with other entities in the investment management business and otherwise, we may decide to acquire or do business with one or more businesses affiliated with our executive officers and directors. Our directors also serve as officers and board members for other entities. Such entities may compete with us for business combination opportunities. We could pursue an affiliate transaction if we determined that such affiliated entity met our criteria for a business combination and such transaction was approved by a majority of our disinterested directors. Potential conflicts of interest may exist and, as a result, the terms of the business combination may not be as advantageous to our public stockholders as they would be absent any conflicts of interest.

We may issue notes or other debt securities, or otherwise incur substantial debt, to complete a business combination, which may adversely affect our leverage and financial condition and thus negatively impact the value of our stockholders' investment in us.

Although we have no commitments as of the date of this proxy statement to issue any notes or other debt securities, or to otherwise incur indebtedness, we may choose to incur substantial debt to finance our growth plans. The incurrence of debt could have a variety of negative effects, including:

We may attempt to complete business combinations with private companies about which little information is available, which may result in a business combination with a company that is not as profitable as we suspected, if at all.

In pursuing our acquisition strategy, we may seek to effectuate business combinations with privately held companies. By definition, very little public information exists about private companies, and we could be required to make our decision on whether to pursue a

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potential initial business combination on the basis of limited information, which may result in a business combination with a company that is not as profitable as we expect, if at all.

We may make acquisitions where we do not own all or a majority of the target enterprise.

We may make acquisitions where do not own all or a majority of the target enterprise. We may engage in such acquisitions or make such investments where we desire the target management to continue to have a significant equity incentive to grow and ensure the profitability of the target business. We may also make such acquisitions or investments where we do not have sufficient financial resources to acquire all of the equity in the target company or where the target has price requirements that we are unwilling to meet at the time of the acquisition or investment. Our minority or less than 100% ownership subjects us to risks that we do not control the target company and its results of operations, business condition or prospects may be materially adversely impacted by the decisions of the other equity owners or the difficulty of negotiating among equity owners.

Risks Relating to the Divestiture

The Divestiture may not be completed if the conditions to closing are not satisfied or waived.

There is a risk that the Divestiture may not be completed because the conditions to closing, including stockholder approval, consent of certain third parties and the absence of a material adverse event affecting the IP Licensing Companies before the closing, may not be satisfied or, where permissible, waived. In addition, the consent we have obtained from Ericsson to the Divestiture is contingent on the Purchaser and Ericsson agreeing upon the amount to be paid by the Purchaser to Ericsson. If the Purchaser and Ericsson are unable to agree on the amount to be paid, the consent may be ineffective and the Divestiture may not close. If the Divestiture is not completed, we may be unable to find another buyer for the patent business or the terms offered by another buyer may not be as favorable to us as those in the Purchase Agreement.

The amount of net proceeds that we receive is subject to uncertainties.

In the Purchase Agreement, we agreed to indemnify the Purchaser from liabilities associated with breaches of our representations and warranties, our post-closing business, taxes incurred before the closing and other matters. The Purchaser has the right to set off the amounts we owe under such indemnification agreement against the $10 million payment due to us two years after the closing. It is possible that the Purchaser may default on its obligation to make that $10 million payment and that the Purchaser may not be credit worthy at that time. We may not receive the entire $10 million back-end payment.

We may not enter into a definitive agreement for a superior offer for the IP Licensing Companies unless we pay a termination fee to the Purchaser.

The Purchase Agreement requires us to pay the Purchaser a termination fee equal to $2 million if we terminate or the Purchaser terminates the Purchase Agreement prior to closing as a result of our board of directors changing its recommendation with respect to the Divestiture or determining to accept an unsolicited acquisition proposal that we determine to be a superior proposal.

Our officers and directors have interests in the Divestiture that are different from and in addition to those of our other stockholders.

Our executive officers are entitled to accelerated vesting of the equity incentives we granted them, a transaction size incentive (in the case of Mr. Teksler), severance, post-employment health care and (in the case of Mr. Wheat) an incentive payment for remaining an employee through the filing of our 2016 Form 10-K. These interests are described elsewhere in this proxy statement. These interests are different from and in addition to those of our other stockholders. These additional interests may have motivated our officers in negotiating the Divestiture.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

 

Item 3. Defaults Upon Senior Securities

None.

 

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Item 4. Mine Safety Disclosures

Not applicable.

 

 

Item 5. Other Information

None.

 

 

Item 6. Exhibits

See the Index to Exhibits, which follows the signature page of this Quarterly Report on Form 10-Q and which is incorporated herein by reference.

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

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INDEX TO EXHIBITS

 

 

The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

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