The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Nature of Business
These condensed consolidated financial statements include the accounts of Pendrell Corporation (“Pendrell”) and its consolidated subsidiaries (collectively referred to as the “Company”). Since 2011, the Company, through its consolidated subsidiaries, has invested in, acquired and developed businesses with unique technologies that are often protected by intellectual property (“IP”) rights, and that present the opportunity to address large, global markets. The Company’s subsidiaries focus on licensing their IP rights to third parties. The Company regularly evaluates its existing investments to determine whether retention or disposition is appropriate, and investigates new investment and business acquisition opportunities.
2. Basis of Presentation
Interim Financial Statements
—The financial information included in the accompanying condensed consolidated financial statements is unaudited and includes all adjustments, consisting of normal recurring adjustments and accruals, considered necessary for a fair presentation in accordance with accounting principles generally accepted in the United States (“U.S.”) of America (“GAAP”). Certain information and footnote disclosures have been condensed or omitted. The financial information as of December 31, 2016 is derived from the Company’s audited consolidated financial statements and notes included in Item 8 in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (“2016 Form 10-K”), filed with the U.S. Securities and Exchange Commission on March 15, 2017. The financial information included in this quarterly report should be read in conjunction with management’s discussion and analysis of financial condition and results of operations and the consolidated financial statements and notes included in the 2016 Form 10-K. Capitalized terms used and not otherwise defined in this quarterly report have the meanings given to them in the Company’s 2016 Form 10-K. Operating results and cash flows for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017 or any interim period.
Capital Structure Change
—On September 30, 2016, the Company underwent a reverse stock split at a ratio of 1-for-10 (the “2016 Reverse Split”). The share counts and per share data reported in the historical financial statements have been adjusted retrospectively as if the 2016 Reverse Split had been in effect for all periods presented. Additionally, the exercise prices and the number of shares issuable under the Company’s stock-based compensation plans have been adjusted retrospectively to reflect the 2016 Reverse Split.
Principles of Consolidation and Basis of Presentation
—The consolidated financial statements of the Company include the assets and liabilities of its wholly-owned subsidiaries and subsidiaries it controls or in which it has a controlling financial interest. All information in these financial statements is in U.S. dollars.
Noncontrolling interests on the consolidated balance sheets include third-party investments in entities that the Company consolidates, but does not wholly own. Noncontrolling interests are classified as part of equity and the Company allocates net income (loss), other comprehensive income (loss) and other equity transactions to its noncontrolling interests in accordance with their applicable ownership percentages. All intercompany transactions and balances have been eliminated in consolidation, including a $36.6 million loan from Pendrell to ContentGuard Holdings, Inc. (“ContentGuard”). In June 2017, the Company sold a 9% interest in ContentGuard. ContentGuard now has two minority shareholders, while Pendrell maintains an 81.1% ownership stake.
Segment Information
—The Company operates in and reports on one segment (IP management). Operating segments are based upon the Company’s internal organization structure, how its operations are managed, and the criteria used by its Chief Operating Decision Maker. Substantially all the Company’s revenue is generated by operations located within the U.S., and the Company does not have any long-lived assets located in foreign countries.
Use of Estimates
—The preparation of financial statements in conformity with GAAP 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates.
7
On an ongoing basis, the Company evaluates its estimates, including among others, those related to the fair value of acquired intangible assets, the useful lives and potential impairment of intangible assets and property and
equipment, the value of stock awards for the purpose of determining stock-based compensation expense, accrued liabilities (including bonus accruals), valuation allowances related to the ability to realize deferred tax assets, allowances for doubtful recei
vables, and certain tax liabilities. Estimates are based on historical experience and other factors, including the current economic environment as deemed appropriate under the circumstances. Estimates and assumptions are adjusted when facts and circumstanc
es dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in estimates used to prepare these financial statements will be reflected in the financial state
ments in future periods.
Accounting Policies
—There have been no material changes or updates in the Company’s existing accounting policies from the disclosures included in its 2016 Form 10-K.
Recent Accounting Pronouncements
—In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-02,
Leases (Topic 842),
which requires companies that are lessees to recognize a right-of-use asset and lease liability for most leases that do not meet the definition of a short-term lease. For income statement purposes, leases will continue to be classified as either operating or financing. Classification will be based on criteria that are similar to those applied in current lease accounting. Compliance with this ASU is required for annual periods beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. As the Company’s future minimum lease commitments as of September 30, 2017 are approximately $0.6 million, the Company believes the future adoption of this ASU will not have a material impact on its financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, to simplify certain provisions in stock compensation accounting, including provisions applicable to: (1) accounting for income taxes, (2) classification of excess tax benefits on the statement of cash flow, (3) forfeitures, (4) minimum statutory tax withholding requirements, (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes, (6) the practical expedient for estimating the expected term and (7) intrinsic value. Compliance with this ASU is required for annual periods beginning after December 15, 2016, and interim periods therein. The adoption of this ASU on January 1, 2017 resulted in an adjustment to retained earnings and additional paid in capital of approximately $0.2 million due to a change in accounting for forfeitures.
Throughout the year ended December 31, 2016, the FASB issued a number of ASUs which provide further clarification to ASU No. 2014-09,
Revenue (Topic 606): Revenue from Contracts with Customers
, issued in May 2014, which supersedes existing revenue recognition guidance under GAAP. The core principle of ASU No. 2014-09 is to recognize as revenue the amount that an entity expects to be entitled for goods or services at the time the goods or services are transferred to customers. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of the amendments in ASU No. 2014-09 to the annual reporting period beginning after December 15, 2017, with early adoption permitted beginning January 1, 2017. The ASUs issued in 2016 related to ASU No. 2014-09 will become effective when the guidance in ASU No. 2014-09 becomes effective. The Company is continuing to assess the impact, if any, of implementing ASU No. 2014-09 and related ASUs as of January 1, 2018, and plans to adopt this ASU under the modified retrospective method where the cumulative effect is recognized at the date of initial application. As the Company’s patent licensing agreements generally provide no further obligation for the Company upon receipt of the applicable license fees, the fiscal 2018 adoption of ASU 2014-09 will have no impact to revenues previously reported but may require additional footnote disclosures.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation
—
Stock Compensation (Topic 718)-Scope of Modification Accounting,
which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Unless the changes in terms or conditions meet all three criteria outlined in the guidance, modification accounting should be applied. The three criteria relate to changes in the terms and conditions that affect the fair value, vesting conditions, or classification of a share-based payment award. Compliance with this ASU is
required
f
or annual pe
r
i
o
d
s be
g
inni
n
g after Dec
e
mber 1
5
,
20
17. Early adoption is permitted. The adoption of this ASU in 2017 did not have an impact on the Company’s financial position, results of operations or cash flows.
8
3. Accounts Receivable (Current and Non-current)
Accounts receivable consist primarily of amounts billed to customers under licensing arrangements. Since 2011, the Company has not incurred any material losses on its accounts receivable.
A significant portion of the Company’s current accounts receivable balance is due from Toshiba Memory Corporation (“TMC”), which prior to 2017 was a division of Toshiba Corporation (“Toshiba”). Based on the Company’s assessment of various reports, including Toshiba’s unaudited financial results, as well as the ongoing activities of TMC, the Company believes that no allowance for doubtful accounts is required for its receivable from TMC. The Company will continue to evaluate its position as new information becomes available.
4. Other Receivables
From acquisition through the year ended December 31, 2014, the Company attempted to develop a strategy to commercialize a proprietary micro-propagation technology (designed to facilitate the production on a commercial scale of certain plants, particularly timber bamboo) through its former subsidiary, Provitro Biosciences LLC (“Provitro”), but did not generate revenue from the technology.
In January 2015, the Company discontinued its efforts to commercialize the Provitro™ technology and in September 2015, the Company sold Provitro’s facility and related tangible assets for $2.0 million. The purchase price was paid in installments of which $0.1 million was paid immediately, $0.4 million was received in January 2016, $0.9 million was received in August 2016 and $0.6 million was received in January 2017.
5. Accrued expenses
The following table summarizes accrued expenses (in thousands):
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Accrued payroll and related expenses
|
|
$
|
1,073
|
|
|
$
|
1,134
|
|
Accrued legal, professional and other expenses
|
|
|
349
|
|
|
|
538
|
|
Accrued revenue share obligations
|
|
|
6,100
|
|
|
|
4,606
|
|
|
|
$
|
7,522
|
|
|
$
|
6,278
|
|
6. Commitments and Contingencies
Purchase and Lease Commitments—
The Company has operating lease agreements for its offices in Kirkland, Washington and Finland.
Litigation—
In the opinion of management, except for those matters described below and elsewhere in this report, to the extent so described, litigation, contingent liabilities and claims against the Company in the normal course of business are not expected to involve any judgments or settlements that would be material to the Company’s financial condition, results of operations or cash flows.
There have been no material changes to the legal proceedings disclosures included under Part I, Item 3 of the Company’s 2016 Form 10-K other than the following update, with capitalized terms having the meaning given to them in the Form 10-K:
MTL Enforcement Actions—
In 2016, Western Digital Corporation (“Western Digital”) acquired SanDisk Corporation. In June 2017, Memory Technologies, LLC, a subsidiary of Pendrell Corporation, and Western Digital entered into a settlement and patent license agreement. The agreement fully resolves all pending litigation between the parties and grants Western Digital a license to patents relating to memory and storage technologies.
ContentGuard Enforcement Actions
— ContentGuard appealed the judgments in the Google Litigation and Apple Litigation to the Federal Circuit Court. On July 12, 2017, the Federal Circuit Court affirmed both adverse judgments, bringing those actions to conclusion.
9
7. Shareholders’ Equity
On March 9, 2017, the Company agreed to redeem 2,432,923 shares of the Company’s Class A Stock from Highland Crusader Offshore Partners, L.P. in a private transaction at a price of $6.55 per share
.
In March 2017, the Board of Directors (the "Board") of the Company approved and recommended that the Company’s shareholders approve a 1-for-100 reverse stock split of the Company’s shares of Class A Stock and Class B common stock (collectively, the “Common Stock”), to be effective no earlier than the fourth quarter of 2017 (the "2017 Reverse Split"), to enable the Company to (i) terminate the registration of the Class A Stock under the Securities Exchange Act of 1934, as amended (the “Exchange Act”); (ii) cease to be a reporting company under the Exchange Act; and (iii) terminate its Nasdaq listing if, after the 2017 Reverse Split, there are fewer than 300 record holders of Class A Stock. At the Company’s annual meeting of shareholders on June 14, 2017, the Company’s shareholders approved the 2017 Reverse Split and authorized the Board to implement the 2017 Reverse Split in the fourth quarter of 2017.
On September 20, 2017, the Board set November 30, 2017 as the effective date for the 2017 Reverse Split, but reserved the right to delay or cancel the 2017 Reverse Split if the 2017 Reverse Split will not reduce the number of record holders of Class A Stock below 300, or if the Board determines that the 2017 Reverse Split is no longer in the best interests of the Company or its shareholders. The Board also authorized the de-registration and de-listing of the Class A Stock from Nasdaq promptly after completion of the 2017 Reverse Split, and clarified that the Company does not currently plan to publish financial information following the expiration of the Company’s reporting obligations under the Exchange Act.
8. Stock-based Compensation
The Company records stock-based compensation on stock options, stock appreciation rights, 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 recognizes compensation cost over the requisite service period for awards expected to vest.
On January 1, 2017, the Company elected to change its accounting policy for calculating stock-based compensation based on forfeiture estimates to one that recognizes forfeitures when they occur. ASU 2016-09 permits this one-time policy change, but requires the change to be adopted utilizing the modified retrospective approach, with a cumulative effect adjustment recorded to retained earnings. The adoption of this change in accounting for forfeitures on January 1, 2017 resulted in an adjustment to retained earnings and additional paid in capital of approximately $0.2 million.
Stock-based compensation expense included in the condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 was as follows (in thousands):
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Stock options
|
|
$
|
229
|
|
|
$
|
93
|
|
|
$
|
667
|
|
|
$
|
951
|
|
Restricted stock awards
|
|
|
692
|
|
|
|
495
|
|
|
|
1,983
|
|
|
|
1,688
|
|
Total stock-based compensation expense
|
|
$
|
921
|
|
|
$
|
588
|
|
|
$
|
2,650
|
|
|
$
|
2,639
|
|
Stock Options—
The Company’s stock option activity for the nine months ended September 30, 2017 is summarized as follows:
|
|
Number of shares
of Class A
common stock
underlying options
|
|
|
Weighted
average
exercise price
|
|
Outstanding – December 31, 2016
|
|
|
1,305,365
|
|
|
$
|
15.70
|
|
Forfeited
|
|
|
(44,695
|
)
|
|
$
|
26.66
|
|
Outstanding –
September
30
, 2017
|
|
|
1,260,670
|
|
|
$
|
15.31
|
|
Exercisable –
September 30, 2017
|
|
|
937,043
|
|
|
$
|
15.87
|
|
Vested and expected to vest –
September
30
, 2017
|
|
|
1,235,670
|
|
|
$
|
15.20
|
|
10
Restricted Stock—
The Company’s restricted stock activity for the
nine
months ended
September
30
, 2017
is summarized as follows:
|
|
Number of shares
of Class A
common stock
underlying
restricted
stock awards
|
|
|
Weighted
average fair
value per share
|
|
Unvested – December 31, 2016
|
|
|
890,755
|
|
|
$
|
8.23
|
|
Granted (1)
|
|
|
46,942
|
|
|
$
|
6.81
|
|
Vested
|
|
|
(256,322
|
)
|
|
$
|
8.50
|
|
Forfeited
|
|
|
(15,740
|
)
|
|
$
|
4.90
|
|
Unvested –
September
30, 2017
|
|
|
665,635
|
|
|
$
|
9.05
|
|
(1)
|
Represents shares issued to the Company’s Board of Directors as compensation for service. These awards have a grant date fair value of $0.3 million and vest upon issuance.
|
9. Contract Termination Costs
Pursuant to the 2013 agreement under which the Company acquired the bulk of its memory and storage technologies portfolio, the Company shared a significant portion of the revenue generated from memory patents with the seller. On February 23, 2017, the seller agreed to relinquish its future revenue share in exchange for an up-front payment and future installment payments.
This agreement resulted in a one-time charge of $3.2 million to expense in the first quarter of 2017 and will significantly reduce the Company’s “Cost of revenues” on future memory patent revenue. The final installment payment associated with the termination comes due in 2018 and is reflected in “Accrued expenses.”
10. Gain on Contingency
During 2012, as part of the Company’s exit from the satellite business, the Company sold its partially completed medium earth orbit satellites, related equipment, and contracts. In February 2016, the final scheduled payment for those assets became payable, resulting in the recognition of a $2.0 million gain on contingency for the nine months ended September 30, 2016. The Company received the final scheduled payment in April 2016.
11. Income Taxes
For the three months ended September 30, 2017, the Company recorded a tax provision of $49,000 related to foreign taxes withheld on revenue generated from license agreements executed with third party licensees domiciled in a foreign jurisdiction. The Company had no foreign taxes withheld during the three and nine months ended September 30, 2016. 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 the Company’s ability to utilize the deduction or credit resulting from the foreign withholding, the Company established a full valuation allowance against the related deferred tax asset.
The Company anticipates it will not have a U.S. federal income tax liability in 2017. However, the Company recorded an income tax provision for the nine months ended September 30, 2017, in the amount of $0.6 million primarily because, as of the filing of this report, the Company believes it will be subject to the U.S. Personal Holding Company tax in 2017. As discussed in more detail below, the U.S. Personal Holding Company tax is assessed on undistributed personal holding company income (“UPHCI”) of a personal holding company (“PHC”). The Board may elect to distribute to shareholders all or a portion of the UPHCI before the end of the year to eliminate or reduce the tax obligation. Under U.S. tax law, any distribution to shareholders that reduces the Company’s UPHCI will be fully taxable as a dividend. If the Board elects to make the distribution, all or a portion of the income tax provision and related liability will be reversed.
11
Personal Holding Company
Determination
- The Internal R
evenue Code imposes an additional tax on undistributed income of a
PHC. In general, a corporation is 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 du
ring the second half of the 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. For
a corporate subsidiary, Concentrated Ownership is determined by reference to direct and indirect ownership, including through attribution to individual shareholders of the parent corporation(s), and the subsidiary’s income is subject to additional tests t
o determine whether its income renders the subsidiary a PHC. If a corporation is a PHC, generates positive net PHCI and does not distribute to its shareholders a proportionate dividend in the full amount of the net PHCI, then the undistributed net PHCI is
taxed (at 20% under current law).
Due to the significant number of shares held by the Company’s largest shareholders and the type of income that the Company generates, the Company must continually assess the Concentrated Ownership of Pendrell and its consolidated subsidiary ContentGuard. For 2017, Pendrell has met the Concentrated Ownership test. As of October 25, 2017, the Company believes ContentGuard has not met the Concentrated Ownership test for 2017 due to the 18.9% interest held by its minority shareholders. However, ContentGuard’s Ownership Concentration could change at any point during the remainder of the year. If ContentGuard becomes a PHC in 2017 and does not distribute to its shareholders a proportionate dividend in the full amount of its net PHCI, then the undistributed amount will be taxed at 20%.
12. Income (Loss) per Share
Basic income (loss) per share is calculated based on the weighted average number of Common Shares outstanding during the period. Diluted income (loss) per share is calculated by dividing the income (loss) allocable to common shareholders by the weighted average Common Shares outstanding plus potential dilutive Common Shares. Prior to the satisfaction of vesting conditions, unvested restricted stock awards are considered contingently issuable and are excluded from weighted average Common Shares outstanding used for computation of basic income (loss) per share.
Potential dilutive Common Shares consist of the incremental Class A Stock issuable upon the exercise of outstanding stock options (both vested and non-vested) and unvested restricted stock awards and units, calculated using the treasury stock method. The calculation of dilutive shares outstanding excludes out-of-the-money stock options (i.e., such options’ exercise prices were greater than the average market price of the Company’s Class A Stock for the period) because their inclusion would have been anti-dilutive.
The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except share and per share data):
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income (loss) attributable to Pendrell
|
|
$
|
1,713
|
|
|
$
|
(5,254
|
)
|
|
$
|
18,182
|
|
|
$
|
22,731
|
|
Weighted average common shares outstanding
|
|
|
24,653,939
|
|
|
|
26,838,073
|
|
|
|
25,266,581
|
|
|
|
26,817,736
|
|
Less: weighted average unvested restricted stock awards
|
|
|
(56,250
|
)
|
|
|
(59,620
|
)
|
|
|
(56,250
|
)
|
|
|
(72,899
|
)
|
Shares used for computation of basic income (loss) per
share
|
|
|
24,597,689
|
|
|
|
26,778,453
|
|
|
|
25,210,331
|
|
|
|
26,744,837
|
|
Add back: weighted average unvested restricted stock
awards and units
|
|
|
683,972
|
|
|
|
—
|
|
|
|
704,696
|
|
|
|
947,026
|
|
Shares used for computation of diluted income
(loss)
per share (1)
|
|
|
25,281,661
|
|
|
|
26,778,453
|
|
|
|
25,915,027
|
|
|
|
27,691,863
|
|
Basic income (loss) per share attributable to Pendrell
|
|
$
|
0.07
|
|
|
$
|
(
0.20
|
)
|
|
$
|
0.72
|
|
|
$
|
0.85
|
|
Diluted income (loss) per share attributable to Pendrell
|
|
$
|
0.07
|
|
|
$
|
(
0.20
|
)
|
|
$
|
0.70
|
|
|
$
|
0.82
|
|
(1)
|
Stock options totaling 1,260,670 for the three and nine months ended September 30, 2017, and 2,347,370 and 1,456,615 for the three and nine months ended September 30, 2016, respectively, were excluded from the calculation of diluted income (loss) per share as their inclusion was anti-dilutive.
|
12