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
17
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 Sam
sung, 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 underpi
nning 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 dat
es 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.
18
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.
19
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 requir
ed 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.
20
If we a
re 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:
|
·
|
restrictions on the nature of our investments, and
|
|
·
|
restrictions on the issuance of securities each of which may make it difficult for us to run our business.
|
In addition, the law may impose upon us burdensome requirements, including:
|
·
|
registration as an investment company;
|
|
·
|
adoption of a specific form of corporate structure; and
|
|
·
|
reporting, record keeping, voting, proxy and disclosure requirements and other rules and regulations.
|
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:
|
·
|
may significantly dilute your equity interests;
|
|
·
|
may subordinate the rights of holders of shares of our common stock if shares of preferred stock are issued with rights senior to those afforded our common stock;
|
|
·
|
could cause a change in control if a substantial number of shares of our common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards and could result in the resignation or removal of our present officers and directors; and
|
|
·
|
may adversely affect prevailing market prices for our common stock.
|
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
21
unfamiliar with the requirements of operating a company regulated by the SEC, wh
ich 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.
22
Our executive officers, directors, security holders and their respective affiliates may have competitive pe
cuniary 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:
|
·
|
default and foreclosure on our assets if our operating revenues after an initial business combination are insufficient to repay our debt obligations;
|
|
·
|
acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach covenants that require the maintenance of financial ratios or reserves without a waiver or renegotiation of that covenant;
|
|
·
|
our immediate payment of all principal and accrued interest, if any, if the debt security is payable on demand;
|
|
·
|
our inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing while the debt security is outstanding;
|
|
·
|
our inability to pay dividends on our common stock;
|
|
·
|
using a substantial portion of our cash flow to pay principal and interest on our debt, which will reduce the funds available for dividends on our common stock if declared, expenses, capital expenditures, acquisitions and other general corporate purposes;
|
|
·
|
limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate;
|
|
·
|
increased vulnerability to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation; and
|
|
·
|
limitations on our ability to borrow additional amounts for expenses, capital expenditures, acquisitions, debt service requirements, execution of our strategy and other purposes and other disadvantages compared to our competitors who have less debt.
|
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
23
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.