Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
PCO > SEC Filings for PCO > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for PENDRELL CORP

Form 10-Q for PENDRELL CORP


2-Nov-2012

Quarterly Report


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

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and accompanying notes included elsewhere in this quarterly report and the audited consolidated financial statements and notes included in our 2011 Form 10-K.

Special Note Regarding Forward-Looking Statements

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

Overview

We are an intellectual property ("IP") investment, advisory and asset management firm. We develop and implement strategies to create, acquire, commercialize, divest, license and sell intellectual property on behalf of our clients and partners, and for our own account. Our patent portfolio has grown to include more than 1,600 issued U.S. and foreign patents, covering digital rights management, wireless handset and infrastructure technologies, e-commerce, mobile applications, video delivery, security and other technologies. The vast majority of the inventions described in our patents were conceived either by our employees, or by global innovation leaders such as IBM, Philips and Xerox. Many of the inventions in our portfolio are incorporated into various standards, such as OMA, MPEG, WiFi, Bluetooth, LTE, CDMA, UMTS and others.

Our team of experienced IP professionals, including engineers and lawyers, is critical to our ability to identify and pursue IP investment opportunities and to monetize the assets in our portfolio. Our team includes seven holders of PhDs, fourteen engineers with electrical or mechanical engineering degrees, and eleven recipients of juris doctor degrees. A number of the members of our team are identified as inventors of issued patents, and six have been recognized as global leaders in the intellectual property asset management industry. Most of our employees have significant prior experience in communications and technology companies including AT&T, Clearwire, Intel, Microsoft, Qualcomm, Xerox, and Yahoo. We provide IP advisory services through our wholly-owned subsidiary, Ovidian Group LLC ("Ovidian"), which we acquired in June 2011. Through Ovidian, we advise some of the most respected technology companies in the world on a variety of IP-related advisory services, including IP valuation and investment analysis, IP landscape analysis, IP acquisitions and divestitures, and IP risk mitigation strategies. The Ovidian team is also actively engaged in the investigation and analysis of IP investment opportunities on our behalf, as well as the development and implementation of many aspects of our IP business strategies. The amount of consulting revenues generated by Ovidian varies quarter to quarter based on the nature and structure of fee agreements with clients as well as the amount of time the Ovidian team dedicates to supporting internal acquisition, licensing and sale efforts.

Our licensing efforts continue to expand, both through new engagements with prospective licensees in connection with our mobility licensing program, as well as through the development of new licensing programs aimed at making our IP available to new segments to which we believe our IP is applicable. Although we did not enter into any new licensing agreements in the third quarter, we signed a digital rights management technology collaboration agreement with Pantech Co., Ltd in early October that will result in fourth quarter revenue. In addition, we are actively engaged in negotiations with more than a dozen prospective licensees. Our experience has been that the average duration of licensing negotiations is twelve to twenty-four months. As a result, it is difficult to predict when these negotiations will come to fruition, if at all. This means that the amount and timing of our revenue will likely continue to be uneven from quarter to quarter. Nonetheless, our $25.5 million of revenue for the nine months ended September 30, 2012 is substantially higher than the $1.3 million generated during the same period in the prior year.

In addition to expansion of existing licensing programs and development of new licensing programs, we continue to invest considerable resources to evaluate new investment opportunities.

Finally, over the past 18 months, we addressed virtually all remaining vestiges of our legacy satellite communication business. We sold DBSD North America, Inc. and its subsidiaries (collectively referred to as "DBSD") to DISH Networks Corporation ("DISH Network"), we settled the litigation with The Boeing Company ("Boeing), we sold our residual satellite assets, and we wound down or divested most of our satellite communication subsidiaries. Our exit from the satellite business


Table of Contents

has generated approximately $2.7 billion in net operating losses ("NOLs") which, subject to Internal Revenue Service loss recognition provisions, we believe can be carried forward to offset taxable income for up to 20 years. We adopted a Tax Benefit Preservation Plan in 2010 designed to preserve the value of the NOLs for Pendrell and our stockholders.

Critical Accounting Policies

Critical accounting policies require difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The judgments and uncertainties affecting the application of these policies include significant estimates and assumptions made by us using information available at the time the estimates are made. Actual results could differ materially from those estimates. Our critical accounting policies involve judgments associated with our accounting for the fair value of financial instruments, asset impairment, valuation of goodwill and intangible assets, contract settlements, revenue recognition, stock-based compensation, income taxes, contingencies and business combinations. There have been no significant changes to our critical accounting policies disclosed in our 2011 Form 10-K other than those disclosed below.

Accounts Receivable-Accounts receivable consists of amounts billed to customers under licensing agreements or consulting services. The majority of our customers are well-established operating companies with investment-grade credit. For the periods ended September 30, 2012 and December 31, 2011, we have not incurred any losses on our accounts receivable. Based upon historical collections experience and specific client information, we have determined that no allowance for doubtful accounts was required at either September 30, 2012 or December 31, 2011. Carrying amounts of such receivables approximates their fair value due to their short-term nature.

Revenue Recognition-Since mid-2011, we have derived our operating revenue from IP licensing activities and fees earned from IP consulting services. Our patent licensing agreements typically provide for the payment of contractually determined license fees in consideration for the grant of a non-exclusive license to intellectual property rights that we own or control. These agreements typically include (i) a non-exclusive license to make, sell, distribute, and use certain specified products that read on our patents ("Licensed Activities"),
(ii) a covenant not to enforce patent rights against the licensee based on the Licensed Activities, and (iii) the release of the licensee from certain claims.

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

The timing and amount of revenue recognized from patent licensing activities depends on the specific terms of each agreement and the nature of the deliverables and obligations. Agreements that are deemed to contain multiple elements are accounted for under the Financial Accounting Standards Board ("FASB") revenue recognition guidance, "Revenue Arrangements with Multiple Deliverables." This guidance requires consideration to be allocated to each element of an agreement that has stand-alone value using the relative fair value method. We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) all material obligations have been substantially performed pursuant to agreement terms or services have been rendered to the customer, (iii) amounts are fixed or determinable, and (iv) collectability is reasonably assured. As a result of the contractual terms of our patent license agreements and the unpredictable nature and frequency of licensing transactions, our revenue may fluctuate substantially from period to period.

New Accounting Pronouncements

In May 2011, the FASB issued Update No. 2011-05, Comprehensive Income ("Update No. 2011-05"). Update No. 2011-05 requires in the presentation on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. Update No. 2011-05 is to be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. In December 2011, the FASB issued an amendment to the accounting guidance on the presentation of other comprehensive income which deferred the effective date for the provisions pertaining to reclassification adjustments. The adoption of this statement during the nine months ended September 30, 2012, did not have a material impact on our financial position, results of operations or cash flows.

In July 2012, the FASB issued Update No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment ("Update No. 2012-02") which allows entities to first use a qualitative approach to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. Update 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this statement during the nine months ended September 30, 2012, did not have a material impact on our financial position, results of operations or cash flows.


Table of Contents

Results of Operations

Prior to our transformation into a fully-integrated intellectual property investment and advisory firm, initiated by the acquisition of Ovidian in June 2011 and further supported by the acquisition of ContentGuard in October 2011, we were a development stage next-generation mobile satellite service operator. In March 2011, we began the divesture of our domestic and international satellite related assets by selling our interests in DBSD to DISH Network for approximately $325 million, and continued our exit from the satellite business with the 2012 sale of our remaining satellite assets.

The following table is provided to facilitate the discussion of our results of operations for the three and nine months ended September 30, 2012 and 2011 (in thousands):

                                                 Three months ended            Nine months ended
                                                   September 30,                 September 30,
                                                 2012           2011          2012          2011
Revenue                                       $    1,023       $ 1,083      $ 25,515      $   1,278
General and administrative expenses               10,237         8,464        32,081         17,657
Gain associated with contract settlements             -             -             -           4,735
Amortization of intangibles                        3,589           132         9,882            132
Interest income                                       58            51           178            107
Interest expense                                      -          1,185         2,483          3,424
Gain on deconsolidation of subsidiaries               -             -         48,685             -
Gain on settlement of Boeing litigation               -             -         10,000             -
Gain (loss) associated with disposition of
assets                                                (4 )          -          5,599        300,886
Other income                                         220           328         1,584          2,131
Income tax benefit                                    -            140         1,004          2,872

Revenue. Revenue of $1.0 million and $25.5 million for the three and nine months ended September 30, 2012, respectively, was entirely comprised of revenues from our IP business which we entered into in June of 2011.

Revenue of $1.1 million and $1.3 million for the three and nine months ended September 30, 2011, respectively, was due to the acquisition of Ovidian on June 17, 2011. Prior to the acquisition of Ovidian, we were a development stage enterprise and did not generate any revenue from operations.

General and Administrative Expenses. General and administrative expenses are primarily comprised of personnel costs, stock-based compensation, legal and professional fees, acquisition investigation costs and general office related costs. Expenses in 2011 also included costs associated with satellite storage and satellite system operating expenses.

General and administrative expenses increased $1.8 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The increase was primarily due to (i) a $1.4 million increase in personnel related costs as a result of the acquisition of ContentGuard in the fourth quarter of 2011 as well as additional executives added to the Pendrell team in 2012, (ii) an increase of $0.7 million in non-cash stock-based compensation expense, which includes incremental expense of $0.2 million due to the August 2012 modification of restricted stock which added alternative vesting criteria to 3,175,000 shares previously outstanding (the "Modification"), and (iii) a $1.9 million increase in legal fees primarily due to patent maintenance and enforcement activities. These increases were partially offset by a $2.1 million decrease in expenses related to the medium earth orbit satellites and related equipment (collectively, "MEO Assets") that were sold during the three months ended March 31, 2012 and, which in 2011, included the establishment of a reserve against a previously recorded receivable from Jay and Jayendra Pty Ltd (the "J&J Group") for reimbursement of operation and maintenance costs incurred from and after January 14, 2011 through September 30, 2011.

General and administrative expenses increased $14.4 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The increase was primarily due to (i) a $7.5 million increase in personnel related costs as a result of the acquisition of Ovidian and ContentGuard in 2011 as well as additional executives added to the Pendrell team in 2012, (ii) an increase of $1.5 million in non-cash stock-based compensation expense, which included incremental expense of $0.2 million due to the Modification, (iii) a $5.3 million increase in legal fees primarily due to patent maintenance and enforcement activities, and (iv) $1.5 million of amortized prepaid compensation expense associated with the acquisition of Ovidian. These increases were partially offset by a $1.2 million decrease in expenses related to the MEO Assets which included the establishment of a reserve against a previously recorded receivable from the J&J Group.

Contract Settlements. During the nine months ended September 30, 2011, we recognized a $4.7 million gain associated with a reduction of our estimated liability for gateway obligations as a result of our agreement to purchase Deutsche Telekom AG's claim against one of our subsidiaries.


Table of Contents

Amortization of Intangible Assets. Amortization of intangible assets of $3.6 million and $9.9 million for the three and nine months ended September 30, 2012, respectively, was primarily related to the amortization of intangibles acquired in the acquisition of Ovidian in June 2011 and ContentGuard in October 2011, as well as additional intangibles acquired during the nine months ended September 30, 2012.

Interest Expense. Interest expense for the nine months ended September 30, 2012 and for the three and nine months ended September 30, 2011 consisted primarily of interest costs resulting from capital lease obligations associated with certain of our medium earth orbit ("MEO") gateway sites prior to their deconsolidation as a result of the transfer of certain of our MEO-related international subsidiaries (the "International Subsidiaries") to a liquidating trust (the "Trust") on June 29, 2012.

Gain on Deconsolidation of Subsidiaries. During the nine months ended September 30, 2012, we transferred our International Subsidiaries to the Trust and recognized a gain of $48.7 million on deconsolidation as a result of eliminating $61.9 million of liabilities associated with the International Subsidiaries, including liabilities for uncertain tax positions, net of cumulative translation adjustment losses of $12.7 million related to the International Subsidiaries.

Gain on Settlement of Boeing Litigation. On June 25, 2012, we settled our litigation against Boeing in exchange for $10.0 million, which we have reflected as a gain on litigation settlement for the nine months ended September 30, 2012.

Gain Associated with Disposition of Assets. During the nine months ended September 30, 2012, we recognized a $5.6 million gain associated with the disposition of real property and MEO satellite related gateway equipment we owned in Brazil. During the nine months ended September 30, 2011, we recognized a $300.9 million gain associated with the disposition of our cost method investment in DBSD and certain other assets pursuant to the various agreements entered into with DISH Network.

Other Income. Other income for the three months ended September 30, 2012, was primarily due to gains on foreign currency transactions. Other income for the nine months ended September 30, 2012 was due to the release of a $0.8 million liability associated with our prior ownership of the MEO Assets (sold during the three months ended March 31, 2012) and gains on foreign currency transactions.

Other income for the three months ended September 30, 2011 was comprised primarily of $0.3 million in gains on foreign currency transactions. Other income for the nine months ended September 30, 2011 was comprised primarily of a $1.2 million gain recognized upon elimination of our payable to an affiliate and gains on foreign currency transactions of $0.9 million.

Income Tax Benefit. Income tax benefit for the nine months ended September 30, 2012 and the nine months ended September 30 2012 was primarily due to expiration of the statute of limitations associated with previously recorded uncertain tax positions, including interest and penalties.

Income tax benefit for the three months ended September 30, 2011 was primarily due the utilization of foreign NOL's to receive refunds of previous foreign taxes.

Liquidity and Capital Resources

Overview. As of September 30, 2012, we had cash liquidity of $215.0 million. These funds are currently expected to be utilized to fund our working capital needs for at least the next twelve months including ongoing operating costs associated with our IP business, potential acquisitions, expenses in connection with legal proceedings, costs associated with the pursuit of new investment and acquisition opportunities, and other general corporate purposes.

On March 15, 2011, we entered into an implementation agreement under which DISH Network paid us $325.0 million for our support of DBSD's plan of reorganization which provided for the stock of DBSD to be transferred to DISH Network, certain spectrum priority rights, any distributions to us from DBSD, and a contingent option to purchase the MEO Assets of which (i) $35.0 million was paid in March 2011, (ii) $280.0 million was paid in April 2011, and (iii) $10.0 million was paid upon DBSD's emergence from Chapter 11 bankruptcy proceeding on March 9, 2012. We recognized a gain of approximately $300.9 million during the three months ended March 31, 2011, associated with the disposition of our cost method investment in DBSD and other assets as a result of these agreements.


Table of Contents

Cash Flows. The following table is provided to facilitate the discussion of our liquidity and capital resources for the nine months ended September 30, 2012 and 2011 (in thousands):

                                                             Nine months ended
                                                               September 30,
                                                            2012           2011
   Net cash provided by (used in):
   Operating activities                                   $  (2,898 )    $ (12,029 )
   Investing activities                                     (13,725 )      308,865
   Financing activities                                         520             55
   Effect of foreign exchange rate changes on cash              725            616

   Net increase (decrease) in cash and cash equivalents     (15,378 )      297,507
   Cash and cash equivalents - beginning of period          230,377         20,771

   Cash and cash equivalents - end of period              $ 214,999      $ 318,278

Cash and cash equivalents were $215.0 million at September 30, 2012 compared to $230.4 million at December 31, 2011. This decrease was primarily due to various new investment activities and other general corporate expenditures, partially offset by the receipt of funds from DISH Network and from the settlement of our litigation with Boeing, and the sale of real property in Brazil.

For the nine months ended September 30, 2012, the $2.9 million of cash used in operating activities consisted primarily of net income of $48.1 million adjusted for various non-cash items, including (i) the gain on the deconsolidation of subsidiaries of $48.7 million, (ii) the reclassification of the $5.6 million gain on the sale of our real property in Brazil to investing activities,
(iii) $9.9 million of amortization expense associated with patents and other intangibles, (iv) $4.8 million of stock-based compensation expense, and (v) $2.3 million of amortized prepaid compensation expense associated with the acquisition of Ovidian. Net income was further adjusted by changes in assets and liabilities, including (i) an increase of $9.6 million in accounts receivable,
(ii) a $6.1 million decrease in other accrued expenses, (iii) a $1.7 million increase in accrued interest payable, and (iv) a $0.7 million increase in accounts payable.

For the nine months ended September 30, 2011, cash used in operating activities consisted primarily of our net income of $290.8 million adjusted for various non-cash items including: (i) a $300.9 million gain associated with the disposition of certain assets to DISH Network; (ii) a $4.7 million reduction of a Gateway obligation; (iii) stock-based compensation expense of $3.4 million;
(iv) a $2.8 million increase in accrued interest payable; (v) $1.2 million gain recognized upon elimination of our payable to an affiliate; (vi) a $1.0 million net decrease in income taxes payable, accounts payable and other accrued expenses; (vii) a $1.0 million increase in prepaid expenses and other current/non-current assets; (viii) unrealized foreign exchange gains of $0.9 million; and (ix) $0.8 million of amortized prepaid compensation expense associated with the Ovidian acquisition.

For the nine months ended September 30, 2012, the $13.7 million of cash used by investing activities was primarily due to the acquisition of various assets, partially offset by cash received from DISH Network and from the sale of real property in Brazil. For the nine months ended September 30, 2011, cash provided by investing activities consisted primarily of approximately $315.0 million from DISH Network pursuant to the Implementation Agreement, partially offset by a $5.9 million cash outflow for the acquisition of Ovidian, net of cash acquired.

For the nine months ended September 30, 2012 and 2011, cash provided by financing activities consisted of proceeds from the exercise of stock options, partially offset by the payment of withholding taxes upon vesting of restricted stock awards.


Table of Contents

Contractual Obligations. Our primary contractual obligations relate to operating lease agreements for our office locations in Kirkland, Washington, El Segundo, California and Berkeley, California. Our contractual obligations as of September 30, 2012 were as follows (in millions):

                                                   Years ending December 31,
                                                                                      2017 and
                               Total      2012       2013-2014       2015-2016       Thereafter
 Operating lease obligations   $  3.8     $ 0.1     $       1.5     $       1.1     $        1.1

As of June 29, 2012, we no longer have obligations related to (i) gateway operators, (ii) capital leases or (iii) uncertain tax positions for income taxes, interest and penalties, as these liabilities were all related to our International Subsidiaries that were deconsolidated on June 29, 2012.

Risks and Uncertainties

Certain risks and uncertainties that could materially affect our future results of operations or liquidity are discussed under "Part II-Other Information, Item 1A. Risk Factors" in this quarterly report and in our 2011 Form 10-K.

Inflation

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

  Add PCO to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for PCO - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.