Goodwill and Intangible Assets

12 Months Ended

Dec. 31, 2013

Notes to Financial Statements

5. Goodwill and Intangible Assets

Acquisition of North South

As disclosed in Note 1, on September 10, 2013, the Company completed its acquisition of North South.  The Company acquired North South to expand its patent portfolio and continue its business plan of the monetization of its intellectual property.  The Company accounted for its acquisition of North South using the acquisition method of accounting. Accordingly, the results of operations for the year ended December 31, 2013, include operations of the acquired business since September 10, 2013.

The fair value of the purchase consideration issued to the sellers of North South was allocated to fair value of the net tangible assets acquired, with the resulting excess allocated to separately identifiable intangibles, and the remainder recorded as goodwill.  Goodwill recognized from the transactions mainly represented the expected operational synergies upon acquisition of the subsidiary and intangibles not qualifying for separate recognition. Goodwill is nondeductible for income tax purposes in the tax jurisdiction of the acquired business.

The purchase price was allocated as follows (in thousands):

Purchase Consideration:
Value of common stock and convertible preferred stock issued to sellers	$	5,511
Tangible assets acquired:
Cash		2,662
Prepaid expenses		35
Net tangible assets acquired		2,697
Purchase consideration in excess of fair value of net tangible assets		2,814
Allocated to:
Patent portfolios		1,102
Goodwill		1,712
	$	-

The purchase price allocation was based, in part, on management’s knowledge of North South’s business and the results of a third party appraisal commissioned by management.

The following table presents the unaudited pro-forma financial results, as if the acquisition of North South had been completed as of January 1, 2012 and 2013 (in thousands, except per share amounts):

	For the Years Ended December 31,
	2013			2012
Revenues	$	121		$	20
Net loss		(18,259	)		(4,023	)
Loss per share - basic and diluted	$	(8.49	)	$	(2.72	)

The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2012 or to project potential operating results as of any future date or for any future periods.

Rockstar Patent Acquisition – July 2013

As disclosed in Note 1, on July 24, 2013, the Company purchased a group of patents in the mobile communication sector from Rockstar at a contractual price of $4.0 million. In consideration for the Purchased Patents, the Company paid an aggregate $3.0 million in consideration to Rockstar, which consisted of a $2.0 million cash payment and 176,991 shares of common stock accepted by the seller in settlement of the $1.0 million (at $5.65 per shares) remaining balance of the Company’s common stock. On the anniversary of one year and one day after the Company files its first complaint against a defendant with any one or more of the patents acquired in this transaction, the Company shall deliver $1.0 million to Rockstar. The initial complaint was filed on August 30, 2013, and at that time the additional $1.0 million was accrued and included in patent portfolio on the consolidated balance sheet. On January 3, 2014, the Company remitted the $1.0 million to Rockstar in satisfaction of this liability.

Rockstar Patent Acquisition – December 2013

As disclosed in Note 1, on December 31, 2013, the Company entered into its second agreement to acquire certain patents from Rockstar.  The Company acquired a suite of 101 patents and patent applications pursuant to a Patent Purchase Agreement in several technology families, including data, optical and voice technology.  The patents provide the Company with rights to develop and commercialize products as well as enforcement rights for past, present and future infringement.

Rockstar will also be entitled to receive a contingent recovery percentage of future profits (“Participation Payments”) from licensing, settlements and judgments against defendants; however no payment is required unless the Company receives a recovery. The Participation Payments are equal to zero percent until the Company recovers at least $8 million, then the next $13.0 million to Rockstar, and then up to 70% of the net amounts recovered in excess of $1 billion.  Of the above, the $13.0 million payable to Rockstar is required to be paid on or before the six month anniversary of the recovery, license or settlement of the first action to generate Participation Payments by Company.  The Company’s ability to fund these Participation Payments will depend on the liquidity of the Company’s assets, recoveries, alternative demands for cash resources and access to capital at the time.  The Company’s obligation to fund Participation Payments could adversely impact our liquidity and financial position.

Additionally, in the event the Company consummates a Fundamental Transaction (as defined in the Certificate of Designation of Preferences, Rights and Limitations of Series I Convertible Preferred Stock), within two trading days of the closing of the Fundamental Transaction the Company shall be required to redeem such portion of the outstanding shares of Series I Preferred Stock as shall equal (i) 50% of the net proceeds of the Fundamental Transaction after deduction of the amount of net proceeds required to leave the Company with cash and cash equivalents on hand of $5.0 million and up until the net proceeds leave the Company with cash and cash equivalents on hand of $7.5 million and (ii) 100% of the net proceeds of the Fundamental Transaction thereafter.

The Company’s only identifiable intangible assets are patents and patent rights, with estimated remaining economic useful lives ranging from 6 months to 12 years. For all periods presented, all of the Company’s identifiable intangible assets were subject to amortization. The gross carrying amounts and accumulated amortization related to acquired intangible assets as of December 31, 2013 and 2012 are as follows (in thousands, except year amounts): 

Date Acquired and Description	Amount Recorded		Weighted Average Life (in years)		Amortization Expense - Year Ended December 31, 2013		Patent Portfolio Net
7/24/13 - Rockstar patent portfolio	$	4,000		8.50	$	208	$	3,792
9/10/13 - North South patent portfolio		1,102		8.50		40		1,062
12/31/13 - Rockstar patent portfolio		60,000		6.50		19		59,981
	$	65,102			$	267	$	64,835

Amortization of the intangible assets for year ended December 31, 2013 was approximately $267,000. There was no amortization prior to July 24, 2013 as the first assets were placed into service on July 24, 2013.

The weighted average remaining amortization period of the Company’s patents is approximately 8.5 years. Future amortization of all patents is as follows (in thousands):

For the Years Ending	Rockstar Portfolio Acquired 24-Jul-13		North South Portfolio Acquired 10-Sep-13		Rockstar Portfolio Acquired 31-Dec-13		Total Amortization
December 31, 2014	$	470	$	130	$	9,225	$	9,825
December 31, 2015		470		130		9,225		9,825
December 31, 2016		471		130		9,250		9,851
December 31, 2017		470		130		9,225		9,825
December 31, 2018		470		130		9,225		9,825
Thereafter		1,442		416		13,826		15,684
Total	$	3,793	$	1,066	$	59,976	$	64,835