Goodwill and Intangible Assets

12 Months Ended

Dec. 31, 2014

Notes to Financial Statements

5. Goodwill and Intangible Assets

Acquisition of North South

On December 27, 2012, the Company formed a new wholly-owned subsidiary, Nuta, which is incorporated in the state of Virginia. On April 2, 2013, the Company entered into an Agreement and Plan of Merger, as amended (the "Merger Agreement") with its wholly owned subsidiary, Nuta, North South Holdings, Inc., a Delaware corporation ("North South"), the owner or assignee of certain patents, licenses and applications (the “North South Intellectual Property”), and the shareholders of North South (the "North South Shareholders"). On September 10, 2013 the transaction contemplated under the Merger Agreement was completed (the “Merger”). At closing, North South merged with and into Nuta with Nuta as the surviving corporation. Nuta will continue its operations in the State of Virginia as the record owner of the North South’s intellectual property. Pursuant to the terms and conditions of the Merger, at the closing of the Merger, all of North South’s 5,213 issued and outstanding shares of common stock were converted into an aggregate of 1,203,153 shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”), and all of North South’s 491 issued and outstanding shares of Series A Preferred Stock and 107 issued and outstanding shares of Series B Preferred Stock were converted into an aggregate of 1,379,685 shares of the Company's Series D Convertible Preferred Stock, par value $0.0001 per share, which is convertible into shares of the Company’s common stock on a one-for-ten basis (collectively with the 1,203,153 common shares of the Company, the “Merger Consideration”). The Company acquired North South to expand its patent portfolio and continue its business plan of the monetization of its intellectual property.

The closing of the Merger was subject to customary closing conditions, including the receipt of a fairness opinion that the Merger Consideration is fair to stockholders and the Company from a financial point of view, based on, among other things, the North South Intellectual Property assets, and the approval of the Company’s shareholders holding a majority of the outstanding voting capital stock of the Company as of the record date (July 10, 2013) to issue the Merger Consideration pursuant to NASDAQ listing standards.

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, 2013 (in thousands, except per share amounts):

	For the Year Ended December 31, 2013
Revenues	$	121
Net loss		(18,259	)
Loss per share - basic and diluted	$	(8.49	)

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, 2013 or to project potential operating results as of any future date or for any future periods.

Rockstar Patent Acquisition – July 2013

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 pursuant to a patent purchase agreement (the “First Patent Purchase Agreement”). 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 the Company’s common stock paid to Rockstar at the closing of the First Patent Purchase Agreement valued at $1.0 million, or $5.65 per share. Pursuant to the First Patent Purchase Agreement, 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 the First Patent Purchase Agreement, the Company was required to deliver to Rockstar an additional $1.0 million. 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 $1.0 million to Rockstar in satisfaction of this liability.

Rockstar will also be entitled to receive a contingent recovery percentage of future profits (“Participation Payments”) from licensing, settlements and judgments against defendants with respect to patents purchased under the First Patent Purchase Agreement; however, no payment is required unless the Company receives a recovery. The Participation Payments under the First Patent Purchase Agreement are equal to zero percent until the Company recovers with respect to patents purchased under the First Patent Purchase Agreement at least (a) $8.0 million or (b) if the Company recovers less than $17.0 million, an amount equal to $5.0 million plus $3.0 million times a fraction equal to total recoveries minus $10.0 million, divided by $7.0 million (clause (a) or (b), as applicable, being the “Initial Return”), in each case net of certain expenses.  Once the Company obtains recoveries in excess of its Initial Return, it is required to make a payment to Rockstar of $13.0 million, payable only from the proceeds of such recovery, within six months after such recovery. In addition, no later than 30 days after the end of each quarter in which the Company makes such a recovery, the Company would be required to pay to Rockstar a percentage of such recovery, net of certain expenses, scaling from 30% if such cumulative recoveries net of certain expenses are less than or equal to $50.0 million, to 70% to the extent cumulative recoveries net of certain expenses are in excess of $1.0 billion.  The Company’s ability to fund these Participation Payments or the $13.0 million contingent payment 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 its liquidity and financial position.

Rockstar Patent Acquisition – December 2013

On December 31, 2013, the Company entered into its second agreement to acquire certain patents from Rockstar (the “Second Patent Purchase Agreement”).  The Company acquired a suite of 101 patents and patent applications pursuant to the Second 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.  In consideration of these patents, the Company paid Rockstar 199,990 shares of its common stock, 459,043 shares of its Series H Preferred Stock and 119,760 shares of its Series I Preferred Stock for aggregate consideration of $60.0 million.

Rockstar will also be entitled to receive Participation Payments from licensing, settlements and judgments against defendants with respect to patents purchased under the Second Patent Purchase Agreement; however, no payment is required unless the Company receives a recovery. The Participation Payments under the Second Patent Purchase Agreement are equal to zero percent until the Company recovers with respect to patents purchased under the Second Patent Purchase Agreement at least $120.0 million, net of certain expenses.  Once the Company obtains recoveries in excess of that amount, the Company would be required to pay to Rockstar 50% of its recovery in excess of that amount, no later than 30 days after the end of each quarter in which the Company makes such a recovery.  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 intangible assets with finite lives consist of its patents and patent rights, with estimated remaining economic useful lives ranging from six 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, 2014 are as follows (in thousands, except year amounts):

	Rockstar Patent Portfolio Acquired		North South Patent Portfolio Acquired		Rockstar Patent Portfolio Acquired
	24-Jul-13		10-Sep-13		31-Dec-13		Total Amount
Initial Patent Cost	$	4,000	$	1,102	$	60,000	$	65,102
Amortization expense for the year ended December 31, 2013		208		40		19		267
Patent Portfolios at December 31, 2013, Net		3,792		1,062		59,981		64,835
Amortization expense for the year ended December 31, 2014		470		130		9,231		9,831
Patent Portfolios at December 31, 2014, Net	$	3,322	$	932	$	50,750	$	55,004

The Company incurred amortization expense associated with its finite-lived intangible assets of $9.83 million and $0.27 million for the years ended December 31, 2014 and December 31, 2013, respectively. 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 as of December 31, 2014 is approximately 5.6 years. Future amortization of all patents is as follows (in thousands):

	Rockstar		North South		Rockstar
	Portfolio		Portfolio		Portfolio
	Acquired		Acquired		Acquired		Total
	24-Jul-13		10-Sep-13		31-Dec-13		Amortization
Year Ended December 31, 2015		470		130		9,225		9,825
Year Ended December 31, 2016		471		130		9,250		9,851
Year Ended December 31, 2017		470		130		9,225		9,825
Year Ended December 31, 2018		470		130		9,225		9,825
Year Ended December 31, 2019		470		130		9,225		9,825
Thereafter		971		282		4,600		5,853
Total	$	3,322	$	932	$	50,750	$	55,004