UnifiedOnline, Inc. Patent Lawsuit May Negatively Impact Arris Stock Price

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About: ARRIS International plc (ARRS), Includes: ATUS, CABO, CGECF, CHTR, CMCSA, UOIP
by: Anthony Cataldo
Summary

Arris customers seek indemnification in ChanBond v. MSOs, C.A. 15-cv-00848, et al, District of Delaware [RGA].

Arris market capitalization, at $5.1 billion, could be significantly and negatively impacted in the ChanBond case.

Who are the Arris “customers” seeking indemnification – you will note some familiar names.

If you are long or holding Arris, I recommend that you set a news alert for both ARRS and UOIP ticker symbols.

Should the case continue to progress against Arris, you might want to take “insurance” or buy some puts against your long Arris position.

The Relevance of a Footnote Disclosure in the Arris Financials

ARRIS International PLC (ARRS) makes reference to the patent infringement case in their financial statement footnotes. As of April 18, 2018, ARRIS had a market capitalization of more than$5 billion. The below snip is from page 36 of the ARRIS Form 10-K filed for December 31, 2017:

Under U.S. GAAP [see below], this means

[1] The probability of a negative outcome for Arris is reasonably possible, but the amount cannot be estimated,

[2] The probability of a negative outcome for Arris is reasonably possible, and the amount can be estimated, or

[3] The probability of a negative outcome for Arris is probable, but the amount cannot be estimated.

Merely Google contingent liability and footnote disclosure under U.S. GAAP to understand why the above disclosures were required for Arris:

Would the Impact to Arris be Significant or Material Enough to Impact the Stock?

Arris data from Seeking Alpha is provided in the below, 1 year chart:

With a $5.1 billion market capitalization, a $0.5 billion to $3 billion judgment against their customers, seeking indemnification, could have a significant or material and negative impact on the firm's stock price. [This is the range anticipated by those on the IHUB board for UnifiedOnline, Inc. (OTC:UOIP)]. It is, for this reason, that Arris disclosed the case in the footnotes to their financial statements. Recall, from the footnotes to the financials:

A List of the "Customers" Seeking Indemnification from Arris

A list of the 13 customers that may have sought indemnification from Arris follows. It is important to note that Arris is not "directly" involved or named in the ChanBond suit.

This is the "you sue me and I sue you" game that requires a conversation with an attorney to understand, but will make sense after you give careful though to the key word: "indemnification." Remember, if there was no significant or material risk, this matter would not have been disclosed in the footnotes to the Arris financial statements.

(1) WaveDivision Holdings, LLC., a private company,

(2) Comcast Corporation (CMCSA) et al,

(3) Charter Communications, Inc. (CHTR),

(4) WideOpen West Finance, LLC., a private company,

(5) Cequel Communications, LLC., a private company,

(6) RCN Telecom Services ,LLC., a private company,

(7) Cox Communications, Inc.et al, a private company,

(8) Time Warner Cable Inc. et al [see CHTR, above],

(9) Mediacom Communications Corporation, a private company,

(10) Bright House Networks, LLC. [see CHTR, above],

(11) Cablevision Systems Corporation et al,

Acquired by Altice USA Inc. (ATUS).

(12) Cable One, Inc. (CABO), and

(13) Atlantic Broadband Group, LLC (OTC:CGECF).

Summary

I like the risk/reward for UOIP, but do not like the risk reward for ARRS. This is just my humble opinion, but these patent lawsuits are scary and if Arris fails, they will have to "book" a potentially massive judgment in their income statement and balance sheet. They can, of course, appeal.

Disclosure: I am/we are long UOIP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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