NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except for share and per share data)
Note 1. General
Vringo, Inc., together with its consolidated subsidiaries (the “Company”), is engaged in the development and monetization of intellectual property worldwide. The Company's intellectual property portfolio consists of over 500 patents and patent applications covering telecom infrastructure, internet search and mobile technologies. The Company’s patents and patent applications have been developed internally and acquired from third parties. The Company operates a global platform for the distribution of mobile social applications and services it develops.
On July 19, 2012, Vringo, Inc., a Delaware corporation (“Vringo” or “Legal Parent”), closed a merger transaction (the “Merger”) with Innovate/Protect, Inc., a privately held Delaware corporation (“I/P”), pursuant to an Agreement and Plan of Merger, dated as of March 13, 2012 (the “Merger Agreement”), by and among Vringo, I/P and VIP Merger Sub, Inc., a wholly-owned subsidiary of Vringo (“Merger Sub”). Pursuant to the Merger Agreement, I/P became a wholly-owned subsidiary of Vringo through a merger of I/P with and into Merger Sub, and the former stockholders of I/P received shares of Vringo that constituted a majority of the outstanding shares of Vringo.
Immediately following the Merger, approximately
67.61
% of the combined company was owned by I/P stockholders on a fully diluted basis, and as a result of this and other factors, I/P was deemed to be the acquiring company for accounting purposes and the transaction was accounted for as a reverse acquisition in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Accordingly, the Company’s financial statements for periods prior to the M
erger reflect the historical results of I/P
, and the Company’s financial statements for all periods from July 19, 2012 reflect the results of the combined company. Unless specifically noted otherwise, as used throughout these consolidated financial statements, the term “Company” refers to the combined company after the Merger, and the business of I/P before the Merger. The terms I/P and Vringo or Legal Parent refer to such entities’ standalone businesses prior to the Merger.
Note 2. Significant Accounting and Reporting Policies
(a) Basis of presentation
The accompanying consolidated financial statements include the accounts of the Legal Parent, I/P and their wholly-owned subsidiaries, and are presented in accordance with instructions to Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. These financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2012 included in the Company's Annual Report on Form 10-K. The results of operations for the three and nine month periods ended September 30, 2013 are not necessarily indicative of the results that may be expected for the entire fiscal year or for any other interim period. All significant intercompany balances and transactions have been eliminated in consolidation.
(b) Development stage enterprise
The Company’s principal activities to date have been focused on development and enforcement of its intellectual property, and on the research and development of its products. To date, the Company has not generated significant revenues from its principal operations. Accordingly, the Company’s financial statements are presented as those of a development stage enterprise.
(c) Translation into U.S. dollars
The Company conducts significant transactions in foreign currencies, which are recorded at the exchange rate as of the transaction date. All exchange gains and losses from remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected as non-operating income or expense in the statement of operations, as they arise.
(d) Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results may differ from such estimates. Significant items subject to such estimates and assumptions include valuation of assets acquired and liabilities assumed as part of the Merger, useful lives of the Company’s tangible and intangible assets, valuation of its October 2012 Warrants and derivative warrants, valuation of stock-based compensation, deferred tax assets and liabilities, income tax uncertainties and other contingencies.
(e) Cash and cash equivalents
The Company invests its cash in commercial paper, money market deposits and money market funds with financial institutions. The Company has established guidelines relating to diversification and maturities of its investments, in order to minimize credit risk and maintain high liquidity of funds. All highly liquid investments with original maturities of three months or less are considered cash equivalents.
(f) Revenue recognition
Revenue from patent licensing and enforcement, subscription services and software development is recognized if collection is probable, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and delivery of the service has been rendered. The Company uses management's best estimate of selling price for individual elements in multiple-element arrangements, where other sources of evidence are unavailable.
(g) Cost of revenue
Cost of revenue mainly includes expenses incurred in connection with the Company’s patent enforcement activities, such as legal fees, consulting costs, patent maintenance and other related expenses, as well as the amortization of acquired patents and technology. Legal costs incurred in connection with ongoing litigation are expensed as incurred. Cost of revenue also includes expenses directly related to providing mobile services in launched markets. In addition, these costs include royalty fees for content sales and amortization of prepaid content licenses. Cost of revenue does not include expenses related to product development, integration or support, as these are included in research and development expenses.
(h) Net loss per share data
Basic net loss per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock plus dilutive potential common stock considered outstanding during the period. Such dilutive shares consist of incremental shares that would be issued upon exercise of the Company’s derivative warrants. The table below presents the computation of basic and diluted net losses per common share for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from Inception
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
to September 30,
|
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
2013
|
|
|
Basic Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to shares of common stock
|
|
$
|
(10,560)
|
|
$
|
(3,124)
|
|
$
|
(33,464)
|
|
$
|
(6,836)
|
|
$
|
(57,059)
|
|
|
Basic Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock outstanding during the period
|
|
|
83,450,697
|
|
|
48,437,587
|
|
|
82,757,899
|
|
|
25,493,415
|
|
|
46,229,656
|
|
|
Weighted average number of penny stock options
|
|
|
88,070
|
|
|
353,232
|
|
|
124,506
|
|
|
117,744
|
|
|
109,930
|
|
|
Basic common stock shares outstanding
|
|
|
83,538,767
|
|
|
48,790,819
|
|
|
82,882,405
|
|
|
25,611,159
|
|
|
46,339,586
|
|
|
Basic net loss per common stock share
|
|
$
|
(0.13)
|
|
$
|
(0.06)
|
|
$
|
(0.40)
|
|
$
|
(0.27)
|
|
$
|
(1.23)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to shares of common stock
|
|
$
|
(10,560)
|
|
$
|
(3,124)
|
|
$
|
(33,464)
|
|
$
|
(6,836)
|
|
$
|
(57,059)
|
|
|
Increase in net loss attributable to derivative warrants
|
|
|
(758)
|
|
$
|
(7,240)
|
|
$
|
(53)
|
|
$
|
(7,240)
|
|
$
|
(3,387)
|
|
|
Diluted net loss attributable to shares of common stock:
|
|
$
|
(11,318)
|
|
$
|
(10,364)
|
|
$
|
(33,517)
|
|
$
|
(14,076)
|
|
$
|
(60,446)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic common shares outstanding
|
|
|
83,538,767
|
|
|
48,790,819
|
|
|
82,882,405
|
|
|
25,611,159
|
|
|
46,339,586
|
|
|
Weighted average number of derivative warrants outstanding during the period
|
|
|
2,563,090
|
|
|
9,436,281
|
|
|
89,677
|
|
|
9,436,281
|
|
|
1,460,477
|
|
|
Diluted common stock shares outstanding
|
|
|
86,101,857
|
|
|
58,227,100
|
|
|
82,972,082
|
|
|
35,047,440
|
|
|
47,800,063
|
|
|
Diluted net loss per common stock share
|
|
$
|
(0.13)
|
|
$
|
(0.18)
|
|
$
|
(0.40)
|
|
$
|
(0.40)
|
|
$
|
(1.26)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net loss per share data presented excludes from the calculation of diluted net loss the following potentially dilutive securities, as of September 30 of the applicable period, as they had an anti-dilutive impact:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Both vested and unvested options at $0.96-$5.50 exercise price, to purchase an equal number of shares of common stock of the Company
|
|
|
10,225,387
|
|
|
9,160,429
|
|
|
10,225,387
|
|
|
9,160,429
|
|
|
10,225,387
|
|
|
Unvested penny options to purchase an equal number of shares of common stock of the Company
|
|
|
—
|
|
|
30,250
|
|
|
—
|
|
|
30,250
|
|
|
—
|
|
|
Unvested RSUs to issue an equal number of shares of common stock of the Company
|
|
|
2,411,771
|
|
|
3,126,667
|
|
|
2,411,771
|
|
|
3,126,667
|
|
|
2,411,771
|
|
|
Common stock shares granted, but not yet vested
|
|
|
45,762
|
|
|
108,625
|
|
|
45,762
|
|
|
108,625
|
|
|
45,762
|
|
|
Warrants to purchase an equal number of shares of common stock of the Company
|
|
|
15,829,262
|
|
|
12,814,533
|
|
|
18,289,611
|
|
|
12,814,533
|
|
|
15,115,357
|
|
|
Total number of potentially dilutive instruments, excluded from the calculation of net loss per share:
|
|
|
28,512,182
|
|
|
25,240,504
|
|
|
30,972,531
|
|
|
25,240,504
|
|
|
27,798,277
|
|
Note 3. Intangible Assets
|
|
|
As of September 30,
2013
|
|
As of December 31,
2012
|
|
Weighted average
amortization period (years)
|
|
|
Acquired technology (see Note 5)
|
|
$
|
10,133
|
|
$
|
10,133
|
|
6.0
|
|
|
Patents
|
|
|
26,794
|
|
|
26,694
|
|
8.5
|
|
|
Total
|
|
|
36,927
|
|
|
36,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated amortization
|
|
|
(6,567)
|
|
|
(2,783)
|
|
|
|
|
|
|
$
|
30,360
|
|
$
|
34,044
|
|
|
|
In June 2011, prior to the Merger, the Company’s subsidiary acquired patents from Lycos, Inc. The gross carrying amount of those patents is comprised of the original purchase price of $
3,200
and $
196
of associated patent acquisition costs.
In August 2012, the Company purchased from Nokia Corporation a portfolio consisting of various patents and patent applications. The portfolio encompasses a broad range of technologies relating to telecom infrastructure, including communication management, data and signal transmission, mobility management, radio resources management and services. The total consideration paid for the portfolio was $
22,000
. In addition, the Company capitalized certain costs related to the acquisition of patents in the total amount of $
548
. Under the terms of the purchase agreement, to the extent that the gross revenue generated by such portfolio exceeds $22,000, the Company is obligated to pay a royalty of
35
% of such excess. The Company has not recorded any amounts in respect of this contingent consideration, as both the amounts of future potential revenue, if any, and the timing of such revenue cannot be reliably estimated.
In October 2012, the Company’s subsidiary entered into an additional patent purchase agreement. As partial consideration, the Company issued
160,600
shares of common stock to the seller with a fair value of $
750
. In addition, under the terms of the purchase agreement,
20
% of the gross revenue collected will be payable to the seller as a royalty. The Company has not recorded any amounts in respect of this contingent consideration, as both the amounts of future potential revenue, if any, and the timing of such revenue cannot be reliably estimated.
During the three and nine month periods ended September 30, 2013, the Company recorded amortization expense of $
1,269
and $
3,784
, respectively. During the three and nine month periods ended September 30, 2012, the Company recorded amortization expense of $
880
and $
1,190
, respectively. During the period from June 8, 2011 (“Inception”) through September 30, 2013, total amortization expense of $
6,567
was recorded. Estimated amortization expense for each of the five succeeding years, based upon intangible assets owned at September 30, 2013 is as follows:
|
Period ending December 31,
|
Amount
|
|
2013 (three months ending December 31, 2013)
|
$
|
1,257
|
|
2014
|
|
5,009
|
|
2015
|
|
5,009
|
|
2016
|
|
4,618
|
|
2017 and thereafter
|
|
14,467
|
|
|
$
|
30,360
|
Note 4. Fair Value Measurements
The Company measures fair value in accordance with ASC 820-10, “
Fair Value Measurements and Disclosures
” (formerly SFAS 157, “
Fair Value Measurements
”). ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received by selling an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820-10 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 Inputs
: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs
: Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Inputs:
Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company measures its derivative liabilities at fair value. The Special Bridge Warrants, Conversion Warrants, Preferential Reload Warrants and majority of Series 1 Warrants (as they are defined in Note 6) are classified within Level 3 because they are valued using the Black-Scholes-Merton and the Monte-Carlo models (as these warrants include down-round protection clauses), which utilize significant inputs that are unobservable in the market.
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012, aggregated by the level in the fair-value hierarchy within which those measurements fall:
|
|
|
|
|
|
Fair value measurement at reporting date using
|
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
active markets
|
|
Significant other
|
|
Significant
|
|
|
|
|
|
|
|
for identical
|
|
observable
|
|
unobservable
|
|
|
Derivative liabilities on account of warrants
|
|
Balance
|
|
assets (Level 1)
|
|
inputs (Level 2)
|
|
inputs (Level 3)
|
|
|
As of September 30, 2013
|
|
$
|
4,126
|
|
—
|
|
—
|
|
$
|
4,126
|
|
|
As of December 31, 2012
|
|
$
|
7,612
|
|
—
|
|
—
|
|
$
|
7,612
|
|
In addition to the above, the Company’s financial instruments at September 30, 2013 and December 31, 2012 consisted of cash, cash equivalents, short-term investments, accounts receivable, accounts payable and long term deposits. The carrying amounts of all the aforementioned financial instruments approximate fair value. The following table summarizes the changes in the Company’s liabilities measured at fair value using significant unobservable inputs (Level 3) during the period from Inception through September 30, 2013:
|
|
|
Level 3
|
|
|
Balance at Inception
|
|
$
|
—
|
|
|
Balance at December 31, 2011
|
|
|
—
|
|
|
Derivative warrants issued to I/P’s shareholders in connection with the Merger, July 19, 2012
|
|
|
21,954
|
|
|
Fair value of derivative warrants issued by Legal Parent
|
|
|
3,162
|
|
|
Fair value adjustment, prior to exercise of warrants, included in statement of operations
|
|
|
156
|
|
|
Exercise of derivative warrants
|
|
|
(10,657)
|
|
|
Fair value adjustment at end of period, included in statement of operations
|
|
|
(7,003)
|
|
|
Balance at December 31, 2012
|
|
|
7,612
|
|
|
Net impact of removal of down-round clause in Series 1 Warrant (see Note 6)
|
|
|
(2,300)
|
|
|
Fair value adjustment, prior to exercise of warrants, included in statement of operations
|
|
|
15
|
|
|
Exercise of derivative warrants
|
|
|
(790)
|
|
|
Fair value adjustment at end of period, included in statement of operations
|
|
|
(411)
|
|
|
Balance at September 30, 2013
|
|
$
|
4,126
|
|
Valuation processes for Level 3 Fair Value Measurements
Fair value measurement of the derivative liability on account of Special Bridge Warrants, Conversion Warrants, Preferential Reload Warrants and Series 1 Warrants (as defined in Note 6) fall within Level 3 of the fair value hierarchy. The fair value measurements are evaluated by management to ensure that changes are consistent with expectations of management based upon the sensitivity and nature of the inputs.
|
Description
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
|
|
|
|
|
Volatility
|
|
51.91% – 57.04%
|
|
|
|
|
|
|
Risk free interest rate
|
|
0.16% – 0.98%
|
|
|
Special Bridge Warrants, Conversion Warrants,
|
|
Black-Scholes-Merton and the
|
|
Expected term, in years
|
|
1.24 – 3.80
|
|
|
Preferential Reload Warrants and the derivative Series 1 Warrants
|
|
Monte-Carlo models
|
|
Dividend yield
|
|
0%
|
|
|
|
|
|
|
Probability and timing of down-round triggering event
|
|
5% occurrence in December 2013
|
|
Sensitivity of Level 3 measurements to changes in significant unobservable inputs
The inputs to estimate the fair value of the Company’s derivative warrant liability are the current market price of the Company’s shares of common stock, the exercise price of the warrant, its remaining expected term, the volatility of the Company’s common stock market price, the Company’s estimations regarding the probability and timing of a down-round protection triggering event and the risk-free interest rate. Significant changes in any of those inputs in isolation can result in a significant change in the fair value measurement. Generally, a positive change in the market price of the Company’s common stock, and an increase in the volatility of the Company’s shares of common stock, or an increase in the remaining term of the warrant, or an increase of a probability of a down-round triggering event would each result in a directionally similar change in the estimated fair value of the Company’s warrants and thus an increase in the associated liability and vice-versa. An increase in the risk-free interest rate or a decrease in the positive differential between the warrant’s exercise price and the market price of the Company’s shares of common stock would result in a decrease in the estimated fair value measurement of the warrants and thus a decrease in the associated liability. The Company has not, nor plans to, declare dividends on its shares of common stock, and thus, there is no change in the estimated fair value of the warrants due to the dividend assumption.
Note 5. Business Combination
On July 19, 2012, I/P consummated the Merger with the Legal Parent, as also described in Note 1. The consideration consisted of various equity instruments, including: shares of common stock, preferred stock, options and warrants. The purpose of the Merger was to increase the combined company's intellectual property portfolio and array of products, to gain access to capital markets, among other reasons. Upon completion of the Merger, (i) all then outstanding
6,169,661
common stock shares of I/P, par value $
0.0001
per share, were exchanged for
18,617,569
, shares of the Company’s common stock, par value $
0.01
per share, and (ii) all then outstanding shares of Series A Convertible Preferred Stock of I/P, par value $0.0001 per share, were exchanged for
6,673
shares of the Legal Parent’s Series A Convertible Preferred Stock, par value $
0.01
per share, which shares were convertible into
20,136,445
shares of common stock of the Legal Parent. In addition, the Legal Parent issued to the holders of I/P capital stock an aggregate of
15,959,838
warrants to purchase an aggregate of
15,959,838
shares of the Company’s common stock with an exercise price of $
1.76
per share. The Company recorded such warrants as a derivative long-term liability in the total amount of $
21,954
. In addition, all outstanding and unexercised options to purchase I/P common stock, whether vested or unvested, were converted into
41,178
options to purchase the Company’s common stock. Immediately following the completion of the Merger, the former stockholders of I/P owned approximately
55.04
% of the outstanding common stock of the combined company (or
67.61
% of the outstanding shares of the Company’s common stock, calculated on a fully diluted basis), and the Legal Parent’s stockholders prior to the Merger owned approximately
44.96
% of the outstanding common stock of the combined company (or
32.39
% of the outstanding shares of its common stock calculated on a fully diluted basis). For accounting purposes, I/P was identified as the accounting “acquirer”, as it is defined in FASB Topic ASC 805. The total purchase price of $
75,654
was allocated to the assets acquired and liabilities assumed of the Legal Parent. Registration and issuance cost, in the total amount of $
463
, was recorded against the additional paid-in capital.
|
|
|
Allocation of purchase price
|
|
|
|
Current assets, net of current liabilities
|
|
$
|
2,586
|
|
|
|
Long-term deposit
|
|
|
8
|
|
|
|
Property and equipment
|
|
|
124
|
|
|
|
Technology
|
|
|
10,133
|
|
|
|
Goodwill
|
|
|
65,965
|
|
|
|
Total assets acquired, net
|
|
|
78,816
|
|
|
|
|
|
|
|
|
|
|
Fair value of outstanding warrants granted by Legal Parent prior to the Merger, classified as a long-term derivative liability
|
|
|
(3,162)
|
|
|
|
Total liabilities assumed, net
|
|
|
(3,162)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,654
|
|
|
|
Measurement of consideration:
|
|
|
|
|
|
|
Fair value of vested stock options granted to employees, management and consultants, classified as equity
|
|
|
7,364
|
|
|
|
Fair value of outstanding warrants granted by the Legal Parent prior to the Merger, classified as equity
|
|
|
10,079
|
|
|
|
Fair value of Vringo shares of common stock and vested penny options granted to employees, management and consultants
|
|
|
58,211
|
|
|
|
Total estimated purchase price
|
|
$
|
75,654
|
|
|
The fair values of the identified intangible assets were estimated using an income approach. Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. Indications of value are developed by discounting future net cash flows to their present value at market-based rates of return. The goodwill recognized as a result of the acquisition is primarily attributable to the value of the workforce and other intangible asset arising as a result of operational synergies, products, and similar factors which could not be separately identified. The useful life of the intangible assets for amortization purposes was determined considering the period of expected cash flows used to measure the fair value of the intangible assets adjusted as appropriate for the entity-specific factors including legal, regulatory, contractual, competitive economic or other factors that may limit the useful life of intangible assets. Goodwill recognized is not deductible for income tax purposes.
Had the acquisition taken place on Inception, the revenue in the consolidated statement of operations and the consolidated net loss would have been as follows:
|
|
|
Cumulative from Inception
to September 30, 2013
|
|
Nine month period ended
September 30, 2012
|
|
Three month period ended
September 30, 2012
|
|
|
|
|
Revenue
|
|
Net Loss
|
|
Revenue
|
|
Net Loss
|
|
Revenue
|
|
Net Loss
|
|
|
Total amount
|
|
$
|
2,285
|
|
$
|
(73,855)
|
|
$
|
487
|
|
$
|
(18,298)
|
|
$
|
281
|
|
$
|
(6,632)
|
|
The pro forma adjustment consists of amortization of acquired technology. The amortization, for the period from Inception through September 30, 2013 would have been $
3,964
. The amortization for the three and nine month period ended September 30, 2012 would have been $
422
and $
1,267
, respectively. The above pro forma disclosure excludes the possible impact of valuation of equity and derivative instruments valued in connection with the Merger.
Note 6. Stockholders’ Equity
Pre-Merger common stock share amounts and balance sheet disclosures were retrospectively restated to reflect Vringo’s equity instruments after the Merger.
(a) Common Stock
The following table summarizes information about the Company's issued and outstanding common stock from Inception through September 30, 2013:
|
|
|
Shares of common stock
|
|
|
Balance as of June 8, 2011 (Inception)
|
|
|
—
|
|
|
Grant of shares at less than fair value to officers, directors and consultants
|
|
|
8,768,014
|
|
|
Issuance of shares of common stock
|
|
|
8,204,963
|
|
|
Balance as of December 31, 2011
|
|
|
16,972,977
|
|
|
Conversion of Series A Preferred Convertible Preferred stock, classified as mezzanine equity
|
|
|
890,192
|
|
|
Grant of shares to consultants
|
|
|
265,000
|
|
|
Legal Parent’s shares of common stock, recorded upon Merger
|
|
|
15,206,118
|
|
|
Exercise of 250,000 warrants, issued and exercised prior to the Merger
|
|
|
754,400
|
|
|
Post-Merger exercise of warrants
|
|
|
6,832,150
|
|
|
Exercise of stock options and vesting of RSUs
|
|
|
726,346
|
|
|
Conversion of Series A Preferred Convertible Preferred stock, classified as equity
|
|
|
20,136,445
|
|
|
Issuance of shares of common stock in connection with $31,148 received in a private financing round, net of issuance cost of $52
|
|
|
9,600,000
|
|
|
Issuance of shares of common stock in connection with $44,962 received in a private financing round, net of issuance cost of $39
|
|
|
10,344,998
|
|
|
Shares issued for acquisition of patents, see Note 3
|
|
|
160,600
|
|
|
Balance as of December 31, 2012
|
|
|
81,889,226
|
|
|
Exercise of warrants
|
|
|
421,493
|
|
|
Exercise of stock options and vesting of RSUs
|
|
|
1,810,005
|
|
|
Balance as of September 30, 2013
|
|
|
84,120,724
|
|
(b) Equity Incentive Plan
In August 2011, I/P adopted its 2011 Equity and Performance Incentive Plan (the “I/P 2011 Plan”). The I/P 2011 Plan provided for the issuance of stock options and restricted stock to the Company’s directors, employees and consultants. Cancelled, expired or forfeited grants may be reissued under the I/P 2011 Plan. The number of shares available under I/P 2011 Plan was subject to adjustments for certain changes. Following the Merger with the Legal Parent, the I/P 2011 Plan was assumed by the Company.
On July 19, 2012, following the Merger with the Legal Parent, the Company’s stockholders approved the 2012 Employee, Director and Consultant Equity Incentive Plan (“2012 Plan”), replacing the existing 2006 Stock Option Plan of the Legal Parent, and the remaining
9,100,000
authorized shares thereunder were cancelled. The Company’s 2012 Plan was approved in order to ensure full compliance with legal and tax requirements under U.S. law. The number of shares subject to the 2012 Plan is the sum of: (i)
15,600,000
shares of common stock, which constitutes
6,500,000
new shares and 9,100,000 previously authorized but unissued shares under the 2006 Stock Option Plan and (ii) any shares of common stock that are represented by awards granted under the Legal Parent’s 2006 Stock Option Plan that are forfeited, expired or are cancelled without delivery of shares of common stock or which result in the forfeiture of shares of common stock back to the Company, or the equivalent of such number of shares after the administrator, in its sole discretion, has interpreted the effect of any stock split, stock dividend, combination, recapitalization or similar transaction in accordance with the 2012 Plan; provided, however, that no more than
3,200,000
shares shall be added to the 2012 Plan.
As of September 30, 2013,
4,802,211
shares were available for future grants under the 2012 Plan.
(c) Stock options and RSUs
The following table illustrates the common stock options granted for the nine month period ended September 30, 2013:
|
Title
|
|
Grant date
|
|
No. of
options
|
|
Exercise price
|
|
Share price at
grant date
|
|
Vesting terms
|
|
Assumptions used in Black-Scholes option pricing
model
|
|
|
Management, Directors and Employees
|
|
|
January-September 2013
|
|
|
3,090,833
|
|
|
$2.85-$3.24
|
|
|
$2.85-$3.24
|
|
|
Over 0.67-3 years
|
|
|
Volatility
|
|
61.93%-70.51%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
0.85%-2.06%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term, in years
|
|
5.71-10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
0.00%
|
|
|
Consultants
|
|
|
January-June 2013
|
|
|
132,500
|
|
|
$2.90-$3.30
|
|
|
$2.90-$3.30
|
|
|
Over 0-2.5 years
|
|
|
Volatility
|
|
63.87%-65.96%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
2.16%-2.62%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining expected term, in years
|
|
9.25-9.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
0.00%
|
|
The following table illustrates the RSUs granted for the nine month period ended September 30, 2013:
|
Title
|
|
Grant date
|
|
No. of RSUs
|
|
Exercise price
|
|
Share price at grant
date
|
|
Vesting terms
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management, directors and employees
|
|
|
February-May 2013
|
|
|
656,250
|
|
|
—
|
|
|
$2.95-$3.18
|
|
|
Over 0.67-3 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consultants
|
|
|
January 2013
|
|
|
33,000
|
|
|
—
|
|
|
$3.26
|
|
|
Over 0.75 years
|
|
Certain options granted to officers, directors and certain key employees are subject to acceleration of vesting of
75
% -
100
% (according to the agreement signed with each optionee), upon a subsequent change of control.
The following table summarizes information about RSU and stock option activity for the nine month period ended September 30, 2013:
|
|
|
RSUs
|
|
Options
|
|
|
|
|
No. of
RSUs
|
|
Weighted average
grant date fair
value
|
|
No. of
options
|
|
Weighted average
exercise price
|
|
Exercise price
range
|
|
Weighted average
grant date fair
value
|
|
|
Outstanding at January 1, 2013
|
|
|
3,125,000
|
|
$
|
3.72
|
|
|
9,149,105
|
|
$
|
3.33
|
|
|
$0.01 – $5.50
|
|
$
|
2.57
|
|
|
Granted
|
|
|
689,250
|
|
$
|
3.17
|
|
|
3,223,333
|
|
$
|
3.14
|
|
|
$2.85 – $3.30
|
|
$
|
2.22
|
|
|
Vested/Exercised
|
|
|
(1,092,270)
|
|
$
|
3.62
|
|
|
(717,735)
|
|
$
|
1.36
|
|
|
$0.01 – $3.18
|
|
$
|
2.96
|
|
|
Forfeited
|
|
|
(310,209)
|
|
$
|
3.66
|
|
|
(417,821)
|
|
$
|
3.51
|
|
|
$0.01 – $5.50
|
|
$
|
2.44
|
|
|
Expired
|
|
|
—
|
|
|
—
|
|
|
(954,868)
|
|
$
|
5.04
|
|
|
$0.01 – $5.50
|
|
$
|
1.58
|
|
|
Outstanding at September 30, 2013
|
|
|
2,411,771
|
|
$
|
3.61
|
|
|
10,282,014
|
|
$
|
3.24
|
|
|
$0.01 – $5.50
|
|
$
|
2.53
|
|
|
Exercisable at September 30, 2013
|
|
|
—
|
|
|
—
|
|
|
5,099,098
|
|
$
|
3.04
|
|
|
$0.01 – $5.50
|
|
|
|
|
The Company cumulatively did not create tax benefits related to its stock-based compensation due to a full valuation allowance.
(d)
Warrants
The following table summarizes information about warrant activity for the nine month period ended September 30, 2013:
|
|
|
No. of warrants
|
|
Weighted average
exercise price
|
|
Exercise
price range
|
|
|
Outstanding at January 1, 2013
|
|
|
18,863,261
|
|
$
|
3.11
|
|
|
$0.94 – $5.06
|
|
|
Exercised
|
|
|
(421,493)
|
|
$
|
1.34
|
|
|
$0.94 – $1.76
|
|
|
Outstanding at September 30, 2013
|
|
|
18,441,768
|
|
$
|
3.15
|
|
|
$0.94 – $5.06
|
|
The Company’s outstanding warrants consisted of the following:
(1) Series 1 and Series 2 Warrants
As part of the Merger, on July 19, 2012, the Legal Parent issued to I/P’s stockholders
8,299,115
warrants at an exercise price of $
1.76
per share and contractual term of
5
years (“Series 1 Warrant”). These warrants bear down-round protection clauses and as a result, they were initially classified as a long-term derivative liability and recorded at fair value. In addition, I/P’s stockholders received another
7,660,722
warrants at an exercise price of $
1.76
per share and contractual term of
5
years (“Series 2 Warrant”). As the Series 2 Warrants do not have down-round protection clauses, they were classified as equity.
As part of the issuance of October 2012 Warrants, the down-round protection clause in
2,173,852
then outstanding Series 1 Warrants was removed. Because such warrants were no longer subject to down-round protection they were re-measured at fair value and classified as equity instruments. The overall impact of the removal of the down-round warrant protection, which was not material, was recorded during the nine month period ended September 30, 2013. As a result, during the nine month period ended September 30, 2013 the Company recorded an additional non-operating expense of $
1,617
, and re-classified $3,918 from derivative liabilities on account of warrants to stockholders’ equity.
During the nine month period ended September 30, 2013,
152,157
Series 1 Warrants and
45,190
Series 2 Warrants were exercised. From Inception and through September 30, 2013,
4,807,257
Series 1 Warrants and
1,326,060
Series 2 Warrants were exercised.
(2) Conversion Warrants, Special Bridge Warrants and Reload Warrants
On July 19, 2012, the date of the Merger, Legal Parent’s outstanding warrants included: (i)
148,390
derivative warrants, at an exercise price of $
0.94
per share, with a remaining contractual term of
2.44
years (the “Special Bridge Warrants”); (ii)
101,445
derivative warrants, at an exercise price of $
0.94
per share, with a remaining contractual term of
2.44
years (the “Conversion Warrants”); (iii)
887,330
derivative warrants, at an exercise price of $
1.76
per share, with a remaining contractual term of
4.55
years (the “Preferential Reload Warrants”); and (iv)
814,408
warrants, classified as equity, at an exercise price of $
1.76
per share, with a remaining contractual term of
4.55
years (the “non-Preferential Reload Warrants”). During both the nine month period ended September 30, 2013, and from Inception through September 30, 2013,
127,192
Special Bridge Warrants and
86,954
Conversion Warrants were exercised. During the nine month period ended September 30, 2013,
1
0,000 non-Preferential Reload Warrants were exercised. From Inception and through September 30, 2013,
1
7
9
,
520
non-Preferential Reload Warrants and
726,721
Preferential Reload Warrants were exercised.
(3) Initial Public Offering Warrants
Upon completion of its initial public offering, in June 2010, the Legal Parent issued
4,784,000
warrants at an exercise price of $
5.06
per share. These warrants are publicly traded and are exercisable until June 21, 2015, at an exercise price of $5.06 per share. As of September 30, 2013, all of these warrants were outstanding and classified as equity instruments.
(4) October 2012 Warrants
On October 12, 2012, the Company entered into an agreement with certain of its warrant holders, pursuant to which, on October 23 and 24, 2012, the holders exercised in cash
3,721,062
of their outstanding warrants, with an exercise price of $
1.76
per share. In exchange, the Company granted such warrant holders unregistered warrants of the Company to purchase an aggregate of
3,000,000
shares of the Company’s common stock, par value $
0.01
per share, at an exercise price of $
5.06
per share (the “October 2012 Warrants”). The contractual life of these warrants is
2.66
years and because such warrants do not bear any down-round protection clauses they were classified as equity instruments. October 2012 Warrants were valued using the following assumptions: volatility:
68.1
%, share price: $
3.50
-$
3.77
, risk free interest rate:
0.724
% and dividend yield:
0
%. The fair value of warrants issued in exchange for the exercise of the Company’s derivative warrants was accounted for as an inducement, therefore an amount of $
2,883
, was recorded as a non-operating expense. As of September 30, 2013, all October 2012 warrants were outstanding.
Note 7. Revenue from Settlement and Licensing Agreement
On May 30, 2013, the Company’s subsidiary entered into a settlement and license agreement with Microsoft Corporation to resolve its patent litigation pending in the U.S. District Court for the Southern District of New York (I/P Engine, Inc. v. Microsoft Corporation, Case No. 1:13-cv-00688 (SDNY)). According to the agreement, Microsoft Corporation paid the Company $1,000 and agreed to pay 5% of any future amount Google pays for its use of the patents acquired from Lycos. The parties also agreed to a limitation on Microsoft Corporation's total liability, which would not impact the Company unless the amounts received from Google substantially exceed the judgment previously awarded. In addition, the parties also entered into a patent assignment agreement, pursuant to which Microsoft Corporation assigned six patents to I/P Engine. The assigned patents relate to telecommunications, data management, and other technology areas.
Note 8. Commitments and Contingencies
(a)
Litigation and legal proceedings
The Company retains the services of professional service providers, including law firms that specialize in intellectual property licensing, enforcement and patent law. These service providers are often retained on an hourly, monthly, project, contingent or a blended fee basis. In contingency fee arrangements, a portion of the legal fee is based on predetermined milestones or the Company’s actual collection of funds. The Company accrues contingent fees when it is probable that the milestones will be achieved and the fees can be reasonably estimated.
From October 2012 through
October 7
, 2013, the Company’s subsidiaries filed patent infringement lawsuits against the subsidiaries of ZTE Corporation in the United Kingdom, France, Germany and Australia
and against ASUSTeK Computer, Inc. and ASUS Computer GmbH in Germany
.
In such jurisdictions, an unsuccessful plaintiff may be required to pay a portion of the other party’s legal fees. Pursuant to negotiation with ZTE’s United Kingdom subsidiary, the Company placed two guarantees, in November 2012 and May 2013, to ensure payment should a liability by Vringo Infrastructure arise as a result of the two cases it filed. Defendants estimated the total possible liability to be no more than $
2,900
for each case.
In addition, the Company may be required to grant additional guarantees, as necessary, in connection with its commenced proceedings against ZTE Corporation and its subsidiaries in Europe and Australia. It should be noted, however, that if the Company were successful on any court applications or the entirety of any litigation, ZTE Corporation would be responsible for a substantial portion of the Company’s legal fees.
(b)
Leases
The Company has entered into various operating lease agreements. Rent expense, which is primarily for its office spaces, for the nine month periods ended September 30, 2013 and 2012, was $
175
and $
62
, respectively. Rent expense for the three month periods ended September 30, 2013 and 2012 was $
68
and $
40
, respectively. The cumulative expense for the period from Inception until September 30, 2013, was $
306
.
Future minimum lease payments under non-cancelable operating leases for office space, as of September 30, 2013, are as follows:
|
Period ending December 31,
|
|
Amount
|
|
|
2013 (three months ending December 31, 2013)
|
|
$
|
56
|
|
|
2014
|
|
|
179
|
|
|
2015
|
|
|
104
|
|
|
|
|
$
|
339
|
|
Note 9. Risks and Uncertainties
|
(a)
|
|
New legislation, regulations or rulings that impact the patent enforcement process or the rights of patent holders, could negatively affect the Company’s current business model. For example, limitations on the ability to bring patent enforcement claims, limitations on potential liability for patent infringement, lower evidentiary standards for invalidating patents, increases in the cost to resolve patent disputes and other similar developments could negatively affect the Company’s ability to assert its patent or other intellectual property rights.
|
|
|
|
|
|
(b)
|
|
As part of the Company’s ongoing legal proceedings, the validity and/or enforceability of its patents is often challenged in a court or an administrative proceeding, as it is almost universal practice for the defendant in a patent litigation to seek to challenge the validity of the patent asserted in the same or a parallel proceeding and/or in an administrative proceedings before the relevant jurisdiction’s patent office. Currently, several of the Company’s patents are being challenged in several jurisdictions.
|
|
|
|
|
|
(c)
|
|
Financial instruments which potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable. The Company maintains its cash, cash equivalents and short-term investments with various major financial institutions. These major financial institutions are located in the United States, Germany and Israel, and the Company’s policy is designed to limit exposure to any one institution.
|
|
(d)
|
|
A portion of the Company’s expenses are denominated in NIS, British Pound and Euro. If the value of the U.S. dollar weakens against the value of these currencies, there will be a negative impact on the Company’s operating costs. In addition, the Company is subject to the risk of exchange rate fluctuations to the extent it holds monetary assets and liabilities in these currencies.
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained herein that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included in our Annual Report on Form 10-K filed on March 21, 2013 and any future reports we file with the Securities and Exchange Commission. The forward-looking statements set forth herein speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. In this report, “Vringo,” the “Company,” “we,” “us,” and “our” refer to Vringo, Inc.
Overview
All references in this Quarterly Report on Form 10-Q to “we,” “us” and “our” refer to Vringo, Inc., a Delaware corporation, and its consolidated subsidiaries for periods after the closing of the Merger, and to I/P and its consolidated subsidiaries for periods prior to the closing of the Merger unless the context requires otherwise.
We were incorporated in Delaware on January 9, 2006 and commenced operations during the first quarter of 2006. In March 2006, we formed a wholly-owned subsidiary, Vringo (Israel) Ltd., for the primary purpose of providing research and development services. On July 19, 2012, Innovate/Protect, Inc., (“I/P”) merged with us through an exchange of equity instruments of I/P for those of Vringo. The Merger was accounted for as a reverse acquisition under which I/P was considered the accounting acquirer of Vringo. As such, the financial statements of I/P are treated as the historical financial statements of the combined company, with the results of Vringo included from July 19, 2012.
Our business strives to develop, acquire, license and protect innovation worldwide. Our attempts currently are focused on identification, acquisition and generation of economic benefits of intellectual property assets. We plan to continue to further expand our portfolio of intellectual property assets through acquisition and internal development of new technologies. We intend to monetize our rights in innovative technologies through a variety of value enhancing initiatives, including, but not limited to:
|
|
•
|
strategic partnerships, and
|
We are a development stage company. From the inception of I/P on June 8, 2011 (“Inception”) to date, we have raised approximately $97,378,000. These amounts have been used to finance our operations, as until now, we have not yet generated any significant revenues. From Inception through September 30, 2013, we recorded losses of approximately $57,059,000 and net cash used in operations was approximately $33,380,000. Our average monthly use of cash from operations for the nine month period ended September 30, 2013 was approximately $1,931,000. This is not necessarily indicative of the future use of our working capital.
Intellectual Property
Search Patents
Upon Inception in June 2011, I/P acquired its initial patent assets from Lycos, Inc. (“Lycos”) through its wholly-owned subsidiary, I/P Engine, Inc. Such assets were comprised of eight patents relating to information filtering and search technologies. As one means of realizing the value of the patents acquired from Lycos, on September 15, 2011, I/P initiated (through its wholly-owned subsidiary I/P Engine) litigation in the United States District Court, Eastern District of Virginia, against AOL Inc. (“AOL”), Google, Inc. (“Google”), IAC Search & Media, Inc. (“IAC”), Gannett Company, Inc. (“Gannett”), and Target Corporation (“Target”) (collectively, the “Defendants”) for infringement regarding two of the patents acquired from Lycos (U.S. Patent Nos. 6,314,420 and 6,775,664) (collectively the “Patents”). The case number is 2:11 CV 512-RAJ/FBS. The court docket for the case, including the parties’ briefs, is publicly available on the Public Access to Court Electronic Records website (“PACER”), www.pacer.gov, which is operated by the Administrative Office of the U.S. Courts.
Trial commenced on October 16, 2012, and the case was submitted to the jury on November 1, 2012. On November 6, 2012, the jury unanimously returned a verdict as follows: (i) I/P Engine had proven by a preponderance of the evidence that the Defendants infringed the asserted claims of the patents; and (ii) Defendants had not proven by clear and convincing evidence that the asserted claims of the patents are invalid by anticipation. The jury also found certain specific facts related to the ultimate question of whether the patents are invalid as obvious. Based on such facts, on November 20, 2012, the court issued a ruling that the patents-in-suit were not obvious. The jury found that reasonable royalty damages should be based on a "running royalty", and that the running royalty rate should be 3.5%. The jury also found that the following sums of money, if paid now in cash, would reasonably compensate I/P Engine for the Defendants past infringement: Google: $15,800,000, AOL: $7,943,000, IAC: $6,650,000, Gannett: $4,322, Target: $98,833. On August 1, 2013, the District Court found that I/P Engine is entitled to supplemental damages from October 1, 2012 to November 20, 2012, in an amount to be determined; prejudgment interest from September 15, 2011 to November 20, 2012 in an amount to be determined; and post-judgment interest for Defendants' infringement in an amount to be determined. I/P Engine's motion for an award of post-judgment royalties is pending in the District Court.
Motions by I/P Engine for awards of pre-judgment interest, post-judgment interest, supplemental damages, and post-judgment royalties are pending in U.S. District Court. I/P Engine and Defendants have filed appeals with the Court of Appeals for the Federal Circuit. The docket numbers for the appealable cases are 13-1307 and 13-1311. The parties' filings are available on PACER.
As part of our ongoing legal proceedings, the validity and/or enforceability of the patents is often challenged in a court or an administrative proceeding, as it is almost universal practice for the defendant in a patent litigation to seek to challenge the validity of the patent asserted in the same or parallel proceeding and/or in an administrative proceedings before the relevant patent office. Currently, several of our patents are being challenged in several jurisdictions.
On March 15, 2012, Google submitted a request to the USPTO for ex parte reexamination of certain claims of U.S. Patent No. 6,314,420. On July 18, 2012, the USPTO issued a determination ordering a reexamination. On September 25, 2012, the USPTO issued a first, non-final office action where it adopted the rejections proposed by Google. Our response was filed on November 26, 2012. A final, appealable office action maintaining the rejections was mailed on May 3, 2013. An interview was held with the Examiner and on July 3, 2013 we filed a response. On September 13, 2013, the USPTO issued a certificate confirming that all of the claims in the '420 patent challenged by Google remain valid and unchanged. On September 20, 2013, the USPTO ordered a second reexamination of certain claims of the '420 patent based on a reference not relied upon by Google in the first reexamination. To date, the USPTO has not determined whether to reject the claims of the '420 patent.
On November 20, 2012, Google submitted a request to the USPTO for ex parte reexamination of certain claims of U.S. Patent No. 6,775,664 based on four prior art references. On January 17, 2013, the USPTO ordered reexamination based on only one of the four references submitted by Google. On February 8, 2013, Google filed a second request for reexamination based on the three references not adopted by the USPTO in the first proceeding. On March 7, 2013, the USPTO ordered a second reexamination proceeding. On May 10, 2013, the USPTO issued a first, non-final office action in the first reexamination. On June 13, 2013, the USPTO decided to merge the two reexamination proceedings. On June 25, 2013, the May 10 office action was rescinded and a new non-final office action was issued, rejecting the challenged claims based on two of the four references originally cited by Google. Our response was timely filed on August 26, 2013. An interview was subsequently held with the Examiner on September 16, 2013.
On November 5, 2013, the USPTO mailed a notice that it will issue a certificate confirming that all of the claims in the 6,775,664 patent challenged by Google remain valid and unchanged.
To further realize the value of the patents acquired from Lycos, on January 31, 2013, I/P Engine filed an action asserting infringement of U.S. Patent Nos. 6,314,420 and 6,775,664 in the United States District Court, Southern District of New York, against Microsoft Corporation (“Microsoft”).
On May 30, 2013, our subsidiary entered into a settlement and license agreement with
Microsoft
to resolve its patent litigation pending in the U.S. District Court for the Southern District of New York (I/P Engine, Inc. v. Microsoft, Case No. 1:13-cv-00688 (SDNY)). According to the agreement, Microsoft paid us $1,000,000 and agreed to pay 5% of any future amount Google pays for its use of the patents acquired from Lycos. The parties also agreed to a limitation on Microsoft's total liability, which would not impact us unless the amounts received from Google substantially exceed the judgment previously awarded. In addition, the parties also entered into a patent assignment agreement, pursuant to which Microsoft assigned six patents to I/P Engine. The assigned patents relate to telecommunications, data management, and other technology areas.
Infrastructure Patents
On August 9, 2012, we entered into a patent purchase agreement with Nokia Corporation ("Nokia"), pursuant to which Nokia sold us a portfolio consisting of over 500 patents and patent applications worldwide, including over 100 issued United States patents. We agreed to compensate Nokia with a cash payment and certain ongoing rights in revenues generated from the patent portfolio. The portfolio encompasses technologies relating to telecom infrastructure and handsets, including communication management, data and signal transmission, mobility management, radio resources management and services. Declarations have been filed by Nokia indicating that 31 of the 124 patent families acquired may be essential to wireless communications standards. Standards represented in the portfolio are commonly known as 2G, 2.5G, 3G and 4G and related technologies and include GSM, WCDMA, T63, T64, DECT, LTE, and SAE. The purchase price for the portfolio was $22,000,000, and in addition we capitalized acquisition costs of $548,000. To the extent that the gross revenue (as defined in the purchase agreement) generated by such portfolio exceeds $22 million, a royalty of 35% of such excess would be payable to Nokia. The $22 million cash payment was made to Nokia on August 10, 2012. The purchase agreement provides that Nokia and its affiliates will retain a non-exclusive, worldwide and fully paid-up license (without the right to grant sublicenses) to the portfolio for the sole purpose of supplying (as defined in the purchase agreement) Nokia’s products. The purchase agreement also provides that if we bring a proceeding against Nokia or its affiliates within seven years, Nokia shall have the right to re-acquire the patent portfolio for a nominal amount. Further, if we either sell to a third party any assigned essential cellular patent, or more than a certain portion of the other assigned patents (other than in connection with a change of control of our company), or file an action against a telecom provider to enforce any of the assigned patents (other than in response to any specified action filed by a telecom provider against us or our affiliate) which action is not withdrawn after notice from Nokia, then we will be obligated to pay to Nokia a substantial impairment payment.
As one of the means of realizing the value of the patents on telecom infrastructure, our wholly-owned subsidiaries, Vringo Infrastructure, Inc. (“Vringo Infrastructure”) and Vringo Germany GmbH (“Vringo Germany”) have filed a number of suits in European jurisdictions and in Australia, alleging infringement of certain U.S., European and Australian patents.
ZTE
On October 5, 2012, Vringo Infrastructure, filed a suit in the UK High Court of Justice, Chancery Division, Patents Court, alleging infringement of European Patents (UK) 1,212,919; 1,166,589; and 1,808,029. ZTE (UK) Ltd.’s formal response to the complaint was received on December 19, 2012 and included a counterclaim for invalidity of the patents in suit. Vringo Infrastructure responded to the defense on January 16, 2013. Vringo Infrastructure filed a further UK suit on December 3, 2012, alleging infringement of European Patents (UK) 1,221,212; 1,330,933; and 1,186,119. ZTE (UK) Ltd.’s response to this claim was received on February 27, 2013 and included a counterclaim for invalidity of the patents in suit. Vringo Infrastructure’s reply was filed on March 20, 2013. The UK complaints allege that ZTE’s cellular network elements fall within the scope of all six patents, and ZTE’s GSM/UMTS multi-mode wireless handsets also fall within the scope of at least the 1,808,029 patent. Declarations have been filed at the European Telecommunications and Standards Institute (ETSI) that cover all the patent applications from which the patents in suit are derived. On June 5, 2013, the Court held a case management conference and on June 6, 2013, made an order governing the schedule of the two UK suits. The first UK case will hold a trial with the trial period commencing on October 27, 2014 and the second UK case will hold a trial with the trial period commencing on June 8, 2015.
Germany
has a split-infringement system where patent infringement cases are heard in district courts of general jurisdiction and nullity cases (where the validity of patents is adjudicated) are heard in a different proceeding in the Federal Patents Court. Appeals from the district courts and the Federal Patents Court are heard by distinct appellate courts. Appeals from the district courts are heard by the Higher Regional Court, decisions of which can be appealed to the Supreme Court. Appeals from the Federal Patents Court are heard by the Supreme Court. Infringement actions are typically decided by the trial court within 8 to 13 months (although, depending upon the venue, they can take as long as 18 months). Nullity cases are typically decided by the trial court within 18 to 22 months. If the district court finds a patent infringed, absent specific factors, it will generally issue an injunction. Where there is a pending nullity action and the accused infringer has not sufficiently rebutted the asserted patent’s presumption of validity, the district court will generally issue an injunction upon payment of a security. Where the presumption of validity has been sufficiently rebutted, the district court will generally stay proceedings pending the outcome of the nullity case if infringement is established at trial. Typically, in German infringement proceedings each party is allowed to make two filings to the Court prior to trial. After the plaintiff files its complaint, the defendant is given time to file its response. The parties are then given dates for the plaintiff to file its second filing (often called a “Replica”) and for the defendant to file its second filing (often called a “Rejoinder”). Typically there are no additional filings or documents allowed.
On November 15, 2012, Vringo
Germany
filed a suit in the Mannheim Regional Court in Germany, alleging infringement of European Patent (DE) 1,212,919. The litigation was expanded to include a second patent on February 21, 2013, alleging infringement of European Patent (DE) 1,186,119. At the Mannheim Court’s request, both cases were scheduled to be heard on the same day, October 15, 2013. On October 9, 2013, Vringo Germany was notified that the hearing on infringement that was scheduled for October 15, 2013 will now take place on November 12, 2013. On November 4, 2013, Vringo filed a further brief in the 1,212,919 proceedings introducing an additional independent patent claim and asserting infringement by ZTE eNode B infrastructure equipment used in 4G networks.
In light of the additional products accused, the court has moved the hearing date for the 1,212,919 case to early next year, while the 1,186,119 case will still be heard on November 12, 2013.
To date, ZTE has not made an
Orange Book
offer with respect to either European Patent (DE) 1,212,919 or European Patent (DE) 1,186,119. Under German law, where a defendant alleges: (a) plaintiff has a dominant position under the relevant competition (a/k/a anti-trust) laws, for example, because of plaintiff’s assertion of a patent that is essential to a technical standard, and (b) plaintiff is not willing to license under fair, reasonable and non-discriminatory terms (FRAND), and if the defendant’s allegation is accepted by the Court, the Court may decide not to grant an injunction. It is a condition of this defense in Germany that the defendant must make a binding, unconditional offer to the plaintiff to conclude a license on FRAND terms and stay bound by that offer. Furthermore, the
Orange Book
offer must be such that its rejection by the plaintiff would amount to an abuse of a dominant position. Finally, defendant must behave like a licensee and provide regular royalty reports and remit payment to plaintiff or pay a sufficient amount of the royalties for prior infringement into escrow.
On February 14, 2013, ZTE filed a nullity suit with respect to European Patent (DE) 1,212,919 in the Federal Patents Court, Munich, Germany, alleging invalidity of the patent. Vringo filed its responsive pleading on July 25, 2013 and Vringo received ZTE’s responsive pleading on September 13, 2013. The Court has not set a deadline for Vringo’s next brief. Trial in the nullity suit has not been scheduled and is not anticipated before July 1, 2014.
On May 3, 2013, ZTE filed a nullity suit with respect to European Patent (DE) 1,186,119 in the Federal Patents Court in Munich, Germany. Vringo filed its intent to defend the validity of the patent on July 11, 2013. Vringo’s first responsive pleading is due on November 11, 2013. Trial in the nullity suit has not been scheduled and is not anticipated before July 1, 2014.
On September 13, 2013, Vringo Germany filed a suit in the Regional Court of Düsseldorf, alleging infringement of European Patent (DE) 0,748,136. Complaints in this action were filed against both ZTE Germany and ZTE China. A case management hearing is scheduled to take place on December 3, 2013.
In November and December 2012, ZTE initiated invalidity proceedings in China against Chinese Patents ZL00806049.5; ZL 00812876.6; and ZL200480044232.1, before the Patent Reexamination Board of the Patent Office of the People’s Republic of China. These patents are the Chinese equivalents of European Patents 1,212,919; 1,166,589; and 1,808,029. Vringo Infrastructure filed responses to these actions in January and February 2013. The oral hearing for ZL200480044232.1 (equivalent to European Patent 1,808,029) occurred on April 10, 2013. On July 3, 2013, our patent rights were upheld.
We are currently awaiting information as to whether or not ZTE will appeal this decision.
An oral hearing for ZL00806049.5 (equivalent to European Patent 1,166,589) occurred on May 9, 2013 and a ruling is still pending.
On March 29, 2013, Vringo Infrastructure filed a patent infringement lawsuit in France against ZTE, China and its French subsidiary, ZTE France SASU, in the Tribunal de Grande Instance de Paris, alleging infringement of the French part of European Patents 1,186,119 and 1,221,212 by ZTE devices, which are believed to fall within the scope of these patents. Vringo Infrastructure filed the lawsuit based on particular information uncovered during a seizure to obtain evidence of infringement, known as a saisie-contrefaçon, which was executed at two of ZTE's facilities in France.
French litigations follow a similar filing structure to German litigations (save that validity is not separated from infringement), with each side typically allotted two filings on the merits. Scheduling conferences occurred on June 25 and 27, 2013. The oral hearing in relation to European Patents (FR) 1,186,119 and 1,221,212 has been scheduled to take place on December 8, 2014 before the 3
rd
division of the 3
rd
chamber of the Tribunal de Grande Instance de Paris (specializing in IP matters). ZTE filed its first responsive pleading on the merits on October 29, 2013 and held a third scheduling conference on that same date. Subsequent pleadings are due for us on February 4, 2014 and for ZTE on May 20, 2014. The closing of the proceeding is set for June 10, 2014 and the oral hearing has been scheduled for December 8, 2014.
On June 11, 2013, Vringo Infrastructure filed a patent infringement lawsuit against ZTE (Australia) Pty Ltd. (ZTE Australia), an Australian subsidiary of ZTE Corporation. The lawsuit filed in the Federal Court of Australia in the New South Wales registry, alleges infringement by ZTE Australia of Australian Standard Patents AU 2005/212,893 and AU 773,182. The proceeding has been assigned Case No. NSD1010/2013. The patents in suit relate to telecommunications infrastructure equipment and mobile devices. The pleadings were completed on October 21, 2013 and a further directions conference (similar to a US Rule 16 conference)
was held on November 4, 2013.
We currently anticipate that the Court will set a trial date in the second half of 2014.
On September 6, 2013, Vringo Infrastructure filed a preliminary inquiry order against ZTE entities Sociedad Anonima de Comunicaciones Zhong Xing ZTE Corporation, Sucursal en Espana, and ZhongXing Corporation, S.L. in the Commercial Court of Madrid, Spain, requiring the respondent companies to provide discovery relating to alleged infringement of Spanish Patent
2220484 (EP (ES)
1,186,119)
. ZTE refused service of the preliminary inquiry order and failed to oppose the order by the deadline of September 16, 2013. The Court will hold a hearing on November 11, 2013, at which time
the respondent companies
must produce financial, commercial, bank, and customs documents related to sales of certain ZTE base station products.
ASUS
On October 4, 2013, Vringo Germany filed a patent infringement lawsuit against ASUSTeK Computer, Inc. and ASUS Computer GmbH. The lawsuit, filed in the Düsseldorf Regional Court, alleges infringement of European Patent (DE) 0,748,136. The patent in suit relates to devices, including those with hotspot functionality, that provide data services between two different wireless/cellular networks. The schedule hearing for the rest of the case is set for December 3, 2013. The patent in suit relates to devices, including those with hotspot functionality, that provide data services between two different wireless/cellular networks. The schedule hearing for the rest of the case is set for December 3, 2013.
ADT/Tyco
On September 12, 2013, Vringo Infrastructure filed a patent infringement lawsuit against The ADT Corporation, ADT LLC, ADT Security Services, Inc., and Tyco Integrated Security, LLC in the United States District Court for the Southern District of Florida. The lawsuit alleges infringement of U.S. Patent No. 6,288,641, entitled "Assembly, and Associated Method, for Remotely Monitoring a Surveillance Area".
Mobile Social Applications
We have developed a platform for the distribution of mobile applications which enable direct to consumer and business-to-business delivery models. We continue to leverage these technologies and integrate these tools with mobile operators, content providers, and handset manufacturers.
Our Video Ringtone product, a client-server based suite of mobile tools, enables users to create, download and share video ringtones and provides our business partners with a consumer-friendly and easy-to-integrate monetization platform. The standard revenue model for our video ringtone service offered through the carriers is a subscription-based model where users pay a monthly fee for access to our service and additional fees for premium content. Our free version has been released as an advertisement-supported application on the Google Play marketplace and is available in markets where we have not entered into commercial arrangements with carriers or other partners. As of September, 2013, we have commercial video ringtone services with nine carriers and partners across the Middle East, Asia, India, Africa, and Europe.
Our Vringo mobile application also functions as a standalone direct-to-consumer offering and has been white labeled for media brands and entertainment companies, including two new partnerships established in the third quarter of 2013, with customers in the USA for custom versions of our Video Ringtone app.
Our Facetones® social ringtone application generates social visual ringtone content automatically by aggregating and displaying a user’s friends’ pictures from social networks and then enhancing the standard ringtone and ringback tone with visual and video displays and functions. The product is available to consumers on several operating systems, most notably Android, and is delivered in various configurations, with a variety of monetization methods. We have developed several updated and customized versions of Facetones, including a version for Android which includes post-call engagement and advertising as well as our most recent release in partnership with Nokia’s Asha Full Touch 311 devices which launched in the second quarter of 2013 and exceeded 250,000 downloads in the third quarter. As of September 30, 2013, the Facetones® app reached over 2,000,000 downloads across all platforms. In the second quarter of 2013, the Facetones® app generated over 10,000,000 mobile impressions. Facetones® is furnished directly to consumers via leading mobile application stores and download sites, and offers revenue models ranging from advertising, licensing, and custom development projects.
Merger
The accompanying unaudited financial statements include the accounts of I/P, Legal Parent and their wholly-owned subsidiaries, and are presented in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). All significant intercompany balances and transactions have been eliminated in consolidation. These financial statements include the results of operations of I/P and subsidiaries for all periods presented, with the results of operations of the Legal Parent and its subsidiaries for the period from July 19, 2012 (the effective date of the Merger) through September 30, 2013. Moreover, common stock amounts presented for comparative periods differ from those previously presented by I/P, due to application of accounting requirements applicable to a reverse acquisition.
Our Strategy
We manage an intellectual property portfolio consisting of over 500 patents and patent applications, covering telecom infrastructure, internet search and mobile technologies. These patents and patent applications have been developed internally and acquired from third parties. We innovate, acquire, license and protect technology and intellectual property rights worldwide. We continually strive to expand our portfolio of rights through acquisition and development both internally and with third parties. Our goal is to partner with innovators of compelling technologies.
We continue to develop our products and partner with various with mobile operators and content providers. Our mobile solution, which encompasses a suite of mobile and PC-based tools, enables users to create, download and share video ringtones and provides our business partners with a consumer-friendly and easy-to-integrate monetization platform. Our Vringo video ringtone mobile app also functions as a standalone direct-to-consumer offering. Separately, we seek to continue to expand the distribution of our free, ad-supported, mobile application. We believe that our core technology and business relationships will allow us to distribute applications and services through mobile operators, handset makers, and application storefronts. In addition to the innovation contained in our mobile operations, we have begun a focused effort in the cognitive radio space, in order to leverage our existing intellectual capital, as well as partner with select innovators to create an efficient and effective research and development program in this cutting edge technology. We are also actively mining our portfolio for additional avenues through which we can effectively develop significant and useful technology.
In potential acquisitions, we seek to purchase all of, or interests in, intellectual property in exchange for cash and/or securities of our company and/or interests in the monetization of those assets. Our revenue from this aspect of our business can be generated through licensing and litigation efforts. We engage in robust due diligence and a principled risk underwriting process to evaluate the merits and potential value of any acquisition or partnership. We seek to structure the terms of our acquisitions and partnerships in a manner that will achieve the highest risk-adjusted returns possible. We believe that our capital resources and potential access to capital, together with the experience of our management team and board, will allow us to assemble a portfolio of quality assets with short and long-term revenue opportunities.
Revenue
Revenue from patent licensing and enforcement, subscription services and software development is recognized if collection is probable, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and delivery of the service has been rendered. The Company uses management's best estimate of selling price for individual elements in multiple-element arrangements, where other sources of evidence are unavailable.
Cost of revenue
Cost of revenue mainly includes the costs and expenses incurred in connection with our patent licensing and enforcement activities, contingent legal fees paid to external patent counsel, other patent-related legal expenses paid to external patent counsel, licensing and enforcement related research, consulting and other expenses paid to third parties, the amortization of patent-related acquisition costs and of the acquired technology, the value to which was allocated upon consummation of the Merger. Cost of revenue also includes third party expenses directly related to providing our service in launched markets. Cost of revenue does not include expenses related to product development, integration and support, as these costs are included in research and development.
Research and development expenses
Research and development expenses consist primarily of the cost of our development and operations personnel, as well as of the cost of outsourced development services.
Marketing, general and administrative expenses
Marketing, general and administrative expenses include marketing, management and administrative personnel, public and investor relations, advertising, overhead/office cost and various professional fees, as well as insurance, depreciation and amortization.
Non-operating income (expenses)
Non-operating income (expenses) includes transaction gains (losses) from foreign exchange rate differences, interest on deposits, bank charges, as well as fair value adjustments of derivative liabilities on account of the Preferential Reload Warrants, Special Bridge Warrants, Series 1 Warrants and the Conversion Warrants. The value of such derivative liabilities is highly influenced by assumptions used in its valuation, as well as by our stock price at the period end (revaluation date).
Income taxes
Our effective tax rate differs from the statutory federal rate primarily due to differences between income and expense recognition prescribed by income tax regulations and generally accepted accounting principles. We utilize different methods and useful lives for depreciating and amortizing property and equipment and different methods and timing for certain expenses. Furthermore, permanent differences arise from certain income and expense items recorded for financial reporting purposes but not recognizable for income tax purposes. As part of the Merger purchase price allocation, we recorded a deferred tax liability in connection with the acquired technology. This deferred tax liability was offset by a deferred tax asset in the same amount. The deferred tax asset in respect of the remaining tax loss carryforwards has been offset by a valuation allowance as in our opinion it is more likely than not that the tax loss carryforwards will not be utilized in the foreseeable future.
Our subsidiary in Israel generates net taxable income from services it provides to us. It charges us for research, development, certain management and other services provided to us, plus a profit margin on such costs, which is currently 8%. In the zone where the production facilities of the subsidiary in Israel are located, the statutory tax rate is 12.5% in 2013 and expected to be 16% thereafter.
Results of Operations
Three and nine month periods ended September 30, 2013 compared to the three and nine month periods ended September 30, 2012 and the development stage period (cumulative from Inception through September 30, 2013)
Revenue
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Three months ended September 30,
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Nine months ended September 30,
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Cumulative from
Inception through
September 30,
|
|
|
|
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2013
|
|
2012
|
|
Change
|
|
2013
|
|
2012
|
|
Change
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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Revenue
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$
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50,000
|
|
$
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266,000
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|
$
|
(216,000)
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|
$
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1,276,000
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|
$
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266,000
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|
$
|
1,010,000
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|
$
|
1,645,000
|
|
Three Months Ended September 30, 2013, Compared to Three Months Ended September 30, 2012
During the three month period ended September 30, 2013, we recorded total revenues of $50,000 compared to $266,000 in the third quarter of 2012. The revenue recorded in the third quarter of 2013 consisted solely of subscription and content based revenue generated by Vringo mobile business compared to subscription and content sales based revenue of $76,000 in the third quarter of 2012 which represents Vringo mobile revenue from July 19, 2012, the date of the Merger, through September 30, 2012. In addition, in the third quarter of 2012, the recognized revenue consisted of: (i) revenue from a development project with Nokia of $90,000 and (ii) proceeds from partial settlement with AOL in the total amount of $100,000.
Nine Months Ended September 30, 2013, Compared to Nine Months Ended September 30, 2012
During the nine month periods ended September 30, 2013 and 2012, we recorded total revenues of $1,276,000 and $266,000, respectively. The increase was primarily due to a license and settlement agreement entered into with Microsoft,
as disclosed in Note 7 to our accompanying consolidated financial statements. The increase was partially offset by revenue recorded in 2012 comprising of (i) revenue from a development project with Nokia of $90,000 and (ii) proceeds from partial settlement with AOL in the total amount of $100,000.
From Inception Through September 30, 2013
From Inception through September 30, 2013, total revenue amounted to $1,645,000. Cumulative revenue consisted of: (i) license and settlement agreement with Microsoft, (ii) subscription and content sales based revenue of $345,000, which represents Vringo mobile revenue from July 19, 2012, (iii) revenue from a development project with Nokia of $100,000 which was completed in 2012, and (iv) $100,000 from partial settlement with AOL entered into in the third quarter of 2012.
On May 30, 2013, our subsidiary entered into a settlement and license agreement with Microsoft to resolve its patent litigation pending in the U.S. District Court for the Southern District of New York (I/P Engine, Inc. v. Microsoft, Case No. 1:13-cv-00688 (SDNY)). According to the agreement, Microsoft paid us $1,000,000 and agreed to pay 5% of any future amount Google pays for its use of the patents acquired from Lycos. The parties also agreed to a limitation on Microsoft's total liability, which would not impact us unless the amounts received from Google substantially exceed the judgment previously awarded. In addition, the parties also entered into a patent assignment agreement, pursuant to which Microsoft assigned six patents to I/P Engine. The assigned patents relate to telecommunications, data management, and other technology areas.
We seek to generate revenue through licensing or litigation, when required, which may be resolved through a settlement or collection. We also intend to continue to expand our planned operations through acquisitions and monetization of additional patents, other intellectual property or operating businesses. In particular, following the incorporation of our subsidiary in Germany and the acquisition of a patent portfolio from Nokia, we intend to expand our intellectual property monetization efforts worldwide.
Cost of revenue
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Three months ended September 30,
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Nine months ended September 30,
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Cumulative from
Inception through
September 30,
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2013
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2012
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Change
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2013
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2012
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Change
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2013
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Cost of services provided
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$
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23,000
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$
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18,000
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$
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5,000
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$
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73,000
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$
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18,000
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$
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55,000
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$
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120,000
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Amortization of intangibles
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$
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1,276,000
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$
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878,000
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$
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398,000
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|
$
|
3,800,000
|
|
$
|
1,189,000
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|
$
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2,611,000
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$
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6,583,000
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Operating legal
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$
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5,426,000
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$
|
2,519,000
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$
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2,907,000
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$
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15,684,000
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|
$
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4,769,000
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$
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10,915,000
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|
$
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26,927,000
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,725,000
|
|
$
|
3,415,000
|
|
$
|
3,310,000
|
|
$
|
19,557,000
|
|
$
|
5,976,000
|
|
$
|
13,581,000
|
|
$
|
33,630,000
|
|
Three Months Ended September 30, 2013, Compared to Three Months Ended September 30, 2012
During the three month period ended September 30, 2013, our cost of revenue was $6,725,000, which represents an increase of $3,310,000 (97%) from cost of revenue recorded for the three month period ended September 30, 2012. The increase in cost of revenue, compared to the third quarter of 2012, was mainly related to significant consulting and litigation costs, ($5,127,000, compared to $2,201,000 in the third quarter of 2012), mainly related to the commenced legal proceedings against ZTE, as well as increased amortization expenses related to patents acquired ($851,000, compared to $540,000 in the third quarter of 2012), and amortization of acquired Vringo technology, the value to which was allocated upon consummation of the Merger ($425,000, compared to $338,000 in the third quarter of 2012).
Nine Months Ended September 30, 2013, Compared to Nine Months Ended September 30, 2012
During the nine month period ended September 30, 2013, our cost of revenue was $19,557,000, which represents an increase of $13,581,000 (227%) from cost of revenue recorded for the nine month period ended September 30, 2012. The increase in cost of revenue was mainly related to increased amortization expenses related to patents acquired ($2,538,000, compared to $852,000 in 2012), as well as due to amortization of acquired Vringo technology, the value to which was allocated upon consummation of the Merger ($1,262,000, compared to $338,000 in 2012). In addition, we incurred significant consulting and litigation costs, ($14,790,000, compared to $4,451,000 in 2012), mainly related to the more recently commenced legal proceedings against ZTE, and non-cash, stock-based compensation costs ($894,000, compared to $318,000 in 2012).
From Inception Through September 30, 2013
From Inception through September 30, 2013, cost of revenue expenses amounted to $33,630,000. Of this amount, $120,000 was attributed to the cost of Vringo mobile products, $1,417,000 to non-cash, stock-based compensation expense, $2,025,000 was attributed to amortization of the acquired technology, $25,510,000 was attributed to operating legal expenses, mainly related to our patent monetization efforts and $4,542,000 was attributed to patent amortization.
We expect that our cost of revenue will increase over time, as we diversify the portfolio of our products and increase our intellectual property. With the goal of monetizing our intellectual property, we intend to commence new licensing and litigation campaigns which are expected to be costly.
Research and development
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
Cumulative from
Inception through
September 30,
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
2013
|
|
2012
|
|
Change
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
700,000
|
|
$
|
997,000
|
|
$
|
(297,000)
|
|
$
|
2,110,000
|
|
$
|
997,000
|
|
$
|
1,113,000
|
|
$
|
3,850,000
|
|
Three Months Ended September 30, 2013, Compared to Three Months Ended September 30, 2012
During the three month period ended September 30, 2013 and 2012, our research and development expense amounted to $700,000 and $997,000, respectively. The decrease of $297,000 (or 30%) was primarily due to reduced development team cost ($210,000, compared to $454,000 in the third quarter of 2012), and related non cash, stock-based compensation cost ($177,000, compared to $452,000 in the third quarter of 2012). This decrease was offset by an increase in consulting costs ($285,000, compared to $14,000 in the third quarter of 2012). These expenses relate to the cost of our research and development efforts in the U.S.
Nine Months Ended September 30, 2013, Compared to Nine Months Ended September 30, 2012
During the nine month period ended September 30, 2013, our research and development expense amounted to $2,110,000 and $997,000, respectively. The increase of $1,113,000 (or 112%) was primarily due to an increase in development team cost ($922,000, compared to $454,000 in 2012), an increase in consulting cost ($461,000, compared to $14,000 in 2012), and related non cash, stock-based compensation cost ($613,000, compared to $452,000 in 2012). These expenses mainly relate to post-Merger cost of the Vringo mobile research and development center in Israel.
From Inception Through September 30, 2013
From Inception through September 30, 2013, research and development expenses, in the total amount of $3,850,000, recorded following the Merger with I/P, consist primarily of the cost of our development team of $1,731,000, consulting expenses of $491,000 and related stock-based compensation cost $1,305,000.
We anticipate that research and development costs incurred in connection with our Vringo mobile services may decrease over time. In March 2013, we reduced research and development personnel in Israel. In addition, we now focus our efforts towards finding and developing new technologies and intellectual property. As part of this effort we are seeking to introduce new products or technology either through internal development or through merger or acquisition. As such, our other research and development costs may increase over time. We are currently focusing on research and development in the cognitive radio space including building on the technology licensed from Virginia Tech.
Marketing, general and administrative
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
Cumulative from
Inception through
September 30,
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
2013
|
|
2012
|
|
Change
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing, general and administrative
|
|
$
|
3,801,000
|
|
$
|
6,364,000
|
|
$
|
(2,563,000)
|
|
$
|
11,806,000
|
|
$
|
7,508,000
|
|
$
|
4,298,000
|
|
$
|
23,876,000
|
|
Three Months Ended September 30, 2013, Compared to Three Months Ended September 30, 2012
During the three month period ended September 30, 2013, marketing, general and administrative expenses decreased by $2,563,000 (or -40%), to $3,801,000, from $6,364,000 recorded during the three month period ended September 30, 2012. Marketing, general and administrative expenses decreased mostly due to a decrease in stock-based compensation expense ($2,383,000, compared to $4,592,000 recorded in the third quarter of 2012, as well as due to a decrease in payroll expense ($661,000, compared to $941,000 recorded in the third quarter of 2012).
Nine Months Ended September 30, 2013, Compared to Nine Months Ended September 30, 2012
During the nine month period ended September 30, 2013, marketing, general and administrative expenses increased by $4,298,000 (or 57%), to $11,806,000, from $7,508,000 recorded during the nine month period ended September 30, 2012. Marketing, general and administrative expenses increased mostly due to an increase in stock-based compensation expense ($7,468,000, compared to $4,762,000 recorded in 2012), as well as due to an increase in payroll expense ($1,930,000, compared to $1,274,000 recorded in 2012), incurred in connection with our post-Merger, combined management.
From Inception Through September 30, 2013
From Inception through September 30, 2013, marketing, general and administrative expenses amounted to $23,876,000. Of that amount, $3,732,000 was attributed to salaries and related expenses, $14,814,000 was attributed to non-cash stock-based compensation, $313,000 was attributed to merger and acquisition activity and $2,566,000 was attributed to various professional fees.
We expect our marketing, general and administrative expenses to increase, as our business continues to grow, on a post-Merger basis, due to increased administration, rent, office, accounting, legal and insurance costs. New merger and acquisition opportunities, should such arise, may also significantly increase our marketing, general and administrative costs.
Non-operating income (expense), net
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
Cumulative from
Inception through
September 30,
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
2013
|
|
2012
|
|
Change
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense), net
|
|
$
|
645,000
|
|
$
|
7,310,000
|
|
$
|
(6,665,000)
|
|
$
|
(1,220,000)
|
|
$
|
7,303,000
|
|
$
|
(8,523,000)
|
|
$
|
2,754,000
|
|
Three Months Ended September 30, 2013, Compared to Three Months Ended September 30, 2012
During the three month period ended September 30, 2013, we recorded non-operating income in the amount of $645,000, compared to non-operating income in the amount of $7,310,000 recorded in the three month period ended September 30, 2012. Following the Merger, in the third quarter of 2012, our non-operating income (expense), net, included mainly the impact of changes in fair value of our derivative warrants, the fair value of which is highly affected by our share price at the measurement date. Consequently, as of September 30, 2012, we recorded an income of $7,240,000 due to the decrease of our share price at quarter end, compared to the price on the date of the Merger. During the three month period ended September 30, 2013, we recorded approximately $689,000 income related to a decrease in fair value of our derivative warrant liability. The change was mainly due to a decrease in our share price as of the valuation date, compared to the end of the second quarter of 2013.
Nine Months Ended September 30, 2013, Compared to Nine Months Ended September 30, 2012
During the nine month period ended September 30, 2013, we recorded non-operating expense in the amount of $1,220,000, compared to non-operating income in the amount of $7,303,000 recorded in the nine month period ended September 30, 2012. During the nine month period ended September 30, 2013, we recorded approximately a $397,000 income related to a decrease in fair value of our derivative warrant liability. In addition, as part of the issuance of October 2012 Warrants, down-round protection clause in certain then outstanding Series 1 Warrants were removed. The impact of the removal of the down-round warrant protection, which was not material, was recorded during the nine month period ended September 30, 2013. As a result, we recorded an additional, non-operating expense of $1,617,000. As of September 30, 2012, we recorded an income of $7,240,000 due to the decrease of our share price at quarter end, compared to the price on the date of the Merger.
From Inception Through September 30, 2013
Following the Merger, our non-operating income (expenses), net, included mainly the impact of changes in fair value of our derivative warrants, the fair value of which is highly affected by our share price at the measurement date. Consequently, as of September 30, 2013, we recorded income of $5,627,000 due to the decrease of our share price, compared to the share price on the date of issuance (i.e. Merger).
In October 2012, we entered into an agreement with certain of our warrant holders, pursuant to which such warrant holders exercised in cash their outstanding warrants into 3,721,062 shares of our common stock, with an exercise price of $1.76 per share, and agreed to delete down round protection clause in their then outstanding Series 1 Warrant agreements. In consideration, we issued such warrant holders unregistered warrants to purchase an aggregate of 3,000,000 of our shares of common stock at an exercise price of $5.06 per share. The newly issued warrants do not bear down-round protection clauses. As a result of this issuance, additional non-operational expense in the total amount of $2,883,000 was recorded (see also Note 6 to the accompanying financial statements).
We expect that our non-operating income (expenses), net, will remain highly volatile, as we may choose to fund our operations through additional financing. In particular, non-operating income (expenses), net, will be affected by the adjustments to fair value of our derivative instruments. Fair value of these derivative instruments depends on variety of assumptions, such as estimations regarding volatility, triggering of down-round protection and estimated future share price. An estimated increase in the price of our common stock increases the value of the warrants and thus results in a loss on our statement of operations. In addition, increase in estimated probability of a down-round protection, increases the value of the warrants and again results in a loss on our statement of operations. Also see Notes 4 and 6 to the accompanying financial statements.
Income tax benefit (expense)
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
Cumulative from
Inception through
September 30,
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
2013
|
|
2012
|
|
Change
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
$
|
(29,000)
|
|
$
|
76,000
|
|
$
|
(105,000)
|
|
$
|
(47,000)
|
|
$
|
76,000
|
|
$
|
(123,000)
|
|
$
|
(102,000)
|
|
During the three months ended September 30, 2013, we recorded income tax expense in the total amount of $29,000, compared to a $76,000 tax benefit recorded in the three month period ended September 30, 2012. During the nine months ended September 30, 2013, we recorded income tax expense in the total amount of $47,000, compared to a $76,000 tax benefit recorded in the nine month period ended September 30, 2012. In general, current taxes on income are mainly due to taxable profits generated by our subsidiary in Israel, as a result of the intercompany cost plus agreement between us and the subsidiary in Israel, whereby the subsidiary in Israel performs development and other services for us and is reimbursed for its expenses plus 8% profit. For financial statements purposes, these profits are eliminated upon consolidation.
As of December 31, 2012, we had approximately $55,000,000 in aggregate total net tax loss carryforwards ("NOL") for U.S. federal state and local purposes expiring 20 years from the respective tax years to which they relate (beginning with 2006 for the Legal Parent and 2011 for I/P). The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of NOL and tax credits in the event of an ownership change of a corporation. Thus, in accordance with Internal Revenue Code, Section 382, our initial public offering, financing activities, as well as the Merger, has significantly limited our ability to utilize such NOL’s and credit carryforwards.
We file our tax returns in the U.S. federal jurisdiction, as well as in various state and local jurisdictions. Vringo has open tax assessments for the years 2009 through 2012. As of September 30, 2013, all tax assessments for I/P are still open. The Israeli subsidiary files its income tax returns in Israel. As of September 30, 2013, the Israeli subsidiary has open tax assessments for the years 2009 through 2012.
As part of the Merger purchase price allocation, we recorded a deferred tax liability in connection with the acquired technology. This deferred tax liability was offset by a deferred tax asset in the same amount. The deferred tax asset in respect of the remaining tax loss carryforwards has been offset by a valuation allowance as in our opinion it is more likely than not that the tax loss carryforwards will not be utilized in the foreseeable future. No valuation allowance has been provided for the deferred tax assets of the Israeli subsidiary since as of September 30, 2013, they are more likely than not to be realized.
We expect our tax expense in Israel to decrease, as the scope of services provided to us is expected to decrease, mainly due to reduction in operating and support personnel. We also expect our income tax expenses in the U.S. to increase, partially due to the potential increase in revenues, as well as due to increase in local taxes calculated based on equity and total assets.
Liquidity and Capital Resources
As of September 30, 2013, we had a cash balance of $40,436,000 and $37,596,000 in net working capital. The decrease of $16,524,000 in our cash balance from December 31, 2012, was mainly due to cash used by us in our business operations, in the total amount of approximately $17,384,000, offset by $1,539,000 received from the exercise of options and warrants.
During the nine month period ended September 30, 2013, 421,493 warrants to purchase an aggregate of 421,493 shares of our common stock
, were exercised by our warrant holders, pursuant to which we received an additional $566,000. In addition, 717,735 options, to purchase 717,735 shares of our common stock, issued to employees, directors and management, were exercised. As a result, we received an additional $973,000.
As of November 5, 2013, we had approximately $
38,025,000
in cash, cash equivalents and short-term investments. Based on current operating plans, we expect to have sufficient funds for at least the next twelve months. In addition, we may choose to raise additional funds in connection with potential acquisitions of patent portfolios or other intellectual property assets that we may pursue. There can be no assurance, however, that any such opportunities will materialize.