NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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. Prior to December 31, 2013, the Company operated a global platform for the distribution of mobile social applications and services it developed
.
On December 31, 2013, the Company entered into a definitive agreement to sell its mobile social application business (refer to Notes 7 and 14).
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 Merger 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, Vringo, or Legal Parent refer to such entities’ standalone businesses prior to the Merger.
N
ote 2 Significant Accounting and Reporting Policies
(a) Basis of presentation and principles of consolidation
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 U.S. GAAP. All significant intercompany balances and transactions have been eliminated in consolidation. These consolidated 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 December 31, 2013. Moreover, equity amounts, as well as net loss per common share, presented for comparative periods differ from those previously presented by I/P, due to application of accounting requirements applicable to a reverse acquisition.
(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 any significant revenues from its planned principal operations. Accordingly, the Company’s consolidated financial statements are presented as those of a development stage enterprise.
(c) Translation into U.S. dollars
The currency of the primary economic environment in which the operations of the Company are conducted is the U.S. dollar ("U.S. $" or “$”). Therefore, the U.S. dollar has been determined to be the Company's functional currency. Post-Merger, the Company conducted significant transactions in foreign currencies (primarily the New Israeli Shekels "NIS" and the Euro). These 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-U.S. dollar currencies are reflected as non-operating income (expenses) in the consolidated statements of operations, as they arise.
Exchange rate of 1 U.S. $:
|
|
NIS
|
|
Euro
|
|
At December 31, 2013
|
|
3.471
|
|
0.726
|
|
At December 31, 2012
|
|
3.733
|
|
0.759
|
|
Average exchange rate for the year ended December 31, 2013
|
|
3.611
|
|
0.753
|
|
(d) Use of estimates
The preparation of the accompanying consolidated 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 of the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results may differ from such estimates. Significant items subject to such estimates and assumptions include the valuation of assets assumed and liabilities incurred as part of the Merger, the useful lives of the Company’s tangible and intangible assets, the valuation of its October 2012 Warrants (as defined in Note 9), assets held for sale, derivative warrants, the 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 at acquisition date are considered cash equivalents.
(f) Derivative instruments
The Company recognizes all derivative instruments as either assets or liabilities in the consolidated balance sheets at their respective fair values. The Company's derivative instruments include Special Bridge Warrants, Conversion Warrants, Preferential Reload Warrants and Series 1 Warrants, all of which have been recorded as a liability, at fair value, and are revalued at each reporting date, with changes in the fair value of the instruments included in the consolidated statements of operations as non-operating income (expense).
(g) Long-lived assets
The Company’s long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of the Company's long-lived assets, the Company must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, the Company may be required to record impairment charges related to its long-lived assets.
D
uring the fourth quarter of 2013, the Company recorded an impairment loss of $
7,045
related to its acquired technology in connection with the sale of its mobile social application business.
Refer to Note 7 for further discussion.
(h) Property and equipment
Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. The useful lives of the Company’s property and equipment are based on estimates of the period over which the Company expects the assets to be of economic benefit to the Company.
Leasehold improvements are amortized over the shorter of the useful life of the asset or the term of the lease.
Annual depreciation rates are as follows:
|
|
%
|
|
Office furniture and equipment
|
|
7-33
|
|
Computers and related equipment
|
|
33
|
|
Leasehold improvements
|
|
10-33
|
|
(i) Intangible assets
Intangible assets include purchased patents which are recorded based on the cost to acquire them (refer to Note 5). These assets are amortized over their remaining estimated useful lives which are periodically evaluated for reasonableness. The assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may no longer be recoverable. The Company also has acquired technology which is included in assets held for sale in the consolidated balance sheet as of December 31, 2013 at fair value. The acquired technology was included in intangible assets, net in the consolidated balance sheet as of December 31, 2012. Refer to Notes 6 and 7 for further discussion.
(j) Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is reviewed for impairment at least annually, and when triggering events occur, in accordance with the provisions of
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles - Goodwill and Other
. The Company has one reporting unit for purposes of evaluating goodwill impairment.
The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would not need to perform the two-step impairment test for the reporting unit. If the Company cannot support such a conclusion or the Company does not elect to perform the qualitative assessment then the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, then step two of the impairment test (measurement) does not need to be performed. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the impairment test. Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to an acquisition price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using certain valuation techniques in addition to the company’s market capitalization.
The Company performed its annual impairment test of goodwill as of December 31, 2013. Based on this test, the Company did not recognize an impairment charge related to goodwill since the fair value of the reporting unit significantly exceeded its carrying value. The fair value as of December 31, 2013 was approximated to be $
250,127
, exceeding the carrying value by
118
%. The Company did however recognize an impairment charge related to goodwill of approximately $
208
during the fourth quarter of 2013 in connection with the sale of its mobile social application business.
Refer to Note 7 for further discussion.
(k) Revenue recognition
Revenue from patent licensing and enforcement is recognized if collection is reasonably assured, 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 vendor specific evidence or third party evidence of selling price is not available
.
(l) Operating legal costs
Operating legal costs mainly include the costs and expenses incurred in connection with the Company’s patent licensing and enforcement activities, patent-related legal expenses paid to external patent counsel (including contingent legal fees), licensing and enforcement related research, consulting and other expenses paid to third parties, as well as internal payroll expenses, share based compensation, and the amortization of acquired patents.
(m) Research and development
Research and development expenses were expensed as incurred and consists primarily of payroll and facilities charges associated with the research, development and integration of the Company’s mobile social application products.
(n) Accounting for stock-based compensation
Stock-based compensation is recognized as an expense in the consolidated statements of operations and such cost is measured at the grant-date fair value of the equity-settled award. The fair value of stock options is estimated at the date of grant using the Black-Scholes-Merton option-pricing model. In cases where no measurement date has been reached as there is no counter-party performance nor performance commitment (sufficiently large disincentive for non-performance), the options are revalued at each reporting date. The expense is recognized on a straight-line basis, over the requisite service period. The Company uses full contractual life to estimate the expected term of options granted to management and directors (and non-employees), as the Company expects such options to be exercised at the end of their life, and the simplified method to estimate the expected term of options granted to employees, due to insufficient history and high turnover in the past. The contractual life of options granted under the Legal Parent’s 2006 and 2012 option plans
are
6
and
10
years, respectively. Since the Company lacks sufficient history, expected volatility is estimated based on the average historical volatility of similar entities with publicly traded shares. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve at the date of grant.
(o) Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not more likely than not to be realized.
Tax benefits related to excess deductions on stock-based compensation arrangements are recognized when they reduce taxes payable.
In assessing the need for a valuation allowance, the Company looks at cumulative losses in recent years, estimates of future taxable earnings, feasibility of tax planning strategies, the realizability of tax benefit carryforwards, and other relevant information. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. Ultimately, the actual tax benefits to be realized will be based upon future taxable earnings levels, which are very difficult to predict. In the event that actual results differ from these estimates in future periods, the Company will be required to adjust the valuation allowance.
Significant judgment is required in evaluating the Company's federal, state and foreign tax positions and in the determination of its tax provision. Despite management's belief that the Company's liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matters. The Company may adjust these accruals as relevant circumstances evolve, such as guidance from the relevant tax authority, its tax advisors, or resolution of issues in the courts. The Company's tax expense includes the impact of accrual provisions and changes to accruals that it considers appropriate. These adjustments are recognized as a component of income tax expense entirely in the period in which new information is available. The Company records interest related to unrecognized tax benefits in interest expense and penalties in the consolidated statements of operations as general and administrative expenses
.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 percent of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
(p) 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. However, as the Company generated net losses in all periods presented, some potentially dilutive securities, that relate to the continuing operations, including certain warrants and stock options, were not reflected in diluted net loss per share, because the impact of such instruments was anti-dilutive. The table below presents the computation of basic and diluted net losses per common share:
|
|
Year ended December 31,
|
|
Cumulative from June 8, 2011
(Inception) through
|
|
|
|
2013
|
|
2012
|
|
December 31, 2013
|
|
Basic Numerator:
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to shares of
common stock
|
|
$
|
(41,748)
|
|
$
|
(18,409)
|
|
$
|
(62,911)
|
|
Loss from discontinued operations attributable to shares of
common stock
|
|
$
|
(10,685)
|
|
$
|
(2,432)
|
|
$
|
(13,117)
|
|
Net loss attributable to shares of common stock
|
|
$
|
(52,433)
|
|
$
|
(20,841)
|
|
$
|
(76,028)
|
|
Basic Denominator:
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock outstanding
during the period
|
|
|
83,097,667
|
|
|
38,949,305
|
|
|
50,004,601
|
|
Weighted average number of penny stock options
|
|
|
104,024
|
|
|
161,871
|
|
|
100,872
|
|
Basic common stock share outstanding
|
|
|
83,201,691
|
|
|
39,111,176
|
|
|
50,105,473
|
|
Basic loss per common stock share from continuing
operations
|
|
$
|
(0.50)
|
|
$
|
(0.47)
|
|
$
|
(1.26)
|
|
Basic loss per common stock share from discontinued
operations
|
|
$
|
(0.13)
|
|
$
|
(0.06)
|
|
$
|
(0.26)
|
|
Basic net loss per common stock share
|
|
$
|
(0.63)
|
|
$
|
(0.53)
|
|
$
|
(1.52)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Numerator:
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to shares of common stock
|
|
$
|
(41,748)
|
|
$
|
(18,409)
|
|
$
|
(62,911)
|
|
Increase in net loss attributable to derivative warrants
|
|
$
|
(59)
|
|
$
|
(4,701)
|
|
$
|
(3,336)
|
|
Diluted net loss from continuing operations attributable to
shares of common stock
|
|
$
|
(41,807)
|
|
$
|
(23,110)
|
|
$
|
(66,247)
|
|
Diluted net loss from discontinued operations attributable to
shares of common stock
|
|
$
|
(10,685)
|
|
$
|
(2,432)
|
|
$
|
(13,117)
|
|
Diluted net loss attributable to shares of common stock
|
|
$
|
(52,492)
|
|
$
|
(25,542)
|
|
$
|
(79,364)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Denominator:
|
|
|
|
|
|
|
|
|
|
|
Basic common stock share outstanding
|
|
|
83,201,691
|
|
|
39,111,176
|
|
|
50,105,473
|
|
Weighted average number of derivative warrants outstanding
during the period
|
|
|
79,182
|
|
|
2,553,500
|
|
|
1,513,424
|
|
Diluted common stock share outstanding
|
|
|
83,280,873
|
|
|
41,664,676
|
|
|
51,618,897
|
|
Diluted loss per common stock share from continuing
operations
|
|
$
|
(0.50)
|
|
$
|
(0.55)
|
|
$
|
(1.28)
|
|
Diluted loss per common stock share from discontinued
operations
|
|
$
|
(0.13)
|
|
$
|
(0.06)
|
|
$
|
(0.26)
|
|
Diluted net loss per common stock share
|
|
$
|
(0.63)
|
|
$
|
(0.61)
|
|
$
|
(1.54)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share data presented excludes from the calculation of diluted net loss the following potentially
dilutive securities, as of December 31 of the applicable period, as they had an anti-dilutive impact:
|
|
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
|
|
|
10,407,157
|
|
|
8,942,929
|
|
|
10,407,157
|
|
Unvested penny options to purchase an equal number of
shares of common stock of the Company
|
|
|
|
|
|
14,125
|
|
|
|
|
Unvested RSUs to issue an equal number of shares of common stock
of the Company
|
|
|
2,161,402
|
|
|
3,125,000
|
|
|
2,161,402
|
|
Common stock shares granted, but not yet vested
|
|
|
30,046
|
|
|
92,903
|
|
|
30,046
|
|
Warrants to purchase an equal number of shares of common stock
of the Company
|
|
|
18,261,031
|
|
|
3,787,628
|
|
|
15,202,513
|
|
Total number of potentially dilutive instruments, excluded
from the calculation of net loss per share:
|
|
|
30,859,636
|
|
|
15,962,585
|
|
|
27,801,118
|
|
(q) Commitments and Contingencies
Liabilities for loss contingencies arising from assessments, estimates or other sources are to be recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs expected to be incurred in connection with a loss contingency are expensed as incurred.
(r) Fair value measurements
The Company measures fair value in accordance with
FASB
ASC 820-10, Fair Value Measurements and Disclosures
. ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received to sell 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-
Unadjusted
quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2
-
Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 -
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.
(s) Impact of recently issued accounting standards
In December 2011, the FASB issued
ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.
ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under International Financial Reporting Standards (IFRS). The new standards are effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required. The Company adopted the guidance as of January 1, 2013, as required. There was no material impact on the consolidated financial statements resulting from the adoption.
In July 2013, the FASB issued
ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,
which provides guidance on the presentation of unrecognized tax benefits. This guidance requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance is effective for the Company beginning January 1, 2014 and should be applied prospectively with retroactive application permitted. The Company does not expect the adoption of ASU No. 2013-11 to have a material impact on its consolidated financial statements.
(t) Reclassification
Certain balances have been reclassified to conform to the presentation requirements for discontinued operations and the post-Merger year.
N
ote 3 Cash and Cash Equivalents
|
|
As of December 31,
|
|
|
|
2013
|
|
2012
|
|
Cash denominated in U.S. dollars
|
|
$
|
24,628
|
|
$
|
34,386
|
|
Money market funds denominated in U.S. dollars
|
|
|
3,184
|
|
|
22,352
|
|
Cash in currency other than U.S. dollars
|
|
|
5,774
|
|
|
222
|
|
|
|
$
|
33,586
|
|
$
|
56,960
|
|
Note 4 Property and Equipment
|
|
As of December 31,
|
|
|
|
2013
|
|
2012
|
|
Computers, software and equipment
|
|
$
|
171
|
|
$
|
169
|
|
Furniture and fixtures
|
|
|
83
|
|
|
67
|
|
Leasehold improvements
|
|
|
110
|
|
|
105
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(134)
|
|
|
(47)
|
|
|
|
$
|
230
|
|
$
|
294
|
|
During the years ended December 31, 2013 and 2012, the Company recorded $
87
and $
46
of depreciation and amortization expense, respectively, and $
134
cumulatively from Inception.
Note 5 Intangible Assets
|
|
As of December 31,
|
|
Weighted average
amortization period
|
|
|
2013
|
|
2012
|
|
(years)
|
Acquired technology (refer to Note 6)
|
|
$
|
10,133
|
|
$
|
10,133
|
|
6.0
|
Less: accumulated amortization
|
|
|
(2,451)
|
|
|
(763)
|
|
|
Less: impairment of technology (refer to Note 7)
|
|
|
(7,045)
|
|
|
|
|
|
Less: technology reclassified to assets held for sale (refer to Note 7)
|
|
|
(637)
|
|
|
|
|
|
Total
|
|
|
|
|
|
9,370
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
28,213
|
|
|
26,694
|
|
8.3
|
Less: accumulated amortization
|
|
|
(5,465)
|
|
|
(2,020)
|
|
|
Total
|
|
|
22,748
|
|
|
24,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,748
|
|
$
|
34,044
|
|
|
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 years ended December 31, 2013 and 2012, the
Company recorded
total patent amortization expense of $
3,445
and $
1,692
,
respectively, and $
5,465
cumulatively from Inception.
In addition, during the years ended December 31, 2013 and 2012, total amortization expense of $
1,688
and $
763
was recorded
, respectively, and $
2,451
cumulatively from Inception,
for the Company’s acquired technology (for December 31, 2013 classification refer to Note 7).
Estimated patent amortization expense for each of the five succeeding years, based upon intangible assets owned at December 31, 2013 is as follows:
Year ending December 31,
|
|
Amount
|
|
2014
|
|
$
|
3,832
|
|
2015
|
|
|
3,766
|
|
2016
|
|
|
3,045
|
|
2017
|
|
|
2,845
|
|
2018
|
|
|
2,822
|
|
2019 and thereafter
|
|
|
6,438
|
|
|
|
$
|
22,748
|
|
Note 6 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, options, preferred stock 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, and for 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 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
(refer to Note 9). 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
ASC
805, Business Combinations.
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
|
|
Acquired 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 $0.01 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
by the Company using an income approach valuation model
. 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.
Note 7
Assets Held for Sale and Discontinued Operations
On December 31, 2013, the Company entered into a definitive asset purchase agreement with InfoMedia Services Limited
(“Infomedia”), a private company, incorporated in the United Kingdom, for the sale of all assets (the “Asset Group”) and the assignment of all agreements related to the Company’s mobile social application business. The Asset Group, which the Company determined to represent a business in accordance with
ASC 805, “Business Combinations,”
is mostly comprised of the Company’s acquired technology (refer to Notes 5 and 6). The closing of the transaction, which was subject to the satisfaction or waiver of certain conditions, occurred on February 18, 2014 (“Closing”) (refer to Note 14)
.
Upon Closing, in exchange for the assets and agreements related to the Company’s mobile social application business, the Company received 18 Class B shares of Infomedia, which represent an
8.25
% ownership interest in Infomedia. The Infomedia Class B shares were accounted for as a cost-method investment in the first quarter of 2014. The Company will
test
its investment
for impairment whenever events or changes in circumstances indicate that the carrying amount may no longer be recoverable
.
In
connection with the asset purchase agreement, an impairment loss of
$
7,253
was recorded during the fourth quarter of 2013, which represents the excess of the carrying value (which includes the portion of goodwill allocated to the mobile social application business) over the estimated fair value of the Asset Group. The fair value of the Asset Group was estimated using an income approach by developing a discounted, future, net cash flows model. The following table presents the carrying amounts of the major classes of assets from discontinued mobile social application in the Company’s consolidated balance sheet as of December 31, 2013 (as of December 31, 2013, there were no liabilities classified as held for sale, as no liabilities were transferred to Infomedia upon Closing):
|
|
As of December 31,
|
|
|
|
2013
|
|
Cash
|
|
$
|
48
|
|
Accounts receivable
|
|
|
102
|
|
Goodwill at carrying amount of $208, net of $208 loss on impairment
|
|
|
|
|
Acquired technology at carrying amount of $10,133, net of $2,451 accumulated amortization and $7,045 loss on impairment
|
|
|
637
|
|
Total assets held for sale
|
|
$
|
787
|
|
The following table represents the components of operating results from discontinued operations, as presented in the consolidated statements of operations:
|
|
As of December 31,
|
|
Cumulative from
Inception through
December 31,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
Revenue
|
|
$
|
224
|
|
$
|
269
|
|
$
|
493
|
|
Operating expenses
|
|
|
(3,334)
|
|
|
(2,666)
|
|
|
(6,000)
|
|
Loss on impairment
|
|
|
(7,253)
|
|
|
|
|
|
(7,253)
|
|
Operating loss
|
|
|
(10,363)
|
|
|
(2,397)
|
|
|
(12,760)
|
|
Non-operating income (expense)
|
|
|
(65)
|
|
|
20
|
|
|
(45)
|
|
Loss before taxes on income
|
|
|
(10,428)
|
|
|
(2,377)
|
|
|
(12,805)
|
|
Income tax expense
|
|
|
(257)
|
|
|
(55)
|
|
|
(312)
|
|
Loss from discontinued operations
|
|
$
|
(10,685)
|
|
$
|
(2,432)
|
|
$
|
(13,117)
|
|
N
ote 8 Fair Value Measurements
The
Company measures its derivative liabilities at fair value. The Special Bridge Warrants, Conversion Warrants, Preferential Reload Warrants and the derivative Series 1 Warrants (as they are defined in Note 9) 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 placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2013 and 2012:
|
|
|
|
|
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 December 31, 2013
|
|
$
|
4,083
|
|
|
|
|
|
$
|
4,083
|
|
As of December 31, 2012
|
|
$
|
7,612
|
|
|
|
|
|
$
|
7,612
|
|
The following table presents the placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a non-recurring basis as of December 31, 2013 (there were no such assets or liabilities as of December 31, 2012):
|
|
Fair value measurement at reporting date using
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
|
|
|
active markets
|
|
Significant other
|
|
Significant
|
|
|
|
|
|
|
for identical
|
|
observable
|
|
unobservable
|
|
|
|
Balance
|
|
assets (Level 1)
|
|
inputs (Level 2)
|
|
inputs (Level 3)
|
|
Assets held for sale
|
|
$
|
787
|
|
$
|
150
|
|
|
|
$
|
637
|
|
In addition to the above, the Company’s financial instruments at December 31, 2013 and December 31, 2012, consisted of cash, cash equivalents, accounts payable, and accounts receivable 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 years ended December 31, 2013 and 2012:
|
|
Level 3
|
|
Balance at January 1, 2012
|
|
$
|
|
|
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 (refer to Note 9)
|
|
|
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 (refer to Note 9)
|
|
|
(2,300)
|
|
Fair value adjustment, prior to exercise of warrants, included in statement of operations
|
|
|
9
|
|
Exercise of derivative warrants
|
|
|
(808)
|
|
Fair value adjustment at end of period, included in statement of operations
|
|
|
(430)
|
|
Balance at December 31, 2013
|
|
$
|
4,083
|
|
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 9) 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
|
|
|
Special Bridge Warrants, Conversion Warrants,
Preferential Reload Warrants and the outstanding derivative Series 1 Warrants
|
|
Black-Scholes-Merton and the Monte-Carlo models
|
|
Volatility
|
|
46.85% 52.63%
|
|
|
Risk free interest rate
|
|
0.16% 1.11%
|
|
|
Expected term, in years
|
|
0.99 3.55
|
|
|
Dividend yield
|
|
0%
|
|
|
Probability and timing of down-round triggering event
|
|
5% occurrence in
December 2014
|
|
|
The fair value of assets held for sale, as well as other long-lived assets, is determined by estimating the present value of the expected future cash flows associated with that asset or asset group by using certain unobservable market inputs. These inputs include discount rates, estimated future cash flows and certain continuing growth rate assumptions. The discount rates are intended to reflect the risk inherent in the projected future cash flows generated by the respective asset or asset group. These inputs, particularly related to mobile social application technology, are sensitive to rapid changes in the industry and technological advances.
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 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, an increase in the volatility of the Company’s shares of common stock, 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 common stock, and thus, there is no change in the estimated fair value of the warrants due to the dividend assumption.
Note 9 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 December 31, 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, refer to Note 5
|
|
160,600
|
|
Balance as of December 31, 2012
|
|
81,889,226
|
|
Exercise of warrants
|
|
435,783
|
|
Exercise of stock options and vesting of RSUs
|
|
2,177,644
|
|
Balance as of December 31, 2013
|
|
84,502,653
|
|
(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 December 31, 2013,
4,509,796
shares were available for future grants under the 2012 Plan.
(c) Stock options and RSUs
The following table illustrates the common stock options granted during the year ended December 31, 2013:
Title
|
|
Grant date
|
|
No. of
options
|
|
Exercise
price
|
|
FMV at
grant date
|
|
Vesting terms
|
|
Assumptions used in Black-Scholes option
pricing model
|
|
Management, Directors and Employees *
|
|
January-December 2013
|
|
3,365,833
|
|
$2.77-$3.24
|
|
$2.77-$3.24
|
|
Over 0.67-3 years
|
|
Volatility
Risk free interest rate
Expected term,
in years
Dividend yield
|
|
59.26%-70.51%
0.85%-2.06%
5.71-10.00
0.00%
|
|
Consultant
|
|
January-June 2013
|
|
132,500
|
|
$2.90-$3.30
|
|
$2.90-$3.30
|
|
Over 0-2.5 years
|
|
Volatility
Risk free interest rate
Remaining expected term, in years
Dividend yield
|
|
61.80%-63.87%
2.16%-2.95%
9-9.50
0.00%
|
|
*
|
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 grantee), upon a subsequent change of control.
|
The following table illustrates the RSUs granted during the year ended December 31, 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-October
2013
|
|
66,000
|
|
|
|
|
$2.96-$3.26
|
|
Over 0.75-1.20 years
|
|
The following tables summarize information about stock options and RSU activity for the year ended December 31, 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
|
|
722,250
|
|
$
|
3.15
|
|
3,498,333
|
|
$
|
3.12
|
|
|
$2.77 $3.30
|
|
$
|
2.16
|
|
Vested/Exercised
|
|
(1,452,721)
|
|
$
|
3.60
|
|
(724,923)
|
|
$
|
1.34
|
|
|
$0.01 $3.18
|
|
$
|
2.97
|
|
Expired
|
|
|
|
|
|
|
(982,534)
|
|
$
|
5.02
|
|
|
$0.01 $5.50
|
|
$
|
1.59
|
|
Forfeited
|
|
(233,126)
|
|
$
|
3.71
|
|
(482,822)
|
|
$
|
3.51
|
|
|
$0.01 $5.50
|
|
$
|
2.44
|
|
Outstanding at December 31, 2013
|
|
2,161,403
|
|
$
|
3.61
|
|
10,457,159
|
|
$
|
3.23
|
|
|
$0.01 $5.50
|
|
$
|
2.50
|
|
Exercisable at December 31, 2013
|
|
|
|
|
|
|
5,863,479
|
|
$
|
3.09
|
|
|
$0.01 $5.50
|
|
|
|
|
|
|
Non vested options:
|
|
Non vested RSUs:
|
|
|
|
No. of options
|
|
Weighted average
grant date fair
value
|
|
No. of RSUs
|
|
Weighted average
grant date fair
value
|
|
Balance at January 1, 2013
|
|
4,902,989
|
|
$
|
2.50
|
|
3,125,000
|
|
$
|
3.72
|
|
Granted
|
|
3,498,333
|
|
$
|
2.16
|
|
722,250
|
|
$
|
3.15
|
|
Vested
|
|
(3,324,820)
|
|
$
|
2.35
|
|
(1,452,721)
|
|
$
|
3.60
|
|
Forfeited
|
|
(482,822)
|
|
$
|
2.44
|
|
(233,126)
|
|
$
|
3.71
|
|
Balance at December 31, 2013
|
|
4,593,680
|
|
$
|
2.36
|
|
2,161,403
|
|
$
|
3.61
|
|
The following table summarizes information about employee and non-employee stock options outstanding as of December 31, 2013:
Exercise price
|
|
No. options outstanding
|
|
No. options exercisable
|
|
Weighted average remaining
contractual life (years)
|
|
$
|
0.01-1.00
|
|
381,679
|
|
381,679
|
|
3.72
|
|
$
|
1.01-2.00
|
|
1,262,232
|
|
1,220,566
|
|
4.19
|
|
$
|
2.01-3.00
|
|
655,000
|
|
161,250
|
|
8.53
|
|
$
|
3.01-4.00
|
|
7,749,582
|
|
3,691,317
|
|
8.67
|
|
$
|
4.01-5.00
|
|
11,166
|
|
11,167
|
|
0.22
|
|
$
|
5.04-6.00
|
|
397,500
|
|
397,500
|
|
2.56
|
|
|
|
|
10,457,159
|
|
5,863,479
|
|
|
|
As of December 31, 2013, the total aggregate intrinsic value of options outstanding and options exercisable was $
2,558
and $
2,445
, respectively. The total aggregate intrinsic value of options exercised was $
1,322
. As of December 31, 2012, the total aggregate intrinsic value of options outstanding and options exercisable was $
3,548
and $
3,200
, respectively. The total aggregate intrinsic value of options exercised was $
2,417
. The total fair value of stock options that vested in the year ended December 31, 2013, and 2012, and cumulative from Inception until December 31, 2013 amounts to $
7,807
, $
5,927
and $
13,759
respectively.
As of December 31, 2013, there was approximately $
17,481
of total unrecognized share-based payment cost related to non-vested options, shares and RSUs, granted under the incentive stock option plans. Overall, the cost is expected to be recognized over a weighted average of
1.5
years.
The Company did not recognize tax benefits related to its stock-based compensation due to full valuation allowance in the U.S.
(d)
Warrants
The following table summarizes information about warrant activity for the year ended December 31, 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 during the year
|
|
(435,783)
|
|
$
|
1.36
|
|
|
$0.94 $1.76
|
|
Outstanding at December 31, 2013
|
|
18,427,478
|
|
$
|
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 year ended December 31, 2013. As a result, during the year ended December 31, 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 year ended December 31, 2013,
166,447
Series 1 Warrants and
45,190
Series 2 Warrants were exercised. From Inception and through December 31, 2013,
4,821,547
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, the 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 year ended December 31, 2013, and from Inception through December 31, 2013,
127,192
Special Bridge Warrants and
86,954
Conversion Warrants were exercised. During the year ended December 31, 2013,
10,000
non-Preferential Reload Warrants were exercised. From Inception and through December 31, 2013,
179,520
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 December 31, 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 December 31, 2013, all October 2012 warrants were outstanding.
Note 10 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 11 Income Taxes
For the years ended December 31, 2013 and 2012, and the cumulative period from Inception through December 31, 2013, loss from continuing operations before taxes consists of the following:
|
|
For the year ended December 31,
|
|
Cumulative
from Inception through
|
|
|
|
2013
|
|
2012
|
|
December 31, 2013
|
|
U.S.
|
|
$
|
(41,204)
|
|
$
|
(17,673)
|
|
$
|
(61,631)
|
|
Non-U.S.
|
|
|
(544)
|
|
|
(736)
|
|
|
(1,280)
|
|
|
|
$
|
(41,748)
|
|
$
|
(18,409)
|
|
$
|
(62,911)
|
|
Income tax expense attributable to the operating loss of continuing and discontinued operations consists of the following:
|
|
For the year ended December 31,
|
|
Cumulative
from Inception through
|
|
|
|
2013
|
|
2012
|
|
December 31, 2013
|
|
U.S. (continuing operations)
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S (discontinued operations)
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(245)
|
|
|
(112)
|
|
|
(357)
|
|
Deferred
|
|
|
(12)
|
|
|
57
|
|
|
45
|
|
|
|
$
|
(257)
|
|
$
|
(55)
|
|
$
|
(312)
|
|
Income tax expense attributable to continuing operations differed from the amounts computed by applying the U.S. federal income tax rate
of
35
% to
loss from continuing operations before taxes on income as a result of the following:
|
|
For the year ended December 31, 2012
|
|
|
Cumulative
from Inception
through
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
Loss from continuing operations before taxes on income
|
|
$
|
(41,748)
|
|
|
$
|
(18,409)
|
|
|
$
|
(62,911)
|
|
Tax rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computed "expected" tax benefit
|
|
|
14,612
|
|
|
|
6,443
|
|
|
|
22,019
|
|
Foreign tax rate differential
|
|
|
(122)
|
|
|
|
(147)
|
|
|
|
(269)
|
|
Change in valuation allowance
|
|
|
(17,085)
|
|
|
|
(7,461)
|
|
|
|
(25,777)
|
|
Nondeductible expenses
|
|
|
(125)
|
|
|
|
(15)
|
|
|
|
(140)
|
|
State and local income tax, net of federal income tax expense
|
|
|
2,714
|
|
|
|
1,197
|
|
|
|
3,911
|
|
Other items
|
|
|
6
|
|
|
|
(17)
|
|
|
|
256
|
|
Income tax expense attributable to continuing operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
These deferred tax assets (liabilities) arise from the following types of temporary differences:
|
|
For the year ended December 31,
|
|
|
|
2013
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Acquired patents (see also Note 5)
|
|
$
|
|
|
$
|
446
|
|
Liability for accrued employee vacation and severance pay
|
|
|
7
|
|
|
19
|
|
Stock-based compensation
|
|
|
8,104
|
|
|
4,590
|
|
Net operating loss carryforwards
|
|
|
36,605
|
|
|
23,127
|
|
Total gross deferred tax assets
|
|
|
44,716
|
|
|
28,182
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(44,445)
|
|
|
(24,274)
|
|
Deferred tax liability for acquired technology (refer to Note 8):
|
|
|
(264)
|
|
|
(3,889)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
7
|
|
$
|
19
|
|
The valuation allowance primarily relates to operating loss carryforwards ("NOL") that, in the judgment of management, are not more-likely-than-not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The following table presents the changes to valuation allowance during the periods presented:
|
|
Amount
|
|
As of Inception
|
|
$
|
|
|
Charged to cost and expenses
|
|
|
1,231
|
|
|
|
|
|
|
As of December 31, 2011
|
|
|
1,231
|
|
Charged to cost and expenses
|
|
|
12,240
|
|
Acquisitions *
|
|
|
10,803
|
|
|
|
|
|
|
As of December 31, 2012
|
|
|
24,274
|
|
Charged to cost and expenses continuing operations
|
|
|
17,085
|
|
Charged to cost and expenses discontinued operations
|
|
|
3,086
|
|
|
|
|
|
|
As of December 31, 2013
|
|
$
|
44,445
|
|
* As mentioned below, the NOL amounts are presented before Internal Revenue Code, Section 382 limitations.
As of December 31, 2013, the Company has an aggregate total NOL for U.S. federal, state and local purposes in the amount of approximately $
88,204
expiring 20 years from the respective tax years to which they relate (beginning with 2006 for Vringo, Inc., and 2011 for Innovate/Protect Inc.), i.e. 2026 to 2033. 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, the Company's initial public offering, its certain pre-Merger financing activities, as well as the Merger, may limit the Company's ability to utilize all such NOL and credit carryforwards.
As of December 31, 2013, with the sale of its
mobile social application business, and its
classification as assets held for sale, the Company does not meet the criteria for the exception of indefinite reversal criteria for its Israeli subsidiary.
The Company did not record any additional material provisions related to such event
.
A valuation allowance has been recorded against the net deferred tax asset in the U.S. as it is in the opinion of the Company’s management it is more likely than not that the operating 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 they are more likely than not to be realized.
The Company files its tax returns in the U.S. federal jurisdiction, as well as in various state and local jurisdictions. Vringo, Inc, has open tax assessments for the years 2010 through 2013. As of December 31, 2013, all tax assessments for Innovate/Protect are still open. The Israeli subsidiary files its income tax returns in Israel. As of December 31, 2013, the Israeli subsidiary has open tax assessments for the years 2010 through 2013.
The Company did not have any material unrecognized tax benefits in 2013 and 2012. The Company does not expect to record any additional material provisions for unrecognized tax benefits within the next year.
The Israeli subsidiary has qualified as a "Beneficiary Enterprise" under the 2005 amendment to the Israeli Law for the Encouragement of Capital Investments, 1959 (the "Investment Law"). As a Beneficiary Enterprise, the Israeli subsidiary is entitled to receive future tax benefits which are limited to a period of seven years. The year in which a company elects to commence its tax benefits is designated as the year of election ("Year of Election"). The Israeli subsidiary has elected 2007 as its Year of Election and has received a two year tax holiday for profits accumulated in the years 2007-2008. In 2011, the Israeli subsidiary irrevocably adopted an amendment to the Investment law, according to which the following uniform tax rates (applicable to the zone where the production facilities of the Israeli subsidiary are located) would apply: 15% in 2011 and 2012 and 12.5% in 2013. On August 5, 2013 the Knesset passed the Law for Changes in National Priorities (Legislative Amendments for Achieving Budget Objectives in the Years 2013 and 2014) 2013, according to which, for 2014, the regular tax rate on corporate income will be raised by
1.5
% to
26.5
% and on tax rate of preferred income to
16
%. As of the balance sheet date, the Israeli subsidiary believes that it is in compliance with the conditions of the Beneficiary Enterprise program. Income that is not derived from the Beneficiary Enterprise is subject to the regular corporate tax rate of 25% in 2013 and 26.5% in 2014.
Note 12 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 written commitments, 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, ZTE's German subsidiary started three revocation (invalidity) proceedings against the Company; two in the first half of 2013 and one in the first quarter 2014. Should ZTE's be successful in any of those actions the Company would liable for some portion of ZTE’s fees. The total amount the Company would have to pay is a statutorily determined percentage based on the estimated the value in dispute for these proceedings. ZTE has estimated the value of the revocation proceeding at €
2,500
for each case; the Company assesses the likelihood of it as remote.
In addition, the Company may be required to grant additional written commitments, 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
In July 2012, the Company signed a rental agreement for its corporate executive office in New York for an annual rental fee of approximately $
137
(subject to certain adjustments) which was to expire in September 2015.
However in January 2014, the Company entered into an amended lease agreement with the landlord for newly renovated office within the same building. The annual rental fee for this new office is approximately $
403
(subject to certain adjustments) beginning when the renovations are completed and the new office is available. Until the new office is available, the monthly rent is based on the previous annual rental fee. The lease for the New York office will expire 5 years and 3 months after the new office is available.
The Company’s subsidiary in Israel leases an office space which expires in May 2014. The annual rental fee is approximately $
72
.
Rent expense for operating leases for the years ended December 31, 2013, and 2012, and cumulative from Inception until December 31, 2013 amounts to $
230
, $
120
and $
361
respectively. Future minimum lease payments under non-cancelable operating leases for office space, as of December 31, 2013, are as follows:
Year ending December 31,
|
|
Amount
|
|
2014
|
|
$
|
180
|
|
2015
|
|
|
104
|
|
|
|
$
|
284
|
|
Note 13 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)
|
|
The patents owned by the Company are presumed to be valid and enforceable. As part of the Company’s ongoing legal proceedings, the validity and/or enforceability of the patents may be challenged in a court or administrative proceeding. To date, the Company’s patents have not been declared to be invalid or unenforceable.
|
|
|
|
(c)
|
|
Financial instruments which potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company maintains its cash and cash equivalents with various major financial institutions. These major financial institutions are located in the United States and its 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.
|
Note 14 Subsequent Events
(a)
|
|
In January and February 2014,
626,805
warrants to purchase an aggregate of
626,805
shares of the Company’s common stock, at an exercise price of $
1.76
per share, were exercised by its warrant holders, pursuant to which it received an additional $
1,103
. In addition,
699,606
options and RSUs, collectively, to purchase
699,606
shares of the Company’s common stock, issued to employees, directors and management, were exercised. As a result, the Company received an additional $
1,455
.
|
|
|
|
(b)
|
|
On February 20, 2014, the Board approved a new grant of
1,025,000
options, at an exercise price of $
4.10
, to the Company’s directors and certain members of management, granted under the 2012 Plan. The options granted to directors will vest quarterly over a one year period. The options granted to certain members of management will vest quarterly over a three year period. The full impact of these events on the Company’s financial statements has not yet been determined, however, the Company believes that such effect will be material.
|
|
|
|
(c)
|
|
On February 18
, 2014, the Company executed
the sale of its mobile social application business to Infomedia, in exchange for 18 Class B shares of Infomedia, which represent an
8.25
% ownership interest
(refer to Note 7).
The Infomedia Class B shares were accounted for as a cost-method investment.
|