Item 1. Financial Statements
Vringo, Inc. and
Subsidiaries
(a Development
Stage Company)
CONSOLIDATED BALANCE
SHEETS
(In thousands,
except share and per share data)
|
|
March 31,
2014
(Unaudited)
|
|
|
December 31,
2013
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
27,818
|
|
|
$
|
33,586
|
|
Assets held for sale
|
|
|
—
|
|
|
|
787
|
|
Other current assets
|
|
|
729
|
|
|
|
455
|
|
Total current assets
|
|
|
28,547
|
|
|
|
34,828
|
|
Property and equipment, at cost, net of $318 and $134 accumulated depreciation, as of March 31,
2014 and December 31, 2013, respectively
|
|
|
118
|
|
|
|
230
|
|
Intangible assets, net
|
|
|
21,791
|
|
|
|
22,748
|
|
Goodwill
|
|
|
65,757
|
|
|
|
65,757
|
|
Other assets
|
|
|
1,034
|
|
|
|
247
|
|
Total assets
|
|
$
|
117,247
|
|
|
$
|
123,810
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
2,650
|
|
|
$
|
5,146
|
|
Accrued employee compensation
|
|
|
224
|
|
|
|
299
|
|
Derivative warrant liabilities
|
|
|
54
|
|
|
|
43
|
|
Total current liabilities
|
|
|
2,928
|
|
|
|
5,488
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Derivative warrant liabilities
|
|
|
4,359
|
|
|
|
4,040
|
|
Other liabilities
|
|
|
32
|
|
|
|
—
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred stock, $0.01 par value per share; 5,000,000 authorized; none issued
and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.01 par value per share 150,000,000 authorized; 86,458,959 and 84,502,653 issued and outstanding as of
March 31, 2014 and December 31, 2013, respectively
|
|
|
865
|
|
|
|
845
|
|
Additional paid-in capital
|
|
|
196,200
|
|
|
|
189,465
|
|
Deficit accumulated during the development stage
|
|
|
(87,137
|
)
|
|
|
(76,028
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
109,928
|
|
|
|
114,282
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
117,247
|
|
|
$
|
123,810
|
|
The accompanying notes form an integral
part of these consolidated financial statements.
Vringo, Inc. and
Subsidiaries
(a Development
Stage Company)
CONSOLIDATED STATEMENTS
OF OPERATIONS
(Unaudited)
(In thousands,
except share and per share data)
|
|
For the quarter ended March 31,
|
|
|
Cumulative from
June 8, 2011
(Inception) through
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
Revenue
|
|
$
|
250
|
|
|
$
|
—
|
|
|
$
|
1,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses*
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating legal costs
|
|
|
4,875
|
|
|
|
5,399
|
|
|
|
37,708
|
|
Amortization of intangibles
|
|
|
957
|
|
|
|
839
|
|
|
|
6,422
|
|
Research and development
|
|
|
225
|
|
|
|
270
|
|
|
|
2,280
|
|
General and administrative
|
|
|
4,018
|
|
|
|
3,991
|
|
|
|
30,759
|
|
Total operating expenses
|
|
|
10,075
|
|
|
|
10,499
|
|
|
|
77,169
|
|
Operating loss from continuing operations
|
|
|
(9,825
|
)
|
|
|
(10,499
|
)
|
|
|
(75,719
|
)
|
Non-operating income
|
|
|
6
|
|
|
|
17
|
|
|
|
269
|
|
Non-operating expenses
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
(53
|
)
|
Gain (loss) on revaluation of warrants
|
|
|
(1,076
|
)
|
|
|
(376
|
)
|
|
|
4,575
|
|
Issuance of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,883
|
)
|
Loss from continuing operations before income taxes
|
|
|
(10,900
|
)
|
|
|
(10,859
|
)
|
|
|
(73,811
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss from continuing operations
|
|
|
(10,900
|
)
|
|
|
(10,859
|
)
|
|
|
(73,811
|
)
|
Loss from discontinued operations before income taxes*
|
|
|
(209
|
)
|
|
|
(1,089
|
)
|
|
|
(13,014
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
(16
|
)
|
|
|
(312
|
)
|
Loss from discontinued operations
|
|
|
(209
|
)
|
|
|
(1,105
|
)
|
|
|
(13,326
|
)
|
Net loss
|
|
$
|
(11,109
|
)
|
|
$
|
(11,964
|
)
|
|
$
|
(87,137
|
)
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations
|
|
$
|
(0.13
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(1.39
|
)
|
Loss per share from discontinued operations
|
|
|
(0.00
|
)
|
|
|
(0.02
|
)
|
|
|
(0.25
|
)
|
Total net loss per share
|
|
$
|
(0.13
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(1.64
|
)
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations
|
|
$
|
(0.13
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(1.39
|
)
|
Loss per share from discontinued operations
|
|
|
(0.00
|
)
|
|
|
(0.02
|
)
|
|
|
(0.25
|
)
|
Total net loss per share
|
|
$
|
(0.13
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(1.64
|
)
|
Weighted-average number of shares outstanding during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
85,457,670
|
|
|
|
82,389,353
|
|
|
|
53,255,928
|
|
Diluted
|
|
|
85,457,670
|
|
|
|
82,389,353
|
|
|
|
54,752,466
|
|
* Includes stock-based compensation expense, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating legal costs
|
|
$
|
343
|
|
|
$
|
294
|
|
|
$
|
2,087
|
|
Research and development
|
|
|
107
|
|
|
|
134
|
|
|
|
943
|
|
General and administrative
|
|
|
2,199
|
|
|
|
2,528
|
|
|
|
19,441
|
|
Discontinued operations
|
|
|
151
|
|
|
|
138
|
|
|
|
983
|
|
|
|
$
|
2,800
|
|
|
$
|
3,094
|
|
|
$
|
23,454
|
|
The accompanying notes form an integral
part of these consolidated financial statements.
Vringo, Inc. and
Subsidiaries
(a Development
Stage Company)
CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands)
|
|
Common
stock
|
|
|
Additional
paid-in capital
|
|
|
Deficit
accumulated
during the
development
stage
|
|
|
Total
|
|
Balance as of June 8, 2011 (Inception)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Issuance of shares of common stock
|
|
|
170
|
|
|
|
4,975
|
|
|
|
—
|
|
|
|
5,145
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
474
|
|
|
|
—
|
|
|
|
474
|
|
Net loss for the period
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,754
|
)
|
|
|
(2,754
|
)
|
Balance as of December 31, 2011
|
|
|
170
|
|
|
|
5,449
|
|
|
|
(2,754
|
)
|
|
|
2,865
|
|
Conversion of Series A Preferred Convertible Preferred
stock, classified as mezzanine equity
|
|
|
8
|
|
|
|
68
|
|
|
|
—
|
|
|
|
76
|
|
Stock-based compensation
|
|
|
3
|
|
|
|
8,084
|
|
|
|
—
|
|
|
|
8,087
|
|
Recording of equity instruments upon Merger, net of
fair value of issued warrants $21,954 and issuance cost of $463
|
|
|
152
|
|
|
|
54,809
|
|
|
|
—
|
|
|
|
54,961
|
|
Issuance of warrants
|
|
|
—
|
|
|
|
2,883
|
|
|
|
—
|
|
|
|
2,883
|
|
Conversion of Series A Preferred Convertible Preferred
stock, classified as equity
|
|
|
201
|
|
|
|
(201
|
)
|
|
|
—
|
|
|
|
—
|
|
Exercise of warrants
|
|
|
76
|
|
|
|
22,856
|
|
|
|
—
|
|
|
|
22,932
|
|
Exercise of stock options
|
|
|
8
|
|
|
|
501
|
|
|
|
—
|
|
|
|
509
|
|
Issuance of shares in connection with a financing round,
net of issuance cost of $52
|
|
|
96
|
|
|
|
31,052
|
|
|
|
—
|
|
|
|
31,148
|
|
Shares issued for acquisition of patents
|
|
|
2
|
|
|
|
748
|
|
|
|
—
|
|
|
|
750
|
|
Issuance of shares in connection with a financing round,
net of issuance cost of $39
|
|
|
103
|
|
|
|
44,859
|
|
|
|
—
|
|
|
|
44,962
|
|
Net loss for the year
|
|
|
—
|
|
|
|
—
|
|
|
|
(20,841
|
)
|
|
|
(20,841
|
)
|
Balance as of December 31, 2012
|
|
|
819
|
|
|
|
171,108
|
|
|
|
(23,595
|
)
|
|
|
148,332
|
|
Exercise of stock options and vesting of Restricted
Stock Units (“RSU”)
|
|
|
22
|
|
|
|
952
|
|
|
|
—
|
|
|
|
974
|
|
Exercise of warrants
|
|
|
4
|
|
|
|
1,394
|
|
|
|
—
|
|
|
|
1,398
|
|
Conversion of derivative warrants into equity warrants
|
|
|
—
|
|
|
|
3,918
|
|
|
|
—
|
|
|
|
3,918
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
12,093
|
|
|
|
—
|
|
|
|
12,093
|
|
Net loss for the year
|
|
|
—
|
|
|
|
—
|
|
|
|
(52,433
|
)
|
|
|
(52,433
|
)
|
Balance as of December 31, 2013
|
|
|
845
|
|
|
|
189,465
|
|
|
|
(76,028
|
)
|
|
|
114,282
|
|
Exercise of stock options and vesting of Restricted
Stock Units (“RSU”)
|
|
|
13
|
|
|
|
1,931
|
|
|
|
—
|
|
|
|
1,944
|
|
Exercise of warrants
|
|
|
7
|
|
|
|
2,004
|
|
|
|
—
|
|
|
|
2,011
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
2,800
|
|
|
|
—
|
|
|
|
2,800
|
|
Net loss for the period
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,109
|
)
|
|
|
(11,109
|
)
|
Balance as of March 31, 2014
|
|
$
|
865
|
|
|
$
|
196,200
|
|
|
$
|
(87,137
|
)
|
|
$
|
109,928
|
|
The accompanying notes form an integral
part of these consolidated financial statements.
Vringo, Inc. and
Subsidiaries
(a Development
Stage Company)
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
Three months ended March 31,
|
|
|
Cumulative from
June 8, 2011
(Inception) through
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,109
|
)
|
|
$
|
(11,964
|
)
|
|
$
|
(87,137
|
)
|
Adjustments to reconcile net cash flows used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Items not affecting cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,141
|
|
|
|
1,281
|
|
|
|
9,191
|
|
Impairment loss
|
|
|
—
|
|
|
|
—
|
|
|
|
7,253
|
|
Change in deferred tax assets and liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
(58
|
)
|
Stock-based compensation
|
|
|
2,800
|
|
|
|
3,094
|
|
|
|
23,454
|
|
Issuance of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
2,883
|
|
Assignment of patents
|
|
|
—
|
|
|
|
—
|
|
|
|
(100
|
)
|
Change in fair value of warrants
|
|
|
1,076
|
|
|
|
376
|
|
|
|
(4,575
|
)
|
Exchange rate loss (gain), net
|
|
|
20
|
|
|
|
4
|
|
|
|
(69
|
)
|
Changes in current assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in other current assets
|
|
|
139
|
|
|
|
109
|
|
|
|
(230
|
)
|
Increase (decrease) in payables and accruals
|
|
|
(2,560
|
)
|
|
|
2,228
|
|
|
|
1,434
|
|
Net cash used in operating activities
|
|
|
(8,493
|
)
|
|
|
(4,872
|
)
|
|
|
(47,954
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(72
|
)
|
|
|
(28
|
)
|
|
|
(312
|
)
|
Deposit in short-term investments
|
|
|
—
|
|
|
|
(3,120
|
)
|
|
|
—
|
|
Acquisition of patents
|
|
|
—
|
|
|
|
—
|
|
|
|
(27,364
|
)
|
Decrease (increase) in deposits
|
|
|
—
|
|
|
|
8
|
|
|
|
(239
|
)
|
Cash acquired as part of acquisition of Vringo (1)
|
|
|
—
|
|
|
|
—
|
|
|
|
3,326
|
|
Net cash used in investing activities
|
|
$
|
(72
|
)
|
|
$
|
(3,140
|
)
|
|
$
|
(24,589
|
)
|
The accompanying notes form an integral
part of these consolidated financial statements.
Vringo, Inc. and
Subsidiaries
(a Development
Stage Company)
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
Three months ended March 31,
|
|
|
Cumulative from
June 8, 2011
(Inception) through
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of issuance cost of $52
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31,148
|
|
Proceeds from issuance of common stock, net of issuance cost of $39
|
|
|
—
|
|
|
|
—
|
|
|
|
44,962
|
|
Proceeds from issuance (repayment) of note payable—related party
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Proceeds from issuance of preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
1,800
|
|
Proceeds from issuance of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
5,145
|
|
Exercise of stock options
|
|
|
1,531
|
|
|
|
9
|
|
|
|
3,014
|
|
Exercise of warrants
|
|
|
1,265
|
|
|
|
165
|
|
|
|
14,130
|
|
Net cash provided by financing activities
|
|
|
2,796
|
|
|
|
174
|
|
|
|
100,199
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1
|
|
|
|
6
|
|
|
|
162
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(5,768
|
)
|
|
|
(7,832
|
)
|
|
|
27,818
|
|
Cash and cash equivalents at beginning of period
|
|
|
33,586
|
|
|
|
56,960
|
|
|
|
—
|
|
Cash and cash equivalents at end of period
|
|
$
|
27,818
|
|
|
$
|
49,128
|
|
|
$
|
27,818
|
|
Supplemental disclosure of cash flows information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
Income taxes paid
|
|
|
—
|
|
|
|
3
|
|
|
|
41
|
|
Non-cash investing and financing transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash acquisition of cost method investment
|
|
|
787
|
|
|
|
—
|
|
|
|
787
|
|
Non-cash acquisition of patents through issuance of common stock shares
|
|
|
—
|
|
|
|
—
|
|
|
|
750
|
|
Conversion of Series A Convertible Preferred stock, classified as mezzanine equity, into common stock, prior to the Merger
|
|
|
—
|
|
|
|
—
|
|
|
|
76
|
|
Conversion of Series A Convertible Preferred stock, classified as mezzanine equity, into common stock, upon Merger
|
|
|
—
|
|
|
|
—
|
|
|
|
1,724
|
|
Conversion of Series A Convertible Preferred stock, classified as equity, into common stock, post-Merger
|
|
|
—
|
|
|
|
—
|
|
|
|
201
|
|
Conversion of derivative warrants into common stock
|
|
|
746
|
|
|
|
69
|
|
|
|
12,221
|
|
Conversion of derivative warrants into equity warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
3,918
|
|
(1) Cash acquired as part of acquisition of Vringo
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (excluding cash and cash equivalents)
|
|
|
|
|
|
|
|
|
|
$
|
740
|
|
Long-term deposit
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
Fixed assets, net
|
|
|
|
|
|
|
|
|
|
|
(124
|
)
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
(65,965
|
)
|
Technology
|
|
|
|
|
|
|
|
|
|
|
(10,133
|
)
|
Fair value of Legal Parent’s shares of common stock and vested $0.01 options
|
|
|
|
|
|
|
|
|
|
|
58,211
|
|
Fair value of warrants and vested stock options
|
|
|
|
|
|
|
|
|
|
|
17,443
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
3,162
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,326
|
|
The accompanying notes form an integral
part of these consolidated financial statements.
Vringo, Inc. and
Subsidiaries
(a Development
Stage Company)
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 600 patents and patent applications covering
telecom infrastructure, internet search and mobile technologies. The Company’s patents and patent applications have been
developed internally and / or acquired from third parties. Prior to December 31, 2013, the Company operated a global platform
for the distribution of mobile social applications and the services that it developed.
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 and Vringo or Legal Parent
refer to such entities’ standalone businesses prior to the Merger.
On February 18, 2014,
the Company executed the sale of its mobile social application business to InfoMedia Services Limited (“Infomedia”),
in exchange for an 8.25% ownership interest (refer to Note 5).
Note 2. 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 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 U.S. GAAP. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31,
2013 included in the Company's Annual Report on Form 10-K. The results of operations for the three month period ended March 31,
2014 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) Use of estimates
The preparation of
accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make certain 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 consolidated financial statements and the reported amounts of revenues and expenses for the periods presented.
Actual results may differ from such estimates. Significant items subject to such estimates and assumptions include the valuation
of the assets acquired and the liabilities assumed as part of the Merger, the useful lives of the Company’s tangible and
intangible assets, the valuation of the Company’s derivative warrants, the valuation of stock-based compensation, the valuation
of goodwill, deferred tax assets and liabilities, income tax uncertainties and other contingencies.
(c) Development stage enterprise
The Company’s
principal activities to date have been focused on development and enforcement of its intellectual property. To date, the Company
has not generated significant revenues from its planned principal operations. Accordingly, the Company’s consolidated
financial statements are presented as those of a development stage enterprise.
(d) 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 occurring from the remeasurement of monetary balance sheet items denominated in non-dollar
currencies are reflected as non-operating income or expense in the consolidated statements of operations.
(e) Cash and cash equivalents
The Company invests
its cash in 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 its Special Bridge Warrants, Conversion Warrants, Preferential Reload Warrants and
certain of its Series 1 Warrants (as defined in Note 8), 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) Revenue recognition
Revenue from patent
licensing and enforcement is recognized if collectability 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.
Currently, the Company’s
revenue arrangements provide for the payment of contractually determined fees and other consideration for the grant of certain
intellectual property rights related to the Company’s patents. These rights typically include some combination of the following:
(i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patents, (ii)
the release of the licensee from certain claims, and (iii) the dismissal of any pending litigation. The intellectual property
rights granted typically extend until the expiration of the related patents. Pursuant to the terms of these agreements, the Company
has no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue,
releases, and other deliverables, including no express or implied obligation on the Company’s part to maintain or upgrade
the related technology, or provide future support or services. Generally, the agreements provide for the grant of the licenses,
covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement, or upon receipt of the upfront
payment. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, upon receipt
of the upfront fee, and when all other revenue recognition criteria have been met.
(h) 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 and stock-based compensation.
(i) Recently Issued Accounting Pronouncements
In July 2013, the
Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“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 beginning January 1, 2014 and is to be applied prospectively
with retroactive application permitted. The Company adopted this guidance as of January 1, 2014, as required. There was no material
impact of the consolidated financial statements resulting from the adoption.
In
April 2014, the FASB issued ASU No. 2014-08,
Presentation of Financial Statements (Topic 205) and Property,
Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an
Entity
.
This guidance changes the criteria for reporting a discontinued operation while enhancing disclosures in
this area. This standard will be effective for the Company beginning January 1, 2015. Early adoption of the standard is
permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements
previously issued or available for issuance. The Company is currently evaluating the impact of the adoption on its
consolidated financial statements.
(j) Reclassification
Certain balances
have been reclassified to conform to presentation requirements including discontinued operations.
Note 3. Computation of Net Loss per Common Share
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:
|
|
Three months ended March 31,
|
|
|
Cumulative from
June 8, 2011
(Inception) through
|
|
|
|
2014
|
|
|
2013
|
|
|
March 31, 2014
|
|
Basic Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to shares of common stock
|
|
$
|
(10,900
|
)
|
|
$
|
(10,859
|
)
|
|
$
|
(73,811
|
)
|
Loss from discontinued operations attributable to shares of common stock
|
|
$
|
(209
|
)
|
|
$
|
(1,105
|
)
|
|
$
|
(13,326
|
)
|
Net loss attributable to shares of common stock
|
|
$
|
(11,109
|
)
|
|
$
|
(11,964
|
)
|
|
$
|
(87,137
|
)
|
Basic Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock outstanding during the period
|
|
|
85,428,830
|
|
|
|
82,185,649
|
|
|
|
53,150,923
|
|
Weighted average number of penny stock options
|
|
|
28,840
|
|
|
|
203,704
|
|
|
|
105,005
|
|
Basic common stock shares outstanding
|
|
|
85,457,670
|
|
|
|
82,389,353
|
|
|
|
53,255,928
|
|
Basic loss per common stock share from continuing operations
|
|
$
|
(0.13
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(1.39
|
)
|
Basic loss per common stock share from discontinued operations
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.25
|
)
|
Basic net loss per common stock share
|
|
$
|
(0.13
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(1.64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations attributable to shares of common stock
|
|
$
|
(10,900
|
)
|
|
$
|
(10,859
|
)
|
|
$
|
(73,811
|
)
|
Increase in net loss attributable to derivative warrants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2,488
|
)
|
Diluted net loss from continuing operations attributable to shares of common stock
|
|
$
|
(10,900
|
)
|
|
$
|
(10,859
|
)
|
|
$
|
(76,299
|
)
|
Diluted net loss from discontinued operations attributable to shares of common stock
|
|
$
|
(209
|
)
|
|
$
|
(1,105
|
)
|
|
$
|
(13,326
|
)
|
Diluted net loss attributable to shares of common stock
|
|
$
|
(11,109
|
)
|
|
$
|
(11,964
|
)
|
|
$
|
(89,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic common stock shares outstanding
|
|
|
85,457,670
|
|
|
|
82,389,353
|
|
|
|
53,255,928
|
|
Weighted average number of derivative warrants outstanding during the period
|
|
|
—
|
|
|
|
—
|
|
|
|
1,496,538
|
|
Diluted common stock shares outstanding
|
|
|
85,457,670
|
|
|
|
82,389,353
|
|
|
|
54,752,466
|
|
Diluted loss per common stock share from continuing operations
|
|
$
|
(0.13
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(1.39
|
)
|
Diluted loss per common stock share from discontinued operations
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.25
|
)
|
Diluted net loss per common stock share
|
|
$
|
(0.13
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(1.64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share data presented excludes from the calculation of diluted net loss the following potentially dilutive securities, 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
|
|
|
10,331,409
|
|
|
|
11,583,888
|
|
|
|
10,331,409
|
|
Unvested penny options to purchase an equal number of shares of common stock of the Company
|
|
|
—
|
|
|
|
12,125
|
|
|
|
—
|
|
Unvested Restricted Stock Units (“RSUs”) to issue an equal number of shares of common stock of the Company
|
|
|
1,890,738
|
|
|
|
3,336,375
|
|
|
|
1,890,738
|
|
Common stock shares granted, but not yet vested
|
|
|
14,331
|
|
|
|
77,193
|
|
|
|
14,331
|
|
Warrants to purchase an equal number of shares of common stock of the Company
|
|
|
17,708,713
|
|
|
|
18,769,114
|
|
|
|
14,812,508
|
|
Total number of potentially dilutive instruments, excluded from the calculation of net loss per share
|
|
|
29,945,191
|
|
|
|
33,778,695
|
|
|
|
27,048,986
|
|
Note 4. 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
8). 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 Accounting Standards Codification (“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 5.
Discontinued
Operations and Assets Held For Sale
On December 31, 2013,
the Company entered into a definitive asset purchase agreement with Infomedia for the sale of all assets and the assignment of
all agreements related to the Company’s mobile social application business. The closing of the transaction, which was subject
to the satisfaction or waiver of certain conditions, occurred on February 18, 2014 (“Closing”).
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. Additionally, the Company’s CEO
was appointed as a full voting member on Infomedia’s board of directors and the Company received a number of customary protective
and anti-dilution rights. The Infomedia Class B shares were accounted for as a cost-method investment at the carrying amount
of $787 and are included in Other assets in the consolidated balance sheet as of March 31, 2014. During the quarter ended March
31, 2014, there were no events or changes in circumstances that would indicate that the carrying amount of this investment may
no longer be recoverable.
In connection with
the asset purchase agreement, a non-cash impairment loss of $7,253 was recorded during the fourth quarter of 2013 and the requirement
to report the results of the Company’s mobile social application business as discontinued operations was triggered. The
following table represents the components of operating results from discontinued operations, as presented in the consolidated
statements of operations:
|
|
Three months ended March 31,
|
|
|
Cumulative from
Inception through
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
Revenue
|
|
$
|
37
|
|
|
$
|
65
|
|
|
$
|
530
|
|
Operating expenses
|
|
|
(266
|
)
|
|
|
(1,145
|
)
|
|
|
(6,266
|
)
|
Loss on impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,253
|
)
|
Operating loss
|
|
|
(229
|
)
|
|
|
(1,080
|
)
|
|
|
(12,989
|
)
|
Non-operating income (expense)
|
|
|
20
|
|
|
|
(9
|
)
|
|
|
(25
|
)
|
Loss before taxes on income
|
|
|
(209
|
)
|
|
|
(1,089
|
)
|
|
|
(13,014
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
(16
|
)
|
|
|
(312
|
)
|
Loss from discontinued operations
|
|
$
|
(209
|
)
|
|
$
|
(1,105
|
)
|
|
$
|
(13,326
|
)
|
In addition, the following
table presents the carrying amounts of the major classes of assets from the discontinued mobile social application business in
the Company’s consolidated balance sheet as of December 31, 2013. These assets were transferred to Infomedia upon Closing.
As of December 31, 2013, there were no liabilities classified as held for sale and 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
|
|
Note 6. Intangible Assets
|
|
As of March 31,
2014
|
|
|
As of December 31,
2013
|
|
|
Weighted average
amortization period (years)
|
|
Patents
|
|
|
28,213
|
|
|
|
28,213
|
|
|
|
8.3
|
|
Less: accumulated amortization
|
|
|
(6,422
|
)
|
|
|
(5,465
|
)
|
|
|
|
|
|
|
$
|
21,791
|
|
|
$
|
22,748
|
|
|
|
|
|
The Company’s
intangible assets consist of its patents which are amortized over their expected useful lives (i.e., through the expiration date
of the patent). During the quarters ended March 31, 2014 and 2013, the Company recorded amortization expense of $957 and $839,
respectively, related to its intangible assets. The amortization expense for the three month period ended March 31, 2013 excludes
$416 of amortization expense recorded related to the Company’s acquired technology which has been presented as discontinued
operations. During the period from June 8, 2011 (“Inception”) through March 31, 2014, total amortization expense of
$6,422 was recorded related to the Company’s intangible assets, which excludes $2,451 of amortization expense recorded related
to the Company’s acquired technology prior to December 31, 2013 that has been presented as discontinued operations.
Note 7. Fair Value Measurements
The Company measures
fair value in accordance with FASB ASC 820-10,
Fair Value Measurements and Disclosures
. FASB 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,
FASB 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 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 following table presents the placement
in the fair value hierarchy of liabilities measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013:
|
|
|
|
|
Fair value measurement at reporting date
using
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
active markets
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
Derivative warrant liabilities
|
|
Balance
|
|
|
assets (Level 1)
|
|
|
inputs (Level 2)
|
|
|
inputs (Level 3)
|
|
As of March 31, 2014
|
|
$
|
4,413
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
4,413
|
|
As of December 31, 2013
|
|
$
|
4,083
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
4,083
|
|
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 defined in Note 8) 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 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 March 31, 2014):
|
|
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 as of March 31, 2014 and December 31, 2013 consisted of cash, cash equivalents,
receivables, 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 on a recurring
basis using significant unobservable inputs (Level 3) during the period from Inception through March 31, 2014:
|
|
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 Consolidated Statement of Operations
|
|
|
156
|
|
Exercise of derivative warrants
|
|
|
(10,657
|
)
|
Fair value adjustment at end of period, included in Consolidated 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 8)
|
|
|
(2,300
|
)
|
Fair value adjustment, prior to exercise of warrants, included in Consolidated Statement of Operations
|
|
|
9
|
|
Exercise of derivative warrants
|
|
|
(808
|
)
|
Fair value adjustment at end of period, included in Consolidated Statement
of Operations
|
|
|
(430
|
)
|
Balance at December 31, 2013
|
|
$
|
4,083
|
|
Fair value adjustment, prior to exercise of warrants, included in Consolidated Statement of Operations
|
|
|
210
|
|
Exercise of derivative warrants
|
|
|
(746
|
)
|
Fair value adjustment at end of period, included in Consolidated Statement
of Operations
|
|
|
866
|
|
Balance at March 31, 2014
|
|
$
|
4,413
|
|
Valuation processes for Level 3 Fair Value Measurements
Fair value measurement
of the derivative warrant liabilities related to the Special Bridge Warrants, Conversion Warrants, Preferential Reload Warrants
and Series 1 Warrants (as defined in Note 8) 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,
|
|
Black-Scholes-Merton and the
|
|
Volatility
|
|
40.59% – 50.29%
|
|
Preferential Reload Warrants and the outstanding
|
|
Monte-Carlo models
|
|
Risk free interest rate
|
|
0.09% – 1.05%
|
|
derivative Series 1 Warrants
|
|
|
|
Expected term, in years
|
|
0.75 – 3.30
|
|
|
|
|
|
Dividend yield
|
|
0%
|
|
|
|
|
|
Probability and timing of down-round triggering
event
|
|
5%
occurrence in December 2014
|
|
The fair value of
the assets held for sale as of December 31, 2013 (refer to Note 5) was 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 included
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. The inputs used
in the valuation were sensitive to certain factors related to mobile social application technology such as 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 price,
the Company’s assumptions 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, an increase 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. Such changes would increase the associated liability while decreases in these assumptions would decrease the associated
liability. 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, and does not
plan to, declare dividends on its common stock, and as such, there is no change in the estimated fair value of the warrants due
to the dividend assumption.
Note 8. Stockholders’ Equity
(a) Common Stock
The following table
summarizes information about the Company's issued and outstanding common stock from Inception through March 31, 2014:
|
|
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 4)
|
|
|
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
|
|
Exercise of warrants
|
|
|
718,766
|
|
Exercise of stock options and vesting of RSUs
|
|
|
1,237,540
|
|
Balance as March 31, 2014
|
|
|
86,458,959
|
|
(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 March 31, 2014, 3,647,837 shares were available for future grants under the 2012 Plan.
(c) Stock options and RSUs
The following table illustrates the stock
options granted for the three month period ended March 31, 2014:
Title
|
|
Grant date
|
|
No. of
options
|
|
|
Exercise
price
|
|
|
FMV at
grant date
|
|
|
Vesting terms
|
|
Assumptions used in
Black-Scholes option pricing
model
|
Directors, Management, and Employees
|
|
February 2014
|
|
|
1,025,000
|
|
|
$
|
4.10
|
|
|
$
|
4.10
|
|
|
Over 1 year for Directors; Over
3 years for Management and Employees
|
|
Volatility: 57.75 % –
61.17%
Risk free interest rate: 1.82% - 1.96%
Expected term, in years: 5.31-5.81
Dividend yield: 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
summarizes information about stock options and RSU activity for the three month period ended March 31, 2014:
|
|
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, 2014
|
|
|
2,161,403
|
|
|
$
|
3.61
|
|
|
|
10,457,159
|
|
|
$
|
3.23
|
|
|
|
$0.01
– $5.50
|
|
|
$
|
2.50
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
1,025,000
|
|
|
$
|
4.10
|
|
|
$
|
4.10
|
|
|
$
|
2.21
|
|
Vested/Exercised
|
|
|
(267,539
|
)
|
|
$
|
3.60
|
|
|
|
(970,001
|
)
|
|
$
|
2.00
|
|
|
|
$0.01
– $3.72
|
|
|
$
|
1.42
|
|
Forfeited
|
|
|
(3,125
|
)
|
|
$
|
3.72
|
|
|
|
(93,750
|
)
|
|
$
|
3.72
|
|
|
$
|
3.72
|
|
|
$
|
2.20
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
(66,166
|
)
|
|
$
|
5.41
|
|
|
|
$4.50
– $5.50
|
|
|
$
|
2.48
|
|
Outstanding at March 31, 2014
|
|
|
1,890,739
|
|
|
$
|
3.62
|
|
|
|
10,352,242
|
|
|
$
|
3.41
|
|
|
|
$0.01
– $5.50
|
|
|
$
|
2.32
|
|
Exercisable at March 31, 2014
|
|
|
—
|
|
|
|
—
|
|
|
|
5,716,131
|
|
|
$
|
3.32
|
|
|
|
$0.01
– $5.50
|
|
|
|
|
|
The Company did not
recognize tax benefits related to its stock-based compensation as there is a full valuation allowance recorded.
(d) Warrants
The following table
summarizes information about warrant activity for the three month period ended March 31, 2014:
|
|
No. of warrants
|
|
|
Weighted average
exercise price
|
|
|
Exercise
price range
|
|
Outstanding at January 1, 2014
|
|
|
18,427,478
|
|
|
$
|
3.15
|
|
|
$
|
0.94 – $5.06
|
|
Exercised
|
|
|
(718,766
|
)
|
|
$
|
1.76
|
|
|
$
|
1.76
|
|
Outstanding at March 31, 2014
|
|
|
17,708,712
|
|
|
$
|
3.21
|
|
|
$
|
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 warrant liabilities to stockholders’ equity.
During the quarter ended March
31, 2014, 328,760 Series 1 Warrants and 352,532 Series 2 Warrants were exercised. From Inception and through March 31, 2014, 5,150,307
Series 1 Warrants and 1,678,592 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 the quarter ended March
31, 2014, 37,474 non-Preferential Reload Warrants were exercised. During the period from Inception through March 31, 2014, 127,192
Special Bridge Warrants and 86,954 Conversion Warrants were exercised. From Inception and through March 31, 2014, 216,994 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 March 31, 2014, 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 March 31, 2014, all October 2012 warrants were outstanding.
Note 9. 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 10. 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.
The Company’s
subsidiaries have filed patent infringement lawsuits against the subsidiaries of ZTE Corporation in the United Kingdom,
France, Germany, Australia, India, and Brazil and against ASUSTeK Computer, Inc. and ASUS Computer GmbH in Germany, Spain and India.
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 has filed. The defendants
estimated the total possible liability to be no more than approximately $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 of 2014. Should ZTE 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 approximately
$1,700 for each of the three revocation cases on file; the Company assesses the likelihood of such payment as remote.
The value of each of the four infringement proceedings against ZTE on file and of each of the two infringement proceedings against
ASUS on file has been estimated at approximately $1,400 by the Company. On May 5, 2014, the Company deposited a bond of approximately
$1,400 to allow it to enforce an injunction against ZTE. Should the injunction be successfully overturned on appeal, the Company may be
obligated to compensate ZTE for any damages allegedly suffered as a result of the enforcement of the injunction, which would be
ascertained through separate damages proceedings. Should the judgment which granted the injunction be affirmed on appeal, however,
the amount paid as security would be returnable to the Company in full.
Pursuant to
negotiations with ZTE’s Australian subsidiary, the Company placed a written commitment in April 2014 to ensure payment
should a liability by Vringo Infrastructure arise as a result of the case filed. The amount of such commitment cannot be
reasonably estimated at this time and the Company assesses the likelihood of such payment as remote. In addition, in Brazil
as a condition of the relief requested, the Company deposited approximately $900 as a surety against the truth of allegations
contained in the complaint. Unless ZTE is the prevailing party and proves that actual material damages were suffered while
the requested relief was in place, the funds are returnable at the end of the litigation.
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 various countries. 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 a different office space within the same building. The initial annual rental fee for this
new office is approximately $403 (subject to certain future escalations and adjustments) beginning when the new office space is
available which is expected to be the third quarter of 2014. This lease will expire five years and three months after the new
office space is available. Rent expense for operating leases for the quarters ended March 31, 2014, and 2013, and cumulative from
Inception until March 31, 2014 was $112, $53 and $473, respectively.
Note 11. Risks and Uncertainties
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(a)
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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.
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(b)
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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 its patents is often challenged in a court or
an administrative proceeding. To date, none of the Company’s patents have been declared to be invalid
or unenforceable.
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(c)
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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 the Company’s policy is designed to limit exposure to any one institution.
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(d)
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A portion of the Company’s expenses are denominated in foreign currencies. 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.
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Note 12. Subsequent Events
On April 28, 2014,
Vringo Infrastructure, Inc., a wholly-owned subsidiary of Vringo, Inc., entered into a confidential agreement with Tyco to resolve
litigation on mutually acceptable terms that was pending between the parties in the United States District Court for the Southern
District of Florida and the Regional Court of Mannheim, Germany.
On May 6, 2014, the
United States Court of Appeals for the Federal Circuit heard oral argument in I/P Engine, Inc., Plaintiff-Cross Appellant v. AOL
Inc., Google Inc., IAC Search & Media, Inc., Gannett Company, Inc. and Target Corporation, Defendants-Appellants, Appeal Nos.
13-1307 and 13-1313. The Court's decision in the case is pending as of the filing date of this Form 10-Q.
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. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipates,”
“believes,” “can,” “continues,” “could,” “estimates,” “expects,”
“intends,” “may,” “will be,” “plans,” “projects,” “seeks,”
“should,” “targets,” “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 10, 2014 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, except as required by law.
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.
Overview
Vringo, Inc. (“Vringo”)
strives to develop, acquire, license and protect innovation worldwide. We are currently focused on identifying, generating, acquiring,
and deriving economic benefits from intellectual property assets. We plan to continue to expand our portfolio of intellectual
property assets through acquiring and internally developing new technologies. We intend to monetize our technology portfolio through
a variety of value enhancing initiatives, including, but not limited to:
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•
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strategic partnerships, and
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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”).
The Merger was accounted for as a reverse acquisition pursuant to 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 (the effective date of the Merger) through December 31, 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. The accompanying unaudited consolidated financial statements 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.
We are a development
stage company and until now, we have not yet generated any significant revenues. From the inception of I/P on June 8, 2011 (“Inception”)
to date, we have raised approximately $100,199,000, which has been used to finance our operations.
Our Strategy
We manage an intellectual
property portfolio consisting of over 600 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 seek to expand our portfolio
of intellectual property through acquisition and development both internally and with third parties. Our goal is to partner with
innovators of compelling technologies.
In potential
acquisitions, we seek to purchase all of, or interests in, technology and intellectual property in exchange for cash, our securities
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 of directors, will allow us to assemble a portfolio of quality assets
with short and long-term revenue opportunities.
Intellectual Property
Search Patents
In June 2011, I/P
Engine acquired eight patents from Lycos, Inc. (“Lycos”) through its wholly-owned subsidiary, I/P Engine. On
September 15, 2011, I/P Engine initiated litigation in the United States District Court, Eastern District of Virginia, against
Google Inc., and certain of its customers (“Defendants”) for infringement of two of the patents acquired from Lycos.
On November 6, 2012,
a jury in Norfolk, Virginia unanimously returned a verdict in favor of I/P Engine. The jury verdict is available at
http://bit.ly/QBRt5S
.
On November 20, 2012, the District Court issued a ruling that asserted patents were not invalid as obvious, and the Court entered
final judgment which can be found at
http://bit.ly/1hqlUpD
.
On January 3, 2014,
the District Court ordered that I/P Engine recover an additional sum from the Defendants for supplemental damages and prejudgment
interest. This ruling can be found at
http://bit.ly/1iRY5rc
. On January 21, 2014, the District Court ruled that the
Defendants' alleged design-around was “nothing more than a colorable variation of the system adjudged to infringe,”
and accordingly I/P Engine “is entitled to ongoing royalties as long as [the] Defendants continue to use the modified system.”
This ruling can be found at
http://bit.ly/1rpVeZp
. On January 28, 2014, the District Court ruled that the appropriate ongoing
royalty rate for Defendants' continued infringement of the patents-in-suit that "would reasonably compensate [I/P Engine]
for giving up [its] right to exclude yet allow an ongoing willful infringer to make a reasonable profit" is a rate of 6.5%
of the 20.9% royalty base previously set by the District Court.
Both I/P Engine and
the Defendants have appealed the case to the U.S. Court of Appeals for the Federal Circuit. The case number for the District
Court case is 2:11 CV 512-RAJ. The case numbers for the cases in the Court of Appeals for the Federal Circuit are 13-1307,
13-1313, 14-1233 and 14-1289. On May 6, 2014, the United States Court of Appeals for the Federal Circuit heard oral argument in
I/P Engine, Inc., Plaintiff-Cross Appellant v. AOL Inc., Google Inc., IAC Search & Media, Inc., Gannett Company, Inc. and
Target Corporation, Defendants-Appellants, Appeal Nos. 13-1307 and 13-1313. The Court's decision in the case is pending as
of the filing date of this Form 10-Q.
Requests for reexamination
are a standard tactic used by defendants in patent litigation cases. Google has filed four separate requests for reexamination
of the two asserted patents at the USPTO, with the two requests on one of the patents being merged. To date, three of the
reexaminations have been resolved in I/P Engine's favor. One reexamination remains pending and I/P Engine continues to vigorously
defend the validity of its patent before the USPTO. Documents regarding USPTO proceedings are publicly available on the
Patent Application Information Retrieval website, http://portal.uspto.gov/pair/PublicPair, which is operated by the USPTO.
On January 31, 2013,
I/P Engine initiated litigation in the United States District Court, Southern District of New York, against Microsoft Corporation
(“Microsoft”). On May 30, 2013, I/P Engine entered into a settlement and license agreement with
Microsoft to resolve the litigation. According to the agreement, Microsoft paid I/P Engine $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 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. The case number was 1:13 CV 00688.
Infrastructure Patents
On August 9, 2012,
we entered into a patent purchase agreement with Nokia Corporation ("Nokia"), comprising of 124 patent families with
counterparts world-wide. The total consideration paid for the portfolio was $22,000. 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 portfolio encompasses technologies relating to telecom infrastructure, including communication management,
data and signal transmission, mobility management, radio resources management and services. Declarations were filed by Nokia indicating
that 31 of the 124 patent families acquired may be essential to wireless communications standards. Copies of the declarations
are available on our website at
http://www.vringoip.com/documents/FG/vringo/ip/99208_Nokia_ETSI_Declarations.pdf
.
As one of the means
of realizing the value of the patents on telecom infrastructure, our wholly-owned subsidiaries, Vringo Infrastructure, Inc. (“Vringo
Infrastructure”), Vringo, Inc. and Vringo Germany GmbH (“Vringo Germany”) have filed a number of suits against
ZTE Corporation (“ZTE”), ASUSTeK Computer Inc. (“ASUS”), ADT Corporation (“ADT”) and Tyco
Integrated Security, LLC (“Tyco”) and their subsidiaries and affiliates in the United States, European jurisdictions,
India, Australia and Brazil, alleging infringement of certain U.S., European, Indian, Australian and Brazilian patents.
ZTE
United Kingdom
On October 5, 2012,
Vringo Infrastructure, filed a suit in the UK High Court of Justice, Chancery Division, Patents Court, alleging infringement of
certain European patents. Subsequently, ZTE responded to the complaint on December 19, 2012 with a counterclaim for invalidity
of the patents in suit. Vringo Infrastructure filed a further UK suit on December 3, 2012, alleging infringement of additional
European patents. In the first UK suit, trial is scheduled for October 2014 and in the second UK suit, trial is scheduled for
June 2015.
Germany
On November 15, 2012,
Vringo Germany filed a suit in the Mannheim Regional Court in Germany, alleging infringement of a European patent. The litigation
was expanded to include a second European patent on February 21, 2013. On November 4, 2013, we filed a further brief with respect
to the proceedings of the first European patent suit, asserting infringement by ZTE eNode B infrastructure equipment used in 4G
networks.
The hearing for the
first European patent case has been postponed by mutual agreement with ZTE; no date has been set for reinstatement. On December
17, 2013, the Court issued its judgment in the second European patent case, finding that ZTE infringed that patent and ordered
an accounting and an injunction upon payment of the appropriate bonds. On February 19, 2014, Vringo Germany filed suit in the Mannheim
Regional Court seeking enforcement of the accounting ordered and a further order that non-compliance be subject to civil and criminal
penalties. On May 5, 2014, we paid a bond of approximately $1,400,000 to the Court in order to enforce the injunction against ZTE.
Trial in the suit to enforce the accounting is scheduled for September 2014.
On December 27, 2013,
ZTE filed a notice of appeal of the Mannheim Regional Court’s judgment in the second European patent case, and on January
24, 2014, ZTE filed an emergency motion with the Court of Appeals seeking a stay of the judge’s order pending appeal. On
February 24, 2014, ZTE’s motion was denied.
On September 13,
2013 and January 28, 2014, Vringo Germany filed two suits in the Regional Court of Düsseldorf, alleging infringement of two
additional European patents. Both cases are scheduled to be heard in November 2014. On April 23, 2014, Google commenced the process
to intervene in the fourth filed suit as an interested third party. As a result of this process Google will be entitled to
file defensive briefs in tandem with ZTE.
ZTE filed nullity
suits with respect to the first and second European patents in the Federal Patents Court in Munich, Germany during the second
and fourth quarters, respectively, of 2013. Trials in the nullity suits have not been scheduled but are not anticipated before
the third quarter of 2014. In addition, ZTE filed a nullity suit with respect to the third European patent in the Federal Patents
Court in Munich, Germany, in the fourth quarter of 2013. A schedule has not yet been set and the trial is not anticipated before
the third quarter of 2015.
China
In November and December
2012, ZTE filed reexamination requests in China against three Chinese patents owned by Vringo before the Patent Reexamination
Board of the Patent Office of the People’s Republic of China. On July 3, 2013, the patent rights for one of those patents
was upheld. Oral hearings for the remaining two patents occurred on May 9, 2013 and December 23, 2013, respectively,
for which the rulings are still pending. Between December 20 and December 28, 2013, ZTE filed four more additional reexamination
requests against the four other Chinese patents owned by Vringo. Vringo’s initial responses are due in early May 2014. The
remaining schedule in these four new re-examinations is not yet available.
France
On March 29, 2013,
Vringo Infrastructure filed a patent infringement lawsuit in France in the Tribunal de Grande Instance de Paris, alleging infringement
of the French part of two European 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. The oral hearing in relation to these patents has been scheduled for December 2014 before the 3
rd
division of the 3
rd
chamber of the Tribunal de Grande Instance de
Paris (specializing in IP matters).
Australia
On June 11, 2013,
Vringo Infrastructure filed a patent infringement lawsuit in the Federal Court of Australia in the New South Wales registry, alleging
infringement by ZTE of two Australian patents. We currently anticipate that the Court will set a trial date in the second
half of 2014.
Spain
On September 6, 2013,
Vringo Infrastructure filed a preliminary inquiry order against ZTE in the Commercial Court of Madrid, Spain, requiring ZTE to
provide discovery relating to alleged infringement of a patent which is the Spanish counter-part of the second European patent
filed in Germany. In light of ZTE’s non-responsiveness to the order, on March 24, 2014 the Court granted our request
to seek discovery of four of ZTE’s Spanish customers. To date, we have received responses from two of the four customers.
India
On November 7, 2013,
we, along with our subsidiary, Vringo Infrastructure, filed a patent infringement lawsuit in the High Court of Delhi at New Delhi,
India, alleging infringement of an Indian patent related to CDMA. On November 8, 2013, the Court granted an ex-parte preliminary
injunction and appointed commissioners to inspect ZTE’s facilities and collect evidence. ZTE appealed the preliminary injunction
and, on December 12, 2013, the appellate panel instituted an interim arrangement, requiring ZTE to file an accounting affidavit
disclosing the number of CDMA devices sold by its entities in India, revenue derived therefrom, and other supporting documentation.
The Court also required ZTE to pay a bond approximately $800,000, directed Indian customs authorities to notify us when all
relevant ZTE goods are imported into India, and required ZTE to give us the opportunity to inspect those goods. ZTE filed its
accounting affidavit on January 13, 2014.
On February 3, 2014,
we filed a motion for contempt for ZTE’s failure to comply with the Court’s order, and requested that the Court order
ZTE to pay an increased bond. A hearing on the contempt motion is scheduled for May 20, 2014.
On January 31, 2014,
we and our subsidiary, Vringo Infrastructure, filed a patent infringement lawsuit in the High Court of Delhi at New Delhi, alleging
infringement of a second Indian patent related to GSM Infrastructure. The Court, finding a
prima facie
case of infringement,
granted an ex-parte preliminary injunction, restraining ZTE and its officers, directors, agents, distributors and customers from
importing, selling, offering for sale, advertising, installing, or operating any infringing products, and giving us the right
to inspect any infringing goods arriving in India, which are to be detained by customs authorities. The judge granted the injunction
after ruling that we would suffer an irreparable loss if such an injunction were not put into place. ZTE subsequently appealed
the injunction. The court heard the parties’ arguments and reserved decision. The injunction remains in place at least until
the judge issues his decision.
Brazil
On April 14, 2014,
Vringo Infrastructure filed a patent infringement lawsuit in the 5th Trial Court of Rio de Janeiro State Court in Brazil, alleging
infringement of a Brazilian patent related to 3G/4G/LTE infrastructure. On April 15, 2014, the court granted an ex-parte preliminary
injunction restraining ZTE from manufacturing, using, offering for sale, selling, installing, testing, or importing such infrastructure
equipment, subject to a fine. To enforce the injunction, the Company posted a bond of approximately $900,000 with the
court on April 17, 2014.
ASUS
Germany
On October 4, 2013
and January 29, 2014, Vringo Germany filed two patent infringement lawsuits against ASUS in the Düsseldorf Regional Court,
alleging infringement of two European patents. The cases are scheduled to be heard in November 2014.
Spain
On February 7, 2014,
Vringo Infrastructure filed suit in the Commercial Court of Barcelona alleging infringement of a patent which is the Spanish counter-part
of the first European patent filed in Germany. A schedule for the case has not yet been set.
India
On April 15, 2014,
Vringo Infrastructure filed suit in the High Court of Delhi, New Delhi alleging infringement of a patent related to use of dictionaries
in search engines preloaded on certain ASUS devices. A schedule for the case has not yet been set.
ADT/Tyco
On September 12,
2013, Vringo Infrastructure filed a patent infringement lawsuit against ADT and Tyco in the United States District Court for the
Southern District of Florida.
On January 15, 2014,
Vringo Germany filed a patent infringement lawsuit against Tyco in the Regional Court of Mannheim, alleging infringement
of a European patent.
On January 28, 2014,
Vringo Infrastructure entered into a confidential agreement with ADT that resolved the litigation pending between the parties
in the United States District Court for the Southern District of Florida. On April 28, 2014, the Company entered into a confidential
agreement with Tyco that resolved all pending litigation pending between the parties.
Sale of mobile social application business
to InfoMedia Services Limited (“Infomedia”)
On December 31, 2013,
we entered into a definitive asset purchase agreement with Infomedia for the sale of certain assets (mostly comprised of acquired
technology) and the assignment of certain agreements related to our mobile social application business. The closing of the transaction,
which was subject to the satisfaction or waiver of certain conditions, occurred on February 18, 2014 (“Closing”).
Upon Closing, in exchange for the assets and agreements related to our mobile social application business, we received 18 Class
B shares of Infomedia, which represent an 8.25% ownership interest in Infomedia.
Infomedia is a privately
owned, UK based, provider of customer relationship management and monetization technologies to mobile carriers and device manufacturers.
As part of the transaction, we will have the opportunity to license certain intellectual property assets and support Infomedia
to identify and protect new intellectual property. Additionally, Vringo’s CEO was appointed as a full voting member on Infomedia’s
board of directors and we received a number of customary protective and anti-dilution rights.
In connection with this
sale of our mobile social application business, an impairment loss of $7,253,000 was recorded during the fourth quarter of 2013
representing the excess of the carrying value over the estimated fair value of the asset group.
Revenue
Revenue from patent
licensing and enforcement is recognized when 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. We use 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.
Currently, our revenue
arrangements provide for the payment of contractually determined fees in consideration for the grant of certain intellectual property
rights related to our patents. These rights typically include some combination of the following: (i) the grant of a non-exclusive,
retroactive and future license to manufacture and/or sell products covered by patents, (ii) the release of the licensee from certain
claims, and (iii) the dismissal of any pending litigation. The intellectual property rights granted may be perpetual in nature,
extending until the expiration of the related patents, or can be granted for a defined, relatively short period of time, with
the licensee possessing the right to renew the agreement at the end of each contractual term for an additional minimum upfront
payment. Pursuant to the terms of these agreements, we have no further obligation with respect to the grant of the non-exclusive
retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation
on our part to maintain or upgrade the related technology, or provide future support or services. Generally, the agreements provide
for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement,
or upon receipt of the minimum upfront payment for term agreement renewals. As such, the earnings process is complete and revenue
is recognized upon the execution of the agreement, upon receipt of the minimum upfront fee for term agreement renewals, and when
all other revenue recognition criteria have been met.
Operating legal costs
Operating legal costs
mainly include the costs and expenses incurred in connection with our 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 and stock-based compensation.
Amortization of intangibles
Amortization of intangibles
represents the amortization expense of our acquired patents which is recognized on a straight-line basis over the remaining legal
life of the patents.
Research and development expenses
Research and development
expenses consisted primarily of the cost of our development personnel, as well as of the cost of outsourced development services.
General and administrative expenses
General and administrative
expenses include management and administrative personnel, public and investor relations, overhead/office costs and various professional
fees, as well as insurance, non-operational 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 warrant liabilities related to the Preferential Reload Warrants, Special Bridge Warrants,
Conversion Warrants, and certain of our Series 1 Warrants. The value of such derivative warrants 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.
At March 31, 2014, deferred tax assets generated from our U.S. activities were mostly offset by a valuation allowance because
realization depends on generating future taxable income, which, in our estimation, is not more likely than not to be generated
before such net operating loss carryforwards expire.
Prior to the sale of our mobile social
application business, our subsidiary in Israel generated net taxable income from services it provided to us. The subsidiary in
Israel charged us for research, development, certain management and other services provided to us, plus a profit margin on such
costs, which was 8%. In the zone where the production facilities of the subsidiary in Israel were located, the statutory tax rate
was 12.5% in 2013. The deferred tax assets and liabilities generated from our subsidiary in Israel’s operations are not
offset by an allowance, as in our estimation, they are more likely than not to be realized.
Results of Operations
Three month period ended March 31,
2014 compared to the three month period ended March 31, 2013 and the development stage period (cumulative from Inception through
March 31, 2014)
Revenue
|
|
Quarter ended March 31,
|
|
|
Cumulative
from Inception
through
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
2014
|
|
Revenue
|
|
$
|
250,000
|
|
|
$
|
—
|
|
|
$
|
250,000
|
|
|
$
|
1,450,000
|
|
During the quarter
ended March 31, 2014, net cash used in operating activities totaled $8,493,000. During the quarter ended March 31, 2013, net cash
used in operating activities totaled $4,872,000. The $3,621,000 increase in net cash used in operating activities was mainly due
to increased litigation costs described above, as well as an increase in cost of our in-house staff, which was expanded during
the second half of 2013.
Cumulative revenue
from Inception through March 31, 2014 also includes $1,100,000 from a one-time payment in connection with the license and settlement
agreement entered into with Microsoft and proceeds from a partial settlement with AOL during 2012 in the total amount of $100,000.
We seek to generate
revenue through the monetization of our intellectual property through licensing, strategic partnerships and 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 continue to
expand our intellectual property monetization efforts worldwide.
We anticipate that
our legal proceedings may continue for several years and may require significant expenditures for legal fees and other expenses.
Disputes regarding the assertion of patents and other intellectual property rights are highly complex and technical.
Operating legal costs
|
|
Quarter ended March 31,
|
|
|
Cumulative
from Inception
through
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
2014
|
|
Operating legal costs
|
|
$
|
4,875,000
|
|
|
$
|
5,399,000
|
|
|
$
|
(524,000
|
)
|
|
$
|
37,708,000
|
|
During the quarter
ended March 31, 2014, our operating legal costs were $4,875,000, which represents a decrease of $524,000 (or 9.7%) from operating
legal costs recorded for the quarter ended March 31, 2013. This decrease was primarily due to the timing and nature of consulting
and patent litigation costs related to legal proceedings against Google and ZTE. Further, we expanded our in-house legal department
staff during the second half of 2013 which allowed for more cost efficiency during the current quarter. The overall decrease is
partially offset by a slight increase in stock-based compensation costs (approximately $50,000) due to our efforts to expand our
in-house legal department staff.
From Inception through
March 31, 2014, operating legal costs expenses amounted to $37,708,000 which is primarily attributed to consulting and patent
litigation costs in connection with our legal proceedings against Google and ZTE, payroll expense of our in-house legal department
staff, and stock-based compensation to employees, management and consultants.
It is not certain
whether our operating legal costs will increase over time. Though we aim to diversify our portfolio of products and increase our
intellectual property monetization efforts, we have also increased the size of our in-house legal department staff as mentioned
above. The goal is to decrease our overall legal expenses by bringing more work in-house, which we believe will cost less than
outsourcing to external firms. There is no guarantee, however, that an in-house team will be less expensive or more efficient
than outsourcing this work. Moreover, as we expand the scope of our monetization efforts, the amount of legal work will increase
leading to a concomitant increase in our operating legal costs, regardless of if such work is performed in-house or outsourced.
Amortization of intangibles
|
|
Quarter ended March 31,
|
|
|
Cumulative
from Inception
through
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
2014
|
|
Amortization of intangibles
|
|
$
|
957,000
|
|
|
$
|
839,000
|
|
|
$
|
118,000
|
|
|
$
|
6,422,000
|
|
During the quarter
ended March 31, 2014, amortization expense related to our intangibles was $957,000 which represents an increase of $118,000 (or
14.1%) from amortization of intangibles recorded for the quarter ended March 31, 2013. Currently, our intangible assets consist
of our patent portfolios which are amortized over their remaining useful lives (i.e., through the expiration date of the patent).
The increase during the current quarter was due to the additional patent portfolios that were acquired during 2013.
From Inception through
March 31, 2014, amortization of intangibles amounted to $6,422,000 which is related to our patent portfolios.
Research and development
|
|
Quarter ended March 31,
|
|
|
Cumulative
from Inception
through
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
2014
|
|
Research and development
|
|
$
|
225,000
|
|
|
$
|
270,000
|
|
|
$
|
(45,000
|
)
|
|
$
|
2,280,000
|
|
During the quarter
ended March 31, 2014 and 2013, our research and development expenses amounted to $225,000 and $270,000, respectively. These amounts
exclude research and development expenses related to our mobile social application business which is presented in discontinued
operations. The decrease of $45,000 (or 16.7%) is primarily due to a decrease in stock-based compensation costs of approximately
$27,000 related to the timing of vesting in connection with outstanding stock-based awards. In addition, there was a decrease
in costs related to third party consultants who were no longer utilized in 2014.
From Inception through
March 31, 2014, research and development expenses, in the total amount of $2,280,000, consist primarily of labor related costs,
consulting expenses, and related stock-based compensation costs.
As mentioned above,
in February 2014, we sold our mobile social application business to Infomedia. As part of the sale agreement, our former remaining
research and development personnel were assumed by Infomedia. Should we seek to introduce new products or new business opportunities,
such as a merger or acquisition relating to our intellectual property or other technology, we expect that our research and development
costs would increase.
General and administrative
|
|
Quarter ended March 31,
|
|
|
Cumulative
from Inception
through
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
2014
|
|
General and administrative
|
|
$
|
4,018,000
|
|
|
$
|
3,991,000
|
|
|
$
|
27,000
|
|
|
$
|
30,759,000
|
|
During the quarter
ended March 31, 2014, general and administrative expenses slightly increased by $27,000 (or 0.7%), to $4,018,000, compared to
$3,991,000 that was recorded during the quarter ended March 31, 2013. The overall increase in general and administrative expenses
was primarily due to increased payroll expenses and an increase in depreciation expense related to our fixed assets. Such increases
are due to our efforts to consolidate our executive management and finance functions under a centralized location. The overall
increase is partially offset by a decrease in external corporate consulting costs (such as corporate legal consulting fees) in
connection with our efforts to utilize our internal corporate staff. In addition, there was a decrease in stock-based compensation
costs during the current quarter.
From Inception through
March 31, 2014, general and administrative expenses amounted to $30,759,000. This amount is primarily attributed to salaries and
related payroll expenses, stock-based compensation expenses, and various professional fees.
We expect that our
general and administrative expenses will increase, as our expenses will incorporate full costs of our management and administration,
as well as increased office, accounting, legal and insurance costs. New merger and acquisition opportunities, should such arise,
may also significantly increase our general and administrative costs.
Non-operating income (expense), net
|
|
Quarter ended March 31,
|
|
|
Cumulative
from Inception
through
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
2014
|
|
Non-operating income (expense), net
|
|
$
|
(1,075,000
|
)
|
|
$
|
(360,000
|
)
|
|
$
|
(715,000
|
)
|
|
$
|
1,908,000
|
|
During the quarter
ended March 31, 2014, we recorded non-operating expense in the amount of $1,075,000 compared to non-operating expense in the amount
of $360,000 recorded in the quarter ended March 31, 2013. During the quarter ended March 31, 2014, we recorded approximately $1,076,000
of expense related to an increase in the fair value of our derivative warrant liabilities.
During the cumulative
period from Inception through March 31, 2014, as part of the issuance of October 2012 Warrants, the down-round protection clauses
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 year ended December 31, 2013. As a result of the removal of the down-round warrant protection,
we recorded an additional, non-operating expense of $1,617,000 during the year ended December 31, 2013. Following the Merger,
our non-operating income, net, included mainly the impact of changes in the fair value of derivative warrants, the fair value
of which is highly affected by our share price at the measurement date. Consequently, as of December 31, 2012, we recorded income
of $6,847,000 due to the decrease of our share price, compared to the share price on the date of the Merger.
In addition, in October
2012, we entered into an agreement with certain of our warrant holders, pursuant to which such warrant holders exercised in cash
3,721,062 of their outstanding warrants, with an exercise price of $1.76 per share, and we issued such warrant holders unregistered
warrants to purchase an aggregate of 3,000,000 of our shares of common stock, par value $0.01 per share, 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.
We expect that our
non-operating income (expense) will remain highly volatile, and we may choose to fund our operations through additional financing.
In particular, non-operating income (expense) will be affected by the adjustments to fair value of our derivative instruments.
Fair value of these derivative instruments depends on a variety of assumptions, such as estimations regarding 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, high 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 refer to Note 8 to the accompanying
unaudited consolidated financial statements.
Loss from discontinued mobile social application operations
|
|
Quarter ended March 31,
|
|
|
Cumulative from
Inception through
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
2014
|
|
Revenue
|
|
$
|
37,000
|
|
|
$
|
65,000
|
|
|
$
|
(28,000
|
)
|
|
$
|
530,000
|
|
Operating expenses
|
|
|
(266,000
|
)
|
|
|
(1,145,000
|
)
|
|
|
879,000
|
|
|
|
(6,266,000
|
)
|
Loss on impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,253,000
|
)
|
Operating loss
|
|
|
(229,000
|
)
|
|
|
(1,080,000
|
)
|
|
|
851,000
|
|
|
|
(12,989,000
|
)
|
Non-operating income (expense)
|
|
|
20,000
|
|
|
|
(9,000
|
)
|
|
|
29,000
|
|
|
|
(25,000
|
)
|
Loss before taxes on income
|
|
|
(209,000
|
)
|
|
|
(1,089,000
|
)
|
|
|
880,000
|
|
|
|
(13,014,000
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
(16,000
|
)
|
|
|
16,000
|
|
|
|
(312,000
|
)
|
Loss from discontinued operations
|
|
$
|
(209,000
|
)
|
|
$
|
(1,105,000
|
)
|
|
$
|
896,000
|
|
|
$
|
(13,326,000
|
)
|
On February 18, 2014, we executed the
sale of our mobile social application business to Infomedia, in exchange for 18 Class B shares of Infomedia, which represent an
8.25% ownership interest. Additionally, Vringo’s CEO was appointed as a full voting member on Infomedia’s board of
directors and we received a number of customary protective and anti-dilution rights. The Infomedia Class B shares are accounted
for as a cost-method investment. Cash requirements for termination of mobile operations include mainly post-employment obligations,
were incurred in the quarter ended March 31, 2014, and are considered to be immaterial. We expect the consummation of the sale
agreement to reduce our annual cost and cash used in operations, by approximately $3,000,000 per annum.
During the quarter
ended March 31, 2014, we recorded $37,000 revenue which represents a decrease of $28,000 (or 43%) from revenues recorded for the
quarter ended March 31, 2013.
During the quarter
ended March 31, 2014, operating expenses decreased by $879,000 (or 76.8%), to $266,000, from $1,145,000 recorded during the quarter
ended March 31, 2013. This decrease is primarily due to the fact that there was no amortization related to acquired technology
during the current quarter as the related asset was classified as held for sale as of December 31, 2013 and was subsequently sold
to Infomedia in February 2014.
From Inception through
March 31, 2014, loss from the discontinued mobile social application business amounted to $13,326,000. This amount is primarily
attributed to operating expenses such as salaries and related payroll expenses, stock-based compensation expenses, and various
professional fees. In addition, during the fourth quarter of 2013, an impairment loss of $7,253,000 was recorded in connection
with the sale of our mobile social application business.
Taxes on Income
As of December 31,
2013, we had approximately $88,204,000 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, may limit the Company's ability to utilize all such NOL and credit carryforwards.
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 that
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.
We file our tax returns
in the U.S. federal jurisdiction, as well as in various state and local jurisdictions. Vringo, Inc. has open tax years for
2010 through 2013. As of March 31, 2014, all tax years for Innovate/Protect are still open. The Israeli subsidiary files its income
tax returns in Israel. As of March 31, 2014, the Israeli subsidiary has open tax years for 2010 through 2013.
We did not have any
material unrecognized tax benefits as of March 31, 2014. We do not expect to record any additional material provisions for unrecognized
tax benefits within the next year.
Liquidity and Capital Resources
As of March 31, 2014,
we had a cash balance of $27,818,000 and $25,619,000 in net working capital. The decrease of $5,768,000 in our cash balance from
December 31, 2013, was mainly due to net cash used by us in our business operations of approximately $8,493,000 during the quarter
ended March 31, 2014. The majority of these expenditures consisted of costs related to our four litigation campaigns. In our case
against Google et al., we incurred costs related to the preparation for the oral argument, which was heard before the United States
Court of Appeals for the Federal Circuit on May 6, 2014, in addition to other related costs. In our cases against ZTE and ASUS,
we incurred costs related to the preparation and filing of briefs and other court documents, as well as case preparation and management.
A large percentage of these costs were incurred in the United Kingdom, Australia, Germany, and France. In civil law jurisdictions,
such as Germany, France, Spain, and others, the majority of costs are incurred in the early stages of litigation and we anticipate
that the costs in these jurisdictions will be lower in future periods. In our case against Tyco, we incurred costs related to
the preparation and filing of briefs and other court documents, case preparation and management, and the worldwide resolution
of litigation between the parties.
The overall decrease
in our cash balance from expenditures related to our litigation campaigns was partially offset by approximately $2,800,000 that
was received in connection with the exercises of warrants and stock options that occurred during the quarter ended March 31, 2014,
as described below. As of March 31, 2014, our total stockholders' equity was $109,928,000 which mainly decreased by continuing
operation deficits from Inception to date.
During the quarter
ended March 31, 2014, a total of 718,766 warrants to purchase an aggregate of 718,766 shares of our common stock, at an exercise
price range from $0.94 to $1.76 per share, were exercised by our warrant holders, pursuant to which we received $1,265,000. In
addition 1,237,540 options to purchase 1,237,540 shares of our common stock were exercised during the quarter ended March 31,
2014. As a result, we received $1,531,000 through March 2014 and an additional $413,000 in April 2014.
Based on current
operating plans, we expect to have sufficient funds for our operations for at least the next twelve months. In addition,
until we generate sufficient revenue, we may need to raise additional funds, which can be achieved through the exercise of our
outstanding warrants and options, the issuance of additional equity or through loans from financial institutions. There can be
no assurance, however, that any such opportunities will materialize.
We anticipate that
we will continue to search for additional sources of liquidity, when needed, until we generate positive cash flows to support
our operations. We cannot give any assurance that the necessary capital will be raised or that, if funds are raised, it will be
on favorable terms. Any future sales of securities to finance our operations may require stockholder approval and will dilute
existing stockholders' ownership. We cannot guarantee when or if we will ever generate positive cash flows.
Cash flows
|
|
Quarter ended March 31,
|
|
|
Cumulative
from Inception
through
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
2014
|
|
Net cash used in operating activities
|
|
$
|
(8,493,000
|
)
|
|
$
|
(4,872,000
|
)
|
|
$
|
(3,621,000
|
)
|
|
$
|
(47,954,000
|
)
|
Net cash used in investing activities
|
|
$
|
(72,000
|
)
|
|
$
|
(3,140,000
|
)
|
|
$
|
3,068,000
|
|
|
$
|
(24,589,000
|
)
|
Net cash provided by financing activities
|
|
$
|
2,796,000
|
|
|
$
|
174,000
|
|
|
$
|
2,622,000
|
|
|
$
|
100,199,000
|
|
Operating activities
During the quarter
ended March 31, 2014, net cash used in operating activities totaled $8,493,000. During the quarter ended March 31, 2013, net cash
used in operating activities totaled $4,872,000. The $3,621,000 increase in net cash used in operating activities was mainly due
to increased litigation costs described above, as well as an increase in cost of our in-house staff, which was expanded during
the second half of 2013.
We expect our net
cash used in operating activities to increase due to further development of our business. As we expect to move towards greater
revenue generation, we expect that these amounts will be offset over time by the collection of revenues.
Investing activities
During the quarter
ended March 31, 2014, net cash used in investing activities totaled $72,000. During the quarter ended March 31, 2013, net cash
used in investing activities totaled $3,140,000. The decrease in cash used in investing activities, in the total amount of $3,068,000,
was primarily due to the fact that we had invested in commercial paper during the quarter ended March 31, 2013 in the amount of
$3,120,000. This decrease is partially offset by an increase in fixed asset purchases during the quarter ended March 31, 2014
as compared to the quarter ended March 31, 2014.
We expect that net
cash used in investing activities will increase as we intend to continue to acquire additional intellectual property assets and
invest surplus cash, according to our investment policy.
Financing activities
During the
quarter ended March 31, 2014, net cash provided by financing activities totaled $2,796,000, which relates to funds that we received
from the exercises of warrants and stock options in the total amount of $1,265,000 and $1,531,000, respectively. During the quarter
ended March 31, 2013, net cash provided by financing activities totaled $174,000, which relates to funds received from the exercises
of warrants and stock options in the total amount of $165,000 and $9,000, respectively.
A significant portion
of our issued and outstanding warrants are currently “in the money” and the underlying shares of common stock held
by non-affiliates are freely tradable, with the potential of up to $17,438,086 of additional incoming funds as of March 31, 2014.
We may choose to raise additional funds in connection with any acquisitions of patent portfolios or other intellectual property
assets that we may pursue. There can be no assurance, however, that any such opportunity will materialize, and moreover, that
any such financing would likely be dilutive to our current stockholders.
Future operations
We are currently
pursuing several potential strategic partners and have identified patent portfolios, other intellectual property assets and operating
businesses that we may wish to acquire. In addition, we are continuing to explore further opportunities for strategic business
alliances. However, there can be no assurance that any such opportunities will be consummated.
Off-Balance Sheet Arrangements
From October 2012
through the filing date of this Form 10-Q, our subsidiaries filed patent infringement lawsuits against the subsidiaries of ZTE
Corporation in the United Kingdom, France, Germany, Australia, India, and Brazil. Should we be deemed the losing party in
any of its applications to the court in the UK, we may be held responsible for a portion of the defendant’s legal fees for
the relevant application or for the litigation. Pursuant to negotiation with ZTE’s UK subsidiary, in the United Kingdom,
we placed two written commitments to ensure the payment of a potential liability by Vringo Infrastructure resulting
for the two cases filed in the fourth quarter of 2012 and second quarter of 2013, which the defendants estimated to be approximately
$2,900,000 each. In addition, we may be required to grant additional written commitments, as necessary, in connection with our
commenced proceedings against ZTE Corporation in Europe, Brazil, India and Australia. It should be noted, however, that if we
were successful on any court applications or the entirety of any litigation, ZTE Corporation would be responsible for a substantial
portion of our legal fees.
Other than the arrangements
described in the preceding paragraph, we have no obligations, assets or liabilities which would be considered off-balance sheet
arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships,
often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance
sheet arrangements.
Contractual Obligations
The following table summarizes our future
contractual obligations beginning on April 1, 2014:
|
|
Remainder
of 2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
Total
|
|
Operating leases
|
|
$
|
135,000
|
|
|
$
|
403,000
|
|
|
$
|
403,000
|
|
|
$
|
408,000
|
|
|
$
|
416,000
|
|
|
$
|
312,000
|
|
|
$
|
2,077,000
|
|
In July 2012, the
Company signed a rental agreement for its corporate executive office in New York for an annual rental fee of approximately $137,000
(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 initial annual rental fee for this
new office is approximately $403,000 (subject to certain future escalations and adjustments) beginning when the renovations are
completed and the new office is available. Until the new office is available, the monthly rent payments are 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.
Critical Accounting Estimates
While our significant
accounting policies are more fully described in the notes to our audited consolidated financial statements for the year ended
December 31, 2013, we believe the following accounting policies to be the most critical in understanding the judgments and estimates
we use in preparing our consolidated financial statements.
Impairment of Long-Lived Assets
Our long-lived assets
include property and equipment and amortizable intangible assets. In assessing the recoverability of these long-lived assets,
we 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, we may be required to record impairment charges related to our long-lived assets.
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”) 350
, Intangibles - Goodwill and Other
. Based on our evaluation, we have one reporting
unit for purposes of evaluating goodwill impairment.
We have the option
to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If we 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, we
would not need to perform the two-step impairment test for the reporting unit. If we cannot support such a conclusion or we do
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 our market capitalization.
We performed our
annual impairment test of goodwill as of December 31, 2013. Based on this test, we 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 $250,127,000, exceeding the carrying value by 118%.
Valuation of Financial Instruments
As of March 31, 2014,
we had 21,198 Special Bridge Warrants and 14,491 Conversion Warrants at an exercise price of $0.94, with a fair value of $54,000
and $37,000, respectively. In addition, we had 160,609 Preferential Reload Warrants and 1,974,957 Series 1 Warrants at an exercise
price of $1.76, with a fair value of $313,000 and $4,009,000, respectively. (Refer to Note 8 to the accompanying unaudited
consolidated financial statements). The following table represents the assumptions, valuation models and inputs used, as of March
31, 2014:
|
|
Valuation
|
|
Unobservable
|
|
|
|
Description
|
|
Technique
|
|
Inputs
|
|
Range
|
|
Special Bridge Warrants, Conversion Warrants,
|
|
Black-Scholes-Merton and the
|
|
Volatility
|
|
40.59% – 50.29%
|
|
Preferential Reload Warrants and the outstanding
|
|
Monte-Carlo models
|
|
Risk free interest rate
|
|
0.09% – 1.05%
|
|
derivative Series 1 Warrants
|
|
|
|
Expected term, in years
|
|
0.75 – 3.30
|
|
|
|
|
|
Dividend yield
|
|
0%
|
|
|
|
|
|
Probability and timing of down-round triggering event
|
|
5% occurrence in December 2014
|
|
Had we made different
assumptions about the risk-free interest rate, volatility, the impact of the down-round provision, or the estimated time that
the abovementioned warrants will be outstanding before they are ultimately exercised, the recorded expense, our net loss and net
loss per share amounts could have been significantly different.
Accounting for Stock-based Compensation
We measure compensation
cost for stock-based awards at fair value on the date of grant and recognize the cost over the service period in which the awards
are expected to vest. For options granted to consultants, the measurement date of the option is the earlier of counterparty performance
or performance commitment. Such options are revalued at every reporting date until the measurement date. The estimation of stock-based
awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will
be recorded as a cumulative adjustment in the period estimates are revised. Actual results may differ substantially from these
estimates.
We determine the
fair value of stock options granted to employees, directors and consultants using the Black-Scholes-Merton and the Monte-Carlo
(for grants that include market conditions) valuation models. Those models require us to make significant assumptions regarding
the expected stock price volatility, the risk-free interest rate and the dividend yield, and the estimated period of time option
grants will be outstanding before they are ultimately exercised. Since the Merger occurred on July 19, 2012, we still
lack sufficient history to use our own historical volatility; as a result, we estimate our expected stock volatility based
on historical stock volatility from comparable companies. 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.
The various inputs
and assumptions utilized in connection with our option pricing models are highly subjective. Had we made different assumptions
about the risk-free interest rate, expected stock price, volatility, or the estimated time that the options will be outstanding
before they are ultimately exercised, the recorded expense, our net loss and net loss per share amounts could have been significantly
different.
Accounting for Income Taxes
As part of the process
of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions
in which we operate. This process involves management estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that
our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not more likely
than not, we must establish a valuation allowance. Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.
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. Our lack of earnings history and the uncertainty surrounding
our ability to generate U.S. taxable income prior to the expiration of such deferred tax assets were the primary factors considered
by management in establishing the valuation allowance.
FASB ASC 740
,
Income Taxes
, prescribes how a company should recognize, measure, present and disclose in its financial statements uncertain
tax positions that the company has taken or expects to take on a tax return. Additionally, for tax positions to qualify for deferred
tax benefit recognition under ASC 740, the position must have at least a “more likely than not” chance of being sustained
upon challenge by the respective taxing authorities, which criteria is a matter of significant judgment.
Recently Adopted Accounting Pronouncements
In July 2013, FASB
issued
Accounting Standards Update (“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 beginning January 1, 2014 and is to be applied prospectively with retroactive application permitted. We
have adopted this guidance as of January 1, 2014, as required. There was no material impact of the consolidated financial statements
resulting from the adoption.
In April 2014,
the FASB issued ASU No. 2014-08,
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic
360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
.
This guidance changes
the criteria for reporting a discontinued operation while enhancing disclosures in this area. This standard will be effective
for us beginning January 1, 2015. Early adoption of the standard is permitted, but only for disposals (or classifications as held
for sale) that have not been reported in financial statements previously issued or available for issuance. We are currently evaluating
the impact of the adoption on our consolidated financial statements.