Item 1. Financial Statements
Vringo, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share
data)
|
|
June 30,
2014
(Unaudited)
|
|
|
December 31,
2013
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
31,654
|
|
|
$
|
33,586
|
|
Assets held for sale
|
|
|
—
|
|
|
|
787
|
|
Deposits with courts
|
|
|
2,304
|
|
|
|
—
|
|
Other current assets
|
|
|
224
|
|
|
|
455
|
|
Total current assets
|
|
|
34,182
|
|
|
|
34,828
|
|
Property and equipment, at cost, net of $348 and $134 accumulated depreciation, as of June 30, 2014 and December 31, 2013, respectively
|
|
|
161
|
|
|
|
230
|
|
Intangible assets, net
|
|
|
20,823
|
|
|
|
22,748
|
|
Goodwill
|
|
|
65,757
|
|
|
|
65,757
|
|
Other assets
|
|
|
1,034
|
|
|
|
247
|
|
Total assets
|
|
$
|
121,957
|
|
|
$
|
123,810
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
4,582
|
|
|
$
|
5,146
|
|
Accrued employee compensation
|
|
|
36
|
|
|
|
299
|
|
Derivative warrant liabilities
|
|
|
89
|
|
|
|
43
|
|
Total current liabilities
|
|
|
4,707
|
|
|
|
5,488
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Derivative warrant liabilities
|
|
$
|
3,015
|
|
|
$
|
4,040
|
|
Other liabilities
|
|
|
69
|
|
|
|
—
|
|
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; 92,545,862 and 84,502,653 issued and outstanding as of June 30, 2014 and December 31, 2013, respectively
|
|
|
925
|
|
|
|
845
|
|
Additional paid-in capital
|
|
|
210,427
|
|
|
|
189,465
|
|
Accumulated deficit
|
|
|
(97,186
|
)
|
|
|
(76,028
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
$
|
114,166
|
|
|
$
|
114,282
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
121,957
|
|
|
$
|
123,810
|
|
The accompanying notes form an integral
part of these consolidated financial statements.
Vringo, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share
data)
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Revenue
|
|
$
|
800
|
|
|
$
|
1,100
|
|
|
$
|
1,050
|
|
|
$
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating legal costs
|
|
|
5,982
|
|
|
|
4,790
|
|
|
|
10,857
|
|
|
|
10,189
|
|
Amortization of intangibles
|
|
|
968
|
|
|
|
839
|
|
|
|
1,925
|
|
|
|
1,678
|
|
Research and development
|
|
|
217
|
|
|
|
467
|
|
|
|
442
|
|
|
|
737
|
|
General and administrative
|
|
|
3,986
|
|
|
|
3,759
|
|
|
|
8,004
|
|
|
|
7,750
|
|
Total operating expenses
|
|
|
11,153
|
|
|
|
9,855
|
|
|
|
21,228
|
|
|
|
20,354
|
|
Operating loss from continuing operations
|
|
|
(10,353
|
)
|
|
|
(8,755
|
)
|
|
|
(20,178
|
)
|
|
|
(19,254
|
)
|
Non-operating income, net
|
|
|
21
|
|
|
|
17
|
|
|
|
22
|
|
|
|
32
|
|
Gain (loss) on revaluation of warrants
|
|
|
348
|
|
|
|
(1,491
|
)
|
|
|
(728
|
)
|
|
|
(1,866
|
)
|
Issuance of warrants
|
|
|
(65
|
)
|
|
|
—
|
|
|
|
(65
|
)
|
|
|
—
|
|
Loss from continuing operations before income taxes
|
|
|
(10,049
|
)
|
|
|
(10,229
|
)
|
|
|
(20,949
|
)
|
|
|
(21,088
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss from continuing operations
|
|
|
(10,049
|
)
|
|
|
(10,229
|
)
|
|
|
(20,949
|
)
|
|
|
(21,088
|
)
|
Loss from discontinued operations before income taxes*
|
|
|
—
|
|
|
|
(709
|
)
|
|
|
(209
|
)
|
|
|
(1,798
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(18
|
)
|
Loss from discontinued operations
|
|
|
—
|
|
|
|
(711
|
)
|
|
|
(209
|
)
|
|
|
(1,816
|
)
|
Net loss
|
|
$
|
(10,049
|
)
|
|
$
|
(10,940
|
)
|
|
$
|
(21,158
|
)
|
|
$
|
(22,904
|
)
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations
|
|
|
(0.12
|
)
|
|
|
(0.12
|
)
|
|
|
(0.24
|
)
|
|
|
(0.26
|
)
|
Loss per share from discontinued operations
|
|
|
(0.00
|
)
|
|
|
(0.01
|
)
|
|
|
(0.00
|
)
|
|
|
(0.02
|
)
|
Total net loss per share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.28
|
)
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations
|
|
|
(0.12
|
)
|
|
|
(0.12
|
)
|
|
|
(0.24
|
)
|
|
|
(0.26
|
)
|
Loss per share from discontinued operations
|
|
|
(0.00
|
)
|
|
|
(0.01
|
)
|
|
|
(0.00
|
)
|
|
|
(0.02
|
)
|
Total net loss per share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.28
|
)
|
Weighted-average number of shares outstanding during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
87,210,483
|
|
|
|
82,739,447
|
|
|
|
86,337,006
|
|
|
|
82,552,710
|
|
Diluted
|
|
|
88,515,948
|
|
|
|
82,739,447
|
|
|
|
86,337,006
|
|
|
|
82,552,710
|
|
* Includes stock-based compensation expense, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating legal costs
|
|
$
|
385
|
|
|
$
|
301
|
|
|
$
|
728
|
|
|
$
|
595
|
|
Research and development
|
|
|
108
|
|
|
|
114
|
|
|
|
215
|
|
|
|
248
|
|
General and administrative
|
|
|
2,525
|
|
|
|
2,515
|
|
|
|
4,724
|
|
|
|
5,043
|
|
Discontinued operations
|
|
|
—
|
|
|
|
92
|
|
|
|
151
|
|
|
|
230
|
|
|
|
$
|
3,018
|
|
|
$
|
3,022
|
|
|
$
|
5,818
|
|
|
$
|
6,116
|
|
The accompanying notes form an integral
part of these consolidated financial statements.
Vringo, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands)
|
|
Common
stock
|
|
|
Additional
paid-in capital
|
|
|
Accumulated
deficit
|
|
|
Total
|
|
Balance as of December 31, 2013
|
|
$
|
845
|
|
|
$
|
189,465
|
|
|
$
|
(76,028
|
)
|
|
$
|
114,282
|
|
Exercise of stock options and vesting of restricted stock units (“RSU”)
|
|
|
16
|
|
|
|
2,144
|
|
|
|
—
|
|
|
|
2,160
|
|
Issuance of warrants (Note 8)
|
|
|
—
|
|
|
|
65
|
|
|
|
—
|
|
|
|
65
|
|
Exercise of warrants
|
|
|
64
|
|
|
|
12,935
|
|
|
|
—
|
|
|
|
12,999
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
5,818
|
|
|
|
—
|
|
|
|
5,818
|
|
Net loss for the period
|
|
|
—
|
|
|
|
—
|
|
|
|
(21,158
|
)
|
|
|
(21,158
|
)
|
Balance as of June 30, 2014
|
|
$
|
925
|
|
|
$
|
210,427
|
|
|
$
|
(97,186
|
)
|
|
$
|
114,166
|
|
|
|
Common
stock
|
|
|
Additional
paid-in capital
|
|
|
Accumulated
deficit
|
|
|
Total
|
|
Balance as of December 31, 2012
|
|
$
|
819
|
|
|
$
|
171,108
|
|
|
$
|
(23,595
|
)
|
|
$
|
148,332
|
|
Exercise of stock options and vesting of RSU
|
|
|
10
|
|
|
|
143
|
|
|
|
—
|
|
|
|
153
|
|
Exercise of warrants
|
|
|
1
|
|
|
|
249
|
|
|
|
—
|
|
|
|
250
|
|
Conversion of derivative warrants into equity warrants
|
|
|
—
|
|
|
|
3,748
|
|
|
|
—
|
|
|
|
3,748
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
6,116
|
|
|
|
—
|
|
|
|
6,116
|
|
Net loss for the period
|
|
|
—
|
|
|
|
—
|
|
|
|
(22,904
|
)
|
|
|
(22,904
|
)
|
Balance as of June 30, 2013
|
|
$
|
830
|
|
|
$
|
181,364
|
|
|
$
|
(46,499
|
)
|
|
$
|
135,695
|
|
The accompanying notes form an integral
part of these consolidated financial statements.
Vringo, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
Six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21,158
|
)
|
|
$
|
(22,904
|
)
|
Adjustments to reconcile net cash flows used in operating activities:
|
|
|
|
|
|
|
|
|
Items not affecting cash flows
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,139
|
|
|
|
2,567
|
|
Stock-based compensation
|
|
|
5,818
|
|
|
|
6,116
|
|
Issuance of warrants
|
|
|
65
|
|
|
|
—
|
|
Assignment of patents
|
|
|
—
|
|
|
|
(100
|
)
|
Change in fair value of warrants
|
|
|
728
|
|
|
|
1,866
|
|
Exchange rate loss (gain), net
|
|
|
(35
|
)
|
|
|
4
|
|
Changes in current assets and liabilities
|
|
|
|
|
|
|
|
|
Decrease in other current assets
|
|
|
231
|
|
|
|
73
|
|
Increase (decrease) in payables and accruals
|
|
|
(743
|
)
|
|
|
1,412
|
|
Net cash used in operating activities
|
|
|
(12,955
|
)
|
|
|
(10,966
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(145
|
)
|
|
|
(31
|
)
|
Increase in short-term investments
|
|
|
—
|
|
|
|
(3,120
|
)
|
Decrease (increase) in deposits
|
|
|
(2,304
|
)
|
|
|
8
|
|
Net cash used in investing activities
|
|
|
(2,449
|
)
|
|
|
(3,143
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
2,160
|
|
|
|
153
|
|
Exercise of warrants
|
|
|
11,292
|
|
|
|
174
|
|
Cash provided by financing activities
|
|
|
13,452
|
|
|
|
327
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
20
|
|
|
|
10
|
|
Decrease in cash and cash equivalents
|
|
|
(1,932
|
)
|
|
|
(13,772
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
33,586
|
|
|
|
56,960
|
|
Cash and cash equivalents at end of period
|
|
$
|
31,654
|
|
|
$
|
43,188
|
|
Supplemental disclosure of cash flows information
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
|
—
|
|
|
|
3
|
|
Non-cash investing and financing transactions
|
|
|
|
|
|
|
|
|
Non-cash acquisition of cost method investment
|
|
|
787
|
|
|
|
—
|
|
Conversion of derivative warrants into common stock
|
|
|
1,707
|
|
|
|
76
|
|
Conversion of derivative warrants into equity warrants
|
|
|
—
|
|
|
|
3,748
|
|
The accompanying notes form an integral
part of these consolidated financial statements.
Vringo, Inc. and Subsidiaries
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 (“Vringo” or 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 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 February 18, 2014, the Company executed the
sale of its mobile social application business to InfoMedia Services Limited (“InfoMedia”), receiving an
8.25% ownership interest as consideration (Note 4).
Note 2. Accounting and Reporting Policies
(a) Basis of presentation and principles of consolidation
The accompanying interim consolidated financial
statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S.
GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X, and should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31, 2013. The results of operations for the three month
and six month periods ended June 30, 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 useful lives of the Company’s 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) Translation into U.S. dollars
The Company conducts certain 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.
(d) Cash and cash equivalents
The Company invests its cash in 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.
(e) 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,
which are discussed in Notes 6 and 8, have been recorded as liabilities 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).
(f) 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.
(g) Operating legal costs
Operating legal costs mainly include 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.
(h) 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.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from
Contracts with Customers (Topic 606)
, which impacts virtually all aspects of an entity's revenue recognition. The core principle
of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
guidance is effective for annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact
of the adoption on its consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-10,
Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable
Interest Entities Guidance in Topic 810, Consolidation
, which removes the definition of development stage entity, as was previously
defined under U.S. GAAP, thereby removing the financial reporting distinction between development stage entities and other reporting
entities. In addition, the ASU eliminates the requirements for development stage entities to (i) present inception-to-date information
in their financial statements, (ii) label the financial statements as those of a development stage entity, (iii) disclose a description
of the development stage activities in which the entity is engaged, and (iv) disclose in the first year in which the entity is
no longer a development stage entity that in prior years it had been in the development stage. This guidance is effective for annual
reporting periods beginning after December 31, 2014 and early adoption of the standard is permitted. The Company adopted this guidance
during the second quarter of 2014.
(i) 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
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Basic Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to shares of common stock
|
|
$
|
(10,049
|
)
|
|
$
|
(10,229
|
)
|
|
$
|
(20,949
|
)
|
|
$
|
(21,088
|
)
|
Loss from discontinued operations attributable to shares of common stock
|
|
|
—
|
|
|
|
(711
|
)
|
|
$
|
(209
|
)
|
|
$
|
(1,816
|
)
|
Net loss attributable to shares of common stock
|
|
$
|
(10,049
|
)
|
|
$
|
(10,940
|
)
|
|
$
|
(21,158
|
)
|
|
$
|
(22,904
|
)
|
Basic Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock outstanding during the period
|
|
|
87,210,483
|
|
|
|
82,625,295
|
|
|
|
86,337,006
|
|
|
|
82,406,883
|
|
Weighted average number of penny stock options
|
|
|
—
|
|
|
|
114,152
|
|
|
|
—
|
|
|
|
145,827
|
|
Basic common stock shares outstanding
|
|
|
87,210,483
|
|
|
|
82,739,447
|
|
|
|
86,337,006
|
|
|
|
82,552,710
|
|
Basic loss per common stock share from continuing operations
|
|
$
|
(0.12
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
Basic loss per common stock share from discontinued operations
|
|
$
|
(0.00
|
)
|
|
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
Basic net loss per common stock share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations attributable to shares of common stock
|
|
$
|
(10,049
|
)
|
|
$
|
(10,229
|
)
|
|
$
|
(20,949
|
)
|
|
$
|
(21,088
|
)
|
Increase in net loss attributable to derivative warrants
|
|
$
|
(348
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Diluted net loss from continuing operations attributable to shares of common stock
|
|
$
|
(10,397
|
)
|
|
$
|
(10,229
|
)
|
|
$
|
(20,949
|
)
|
|
$
|
(21,088
|
)
|
Diluted net loss from discontinued operations attributable to shares of common stock
|
|
$
|
—
|
|
|
$
|
(711
|
)
|
|
$
|
(209
|
)
|
|
$
|
(1,816
|
)
|
Diluted net loss attributable to shares of common stock
|
|
$
|
(10,397
|
)
|
|
$
|
(10,940
|
)
|
|
$
|
(21,158
|
)
|
|
$
|
(22,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic common stock shares outstanding
|
|
|
87,210,483
|
|
|
|
82,739,447
|
|
|
|
86,337,006
|
|
|
|
82,552,710
|
|
Weighted average number of derivative warrants outstanding during the period
|
|
|
1,305,465
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted common stock shares outstanding
|
|
|
88,515,948
|
|
|
|
82,739,447
|
|
|
|
86,337,006
|
|
|
|
82,552,710
|
|
Diluted loss per common stock share from continuing operations
|
|
$
|
(0.12
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
Diluted loss per common stock share from discontinued operations
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
Diluted net loss per common stock share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
10,102,094
|
|
|
|
11,805,940
|
|
|
|
10,102,094
|
|
|
|
11,805,940
|
|
Unvested penny options to purchase an equal number of shares of common stock of the Company
|
|
|
—
|
|
|
|
2,375
|
|
|
|
—
|
|
|
|
2,375
|
|
Unvested RSUs to issue an equal number of shares of common stock of the Company
|
|
|
1,657,890
|
|
|
|
2,815,794
|
|
|
|
1,657,890
|
|
|
|
2,815,794
|
|
Common stock shares granted, but not yet vested
|
|
|
—
|
|
|
|
61,478
|
|
|
|
—
|
|
|
|
61,478
|
|
Warrants to purchase an equal number of shares of common stock of the Company
|
|
|
15,801,923
|
|
|
|
18,764,114
|
|
|
|
17,423,851
|
|
|
|
18,764,114
|
|
Total number of potentially dilutive instruments, excluded from the calculation of net loss per share
|
|
|
27,561,907
|
|
|
|
33,449,701
|
|
|
|
29,183,835
|
|
|
|
33,449,701
|
|
Note 4. 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 occurred on February 18, 2014 (“Closing”).
Upon Closing, as consideration 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 Chief
Executive Officer was appointed as a full voting member on InfoMedia’s board of directors and the Company received a
number of customary protective 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 June 30, 2014. During
the six month period ended June 30, 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,
the requirement to report the results of the Company’s mobile social application business as discontinued operations was
triggered. The following tables represent the components of operating results from discontinued operations, as presented in the
consolidated statements of operations:
|
|
Three months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
61
|
|
Operating expenses
|
|
|
—
|
|
|
|
(748
|
)
|
Operating loss
|
|
|
—
|
|
|
|
(687
|
)
|
|
|
|
|
|
|
|
|
|
Non-operating expense
|
|
|
—
|
|
|
|
(22
|
)
|
Loss before taxes on income
|
|
|
—
|
|
|
|
(709
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
(2
|
)
|
Loss from discontinued operations
|
|
$
|
—
|
|
|
$
|
(711
|
)
|
|
|
Six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Revenue
|
|
$
|
37
|
|
|
$
|
126
|
|
Operating expenses
|
|
|
(266
|
)
|
|
|
(1,893
|
)
|
Operating loss
|
|
|
(229
|
)
|
|
|
(1,767
|
)
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense)
|
|
|
20
|
|
|
|
(31
|
)
|
Loss before taxes on income
|
|
|
(209
|
)
|
|
|
(1,798
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
(18
|
)
|
Loss from discontinued operations
|
|
$
|
(209
|
)
|
|
$
|
(1,816
|
)
|
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 5. Intangible Assets
|
|
As of June 30,
2014
|
|
|
As of December 31,
2013
|
|
|
Weighted average
amortization period (years)
|
Patents
|
|
|
28,213
|
|
|
|
28,213
|
|
|
8.3
|
Less: accumulated amortization
|
|
|
(7,390
|
)
|
|
|
(5,465
|
)
|
|
|
|
|
$
|
20,823
|
|
|
$
|
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
three and six month periods ended June 30, 2014, the Company recorded amortization expense of $968 and $1,925, respectively, related
to its patents. During the three and six month periods ended June 30, 2013, the Company recorded amortization expense of $839 and
$1,678, respectively, related to its patents.
Note 6. Fair Value Measurements
The Company measures fair value in accordance
with FASB Accounting Standards Codification (“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
:
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 June 30, 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 June 30, 2014
|
|
$
|
3,104
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
3,104
|
|
As of December 31, 2013
|
|
$
|
4,083
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
4,083
|
|
The Company measures its derivative liabilities
at fair value. The Special Bridge Warrants, Conversion Warrants, the derivative 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 June 30, 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 June 30, 2014 and December 31, 2013 consisted of cash, cash equivalents, receivables, accounts
payable and 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 six month period ended June 30, 2014:
|
|
Level 3
|
|
Balance at December 31, 2013
|
|
$
|
4,083
|
|
Fair value adjustment, prior to exercise of warrants, included in Consolidated Statement of Operations
|
|
|
56
|
|
Exercise of derivative warrants
|
|
|
(1,707
|
)
|
Fair value adjustment at end of period, included in Consolidated Statement of Operations
|
|
|
672
|
|
Balance at June 30, 2014
|
|
$
|
3,104
|
|
Valuation processes for Level 3 Fair Value Measurements
Fair value measurement of the derivative
warrant liabilities related to the Special Bridge Warrants, Conversion Warrants, 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,
derivative
|
|
Black-Scholes-Merton and the
|
|
Volatility
|
|
32.83% – 46.41%
|
|
Reload Warrants and derivative
Series 1 Warrants
|
|
Monte-Carlo models
|
|
Risk free interest rate
|
|
0.08% – 0.88%
|
|
|
|
|
|
Expected term, in years
|
|
0.50 – 3.05
|
|
|
|
|
|
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 (Note 4) 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 liabilities 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 7. Stock-based Compensation
The Company has a stock-based compensation
plan available to grant stock options and RSU to the Company’s directors, employees and consultants. Under the 2012 Employee,
Director and Consultant Equity Incentive Plan (the “Plan”), a maximum of 15,600,000 shares of common stock may be awarded.
As of June 30, 2014, 3,741,170 shares were available for future grants under the Plan.
The following table illustrates the stock options granted for
the six month period ended June 30, 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
|
|
January - June 2014
|
|
1,200,000
|
|
$ 3.12 - $ 4.10
|
|
$ 1.76 - $ 2.32
|
|
Over 1 year for
Directors; Over 3 years
for Management and
Employees
|
|
Volatility: 57.75 % – 62.00%
Risk free interest rate: 1.82% - 2.06%
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 activity related to stock options and
RSU for the six month period ended June 30, 2014 consisted of the following:
|
|
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
|
|
|
—
|
|
|
|
—
|
|
|
|
1,200,000
|
|
|
$
|
3.98
|
|
|
$3.12 - $4.10
|
|
$
|
2.16
|
|
Vested/Exercised
|
|
|
(500,388
|
)
|
|
$
|
3.59
|
|
|
|
(1,126,815
|
)
|
|
$
|
1.92
|
|
|
$0.01 – $3.72
|
|
$
|
1.31
|
|
Forfeited
|
|
|
(3,125
|
)
|
|
$
|
3.72
|
|
|
|
(95,833
|
)
|
|
$
|
3.71
|
|
|
$3.24 - $3.72
|
|
$
|
2.19
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
(332,416
|
)
|
|
$
|
4.60
|
|
|
$0.96 – $5.50
|
|
$
|
1.97
|
|
Outstanding at June 30, 2014
|
|
|
1,657,890
|
|
|
$
|
3.62
|
|
|
|
10,102,095
|
|
|
$
|
3.41
|
|
|
$0.96 – $5.50
|
|
$
|
2.30
|
|
Exercisable at June 30, 2014
|
|
|
—
|
|
|
|
—
|
|
|
|
6,099,385
|
|
|
$
|
2.28
|
|
|
$0.96 – $5.50
|
|
|
|
|
The Company did not recognize tax benefits
related to its stock-based compensation as there is a full valuation allowance recorded.
Note 8. Warrants
The following table summarizes information
about warrant activity for the six month period ended June 30, 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
|
|
Granted
|
|
|
5,412,366
|
|
|
$
|
5.06
|
|
|
$
|
5.06
|
|
Exercised
|
|
|
(6,415,992
|
)
|
|
$
|
1.76
|
|
|
$
|
1.76
|
|
Outstanding at June 30, 2014
|
|
|
17,423,852
|
|
|
$
|
4.26
|
|
|
|
$ 0.94 – $5.06
|
|
On June 19, 2014, the Company entered
into agreements with certain of its warrant holders, pursuant to which the warrant holders exercised for cash 5,697,227 of
their outstanding Series 1 and Series 2 warrants, with an exercise price of $1.76 per share. The Company granted such warrant
holders unregistered warrants of the Company to purchase an aggregate of 5,412,366 shares of the Company’s common
stock, par value $0.01 per share, at an exercise price of $5.06 per share (the “June 2014 Warrants”). The June
2014 Warrants expire on June 21, 2015 and because such warrants do not bear any down-round protection clauses, they are
classified as equity instruments. As a result of these transactions, the Company received $10,027 of proceeds.
The Company’s outstanding warrants consist of the following:
|
|
No. outstanding
|
|
|
No.
outstanding
classified as
equity
|
|
|
No.
outstanding
classified as
liabilities*
|
|
|
Exercise price
|
|
|
Remaining
contractual life
|
Series 1 Warrants
|
|
|
1,490,250
|
|
|
|
64,621
|
|
|
|
1,425,629
|
|
|
$
|
1.76
|
|
|
3.05 years
|
Series 2 Warrants
|
|
|
1,943,523
|
|
|
|
1,943,523
|
|
|
|
—
|
|
|
$
|
1.76
|
|
|
3.05 years
|
Conversion Warrants
|
|
|
14,492
|
|
|
|
—
|
|
|
|
14,492
|
|
|
$
|
0.94
|
|
|
0.98 years
|
Special Bridge Warrants
|
|
|
21,198
|
|
|
|
—
|
|
|
|
21,198
|
|
|
$
|
0.94
|
|
|
0.50 years
|
Reload Warrants
|
|
|
758,023
|
|
|
|
597,414
|
|
|
|
160,609
|
|
|
$
|
1.76
|
|
|
2.61 years
|
Initial Public Offering Warrants
|
|
|
4,784,000
|
|
|
|
4,784,000
|
|
|
|
—
|
|
|
$
|
5.06
|
|
|
0.98 years
|
October 2012 Warrants
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
|
|
—
|
|
|
$
|
5.06
|
|
|
0.98 years
|
June 2014 Warrants**
|
|
|
5,412,366
|
|
|
|
5,412,366
|
|
|
|
—
|
|
|
$
|
5.06
|
|
|
0.98 years
|
Outstanding at June 30, 2014
|
|
|
17,423,852
|
|
|
|
15,801,924
|
|
|
|
1,621,928
|
|
|
|
|
|
|
|
*
These warrants
bear down-round protection clauses and as a result, they are classified as derivative liabilities and recorded at fair value.
** The June 2014 Warrants were
valued on the grant date (June 20, 2014) using the following assumptions: volatility: 40.05%, stock price: $3.33, risk free interest
rate: 0.15% and dividend yield: 0%. The new warrants issued in connection with the exercise of warrants classified as liabilities
were accounted for as an inducement and therefore an amount of $65, which is based on the fair value of the new warrants, was recorded
as a non-operating expense during the second quarter of 2014. The new warrants issued in connection with the exercise of warrants
classified as equity, which were fair valued at $611, were recorded as equity.
Note 9. Revenue from Settlements and Licensing Agreements
On April 28, 2014, the Company entered
into a confidential agreement with Tyco that resolved all litigation pending between the parties.
Note 10. Commitments and Contingencies
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, Brazil, Malaysia, and Romania, 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 made two written
commitments, in November 2012 and May 2013, representing 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 be 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 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 enforce an injunction against ZTE in Germany. 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 $904 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. The $1,400 bond deposit in Germany and the $904 surety deposit in Brazil are included in Deposits with courts
in the consolidated balance sheet as of June 30, 2014.
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 may be responsible for a substantial portion of the Company’s legal fees.
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 in 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 three and six month periods ended June 30,
2014 were $70 and $182, respectively. Rent expense for operating leases for the three and six month periods ended June 30,
2013 were $63 and $107, respectively.
Note 11. Risks and Uncertainties
|
(a)
|
New legislation, regulations or rulings that impact the patent enforcement process or the rights of patent holders, could negatively affect the Company’s current business model. For example, limitations on the ability to bring patent enforcement claims, limitations on potential liability for patent infringement, lower evidentiary standards for invalidating patents, increases in the cost to resolve patent disputes and other similar developments could negatively affect the Company’s ability to assert its patent or other intellectual property rights.
|
|
(b)
|
The patents owned by the Company are presumed to be valid and enforceable. As part of the Company’s ongoing legal proceedings, the validity and/or enforceability of 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.
|
|
(c)
|
Financial instruments which potentially
subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company
maintains its cash and cash equivalents with various major financial institutions. These major financial institutions are located
in the United States and the Company’s policy is designed to limit exposure to any one institution.
|
|
(d)
|
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.
|
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 (“SEC”). 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.
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:
|
•
|
strategic partnerships, and
|
The accompanying interim 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.
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 or 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 the assistance of 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 previously 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. On July 2, 2014, the USPTO
mailed a notice that it will issue a certificate that all of the claims of U.S. Patent No. 6,314,420 remain valid and unchanged.
This is the second time the USPTO has confirmed the validity of the ‘420 patent. The USPTO has also previously confirmed
the validity of U.S. Patent No. 6,775,664, the other patent asserted in litigation with Google. At this time, there are no other
pending reexaminations for the patents asserted in the litigation.
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 $22,000,000. Under the terms of the purchase agreement, to the extent that the
gross revenue generated by such portfolio exceeds $22,000,000, we are 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”), and Tyco Integrated Security, LLC
(“Tyco”) and certain of their subsidiaries, affiliates and other companies in the United States, European
jurisdictions, India, Australia, Brazil, and Malaysia alleging infringement of certain U.S., European, Indian, Australian,
Brazilian, and Malaysian 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 is 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. 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. In addition, ZTE filed a nullity suit with respect to the fourth European patent
in the Federal Patents Court in Munich, Germany in the second quarter of 2014. 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. On May
30, 2014, the patent rights for another one of those patents was upheld. The oral hearing for the remaining patent occurred on
January 23, 2014,
for which the ruling is still pending. Between December 20 and December 28, 2013,
ZTE filed four more additional reexamination requests against four other Chinese patents owned by Vringo. Vringo filed responses
for these four patents in early May 2014. The oral hearing for one of the patents occurred on June 17, 2014. Oral hearings for
the remaining three patents are expected to occur later in the year.
Between May and July of
2014, ZTE filed reexamination requests in China against 25 additional Chinese patents owned by Vringo before the Patent Reexamination
Board of the Patent Office of the People’s Republic of China. Vringo’s initial responses are due in August of 2014.
The remaining schedule in these 25 new re-examinations is not yet available.
On February 21, 2014,
ZTE filed a civil antitrust complaint against Vringo and Vringo Infrastructure in the Shenzhen Intermediate Court. Vringo
received notice of the action on June 26, 2014. Vringo intends to vigorously contest all aspects of this action in the
appropriate manner. A schedule for the case has not yet been set.
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 2015.
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. We have received responses from all 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.
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. On August 5, 2014, ZTE's appeal was heard by the Court. A ruling is pending.
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 $904,000 with the court on April 17,
2014. On May 9, 2014, ZTE filed an interlocutory appeal against the injunction. This appeal was denied by the Court on June 16,
2014.
On July 17, 2014, ZTE filed a nullity suit
in the Federal district court in Rio de Janiero, Brazil, against both Vringo and the Brazilian patent office, seeking to invalidate
Vringo’s Brazilian patent.
Malaysia
On June 23, 2014, Vringo Infrastructure
filed a patent infringement lawsuit against ZTE in the High Court of Malaya at Kuala Lumpur. A schedule has not yet been set in
this matter.
Romania
On June 23, 2014, Vringo Infrastructure
filed a patent infringement lawsuit against ZTE in the Bucharest Tribunal Civil Section. On July 1, 2014, the court granted an
ex-parte preliminary injunction, ordering ZTE to cease any importation, exportation, introduction on the market, offer for sale,
storage, sale, trade, distribution, promotion, or any other business activity regarding the infringing product. The remaining schedule
has not yet been set in this matter.
Netherlands
On May 28, 2014, Vringo Infrastructure
commenced legal proceedings, pursuant to European Anti-Piracy Regulations, Number 1383/2003, Article 11 against ZTE in the District
Court of The Hague. A schedule has not yet been set in this matter.
On June 4, 2014, ZTE filed suit in the
District Court of Rotterdam against Vringo and Vringo Infrastructure for the alleged wrongful detention of goods under the relevant
anti-piracy regulations. A schedule has not yet been set in this matter.
On July 24, 2014, ZTE filed an action for a preliminary injunction in District Court of The Hague against
Vringo Infrastructure for the release of allegedly wrongfully detained goods. This matter will be heard on September 16, 2014.
United States
On July 2, 2014, Vringo filed suit in
the United States District Court for the Southern District of New York seeking a temporary restraining order and preliminary and
permanent injunctions against ZTE, enjoining ZTE’s use of prohibited materials captured under NDA, including but not limited
to ZTE’s use of such materials in its antitrust lawsuit in China against Vringo and Vringo Infrastructure. On July 7, 2014,
the court granted a temporary restraining order against ZTE’s use of such material. On July 23, 2014, ZTE filed a counterclaim
against Vringo.
European Commission
On April 10, 2014, ZTE filed a complaint
with the European Commission. We believe that the accusations are not accurate. The European Commission has not yet set the
schedule for this matter.
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.
ASUS filed nullity suits with respect to
the first and second European patents in the Federal Patents Court in Munich, Germany, during the second quarter of 2014. Trials
in the nullity suits have not been scheduled but are not anticipated before the second quarter of 2016 for the first patent and
the second quarter of 2015 for the second patent.
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. The oral hearing for this case is scheduled to be heard before the Commercial Court of Barcelona
in November 2014.
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.
Tyco
On April 28, 2014, the Company entered into a confidential agreement with Tyco that resolved all 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
occurred on February 18, 2014 (“Closing”). Upon Closing, as consideration 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, our Chief Executive Officer was appointed as a full voting member on InfoMedia’s
board of directors and we received a number of customary protective rights.
June 2014 Warrants
On June 19, 2014, we entered into
agreements with certain of our warrant holders, pursuant to which the warrant holders exercised for cash 5,697,227 of their
outstanding Series 1 and Series 2 warrants, with an exercise price of $1.76 per share. In addition, we granted such warrant
holders unregistered warrants of the Company to purchase an aggregate of 5,412,366 shares of our common stock, par value
$0.01 per share, at an exercise price of $5.06 per share (the “June 2014 Warrants”). The June 2014 Warrants expire on June 21, 2015 and because such warrants do not bear any down-round protection clauses, they are classified as
equity instruments. As a result of these transactions, we received approximately $10 million of proceeds.
Results of Operations
Overview
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 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 consist
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
related to our derivative warrant liabilities. The value of such derivative warrant liabilities is highly influenced by assumptions
used in its valuation, as well as by our stock price at the period end (revaluation date).
Income taxes
At June 30, 2014, deferred tax assets generated
from our U.S. activities were 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.
Three month period ended June 30,
2014 compared to the three month period ended June 30, 2013
Revenue
|
|
Three months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Revenue
|
|
$
|
800,000
|
|
|
$
|
1,100,000
|
|
|
$
|
(300,000
|
)
|
During the three month period ended June
30, 2014, we recorded total revenue of $800,000, which represents a decrease of $300,000 (or 27.3%) as compared to the three month
period ended June 30, 2013. The current period revenue was due to a one-time payment in connection with a license
and settlement agreement for certain of our owned intellectual property. Revenue during the three month period ended June 30, 2013
of $1,100,000 mostly relates to a one-time payment in connection with the license and settlement agreement entered into with Microsoft
for $1,000,000.
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
|
|
Three months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Operating legal costs
|
|
$
|
5,982,000
|
|
|
$
|
4,790,000
|
|
|
$
|
1,192,000
|
|
During the three month period ended June
30, 2014, our operating legal costs were $5,982,000, which represents an increase of $1,192,000 (or 24.9%) from operating legal
costs recorded for the three months ended June 30, 2013. This increase was primarily due to the timing and nature of consulting
and patent litigation costs related to legal proceedings against Google and ZTE. During the three month period ended June 30, 2014,
there were costs associated with the oral argument heard in the appeals court in May 2014 in connection with our legal proceedings
against Google. With respect to our legal proceedings against ZTE, costs during the three month period ended June 30, 2014 were
associated with our continued worldwide litigation efforts including commencement of legal actions in Brazil, Malaysia, Spain,
Netherlands, and other countries.
It is uncertain 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 whether such work is performed in-house or outsourced.
Amortization of intangibles
|
|
Three months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Amortization of intangibles
|
|
$
|
968,000
|
|
|
$
|
839,000
|
|
|
$
|
129,000
|
|
During the three month period ended June
30, 2014, amortization expense related to our intangibles was $968,000 which represents an increase of $129,000 (or 15.4%) from
amortization of intangibles recorded for the three month period ended June 30, 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 the second half of
2013.
Research and development
|
|
Three months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Research and development
|
|
$
|
217,000
|
|
|
$
|
467,000
|
|
|
$
|
(250,000
|
)
|
During the three month periods ended June
30, 2014 and 2013, our research and development expenses amounted to $217,000 and $467,000, respectively. The prior period amount
excludes research and development expenses related to our mobile social application business which is presented in discontinued
operations. The decrease of $250,000 (or 53.5%) is primarily due to a decrease in costs related to third party consultants who
were engaged on certain projects during 2013. Such projects had ended prior to 2014 and therefore these third party consultants
were no longer utilized in the current period.
As mentioned above, in February 2014,
we sold our mobile social application business to InfoMedia. As part of the sale agreement, the employment of our mobile
products and services personnel were assumed by InfoMedia.
General and administrative
|
|
Three months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
General and administrative
|
|
$
|
3,986,000
|
|
|
$
|
3,759,000
|
|
|
$
|
227,000
|
|
During the three month period ended June
30, 2014, general and administrative expenses increased by $227,000 (or 6.0%), to $3,986,000, compared to $3,759,000 that was
recorded during the three month period ended June 30, 2013. The overall increase in general and administrative expenses was primarily
due to increased costs in connection with our efforts to consolidate our executive management and finance functions in a centralized
location. In addition, there was an increase in corporate legal and accounting fees as compared to the prior period. The overall
increase is partially offset by a decrease in stock-based compensation expense of about $319,000 as compared to the prior three
month period.
Non-operating income (expense), net
|
|
Three months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Non-operating income (expense), net
|
|
$
|
304,000
|
|
|
$
|
(1,474,000
|
)
|
|
$
|
1,778,000
|
|
During the three month period ended June
30, 2014, we recorded non-operating income in the amount of $304,000 compared to non-operating expense in the amount of $1,474,000
during the three month period ended June 30, 2013. During the three month period ended June 30, 2014, we recorded approximately
$348,000 of income related to a decrease in the fair value of our derivative warrant liabilities. This income was partially offset
by $65,000 of expense recorded in connection with the issuance of the June 2014 Warrants described above. During the three month
period ended June 30, 2013, a charge of $1,574,000 was recorded related to the removal of the down-round protection clause in certain
then outstanding Series 1 Warrants. This expense was partially offset by income of $77,000 related to a decrease in fair value
of our then remaining derivative warrant liabilities.
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
|
|
Three months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
61,000
|
|
|
$
|
(61,000
|
)
|
Operating expenses
|
|
|
—
|
|
|
|
(748,000
|
)
|
|
|
748,000
|
|
Operating loss
|
|
|
—
|
|
|
|
(687,000
|
)
|
|
|
687,000
|
|
Non-operating expense
|
|
|
—
|
|
|
|
(22,000
|
)
|
|
|
22,000
|
|
Loss before taxes on income
|
|
|
—
|
|
|
|
(709,000
|
)
|
|
|
709,000
|
|
Income tax expense
|
|
|
—
|
|
|
|
(2,000
|
)
|
|
|
2,000
|
|
Loss from discontinued operations
|
|
$
|
—
|
|
|
$
|
(711,000
|
)
|
|
$
|
711,000
|
|
On February 18, 2014, we executed the
sale of our mobile social application business to InfoMedia, receiving eighteen (18) Class B shares of InfoMedia as consideration, which
represent an 8.25% ownership interest. Additionally, our Chief Executive Officer was appointed as a full voting member on
InfoMedia’s board of directors and we received a number of customary protective rights. The InfoMedia Class B
shares are accounted for as a cost-method investment.
During the three month period ended June
30, 2014, there were no results from discontinued operations since all related activities ceased when the sale was executed.
Six month period ended June 30, 2014
compared to the six month period ended June 30, 2013
Revenue
|
|
Six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Revenue
|
|
$
|
1,050,000
|
|
|
$
|
1,100,000
|
|
|
$
|
(50,000
|
)
|
During the six month period ended June
30, 2014, we recorded total revenue of $1,050,000, which represents a decrease of $50,000 (or 4.5%) as compared to the six month
period ended June 30, 2013. The current period revenue was due to certain one-time payments in connection with license
and settlement agreements for certain of our owned intellectual property. Revenue during the six month period ended June 30, 2013
of $1,100,000 mostly relates to a one-time payment in connection with the license and settlement agreement entered into with Microsoft
for $1,000,000.
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
|
|
Six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Operating legal costs
|
|
$
|
10,857,000
|
|
|
$
|
10,189,000
|
|
|
$
|
668,000
|
|
During the six month period ended June
30, 2014, our operating legal costs were $10,857,000, which represents an increase of $668,000 (or 6.6%) from operating legal costs
recorded for the six months ended June 30, 2013. This increase was primarily due to the timing and nature of consulting and patent
litigation costs related to legal proceedings against Google and ZTE. During the six month period ended June 30, 2014, there were
costs associated with the oral argument heard in the appeals court in May 2014 in connection with our legal proceedings against
Google. With respect to our legal proceedings against ZTE, costs during the six month period ended June 30, 2014 were associated
with our continued worldwide litigation efforts including commencement of legal actions in Brazil, Malaysia, Spain, Netherlands,
and other countries. Also, there was an increase in stock-based compensation expense (approximately $133,000) due to our efforts
to expand our in-house legal department staff.
It is uncertain 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
|
|
Six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Amortization of intangibles
|
|
$
|
1,925,000
|
|
|
$
|
1,678,000
|
|
|
$
|
247,000
|
|
During the six month period ended June
30, 2014, amortization expense related to our intangibles was $1,925,000 which represents an increase of $247,000 (or 14.7%) from
amortization of intangibles recorded for the six month period ended June 30, 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 period was due to the additional patent portfolios that were acquired during the second half of
2013.
Research and development
|
|
Six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Research and development
|
|
$
|
442,000
|
|
|
$
|
737,000
|
|
|
$
|
(295,000
|
)
|
During the six month periods ended June
30, 2014 and 2013, our research and development expenses amounted to $442,000 and $737,000, respectively. These amounts exclude
research and development expenses related to our mobile social application business which is presented in discontinued operations.
The decrease of $295,000 (or 40.0%) is primarily due to a decrease in costs related to third party consultants who were engaged
on certain projects during 2013. Such projects had ended prior to 2014 and therefore these third party consultants were no longer
utilized in the current period.
As mentioned above, in February 2014,
we sold our mobile social application business to InfoMedia. As part of the sale agreement, the employment of our mobile
products and services personnel were assumed by InfoMedia.
General and administrative
|
|
Six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
General and administrative
|
|
$
|
8,004,000
|
|
|
$
|
7,750,000
|
|
|
$
|
254,000
|
|
During the six month period ended June
30, 2014, general and administrative expenses increased by $254,000 (or 3.3%), to $8,004,000, compared to $7,750,000 that was recorded
during the six month period ended June 30, 2013. The overall increase in general and administrative expenses was primarily due
to increased costs in connection with our efforts to consolidate our executive management and finance functions in a centralized
location. In addition, there was an increase in corporate legal, insurance, and accounting costs as compared to the prior
period.
Non-operating income (expense), net
|
|
Six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Non-operating income (expense), net
|
|
$
|
(771,000
|
)
|
|
$
|
(1,834,000
|
)
|
|
$
|
1,063,000
|
|
During the six month period ended June
30, 2014, we recorded non-operating expense in the amount of $771,000 compared to non-operating expense in the amount of $1,834,000
recorded during the six month period ended June 30, 2013. During the six month period ended June 30, 2014, we recorded approximately
$728,000 of expense related to an increase in the fair value of our derivative warrant liabilities and $65,000 of expense recorded
in connection with the issuance of the June 2014 Warrants described above. During the six month period ended June 30, 2013, a charge
of $1,574,000 was recorded related to the removal of the down-round protection clause in certain then outstanding Series 1 Warrants.
In addition, expense of $292,000 was recorded related to an increase in fair value of our then remaining derivative warrant liabilities.
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
|
|
Six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Revenue
|
|
$
|
37,000
|
|
|
$
|
126,000
|
|
|
$
|
(89,000
|
)
|
Operating expenses
|
|
|
(266,000
|
)
|
|
|
(1,893,000
|
)
|
|
|
1,627,000
|
|
Operating loss
|
|
|
(229,000
|
)
|
|
|
(1,767,000
|
)
|
|
|
1,538,000
|
|
Non-operating income (expense)
|
|
|
20,000
|
|
|
|
(31,000
|
)
|
|
|
51,000
|
|
Loss before taxes on income
|
|
|
(209,000
|
)
|
|
|
(1,798,000
|
)
|
|
|
1,589,000
|
|
Income tax expense
|
|
|
—
|
|
|
|
(18,000
|
)
|
|
|
18,000
|
|
Loss from discontinued operations
|
|
$
|
(209,000
|
)
|
|
$
|
(1,816,000
|
)
|
|
$
|
1,607,000
|
|
On February 18, 2014, we executed the
sale of our mobile social application business to InfoMedia, receiving eighteen (18) Class B shares of InfoMedia as consideration, which
represent an 8.25% ownership interest. Additionally, our Chief Executive Officer was appointed as a full voting member on
InfoMedia’s board of directors and we received a number of customary protective rights. The InfoMedia Class B
shares are accounted for as a cost-method investment. Cash requirements for termination of mobile operations
included mainly post-employment obligations, were incurred during the six month period ended June, 2014, and are considered
to be immaterial.
During the six month period ended June
30, 2014, operating expenses decreased by $1,627,000 (or 85.9%), to $266,000, from $1,893,000 recorded during the six month period
ended June 30, 2013. This decrease is primarily due to the fact that there were no substantial operating expenses and no amortization
related to acquired technology during the current year as the related asset was classified as held for sale as of December 31,
2013 and was subsequently sold to InfoMedia in February 2014.
Taxes on Income
As of June 30, 2014, our
estimated aggregate total net tax loss carryforwards ("NOL") was approximately $96 million for U.S. federal, state
and local purposes expiring 20 years from the respective tax years to which they relate. 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, our ability to utilize all such NOL and credit carryforwards may be limited.
A valuation allowance has been recorded
against the net deferred tax asset in the U.S., as it is in the opinion of our management that it is more likely than not that
the operating loss carryforwards will not be utilized in the foreseeable future.
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 June 30, 2014, all tax years for Innovate/Protect are still open. The Israeli subsidiary files its income tax returns in
Israel. As of June 30, 2014, the Israeli subsidiary has open tax years for 2010 through 2013.
We did not have any material unrecognized
tax benefits as of June 30, 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 June 30, 2014, we had a cash balance
of $31,654,000. This represents a decrease of $1,932,000 from our cash balance on December 31, 2013, which is mainly due to net
cash used by us in our business operations of approximately $12,955,000 during the six month period ended June 30, 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, Brazil, 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. In addition, we paid approximately $2,304,000 in deposits with courts related to proceedings in Germany and Brazil.
The overall decrease in our cash balance
from expenditures related to our litigation campaigns was partially offset by approximately $13,500,000 that was received in connection
with the exercises of warrants and stock options that occurred during the six month period ended June 30, 2014, as described below.
As of June 30, 2014, our total stockholders' equity was $114,166,000 which is consistent with the balance as of December 31, 2013.
During the six month period ended
June 30, 2014, a total of 6,415,992 warrants to purchase an aggregate of 6,415,992 shares of our common stock, at an exercise
price of $1.76 per share, were exercised by our warrant holders, pursuant to which we received $11,292,000. These
proceeds are most significantly attributable to the execution of the agreements with certain of our warrant holders described
above in connection with the June 2014 Warrants. In addition, 1,126,815 options to purchase 1,126,815 shares of our common
stock were exercised during the six month period ended June 30, 2014. As a result, we received $2,160,000 through June
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
|
|
Six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Net cash used in operating activities
|
|
$
|
(12,955,000
|
)
|
|
$
|
(10,966,000
|
)
|
|
$
|
(1,989,000
|
)
|
Net cash used in investing activities
|
|
$
|
(2,449,000
|
)
|
|
$
|
(3,143,000
|
)
|
|
$
|
694,000
|
|
Cash provided by financing activities
|
|
$
|
13,452,000
|
|
|
$
|
327,000
|
|
|
$
|
13,125,000
|
|
Operating activities
During the six month period ended June
30, 2014, net cash used in operating activities totaled $12,955,000. During the six months period ended June 30, 2013, net cash
used in operating activities totaled $10,966,000. The $1,989,000 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.
Our net cash used in operating activities could increase if we engage in future business development activities.
As we expect to move towards greater revenue generation in the future, we expect that these amounts will be offset over time by
the collection of revenues.
Investing activities
During the six month period ended June
30, 2014, net cash used in investing activities totaled $2,449,000. During the six month period ended June 30, 2013, net cash used
in investing activities totaled $3,143,000. Net cash used in investing activities during the six month period ended June 30, 2014
is mostly comprised of the $2,304,000 deposited with courts that is described above. Net cash used in investing activities during
the six month period ended June 30, 2013 is related to an investment made in commercial paper during that period in the amount
of $3,120,000. There was also an increase in fixed asset purchases during the six month period ended June 30, 2014 as compared
to the six month period ended June 30, 2013.
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 six month period ended June
30, 2014, cash provided by financing activities totaled $13,452,000, which relates to funds that we received from the exercises
of warrants and stock options in the total amount of $11,292,000 and $2,160,000, respectively. During the six month period ended
June 30, 2013, cash provided by financing activities totaled $327,000, which relates to funds received from the exercises of
warrants and stock options in the total amount of $174,000 and $153,000, 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 $7.4 million of additional incoming funds as of June 30, 2014, should the warrant holders choose to exercise. 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 constantly seeking to identify 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, Brazil, Malaysia, and Romania. 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 July 1, 2014:
|
|
Remainder
of 2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
Total
|
|
Operating leases
|
|
$
|
79,000
|
|
|
$
|
403,000
|
|
|
$
|
403,000
|
|
|
$
|
407,000
|
|
|
$
|
416,000
|
|
|
$
|
347,000
|
|
|
$
|
2,055,000
|
|
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 five years and three months after the new office is available.
Critical Accounting Estimates
These consolidated financial
statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on
Form 10-K filed with the SEC on March 10, 2014, which includes a description of our critical accounting policies that involve
subjective and complex judgments that could potentially affect reported results. While there have been no material changes to
our critical accounting policies as to the methodologies or assumptions we apply under them, we continue to monitor such
methodologies and assumptions.