UNITED STATES
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2013
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
___to _____
Delaware | 20-4988129 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) |
Identification No.) | |
780 3rd Avenue, 15th Floor, New York, | 10017 | |
(Address of principal executive offices) | (Zip Code) |
(212) 309-7549
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.01 per share | The NASDAQ Stock Market LLC | |
| Warrants to purchase Common Stock |
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| Large accelerated filer | Accelerated filer | x | ||||
| Non-accelerated filer | ¨ (do not check if smaller reporting company) | Smaller reporting company | x |
$235,516,000.
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Page | ||
| Part I | ||
Item 1: | Business | |
Item 1A: | Risk Factors | |
Item 1B: | Unresolved Staff Comments | |
Item 2: | Properties | |
Item 3: | Legal Proceedings | 13 |
Item 4: | Mine Safety Disclosures | |
| Part II | ||
Item 5: | Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
Item 6: | Selected Financial Data | |
Item 7: | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 7A: | Quantitative and Qualitative Disclosures About Market Risk | 23 |
Item 8: | Financial Statements and Supplementary Data | |
Item 9: | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
Item 9A: | Controls and Procedures | |
Item 9B: | Other Information | |
| Part III | ||
Item 10: | Directors, Executive Officers and Corporate Governance | |
Item 11: | Executive Compensation | |
Item 12: | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
Item 13: | Certain Relationships and Related Transactions and Director Independence | |
Item 14: | Principal Accounting Fees and Services | |
| Part IV | ||
Item 15: | Exhibits and Financial Statement Schedules |
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We caution readers that a variety of factors could cause actual results to differ materially from anticipated results or other matters expressed in forward-looking statements.
| • | our ability to license and monetize our patents, including the outcome of the litigation against online search firms and other companies; | |
| • | our ability to monetize and recoup our investment with respect to patent assets that we acquire; | |
| • | our ability to protect our intellectual property rights; | |
| • | our ability to develop and introduce new products and/or develop new intellectual property; | |
| • | new legislation, regulations or court rulings related to enforcing patents that could harm our business and operating results; | |
| • | our ability to raise additional capital to fund our operations and business plan; | |
| • | our ability to maintain the listing of our securities on NASDAQ; and | |
| • | our ability to retain key members of our management team. |
Although management believes the expectations reflected in thesesimilar expressions. These forward-looking statements are reasonable,based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such expectations cannot guarantee future results, levels of activity, performance or achievements. Neither the information on the Company's current or future website is, and such information shalldifferences include, but are not be deemedlimited to, be, a part ofthose discussed in this Annual Report on Form 10-K, or incorporatedand in filingsparticular, the Company makesrisks discussed under the caption “Risk Factors” in Item 1A of this report and those discussed in other documents we file with the Securities and Exchange Commission.
Commission (SEC). We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
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Overview
protect innovation worldwide. We provideare 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 rangevariety of software productsvalue enhancing initiatives, including, but not limited to:
To date, we have developed four different mobile video, personalization and mobile social application platforms:
To develop these platforms, we have leveraged our existing technology, intellectual property and our extensive experience with mobile video, personalization and social applications. We believe that these platforms will represent a significant component of our business going forward.
Our abilitymanagement team and board of directors, will allow us to compete successfully depends on our ability to ensureassemble a continuingportfolio of quality assets with short and timely introduction of innovative new products and technologies to the marketplace. As a result, we must make significant investments in research and development. To date, we filed over 24long-term revenue opportunities.
We were incorporated in January 2006 and are still a development stage company. Our principal executive offices are located in New York, NY, and in addition, we have a wholly owned subsidiary, Vringo (Israel) Ltd., located in Bet-Shemesh, Israel.
Recent Developments
Merger Agreement
Subsequent to year end, on March 12, 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”from Lycos, Inc. (“Lycos”) with VIP Merger Sub, Inc., a Delaware corporation and our wholly-owned subsidiary (“Merger Sub”), and Innovate/Protect, Inc., a Delaware corporation and an intellectual property firm founded in 2011, whosethrough its wholly-owned subsidiary, I/P Engine, holds eight patents that were acquired from Lycos Inc. (“Innovate/Protect”), pursuant to which Innovate/Protect will merge with and into Merger Sub, with Merger Sub being the surviving corporation (the “Surviving Corporation”) through an exchange of capital stock of Innovate/Protect for capital stock of Vringo (the “Merger”).
Under the terms of the Merger Agreement, upon completion of the Merger, (i) each share of then-outstanding common stock of Innovate/Protect, par value $0.0001 per share (“Innovate/Protect Common Stock”) (other than shares held by us, Innovate/Protect or any of our and their subsidiaries, which will be cancelled at the completion of the Merger) will be automatically converted into the right to receive the number of shares of our common stock, par value $0.01 per share (“Vringo Common Stock”) equal to the Common Stock Exchange Ratio (as defined below) and (ii) each share of then-outstanding Series A Convertible Preferred Stock of Innovate/Protect, par value $0.0001 per share (total 6,968 shares outstanding) (“Innovate/Protect Series A Stock” and together with the Innovate/Protect Common Stock, “Innovate/Protect Capital Stock”) (other than shares held by us, Innovate/Protect or any of our and their subsidiaries, which will be cancelled at the completion of the Merger) will be automatically converted into the right to receive the same number of shares of Vringo Series A Convertible Preferred Stock (“Vringo Preferred Stock”), which 6,968 shares shall be convertible into an aggregate of 21,026,637 shares of Vringo Common Stock. The Vringo Preferred Stock will have the powers, designations, preferences and other rights as will be set forth in a Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock to be filed by us prior to closing. The Common Stock Exchange Ratio initially is 3.0176, subject to adjustment as set forth in the Merger Agreement. In addition, at the effective time of the Merger, Vringo will issue to the holders of Innovate/Protect Capital Stock and the holder of Innovate/Protect’s issued and outstanding warrant (on a pro rata as-converted basis) an aggregate of 15,959,838 warrants to purchase an aggregate of 15,959,838 shares of Vringo Common Stock with an exercise price of $1.76 per share. The issued and outstanding warrants to purchase Innovate/Protect Common Stock shall be exchanged for 250,000 shares of Vringo common stock and 850,000 warrants to purchase 850,000 shares of Vringo Common Stock with an exercise price of $1.76 per share.
In addition, at the effective time of the Merger, each outstanding and unexercised option to purchase Innovate/Protect Common Stock (each a “Innovate/Protect Stock Option”), whether vested or unvested will be converted into and become an option to purchase Vringo Common Stock and we will assume such Innovate/Protect Stock Option in accordance with the terms of the Innovate/ProtectEngine. On September 15, 2011, Equity Incentive Plan. After the effective time of the Merger, (a) each Innovate/Protect Stock Option assumed by us may be exercised solely for shares of Vringo Common Stock and (b) the number of shares of Vringo Common Stock and the exercise price subject to each Innovate/Protect Stock Option assumed by us shall be determined by the Common Stock Exchange Ratio.
Immediately following the completion of the Merger, the former stockholders of Innovate/Protect are expected to own approximately 55.41% of the outstanding common stock of the combined company, and our current stockholders are expected to own approximately 44.59% of the outstanding common stock of the combined company. On a fully diluted basis, the former stockholders of Innovate/Protect are expected to own approximately 67.55% of the outstanding common stock of the combined company, and our current stockholders are expected to own approximately 32.45% of the outstanding common stock of the combined company.
Innovate/Protect is the owner of patent assets acquired from Lycos, one of the largest search engine websites of its kind in the mid-late 1990s, with technologies that remain critical to current search platforms. In September 2011, Innovate/Protect through its subsidiary, I/P Engine initiated a patent infringement lawsuitlitigation in the United States District Court, for the Eastern District of Virginia, against AOL Inc. (“AOL”), Google, Inc., AOL, Inc. (“Google”), IAC Search & Media, Inc., Gannett Company, Inc., and Target Corporation (collectively, the “Defendants”) for unlawfully using systemsinfringement of U.S. Patent Nos. 6,314,420 (the "'420 Patent") and 6,775,664 (the "'664 Patent", and collectively the “Asserted Patents”).
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We have expended significant effort and management attention'420 patent. Documents regarding USPTO proceedings are publicly available on the proposed transaction. TherePatent Application Information Retrieval website, http://portal.uspto.gov/pair/PublicPair, which is no assurance that the transaction contemplatedoperated by the Merger Agreement will be consummated. If the transaction is not consummated for any reason, our business and operations, as well as the market price of our stock and warrants may be adversely affected. For accounting purposes, based on our preliminary assessment, I/P was identified as the “Acquirer”, as it is defined in FASB Topic ASC 805. As a result, in the post-combination consolidated financial statements, Innovate/Protect’s assets and liabilities will be presented at its pre-combination amounts, and our assets and liabilities will be recognized and measured in accordance with the guidance for business combinations in ASC 805. We are currently evaluating the effect of this on our financial statements. We believe such effect will be material.
USPTO.
Departure of Chief Executive Officer
Effective March 8, 2012, Jonathan Medved resigned from his position as our Chief Executive Officer and a member of our Board of Directors. In connection with his resignation, Mr. Medved and Vringo (Israel) Ltd. entered into a Separation Letter Agreement (the “Separation Agreement”) effective March 8, 2012. Under the terms of the Separation Agreement, and consistent with Mr. Medved’s employment agreement and amendment thereto, Mr. Medved will be entitled to receive salary and benefits until February 6, 2013, and continue to vest stock options after his termination. In addition, options granted to Mr. Medved at $0.01 will fully vest as of June 21, 2012 and the expiration date for exercising all options vested on or before June 21, 2013 is extended to September 21, 2013. Furthermore, Vringo’s Board of Directors granted Mr. Medved an additional 100,000 options at an exercise price of $1.65 per share. These options shall vest over a three year period.
Appointment of Chief Executive Officer
Facebook, Inc.
On FebruaryAugust 9, 2012, we entered into ana patent purchase agreement with Facebook, Inc.Nokia Corporation ("Nokia"), comprising of 124 patent families with counterparts world-wide. We paid Nokia a cash payment of $22,000,000 and granted Nokia certain ongoing rights in revenues generated from the patent portfolio. 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 use124 patent families acquired may be essential to wireless communications standards. Copies of the declarations are available on our website athttp://www.vringoip.com/documents/FG/vringo/ip/99208_Nokia_ETSI_Declarations.pdf.
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Exercise of Warrants
Between February 6 and February 14, 2012, we entered into agreements with holdersor waiver of certain ofconditions, occurred on February 18, 2014 (“Closing”). Upon Closing, in exchange for the assets and agreements related to our outstanding warrants (the “Holders”), pursuant to which the Holders exercised warrants to purchase 3,828,993mobile social application business, we received 18 Class B shares of our common stock for aggregate proceedsInfomedia, which represent an 8.25% ownership interest in Infomedia.
NYSE Amex
As previously disclosed, on July 21, 2011, the NYSE Amex accepted our plan for regaining compliance with the NYSE Amex's listing standards (the "Plan"). The Plan was submitted in response to a notice received on May 24, 2011 from the NYSE Amex regarding our non-compliance with certain continued listing standards. Our listing is now continued under an extension with a target completion date of April 12, 2012. As noted above, during February 2012, approximately 90% of then outstanding Special Bridgemobile carriers and Conversion Warrants, previously classified as a long-term liability, were exercised for aggregate proceeds of $3.6 million. In addition, asdevice manufacturers. As part of the transaction, we will have the opportunity to license certain holdersintellectual property assets and support Infomedia to identify and protect new intellectual property. Additionally, Vringo’s CEO was appointed as a full voting member on Infomedia’s board of directors.
We believe that, as a resultstatements for further discussion of the warrant exercise,accounting related to this transaction.
We believe that current cash levels will be sufficient to support our activity into the fourth quarter of 2012. The continuation of our business is dependent upon the successful consummation of the Merger with Innovate/Protect and/or similar merger or acquisition, financing and/or further development of our products. There can be no assurance that the Merger will be consummated, or that business development opportunities will materialize. Should we need to raise funds, the issuance of additional equity securities by us could result in a substantial dilution to our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
Business
Our video ringtone platform was our initial product focus since inception. We believe that our comprehensive video ringtone service represents the next stage in the evolution of the ringtone market from standard audio ringtones to high-quality video ringtones, with social networking capability and integration with web systems. Our solution, which encompasses a suite of mobile and PC-based tools, enables users to create, download and share video ringtones with ease. Our solution, furthermore, provides our business partners with a consumer-friendly and easy-to-integrate monetization platform. This platform combines a downloadable mobile application which works on multiple operating systems and over 400 mobile handsets, a WAP site, which is a simplified website accessibleare represented by a user onlabor union or are covered by a mobile phone, and a website, togethercollective bargaining agreement. We consider our relationship with a robust content integration, management and distribution system. As part of providing a complete end-to-end video ringtone platform, we have amassed a library of over 12,000 video ringtones that we provide for our users in various territories. Certain portions of this library are geographically restricted. We also have developed substantial tools for users to create their own video ringtones and for mobile carriers and other partners to include their own content and deliver it exclusively to their customers. Our VringForward™ video ringtone technology allows users to enjoy a rich social experience by sharing video ringtones from our library or which they created.
Until the end of 2009, our video ringtone service was offered to consumers for free. At that point, we moved to a paid service model together with mobile carriers and other partners around the world. The revenue model for our video ringtone service offered through the carriers is generally a subscription-based model where users pay a monthly fee for access to our service and additional fees for premium content. Our free version is still available in markets where we have not entered into commercial arrangements with carriers or other partners. We have built our video ringtone platform with a flexible back-end and front-end that is easy to integrate with the back-end systems of mobile carriers and easy to co-brand with mobile carriers. To date, we have filed 24 patent applications for our platform, three of which have been issued to date, and we continue to create new intellectual property.
As of March 27, 2012, we have commercial video ringtone services with the following eight partners (also refer to Note 12 to the accompanying financial statements):
We are currently in discussions with several other mobile carriers and we will be pursuing additional agreements with mobile carriers over the next 12 to 24 months.
According to a recent study by the United Nations, there were 5 billion global mobile subscribers in 2010. As of March 27, 2012, our partners have an aggregate of approximately 700 million subscribers, of which 211 thousand are paid subscribers to our service, and another 16 thousand subscribers have enrolled on a free-trial basis. This compares to 150 thousand paid subscribers across all of our launches as of December 31, 2010, an increase of over 41%.
Our new Facetones™ social ringtone platform generates social visual ringtone content automatically by aggregating and displaying a user’s friends’ pictures from social networks and then displaying as a video ringtone, as well as a video ringback tone. These ringtones do not replace, but rather enhance, standard ringtone and ringback tones with relevant, current social content that is visually displayed. The Facetones™ product is available for devices running Android, iOS, and Nokia’s Symbian S3. We are planning to release Facetones™ for other operating systems such as Windows Phone and feature phones such as the S40 Nokia platform.
Facetones™ is experiencing fast growth both in consumer downloads and in the number of commercial deals with major partners already announced. The product is being made available to consumers in several different configurations and with a variety of distribution and monetization methods. As of March 27, 2012, the Facetones™ free ad-supported version had more than a million downloads and is generating more than 3.7 million requests in mobile ad inventory on a weekly basis.
Facetones™ is offered directly to consumers via leading mobile application stores and download sites where both for purchase versions (at prices ranging from $1 to $5), as well as ad-supported free versions are available. Facetones is available in application stores integrated into popular handsets such as the Google Android Market and Apple App Store. We have announced placement deals for the app with GetJar, the world’s largest independent app store, Mobango and AppBrain. In July 2011, we launched Facetones™ with BlueVia, the new global software developer platform of Telefonica, the largest mobile operator in the Spanish speaking world and fourth largest globally. Facetones™ has been initially launched on Telefonica's application store (Mstore) in several global markets and is plannedemployees to be launched on additional markets. In August 2011, we launched Facetones™ in Japan for Android users through the DOCOMO market, a mobile internet portal operated by NTT DOCOMO, INC., the largest mobile phone operator in Japan, with more than 50 million users. In October 2011, Verizon, the largest mobile operator in the US, announced the launch of Facetones™ as a subscription service for Verizon subscribers for $0.99 a month. We continue to pursue business for Facetones™ together with handset manufacturers. In December 2011, we launched Facetones™ for Symbian in cooperation with Nokia. In January 2012, we launched Facetones™ for iPhone which generates, as of the end of February 2012, close to a thousand daily downloads without any promotion. In March 2012, we shifted from providing an ad-based free-of-charge for iPhone to a one-time fee ads-free app.
In addition to our direct to consumer and carrier marketed versions of the Facetones™ application, we believe that licensing our software to handset makers will provide a growing and significant revenue stream during 2012 and beyond. In November 2011, we announced an agreement with ZTE Corporation, the largest handset maker in China and fourth-largest globally, to preload the Facetones™ application on Android handsets manufactured by ZTE. ZTE will give us a royalty for each device that our software is pre-loaded on. These ZTE handsets will be sold via mobile phone operators and through various OEM contracts to brand name handset manufacturers. In addition, we have entered into a development contract with Nokia, the world’s largest handset maker, to supply Facetones for Nokia’s S3 devices, subsequent to delivering this version of our application it was recently launched on the Nokia Ovi Store.
Early in 2011 we launched our new Video ReMix platform that allows users to download an application for iOS (iPhone, iPad, iPod) or Android phones and create their own music video by tapping on a variety of music beats and video files. Essentially, the user is able to “Remix” this music video content and add his own user generated video to the mix and then view this content or share it with friends via Facebook® or other social networks. This application turns the smartphone or tablet into a virtual video ReMix sound/video board where this “mixing” is accomplished by simple tapping on the touch screen interface. The Video ReMix applications are branded with an artist or sponsor and then monetized via advertising, sponsorship, a-la carte sales or in app store purchases.
The initial Video ReMix application “Booty Symphony” was developed with Nappy Boy Enterprises, the music production company of the artist T-Pain. Booty Symphony was released in an ad-supported free Android version as well as paid versions for iOS and Android. Our newest application on our Video ReMix platform was delivered in the second quarter of 2011 to partner Corso Communications and its client Heineken. This sponsored version highlighted music and video of the group Dirty Vegas, and was used by Heineken “brand ambassadors” at the Coachella Music festival. We continue to seek new business for this platform with other recording artists and sponsored by additional major brands.
Our Fan Loyalty platform was launched in mid-2011 by co-branding our Fan-Loyalty application with Star Academy 8, the largest music competition in the Middle East and Nokia, the world’s largest handset maker. This platform enables users to obtain video content from the show as well as from behind the scenes, retrieve information regarding the show and vote for their favorite contestants. The free app was launched in partnership with Rotana, a diversified media company and the world's largest producer of music and music television in the Middle East, and sponsored by Nokia. The application featured exclusive content and fully integrated live voting capabilities for the blockbuster "Star Academy" reality music show, which reached over 300 million viewers and was available in over 10 countries in the region.
The Fan Loyalty application for Star Academy was made available exclusively for download on the Ovi Store, and had more than 200 thousand downloads during the season. We are in discussions with several other entertainment groups regarding potential deals for this Fan Loyalty platform.
As of December 31, 2011, we had 24 full time employees and 4 part-time employees.
Our Strategy
Our goal is to become a leading global provider and licensor of mobile video and mobile social applications, services and software, including mobile personalization, and interactive services via our different software platforms. To achieve this goal, we plan to:
Grow our business.On March 12, 2012, we announced the entry into a Merger Agreement pursuant to which Innovate/Protect will merge with and into Merger Sub, our wholly owned subsidiary, with Merger Sub being the surviving corporation through an exchange of capital stock of Innovate/Protect for our capital stock. The objectives of the Merger are to maximize the economic benefits of our intellectual property assets, add significant talent in technological innovation, and be positioned to enhance its opportunities for revenue generation through the monetization of the combined company’s assets. Innovate/Protect is the owner of certain patent assets acquired from Lycos, one of the largest search engine websites of its kind in the mid-late 1990s, including technologies that remain critical to current search platforms. We believe that the Merger, if consummated, will potentially enhance our technology leadership, our portfolio of intellectual property, and as a result open new business opportunities.
Grow our user base through mobile carrier partnerships. We have built our products so as to be easily integrated with mobile carriers. We believe the mobile carrier channel is one of the most efficient and cost effective channels to grow our user base and to monetize our products. We have launched our video ringtone service with seven mobile carriers in UK, Singapore, Belgium, Malaysia, Turkey, United Arab Emirates and Armenia. We are in discussions with additional mobile carriers regarding our software platforms and we plan to aggressively pursue additional mobile carriers globally.
Generate revenue via software licensing partnerships.We have licensed our software to 2 of the 4 largest handset makers in the world, ZTE and Nokia. We believe that the market for pre-loaded software for mobile devices is a fast growing market that provides broad reach and sustainable recurring revenue.
Continue to build a base of strategically important intellectual property.To date we have filed 24 patents and had 3 issued in the United States and 1 notice of allowance in Europe. We believe that these patents and related filings create a high barrier to entry into our existing businesses. In addition, we believe that our patent will be of interest to other application developers and hardware manufacturers. In addition, we believe that the Merger, if consummated, will substantially increase our intellectual property portfolio, add significant talent in technological innovation, and position the combined company for potential enhanced opportunities for revenue generation through the monetization of the combined company’s assets.
Continue to ensure we have broad handset reach. The breadth of our mobile handset coverage will be critical for us to grow our business. Our video ringtone application already supports over 400 handsets and we diligently certify new mobile handset devices as quickly as possible. Additionally, the WAP version of our service is compatible with almost any device that supports video. We will continue to expand the features available as part of our video ringtone WAP service. Our Video ReMix application runs on iOS (iPhone, iPod, and iPad) and Android devices. Our Facetones™ application platform runs on Android and iPhone devices.
Enhance our viral and social tools. We believe that there is substantial opportunity to increase the social and viral nature of our products, which will be critical for our growth. We will continue to add features to the product platforms to enhance their viral and social aspects and which enable users to connect with their existing social networks on platforms such as Facebook™ and Twitter™.
Maintain and grow our product and technology leadership. Our technical team is made up of highly regarded industry professionals that continually ensure that our product is on the cutting-edge in terms of ease of use, functionality and look and feel. We have filed 24 patent applications for our platform (three of which have been issued to date) and we continue to create new intellectual property. We also have enabled our video ringtone application to work on the Blackberry, Android and Windows Mobile operating systems, even though, those platforms do not natively support video ringtones. Nevertheless, there is no assurance that our application will continue to work on these operating systems in the future. We plan to continue to allocate technical resources to remain ahead of our competition and provide users with a product that is easy-to-use and cutting-edge.
Build a strong revenue base of recurring monthly subscription revenue. In the ringback tone business, the bulk of revenue generation is subscription-based. We believe this model is appropriate for our products and are initially launching the commercial versions of our product as a monthly subscription service with mobile carriers. We are focused on ensuring that our product drives value and limits churn. As the mobile video services market matures, our business model may evolve to capitalize on changes in the market.
Find new forms of distribution. While we are currently focused on the mobile carrier distribution channel, we believe there are other avenues that could be successful distribution channels for us. Specifically, we believe broadcasters and content owners could greatly benefit by promoting our service to their customers by monetizing either their content or leveraging their relationship with advertisers via ads.
Explore monetization through advertising and brand sponsorship. The visual nature of our service opens up the possibility of incorporating ads and sponsorships in our software application platforms. We have initially launched advertising supported versions of our Video ReMix platform, and we have also entered into 2 sponsor relationships in 2011 to further monetize this platform. We believe that this will make up a growing portion of our business.
Content licensing leadership. We have signed over 35 different content licensing agreements for primarily content material to be used for video ringtones as well as artist content for our Video ReMix platform. We have conducted substantive research of other commercial video ringtone sites and we have not discovered a commercial library with more than 100 video ringtones available for download. Accordingly, we believe our library of more than 12 thousand video ringtones, certain portions of which are geographically restricted, is one of the largest commercial video ringtone libraries in the world. We intend to continue to grow our library to enhance our future revenues although in many markets we will rely on our partners to supplement our library with additional locally licensed content.
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On March 12, 2012,successfully monetize the patents we entered into a Merger Agreement, pursuant to which Innovate/Protect will merge with and into our wholly owned subsidiary, Merger Sub, with Merger Sub being the surviving corporation through an exchange of capital stock of Innovate/Protect for our capital stock of Vringo. The consummationacquired from Nokia, nor any of the transaction with Innovate/Protect is subjectother patent acquisitions, thus we may fail to stockholders approval and other closing conditions. We have expended significant effort and management attention onrealize all of the proposed transaction. anticipated benefits of such acquisition.
The issuance of our shares of common stock to Innovate/Protect stockholders in connection with the Merger will substantially dilute the voting power of our current stockholders.
Pursuant to the terms of the Merger Agreement, it is anticipatedno assurance that we will issue equity instrumentsbe able to Innovate/Protect stockholders representing approximately 67.55% ofmonetize the outstanding equity instruments ofacquired patent portfolio and recoup our investment.
To date,business may include the internal development of new inventions or intellectual property that we will seek to monetize. However, this aspect of our business would likely require significant capital and would take time to achieve. Such activities could also distract our management team from its present business initiatives, which could have generated only losses, which are expected to continue fora material and adverse effect on our business. There is also the foreseeable future.
As of December 31, 2011, we had a cash balance of $1.2 million and $1 million of net working capital. For the years ended December 31, 2011 and 2010 and for the cumulative period from inception until December 31, 2011, we incurred net losses of $7.5 million, $9.9 million and $37.5 million, respectively. As of December 31, 2011, our deficit in stockholders' equity was $1.2 million.
We expect our net losses to continue in the foreseeable future, as we continue to grow our user base through carrier partnerships, continue to ensure we have broad handset reach, enhance our viral and social tools, maintain and grow our product and technology portfolio, build a strong revenue base of recurring monthly subscription revenue, find new forms of distribution, and explore monetization through advertising and revenue through content sales.
We are a development stage company with no significant source of income and our there is a significant doubt about our ability to continue our activities as a going concern.
We are still a development stage company. Our operations are subject to all of the risks inherent in development stage companies which do not have significant revenues or operating income. Our potential for success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with a new business, especially technology start-up companies. We cannot provide any assurancerisk that our business objectives will be accomplished. Allinitiatives in this regard would not yield any viable new inventions or technology, which would lead to a loss of our audited consolidated financial statements since inception have contained a statement by our management that raises substantial doubt about us being able to continue as a going concern unlessinvestments in time and resources in such activities.
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| • | patent applications we may file may not result in issued patents or may take longer than we expect to result in issued patents; | |
| • | we may be subject to opposition proceedings in the U.S. or foreign countries; | |
| • | any patents that are issued to us may not provide meaningful protection; | |
| • | we may not be able to develop additional proprietary technologies that are patentable; | |
| • | other companies may challenge patents issued to us; | |
| • | other companies may have independently developed and/or patented (or may in the future independently develop and patent) similar or alternative technologies, or duplicate our technologies; | |
| • | other companies may design around patents we have developed; and | |
| • | enforcement of our patents could be complex, uncertain and very expensive. |
We believe that current cash levelsany existing or proposed statutory or regulatory change has materially affected our business.
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failure to do so could cause material harm to our business.
Under the terms of the Merger Agreement, we will issue Innovate/Protect shareholders warrants to purchase 15,959,838 shares of our common stock at an exercise price of $1.76 per share. In addition, all outstanding warrants to purchase Innovate/Protect’s common stock that are outstanding and unexercised immediately prior to the Merger agreement, shall be exchanged for 250,000 shares of our common stock and 850,000 warrants to purchase 850,000 shares of Vringo Common Stock with an exercise price of $1.76 per share. Finally, additional 41,178 options at an exercise price of $0.994 will be issued. As a result of an approval of our merger with Innovate/Protect, the total number of warrants and options held by our security holders will be increased by 16,851,016.
We currently have 13,861,423
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Under the terms of the Merger Agreement, we will issue Innovate/Protect shareholders 16,972,977market price of our common stock sharesto fluctuate, perhaps substantially, including, among others, the following:
· | developments or disputes concerning our patents; | |
· | announcements of developments in our patent enforcement actions; | |
· | additions to or departures of our key personnel; | |
· | announcements of technological innovations by us or our competitors; | |
· | announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, capital commitments, new technologies, or patents; | |
· | new regulatory pronouncements and changes in regulatory guidelines; | |
· | changes in financial estimates or recommendations by securities analysts; and | |
· | general and industry-specific economic conditions. |
Ifmany technology companies in ways that may have been unrelated to these companies' operating performance. Furthermore, we are not able to adequately protect our intellectual property, we may not be able to compete effectively.
Our ability to compete depends in part upon the strength of our proprietary rightsbelieve that fluctuations in our technologies, brands and content. We rely on a combination of U.S. and foreign patents, copyrights, trademark, trade secret laws and license agreements to establish and protect our intellectual property and proprietary rights. The efforts we have taken to protect our intellectual property and proprietary rights may notstock price can also be sufficient or effective at stopping unauthorized use of our intellectual property and proprietary rights. In addition, effective trademark, patent, copyright and trade secret protection may not be available or cost-effective in every country in which our services are made available through the Internet. There may be instances where we are not able to fully protect or utilize our intellectual property in a manner that maximizes competitive advantage. If we are unable to protect our intellectual property and proprietary rights from unauthorized use, the value of our products may be reduced, which could negatively impact our business. Our inability to obtain appropriate protections for our intellectual property may also allow competitors to enter our markets and produce or sell the same or similar products. In addition, protecting our intellectual property and other proprietary rights is expensive and diverts critical managerial resources. If any of the foregoing were to occur, or if we are otherwise unable to protect our intellectual property and proprietary rights, our business and financial results could be adversely affected.
If we are forced to resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome and expensive. In addition, our proprietary rights could be at risk if we are unsuccessful in, or cannot afford to pursue, those proceedings. We also rely on trade secrets and contract law to protect some of our proprietary technology. We have entered into confidentiality and invention agreements with our employees and consultants. Nevertheless, these agreements may not be honored and they may not effectively protect our right to our un-patented trade secrets and know-how. Moreover, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.
The possibility of extensive delays in the patent issuance process could effectively reduce the term during which a marketed product is protectedimpacted by patents.
We may need to obtain licenses to patents or other proprietary rights from third parties. We may not be able to obtain the licenses required under any patents or proprietary rights or they may not be available on acceptable terms. If we do not obtain required licenses, we may encounter delays in product development or find that the development, manufacture or sale of products requiring licenses could be foreclosed. We may, from time to time, support and collaborate in research conducted by universities and governmental research organizations. We may not be able to acquire exclusive rights to the inventions or technical information derived from these collaborations, and disputes may arise over rights in derivative or related research programs conducted by us or our collaborators.
If we or our users infringe on the intellectual property rights of third parties, we may have to defend against litigation and pay damages and our business and prospects may be adversely affected.
If a third party were to assert that our products infringe on its patent, copyright, trademark, right of publicity, right of privacy, trade secret or other intellectual property rights, we could incur substantial litigation costs and be forced to pay substantial damages. Third-party infringement claims, regardless of their outcome, would not only consume significant financial resources, but would also divert our management’s time and attention. Such claims or the lack of available access to certain sites or content could also cause our customers or potential customers to purchase competitors’ products if such competitors have access to the sites or contents that we are lacking or defer or limit their purchase or use of our affected products or services until resolution of the claim. In connection with any such claim or litigation, our mobile carriers and other partners may decide to re-assess their relationships with us, especially if they perceive that they may have potential liability or if such claimed infringement is a possible breach of our agreement with such mobile carrier. If any of our products are found to violate third-party intellectual property rights, we may have to re-engineer one or more of our products, or we may have to obtain licenses from third parties to continue offering our products without substantial re-engineering. Our efforts to re-engineer or obtain licenses could require significant expenditures of time and money and may not be successful. Accordingly, any claims or litigation regarding our infringement of intellectual property of a third party by us or our users could have a material adverse effect on our business and prospects.
Third party infringement claims could also significantly limit our Vringo Studio product and the content available in our content library. Our Vringo Studio tool allows users to access video from multiple sites on the web or from their computer and then edit and send these video clips to their mobile phones as customized video ringtones. These websites could choose to block us from accessing their content for violating their terms of service by allowing users to download clips or for any other reason, which could significantly limit the availability of content in the Vringo Studio. Additionally, while we employ special software that seeks to determine whether a clip is copyrighted or otherwise restricted, it is not feasible for us to determine whether users of Vringo Studio own or acquire appropriate intellectual property permissions to use each clip before it is downloaded. Therefore, we require users of the Vringo Studio to certify that they have the rights to use the content which they desire to send to their phone. Additionally, while the majority of the clips in our content library are either licensed by us directly or are public domain or creative commons, our content library contains certain clips which we have not licensed from the content owner. As a result, we may receive cease-and-desist letters, or other threats of litigation, from website hosts and content owners asserting that we are infringing on their intellectual property or violating the terms and conditions of their websites. In such a case, we will remove or attempt to obtain licenses for such content or obtain additional content from other websites. However, there is no assurance that we will be able to enter into license agreements with content owners. Consequently, we may be forced to remove a portion of our content from our library and significantly limit the availability of content in the Vringo Studio. This would negatively impact our user experience and may cause users to cancel our service and make our service less attractive to our partners.
If we are unable to enter into or maintain distribution arrangements with major mobile carrierscourt rulings and/or other partnersdevelopments in our patent licensing and developenforcement actions and maintain strategic relationships with such mobile carriers and/or other partners, we will be unable to distribute our products effectively or generate significant revenue.
Our strategy for pursuing a significant share of the video ringtone market is dependent upon establishing distribution arrangements with major mobile carriersstock price may reflect certain future growth and other partners. We need to develop and maintain strategic relationships with these entities in order for them to market our service to their end users. While we have entered into agreements with certain partners pursuant to which our service may be made available to their end-users, such agreements are not exclusive and generally do not obligate the partner to market or distribute our service. In addition, a number of our distribution agreements allow the mobile carrier to terminate its rights under the agreement at any time and for any reason upon 30 days’ notice. We are dependent upon the subsequent success of these partners in performing their responsibilities and sufficiently marketing our service. We cannot provide you any assurance that we will be able to negotiate, execute and maintain favorable agreements and relationships with any additional partners, that the partners with whom we have a contractual relationship will choose to promote our service or that such partners will be successful and/or will not pursue alternative technologies.
profitability expectations. If we are unsuccessful in entering into and maintaining content license agreements,fail to meet these expectations then our revenues will be negatively affected.
The success of our service is dependent upon our providing end-users with content they desire. An important aspect of this strategy is establishing licensing relationships with third party content providers that have desirable content. Content license agreements generally have a fixed term,stock price may or may not include provisions for exclusivity and may require us to make significant minimum payments. We have entered into approximately 35 content license agreements with various content providers. While our business is not dependent on any particular content license agreement, there is no assurance that we will enter into a sufficient number of content license agreements or that the ones that we enter into will be profitable and will not be terminated early.
We may not be able to generate revenues from certain of our prepaid mobile customers.
We currently operate in markets that have a high percentage of prepaid mobile customers. Many of these users may not have a sufficient balance in their prepaid account when their free trial ends and we bill them to cover the charges for subscribing to our service. As a result, the subscriber numbers that we periodically disclose may not generate revenues at the expected level.
We are dependent on mobile carriers and other partners to make timely payments to us.
We will receive our revenue from mobile carriers and other distribution partners who may delay payment to us, dispute amounts owed to us, or in some cases refuse to pay us at all. Many of these partners are in markets where we may have limited legal recourse to collect payments from these partners. Our failure to collect payments owed to us from our partners will have an adverse effect on our business and our results of operations.
We may not be able to continue to maintain our application on all of the operating systemssignificantly decline which we currently support.
Our applications are compatible with various mobile operating systems including the Symbian, Sony Ericsson, Java, Windows Mobile, Android and Blackberry operating systems. While Windows Mobile, Blackberry and Android do not support video ringtones natively, our development team has enabled our application to work on many devices which utilize these operating systems. Since these operating systems do not support our applications natively, any significant changes to these operating systems by their respective developers may prevent our application from working properly or at all on these systems. If we are unable to maintain our application on these operating systems or on any other operating systems, users of these operating systems will not be able to use our application, which could adversely affect our business and results of operations.
We operate in the digital content market where piracy of content is widespread.
Our business strategy is partially based upon users paying us for access to our content. If users believe they can obtain the same or similar content for free via other means including piracy, they may be unwilling to pay for our service. Additionally, since our own clips do not have any copy protection, they can theoretically be distributed by a paying user to a non-paying user without any additional payment to us. If users or potential users obtain our content or similar content without payment to us, our business and results of operations will be adversely affected.
Major network failures could have an adverse effect on our business.
Major equipment failures, natural disasters, including severe weather, terrorist acts, acts of war, cyber-attacks or other breaches of network or information technology security that affect third-party networks, transport facilities, communications switches, routers, microwave links, cell sites or other third-party equipment on which we rely, could cause major network failures and/or unusually high network traffic demands that could have a material adverse effect on our operations or our ability to provide service to our customers. These events could disrupt our operations, require significant resources to resolve, result in a loss of customers or impair our ability to attract new customers, which in turn could have a material adverse effect on our business, results of operations and financial condition.
Our data is hosted at a remote location. Although we have full alternative site data backed up, we do not have data hosting redundancy. Accordingly, we may experience significant service interruptions, which could require significant resources to resolve, result in a loss of customers or impair our ability to attract new customers, which in turn could have a material adverse effect on our business, results of operations and financial condition.
In addition, with the growth of wireless data services, enterprise data interfaces and Internet-based or Internet Protocol-enabled applications, wireless networks and devices are exposed to a greater degree to third-party data or applications over which we have less direct control. As a result, the network infrastructure and information systems on which we rely, as well as our customers’ wireless devices, may be subject to a wider array of potential security risks, including viruses and other types of computer-based attacks, which could cause lapses in our service or adversely affect the ability of our customers to access our service. Such lapses could have a material adverse effect on our business and our results of operations.
Our business depends upon our ability to keep pace with the latest technological changes, and our failure to do so could make us less competitive in our industry.
The market for our products and services is characterized by rapid change and technological change, frequent new product innovations, changes in customer requirements and expectations and evolving industry standards. Products using new technologies or emerging industry standards could make our products and services less attractive. Furthermore, our competitors may have access to technology not available to us, which may enable them to produce products of greater interest to consumers or at a more competitive cost. Failure to respond in a timely and cost-effective way to these technological developments may result in serious harm to our business and operating results. As a result, our success will depend, in part, on our ability to develop and market product and service offerings that respond in a timely manner to the technological advances available to our customers, evolving industry standards and changing preferences.
Our Facetones™ application depends upon our continued access to Facebook® photos.
Our Facetones™ application creates automated video slideshow using friends' photos from social media web sites, primarily from Facebook®, the world's leading social media site. In the event Facebook® prohibits or restricts the ability of our application to access photos on its site, our business, financial condition, operating results and projected growth could be harmed. In February 2012, we entered into an agreement with Facebook®, which clarifies our permitted use of the Facetones™ mark and domain name.
If our Facetones™ trademark is challenged by another party, our revenue from this application may be adversely affected.On February 9, 2012, Vringo entered into an agreement with Facebook, Inc. an online social network, relating to the use of our Facetones™ mark and domain name (collectively, the "Facetones Mark"). The Agreement resolved a potential dispute between the parties regarding the Facetones Mark. Nonetheless, Facebook reserves the right to challenge the Facetones Mark in the future if Vringo violates certain limitations on its use of the Facetones Mark and/or certain conditions are not met. If Facebook or any other party successfully challenges our Facetones Mark, we will need to rebrand our application, which may have a negative impact on our revenue from this application.
Regulation concerning consumer privacy may adversely affect our business.
Certain technologies that we currently support, or may in the future support, are capable of collecting personally-identifiable information. We anticipate that as mobile telephone software continues to develop, it will be possible to collect or monitor substantially more of this type of information. A growing body of laws designed to protect the privacy of personally-identifiable information, as well as to protect against its misuse, and the judicial interpretations of such laws, may adversely affect the growth of our business. In the United States, these laws could include the Federal Trade Commission Act, the Electronic Communications Privacy Act, the Fair Credit Reporting Act and the Gramm-Leach Bliley Act, as well as various state laws and related regulations. In addition, certain governmental agencies, like the Federal Trade Commission, have the authority to protect against the misuse of consumer information by targeting companies that collect, disseminate or maintain personal information in an unfair or deceptive manner. In particular, such laws could limit our ability to collect information related to users or our services, to store or process that information in what would otherwise be the most efficient manner, or to commercialize new products based on new technologies. The evolving nature of all of these laws and regulations, as well as the evolving nature of various governmental bodies’ enforcement efforts, and the possibility of new laws in this area, may adversely affect our ability to collect and disseminate or share certain information about consumers and may negatively affect our ability to make use of that information. If we fail to successfully comply with applicable regulations in this area, our business and prospects could be harmed.
investor confidence.
If we are unable to make progress with respect to our plan to regain compliance with the minimum stockholders’ equity requirements imposed by the NYSE Amex within the required timeframes, our common stock could be delisted, which could limit stockholders’ ability to make transactions in our common stock and subject us to additional trading restrictions.
Our common stock and warrants are listed on the NYSE Amex, a national securities exchange, which imposes continued listing requirements with respect to listed shares. In May 2011, we received a letter from the NYSE Amex, stating that we are not in compliance with Section 1003(a)(iv) of the NYSE Amex Company Guide because we have sustained losses which are so substantial in relation to our overall operations or our existing financial resources, or our financial condition has become so impaired that it appears questionable, in the opinion of the NYSE Amex, as to whether we will be able to continue operations and/or meet our obligations as they mature.
On June 23, 2011, we submitted a plan to the NYSE Amex addressing how we intend to regain compliance with the continued listing standards by September 30, 2011. Based on the information in our compliance plan and related discussions with the NYSE Amex staff, the NYSE Amex determined that we had made a reasonable demonstration of our ability to regain compliance with Section 1003(a)(iv) of the NYSE Amex Company Guide by September 30, 2011 (subsequently extended to April 15, 2012) and that it would continue the listing of our common stock subject to conditions. The conditions include providing updates to the NYSE Amex staff as appropriate or upon request, but no later than at each quarter completion concurrent with our filing with the Securities and Exchange Commission. If we do not show progress consistent with our compliance plan, or we do not meet the continued listing standards by April 15, 2012, the NYSE Amex could initiate delisting proceedings. While the NYSE Amex has not initiated delisting proceedings, there is no assurance that it will not do so in the future.
If the NYSE Amex delists our securities from trading, we could face significant consequences, including:
In addition, we would no longer be subject to the NYSE Amex rules, including rules requiring us to have a certain number of independent directors and to meet other corporate governance standards.
Our research and development facility is located in Israel and many of our key personnel reside in Israel. Our business is directly affected by the political, economic and military conditions in Israel and its neighbors. Major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could have a material adverse effect on our existing business relationships and on our operating results and financial condition. Furthermore, several countries restrict business with Israeli companies, which may impair our ability to create new business relationships or to be, or become, profitable.
We may not be able to enforce covenants not-to-compete under current Israeli law, whichraise additional capital. Moreover, additional financing may result in added competition.
We have non-competition agreements with all of our employees, almost all of which are governed by Israeli law. These agreements generally prohibit our employees from competing with or working for our competitors, during their term of employment and for up to 12 months after termination of their employment. However, Israeli courts are reluctant to enforce non-compete undertakings of former employees and tend, if at all, to enforce those provisions for relatively brief periods of time in restricted geographical areas and only when the employee has unique value specific to that employer’s business and not just regarding the professional development of the employee. If we are not able to enforce non-compete covenants, we may be faced with added competition.
Because a substantial portion of our revenues is generated in dollars and euros, while a significant portion of our expenses is incurred in Israeli currency, our revenue may be reduced due to inflation in Israel and currency exchange rate fluctuations.
A substantial portion of our revenues is generated in dollars and euros, while a significant portion of our expenses, principally salaries and related personnel expenses, is paid in Israeli currency. As a result, we are exposed to the risk that the rate of inflation in Israel will exceed the rate of devaluation of Israeli currency in relation to the dollar or the euro, or that the timing of this devaluation will lag behind inflation in Israel. Because inflation has the effect of increasing the dollar and euro costs of our operations, it would therefore have an adverse effect on our dollar-measured results of operations. Thethe value of the New Israeli Shekel,equity instruments held by our stockholders.
The termination or reduction of tax and other incentivesfinancing that the Israeli government provides to domestic companies, such as our wholly-owned subsidiary, may increase the costs involved in operating a company in Israel.
The Israeli government currently provides tax and capital investment incentives to domestic companies, as well as grant and loan programs relating to research and development and marketing and export activities. Our wholly-owned Israeli subsidiary currently takes advantage of some of these programs. We cannot provide you with any assurance that such benefits and programswe undertake will continue tolikely be available in the futuredilutive to our Israeli subsidiary. In addition, it is possible that our subsidiary will fail to meet the criteria required for eligibility of future benefits. If such benefits and programs were terminated or further reduced, it could have an adverse effect on our business, operating results and financial condition.
| 12 | ||
We are not party to any
| 13 | ||
| 14 | ||
| High | Low | |||||||
| Year ending December 31, 2011 | ||||||||
| First quarter | $ | 2.30 | $ | 1.49 | ||||
| Second quarter | $ | 2.45 | $ | 1.01 | ||||
| Third quarter | $ | 2.05 | $ | 1.14 | ||||
| Fourth quarter | $ | 1.64 | $ | 0.99 | ||||
| High | Low | |||||||
| Year ending December 31, 2010 | ||||||||
| Third quarter | $ | 3.35 | $ | 1.25 | ||||
| Fourth quarter | $ | 3.10 | $ | 2.04 | ||||
stock as reported by the NYSE MKT and the NASDAQ Capital Market:
| High | Low | ||||||
| Year ended December 31, 2013 | |||||||
| First quarter | $ | 3.83 | $ | 2.70 | |||
| Second quarter | 3.50 | 2.65 | |||||
| Third quarter | 3.90 | 2.61 | |||||
| Fourth quarter | $ | 3.34 | $ | 2.64 | |||
| High | Low | ||||||
| Year ended December 31, 2012 | |||||||
| First quarter | $ | 2.19 | $ | 0.68 | |||
| Second quarter | 5.45 | 1.80 | |||||
| Third quarter | 4.32 | 2.78 | |||||
| Fourth quarter | $ | 5.73 | $ | 1.75 | |||
| High | Low | |||||||
| Year ending December 31, 2011 | ||||||||
| First quarter | $ | 0.26 | $ | 0.04 | ||||
| Second quarter | $ | 0.25 | $ | 0.01 | ||||
| Third quarter | $ | 0.15 | $ | 0.00 | ||||
| Fourth quarter | $ | 0.12 | $ | 0.01 | ||||
| High | Low | |||||||
| Year ending December 31, 2010 | ||||||||
| Third quarter | $ | 0.35 | $ | 0.16 | ||||
| Fourth quarter | $ | 0.39 | $ | 0.09 | ||||
Holders
warrants as reported by the NYSE MKT and the NASDAQ Capital Market:
| High | Low | ||||||
| Year ended December 31, 2013 | |||||||
| First quarter | $ | 1.45 | $ | 1.00 | |||
| Second quarter | 1.54 | 0.85 | |||||
| Third quarter | 1.49 | 0.79 | |||||
| Fourth quarter | $ | 1.38 | $ | 0.82 | |||
| High | Low | ||||||
| Year ended December 31, 2012 | |||||||
| First quarter | $ | 0.70 | $ | 0.04 | |||
| Second quarter | 1.45 | 0.42 | |||||
| Third quarter | 1.85 | 0.85 | |||||
| Fourth quarter | $ | 3.25 | $ | 0.53 | |||
| 15 | ||
We are a
| • | licensing, | |
| • | strategic partnerships, and | |
| • | litigation. |
this business.
In July 2011, we raised an aggregate amount$1,955,000 and $1,205,000, respectively. This is not necessarily indicative of $2.5 million through the issuance of Convertible Notes in a private placement. On December 1, 2011, we raised additional $0.85 million through the issuance of additional 817,303 shares of common stock (“December 2011 financing”). Pursuant to the December 2011 financing, all Convertible Notes (and accrued interest) were converted into 2,671,026 shares of common stock. In February 2012, we entered into agreements with holders (the “Holders”) of certainfuture use of our outstanding Special Bridgeworking capital.
Subsequent to year end, on March 12, 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with VIP Merger Sub, Inc., a Delaware corporation and our wholly-owned subsidiary (“Merger Sub”), and Innovate/Protect, Inc., a Delaware corporation and an intellectual property firm founded in 2011 whose wholly-owned subsidiary, I/P Engine, holds eight patents that were acquired from Lycos Inc. (“Innovate/Protect”), pursuant to which Innovate/Protect will merge with and into Merger Sub, with Merger Sub being the surviving corporation (the “Surviving Corporation”) through an exchange of capital stock of Innovate/Protect for capital stock of Vringo (the “Merger”).
Under the terms of the Merger Agreement, upon completion of the Merger, (i) each share of then-outstanding common stock of Innovate/Protect, par value $0.0001 per share (“Innovate/Protect Common Stock”) (other than shares held by us, Innovate/Protect or any of our and their subsidiaries, which will be cancelled at the completion of the Merger) will be automatically converted into the right to receive the number of shares of our common stock, par value $0.01 per share (“Vringo Common Stock”) equal to the Common Stock Exchange Ratio (as defined below) and (ii) each share of then-outstanding Series A Convertible Preferred Stock of Innovate/Protect, par value $0.0001 per share (total 6,968 shares outstanding) (“Innovate/Protect Series A Stock” and together with the Innovate/Protect Common Stock, “Innovate/Protect Capital Stock”) (other than shares held by us, Innovate/Protect or any of our and their subsidiaries, which will be cancelled at the completion of the Merger) will be automatically converted into the right to receive the same number of shares of Vringo Series A Convertible Preferred Stock (“Vringo Preferred Stock”), which 6,968 shares shall be convertible into an aggregate of 21,026,637 shares of Vringo Common Stock. The Vringo Preferred Stock will have the powers, designations, preferences and other rights as will be set forth in a Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock to be filed by us prior to closing. The Common Stock Exchange Ratio initiallyenforcement is 3.0176, subject to adjustment as set forth in the Merger Agreement. In addition, at the effective time of the Merger, Vringo will issue to the holders of Innovate/Protect Capital Stock and the holder of Innovate/Protect’s issued and outstanding warrant (on a pro rata as-converted basis) an aggregate of 15,959,838 warrants to purchase an aggregate of 15,959,838 shares of Vringo Common Stock with an exercise price of $1.76 per share. The issued and outstanding warrant to purchase Innovate/Protect Common Stock shall be exchanged for 250,000 shares of Vringo common stock and 850,000 warrants to purchase 850,000 shares of Vringo Common Stock with an exercise price of $1.76 per share.
In addition, at the effective time of the Merger, each outstanding and unexercised option to purchase Innovate/Protect Common Stock (each a “Innovate/Protect Stock Option”), whether vested or unvested will be converted into and become an option to purchase Vringo Common Stock and we will assume such Innovate/Protect Stock Option in accordance with the terms of the Innovate/Protect 2011 Equity Incentive Plan. After the effective time of the Merger, (a) each Innovate/Protect Stock Option assumed by us may be exercised solely for shares of Vringo Common Stock and (b) the number of shares of Vringo Common Stock and the exercise price subject to each Innovate/Protect Stock Option assumed by us shall be determined by the Common Stock Exchange Ratio.
Immediately following the completion of the Merger, the former stockholders of Innovate/Protect are expected to own approximately 55.41% of the outstanding common stock of the combined company, and our current stockholders are expected to own approximately 44.59% of the outstanding common stock of the combined company. On a fully diluted basis, the former stockholders of Innovate/Protect are expected to own approximately 67.55% of the outstanding common stock of the combined company, and our current stockholders are expected to own approximately 32.45% of the outstanding common stock of the combined company.
We have expended significant effort and management attention on the proposed transaction. Thererecognized when collection is no assurance that the transaction contemplated by the Merger Agreement will be consummated. If the transaction is not consummated for any reason, our business and operations, as well as the market price of our stock and warrants may be adversely affected. We are currently evaluating the effect of the proposed Merger on our financial statements. We believe such effect will be material.
As of December 31, 2011, we had approximately $1.2 million in cash and cash equivalents. We believe that current cash levels will be sufficient to support our activity into the fourth quarter of 2012. The continuation of our business, as a going concern is dependent upon the successful consummation of our Merger with Innovate/Protect, or similar merger or acquisition, financing, and upon the further development of our products. There can be no assurance, however, that any such opportunities will materialize. All of our audited consolidated financial statements since inception have contained a “going concern” reference by our auditors, expressing substantial doubt about our ability to continue as a going concern.
Our financial statements were prepared using principles applicable to a going concern, which contemplate the realizations of assets and liquidation of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result if we are not able to continue as a going concern.
Revenue
We recognize revenue from monthly subscription from carriers, development projects and content sales when all the conditions for revenue recognition are met: (i)reasonably assured, persuasive evidence of an arrangement exists, (ii) collection of the fee is probable, (iii) the sales price is fixed andor determinable and (iv) delivery of the service has occurred or services have been rendered. Our subscription serviceWe use management's best estimate of selling price for individual elements in multiple-element arrangements, are evidenced by a written document signed by both parties. Our revenues from monthly subscription fees, content purchases and advertisement revenues are recognized when we have received confirmation that the amount is due to us, which provides proof that the services have been rendered, and making collection probable. We recognize revenue from non-refundable up-front fees relating to set-up and billing integration across the period of the contract for the subscription service as these fees are part of hosting solution that we provide to the carrier. The hosting is provided on our servers for the entire period of the arrangement with this carrier, and the revenues relating to the monthly subscription, set-up fees and billing integration have been recognized over the period in the agreement.
Cost of revenue
Cost of revenue consists primarily ofwhere vendor specific evidence or third party evidence of selling price is not available.
acquired patents.
Marketing expenses
Marketing expenses include the salary of all business development and marketingoperations personnel, travel expenses relating to business development activity and trade shows, as well as public relations, advertising, ongoing customer relations and customer acquisition expenses. As we increase our sales, certain commissions to agents will affect marketing expenses.
of the cost of outsourced development services.
| 16 | ||
Our subsidiary generates net taxable income from services it provides to us. The subsidiary charges us for research, development, certain management and other services provided to us, plus a profit margin on such costs, which is currently 8%. On December 5, 2011, the Knesset (Israel’s Parliament) approved the Law to Change the Tax Burden (Legislative Amendments) - 2011. According to the new law, the corporate tax rate will be 25% starting in 2012. However, the subsidiary is a "Beneficiary Enterprise" as defined in amendment No. 60 to the Israeli Law for the Encouragement of Capital Investment, 1959, which means that income arising from its approved research and development activities is subject to zero percent tax for a period of two years and a reduced tax rate for the subsequent five years. The subsidiary elected to receive the zero percent tax benefits for the fiscal years of 2007-2008. In January 2011, new legislation amending the Investment Law was enacted. According to the amendment, the uniform tax rate applicable to the zone where the production facilities of the subsidiary are located would be 15% in 2011 and 2012, 12.5% in 2013 and 2014, and 12% in 2015 and thereafter. Under the transitory provisions of the newly legislated amendment, the subsidiary irrevocably implemented the new law while waiving benefits provided under the current law.
Results of Operations
| Year Ended December 31, | Cumulative from inception to December 31, | |||||||||||||||
| 2011 | 2010 | Change | 2011 | |||||||||||||
| U.S.$ thousands | ||||||||||||||||
| Revenue | 718 | 211 | 507 | 949 | ||||||||||||
| Year ended December 31, | Cumulative from Inception through December 31, | ||||||||||||
| 2013 | 2012 | Change | 2013 | ||||||||||
| Revenue | $ | 1,100,000 | $ | 100,000 | $ | 1,000,000 | $ | 1,200,000 | |||||
At the end of 2009 we commenced monetization of our subscription service by launchingpartial settlement with carriers primarily in Malaysia and Armenia. As a result, the increase in revenue in 2010,AOL in the total amount of $191 thousand, was mainly related$100,000.
From inceptionmonetization of our intellectual property through December 31, 2011, we recorded revenues of $949 thousand,licensing, strategic partnerships and litigation, when required, which includes $623 thousand from revenue share subscription services, $118 thousand from one-time setup fees, $89 thousand from Facetones™, $80 thousand from Fan Loyalty application formats, $30 thousand from Video ReMix platform and $9 thousand from applications sold.
may be resolved through a settlement or collection. We expectalso intend to continue to generate a substantial portionexpand our planned operations through acquisitions and monetization of additional patents, other intellectual property or operating business. In particular, following the incorporation of our future revenues from: (i) Facetones™ preloads throughsubsidiary in Germany and the agreement with ZTE, (ii) Facetones™ app, Video ReMix,acquisition of a patent portfolio from Nokia, we intend to continue to expand our intellectual property monetization efforts worldwide.
other expenses. Disputes regarding the assertion of patents and other intellectual property rights are highly complex and technical.
Cost of Revenue
| Year Ended December 31, | Cumulative from inception to December 31, | |||||||||||||||
| 2011 | 2010 | Change | 2011 | |||||||||||||
| U.S.$ thousands | ||||||||||||||||
| Cost of revenue | 155 | 180 | (25 | ) | 366 | |||||||||||
| Year ended December 31, | Cumulative from Inception through December 31, | ||||||||||||
| 2013 | 2012 | Change | 2013 | ||||||||||
| Amortization of intangibles | $ | 3,445,000 | $ | 1,692,000 | $ | 1,753,000 | $ | 5,465,000 | |||||
| Operating legal | $ | 21,590,000 | $ | 10,010,000 | $ | 11,580,000 | $ | 32,833,000 | |||||
| Total | $ | 25,035,000 | $ | 11,702,000 | $ | 13,333,000 | $ | 38,298,000 | |||||
| 17 | ||
| Year ended December 31, | Cumulative from Inception through December 31, | ||||||||||||
| 2013 | 2012 | Change | 2013 | ||||||||||
| Research and development | $ | 1,512,000 | $ | 543,000 | $ | 969,000 | $ | 2,055,000 | |||||
| Year ended December 31, | Cumulative from Inception through December 31, | ||||||||||||
| 2013 | 2012 | Change | 2013 | ||||||||||
| General and administrative | $ | 15,330,000 | $ | 10,226,000 | $ | 5,104,000 | $ | 26,741,000 | |||||
We commenced monetization of our subscription service model at the end of 2009. As a result, cost of revenue recorded in 2010administrative expenses increased by 481%$5,104,000 (or 50%), or $149 thousand, compared to 2009.
We expect that cost of revenue will increase over time, as we diversify the portfolio of our products. As some of these costs are fixed irrespective of our revenues, we expect our gross margin to increase, as our revenues increase.
Research and Development
| Year Ended December 31, | Cumulative from inception to December 31, | |||||||||||||||
| 2011 | 2010 | Change | 2011 | |||||||||||||
| U.S.$ thousands | ||||||||||||||||
| Research and development | 2,017 | 2,503 | (486 | ) | 13,371 | |||||||||||
Research and development expenses decreased$15,330,000, from $2,503 thousand to $2,017 thousand (-19%)$10,226,000 recorded during the year ended December 31, 2011,2012. General and administrative expenses increased mostly due to an increase in payroll expense ($2,349,000, compared to the year ended December 31, 2010. The decrease is primarily due to lower salary and$1,301,000 in 2012), an increase in stock-based compensation expenses, a result of salary reductions (a decrease of $351 thousandexpense ($10,037,000, compared to 2010)$6,731,000 in 2012), offset by the effect of a separation agreement signed with one of our officers, and lower consulting costs (a decrease of $170 thousandincreased various professional fees ($2,093,000, compared to 2010), all as part of the cost saving plan implemented by us$1,544,000 in early 2011.
Research and development expenses increased from $1,975 thousand to $2,503 thousand (27%) in the year ended December 31, 2010, compared to the year ended December 31, 2009. The increase in 2010 was mainly due to enhanced research and development efforts and increased share based compensation expenses, related to options granted in connection with our IPO in 2010.
2012).
As our business matures and our revenues increase, we expect that our research and development expenses will grow at a slower rate than our corresponding revenues and marketing expenses. We also expect that our compensation costs will increase due to the recording of the expense related to the options granted to management and employees.
Marketing
| Year Ended December 31, | Cumulative from inception to December 31, | |||||||||||||||
| 2011 | 2010 | Change | 2011 | |||||||||||||
| U.S.$ thousands | ||||||||||||||||
| Marketing | 2,193 | 2,183 | 10 | 11,211 | ||||||||||||
Marketing expenses increased slightly from $2,183 thousand to $2,193 thousand (0%) during the year ended December 31, 2011, compared to the year ended December 31, 2010. The main changes were higher advertising costs, mainly in connection with Facetones™ launch ($498 thousand in 2011 compared to $279 thousand in 2010), offset by a decrease in consulting costs mainly related to the cost saving plan implemented by us in early 2011 ($195 thousand in 2011 compared to $36 thousand in 2010).
During the year ended December 31, 2010, marketing expenses increased by $431 thousand (25%), to $2,183 thousand, from $1,752 thousand in the year ended December 31, 2009. The growth in our marketing expenses for the year ended December 31, 2010, was in part due to the hiring, in April 2010, of Mr. Perlman, our current CEO, whose efforts are focused on marketing and business development. In addition, the growth relates to the vesting of 2010 options grants for employees, thereby increasing the respective compensation expense. Furthermore, we had an increase in public relations and advertising costs in connection with new commercial launches in 2010.
From inception through December 31, 2011, marketing expenses amounted to approximately $11.2 million. Of this amount, approximately $5.0 million was attributed to salaries, $1.0 million was attributed to share basedstock-based payments and related expenses, $2.2 million was attributed to travel and trade shows, $1.6 million was attributed to sub-contracting and consulting services, $1.3 million was attributed to public relations services and customer acquisition expenses and $0.1 million was attributed to overhead expenses.
A significant portion of our marketing activity relates to the launching of services with our global partners and building a pipeline for further agreements. In addition, we conduct direct-to-consumer marketing activities in countries where we have launched our services to build on the efforts of our partners. While we do not expect to invest heavily in direct-to-consumer marketing activities in the future, we do expect an increase in marketing expenses as we continue launching our service in different global markets. In certain markets, our marketing efforts may include hiring local personnel to introduce us to the market and purchasing rights to certain local content. As our market reach grows, we expect our marketing expenses to continue to increase our visibility to potential partners.
General and Administrative
| Year Ended December 31, | Cumulative from inception to December 31, | |||||||||||||||
| 2011 | 2010 | Change | 2011 | |||||||||||||
| U.S.$ thousands | ||||||||||||||||
| General and administrative | 2,777 | 1,840 | 937 | 8,269 | ||||||||||||
General and administrative expenses increased from $1,840 thousand to $2,777 thousand (51%) during the year ended December 31, 2011, compared to the year ended December 31, 2010. The increase was mainly due to higher professional fees connected to aborted merger and acquisition activities, venture loan settlement and December 2011 financing (an increase of $643 thousand compared to 2010), due to increased share-based compensation (an increase of $290 thousand compared to 2010), and increased cost of labor and expenses incurred in connection with being a public company (an increase of $45 thousand compared to 2010).
During the year ended December 31, 2010, general and administrative expenses increased $272 thousand (17.3%), to $1,840 thousand, from $1,568 thousand in the year ended December 31, 2009. The increase is mostly due to the increase in various professional fees in connection with becoming a public company. In addition, there was an increase of in additional insurance costs for our directors’ and officers’ liability insurance and an increase in compensation expenses due to new option grants in 2010.
From inception through December 31, 2011, general and administrative expenses totaled approximately $8.3 million. Of this amount, approximately $2.2 million was attributed to salaries and related expenses, $1.6 million was attributed to share based payments, $1.8 million$5,630,000 was attributed to various office expenses, $2.1 million was attributed to professional fees and $0.5 million was attributed to depreciation and amortization.
fees.
.
| Year Ended December 31, | Cumulative from inception to December 31, | |||||||||||||||
| 2011 | 2010 | Change | 2011 | |||||||||||||
| U.S.$ thousands | ||||||||||||||||
| Non-operating income (expense), net | (965 | ) | (3,412 | ) | (2,447 | ) | (5,159 | ) | ||||||||
| Year ended December 31, | Cumulative from Inception through December 31, | ||||||||||||
| 2013 | 2012 | Change | 2013 | ||||||||||
| Non-operating income (expense), net | $ | (971,000) | $ | 3,962,000 | $ | (4,933,000) | $ | 2,983,000 | |||||
2012. During the year ended December 31, 2011,2013, we recorded $1.0 millionapproximately $421,000 of income related to a decrease in connection with the settlementfair value of our derivative warrant liabilities. In addition, as part of the venture loan. This income was offset by non-operating expenseissuance of approximately $0.4 million recordedOctober 2012 Warrants, the down-round protection clauses in connection with the revaluationcertain then outstanding Series 1 Warrants were removed. The impact of the Special Bridge Warrants and the Conversion Warrants and $1.5 million recorded in connection with interest and amortization of a discount on the venture loan and the Convertible Notes (including the recording of an additional beneficial conversion feature on the Convertible Notes).
During 2010, we recorded non-operating expense, net in the amount of $3.4 million, primarily due to the recordingremoval of the Bridge Notes, issued ondown-round warrant protection, which was not material, was recorded during the year ended December 29, 2009, at their residual value at the closing of Bridge Financing, pursuant to which we recorded additional interest costs for the bridge notes of $1.1 million. In addition, as31, 2013. As a result of the conversionremoval of the Bridge Notesdown-round warrant protection, we recorded an additional, interestnon-operating expense of approximately $1.1 million on account$1,617,000. Following the Merger, our non-operating income, net, included mainly the impact of the beneficial conversion feature from the loan and an additional $0.1 million on account of the additional Special Bridge Warrants issued to investorschanges in the Bridge Financing, in addition to the original 795,200 such warrants issued upon the closing of Bridge Financing. Additional interest expense on account of the loan amortization of $0.3 million in addition to the interest expense recorded for the venture loan was also recorded in this period. In connection with the granting of the lead investor warrants we recorded additional interest expense of $1.3 million. We also recorded approximately $0.1 million of interest expense for bridge notes and approximately $0.4 million of interest expense for the venture loan. In addition, we recorded $1.0 million income in connection with the adjustment of the fair value of the Special Bridge Warrants and Conversion Warrants.
During 2009, we recorded non-operating expenses primarily in connection with interest on venture loan. In addition, we recorded a loss of $0.18 million on extinguished debt from the modification of the terms of the venture loan in December 2009.
From inception through December 31, 2011, non-operating expense totaled approximately $5.2 million. This amount included: income from interest on deposits of $0.2 million, interest expense on venture loan of $1.6 million, $0.1 million of debt extinguishment expense related to the Series B Convertible Preferred Stock, $0.2 million of debt extinguishment expenses as a result of the loan modification agreement with SVB/Gold Hill, $1.0 million of additional interest expense as a result of the conversion of the convertible loan, $0.3 million of warrant amortization and $1.1 million of additional interest expense from the bridge notes, $1.3 million as additional interest expense forderivative warrants, granted to lead investors of the Bridge Financing, $1.0 million income in connection with the settlement of the venture loan, and non-operating income of $0.6 million for the adjustment of the fair value of which is highly affected by our share price at the Special Bridge Warrantsmeasurement date. Consequently, as of December 31, 2012, we recorded income of $6,847,000 due to the decrease of our share price, compared to the share price on the date of the Merger.
| 18 | ||
Taxes on Income
| Year Ended December 31, | Cumulative from inception to December 31, | |||||||||||||||
| 2011 | 2010 | Change | 2011 | |||||||||||||
| U.S.$ thousands | ||||||||||||||||
| Taxes on income | 90 | 35 | 55 | 119 | ||||||||||||
| As of December 31, | Cumulative from Inception through December 31, | ||||||||||||
| 2013 | 2012 | Change | 2013 | ||||||||||
| Revenue | $ | 224,000 | $ | 269,000 | $ | (45,000) | $ | 493,000 | |||||
| Operating expenses | (3,334,000) | (2,666,000) | (668,000) | (6,000,000) | |||||||||
| Loss on impairment | (7,253,000) | — | (7,253,000) | (7,253,000) | |||||||||
| Operating loss | (10,363,000) | (2,397,000) | (7,966,000) | (12,760,000) | |||||||||
| Non-operating income (expense) | (65,000) | 20,000 | (85,000) | (45,000) | |||||||||
| Loss before taxes on income | (10,428,000) | (2,377,000) | (8,051,000) | (12,805,000) | |||||||||
| Income tax expense | (257,000) | (55,000) | (202,000) | (312,000) | |||||||||
| Loss from discontinued operations | $ | (10,685,000) | $ | (2,432,000) | $ | (8,253,000) | $ | (13,117,000) | |||||
From inception through December 31, 2011, incomerecord any additional material provisions for unrecognized tax expense totaled $119 thousand. We expect tax expense to increase as our business grows and as our subsidiary continues to profit frombenefits within the cost plus agreement.
next year.
| 19 | ||
During February 2012, approximately 90% of the then outstanding Special Bridge and Conversion Warrants, previously classified as a long-term liability, were exercised for an aggregate amount of $3.6 million. In addition, as part of the transaction, certain holders of the exercised warrants were granted with additional435,783 warrants to purchase approximately 2.66 millionan aggregate of 435,783 shares of our shares. Accordingcommon stock, at an exercise price range from $0.94 to a preliminary estimation, the total effect, including the offsetting impact of classification of some of above-mentioned warrants as a long-term liability (see Note 17$1.76 per share, were exercised by our warrant holders, pursuant to the accompanying financial statements)which we received an additional $590,522. In addition, 2,177,644 options and restricted stock units (“RSUs”), is an increase of approximately $4.1 million in our total stockholder’s equity.
The continuationcollectively, to purchase 2,177,644 shares of our business,common stock, issued to consultants, employees, directors and management, were exercised or vested, as applicable. As a going concern is dependent upon the successful consummationresult, we received an additional $973,986. In addition, during 2014 through February 21, 2014, 626,805 warrants to purchase an aggregate of 626,805 shares of our Merger with Innovate/Protect, or similar merger or acquisition, financing,common stock, at an exercise price of $1.76 per share, were exercised by our warrant holders, pursuant to which we received an additional $1,103,177. In addition, 699,606 options and upon the further developmentRSUs, collectively, to purchase 699,606 shares of our products.common stock, issued to employees, directors and management, were exercised or vested, as applicable. As a result, we received an additional $1,455,066.
| Year ended December 31, | Cumulative from inception to December 31, | |||||||||||||||
| 2011 | 2010 | Change | 2011 | |||||||||||||
| U.S.$ thousands | ||||||||||||||||
| Net cash used in operating activities | (5,380 | ) | (6,361 | ) | (981 | ) | (29,303 | ) | ||||||||
| Net cash provided by (used in) investing activities | (6 | ) | 2,499 | (2,505 | ) | (606 | ) | |||||||||
| Net cash provided by financing activities | 1,198 | 8,520 | 7,322 | 31,160 | ||||||||||||
| Year ended December 31, | Cumulative from Inception through December 31, | ||||||||||||
| 2013 | 2012 | Change | 2013 | ||||||||||
| Net cash used in operating activities | $ | (23,465,000) | $ | (14,468,000) | $ | (8,997,000) | $ | (39,461,000) | |||||
| Net cash used in investing activities | $ | (1,636,000) | $ | (19,476,000) | $ | 17,840,000 | $ | (24,517,000) | |||||
| Net cash provided by financing activities | $ | 1,564,000 | $ | 85,694,000 | $ | (84,130,000) | $ | 97,403,000 | |||||
During the year ended December 31, 2009, net cash used in operating activities totaled $4.8 million. The increase of $1.6 million used in operating activities, compared to 2009, was mainly due to payments to service providersincreased litigation costs, as well as an increase in connection withcost of our IPO, and other payments made in connection with becoming a public company. These costs included: auditors fees, increased directors insurance and legal counsel.
in-house staff.
generation, we expect that these amounts will be offset over time by collection of revenue.
Duringheadquarters and the year ended December 31, 2010, net cash provided by investing activities totaled $2.5 million. During the year ended December 31, 2009, netdevelopment of internal technology infrastructure in 2012. In addition, in 2012, cash used in investing activities totaled $2.6 million. This increase of $5.1 million provided by investing activities is primarily due to the release of proceeds from the bridge financing from escrow, which was slightly offset by $3,326,000 recorded in connection with the purchaseconsummation of fixed assets.
the Merger.
investment policy.
$974,000, respectively. During the year ended December 31, 2010,2012, net cash provided by financing activities totaled $8.5 million,$85,694,000, which relates to the net proceeds received as a result of our IPO, partiallyAugust and October registered direct financings, in which we raised approximately, $31,148,000 and $44,962,000, respectively, offset by repayment of principal on the venture loan,note payable to Hudson Bay Master Fund Ltd., in the total amount of $0.8 million.
During$3,200,000 and funds received from the year ended December 31, 2009, net cash provided by financing activities totaled $2.2 million, which relates to issuanceexercise of Bridge Notes,warrants and options in the total amount of $2.98 million, partially offset by repayment of principal on the venture loan, in the total amount of $0.8 million.
Until we reach profitability, we expect we will continue to explore financing opportunities, through private and public investments and merger and acquisition activity. Other than the proposed merger with Innovate/Protect, we have no specific financing plans at this time.
Future operations
In March 2012, we entered into the Merger Agreement with Innovate/Protect. We believe that the Merger, if consummated, will maximize the economic benefits$12,784,000.
In the fourth quarter of 2011, we announced an agreement with ZTE Corporation, the largest handset maker in China and fourth-largest globally, to preload the Facetones™ application on Android handsets, which is scheduled to commence in the second quarter of 2012. As part of the commercial terms of the agreement, these handsets will be sold via mobile phone operators and through various OEM contracts to brand name handset manufacturers. Similar arrangement are being pursued with other handset manufacturers, although there can be no assurancehowever, that any such opportunities may arise.
opportunity will materialize, and moreover, any such financing would likely be dilutive to our current stockholders.
| 20 | ||
We
Policies
2013.
| 21 | ||
| Valuation | Unobservable | ||||||
| Description | Technique | Inputs | Range | ||||
| Special Bridge Warrants, Conversion Warrants, Preferential Reload Warrants and the outstanding derivative Series 1 Warrants | Black-Scholes-Merton and the Monte-Carlo models | Volatility | 46.85% – 52.63% | ||||
| Risk free interest rate | 0.16% – 1.11% | ||||||
| Expected term, in years | 0.99 – 3.55 | ||||||
| Dividend yield | 0% | ||||||
| Probability and timing of down-round triggering event | 5% occurrence in December 2014 |
These The risk-free rate for the expected term of the option pricing models utilizeis based on the U.S. Treasury yield curve at the date of grant.
Valuation of Financial Instruments
On December 29, 2009, we consummated a bridge financing pursuant to which we issued 5% subordinated convertible promissory notes, ("Bridge Notes"), in the aggregate amount of $2.98 million in a private placement, as well as warrants to purchase 795,200 shares of common stock (the "Special Bridge Warrants") (together the "Bridge Financing"). Proceeds from the Bridge Financing were first allocated to the Special Bridge Warrants, which were classified as a derivative liability and recorded at fair value, with the residual amount allocated to the Bridge Notes.
On December 1, 2011, we entered into financing agreements which triggered anti-dilution provisions in certain of our outstanding warrants. As a result, the number of shares issuable under certain Special Bridge Warrants increased and the number of Special Bridge Warrants outstanding was adjusted to 2,528,615.
As of December 31, 2011, the Special Bridge Warrants were revalued using the Black-Scholes-Merton and the Monte-Carlo models. As the terms of these warrants include a special down-round protection clause, i.e. in a new issuance of common stock at a lower price than the current exercise price, the current exercise price will be lowered to the new issuance price and the number of warrants granted will increase so that the total exercisable value remains as under the original terms (to 2,528,615). As of December 31, 2010, Special Bridge Warrants were valued using 52.76% expected volatility, a risk-free interest rate of 1.52%, estimated life of 4 years and no dividend yield. The fair value of the common stock was $2.38. As of December 31, 2011, we estimated 50% probability of such protection being activated in April, 2012. We have estimated the value of the down-round protection using a Monte-Carlo simulation. The following assumptions were used: 70.20% expected volatility, a risk-free interest rate of 0.38%, estimated life of 3 years and no dividend yield. The fair value of the common stock was $0.94. Refer to Notes 10, 11 and 17 to the accompanying consolidated financial statements.
Upon the consummation of the IPO, the Bridge Notes automatically converted into 864,332 shares of common stock and 1,728,664 warrants (the "Conversion Warrants"). The Conversion Warrants have down-round protection clauses, i.e. in a new issuance of common shares at a lower price than the current exercise price, the current exercise price will be adjusted to the new issuance price. The Conversion Warrants were revalued using the Black-Scholes-Merton and the Monte-Carlo models and classified as a derivative long-term liability. The assumptions used in this calculation for the date of the IPO were 54% expected volatility, a risk-free interest rate of 2.1%, estimated life of 5 years and no dividend yield. The fair value of the common stock was estimated at $2.79. These warrants were valued again on December 31, 2010, with the decrease in fair value being recorded as non-operating income. The assumptions used in this calculation were 52.85% expected volatility, a risk-free interest rate of 1.77%, estimated life of 4.47 years and no dividend yield. The fair value of the common stock was estimated at $2.38. At December 31, 2011 we estimated a 50% probability of down-round protection being activated in April, 2012. We have estimated the value of the down-round protection using a Monte-Carlo simulation. The following assumptions were used: 70.98% expected volatility, a risk-free interest rate of 0.52%, estimated life of 3.47 years and no dividend yield. The fair value of the common stock was $0.94. Refer to Notes10, 11 and 17 to the accompanying consolidated financial statements.
Subsequent to the balance sheet date, between February 6 and February 14, 2012, we entered into agreements with Holders, pursuant to which the Holders exercised 2,274,235Special Bridge and 1,554,758ConversionWarrants to purchase an aggregate of 3,828,993 shares of our common stock for aggregate proceeds of $3.6 million. In addition, we issued new warrants to purchase an aggregate of 2,660,922 shares of common stock at an exercise price of $1.76 per share in consideration for the immediate exercise of the warrants (“Reload Warrants”). 1,392,972 of the Reload Warrantsbear down-round protection clauses; as a result, they will be classified as a long term derivative liability and recorded at fair value. Fair value, in the total amount of $1.5 million was calculated using theBlack-Scholes-Merton and the Monte-Carlomodels, using the following assumptions:72.89% expected volatility, a risk-free interest rate of 0.79%, estimated life of 5 years and no dividend yield. The fair value of the common stock was $1.76. We estimate there is a 30% probability that down-round protection will be activated in September 2012.
Had we made different assumptions about the fair value of the stock price (before it was publicly traded), risk-free interest rate, expected stock price, volatility, the impact of the down-round provision, or the estimated time that the above-mentioned warrantsoptions will be outstanding before they are ultimately exercised, the recorded expense, our net loss and net loss per share amounts could have been significantly different.
ITEM:statements resulting from the adoption.
| 22 | ||
We are a
Our management has identified a material weakness in our disclosure controls and procedures relating to insufficient controls in connection with recognition, valuation and accounting for equity, debt and derivative instruments. We are enhancing our proficiency of the professional literature on these subjects. In addition, we are in the process of remediating this material weakness by broadening the role of external qualified valuation and accounting experts, to allow for our stronger oversight in this area.
Attestation Report of the Independent Registered Public Accounting Firm:
This item is not applicable to smaller reporting companies.
internal control over financial reporting.
We are
Changes in Internal Controls:
During the year ended December 31, 2011, there were no changes in ourCompany’s internal control over financial reporting, identifiedwhich appears in connection with the evaluation required by paragraph (d)Part IV, Item 15 of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| 23 | ||
The following is a brief summary
Seth M. Siegelhas served as a director since May 2006 and as chairman of the board since March 2010. Mr. Siegel has been working in the corporate and entertainment licensing industry since 1982. Mr. Siegel is a co-founder of The Beanstalk Group, a leading brand licensing agency and consultancy and a part of Omnicon Group Inc. (NYSE:OMC). He continues his relationship with both The Beanstalk Group (as a Vice Chairman) and Omnicom (as a consultant on special projects). He is also, since 2007, co-founder and co-CEO of Sixpoint Partners, a broker/dealer investment banking boutique and provider of financial advisory and alternative investment solutions for private equity funds and middle market companies. Mr. Siegel has advised many Fortune 500 companies in the proper secondary use of their trademarks, trade dress and copyrights, and has served as an adviser and/or as the licensing agent for such leading brand owners as AT&T, IBM, Harley- Davidson, The Stanley Works, Unilever, Ford Motor Company, Chrysler, Hershey Foods, Campbell Soup, The Rubbermaid Group, and Dr. Scholl's. Mr. Siegel has also served as an adviser to and licensing agent for Hanna-Barbera Productions in the retail and promotional licensed applications of its classic characters, including The Flintstones, The Jetsons and Scooby-Doo. Mr. Siegel has lectured throughout the United States and has written articles, opinion pieces, and a criticism for a wide array of publications, including The New York Times Op-Ed page and The Wall Street Journal. From April 1995 to June 2004, he was a regular columnist for Brandweek magazine, addressing a broad range of issues relating to the licensing industry and pop culture. Mr. Siegel has served on the Board of Trustees of the Abraham Joshua Heschel School, including ten years on its Executive Committee. He also served as chairman of the Cornell University Hillel. Mr. Siegel sits on both the Cornell University Council and the Advisory Council of Cornell University's School of Industrial and Labor Relations. He is also a member of the national Board of Directors of AIPAC, a leading foreign policy advocacy organization. Mr. Siegel is also a member of the Council on Foreign Relations. Before his work in the licensing industry, Mr. Siegel practiced law with Frankfurt, Garbus, Klein & Selz (now Frankfurt, Kurnit, Klein & Selz), an entertainment and constitutional law firm in New York. Mr. Siegel received his Bachelor of Science degree from Cornell University and his J.D. from Cornell University Law School.
We believe Mr. Siegel's extensive knowledge of consumer brands and marketing, as well as his leadership experience at The Beanstalk Group qualifies him to serve on our board of directors. His extensive experience with leading brands as co-founder and chief executive officer of The Beanstalk Group provide a significant contribution to us and the board of directors.
Andrew Perlmanhas served as our Chief Executive Officer since March 2012, as our President from April 2010 and on our board of directors since September 2009. From February 2009 to March 2010, Mr. Perlman served as vice president of global digital business development at EMI Music Group, where he was responsible for leading distribution deals with digital partners for EMI's music and video content. From May 2007 to February 2009, Mr. Perlman served as General Manager of our U.S. operations as well as our Senior Vice President Content & Community. In this position, Mr. Perlman managed our United States operations and led our content and social community partnerships. From June 2005 to May 2007, Mr. Perlman was senior vice president of digital media at Classic Media, Inc., a global media company with a portfolio of kids, family and pop-culture entertainment brands. In his position with Classic Media, Mr. Perlman led the company's partnerships across video gaming, online and mobile distribution. From June 2001 to May 2005, Mr. Perlman served as general manager for the Rights Group, LLC and its predecessors, a mobile content and mobile fan club company, where he oversaw mobile marketing campaigns for major international brands such as Visa and Pepsi. In this role, Mr. Perlman developed and negotiated relationships with technology vendors such as Comverse, Mobile 365 and Mobliss. He was also responsible for selling and executing mobile products including the Britney Spears mobile fan club and Justin Timberlake and American Idol branded karaoke. In addition he also participated in sponsorship deals between Britney Spears and Samsung and Justin Timberlake and Orange U.K. Mr. Perlman holds a Bachelor of Arts in Business Administration from the School of Business and Public Management at George Washington University.
We believe Mr. Perlman's extensive experience in the music and digital media qualifies him to serve on our board of directors. His extensive experience and insights gained both as an executive at start-up companies and as a senior executive at EMI are a significant contribution to us and the board of directors.
Ellen Cohlhas served as Chief Financial Officer, and previously as Vice President, Finance & Governance since October 2009, including the role of Compliance Officer as of our IPO in 2010. From September 2005 to September 2008, Ms. Cohl served as Chief Financial Officer and Director of Information Technology for Mandel Foundation R.A. and Mandel Institute, R.A., philanthropic leadership training organizations. From January 2001 to August 2005, Mrs. Cohl served as the Director of Corporate Services and Accounting for Chiaro Networks Ltd., a telecommunications network infrastructure manufacturer. From August 1997 to December 2000, she served as Vice President of Finance and Controller for Virtual Communities, Ltd., a provider of turnkey solutions for the development and management of Web-based communities, which was formerly listed on the NASDAQ Stock Market, Inc. From July 1992 to September 1994, Mrs. Cohl served as an internal auditor for Bank Leumi Trust Company. From August 1995 to July 1997 and from July 1988 to September 1991, Mrs. Cohl served as a senior auditor for Arthur Andersen & Co. in the Tel Aviv and New York offices.
Mrs. Cohl received a Bachelor of Science degree in Accounting from New York University and a Masters in Business Administration from Baruch College. Mrs. Cohl is a Ph.D. candidate in Sustainabilitycaptions “Management and Corporate Governance with the University of Paris - Sorbonne. Mrs. Cohl is a Certified Public Accountant.
Philip Serlinhas served as our director since May 2010. Since May 2009, Mr. Serlin has served as chief financial officer and chief operating officer of BioLineRx Ltd., a clinical stage drug development company (NASDAQ/TASE: BLRX). From January 2008 to August 2008, Mr. Serlin served as chief financial officer and chief operating officer of Kayote Networks, Inc., a telecommunications service provider. From January 2006 to December 2007, Mr. Serlin served as chief financial officer of Tescom Software Systems Testing Ltd., an IT services company (TASE: TSCM). From January 2000 to December 2005, he served as chief accounting officer for Chiaro Networks Ltd., a telecommunications network infrastructure manufacturer. From January 1994 to December 1999, Mr. Serlin served as senior manager at Deloitte Touche Tohmatsu (Brightman Almagor & Co.), where he headed the SEC and U.S. accounting department at the Tel Aviv national office. From June 1986 to December 1992, Mr. Serlin served as a senior accountant/analyst at the Securities and Exchange Commission in Washington, D.C. Mr. Serlin holds a Bachelor of Science in Accounting from Yeshiva University and a Master's degree in Economics and Public Policy from The George Washington University. Mr. Serlin is a Certified Public Accountant.
We believe Mr. Serlin's financial and public companies' experience qualifies him to serve on our board of directors.
John Engelmanhas served on our board of directors since December 2010. Mr. Engelman is a co-founder of Boomerang Media LLC, which specializes in global media and video distribution, and serves as its Co-Chief Executive Officer since its acquisition of Classic Media in 2009. He was co-CEO of Classic Media from 2000 until its acquisition by Entertainment Rights PLC in 2007. Classic Media owns well-known brands such as Fat Albert and the Cosby Kids, The Lone Ranger, Lassie, Rocky and Bullwinkle, Rudolph the Red-Nosed Reindeer, Frosty the Snowman, Masters of the Universe, Ghostbusters, George of the Jungle, The Dudley Do-Right Show, Mr. Magoo, Gumby, Felix the Cat, etc. From 1998 to 2001, Mr. Engelman was an operating partner with Pegasus Capital Advisors, a U.S.-based private equity fund manager that provides capital and strategic solutions to middle market companies. From 1991 to 1997, he was president of Broadway Video, Inc., one of New York's leading entertainment companies. Founded by producer Lorne Michaels, Broadway Video is the production company for "Saturday Night Live," "Late Night with Conan O'Brien", "Wayne's World" and many other popular television series and movies. He began his career at Irell and Manella where he became a tax partner. Mr. Engelman is a graduate of Harvard College and Harvard Law School.
We believe Mr. Engelman's experience in the media and entertainment industries qualifies him to serve on our board of directors. His extensive experience and insights gained both as an executive at Boomerang Media and Classic Media are a significant contribution to us and the board of directors.
GeoffreyM Skolnik has served as a director since June 2011. Mr. Skolnik is president of G.M. Skolnik Associates Inc., a firm specializing in turning around underperforming companies and companies seeking enhanced profits. Mr. Skolnik’s experience has helped companies in the apparel, consumer products, not-for-profit, equipment manufacturing, food, dairy and chemical businesses to enhance their profitability. Mr. Skolnik has had extensive experience as co-owner of a diversified apparel company, Wingspread Corporation and as a senior executive and consultant to both large public companies and smaller entrepreneurial firms. Additionally he served as Chief Operating Officer and Chief Financial Officer of Accessory Network Group, Chief Operating Officer of the Jacques Moret Group, and has held senior management positions with Arrow Shirt Group, Borden International and Worthington Pump Corporation. Mr. Skolnik began his career with Deloitte & Touche and served in Italy for five years, including manager-in-charge of their Rome, Italy office.
Mr. Skolnik holds a B.S. from Ohio University. He served as an advisor to N.Y.U. Stern School of Business, M.B.A. students and the Department of Computer Studies. Currently he serves on the board of two not-for-profit organizations. Mr. Skolnik is a Certified Public Accountant.
We believe Mr. Skolnik’s financial and public companies' experience qualifies him to serve on our board of directors.
Edo Segal has served as a director since July 2008. Since 1999, Mr. Segal has acted as founder and chief technology officer of The Relegence Corporation, a real-time financial news and information search technology company, or Relegence. Relegence was acquired by AOL Time Warner in November 2006. As chief technology officer of Relegence, Mr. Segal has led the expansion of its search technology and served customers such as Credit Suisse, J.P. Morgan, Deutsche Bank, Merrill Lynch, Bloomberg, and Dow Jones. At AOL Time Warner, Mr. Segal served as Vice President of emerging platforms and explored disruptive technologies. Prior to Relegence, Mr. Segal was involved with multiple digital initiatives including Virtual Arts, a company he founded in 1992 which focused on the production of CD-ROM multimedia titles, and later Tink Productions, which focused on game production with publishers such as Electronic Arts. After leaving AOL Time Warner, Mr. Segal established Futurity Ventures, a venture and incubation entity and now serves as its chief executive officer.
We believe Mr. Segal's experience as the founder of a technology company qualifies him to serve on our board of directors. His extensive technology insights are a significant contribution to us and the board of directors.
Director Independence
We believe Mr. Siegel, Mr. Skolnik, Mr. Serlin and Mr. Engelman qualify as independent directors in accordance with the standards set by the NYSE Amex as well as Rule 10A-3 promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Accordingly, our board of directors is comprised of a majority of independent directors as required by the NYSE Amex.
Committee of the Board of Directors
Our board of directors has established three standing committees: (1) the Audit Committee, (2) the Compensation Committee and (3) the Nominating and Corporate Governance Committee. Each committee operates under a charter that has been approved by the board of directors, and which is available on our website at http://ir.vringo.com.
Compensation Committee
Our board of directors has established a Compensation Committee, comprised of Mr. Siegel, who is independent and serves as chairman of the Compensation Committee.
The Compensation Committee is authorized to:
Audit Committee
Our board of directors has established an Audit Committee, comprised of Mr. Serlin and Mr. Skolnik, both of whom are independent directors. Mr. Serlin serves as chairman of the Audit Committee. Our board of directors has determined that both Mr. Serlin and Mr. Skolnik are "audit committee financial experts" as defined in Item 407(d)(5)(ii) of Regulation S-K.
The Audit Committee is authorized to:
Nominating and Corporate Governance Committee
Our board of directors has established a Nominating and Corporate Governance Committee, comprised of Mr. Siegel who is an independent director and serves as chairman of the Nominating and Corporate Governance Committee.
The Nominating and Corporate Governance Committee is authorized to:
We have no formal policy regarding board diversity. Our Nominating and Corporate Governance Committee and board of directors may therefore consider a broad range of factors relating to the qualifications and background of nominees, which may include diversity, which is not only limited to race, gender or national origin. Our Nominating and Corporate Governance Committee's and board of directors' priority in selecting board members is identification of persons who will further the interests of our stockholders through his or her established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members and professional and personal experiences and expertise relevant to our growth strategy.
Board Leadership Structure, Executive Sessions of Non-Management Directors
Mr. Perlman currently serves as our Chief Executive Officer and Mr. Siegel, a non-management director, serves as chairman of our board of directors. The board of directors has chosen to separate the chief executive officer and chairman positions because it believes that (i) independent oversight of management is an important component of an effective board and (ii) this structure benefits the interests of all stockholders. If the board convenes for a special meeting, the non-management directors will meet in executive session if circumstances warrant. Mr. Siegel will preside over executive sessions of the board of directors.
Risk Oversight
The board of directors oversees our business and considers the risks associated with our business strategy and decisions. The board currently implements its risk oversight function as a whole. Upon the formation of each of the board committees, the committees will also provide risk oversight and report any material risks to the board.
Code of Ethics
We have adopted a code of ethics that applies to our officers, directors and employees. We have filed copies of our code of ethics and our board committee charters as exhibits to our registration statement filing with the SEC. A copy of the code of ethics is accessible on our website athttp://ir.vringo.com.
SectionMatters,” “Section 16(a) Beneficial Ownership Reporting Compliance,
Section 16(a)” and “Code of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our directors, executive officersConduct and holders of more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changesEthics” is incorporated by reference in the ownership of our common stock and other equity securities. Such persons are required to furnish us copies of all Section 16(a) filings.
Based solely upon a review of the copies of the forms furnished to us, we believe that our officers, directors and holders of more than 10% of our common stock complied with all applicable filing requirements during the fiscal year ended December 31, 2011 except as set forth below:
On February 3, 2011 Form 4/As were filed by Jonathan Medved, Andrew Perlman, Seth Siegel and John Engelman to amend filings of their respective June 21, 2010 IPO Units purchases, in order to reflect the warrant portions of those Units. The Form 4/A relating to the same for Edo Segal was filed subsequently on February 15, 2012. On August 23, 2011, a Form 4 was filed by Jonathan Medved for an option exercise on July 12, 2011. On September 26, 2011 a Form 3 was filed by Geoffrey Skolnik relating to his joining as a director on June 22, 2011.
Summary Compensation Table
The following table summarizes the compensation awarded to, earned or paid
| Name and principal position | Year | Salary ($) (1) | Option awards ($) (2) | All other compensation ($) | Total ($) | |||||||||||||||
| Jonathan Medved (3) | 2011 | $ | 215,255 | — | $ | 104,177 | (5) | $ | 319,432 | |||||||||||
| Former Chief Executive Officer | 2010 | $ | 213,531 | $ | 1,476,000 | $ | 90,802 | (5) | $ | 1,780,333 | ||||||||||
| Andrew Perlman | 2011 | $ | 188,269 | $ | 156,325 | $ | — | $ | 344,594 | |||||||||||
| Chief Executive Officer and Director | 2010 | $ | 142,885 | $ | 279,900 | $ | — | $ | 422,785 | |||||||||||
| Ellen Cohl | 2011 | $ | 127,988 | $ | 58,180 | $ | 36,841 | (6) | $ | 223,009 | ||||||||||
| Chief Financial Officer | 2010 | $ | 106,540 | $ | 73,800 | $ | 31,276 | (6) | $ | 211,616 | ||||||||||
| Stuart Frohlich (4) | 2011 | $ | 87,273 | $ | — | $ | 31,097 | (7) | $ | 118,370 | ||||||||||
| Chief Operating Officer | 2010 | $ | 129,693 | $ | 210,600 | $ | 43,893 | (7) | $ | 384,186 | ||||||||||
|
Employment Agreements
Jonathan Medved Separation Agreement
In March 2012, we signed a separation agreement with our former CEO, Jonathan Medved. According to the terms of the separation agreement, and consistent with Mr. Medved’s employment agreement and amendment hereto, Mr. Medved will be entitled to receive salary and benefits during a ninety day notice period and a nine month severance period, and continue to vest stock options after his termination. In addition, options granted to Mr. Medved at $0.01 will fully vest as of June 21, 2012 and the expiration date for exercising all options vested on or before June 21, 2013 is extended to September 21, 2013. Furthermore, granted Mr. Medved an additional 100,000 options at $1.65, subject to good faith compliance upon separation from us. These options will vest over a 3 year period. Refer also to Note 17 to the accompanying consolidated financial statements.
Andrew Perlman Employment Agreement
Andrew Perlman entered into an employment agreement with us dated March 18, 2010. Pursuant to the terms of his employment agreement, Mr. Perlman's term of employment is at the will of the parties andthis Item may be terminated by either party for any reason or for no reason. In the event Mr. Perlman terminates his employment without good reason (as definedfound in the employment agreement), he must provide us with three months advance notice of such termination. In the event he fails to give the requisite notice, he will forfeit the unvested portion of his stock options and his vested stock options will cease to be exercisable subsequent to the termination date.
During the term of his employment, Mr. Perlman's annual base salary is $175,000. In addition, he is eligible for an additional compensation in an amount to be determined by the board of directors, and receives $5,000 at the end of each quarter as an advance for such additional compensation. Upon a Change of Control (as defined in his employment agreement), fifty percent of the unvested portion of his option grants priced at $0.01 and $5.50 will automatically and immediately become fully vested, also refer to Note 17 to accompanying consolidated financial statements.
In March 2012, Mr. Perlman was appointed as our Chief Executive Officer. In connection with Mr. Perlman’s new position, the Board agreed to following revised employment terms: Mr. Perlman will be paid $250,000 per year, he will be entitled to severance, equal to his one year salary, to be paid in the event he ceases to be our Chief Executive Officer pursuant to a change of control. In addition, the Board of Directors approved the grant of options to purchase 450,000 shares at an exercise price of $1.65 per share. We and Mr. Perlman expect to enter into an amendment to his employment agreement to formalize the foregoing terms.
The employment agreement requires Mr. Perlman to assign inventions and other intellectual property which he conceives or reduces to practice during his employment to us and to maintain our confidential information during employment and thereafter. Mr. Perlman is also subject to a non-competition and a non-solicitation provision that extends for a period of twelve months following termination of his agreement.
Ellen Cohl Employment Agreement
Ellen Cohl entered into an employment agreement with us on October 20, 2010, to act as our principal financial officer. Pursuant to the terms of her employment agreement, Mrs. Cohl's term of employment is at the will of the parties and may be terminated by either party for any reason or for no reason by giving advance written notice of 90 days. Notwithstanding the foregoing, Mrs. Cohl may be dismissed immediately, without prior notice, and with rights to receive no further compensation pursuant to this employment agreement upon the occurrence of any event in which severance payments, in whole or in part, may be denied to Mrs. Cohl pursuant to Israeli law. Such events include, without limitation: (i) indictment for an offense constituting a felony or involving moral turpitude, theft or embezzlement, whether or not involving the company; (ii) Mrs. Cohl's breach of her confidentiality or non-competition obligations pursuant to her employment agreement; or (iii) an act of bad faith by Mrs. Cohl towards the company or any other breach of a fiduciary duty towards the company or any other breach of her employment agreement.
During the term of her employment, Mrs. Cohl receives a gross monthly salary of NIS 35,000, or an aggregate of NIS 420,000 per year (approximately $118,000 as of December 31, 2010). In January 2011, Mrs. Cohl's gross monthly salary was increased to NIS 40,000. Mrs. Cohl shall be reimbursed for all pre-approved expenses, and travel expenses, incurreddefinitive Proxy Statement in connection with her duties pursuantour 2014 Annual Meeting of Stockholders to be filed with the employment agreement.
For purposes of examining entitlement to severance payments under law and under her agreement, Mrs. Cohl's tenure commenced on her employment start date of October 1, 2009. To fulfill obligations to pay severance in certain circumstances pursuant to Israeli law, a Manager's Policy has been established for Mrs. Cohl and an amount equal to 15.83% of Mrs. Cohl's annual salary will be deposited towards such Manager's Policy, which amount will be split among an account for severance pay, disability insurance and a pension fund. Except in circumstances that would not require the payment of severance pursuant to Israeli law, in the event of the termination of Mrs. Cohl's employment agreement, the Manager's Policy will be transferred to her personally. The Manager's Policy would not be transferred to Mrs. Cohl in certain circumstances, including breach of confidentiality and non-competition provisions or the breach of fiduciary duties. During the term of Mrs. Cohl's employment agreement, an amount equal to 7.5% of her base salary will be deposited into a Further Education Fund recognized by Israeli income tax authorities. Our contributions under this Section 5.4 will continue only up to the applicable tax-exempt “ceiling”SEC under the income tax regulationscaptions “Executive Officer and Director Compensation” and “Management and Corporate Governance” and is incorporated by reference in effect from time to time. The funds may be released to Mrs. Cohl upon her written request.
The employment agreement requires Mrs. Cohl to assign inventions and other intellectual property which she conceives or reduces to practice during employment to us and to maintain our confidential information during employment and thereafter. Mrs. Cohl is also subject to a non-competition and a non-solicitation provision that extends for a period of 12 months following termination of her agreement.
Outstanding Equity Awards at 2011 Fiscal Year End
The table below sets forth information regarding outstanding equity awards held by our named executive officers as of December 31, 2011, granted under our 2006 Stock Option Plan. We have omitted from this table the columns pertaining to stock awards because they are inapplicable.
| Option awards | |||||||||||||||||
| Name | Number of securities underlying unexercised options (#) exercisable | Number of securities underlying unexercised options (#) un-exercisable | Option exercise price ($) | Vesting commencement date | Option expiration date | ||||||||||||
| Jonathan Medved (1) | 20,833 | — | 3.00 | 9/16/2007 | 9/21/2013 | (4) | |||||||||||
| Jonathan Medved (1) | 7,670 | 4,018 | 1.50 | 6/25/2009 | 9/21/2013 | (4) | |||||||||||
| Jonathan Medved (3) | — | 266,667 | 0.01 | 6/22/2010 | 9/21/2012 | (4) | |||||||||||
| Jonathan Medved (2) | 150,000 | 250,000 | 5.50 | 6/22/2010 | 9/21/2013 | ||||||||||||
| Andrew Perlman (1) | 4,167 | — | 3.00 | 7/30/2007 | 7/30/2013 | ||||||||||||
| Andrew Perlman (1) | 2,500 | — | 4.50 | 1/20/2008 | 1/20/2014 | ||||||||||||
| Andrew Perlman (1) | 1,490 | 677 | 1.50 | 2/14/2009 | 2/14/2015 | ||||||||||||
| Andrew Perlman (3) | — | 46,667 | 0.01 | 6/22/2010 | 3/17/2016 | ||||||||||||
| Andrew Perlman (2) | 33,750 | 56,250 | 5.50 | 6/22/2010 | 3/17/2016 | ||||||||||||
| Andrew Perlman(3) | — | 46,667 | 0.01 | 9/30/2010 | 1/31/2017 | ||||||||||||
| Andrew Perlman(3) | 30,000 | 60,000 | 5.50 | 9/30/2010 | 1/31/2017 | ||||||||||||
| Ellen Cohl(3) | — | 20,000 | 0.01 | 9/30/2010 | 1/31/2017 | ||||||||||||
| Ellen Cohl(3) | 6,250 | 13,750 | 5.50 | 9/30/2010 | 1/31/2017 | ||||||||||||
| Ellen Cohl (2) | — | 15,000 | 0.01 | 6/22/2010 | 3/17/2016 | ||||||||||||
| Ellen Cohl (2) | 15,000 | 25,000 | 5.50 | 6/22/2010 | 3/17/2016 | ||||||||||||
Employeebenefitplans
Under Israeli law, our subsidiary is required to make severance payments to dismissed employees and employees leaving employment in certain other circumstances, based on the most recent monthly salary for each year of an employee's service. All of the subsidiary's employees have signed agreements with the subsidiary limiting its severance liability to actual deposits in the above mentioned severance plans, pursuant to Section 14 of the Severance Payment Law of 1963. Also, refer to Note 7 of our consolidated financial statements.
2006 Stock Option Plan
On October 30, 2006, we adopted the 2006 Stock Option Plan, pursuant to which 880 thousand shares of common stock were reserved for issuance. On July 30, 2007, we amended and restated the original plan in its entirety by adopting Amendment No. 1 to Stock Option Plan (the "Stock Option Plan"), which increased the number of common stock reserved for issuance to 2.79 million. In January 2010, the number of common stock reserved for issuance upon the exercise of options was increased to 14.14 million. The awards issuable under the Option Plan include incentive stock options, nonqualified stock options and other options. The Option Plan is administered by our board of directors or a committee appointed by our board of directors, who have the discretion to determine the terms and conditions of awards issued thereunder, including the exercise price and vesting period. The options are exercisable for six years from the effective date. The Option Plan provides for grants or sales of common stock options to employees, directors and consultants.
As of December 31, 2011, we have outstanding options to purchase an aggregate of 2,228,400 shares of our common stock at a weighted exercise price of $3.16 per share pursuant to the Option Plan. Of these outstanding options, 1,577,189 are issued to our current directors and officers.
In January 2012, the Board approved a one year acceleration of option vesting for all option holders, should we be subject to a change of control in a merger and/or acquisition transaction.
In January and February, 2012, our Board approved the granting of 70,000, fully vested options to management and consultants at an exercise price of $0.01 per share. The Board also approved the granting of 734,500 options at an exercise price of $0.96 to its management, employees and consultants. These options will vest over four years (according to the applicable schedule of each optionee). Total value of the options granted is $467 thousand.
For additional information regarding our outstanding options, and related subsequent events, refer to Notes 11 and 17 to the accompanying consolidated financial statements.
Director Compensation
The following table sets forth the compensation of persons who served as a member of our Board of Directors during all or part of 2011, other than Mr. Medved and Andrew Perlman whose compensations is discussed under "Executive Compensation" above and neither of whom is separately compensated for Board service.
| Option | All other | |||||||||||
| Name | Awards ($) (1) | compensation ($) | Total ($) | |||||||||
| Seth Siegel (2) | $ | 105,431 | $ | — | $ | 105,431 | ||||||
| Philip Serlin (3) | $ | — | $ | 15,000 | $ | 15,000 | ||||||
| Edo Segal (4) | $ | — | $ | 52,563 | $ | 52,563 | ||||||
| Ralph Simon (5) | $ | — | $ | 15,000 | $ | 15,000 | ||||||
| John Engelman (6) | $ | 29,871 | $ | 10,000 | $ | 39,871 | ||||||
| Geoffrey M. Skolnik (7) | $ | — | $ | 6,610 | $ | 6,610 | ||||||
We reimburse each member of our Board of Directors for reasonable travel and other expenses in connection with attending meetings of the Board of Directors.
The following table and accompanying footnotes set forth certain information as
A person is deemedStockholders to be filed with the beneficial ownerSEC under the captions “Security Ownership of securities that can be acquired within sixty days from March 30, 2012, as a result of the exercise of optionsCertain Beneficial Owners and warrants. Accordingly, common stock issuable upon exercise of optionsManagement” and warrants that are currently exercisable or exercisable within sixty days of March 30, 2012, have been included“Equity Compensation Plan Information” and is incorporated by reference in the table with respect to the beneficial ownership of the person or entity owning the options and warrants, but not with respect to any other persons or entities.
The percentage of ownership for each holder is based on 13,861,423 shares of common stock outstanding on March 30, 2012, plus any presently exercisable stock options and warrants held by each such holder, and options and warrants held by each such holder that will become exercisable within sixty days after March 30, 2012.
| Name and Address of beneficial owner (1) | Number of Shares of Common Stock Beneficially Owned (2) (3) (4) | Percentage of Common Stock (5) | ||||||
| Five percent or more beneficial owners: | 1,242,828 | 8.5 | % | |||||
| Iroquois Master Fund Ltd. | ||||||||
| 641 Lexington Ave 26FL | ||||||||
| New York, NY 10022 | ||||||||
| Directors and named executive officers: | ||||||||
| Seth M. Siegel | 313,478 | 2.2 | % | |||||
| Andrew Perlman | 184,334 | 1.3 | % | |||||
| John Engelman | 92,008 | * | ||||||
| Geoffrey Skolnik | — | * | ||||||
| Edo Segal | 64,435 | * | ||||||
| Philip Serlin | 17,813 | * | ||||||
| Ellen Cohl | 60,000 | * | ||||||
| All current directors and officers as a group (7 individuals): | 732,068 | 5.3 | % | |||||
The following is a description of transactions that we entered into
As of December 31, 2010, Mr. Goldfarb, our co-founder and former officer of the Subsidiary, held approximately 6.0% of our outstanding shares of common stock, respectively. In the year ended December 31, 2010, we paid Mr. Goldfarb for consulting services provided to us, through Degel Software Limited (“Degel”) a total amount of $221 thousand. In January 2011, Mr. Goldfarb entered into a separation agreement with us, as part of which, the vesting of 60 thousand options with an exercise price of $0.01 was accelerated. In addition, pursuant to the separation agreement, we paid Mr. Goldfarb, through Degel, a total amount of $125 thousand.
Our intellectual property counsel is Heidi Brun, the wife of our co-founder, and former officer of the Subsidiary, Mr. David Goldfarb. For the years ended December 31, 2011 and 2010, we paid Heidi Brun, through a law firm which she represents, approximately $66 thousand and $95 thousand, respectively. In addition, until March 31, 2011, our Subsidiary sub-leased part of its office space from Heidi Brun Associates. Total rent paid to Heidi Brun Associates in the year ended December 31, 2011 and 2010 was approximately $4 thousand and $16 thousand, respectively.
Edo Segal, who serves on our board of directors, is the chief executive officer of two consulting firms which we paid approximately $53 thousand and $112 thousand during the years ended December 31, 2011 and 2010, respectively.
Our auditors from inception
The following table sets forth the aggregate fees billed to us for the fiscal years ended December 31, 2011 and 2010 by Somekh Chaikin, a member firm of KPMG International:
| 2011 | 2010 | |||||||
| Audit Fees (1) | $ | 172,000 | $ | 422,000 | ||||
| Audit Related Fees (2) | $ | 44,000 | $ | — | ||||
| Tax Fees (3) | $ | 8,000 | $ | 2,500 | ||||
| Total | $ | 224,000 | $ | 424,500 | ||||
Pre-Approval of Audit and Non-Audit Services
All audit and non-audit services provided by KPMG International to us must be pre-approved in advance by our Audit Committee.
this Item 14.
SeeSupplementary Data.”
| 24 | ||
| Page | |
| Report of Independent Registered Public Accounting Firm | F-2 |
| Consolidated Balance Sheets | |
| Consolidated Statements of Operations | |
| Statements of Changes in Stockholders' Equity | |
| Consolidated Statements of Cash Flows | |
| Notes to the Consolidated Financial Statements |
| F-1 | ||
opinions.
The accompanying consolidated financial statements have been prepared assuming that Also in our opinion, the Company will continuemaintained, in all material respects, effective internal control over financial reporting as a going concern. As discussedof December 31, 2013, based on criteria established in Note 1 toInternal Control – Integrated Framework (1992) issued by the consolidated financial statements,Committee of Sponsoring Organizations of the Company has suffered recurring losses from operations and has a deficit in stockholders' equity that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcomeTreadway Commission (“COSO”).
| F-2 | ||
| December 31, | December 31, | |||||||||||
| 2011 | 2010 | |||||||||||
| Note | U.S.$ | U.S.$ | ||||||||||
| Current assets | ||||||||||||
| Cash and cash equivalents | 3 | 1,190 | 5,407 | |||||||||
| Short-term deposit (restricted) | — | 20 | ||||||||||
| Accounts receivable | 341 | 80 | ||||||||||
| Prepaid expenses and other current assets | 4 | 187 | 168 | |||||||||
| Total current assets | 1,718 | 5,675 | ||||||||||
| Long-term deposit | 8 | 9 | ||||||||||
| Property and equipment | 5 | 144 | 178 | |||||||||
| Deferred tax assets—long-term | 14 | 25 | 27 | |||||||||
| Total assets | 1,895 | 5,889 | ||||||||||
| December 31, 2013 | December 31, 2012 | ||||||
| Current assets | |||||||
| Cash and cash equivalents | $ | 33,586 | $ | 56,960 | |||
| Assets held for sale | 787 | — | |||||
| Other current assets | 455 | 469 | |||||
| Total current assets | 34,828 | 57,429 | |||||
| Long-term deposits | 247 | 54 | |||||
| Property and equipment, net | 230 | 294 | |||||
| Intangible assets, net | 22,748 | 34,044 | |||||
| Goodwill | 65,757 | 65,965 | |||||
| Total assets | $ | 123,810 | $ | 157,786 | |||
| Current liabilities | |||||||
| Accounts payable and accrued expenses | $ | 5,146 | $ | 1,444 | |||
| Accrued employee compensation | 299 | 398 | |||||
| Derivative liabilities on account of warrants | 43 | — | |||||
| Total current liabilities | 5,488 | 1,842 | |||||
| Long-term liabilities | |||||||
| Derivative liabilities on account of warrants | 4,040 | 7,612 | |||||
| Commitments and contingencies (Note 12) | |||||||
| 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 and 100,000,000 authorized; 84,502,653 and 81,889,226 issued and outstanding as of December 31, 2013 and 2012, respectively | 845 | 819 | |||||
| Additional paid-in capital | 189,465 | 171,108 | |||||
| Deficit accumulated during the development stage | (76,028) | (23,595) | |||||
| Total stockholders’ equity | 114,282 | 148,332 | |||||
| Total liabilities and stockholders’ equity | $ | 123,810 | $ | 157,786 | |||
| F-3 | ||
| December 31, 2011 | December 31, 2010 | |||||||||||
| Note | U.S.$ | U.S.$ | ||||||||||
| Current liabilities | ||||||||||||
| Deferred tax liabilities, net—short-term | 14 | 67 | 50 | |||||||||
| Accounts payable and accrued expenses* | 6 | 428 | 421 | |||||||||
| Accrued employee compensation | 228 | 358 | ||||||||||
| Accrued short-term severance pay | 7 | — | 178 | |||||||||
| Current maturities of venture loan | 8 | — | 1,262 | |||||||||
| Total current liabilities | 723 | 2,269 | ||||||||||
| Long-term liabilities | ||||||||||||
| Accrued severance pay | 7 | 165 | 178 | |||||||||
| Venture loan | 8 | — | 1,911 | |||||||||
| Derivative liabilities on account of warrants | 10,11 | 2,172 | 1,770 | |||||||||
| Total long-term liabilities | 2,337 | 3,859 | ||||||||||
| Commitments and contingencies | 15 | |||||||||||
| Deficit in stockholders' equity | 11 | |||||||||||
| Preferred stock, $0.01 par value per share; 5,000,000 authorized; none issued and outstanding as of December 31, 2011 and 2010, respectively | — | — | ||||||||||
| Common stock, $0.01 par value per share 28,000,000 authorized; 9,954,516 and 5,405,080 issued and outstanding as of December 31, 2011 and 2010, respectively | 100 | 54 | ||||||||||
| Additional paid-in capital | 36,281 | 29,774 | ||||||||||
| Deficit accumulated during the development stage | (37,546 | ) | (30,067 | ) | ||||||||
| Total deficit in stockholders' equity | (1,165 | ) | (239 | ) | ||||||||
| Total liabilities and deficit in stockholders' equity | 1,895 | 5,889 | ||||||||||
| For the year ended December 31, | Cumulative from June 8, 2011 (Inception) through December 31, | |||||||||
| 2013 | 2012 | 2013 | ||||||||
| Revenue | $ | 1,100 | $ | 100 | $ | 1,200 | ||||
| Costs and Expenses* | ||||||||||
| Operating legal costs | 25,035 | 11,702 | 38,298 | |||||||
| Research and development | 1,512 | 543 | 2,055 | |||||||
| General and administrative | 15,330 | 10,226 | 26,741 | |||||||
| Total operating expenses | 41,877 | 22,471 | 67,094 | |||||||
| Operating loss from continuing operations | (40,777) | (22,371) | (65,894) | |||||||
| Non-operating income | 245 | 18 | 263 | |||||||
| Non-operating expenses | (20) | (20) | (48) | |||||||
| Issuance of warrants | — | (2,883) | (2,883) | |||||||
| Gain (loss) on revaluation of warrants | (1,196) | 6,847 | 5,651 | |||||||
| Loss from continuing operations before taxes on income | (41,748) | (18,409) | (62,911) | |||||||
| Income tax expense | — | — | — | |||||||
| Loss from continuing operations | $ | (41,748) | $ | (18,409) | $ | (62,911) | ||||
| Loss from discontinued operations (including the impairment loss of $7,253 and $0 in 2013 and 2012, respectively)* | (10,428) | (2,377) | (12,805) | |||||||
| Income tax expense | (257) | (55) | (312) | |||||||
| Loss from discontinued operations | (10,685) | (2,432) | (13,117) | |||||||
| Net loss | $ | (52,433) | $ | (20,841) | $ | (76,028) | ||||
| Loss per share: | ||||||||||
| Basic | ||||||||||
| Loss per share from continuing operations | $ | (0.50) | $ | (0.47) | $ | (1.26) | ||||
| Loss per share from discontinued operations | (0.13) | (0.06) | (0.26) | |||||||
| Total net loss per share | $ | (0.63) | $ | (0.53) | $ | (1.52) | ||||
| Diluted | ||||||||||
| Loss per share from continuing operations | $ | (0.50) | $ | (0.55) | $ | (1.28) | ||||
| Loss per share from discontinued operations | (0.13) | (0.06) | (0.26) | |||||||
| Total net loss per share | $ | (0.63) | $ | (0.61) | $ | (1.54) | ||||
| Weighted-average number of shares outstanding during the year: | ||||||||||
| Basic | 83,201,691 | 39,111,176 | 50,105,473 | |||||||
| Diluted | 83,280,873 | 41,664,676 | 51,618,897 | |||||||
| * Includes stock-based compensation expense, as follows: | ||||||||||
| Operating legal costs | $ | 1,221 | $ | 523 | $ | 1,744 | ||||
| Research and development | 470 | 366 | 836 | |||||||
| General and administrative | 10,037 | 6,731 | 17,242 | |||||||
| Discontinued operations | 365 | 467 | 832 | |||||||
| $ | 12,093 | $ | 8,087 | $ | 20,654 | |||||
| F-4 | ||
| For the year ended December 31, | Cumulative from inception to December 31, | |||||||||||||||
| 2011 | 2010 | 2011 | ||||||||||||||
| Note | U.S.$ | U.S.$ | U.S.$ | |||||||||||||
| Revenue | 12 | 718 | 211 | 949 | ||||||||||||
| Costs and Expenses* | ||||||||||||||||
| Cost of revenue | 155 | 180 | 366 | |||||||||||||
| Research and development | 2,017 | 2,503 | 13,371 | |||||||||||||
| Marketing | 2,193 | 2,183 | 11,211 | |||||||||||||
| General and administrative | 2,777 | 1,840 | 8,269 | |||||||||||||
| Total operating expenses | 7,142 | 6,706 | 33,217 | |||||||||||||
| Operating loss | (6,424 | ) | (6,495 | ) | (32,268 | ) | ||||||||||
| Non-operating income | 13 | 13 | 480 | |||||||||||||
| Non-operating expenses | (14 | ) | (73 | ) | (174 | ) | ||||||||||
| Interest and amortization of debt discount expense | 13 | (1,525 | ) | (4,304 | ) | (6,657 | ) | |||||||||
| Gain (loss) on revaluation of warrants | 10 | (402 | ) | 952 | 550 | |||||||||||
| Gain on restructuring of venture loan | 8 | 963 | — | 963 | ||||||||||||
| Loss on extinguishment of debt | — | — | (321 | ) | ||||||||||||
| Loss before taxes on income | (7,389 | ) | (9,907 | ) | (37,427 | ) | ||||||||||
| Income tax expense | 14 | (90 | ) | (35 | ) | (119 | ) | |||||||||
| Net loss | (7,479 | ) | (9,942 | ) | (37,546 | ) | ||||||||||
| Basic and diluted net loss per common share | (1.17 | ) | (3.15 | ) | (20.26 | ) | ||||||||||
| Weighted average number of shares used in computing basic and dilutive net loss per common share | 6,372,659 | 3,154,489 | 1,853,077 | |||||||||||||
| Common stock | Additional paid-in capital | Deficit accumulated during the development stage | Total | ||||||||||
| Balance as of June 8, 2011 (Inception) | $ | — | $ | — | $ | — | $ | — | |||||
| Issuance of shares of common stock | 170 | 4,975 | — | 5,145 | |||||||||
| Stock-based compensation | — | 474 | — | 474 | |||||||||
| Net loss for the period | — | — | (2,754) | (2,754) | |||||||||
| Balance as of December 31, 2011 | 170 | 5,449 | (2,754) | 2,865 | |||||||||
| Conversion of Series A Convertible Preferred stock, classified as mezzanine equity | 8 | 68 | — | 76 | |||||||||
| Stock-based compensation, including grant of shares to consultants | 3 | 8,084 | — | 8,087 | |||||||||
| Recording of equity instruments upon Merger, net of fair value of issued warrants $21,954 and issuance cost of $463 (refer to Note 6) | 152 | 54,809 | — | 54,961 | |||||||||
| Issuance of warrants (refer to Note 9) | — | 2,883 | — | 2,883 | |||||||||
| Conversion of Series A Convertible Preferred stock, classified as equity | 201 | (201) | — | — | |||||||||
| Exercise of warrants | 76 | 22,856 | — | 22,932 | |||||||||
| Exercise of stock options | 8 | 501 | — | 509 | |||||||||
| Issuance of shares in connection with a financing round, net of issuance cost of $52 | 96 | 31,052 | — | 31,148 | |||||||||
| Shares issued for acquisition of patents (refer to Note 5) | 2 | 748 | — | 750 | |||||||||
| Issuance of shares in connection with a financing round, net of issuance cost of $39 | 103 | 44,859 | — | 44,962 | |||||||||
| Net loss for the year | — | — | (20,841) | (20,841) | |||||||||
| Balance as of December 31, 2012 | 819 | 171,108 | (23,595) | 148,332 | |||||||||
| Exercise of stock options and vesting of Restricted Stock Units (“RSUs”) | 22 | 952 | — | 974 | |||||||||
| Exercise of warrants | 4 | 1,394 | — | 1,398 | |||||||||
| Conversion of derivative warrants into equity warrants | — | 3,918 | — | 3,918 | |||||||||
| Stock-based compensation | — | 12,093 | — | 12,093 | |||||||||
| Net loss for the year | — | — | (52,433) | (52,433) | |||||||||
| Balance as of December 31, 2013 | $ | 845 | $ | 189,465 | $ | (76,028) | $ | 114,282 | |||||
| F-5 | ||
| Deficit | ||||||||||||||||||||
| Series A | accumulated | |||||||||||||||||||
| convertible | during the | |||||||||||||||||||
| preferred | Additional | development | ||||||||||||||||||
| Common stock | stock | paid-in capital | stage | Total | ||||||||||||||||
| U.S.$ | U.S.$ | U.S.$ | U.S.$ | U.S.$ | ||||||||||||||||
| Balance as of January 9, 2006 (inception) | — | — | — | — | — | |||||||||||||||
| Issuance of common stock | *— | — | — | — | *— | |||||||||||||||
| Issuance of series A convertible preferred stock, net of issuance costs of $33 | — | *— | 2,321 | — | 2,321 | |||||||||||||||
| Stock dividend | 20 | 24 | (44 | ) | — | — | ||||||||||||||
| Grants of stock options, net of forfeitures—employees | — | — | 7 | — | 7 | |||||||||||||||
| Grants of stock options, net of forfeitures—non employees | — | — | 4 | — | 4 | |||||||||||||||
| Net loss for the period | — | — | — | (1,481 | ) | (1,481 | ) | |||||||||||||
| Balance as of December 31, 2006 | 20 | 24 | 2,288 | (1,481 | ) | 851 | ||||||||||||||
| Issuance of common stock as part of conversion of convertible loan | 2 | — | 138 | — | 140 | |||||||||||||||
| Discounts to temporary equity | — | — | 43 | — | 43 | |||||||||||||||
| Amortization of discounts to temporary equity | — | — | (4 | ) | — | (4 | ) | |||||||||||||
| Grants of stock options, net of forfeitures—employees | — | — | 98 | — | 98 | |||||||||||||||
| Grants of stock options, net of forfeitures—non employees | — | — | 15 | — | 15 | |||||||||||||||
| Net loss for the year | — | — | — | (5,163 | ) | (5,163 | ) | |||||||||||||
| Balance as of December 31, 2007 | 22 | 24 | 2,578 | (6,644 | ) | (4,020 | ) | |||||||||||||
| Issuance of warrants | — | — | 360 | — | 360 | |||||||||||||||
| Amortization of discounts to temporary equity | — | — | (7 | ) | — | (7 | ) | |||||||||||||
| Grants of stock options, net of forfeitures—employees | — | — | 18 | — | 18 | |||||||||||||||
| Grants of stock options, net of forfeitures—non employees | — | — | 11 | — | 11 | |||||||||||||||
| Net loss for the year | — | — | — | (7,332 | ) | (7,332 | ) | |||||||||||||
* Consideration for less than $1.
| For the year ended December 31, | Cumulative from June 8, 2011 (Inception) through December 31, | |||||||||
| 2013 | 2012 | 2013 | ||||||||
| Cash flows from operating activities | ||||||||||
| Net loss | $ | (52,433) | $ | (20,841) | $ | (76,028) | ||||
| Adjustments to reconcile net cash flows used in operating activities: | ||||||||||
| Items not affecting cash flows | ||||||||||
| Depreciation and amortization | 5,220 | 2,501 | 8,050 | |||||||
| Impairment loss | 7,253 | — | 7,253 | |||||||
| Change in deferred tax assets and liabilities | — | (58) | (58) | |||||||
| Stock-based compensation expense | 12,093 | 8,087 | 20,654 | |||||||
| Issuance of warrants | — | 2,883 | 2,883 | |||||||
| Assignment of patents | (100) | — | (100) | |||||||
| Change in fair value of warrants | 1,196 | (6,847) | (5,651) | |||||||
| Exchange rate loss (gain), net | (97) | 8 | (89) | |||||||
| Changes in current assets and liabilities | ||||||||||
| Increase in receivables, prepaid expenses and other current assets | (135) | (208) | (369) | |||||||
| Increase in payables and accruals | 3,538 | 7 | 3,994 | |||||||
| Net cash used in operating activities | (23,465) | (14,468) | (39,461) | |||||||
| Cash flows from investing activities | ||||||||||
| Acquisition of property and equipment | (23) | (208) | (240) | |||||||
| Acquisition of patents | (1,420) | (22,548) | (27,364) | |||||||
| Increase in deposits | (193) | (46) | (239) | |||||||
| Cash acquired as part of acquisition of Vringo (1) | — | 3,326 | 3,326 | |||||||
| Net cash used in investing activities | $ | (1,636) | $ | (19,476) | $ | (24,517) | ||||
| F-6 | ||
Vringo, Inc. and SubsidiarySubsidiaries
| Deficit | ||||||||||||||||||||
| Series A | accumulated | |||||||||||||||||||
| convertible | during the | |||||||||||||||||||
| preferred | Additional | development | ||||||||||||||||||
| Common stock | stock | paid-in capital | stage | Total | ||||||||||||||||
| U.S.$ | U.S.$ | U.S.$ | U.S.$ | U.S.$ | ||||||||||||||||
| Balance as of December 31, 2008 | 22 | 24 | 2,960 | (13,976 | ) | (10,970 | ) | |||||||||||||
| Issuance of warrants | — | — | 60 | — | 60 | |||||||||||||||
| Loan modification | — | — | 500 | — | 500 | |||||||||||||||
| Amortization of discounts to temporary equity | — | — | (7 | ) | — | (7 | ) | |||||||||||||
| Grants of stock options, net of forfeitures—employees | — | — | 178 | — | 178 | |||||||||||||||
| Grants of stock options, net of forfeiture—non employees | — | — | 10 | — | 10 | |||||||||||||||
| Net loss for the year | — | — | — | (6,149 | ) | (6,149 | ) | |||||||||||||
| Balance as of December 31, 2009 | 22 | 24 | 3,701 | (20,125 | ) | (16,378 | ) | |||||||||||||
| Issuance of common stock, net of issuance costs of $1,768 | 24 | — | 9,239 | — | 9,263 | |||||||||||||||
| Exchange of series A convertible preferred stock for common stock | 24 | (24 | ) | — | — | — | ||||||||||||||
| Conversion of Bridge notes | 9 | — | 2,536 | — | 2,545 | |||||||||||||||
| Amortization of discounts to temporary equity | — | — | (3 | ) | — | (3 | ) | |||||||||||||
| Grants of stock options, net of forfeitures—employees | — | — | 883 | — | 883 | |||||||||||||||
| Grants of stock options, net of forfeitures—non employees | — | — | 29 | — | 29 | |||||||||||||||
| Exercise of warrants to charity | *— | — | 11 | — | 11 | |||||||||||||||
| Grants of warrants to lead investors | — | — | 1,342 | — | 1,342 | |||||||||||||||
| Grants of warrants to charity | — | — | 37 | — | 37 | |||||||||||||||
| Exercise of stock options | 1 | — | — | — | 1 | |||||||||||||||
| Exercise of warrants | 2 | — | — | — | 2 | |||||||||||||||
| Stock dividend | 19 | — | (19 | ) | — | — | ||||||||||||||
| Reverse stock split | (93 | ) | — | 93 | — | — | ||||||||||||||
| Exchange of series B convertible preferred stock for common stock | 46 | — | 11,925 | — | 11,971 | |||||||||||||||
| Net loss for the year | — | — | — | (9,942 | ) | (9,942 | ) | |||||||||||||
| Balance as of December 31, 2010 | 54 | — | 29,774 | (30,067 | ) | (239 | ) | |||||||||||||
| Grants of stock options, net of forfeitures—employees | — | — | 1,300 | — | 1,300 | |||||||||||||||
| Grants of stock options, net of forfeitures—non employees | — | — | 131 | — | 131 | |||||||||||||||
| Exercise of warrants | 3 | — | — | — | 3 | |||||||||||||||
| Conversion of convertible notes and accrued interest | 27 | — | 2,484 | — | 2,511 | |||||||||||||||
| Issuance of shares, net of issuance costs of $65 | 8 | — | 777 | — | 785 | |||||||||||||||
| Issuance of shares to a consultant | 2 | — | 293 | — | 295 | |||||||||||||||
| Issuance of shares in connection with restructuring of venture loan | 3 | — | 210 | — | 213 | |||||||||||||||
| Grants of warrants to charity | *— | — | 43 | — | 43 | |||||||||||||||
| Exercise of stock options | 3 | — | — | — | 3 | |||||||||||||||
| Beneficial conversion feature recorded in connection with convertible notes | — | — | 1,269 | — | 1,269 | |||||||||||||||
| Net loss for the year | — | — | — | (7,479 | ) | (7,479 | ) | |||||||||||||
| Balance as of December 31, 2011 | 100 | — | 36,281 | (37,546 | ) | (1,165 | ) | |||||||||||||
* Consideration for less than $1.
| For the year ended December 31, | Cumulative from June 8, 2011 (Inception) through December 31, | |||||||||
| 2013 | 2012 | 2013 | ||||||||
| Cash flows from financing activities | ||||||||||
| Proceeds from issuance of common stock, net of issuance cost of $52 | $ | — | $ | 31,148 | $ | 31,148 | ||||
| Proceeds from issuance of common stock, net of issuance cost of $39 | — | 44,962 | 44,962 | |||||||
| Proceeds from issuance (repayment) of note payable—related party | — | (3,200) | — | |||||||
| Proceeds from issuance of preferred stock | — | — | 1,800 | |||||||
| Proceeds from issuance of common stock | — | — | 5,145 | |||||||
| Exercise of options | 974 | 509 | 1,483 | |||||||
| Exercise of warrants | 590 | 12,275 | 12,865 | |||||||
| Net cash provided by financing activities | 1,564 | 85,694 | 97,403 | |||||||
| Effect of exchange rate changes on cash and cash equivalents | 163 | (2) | 161 | |||||||
| Increase (decrease) in cash and cash equivalents | (23,374) | 51,748 | 33,586 | |||||||
| Cash and cash equivalents at beginning of period | 56,960 | 5,212 | — | |||||||
| Cash and cash equivalents at end of period | $ | 33,586 | $ | 56,960 | $ | 33,586 | ||||
| Supplemental disclosure of cash flows information | ||||||||||
| Interest paid | $ | — | $ | 9 | $ | 17 | ||||
| Income taxes paid | 34 | 7 | 41 | |||||||
| Non-cash investing and financing transactions | ||||||||||
| Non cash acquisition of patents through issuance of common stock shares (refer to Note 5) | — | 750 | 750 | |||||||
| Conversion of Series A Convertible Preferred stock, classified as mezzanine equity, into common stock, prior to the Merger | — | 76 | 76 | |||||||
| Conversion of Series A Convertible Preferred stock, classified as mezzanine equity, into common stock, upon Merger | — | 1,724 | 1,724 | |||||||
| Conversion of Series A Convertible Preferred stock, classified as equity, into common stock, post-Merger | — | 201 | 201 | |||||||
| Conversion of derivative warrants into common stock | 808 | 10,657 | 11,465 | |||||||
| Conversion of derivative warrants to equity warrants | $ | 3,918 | $ | — | $ | 3,918 | ||||
| (1) Cash acquired as part of acquisition of Vringo | ||||||||||
| Working capital (excluding cash and cash equivalents) | $ | — | $ | 740 | $ | 740 | ||||
| Long-term deposit | — | (8) | (8) | |||||||
| Fixed assets, net | — | (124) | (124) | |||||||
| Goodwill | — | (65,965) | (65,965) | |||||||
| Technology | — | (10,133) | (10,133) | |||||||
| Fair value of Legal Parent’s shares of common stock and vested $0.01 options | — | 58,211 | 58,211 | |||||||
| Fair value of warrants and vested stock options | — | 17,443 | 17,443 | |||||||
| Long-term liabilities | — | 3,162 | 3,162 | |||||||
| $ | — | $ | 3,326 | $ | 3,326 | |||||
| F-7 | ||
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Cumulative | ||||||||||||
| from inception | ||||||||||||
| For the year ended December 31, | to December 31, | |||||||||||
| 2011 | 2010 | 2011 | ||||||||||
| U.S.$ | U.S.$ | U.S.$ | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net loss | (7,479 | ) | (9,942 | ) | (37,546 | ) | ||||||
| Adjustments to reconcile net cash flows used in operating activities: | ||||||||||||
| Items not affecting cash flows | ||||||||||||
| Depreciation and amortization | 61 | 87 | 454 | |||||||||
| Change in deferred tax assets and liabilities | 24 | 132 | 52 | |||||||||
| Increase (decrease) in accrued severance pay | (177 | ) | — | 150 | ||||||||
| Share-based payment expenses | 1,769 | 2,291 | 4,462 | |||||||||
| Accrued interest expense | 98 | 2,512 | 2,855 | |||||||||
| Loss (gain) on revaluation of warrants | 402 | (952 | ) | (550 | ) | |||||||
| Gain on restructuring of venture loan | (963 | ) | — | (963 | ) | |||||||
| Loss on extinguishment of debt | — | — | 321 | |||||||||
| Interest and amortization of discount in connection with convertible notes | 1,280 | — | 1,280 | |||||||||
| Exchange rate (gains) losses | 29 | (15 | ) | 81 | ||||||||
| Changes in current assets and liabilities | ||||||||||||
| Increase in accounts receivable, prepaid expenses and other current assets | (283 | ) | (98 | ) | (532 | ) | ||||||
| Increase (decrease) in payables and accruals | (141 | ) | (376 | ) | 633 | |||||||
| Net cash used in operating activities | (5,380 | ) | (6,361 | ) | (29,303 | ) | ||||||
| Cash flows from investing activities | ||||||||||||
| Acquisition of property and equipment | (27 | ) | (86 | ) | (598 | ) | ||||||
| Decrease (increase) in lease deposits | 1 | 3 | (8 | ) | ||||||||
| Proceeds from investment in restricted short-term deposits | 20 | 2,582 | — | |||||||||
| Net cash provided by (used in) investing activities | (6 | ) | 2,499 | (606 | ) | |||||||
The accompanying notes form an integral part of these consolidated financial statements.
Vringo, Inc. and Subsidiary
(a Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Cumulative | ||||||||||||
| from inception | ||||||||||||
| For the year ended December 31, | to December 31, | |||||||||||
| 2011 | 2010 | 2011 | ||||||||||
| U.S.$ | U.S.$ | U.S.$ | ||||||||||
| Cash flows from financing activities | ||||||||||||
| Receipt of venture loan | — | — | 5,000 | |||||||||
| Repayment on account of venture loan | (2,095 | ) | (757 | ) | (3,651 | ) | ||||||
| Receipt of convertible notes | 2,500 | — | 2,500 | |||||||||
| Issuance of common stock and warrants, net | — | 9,263 | 9,263 | |||||||||
| Issuance of warrants | — | — | 1,070 | |||||||||
| Receipt of convertible loans | — | — | 3,976 | |||||||||
| Issuance of convertible preferred stock | — | — | 12,195 | |||||||||
| Exercise of common stock options and warrants | 8 | 14 | 22 | |||||||||
| Issuance of common stock, net of issuance expenses | 785 | — | 785 | |||||||||
| Net cash provided by financing activities | 1,198 | 8,520 | 31,160 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (29 | ) | 5 | (61 | ) | |||||||
| Increase (decrease) in cash and cash equivalents | (4,217 | ) | 4,663 | 1,190 | ||||||||
| Cash and cash equivalents at beginning of period | 5,407 | 744 | — | |||||||||
| Cash and cash equivalents at end of period | 1,190 | 5,407 | 1,190 | |||||||||
| Supplemental disclosure of cash flows information | ||||||||||||
| Interest paid | 151 | 386 | 1,137 | |||||||||
| Non-cash investing and financing transactions | ||||||||||||
| Conversion of convertible loan into convertible preferred stock | — | — | 1,964 | |||||||||
| Extinguishment of debt | — | — | 321 | |||||||||
| Discount to the series B convertible preferred stock | — | — | 43 | |||||||||
| Allocation of fair value of loan warrants | — | — | 334 | |||||||||
| Allocation of fair value of conversion warrants | — | 1,564 | 1,564 | |||||||||
| Exchange of series B convertible preferred stock for common stock | — | 11,971 | 11,971 | |||||||||
| Exchange of series A convertible preferred stock for common stock | — | 24 | 24 | |||||||||
| Conversion of bridge notes into common stock | — | 2,545 | 2,545 | |||||||||
| Amortization of discounts to temporary equity | — | 3 | 21 | |||||||||
| Issuance of shares in consideration of restructuring of venture loan | 213 | — | 213 | |||||||||
| Beneficial conversion feature recorded in connection with convertible notes | 1,269 | — | 1,269 | |||||||||
| Conversion of convertible notes into common stock | 2,511 | — | 2,511 | |||||||||
The accompanying notes form an integral part of these consolidated financial statements.
Vringo, Inc. and Subsidiary
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company, is engaged in developing software platformsthe development and monetization of intellectual property worldwide. The Company's intellectual property portfolio consists of over 500 patents and patent applications covering telecom infrastructure, internet search and mobile technologies. The Company’s patents and patent applications have been developed internally and acquired from third parties. Prior to December 31, 2013, the Company operated a global platform for mobile phones. The Company develops and provides a wide varietythe distribution of mobile videosocial applications and services including a comprehensive platform that allows users to create, download and share video ringtones. The Company's proprietary ringtone platform includes social networking capability and integration with web systems.
The Company is still in the development stage. There is no certainty regarding the Company's ability to complete the development of its products and ensure the success of its marketing. The continuation of the stages of development and the realization of assets related to the planned activities depend on future events, including future financings and achieving operational profitability.
The high-tech industry in which the Company operates is highly competitive and is characterized by the risks of rapidly changing technologies. Penetration into global markets requires investment of considerable resources and continuous development efforts. The Company's future success depends upon several factors including the technological quality, price and performance of its product relative to those of its competitors.
In June 2010, the Company completed an initial public offering (the "IPO") of 2,392,000 units, each containing one share of common stock and two warrants, at an issue price of $4.60 per unit. Each warrant in the IPO unit is exercisable for five years after the IPO at an exercise price of $5.06. Gross proceeds of the IPO totaled approximately $11 million, of which the Company received approximately $9.3 million in net proceeds after deducting underwriting discounts and other offering costs. Immediately prior to the closing of the offering, the Company's outstanding shares of preferred stock were exchanged for shares of common stock and the Company effected a 1 for 6 reverse stock split of its common stock. The Company issued a stock dividend to holders of the preferred stock prior to the split and exchange. All share and per-share information in these consolidated financial statements have been adjusted to give effect to the reverse stock split.it developed
Despite the foregoing, there is still significant doubt as to the ability of the Company to continue operating as a "going concern". The Company has incurred significant losses since its inception and expects that it will continue to operate at a net loss in the foreseeable future. For the year ended December 31, 2011 and for the cumulative period from inception until December 31, 2011, the Company incurred net losses of $7.5 million and $37.4 million, respectively.
In July 2011, the Company raised an aggregate amount of $2.5 million through the issuance of convertible notes (“Convertible Notes”) in a private placement. On December 1, 2011, the Company raised additional $0.85 million through the issuance of 817,303 additional shares of common stock (“December 2011 financing”). In connection with the December 2011 financing, all Convertible Notes (and accrued interest) were converted into 2,671,026 shares of common stock. In February 2012,2013, the Company entered into agreementsa definitive agreement to sell its mobile social application business (refer to Notes 7 and 14).
The Company believes that following the February 2012 warrant exercise, its current cash levels will be sufficient to support its activity into the fourth quarter of 2012. On March 13, 2012, the Company entered into an agreementAgreement and Plan of Merger, Agreement (“Mergerdated as of March 13, 2012 (the “Merger Agreement”), pursuant to which Innovate/Protect, Inc. (“I/P”) will merge withby and intoamong Vringo, I/P and VIP Merger Sub, Inc., a wholly owned subsidiary of the CompanyVringo (“Merger Sub”), with Merger Sub being the surviving corporation through an exchange of capital stock of I/P for capital stock of the Company. The consummation of. Pursuant to the Merger Agreement, is subject to stockholder approvalI/P became a wholly-owned subsidiary of Vringo through a merger of I/P with and into Merger Sub, and the former stockholders of I/P received shares of Vringo that constituted a majority of the outstanding shares of Vringo.
These financial statements were prepared using principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result should the Company not be able to continue as a going concern.
As of December 31, 2011, approximately $303 thousand of the Company's net assets were located outside of the United States.
Vringo, Inc. and Subsidiary
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 2 - Significant Accounting and Reporting Policies
(a) Basis of presentation and principles of consolidation
The accompanying consolidated financial statements include the accounts of the Parent and the Subsidiary and are presentedreverse acquisition in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Accordingly, the Company’s financial statements for periods prior to the Merger reflect the historical results of America ("I/P, and the Company’s financial statements for all periods from July 19, 2012 reflect the results of the combined company. Unless specifically noted otherwise, as used throughout these consolidated financial statements, the term “Company” refers to the combined company after the Merger, and the business of I/P before the Merger. The terms I/P, Vringo, or Legal Parent refer to such entities’ standalone businesses prior to the Merger.
These consolidated financial statements include the results of operations of I/P and subsidiaries for all periods presented, with the results of operations of the Legal Parent and its subsidiaries for the period from July 19, 2012 (the effective date of the Merger) through December 31, 2013. Moreover, equity amounts, as well as net loss per common share, presented for comparative periods differ from those previously presented by I/P, due to application of accounting requirements applicable to a reverse acquisition.
| Exchange rate of 1 U.S. $: | NIS | Euro | |||
| At December 31, 2013 | 3.471 | 0.726 | |||
| At December 31, 2012 | 3.733 | 0.759 | |||
| Average exchange rate for the year ended December 31, 2013 | 3.611 | 0.753 |
For the purpose
| F-8 | ||
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The need for an allowance for doubtful accounts is based on the Company’s best estimate of the amount of credit loss in the Company’s existing receivables. The need for an allowance is determined on an individual account receivable basis. The Company considers customers’ historical payment patterns, general and industry specific economic factors in determining their customers’ probability of default. The Company reviews the need for an allowance for doubtful accounts on a monthly basis. From inception through December 31, 2011 neither write-offs, nor provision for doubtful accounts for was created. The Company does not have any significant off-balance-sheet credit exposure related to its customers.
(g) Derivative instruments
(expense).
based on estimates of the period over which the Company expects the assets to be of economic benefit to the Company. Leasehold improvements are amortized over the shorter of the useful life of the asset or the term of the lease.
| % | |||
| Office furniture and equipment | 7-33 | ||
| Computers and related equipment | 33 | ||
| Leasehold improvements | 10-33 |
| F-9 | ||
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 2 - Significant Accountingexpenses incurred in connection with the Company’s patent licensing and Reporting Policies (cont'd)
(j) Cost of revenue
Cost of revenue consists primarily of direct costs that the Company paysenforcement 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, in order to operateits products in launched markets.Theseas well as internal payroll expenses, includeshare based compensation, and the costs associated with production servers serving the end-users, royalty fees for content sales, amortization of prepaid content licenses.
acquired patents.
(l) Advertising and Promotional costs
We expense advertising and promotional costs in the period in which they are incurred. For the years ended December 31, 2011, 2010, and cumulative from inception till December 31, 2011, advertising and promotional expenses totaled approximately $271 thousand, $141 thousand, and $923 thousand, respectively.
(m)(n) Accounting for share-based paymentsstock-based compensation
Share-based payment
the expected term of the option is based on the U.S. Treasury yield curve at the date of grant.
(n)(o) Income taxes
Tax benefits related to excess deductions on stock-based compensation arrangements are recognized when they reduce taxes payable.
new information is available. The Company accounts for its income tax uncertainties in accordance with ASC Subtopic 740-10 which clarifies the accounting for uncertainties in income taxes recognized in a company's financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Interest and penaltiesrecords interest related to unrecognized tax benefits are recognizedin interest expense and penalties in the consolidated statements of operations as a componentgeneral and administrative expenses
positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 percent of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
| F-10 | ||
(o) Reverse stock split
On June 21, 2010, immediately prior to the closing of the IPO, the Company's outstanding shares of preferred stock were exchanged for shares of common stock and the Company effected a 1 for 6 reverse stock split of its common stock. The Company issued a stock dividend to holders of the preferred stock prior to the split and exchange. All share and per share amounts retroactively reflect the reverse stock split, unless otherwise indicated.
(p) Net loss per share data
Vringo, Inc. and Subsidiary
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 2 - Significant Accounting and Reporting Policies (cont'd)
The table below presents the computation of basic and diluted net losses per common share:
| Cumulative | ||||||||||||
| from inception | ||||||||||||
| Year ended December 31, | to December 31, | |||||||||||
| 2011 | 2010 | 2011 | ||||||||||
| (in thousands, except share and per share data) | ||||||||||||
| Numerator: | ||||||||||||
| Net loss attributable to common stock shares (basic and diluted) | (7,479 | ) | (9,942 | ) | (37,546 | ) | ||||||
| Denominator: | ||||||||||||
| Weighted average number of common stock shares outstanding during the period (basic and diluted) | 6,241,048 | 2,958,568 | 1,797,582 | |||||||||
| Weighted average number of penny stock options and warrants (basic and diluted) | 131,611 | 195,921 | 55,495 | |||||||||
| Basic and diluted shares of common stock outstanding | 6,372,659 | 3,154,489 | 1,853,077 | |||||||||
| Basic and diluted net losses per share of common stock | (1.17 | ) | (3.15 | ) | (20.26 | ) | ||||||
| Year ended December 31, | Cumulative from June 8, 2011 (Inception) through | |||||||||
| 2013 | 2012 | December 31, 2013 | ||||||||
| Basic Numerator: | ||||||||||
| Loss from continuing operations attributable to shares of common stock | $ | (41,748) | $ | (18,409) | $ | (62,911) | ||||
| Loss from discontinued operations attributable to shares of common stock | $ | (10,685) | $ | (2,432) | $ | (13,117) | ||||
| Net loss attributable to shares of common stock | $ | (52,433) | $ | (20,841) | $ | (76,028) | ||||
| Basic Denominator: | ||||||||||
| Weighted average number of shares of common stock outstanding during the period | 83,097,667 | 38,949,305 | 50,004,601 | |||||||
| Weighted average number of penny stock options | 104,024 | 161,871 | 100,872 | |||||||
| Basic common stock share outstanding | 83,201,691 | 39,111,176 | 50,105,473 | |||||||
| Basic loss per common stock share from continuing operations | $ | (0.50) | $ | (0.47) | $ | (1.26) | ||||
| Basic loss per common stock share from discontinued operations | $ | (0.13) | $ | (0.06) | $ | (0.26) | ||||
| Basic net loss per common stock share | $ | (0.63) | $ | (0.53) | $ | (1.52) | ||||
| Diluted Numerator: | ||||||||||
| Net loss attributable to shares of common stock | $ | (41,748) | $ | (18,409) | $ | (62,911) | ||||
| Increase in net loss attributable to derivative warrants | $ | (59) | $ | (4,701) | $ | (3,336) | ||||
| Diluted net loss from continuing operations attributable to shares of common stock | $ | (41,807) | $ | (23,110) | $ | (66,247) | ||||
| Diluted net loss from discontinued operations attributable to shares of common stock | $ | (10,685) | $ | (2,432) | $ | (13,117) | ||||
| Diluted net loss attributable to shares of common stock | $ | (52,492) | $ | (25,542) | $ | (79,364) | ||||
| Diluted Denominator: | ||||||||||
| Basic common stock share outstanding | 83,201,691 | 39,111,176 | 50,105,473 | |||||||
| Weighted average number of derivative warrants outstanding during the period | 79,182 | 2,553,500 | 1,513,424 | |||||||
| Diluted common stock share outstanding | 83,280,873 | 41,664,676 | 51,618,897 | |||||||
| Diluted loss per common stock share from continuing operations | $ | (0.50) | $ | (0.55) | $ | (1.28) | ||||
| Diluted loss per common stock share from discontinued operations | $ | (0.13) | $ | (0.06) | $ | (0.26) | ||||
| Diluted net loss per common stock share | $ | (0.63) | $ | (0.61) | $ | (1.54) | ||||
| Net loss per share data presented excludes from the calculation of diluted net loss the following potentially dilutive securities, as of December 31 of the applicable period, as they had an anti-dilutive impact: | ||||||||||
| Both vested and unvested options at $0.96-$5.50 exercise price, to purchase an equal number of shares of common stock of the Company | 10,407,157 | 8,942,929 | 10,407,157 | |||||||
| Unvested penny options to purchase an equal number of shares of common stock of the Company | — | 14,125 | — | |||||||
| Unvested RSUs to issue an equal number of shares of common stock of the Company | 2,161,402 | 3,125,000 | 2,161,402 | |||||||
| Common stock shares granted, but not yet vested | 30,046 | 92,903 | 30,046 | |||||||
| Warrants to purchase an equal number of shares of common stock of the Company | 18,261,031 | 3,787,628 | 15,202,513 | |||||||
| Total number of potentially dilutive instruments, excluded from the calculation of net loss per share: | 30,859,636 | 15,962,585 | 27,801,118 | |||||||
Long-lived assets, such as property and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is to be determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
(r) Commitments and Contingencies
Legal costs expected to be incurred in connection with a loss contingency are expensed as incurred.
value
:| F-11 | ||
(
presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance is effective for the Company beginning January 1, 2014 and should be applied prospectively with retroactive application permitted. The Company does not expect the adoption of ASU No. 2013-11 to have a material impact on its consolidated financial statements.
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Noteote 3 -— Cash and Cash Equivalents
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| U.S.$ thousands | U.S.$ thousands | |||||||
| Cash | 779 | 597 | ||||||
| Cash equivalents (money market funds) | — | 4,542 | ||||||
| In currency other than U.S. dollars | 411 | 268 | ||||||
| 1,190 | 5,407 | |||||||
| As of December 31, | |||||||
| 2013 | 2012 | ||||||
| Cash denominated in U.S. dollars | $ | 24,628 | $ | 34,386 | |||
| Money market funds denominated in U.S. dollars | 3,184 | 22,352 | |||||
| Cash in currency other than U.S. dollars | 5,774 | 222 | |||||
| $ | 33,586 | $ | 56,960 | ||||
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| U.S.$ thousands | U.S.$ thousands | |||||||
| Government institutions | 6 | 30 | ||||||
| Prepaid expenses and others | 181 | 138 | ||||||
| 187 | 168 | |||||||
Note 5 -— Property and Equipment
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| U.S.$ thousands | U.S.$ thousands | |||||||
| Computers, software and equipment | 475 | 452 | ||||||
| Furniture and fixtures | 42 | 38 | ||||||
| Leasehold improvements | 81 | 81 | ||||||
| 598 | 571 | |||||||
| Less: accumulated depreciation and amortization | (454 | ) | (393 | ) | ||||
| 144 | 178 | |||||||
As of December 31, 2011 and 2010, approximately $116 thousand and $138 thousand of the aggregate value of the Company's net book value of property and equipment was located in Israel, respectively.
| As of December 31, | |||||||
| 2013 | 2012 | ||||||
| Computers, software and equipment | $ | 171 | $ | 169 | |||
| Furniture and fixtures | 83 | 67 | |||||
| Leasehold improvements | 110 | 105 | |||||
| Less: accumulated depreciation and amortization | (134) | (47) | |||||
| $ | 230 | $ | 294 | ||||
Inception.
| F-12 | ||
| As of December 31, | Weighted average amortization period | |||||||
| 2013 | 2012 | (years) | ||||||
| Acquired technology (refer to Note 6) | $ | 10,133 | $ | 10,133 | 6.0 | |||
| Less: accumulated amortization | (2,451) | (763) | ||||||
| Less: impairment of technology (refer to Note 7) | (7,045) | — | ||||||
| Less: technology reclassified to assets held for sale (refer to Note 7) | (637) | — | ||||||
| Total | — | 9,370 | ||||||
| Patents | 28,213 | 26,694 | 8.3 | |||||
| Less: accumulated amortization | (5,465) | (2,020) | ||||||
| Total | 22,748 | 24,674 | ||||||
| $ | 22,748 | $ | 34,044 | |||||
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| U.S.$ thousands | U.S.$ thousands | |||||||
| Accounts payable and accrued expenses | 428 | 403 | ||||||
| Deferred revenue | — | 18 | ||||||
| 428 | 421 | |||||||
Note 7 - Accrued Severance Pay
Under Israeli law, the Subsidiary is requiredpatent applications. The portfolio encompasses a broad range of technologies relating to make severance payments to dismissed employees,telecom infrastructure, including communication management, data and employees leaving employment in certain other circumstances. All of the Subsidiary's employees signed agreements with the Subsidiary, limiting the Subsidiary's severance liability to actual deposits in the insurance policies, as per Section 14 of the Severance Payment Law of 1963.
signal transmission, mobility management, radio resources management and services. The recorded severance liability represents special contractual amounts to betotal consideration paid to our former Chief Executive Officer, upon termination of his respective employment agreement (see Note 17 for subsequent events). There are no statutory or agreed-upon severance arrangements with U.S. employees. Severance pay expense, net, for the current year amounted to $56 thousand (2010 - $168 thousand, cumulative from inception - $1,040 thousand).
Vringo, Inc. and Subsidiary
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 8 - Venture Loan
On September 24, 2008,portfolio was $22,000. In addition, the Company drew-down on a venture loancapitalized certain costs related to the acquisition of patents in the total amount of $5 million.$548. Under the terms of the purchase agreement, to the extent that the gross revenue generated by such portfolio exceeds $22,000, the Company is obligated to pay a royalty of35% of such excess. The Company has not recorded any amounts in respect of this contingent consideration, as both the amounts of future potential revenue, if any, and the timing of such revenue cannot be reliably estimated.
| Year ending December 31, | Amount | |||
| 2014 | $ | 3,832 | ||
| 2015 | 3,766 | |||
| 2016 | 3,045 | |||
| 2017 | 2,845 | |||
| 2018 | 2,822 | |||
| 2019 and thereafter | 6,438 | |||
| $ | 22,748 | |||
| F-13 | ||
| Allocation of purchase | ||||
| price | ||||
| Current assets, net of current liabilities | $ | 2,586 | ||
| Long-term deposit | 8 | |||
| Property and equipment | 124 | |||
| Acquired technology | 10,133 | |||
| Goodwill | 65,965 | |||
| Total assets acquired, net | 78,816 | |||
| Fair value of outstanding warrants granted by Legal Parent prior to the Merger, classified as a long-term derivative liability | (3,162) | |||
| Total liabilities assumed, net | (3,162) | |||
| 75,654 | ||||
| Measurement of consideration: | ||||
| Fair value of vested stock options granted to employees, management and consultants, classified as equity | 7,364 | |||
| Fair value of outstanding warrants granted by the Legal Parent prior to the Merger, classified as equity | 10,079 | |||
| Fair value of Vringo shares of common stock and vested $0.01 options granted to employees, management and consultants | 58,211 | |||
| Total estimated purchase price | $ | 75,654 | ||
the intangible assets adjusted as appropriate for the entity-specific factors including legal, regulatory, contractual, competitive economic or other factors that may limit the useful life of intangible assets. Goodwill recognized is not deductible for income tax purposes.
The Senior Lender Warrants were exercisable at any time before the tenth anniversary of the date they were issued. On the date of the LMA, the loan was recorded atestimated fair market value of $3.70 million, the warrants were recorded at $500 thousand, representing the difference between the fair market value of the new warrants and the fair market value of the previously issued warrants, and the difference between the carrying value of the loan and the fair market value of the loan and the warrants resulted in a loss on the extinguishment of debt in the amount of $180 thousand.Asset Group. The fair value of the loanAsset Group was assessedestimated using an interest rate of 12%, which represented market conditions forincome approach by developing a similar loan.
On June 8, 2011,discounted, future, net cash flows model. The following table presents the Company entered into a Settlement Agreement (the “Settlement Agreement”) with the lenderscarrying amounts of the venture loan (the "Lenders"), pursuant to which the Lenders agreed to accept less than the full amount owed to them by the Company. As partmajor classes of the Settlement Agreement, the Company immediately repaid $331 thousand, and placed an additional $1.051 million as collateral into a restricted account. In addition, the Company issued the Lenders 250,000 shares of its common stock, in exchange for the Senior Lender Warrants, which were cancelled. In July 2011, the Company repaid the outstanding $1.051 million balance of its venture loan, using the funds set asideassets from discontinued mobile social application in the restricted account. Company’s consolidated balance sheet as of December 31, 2013 (as of December 31, 2013, there were no liabilities classified as held for sale, as no liabilities were transferred to Infomedia upon Closing):
| F-14 | ||
| 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 | ||
Changes in the balance of the venture loan are as follows:
Note 9 - Convertible Notes
In July, 2011, the Company entered into agreements (“Securities Purchase Agreements”) with selected accredited investors (the “Purchasers”) to sell and issue Convertible Notes in the aggregate amount of $2.5 million. The Convertible Notes were to mature on January 1, 2012 (the “Maturity Date”) unless earlier converted, and bear interest at a rate of 1.25% per annum. Interest on the Convertible Notes is due on the Maturity Date unless earlier converted. The Company’s obligations under the Convertible Notes were secured by a security interest in all of the Company’s assets, including a pledge over the shares of its wholly-owned subsidiary, pursuant to the Security Purchase Agreements.
The Convertible Notes were convertible into shares of common stock at a conversion price equal to the lower of (i) the closing price of the Company’s common stock on the announcement date of the note offering, (ii) the closing price of the Company’s common stock on the closing date of the note offering and (iii) a ten percent (10%) discount to the price at which the securities are sold in the new stock offering. Consummation of a future stock offering, would automatically trigger conversion of the Convertible Notes and any accrued interest into the same securities and contain the same terms (other than the conversion price, which is set forth above) as in the subsequent stock offering.
On December 1, 2011, the Company raised an additional $0.85 million through the issuance of 817,303 additional shares of common stock in a private placement. Pursuant to the December 2011 financing, all Convertible Notes (and accrued interest) were converted into 2,671,026 shares of common stock.The conversion of the Convertible Notes triggered anti-dilution provisions in certain of our outstanding warrants (see Note 11).
As of the date of the issuance of the Convertible Notes, an amount of $89 thousand was initially allocated to additional paid-in capital in respect of the beneficial conversion feature, with a corresponding discount to the Convertible Notes, to be amortized as interest expense over the repayment period of the Convertible Notes. The December 2011 financing determined the actual conversion price at $0.94. As a result the amount allocated to discount and the beneficial conversion feature was adjusted to $1,269 thousand. The discount was fully amortized to interest expense at conversion; as a result, $1,269 thousand was recorded in the statement of operations, as interest expense.
| As of December 31, | Cumulative from Inception through December 31, | |||||||||
| 2013 | 2012 | 2013 | ||||||||
| Revenue | $ | 224 | $ | 269 | $ | 493 | ||||
| Operating expenses | (3,334) | (2,666) | (6,000) | |||||||
| Loss on impairment | (7,253) | — | (7,253) | |||||||
| Operating loss | (10,363) | (2,397) | (12,760) | |||||||
| Non-operating income (expense) | (65) | 20 | (45) | |||||||
| Loss before taxes on income | (10,428) | (2,377) | (12,805) | |||||||
| Income tax expense | (257) | (55) | (312) | |||||||
| Loss from discontinued operations | $ | (10,685) | $ | (2,432) | $ | (13,117) | ||||
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 10 -ote 8 — Fair Value Measurements
| Fair value measurement at reporting date using | ||||||||||||||
| Quoted prices in | ||||||||||||||
| active markets | Significant other | Significant | ||||||||||||
| December 31, | for identical | observable | unobservable | |||||||||||
| 2011 | assets (Level 1) | inputs (Level 2) | inputs (Level 3) | |||||||||||
| Description | U.S.$ thousands | |||||||||||||
| Liabilities | ||||||||||||||
| Derivative liabilities on account of warrants | 2,172 | — | — | 2,172 | ||||||||||
| Total liabilities | 2,172 | — | — | 2,172 | ||||||||||
| Fair value measurement at reporting date using | ||||||||||||||
| Quoted prices in | ||||||||||||||
| active markets | Significant other | Significant | ||||||||||||
| December 31, | for identical | observable | unobservable | |||||||||||
| 2010 | assets (Level 1) | inputs (Level 2) | inputs (Level 3) | |||||||||||
| Description | U.S.$ thousands | |||||||||||||
| Assets | ||||||||||||||
| Cash equivalents | 4,542 | 4,542 | — | — | ||||||||||
| Total assets | 4,542 | 4,542 | — | — | ||||||||||
| Liabilities | ||||||||||||||
| Derivative liability on account of warrants | 1,770 | — | — | 1,770 | ||||||||||
| Total liabilities | 1,770 | — | — | 1,770 | ||||||||||
2012:
| Fair value measurement at reporting date using | |||||||||||
| Quoted prices in | |||||||||||
| active markets | Significant other | Significant | |||||||||
| for identical | observable | unobservable | |||||||||
| Derivative liabilities on account of warrants | Balance | assets (Level 1) | inputs (Level 2) | inputs (Level 3) | |||||||
| As of December 31, 2013 | $ | 4,083 | — | — | $ | 4,083 | |||||
| As of December 31, 2012 | $ | 7,612 | — | — | $ | 7,612 | |||||
| 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 | |||||
value. The following table summarizes the changes in the Company'sCompany’s liabilities measured at fair value using significant unobservable inputs (Level 3) during the yearyears ended December 31, 2011:
| Level 3 | ||||||||||||
| Special Bridge | Conversion | |||||||||||
| Warrants | Warrants | Total | ||||||||||
| U.S.$ thousands | ||||||||||||
| Original allocated amount | 1,070 | — | 1,070 | |||||||||
| Additional allocated amount (upon IPO) | 88 | 1,564 | 1,652 | |||||||||
| Fair value adjustment included in statement of operations | (382 | ) | (570 | ) | (952 | ) | ||||||
| Balance at December 31, 2010 | 776 | 994 | 1,770 | |||||||||
| Fair value adjustment included in statement of operations | 511 | (109 | ) | 402 | ||||||||
| Balance at December 31, 2011 | 1,287 | 885 | 2,172 | |||||||||
| Level 3 | ||||
| Balance at January 1, 2012 | $ | — | ||
| Derivative warrants issued to I/P’s shareholders in connection with the Merger, July 19, 2012 | 21,954 | |||
| Fair value of derivative warrants issued by Legal Parent (refer to Note 9) | 3,162 | |||
| Fair value adjustment, prior to exercise of warrants, included in statement of operations | 156 | |||
| Exercise of derivative warrants | (10,657) | |||
| Fair value adjustment at end of period, included in statement of operations | (7,003) | |||
| Balance at December 31, 2012 | 7,612 | |||
| Net impact of removal of down-round clause in Series 1 Warrant (refer to Note 9) | (2,300) | |||
| Fair value adjustment, prior to exercise of warrants, included in statement of operations | 9 | |||
| Exercise of derivative warrants | (808) | |||
| Fair value adjustment at end of period, included in statement of operations | (430) | |||
| Balance at December 31, 2013 | $ | 4,083 | ||
| F-15 | ||
Description | Valuation technique | Unobservable inputs | Range | |||||
Special Bridge Warrants, Conversion Warrants,Preferential Reload Warrants and the outstanding derivative Series 1 Warrants | Black-Scholes-Merton and the Monte-Carlo models | Volatility | 46.85% – 52.63% | |||||
| Risk free interest rate | 0.16% – 1.11% | |||||||
| Expected term, in years | 0.99 – 3.55 | |||||||
| Dividend yield | 0% | |||||||
| Probability and timing of down-round triggering event | 5% occurrence in December 2014 |
Note 11 - Stockholders' Equity (Deficit)
(a) Common Stock
In June 2010,
On December 1, 2011, the Company completed an additional financing round, in which it issued 817,303 shares of common stock. In connection with the financing round the Convertible Notes were converted into equity (see Note 9), and 2,671,026Company’s shares of common stock, were issued toan increase in the Convertible Notes holders. In addition, pursuant to the commencementremaining term of the above mentioned financing round,warrant, or an increase of a probability of a down-round triggering event would each result in a directionally similar change in the Company issued 208,159estimated fair value of the Company’s warrants, and thus an increase in the associated liability and vice-versa. An increase in the risk-free interest rate or a decrease in the positive differential between the warrant’s exercise price and the market price of the Company’s shares of common stock would result in a decrease in the estimated fair value measurement of the warrants and thus a decrease in the associated liability. The Company has not, nor plans to, onedeclare dividends on its common stock, and thus, there is no change in the estimated fair value of its consultants.
Subsequentthe warrants due to the dividend assumption.
Merger.
| Shares of common stock | ||||
| Balance as of | June 8, 2011 (Inception) | — | ||
| Issuance of | ||||
| Balance as of December 31, 2011 | 16,972,977 | |||
| Conversion of Series A Preferred Convertible Preferred stock, classified as mezzanine equity | 890,192 | |||
| Grant of shares to consultants | 265,000 | |||
| Legal Parent’s shares of common stock, recorded upon Merger | 15,206,118 | |||
| Exercise of 250,000 warrants, issued and exercised prior to the Merger | 754,400 | |||
| Post-Merger exercise of warrants | 6,832,150 | |||
| Exercise of stock options and vesting of RSUs | 726,346 | |||
| Conversion of Series A Preferred Convertible Preferred stock, classified as equity | 20,136,445 | |||
| Issuance of shares of common stock in connection with $31,148 received in a private financing round, net of issuance cost of $52 | 9,600,000 | |||
| Issuance of shares of common stock in connection with $44,962 received in a private financing round, net of issuance cost of $39 | 10,344,998 | |||
| Shares issued for acquisition of patents, refer to Note 5 | 160,600 | |||
| Balance as of December 31, 2012 | 81,889,226 | |||
| Exercise of warrants | 435,783 | |||
| Exercise of stock options and vesting of RSUs | 2,177,644 | |||
| Balance as of December 31, 2013 | 84,502,653 | |||
On May 8, 2006,Equity Incentive Plan
On July 30, 2007, the Company issued 765,4669,100,000 previously authorized but unissued shares of series B convertible preferred stock (on a post-split basis) which was categorized as temporary equity. Upon the consummation of the IPO, the Series B convertible preferred stock previously classified as temporary equity was granted a 33% stock dividend, and then exchanged for shares of common stock and recorded as such (see table above).
Vringo, Inc. and Subsidiary
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 11 - Stockholders' Equity (Deficit) (cont'd)
(c) Common stock reserved for issuance upon exercise of stock options
On October 30, 2006, the Company adoptedunder the 2006 Stock Option Plan pursuant to which 880 thousandand (ii) any shares of common stock were reserved for issuance. On July 30, 2007,that are represented by awards granted under the Company amended and restated the original plan in its entirety by adopting Amendment No. 1 toLegal Parent’s 2006 Stock Option Plan (the "Stock Option Plan"), which increased the numberthat are forfeited, expired or are cancelled without delivery of shares of common stock reserved for issuance to 2.79 million. In January 2010,or which result in the numberforfeiture of shares of common stock reserved for issuance uponback to the exerciseCompany, or the equivalent of optionssuch number of shares after the administrator, in its sole discretion, has interpreted the Stock Option Plan was increased to 14.14 million.
(d) Stock options
The Stock Option Plan provides for grantseffect of any stock split, stock dividend, combination, recapitalization or sales of common stock options to employees, directors and consultants. Options grantedsimilar transaction in connectionaccordance with the Company's Stock Option Plan are exercisable for six years from the grant date. Options are generally forfeited, if not exercised, within ninety days of termination of employment or service2012 Plan; provided, however, that no more than3,200,000 shares shall be added to the Company.
For the years ended December 31, 2011 and 2010 the Company recorded compensation expense of $1,769 thousand and $912 thousand, respectively. Cumulative from inception the Company has recorded compensation expense of $3,023 thousand, in respect of stock options granted.
On January 31, 2011, the Company's Board of Directors (the "Board") approved the granting of 216 thousand options to management, employees and consultants at an exercise price of $0.01 per share. These options will vest yearly over three and four year periods (according to the applicable schedule of each optionee). The Board also approved the granting of 264 thousand options at an exercise price of $5.50 to its management, employees and consultants. These options will vest over three and four years (according to the applicable schedule of each optionee).
The fair value of options granted in 2011 to employees and directors at an exercise price of $0.01 was calculated using the Black-Scholes-Merton model, which takes into consideration the share price at the date of grant, the exercise price of the option, the expected life of the option, risk free interest rates, expected dividend, and the expected volatility. The following assumptions were used: an expected life of 4-4.25 years, a risk-free interest rate of 1.44%-1.55% and an expected volatility of 52.21%-47.89% and no dividend yield. The fair value of the common stock used for this calculation was $1.68.
The fair value of options, granted in 2011, to employees and directors at an exercise price of $5.50 was calculated using the Lattice model, which takes into consideration the share price at the date of grant, the exercise price of the option, the expected life of the option, risk free interest rates, expected dividend, and the expected volatility. The Company uses the Lattice option pricing model for the valuation of options to employees and directors that are not plain vanilla. The following assumptions were used: an expected life of 6 years, a risk-free interest rate of 2.38% and an expected volatility of 56.41% and no dividend yield. The fair value of the common stock used for this calculation was $1.68.
In 2011, the fair value of options granted to consultants was calculated using the Black-Scholes-Merton model. The following assumptions were used: expected life of 2-6 years, a risk free interest rate of 0.29%-2.38% and an expected volatility of 45.71%-59.69% and no dividend yield. The fair value of the common stock used for this calculation was $0.99-$1.70.
2012 Plan. As of December 31, 2011, there2013,4,509,796 shares were approximately 11.5 million shares of common stock available for future grants.
On March 17, 2010,grants under the Board approved2012 Plan.
| F-16 | ||
The fair value of the options to employees and directors granted in 2010 was calculated using the Lattice model which takes into consideration the share price at the date of grant, the exercise price of the option, the expected life of the option, risk free interest rates, expected dividend, and the expected volatility. The Company uses the Lattice option pricing model for the valuation of options to employees and directors that are not plain vanilla. The following assumptions were used: an expected life of 5.2-6 years, a risk-free interest rate of 2.11%-2.83% and an expected volatility of 56.11%-64.3% and no dividend yield. The fair value of the common stock used for this calculation was $2.49-$2.62. The fair value of options to non-employees is calculated using the following assumptions: expected life of 3-5.5 years, a risk free interest rate of 0.71%-2.64% and an expected volatility of 46%-64% and no dividend yield.
In January and February 2012 the Board of Directors approved the granting of 70,000, fully vested options to management and consultants at an exercise price of $0.01 per share. The Board also approved the granting of 734,500 options at an exercise price of $0.96 to its management, employees and consultants. These options will vest over four years (according to the applicable schedule of each optionee). The fair value of options granted in January and February 2012 was calculated using the Black-Scholes-Merton model. The following assumptions were used: an expected life of 4.25-6 years, a risk-free interest rate of 0.71%-1.19% and an expected volatility of 67.26%-75.78% and no dividend yield. The fair value of the common stock used for this calculation was $0.96-$1.21 and no dividend yield. The Company expects that the total value of the options granted will be approximately $467 thousand.
| Title | Grant date | No. of options | Exercise price | FMV at grant date | Vesting terms | Assumptions used in Black-Scholes option pricing model | |||||||||
| Management, Directors and Employees * | January-December 2013 | 3,365,833 | $2.77-$3.24 | $2.77-$3.24 | Over 0.67-3 years | Volatility Risk free interest rate Expected term, in years Dividend yield | 59.26%-70.51% 0.85%-2.06% 5.71-10.00 0.00% | ||||||||
| Consultant | January-June 2013 | 132,500 | $2.90-$3.30 | $2.90-$3.30 | Over 0-2.5 years | Volatility Risk free interest rate Remaining expected term, in years Dividend yield | 61.80%-63.87% 2.16%-2.95% 9-9.50 0.00% | ||||||||
Vringo, Inc. and Subsidiary
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 11 - Stockholders' Equity (Deficit) (cont'd)
(e) Stock option activity
| * | 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. |
| Title | Grant date | No. of RSUs | Exercise price | Share price at grant date | Vesting terms | |||||||
| Management, directors and employees | February-May 2013 | 656,250 | — | $2.95-$3.18 | Over 0.67-3 years | |||||||
| Consultants | January-October 2013 | 66,000 | — | $2.96-$3.26 | Over 0.75-1.20 years |
| Weighted | ||||||||||||
| No. of shares | No. of shares | average exercise price | ||||||||||
| Employees | Non-Employees | U.S.$ | ||||||||||
| Outstanding at January 1, 2011 | 2,378,908 | 128,000 | $ | 2.76 | ||||||||
| Granted | 496,500 | 73,000 | $ | 3.04 | ||||||||
| Exercised | (302,413 | ) | (39,500 | ) | $ | 0.01 | ||||||
| Expired | (169,759 | ) | (18,000 | ) | $ | 3.46 | ||||||
| Forfeited | (318,336 | ) | — | $ | 3.23 | |||||||
| Outstanding at December 31, 2011 | 2,084,900 | 143,500 | ||||||||||
| Exercisable at December 31, 2011 | 690,121 | 50,074 | ||||||||||
The following table summarizes information about stock option activity for the year ended December 31, 2010:
| Weighted | ||||||||||||
| No. of shares | No. of shares | average exercise price | ||||||||||
| Employees | Non-Employees | U.S.$ | ||||||||||
| Outstanding at January 1, 2010 | 237,677 | 45,250 | $ | 2.58 | ||||||||
| Granted | 2,708,000 | 104,000 | $ | 2.74 | ||||||||
| Exercised | (60,517 | ) | — | $ | 0.21 | |||||||
| Forfeited | (506,252 | ) | (21,250 | ) | $ | 2.87 | ||||||
| Outstanding at December 31, 2010 | 2,378,908 | 128,000 | ||||||||||
| Exercisable at December 31, 2010 | 128,804 | 32,150 | ||||||||||
For cumulative period ended December 31, 2011, the Company granted a total of 3,595 thousand stock options to its employees, directors and consultants at an average exercise price of $2.82. For the cumulative period ended December 31, 2011, 402 thousand stock options were exercised.
2013:
| RSUs | Options | ||||||||||||||||
| No. of RSUs | Weighted average grant date fair value | No. of options | Weighted average exercise price | Exercise price range | Weighted average grant date fair value | ||||||||||||
| Outstanding at January 1, 2013 | 3,125,000 | $ | 3.72 | 9,149,105 | $ | 3.33 | $0.01 – $5.50 | $ | 2.57 | ||||||||
| Granted | 722,250 | $ | 3.15 | 3,498,333 | $ | 3.12 | $2.77 – $3.30 | $ | 2.16 | ||||||||
| Vested/Exercised | (1,452,721) | $ | 3.60 | (724,923) | $ | 1.34 | $0.01 – $3.18 | $ | 2.97 | ||||||||
| Expired | — | — | (982,534) | $ | 5.02 | $0.01 – $5.50 | $ | 1.59 | |||||||||
| Forfeited | (233,126) | $ | 3.71 | (482,822) | $ | 3.51 | $0.01 – $5.50 | $ | 2.44 | ||||||||
| Outstanding at December 31, 2013 | 2,161,403 | $ | 3.61 | 10,457,159 | $ | 3.23 | $0.01 – $5.50 | $ | 2.50 | ||||||||
| Exercisable at December 31, 2013 | — | — | 5,863,479 | $ | 3.09 | $0.01 – $5.50 | |||||||||||
| Non vested options: | Non vested RSUs: | ||||||||||
| No. of options | Weighted average grant date fair value | No. of RSUs | Weighted average grant date fair value | ||||||||
| Balance at January 1, 2013 | 4,902,989 | $ | 2.50 | 3,125,000 | $ | 3.72 | |||||
| Granted | 3,498,333 | $ | 2.16 | 722,250 | $ | 3.15 | |||||
| Vested | (3,324,820) | $ | 2.35 | (1,452,721) | $ | 3.60 | |||||
| Forfeited | (482,822) | $ | 2.44 | (233,126) | $ | 3.71 | |||||
| Balance at December 31, 2013 | 4,593,680 | $ | 2.36 | 2,161,403 | $ | 3.61 | |||||
| Options outstanding | Options exercisable | |||||||||||||||||||||
| Weighted | Weighted | |||||||||||||||||||||
| average | Weighted | average | Weighted | |||||||||||||||||||
| remaining | average | remaining | average | |||||||||||||||||||
| Number | contractual | exercise | Number | contractual | exercise | |||||||||||||||||
| Outstanding | life (years) | price | Outstanding | life (years) | price | |||||||||||||||||
| 1,218,563 | 4.38 | $ | 5.5 | 472,355 | 4.35 | $ | 5.5 | |||||||||||||||
| 40,001 | 2.28 | $ | 4.5 | 35,897 | 2.26 | $ | 4.5 | |||||||||||||||
| 25,000 | 1.67 | $ | 3.0 | 25,000 | 1.67 | $ | 3.0 | |||||||||||||||
| 56,584 | 2.08 | $ | 1.5 | 48,274 | 1.84 | $ | 1.5 | |||||||||||||||
| 888,252 | 4.37 | $ | 0.01 | 158,669 | 4.36 | $ | 0.01 | |||||||||||||||
| 2,228,400 | 740,195 | |||||||||||||||||||||
2013:
| Exercise price | No. options outstanding | No. options exercisable | Weighted average remaining contractual life (years) | |||||
| $ | 0.01-1.00 | 381,679 | 381,679 | 3.72 | ||||
| $ | 1.01-2.00 | 1,262,232 | 1,220,566 | 4.19 | ||||
| $ | 2.01-3.00 | 655,000 | 161,250 | 8.53 | ||||
| $ | 3.01-4.00 | 7,749,582 | 3,691,317 | 8.67 | ||||
| $ | 4.01-5.00 | 11,166 | 11,167 | 0.22 | ||||
| $ | 5.04-6.00 | 397,500 | 397,500 | 2.56 | ||||
| 10,457,159 | 5,863,479 | |||||||
| No. of warrants | Weighted average exercise price | Exercise price range | |||||||
| Outstanding at January 1, 2013 | 18,863,261 | $ | 3.11 | $0.94 – $5.06 | |||||
| Exercised during the year | (435,783) | $ | 1.36 | $0.94 – $1.76 | |||||
| Outstanding at December 31, 2013 | 18,427,478 | $ | 3.15 | $0.94 – $5.06 | |||||
| F-17 | ||
Series 1 Warrants and(a Development Stage Company)1,326,060
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Series 2 Warrants were exercised.
Note 11 - Stockholders' Equity (Deficit) (cont'd)
The following table represents respective annual amortization of unrecognized share based compensation expense:
| Year ending December 31, | U.S.$ thousands | |||||
| 2012 | 1,015 | |||||
| 2013 | 679 | |||||
| 2014 | 158 | |||||
| 1,852 | ||||||
(f)Warrants
Upon the consummationLegal Parent’s outstanding warrants included: (i) 148,390 derivative warrants, at an exercise price of the IPO, the$0.94 per share, with a remaining contractual term of2.44 years (the “Special Bridge Notes were automatically converted into 864,332 sharesWarrants”); (ii) 101,445 derivative warrants, at an exercise price of common stock$0.94 per share, with a remaining contractual term of2.44 years (the “Conversion Warrants”); (iii) 887,330 derivative warrants, at an exercise price of $1.76 per share, with a remaining contractual term of4.55 years (the “Preferential Reload Warrants”); and 1,728,664(iv) 814,408 warrants, (the "Conversion Warrants"). The Conversion Warrants granted to the Bridge Note holders were classified as a derivative long-term liability. Also see Note 10.
On December 1, 2011, the Company entered into Subscription Agreements with certain accredited investors pursuant to which the Company issued 817,303 sharesequity, at an exercise price of common stock at $1.04$1.76 per share, with a 20% discount toremaining contractual term of4.55 years (the “non-Preferential Reload Warrants”). During both the closing price of the Company’s common stock on November 30, 2011. Upon the closing of the Financing, the Company’s outstanding Convertible Notes in the aggregate principal amount of $2.5 million automatically converted into2,671,026shares of common stock at $0.94 per share, a 10% discount to the purchase price in the Financing. The foregoing issuances triggered down-roundyear ended December 31, 2013, and anti-dilution provisions in outstanding Special Bridge and Conversion Warrants. As a result, the number of shares issuable to the holders of thefrom Inception through December 31, 2013,127,192 Special Bridge Warrants was adjusted to 2,528,615and86,954 Conversion Warrants were exercised. During the year ended December 31, 2013,10,000 non-Preferential Reload Warrants were exercised. From Inception and through December 31, 2013,179,520 non-Preferential Reload Warrants and726,721 Preferential Reload Warrants were exercised.
per share. As of December 31, 2011, the Special Bridge Warrants were revalued using the Black-Scholes-Merton and the Monte-Carlo models. As the terms2013, all of these warrants include a special down-round protection clause, i.e. in a new issuance of common stock at a lower price than the current exercise price, the current exercise price will be lowered to the new issuance pricewere outstanding and the number of warrants granted will increase so that the total exercise amount remainsclassified as under the original terms (approximately $2.4 million). We estimate 50% probability of such protection being activated in April, 2012. We have estimated the value of the down-round protection using a Monte-Carlo simulation. The following assumptions were used: 70.2% expected volatility, a risk-free interest rate of 0.38%, estimated life of 3.00 years and no dividend yield. The fair value of the common stock was $0.99. Also see Note 10.
At December 31, 2011, the Conversionequity instruments.
Subsequent to the balance sheet date, between February 6 and February 14,
Had we made different assumptions about the fair value of the stock price (before it was publicly traded), risk-free interest rate, volatility, the impact of the down-round provision, or the estimated time that the abovementioned warrants will be outstanding before they are ultimately exercised, the recorded expense, our net loss and net loss per share amounts could have been significantly different.
Senior Lenders Warrants
As discussed in Note 8, the senior lenders of the Company's venture loan received Senior Lenders Warrants to purchase 250,000 shares of common stock, at an exercise price of $2.75 per share, in exchange for granting the Company a six month moratorium on principal payments and an additional year for the repayment of the venture loan. The Senior Lender Warrants were exercisable at any time before the tenth anniversary of the date they were issued. On June 8, 2011, the Company entered into a Settlement Agreement with the lenders of the venture loan, pursuant to which the Lenders agreed to accept less than the full amount owed to them by the Company. As part of the Settlement Agreement the Company issued the Lenders 250,000 shares of its common stock, in exchange for 250,000 Senior Lender Warrants, which were cancelled.
Vringo, Inc. and Subsidiary
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 11 - Stockholders' Equity (Deficit) (cont'd)
Lead Investor Warrants
The lead investors of the Bridge Financing received warrants ("Lead Investor Warrants") to purchase 482,346 shares of common stock at $0.01 exercise price per share. The Lead Investor Warrants (i) were exercisable 65 days subsequent to the consummation of the IPO, (ii) expire four years after issuance and (iii) Were subject to a lock-up agreement for six months subsequent to exercise. Upon the consummation of the IPO, Lead Investor Warrants were recorded at their fair value using the Black-Scholes-Merton model, as a result, an additional interest expense in the total amount of $1,342 thousand, was recognized. The assumptions used in this calculation were 52.6% expected volatility, risk-free interest rate of 1.68%, estimated life of 4 years and no dividend yield. The fair value of the common stock was estimated at $2.79. In October 2010, 241,173 of the Lead Investor Warrants were exercised, and in February 2011, the remaining 241,173 Lead Investor Warrants were exercised.
Placement Agent Warrants
For their role in helping to facilitate the Bridge Financing, the Placement Agent for the offering received warrants equal to 7% of the total amount of securities sold in the Bridge Financing ("Placement Agent Warrants"). Based on the amount raised, the Company issued 55,664 Placement Agent Warrants. The Placement Agent Warrants were non-exercisable for three months after the date of the closing of the Bridge Financing and subsequently exercisable until five years after the closing of the Bridge Financing. The Placement Agent Warrants were exercisable at $3.795 per share. The December 2011 financingtriggered the anti-dilution provision in the Placement Agent Warrants, resulting in a reduction of the exercise price to $0.94.On February 2,24, 2012, the Placement Agent Warrants were exercised.
IPO warrants
In June 2010, upon completionholders exercised in cash 3,721,062 of the IPO, 2,392,000 units, each containing one share of common stock and two warrants, at an issue price of $4.60 per unit, were issued. Each warrant in the IPO unit is exercisable for five years after the IPO at an exercise price of $5.06. On July 27, 2010, the unit was separated into its components and the shares and warrants began to trade separately. Upon separation of the units into shares and warrants, the units ceased trading. As of December 31, 2011, all of these warrants are outstanding.
Charitable warrants
Upon the consummation of the IPO, the Company recognized a charitable donation of a warrant to purchase 20,000 shares of common stock at an exercise price of $1.50 granted in 2006. The fair value of the donation was calculated using the Black-Scholes-Merton model with an expected life of 6.33 years, a risk-free interest rate of 2.7%, an expected volatility of 56.1% and no dividend yield. The expenses for these options in the amount of $37 thousand were recorded upon the consummation of the IPO. During September 2010, the foregoing warrant was exercised on a cashless basis, resulting in the issuance by the Company of 11,044 shares of common stock. In addition, the Company granted warrants to purchase 40 thousand shares of common stock as a charitable donation. 20 thousand of these warrants were granted at an exercise price of $5.50 per share and the remaining 20 thousand at an exercise price of $0.01 per share. The total fair value of approximately $43 thousand was calculated using the Black-Scholes-Merton model, using the following assumptions: stock price of $1.68, expected life of 6 years, risk-free interest rate of 2.38%, expected volatility of 56.41% and no dividend yield. The total fair value of the grant was recorded as an additional share-based payment expense in year ended December 31, 2011. In April 2011, the Company issued 19,862 shares of common stock upon exercise of 20 thousand charitabletheir outstanding warrants, with an exercise price of $0.01$1.76 per share.
In exchange, the Company granted such warrant holders unregistered warrants of the Company to purchase an aggregate of3,000,000 shares of the Company’s common stock, par value $0.01 per share, at an exercise price of $5.06 per share (the “October 2012 Warrants”). The contractual life of these warrants is2.66 years and because such warrants do not bear any down-round protection clauses they were classified as equity instruments. October 2012 Warrants were valued using the following assumptions: volatility:68.1%, share price: $3.50-$3.77, risk free interest rate:0.724% and dividend yield:0%. The fair value of warrants issued in exchange for the exercise of the Company’s derivative warrants was accounted for as an inducement, therefore an amount of $2,883 was recorded as a non-operating expense.
As of December 31, 2013, all October 2012 warrants were outstanding.| For the year ended December 31, | Cumulative from inception to December 31, | |||||||||||
| 2011 | 2010 | 2011 | ||||||||||
| U.S.$ thousands | U.S.$ thousands | U.S.$ thousands | ||||||||||
| Information on sales by product exceeding 10% of Revenues: | ||||||||||||
| Video Ringtones | 514 | 209 | 743 | |||||||||
| Development Projects | 184 | — | 184 | |||||||||
| Other | 20 | 2 | 22 | |||||||||
| 718 | 211 | 949 | ||||||||||
| Revenues from single customers exceeding 10% of Revenues: | ||||||||||||
| Customer A | 312 | 95 | 407 | |||||||||
| Customer B | 90 | 54 | 144 | |||||||||
| Customer C | 110 | — | 110 | |||||||||
| Other | 206 | 62 | 288 | |||||||||
| 718 | 211 | 949 | ||||||||||
| Information on sales by geographic distribution: | ||||||||||||
| South East Asia | 384 | 105 | 488 | |||||||||
| Middle East | 175 | 54 | 229 | |||||||||
| Europe | 82 | — | 82 | |||||||||
| Others | 77 | 52 | 150 | |||||||||
| 718 | 211 | 949 | ||||||||||
(% of any future amount Google pays for its use of the patents acquired from Lycos. The parties also agreed to a Development Stage Company)limitation on Microsoft Corporation's total liability, which would not impact the Company unless the amounts received from Google substantially exceed the judgment previously awarded. In addition, the parties also entered into a patent assignment agreement, pursuant to which Microsoft Corporation assigned six patents to I/P Engine. The assigned patents relate to telecommunications, data management, and other technology areas.
Note 13- Interest and Amortization of Debt Discount Expense
| For the year ended December 31, | Cumulative from inception to December 31, | |||||||||||
| 2011 | 2010 | 2011 | ||||||||||
| U.S.$ thousands | U.S.$ thousands | U.S.$ thousands | ||||||||||
| Interest and discount amortization expense from venture loan | (245 | ) | (604 | ) | (1,614 | ) | ||||||
| Interest expense from Bridge Notes | — | (161 | ) | (170 | ) | |||||||
| Lead Investor warrants recorded at fair value | — | (1,342 | ) | (1,342 | ) | |||||||
| Amortization of discount of Bridge Notes | — | (1,070 | ) | (1,070 | ) | |||||||
| Beneficial conversion feature in connection with Bridge Notes | — | (1,127 | ) | (1,127 | ) | |||||||
| Interest expense from Series B convertible loan | — | — | (54 | ) | ||||||||
| Interest expense from Convertible Notes | (11 | ) | — | (11 | ) | |||||||
| Amortization of discount of Convertible Notes (beneficial conversion feature) | (1,269 | ) | — | (1,269 | ) | |||||||
| (1,525 | ) | (4,304 | ) | (6,657 | ) | |||||||
Note 14 -11 — Income Taxes
The Components
| For the year ended December 31, | Cumulative from inception to December 31 | |||||||||||
| 2011 | 2010 | 2011 | ||||||||||
| U.S.$ thousands | U.S.$ thousands | U.S.$ thousands | ||||||||||
| U.S. | (7,605 | ) | (10,151 | ) | (38,629 | ) | ||||||
| Non-U.S. | 216 | 244 | 1,202 | |||||||||
| (7,389 | ) | (9,907 | ) | (37,427 | ) | |||||||
the following:
| For the year ended December 31, | Cumulative from Inception through | |||||||||
| 2013 | 2012 | December 31, 2013 | ||||||||
| U.S. | $ | (41,204) | $ | (17,673) | $ | (61,631) | ||||
| Non-U.S. | (544) | (736) | (1,280) | |||||||
| $ | (41,748) | $ | (18,409) | $ | (62,911) | |||||
| For the year ended December 31, | Cumulative from inception to December 31 | |||||||||||
| 2011 | 2010 | 2011 | ||||||||||
| U.S.$ thousands | U.S.$ thousands | U.S.$ thousands | ||||||||||
| U.S. | ||||||||||||
| Current | (43 | ) | — | (43 | ) | |||||||
| Deferred | — | — | — | |||||||||
| Non-U.S | ||||||||||||
| Current | — | 98 | 2 | |||||||||
| Deferred | (47 | ) | (133 | ) | (78 | ) | ||||||
| (90 | ) | (35 | ) | (119 | ) | |||||||
| For the year ended December 31, | Cumulative from Inception through | |||||||||
| 2013 | 2012 | December 31, 2013 | ||||||||
| U.S. (continuing operations) | ||||||||||
| Current | $ | — | $ | — | $ | — | ||||
| Deferred | — | — | — | |||||||
| — | — | — | ||||||||
| Non-U.S (discontinued operations) | ||||||||||
| Current | (245) | (112) | (357) | |||||||
| Deferred | (12) | 57 | 45 | |||||||
| $ | (257) | $ | (55) | $ | (312) | |||||
| F-18 | ||
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 14 - Income Taxes (cont'd)
Income tax benefit (expense) for the years ended December 31, 2011 and 2010, and for the cumulative period from inception until December 31, 2011,expense attributable to continuing operations differed from the amounts computed by applying the U.S. federal income tax rateof 35% (34% in 2010)35% toloss from continuing operations before taxes on income taxes, as a result of the following:
| For the year ended December 31, | Cumulative from inception to December 31 | |||||||||||
| 2011 | 2010 | 2011 | ||||||||||
| U.S.$ thousands | U.S.$ thousands | U.S.$ thousands | ||||||||||
| Loss before income taxes | (7,389 | ) | (9,907 | ) | (37,427 | ) | ||||||
| Tax rate | 35 | % | 34 | % | 35 | % | ||||||
| Computed "expected" tax benefit | 2,586 | 3,368 | 13,099 | |||||||||
| Foreign tax rate differential | 43 | 22 | 133 | |||||||||
| Tax benefit of "Beneficiary Enterprise" tax holiday | — | — | 57 | |||||||||
| Decrease in tax expenses for prior year | — | 220 | 220 | |||||||||
| Change in valuation allowance | (2,319 | ) | (2,141 | ) | (11,271 | ) | ||||||
| Non-deductible expenses | (344 | ) | (1,314 | ) | (2,163 | ) | ||||||
| Other items | (56 | ) | (190 | ) | (194 | ) | ||||||
| Income tax expense | (90 | ) | (35 | ) | (119 | ) | ||||||
| For the year ended December 31, 2012 | Cumulative from Inception through December 31, | |||||||||||
| 2013 | 2012 | 2013 | ||||||||||
| Loss from continuing operations before taxes on income | $ | (41,748) | $ | (18,409) | $ | (62,911) | ||||||
| Tax rate | 35 | % | 35 | % | 35 | % | ||||||
| Computed "expected" tax benefit | 14,612 | 6,443 | 22,019 | |||||||||
| Foreign tax rate differential | (122) | (147) | (269) | |||||||||
| Change in valuation allowance | (17,085) | (7,461) | (25,777) | |||||||||
| Nondeductible expenses | (125) | (15) | (140) | |||||||||
| State and local income tax, net of federal income tax expense | 2,714 | 1,197 | 3,911 | |||||||||
| Other items | 6 | (17) | 256 | |||||||||
| Income tax expense attributable to continuing operations | $ | — | $ | — | $ | — | ||||||
| For the year ended December 31, | |||||||
| 2013 | 2012 | ||||||
| Deferred tax assets: | |||||||
| Acquired patents (see also Note 5) | $ | — | $ | 446 | |||
| Liability for accrued employee vacation and severance pay | 7 | 19 | |||||
| Stock-based compensation | 8,104 | 4,590 | |||||
| Net operating loss carryforwards | 36,605 | 23,127 | |||||
| Total gross deferred tax assets | 44,716 | 28,182 | |||||
| Less: | |||||||
| Valuation allowance | (44,445) | (24,274) | |||||
| Deferred tax liability for acquired technology (refer to Note 8): | (264) | (3,889) | |||||
| Net deferred tax assets | $ | 7 | $ | 19 | |||
| Amount | ||||
| As of Inception | $ | — | ||
| Charged to cost and expenses | 1,231 | |||
| As of December 31, 2011 | 1,231 | |||
| Charged to cost and expenses | 12,240 | |||
| Acquisitions * | 10,803 | |||
| As of December 31, 2012 | 24,274 | |||
| Charged to cost and expenses – continuing operations | 17,085 | |||
| Charged to cost and expenses – discontinued operations | 3,086 | |||
| As of December 31, 2013 | $ | 44,445 | ||
| F-19 | ||
| For the year ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| U.S.$ thousands | U.S.$ thousands | |||||||
| Deferred tax assets: | ||||||||
| Liability for accrued employee vacation pay | 13 | 15 | ||||||
| Liability for accrued severance pay | 25 | 53 | ||||||
| Net operating loss carryforwards | 11,647 | 8,945 | ||||||
| Total gross deferred tax assets | 11,685 | 9,013 | ||||||
| Less valuation allowance | (11,628 | ) | (8,929 | ) | ||||
| Total net deferred tax assets | 57 | 84 | ||||||
| Deferred tax liability: | ||||||||
| Net assets deductible for tax purposes on cash basis | (99 | ) | (107 | ) | ||||
| Deferred tax assets (liabilities), net | (42 | ) | (23 | ) | ||||
Subsidiary tax benefits:
On July 14, 2009, the Knesset (Israel’s parliament) passed the Economic Efficiency Law (Legislation Amendments for Implementation of the 20092013 and 2010 Economic Plan) - 2009, which provided, inter-alia, an additional gradual reduction in the regular company tax rate to 18% as from the 2016 tax year. In accordance with the aforementioned amendments, the regular company tax rates applicable as from the 2009 tax year are as follows: in the 2009 tax year- 26%, in the 2010 tax year - 25%, in the 2011 tax year - 24%, in the 2012 tax year - 23%, in the 2013 tax year - 22%, in the 2014 tax year - 21%, in the 2015 tax year - 20% and as from the 2016 tax year the regular company tax rate will be 18%. On December 5, 2011, the Knesset approved the Law to Change the Tax Burden (Legislative Amendments) - 2011. According to the law the tax reduction that was provided in the Economic Efficiency Law, as aforementioned, will be cancelled and the company tax rate will be 25% as from 2012. The aforementioned had noCompany does not expect to record any additional material impact onprovisions for unrecognized tax benefits within the Company's financial position or results of operations, since the Subsidiary is a Beneficiary Enterprise, as explained below.
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 14- Income Taxes (cont'd)
The SubsidiaryIsraeli subsidiary has qualified as a "Beneficiary Enterprise" under the 2005 amendment to the Israeli Law for the Encouragement of Capital Investments, 1959 (the "Investment Law"). As a Beneficiary Enterprise, the SubsidiaryIsraeli subsidiary is entitled to receive future tax benefits which are limited to a period of seven years. The year in which a company elects to commence its tax benefits is designated as the year of election ("Year of Election"). The SubsidiaryIsraeli subsidiary has elected 2007 as its Year of Election and has received a two year tax holiday for profits accumulated in the years 2007-2008 and a reduced tax rate of 25% for2007-2008. In 2011, the Israeli subsidiary irrevocably adopted an amendment to the Investment law, according to which the following five years.
In January 2011, new legislation amending the Investment Law was enacted. Under the new legislation, a uniform rate of corporate tax would apply to all qualified income of certain industrial companies, as opposed to the current law's incentives that are limited to income from a "Benefited Enterprise" during their benefits period. According to the amendment, the uniform tax rate applicablerates (applicable to the zone where the production facilities of the SubsidiaryIsraeli subsidiary are locatedlocated) would beapply: 15% in 2011 and 2012 and 12.5% in 2013. On August 5, 2013 the Knesset passed the Law for Changes in National Priorities (Legislative Amendments for Achieving Budget Objectives in the Years 2013 and 2014) – 2013, according to which, for 2014, the regular tax rate on corporate income will be raised by1.5% to26.5% and 12% in 2015 and thereafter. Under the transitory provisionson tax rate of the newly legislated amendment, the Subsidiary chosepreferred income to irrevocably implement the new legislation amendment while waiving benefits provided under the current law.16%. As of the balance sheet date, the SubsidiaryIsraeli subsidiary believes that it is in compliance with the conditions of the Beneficiary Enterprise program.
Income that is not derived from the Beneficiary Enterprise is subject to the regular corporate tax rate of 25% in 2013 and 26.5% in 2014.
The Company did not record any provision for unrecognized tax benefits in 2011Inception until December 31, 2013 amounts to $230, $120 and 2010, and does not expect this amount to change significantly within the next twelve months.
Note 15 - Commitments and Contingencies
$361 respectively. Future minimum lease payments under non-cancelable operating leases for office space, and cars, as of December 31, 2011,2013, are as follows:
| U.S.$ | ||||
| thousands | ||||
| Year ending December 31, | ||||
| 2012 | 66 | |||
| 2013 | 27 | |||
| 93 | ||||
Rent expense for operating leases for the years ended December 31, 2011, 2010 and for the cumulative period from inception until December 31, 2011, was $81 thousand, $102 thousand and $557 thousand, respectively. Rent expense for the Subsidiary’s lease is in NIS and linked to the Israeli Consumer Price Index from February 2006.
| Year ending December 31, | Amount | |||
| 2014 | $ | 180 | ||
| 2015 | 104 | |||
| $ | 284 | |||
| (a) | New legislation, regulations or rulings that impact the patent enforcement process or the rights of patent holders, could negatively affect the Company’s current business model. For example, limitations on the ability to bring patent enforcement claims, limitations on potential liability for patent infringement, lower evidentiary standards for invalidating patents, increases in the cost to resolve patent disputes and other similar developments could negatively affect the Company’s ability to assert its patent or other intellectual property rights. | |
| (b) | The patents owned by the Company are presumed to be valid and enforceable. As part of the Company’s ongoing legal proceedings, the validity and/or enforceability of the patents may be challenged in a court or administrative proceeding. To date, the Company’s patents have not been declared to be invalid or unenforceable. | |
| (c) | Financial instruments which potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash |
| (d) |
A |
| (a) |
Vringo, Inc. and Subsidiary
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 17- Subsequent Events
| In January and February | |||
| (b) | On February 20, 2014, the Board approved a | ||
| (c) | On February |
| F-20 | ||
VRINGO, INC. | ||
| By: | /s/ Andrew D. Perlman | |
Andrew D. Perlman | ||
Chief Executive Officer | ||
(Principal Executive Officer) | ||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Andrew Perlman and Ellen Cohl, jointly and severally, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.
Signature | Title | Date | ||
/s/ | Chief Executive Officer | March 10, 2014 | ||
Andrew D. Perlman | Executive Officer) | |||
/s/ Anastasia Nyrkovskaya | Chief Financial Officer (Principal Financial Officer | March 10, 2014 | ||
Anastasia Nyrkovskaya | and Principal Accounting Officer) | |||
/s/ Andrew Kennedy Lang | Director | March 10, 2014 | ||
Andrew | ||||
/ | March | |||
/ | ||||
| Director | March | ||
/ | Director | March | ||
/ | Director | March | ||
/ | Director | March | ||
/s/ Noel J. Spiegel | Director | March 10, 2014 | ||
Noel J. Spiegel |
| 25 | ||
Exhibits
| Description | |
| 2.1 | Agreement and Plan of Merger by and among Vringo, Inc., VIP Merger Sub, Inc. and Innovate/Protect, Inc., dated as of March 12, 2012 (incorporated by reference from Exhibit 2.1 to our Current Report on Form 8-K filed on March 14, 2012) | |
| Amended and Restated Certificate of Incorporation, as amended | ||
| 3.2 | Amended and Restated Bylaws (incorporated by reference from our Registration Statement on Form S-1 filed on January 29, 2010) | |
3.3 | Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock (incorporated by reference from Exhibit 3.2 to our Current Report on Form 8-K filed on July 20, 2012) | |
| 4.1 | Specimen common stock certificate (incorporated by reference from our Registration Statement on Form S-1 filed on May 18, 2010) | |
| 4.2 | ||
| Specimen warrant certificate (incorporated by reference from our Registration Statement on Form S-1 | ||
| Form of Warrant Agreement (incorporated by reference from our Registration Statement on Form S-1 | ||
| Form of Special Bridge Warrants (incorporated by reference from our Registration Statement on Form S-1 | ||
| Form of Management Option Agreement (incorporated by reference from our Registration Statement on Form S-1 | ||
| Form of Preferential Reload Warrant (incorporated by reference from our Quarterly Report on Form 10-Q for the period ended March 31, 2012 filed on May 15, 2012) | ||
| 4.7 | Form of Reload Warrants (incorporated by reference from our Quarterly Report on Form 10-Q for the period ended March 31, 2012 filed on May 15, 2012) | |
| 4.8 | Form of Series 1 Warrant(incorporated by reference from Annex F to our Registration Statement on Form S-4 (File No. 333-180609) originally filed with the SEC on April 6, 2012) | |
| 4.9 | Form of Series 2 Warrant(incorporated by reference from Annex G to our Registration Statement on Form S-4 (File No. 333-180609) originally filed with the SEC on April 6, 2012) | |
| 10.1† | Vringo, Inc. 2012 Employee, Director and Consultant Equity Incentive Plan (incorporated by reference from our Quarterly Report on Form 10-Q for the period ended September 30, 2012 filed on November 14, 2012) | |
| 10.2† | Form of Stock Option Agreement(incorporated by reference from our Registration Statement on Form S-8 filed on July 26, 2012) | |
| 10.3† | Form of Restricted Stock Unit Agreement(incorporated by reference from our Registration Statement on Form S-8 filed on July 26, 2012) | |
| 10.4 | Master Content Provider Agreement, dated June 3, 2009, by and between | |
| Marketing Agreement, dated June 30, 2009, by and between | ||
| Marketing Agreement, dated December 29, 2009, by and between | ||
| Summary of Rental Agreement, dated March 27, 2006, by and between | ||
| Employment Agreement, dated | ||
| 26 | ||
| 10.10† | Employment Agreement, dated June 22, 2011, by and between Innovate/Protect, Inc. and Andrew Kennedy Lang, as amended by Amendment No. 1 to Employment Agreement, dated November 14, 2011, and Amendment No. 2 to Employment Agreement, dated March 11, 2012 (incorporated by reference from our 8-K filed on July 20, 2012) | |
| Agreement on Cooperation, dated July 15, 2010, between | ||
| Marketing Agreement, dated August 19, 2010, between | ||
| Collaboration Agreement, dated September 15, 2010, between | ||
| Employment Agreement, dated December 15, 2010, by and between | ||
| Intercompany Cost Plus Agreement (incorporated by reference from our Form 10-K filing on March 31, 2011) | ||
| License agreement with ZTE Corporation, | ||
| 10.17† | Employment Agreement, dated December 15, 2010, by and between Vringo and Ellen Cohl (incorporated by reference from our Current Report on Form 8-K filedon December 20, 2010) | |
| 10.18† | Offer letter, dated April 24, 2013, by and between Vringo and Anastasia Nyrkovskaya (incorporated by reference from our Current Report on Form 8-K filed on April 25, 2013) | |
| 10.19†* | Employment Agreement, dated May 7, 2013, by and between Vringo and David L. Cohen | |
| 10.20 | Agreement dated February 9, 2012, by and between the Company and Facebook, Inc. (incorporated by reference from our Quarterly Report on Form 10-Q for the period ended March 31, 2012 filed on May 15, 2012) | |
| 10.21* | Lease, dated July 10, 2012, by and between Vringo, Inc. and Teachers Insurance and Annuity Association of America, for the benefit of its separate Real Estate Account Landlord(incorporated by reference from our Quarterly Report on Form 10-Q for the period ended September 30, 2012 filed on November 14, 2012), as amended on January 24, 2014 | |
| 10.22†† | Confidential Patent Purchase Agreement, dated August 9, 2012, by and between Vringo, Inc. and Nokia Corporation(incorporated by reference from our Quarterly Report on Form 10-Q for the period ended September 30, 2012 filed on November 14, 2012) | |
| 10.23 | Form of Subscription Agreement, dated October 4, 2012, by and between Vringo, Inc. and each of the investors(incorporated by reference from our Current Report on Form 8-K filed on October 5, 2012) | |
| 10.24 | Form of Subscription Agreement, dated August 9, 2012, by and between Vringo, Inc. and each of the investors(incorporated by reference from our Current Report on Form 8-K filed on August 9, 2012) | |
| 10.25† | Form of Indemnification Agreement, dated January 31, 2013, by and between Vringo, Inc. and each of its Directors and Executive Officer(incorporated by reference from our Annual Report on Form 10-K for the period ended December 31, 2012 filed on March 21, 2013) | |
| 21* | Vringo, Inc. | |
| 23.1* | Consent of Somekh Chaikin, a member firm of KPMG International, Independent Registered Public Accounting Firm |
| 31.1* | Certification of Principal Executive | |
| 31.2* | Certification of Principal Financial Officer | |
| 101.INS* | XBLR Instance Document | |
| 101.SCH* | XBLR Taxonomy Extension Schema Document |
| 27 | ||
| 101.CAL* | XBLR Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | XBLR Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | XBLR Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | XBLR Taxonomy Extension Presentation Linkbase Document |
| * | Filed herewith. |
| ** | Furnished herewith. |
| † | Management contract or compensatory plan or arrangement. |
| †† | Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been filed separately with the SEC. |