UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

(Mark(Mark One)

SxANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20112014

OR

£¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .___to _____

Commission file number 001-34785

 

VRINGO, INC.

(Exact name of registrant as specified in its charter)

 

Delaware20-4988129

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

44 W. 28th Street

780 Third Avenue, 12thFloor

New York, New YorkNY

1000110017
(Address of principal executive offices)(Zip Code)

 

Registrant'sRegistrant’s telephone number, including area code: (646) 525-4319 (212) 309-7549 

 

Securities registered pursuant to Section 12(b) of the Act:

 

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

 

NYSE Amex

NYSE Amex

The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x     No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x     No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  x¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", ", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:Act (Check one):

 

Large accelerated filer£¨ Accelerated filer £x

Non-accelerated filer

¨  (do

[Do not check if a smaller reporting company)company]

¨  Smaller reporting company S¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

 

The aggregate market value of the registrant's common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate), computed by reference to the closing sale price of such shares on NYSE AmexThe NASDAQ Stock Market LLC on June 30, 2011,2014 was $5,489,391. For purposes of this computation, the registrant has excluded the market value of all shares of its common stock reported as being beneficially owned by executive officers and directors and holders of more than 10% of the common stock on a fully diluted basis of the registrant; such exclusion shall not, however, be deemed to constitute an admission that any such person is an “affiliate” of the registrant.$290,632,195.

 

As of March 30, 2012, 13,861,423February 20, 2015, 93,404,895 shares of the registrant's common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K: portions of the registrant’s Proxy Statement for the 2015 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2014.

 

 
 

 

Table of Contents

 

  Page
Part I 45
   
Item 1:Business45
   
Item 1A:Risk Factors911
   
Item 1B:Unresolved Staff Comments1317
   
Item 2:Properties1317
   
Item 3:Legal Proceedings1318
   
Item 4:Mine Safety Disclosures1322
   
Part II 1422
   
Item 5:Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities1422
   
Item 6:Selected Financial Data1423
   
Item 7:Management's Discussion and Analysis of Financial Condition and Results of Operations1524
   
Item: 7AItem 7A:Quantitative and Qualitative Disclosures About Market Risk2339
   
Item 8:Financial Statements and Supplementary Data2439
   
Item 9:Changes in and Disagreements with Accountants on Accounting and Financial Disclosure2439
   
Item 9A:Controls and Procedures2439
   
Item 9B:Other Information2441
   
Part III 2541
   
Item 10:Directors, Executive Officers and Corporate Governance2541
   
Item 11:Executive Compensation2841
   
Item 12:Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters3241
   
Item 13:Certain Relationships and Related Transactions and Director Independence3241
   
Item 14:Principal Accounting Fees and Services3341
   
Part IV 3341
   
Item 15:Exhibits and Financial Statement Schedules3341

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K includes certain "forward-looking statements"contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relating, among other matters, to such matters asour anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products and services, anticipated market performance and similar matters. The words "may", "will", “expect", “anticipate", "continue", "estimate", "project", "intend", and similar expressions are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect future plans of operations, business strategy, operating results, and financial position.

 

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. These risks and uncertainties, many of which are beyond our control, include:

 

our ability to produce, marketlicense and generate sales ofmonetize our products;patents, including litigation outcomes;

 

our ability to developmonetize and introduce new products;

projected future sales, profitability and other financial metrics;recoup our investment with respect to patent assets that we acquire;

 

our ability to attract and retain key members ofprotect our management team;intellectual property rights;

 

future financing plans;

anticipated needs for working capital;

anticipated trends innew legislation, regulations or court rulings related to enforcing patents that could harm our industry;business and operating results;

 

our ability to expand our marketing and other operational capabilities;

competition existing today or that will likely arise in the future;continue as a going concern;

 

our ability to complete the proposed merger with Innovate/Protect, Inc.;raise additional capital to fund our operations and business plan;

 

our ability to maintain the listing of our common stocksecurities on the NYSE Amex.NASDAQ; and

our ability to retain key members of our management team.

 

Although management believes the expectations reflected in these forward-lookingForward-looking statements are reasonable, 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 shall not be deemed to be, a part ofmay appear throughout this Annual Report on Form 10-K, including without limitation, the following sections: Item 1 “Business,” Item 1A “Risk Factors,” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are 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 incorporatedcontribute to such differences include, but are not limited to, those discussed in filingsthis Annual Report on Form 10-K, and in particular, 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.

All references in this Annual Report on Form 10-K to “we,” “us” and “our” refer to Vringo, Inc., a Delaware corporation, and its consolidated subsidiaries for periods after the closing of the Merger (as defined in Item 1.), and to I/P (as defined in Item 1.) and its consolidated subsidiaries for periods prior to the closing of the Merger unless the context requires otherwise.

 

4

PART I

 

ItemITEM 1. Business

Unless the context requires otherwise, references to "we," "us," "our," "the Company," and "Vringo," refers to Vringo, Inc. and its subsidiary.

OverviewBUSINESS

 

We provide a range of software products for mobile video entertainment, personalization and mobile social applications. Our comprehensive software platforms include applications that allow users to: (i) create, download and share mobile video entertainment content in the form of video ringtones for mobile phones, (ii) create social picture ringtone and ringback content in the form of animated slideshows sourced from their friends’ social networks, (iii) create ReMixed video clips from artists and branded content, and (iv) utilize Fan Loyalty mobile applications for contestant based reality TV shows. We believe that our services represent the next stage in the evolution of the mobile content and mobile social applications market. We anticipate that the mobile content and service market will begin to migrate from standard audio ringtones and content to high-quality video services, with social networking capability and integration with web systems. We also believe that social network information and updates will be shared regularly when friends regularly communicate by voice and by text messages. Our video ringtone solutions and other mobile social and video applications, which encompass a suite of mobile and PC-based tools, enable users to create, download and share video and other social content with ease as part of the normal communication process, and provide our business partners with a consumer-friendly and easy-to-integrate monetization platform.Overview

 

To date, we have developed four different mobile video, personalizationVringo, Inc. (“Vringo”) strives to develop, acquire, license and mobile social application platforms:protect innovation worldwide. We are currently focused on identifying, generating, acquiring, and deriving economic benefits from intellectual property assets. We plan to continue to expand our portfolio of intellectual property assets through acquiring and internally developing new technologies. We intend to monetize our technology portfolio through a variety of value enhancing initiatives, including, but not limited to:

 

Video Ringtones - our original product platform that allows users to create, download and share mobile entertainment content in the form of video ringtones for mobile phones;licensing,

 

Facetones™ - a visual ringtone experience based on social network pictures from a user’s friends;
��strategic partnerships, and

 

Video ReMix - an application that allows a user to create his or her own music video by tapping on a smartphone or tablet, in partnership with music artists and brands; andlitigation.

Fan Loyalty - a platform that allows users to obtain video and video ringtones, view information on certain reality television series and stars and vote for contestants.

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 ability to compete successfully depends on our ability to ensure a continuing 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 24 patents, 3 of the patents that have been filed have been granted by the USPTO and we have received a notice of allowance for 1 patent in Europe.

 

We were incorporated in Delaware on January 9, 2006 and are stillcompleted an initial public offering in June 2010. On July 19, 2012, Vringo closed a development stage company. Our principal executive offices are located in New York, NY, and in addition, we havemerger transaction (the “Merger”) with Innovate/Protect, Inc., a wholly owned subsidiary, Vringo (Israel) Ltd., located in Bet-Shemesh, Israel.privately held corporation (“I/P”).

 

4

On August 9, 2012, we entered into a patent purchase agreement with Nokia Corporation (“Nokia”), comprising of 124 patent families with counterparts in certain jurisdictions world-wide. The total consideration paid for the portfolio was $22,000,000. Under the terms of the purchase agreement, to the extent that the gross revenue generated by such portfolio exceeds $22,000,000, we are obligated to pay a royalty of 35% of such excess. The portfolio encompasses technologies relating to telecom infrastructure, including communication management, data and signal transmission, mobility management, radio resources management and services. Declarations were filed by Nokia indicating that 31 of the 124 patent families acquired may be essential to wireless communications standards. We also acquired certain patent portfolios during 2012 and 2013, and have filed over 60 internally developed patent applications since the Merger.

On February 18, 2014, we closed a transaction with InfoMedia Services Limited (“InfoMedia”) for the sale of certain assets and the assignment of certain agreements related to our mobile social application business. As consideration, we received 18 Class B shares of InfoMedia, which represent an 8.25% ownership interest in InfoMedia.InfoMedia is a privately owned, United Kingdom (“UK”) based, provider of customer relationship management and monetization technologies to mobile carriers and device manufacturers. As part of the transaction, we will have the opportunity to license certain intellectual property assets and support InfoMedia to identify and protect new intellectual property.

Our Strategy

We manage an intellectual property portfolio consisting of over 600 patents and patent applications, covering telecom infrastructure, internet search and mobile technologies. These patents and patent applications have been developed internally or acquired from third parties. We strive to develop, acquire, license and protect innovation worldwide. We seek to expand our portfolio of intellectual property through acquisition and development both internally and with the assistance of third parties. Our goal is to partner with innovators of compelling technologies.

In potential acquisitions, we seek to purchase all of, or interests in, technology and intellectual property in exchange for cash, our securities and/or interests in the monetization of those assets. Our revenue from this aspect of our business can be generated through licensing and litigation efforts. We engage in robust due diligence and a principled risk underwriting process to evaluate the merits and potential value of any acquisition or partnership. We seek to structure the terms of our acquisitions and partnerships in a manner that will achieve the highest risk-adjusted returns possible. We believe that our capital resources and potential access to capital, together with the experience of our management team and board of directors, will allow us to assemble a portfolio of quality assets with short and long-term revenue opportunities.

Intellectual Property

Recent DevelopmentsSearch Patents

 

Merger Agreement

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 andOn September 15, 2011, 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 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/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.

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,Engine”) initiated a patent infringement lawsuitlitigation in the United States District Court, for the Eastern District of Virginia, against Google,AOL Inc., AOL,Google, Inc., IAC Search & Media, Inc., Gannett Company, Inc., and Target Corporation (collectively, the "Defendants") for unlawfully using systems that incorporate features claimed in two patents owned byinfringement of claims of U.S. Patent Nos. 6,314,420 and 6,775,664, which I/P Engine. The patents relateEngine acquired from Lycos, Inc.

Trial commenced on October 16, 2012, and the case was submitted to relevance search technology that is usedthe jury on November 1, 2012. On November 6, 2012, the jury ruled in favor of I/P Engine and against the search engine industry to produce better search results, and has also becomeDefendants. After upholding the dominant technology used in search advertising to position high-quality advertisements. Through the strategic combination with Innovate/Protect, we expect to substantially increase our intellectual property portfolio, add significant talent in technological innovation, and be positioned to potentially enhance our opportunities for revenue generation through the monetizationvalidity of the combined company’s assets.patents-in-suit, and determining that the asserted claims of the patents were infringed by the defendants, the jury found that reasonable royalty damages should be based on a "running royalty," and that the running royalty rate should be 3.5%. The jury also awarded I/P Engine a total of approximately $30.5 million. On November 20, 2012, the clerk entered the District Court's final judgment.

 

We have expended significant effortOn January 3, 2014, the District Court ordered that I/P Engine recover an additional sum of $17.32 million from Defendants for supplemental damages and management attentionprejudgment interest. On January 21, 2014, the District Court ruled that Defendants' alleged design-around is "nothing more than a colorable variation of the system adjudged to infringe," and accordingly I/P Engine "is entitled to ongoing royalties as long as Defendants continue to use the modified system." On January 28, 2014, the District Court ruled that the appropriate ongoing royalty rate for Defendants' continued infringement of the patents-in-suit that "would reasonably compensate [I/P Engine] for giving up [its] right to exclude yet allow an ongoing willful infringer to make a reasonable profit" is a rate of 6.5% of the 20.9% royalty base previously set by the District Court. The Defendants also filed a separate appeal related to these matters.

On August 15, 2014, the Court of Appeals for the Federal Circuit (“Federal Circuit”) held that the asserted claims of the patents-in-suit are invalid for obviousness. On August 20, 2014, Vringo announced that I/P Engine would seek en banc review of the Federal Circuit's decision.

On October 15, 2014, I/P Engine filed a petition for rehearing en banc, in which it argues that the majority's opinion in this case presents important questions of law and is at odds with a series of Supreme Court and Federal Circuit decisions which do not allow appellate judges to disregard a jury's detailed findings under these circumstances. I/P Engine argued that review is particularly appropriate here, where the panel majority not only failed to adopt the proper legal standard, but explicitly rejected it.

On December 15, 2014, the Federal Circuit denied I/P Engine's petition for rehearing of the case en banc and consequently, we announced thatI/P Engine will seek review by the U.S. Supreme Court of the Federal Circuit's decision.

The court dockets for the foregoing cases are publicly available on the proposed transaction. TherePublic Access to Court Electronic Records website, www.pacer.gov, which is no assurance that the transaction contemplatedoperated by the Merger Agreement will be consummated. IfAdministrative Office of the transaction is not consummatedU.S. Courts and the website for any reason, our business and operations, as well as the market priceSupreme Court 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.United States, www.supremecourt.gov.

Departure of Chief Executive OfficerInfrastructure Patents

 

Effective March 8, 2012, Jonathan Medved resigned from his position asAs one of the means of realizing the value of the patents on telecom infrastructure, our Chief Executive Officer and a member of our Board of Directors. In connection with his resignation, Mr. Medvedwholly-owned subsidiaries, Vringo Infrastructure, Inc. (“Vringo Infrastructure”), Vringo, Inc. and Vringo (Israel) Ltd. entered intoGermany GmbH (“Vringo Germany”) have filed a Separation Letter Agreement (the “Separation Agreement”number of suits against ZTE Corporation (“ZTE”) effective March 8, 2012. Under, ASUSTeK Computer Inc. (“ASUS”), D-Link Corporation (“D-Link”), and certain of their subsidiaries, affiliates and other companies in the termsUnited States, European jurisdictions, India, Australia, Brazil, and Malaysia alleging infringement of certain U.S., European, Indian, Australian, Brazilian, and Malaysian patents.

ZTE

United Kingdom

On October 5, 2012, Vringo Infrastructure filed a suit in the UK High Court of Justice, Chancery Division, Patents Court, alleging infringement of three European patents. Subsequently, ZTE responded to the complaint with a counterclaim for invalidity of the Separation Agreement, and consistent with Mr. Medved’s employment agreement and amendment thereto, Mr. Medved will be entitledpatents-in-suit. Vringo Infrastructure filed a second UK suit on December 3, 2012, alleging infringement of three additional European patents.

In March 2014, Vringo Infrastructure withdrew its claim 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 asone of June 21, 2012 and the expiration date for exercising all options vestedpatents included in the first suit. Another patent included in the first suit was heard in a trial that commenced 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 OfficerOctober 28, 2014.

 

On March 11, 2012,November 28, 2014, the BoardCourt found the patent valid as amended and infringed by ZTE. Following the Court’s ruling, ZTE applied to introduce new prior art and re-argue the validity of Directors promoted Andrew D. Perlmanthe patent; the application was rejected on January 30, 2015. The parties will submit pleadings on remedies over the next several months. A hearing to determine the positionnature and course of our Chief Executive Officer, effective March 11, 2012, to fill the vacancy created byremedies phase of the resignation of Jonathan Medved. Mr. Perlman will continue to serve as our President and a member of our Board of Directors.

Facebook, Inc.litigation is scheduled for May 2015.

 

On February 9,17, 2015, in order to streamline and expedite the further phases of its litigation in the United Kingdom, avoid unnecessary expense, and following the receipt of information from ZTE that ZTE intends to only sell equipment in the United Kingdom that is not fully compliant with standards of the European Telecommunications Standards Institute (“ETSI”), Vringo withdrew its infringement claims against ZTE on three of the four remaining European Patents in suit in the United Kingdom. Vringo’s claim against ZTE for infringement of the UK part of the remaining European Patent is still pending, and is currently scheduled to be heard by the Court in a trial starting on June 8, 2015.

Germany

On November 15, 2012, Vringo Germany filed a suit in the Mannheim Regional Court in Germany, alleging infringement of a European patent. The litigation was expanded to include a second European patent on February 21, 2013. On November 4, 2013, Vringo Germany filed a further brief with respect to the proceedings of the first European patent suit, asserting infringement by ZTE eNode B infrastructure equipment used in 4G networks. Vringo Germany re-filed the first European patent case in the Regional Court of Düsseldorf on December 5, 2014.

On December 17, 2013, the Court issued its judgment in the second European patent case, finding that ZTE infringed that patent and ordering an accounting and an injunction upon payment of the appropriate bonds. On February 19, 2014, Vringo Germany filed suit in the Mannheim Regional Court seeking enforcement of the accounting ordered and a further order that non-compliance be subject to civil and criminal penalties. On May 5, 2014, we paid a bond of €1,000,000 (approximately $1,216,000 as of December 31, 2014) to the Court in order to enforce the injunction against ZTE. On December 27, 2013, ZTE filed a notice of appeal of the Mannheim Regional Court’s judgment in the second European patent case, and on January 24, 2014, ZTE filed an emergency motion with the Court of Appeals seeking a stay of the judge’s order pending appeal. On February 24, 2014, ZTE’s motion was denied. A hearing in the appeal is scheduled for the third quarter of 2015.

On September 13, 2013 and January 28, 2014, Vringo Germany filed two suits in the Regional Court of Düsseldorf, alleging infringement of two additional European patents. Those cases were heard by the Court on November 27, 2014. On January 22, 2015, the Court issued its judgment, finding that ZTE does not infringe either patent. On February 17, 2015, Vringo filed notices of appeal for each patent. The appeal process is anticipated to take at least one year.

ZTE filed nullity suits with respect to the first and second European patents in the Federal Patents Court in Munich, Germany during the second and fourth quarters, respectively, of 2013. Trial in the nullity suit with respect to the first European patent took place on March 4, 2015. The Court indicated that it will present its findings in a written decision, which is likely to be released in the second quarter of 2015.Trial in the nullity suit with respect to the second European patent has not yet been scheduled.

ZTE filed a nullity suit with respect to the third European patent in the Federal Patents Court in Munich, Germany, in the fourth quarter of 2013. A schedule has not yet been set and the trial is not anticipated before the third quarter of 2015. In addition, ZTE filed a nullity suit with respect to the fourth European patent in the Federal Patents Court in Munich, Germany in the second quarter of 2014. A schedule has not yet been set and the trial is not anticipated before the third quarter of 2015.

China

ZTE has filed 33 reexamination requests of Vringo’s Chinese patents with the Patent Re-Examination Board (“PRB”) of the State Intellectual Property Office of the People’s Republic of China. To date, the PRB has upheld the validity of eleven of Vringo’s patents and has held that seven of Vringo’s patents are invalid. Vringo has filed appeals on the PRB’s decision on the seven patents that are held invalid. The appeal process is expected to take at least one year. The remaining reexamination requests remain pending, with decisions expected to be rendered on a rolling basis.

On February 21, 2014, ZTE filed a civil complaint against Vringo and Vringo Infrastructure in the Shenzhen Intermediate Court alleging that Vringo violated China’s antimonopoly laws. Vringo received notice of the action on June 26, 2014. Vringo intends to vigorously contest all aspects of this action in the appropriate manner. On July 28, 2014, Vringo filed a motion to have this complaint dismissed due to lack of jurisdiction. On August 6, 2014, the Court dismissed this motion. Vringo filed an appeal of the dismissal, which was denied by the Court. Vringo is considering all aspects of this case, including further appeals.

France

On March 29, 2013, Vringo Infrastructure filed a patent infringement lawsuit in France in the Tribunal de Grande Instance de Paris, alleging infringement of the French part of two European patents. Vringo Infrastructure filed the lawsuit based on particular information uncovered during a seizure to obtain evidence of infringement, known as a saisie-contrefaçon, which was executed at two of ZTE's facilities in France. The oral hearing in relation to these patents is scheduled for April 13, 2015 before the 3rddivision of the 3rd chamber of the Tribunal de Grande Instance de Paris (specializing in IP matters). 

Australia

On June 11, 2013, Vringo Infrastructure filed a patent infringement lawsuit in the Federal Court of Australia in the New South Wales registry, alleging infringement by ZTE of two Australian patents. In March 2015, the Court granted Vringo’s request to join ZTE as a party to the action. We currently anticipate that the Court will set a trial date in 2015.

Spain

On September 6, 2013, Vringo Infrastructure filed a preliminary inquiry order against ZTE in the Commercial Court of Madrid, Spain, requiring ZTE to provide discovery relating to alleged infringement of a patent which is the Spanish counter-part of the second European patent filed in Germany.  In light of ZTE’s non-responsiveness to the order, on March 24, 2014 the Court granted our request to seek discovery of four of ZTE’s Spanish customers. We have received responses from all four customers. On July 31, 2014, ZTE filed a nullity suit in the Commercial Court of Madrid seeking to invalidate two of the Spanish counter-parts of Vringo’s European patents, including the patent found valid as amended and infringed in the United Kingdom.

India

On November 7, 2013, we and our subsidiary, Vringo Infrastructure, filed a patent infringement lawsuit in the High Court of Delhi at New Delhi, India, alleging infringement of an Indian patent related to CDMA. On November 8, 2013, the Court granted an ex-parte preliminary injunction and appointed commissioners to inspect ZTE’s facilities and collect evidence. ZTE appealed the preliminary injunction and, on December 12, 2013, the Court instituted an interim arrangement. On February 3, 2014, we filed a motion for contempt for ZTE’s failure to comply with the Court’s order, and requested that the Court order ZTE to pay an increased bond. A ruling on this motion is pending.

On January 31, 2014, we and our subsidiary, Vringo Infrastructure, filed a patent infringement lawsuit in the High Court of Delhi at New Delhi, alleging infringement of a second Indian patent related to GSM Infrastructure. The Court granted an ex-parte preliminary injunction and appointed commissioners to inspect ZTE’s facilities and collect evidence. ZTE appealed the preliminary injunction and, on August 13, 2014, the Court instituted an interim arrangement. On August 30, 2014, we filed a motion for contempt for ZTE’s failure to comply with the Court’s order, and requested that the Court order ZTE to pay an increased bond. A ruling on this motion is pending.

Brazil

On April 14, 2014, Vringo Infrastructure filed a patent infringement lawsuit in the 5th Trial Court of Rio de Janeiro State Court in Brazil, alleging infringement of a Brazilian patent related to 3G/4G/LTE infrastructure. This is the Brazilian counterpart to the patent found to be valid as amended and infringed in the United Kingdom. On April 15, 2014, the court granted an ex-parte preliminary injunction restraining ZTE from manufacturing, using, offering for sale, selling, installing, testing, or importing such infrastructure equipment, subject to a fine. To enforce the injunction, the Company posted a bond of approximately R$ 2,020,000 (approximately $752,000 as of December 31, 2014) with the court on April 17, 2014. ZTE has filed numerous appeals against the injunction since, all of which have been rejected.

On July 17, 2014, ZTE filed a nullity suit in the Federal district court in Rio de Janiero, Brazil, against both Vringo and the Brazilian patent office, seeking to invalidate Vringo’s Brazilian patent. A schedule for the remainder of this matter has not yet been set.

Malaysia

On June 23, 2014, Vringo Infrastructure filed a patent infringement lawsuit against ZTE in the High Court of Malaya at Kuala Lumpur. The Court is expected to hear the case in the fourth quarter of 2015.

Romania

On June 23, 2014, Vringo Infrastructure filed a patent infringement lawsuit against ZTE in the Bucharest Tribunal Civil Section. On July 1, 2014, the court granted an ex-parte preliminary injunction, ordering ZTE to cease any importation, exportation, introduction on the market, offer for sale, storage, sale, trade, distribution, promotion, or any other business activity regarding the infringing product. ZTE appealed the injunction and, on October 10, 2014, the Bucharest Court of Appeal suspended enforcement of the injunction in light of ZTE’s allegations that it was immediately subject to approximately €31,500,000 in contract losses, pending the outcome of the appeal. On January 8, 2015, the Court rejected ZTE’s appeal, and reinstated the injunction with immediate effect. The Court ordered Vringo to pay a bond of €240,000 in order to continue to enforce the injunction. On February 4, 2015, the Court rejected ZTE’s request for the Court to order Vringo to pay an increased bond of €40,000,000, in a final decision that may not be appealed. Vringo paid the €240,000 bond on February 11, 2015.

Netherlands

On May 28, 2014, Vringo Infrastructure commenced legal proceedings, pursuant to European Anti-Piracy Regulations, Number 1383/2003, Article 11 against ZTE in the District Court of The Hague. ZTE has filed an invalidity lawsuit for the patent-in-suit. On August 19, 2014, Vringo Infrastructure filed another suit at the District Court of The Hague, which subsumed the May 18, 2014 lawsuit. A schedule has not yet been set in this matter.

On June 4, 2014, ZTE filed suit in the District Court of Rotterdam against Vringo and Vringo Infrastructure for the alleged wrongful detention of goods under the relevant anti-piracy regulations. A schedule has not yet been set in this matter.

On July 24, 2014, ZTE filed a request with the District Court of The Hague to seek the release of ZTE UMTS products being held by Dutch customs officials and to order Vringo to ask the Dutch customs authorities to stop their actions against ZTE’s products based on the Anti-Piracy Regulations of the European Union. On October 24, 2014, the President of the Court denied ZTE’s requests, and upheld the detention of ZTE’s goods, finding, prima facie, that ZTE has infringed one of Vringo’s European patents, upholding the validity of that patent, and rejecting ZTE’s argument that Vringo has violated European competition law by enforcing that patent. ZTE was also ordered to pay Vringo’s legal costs of approximately $250,000. ZTE may choose to appeal this decision.

On October 23, 2014, ZTE filed suit in the District Court of The Hague seeking the invalidity of Vringo’s European Patent that is the subject of the other proceedings taking place in the same Court. A hearing in this matter has not yet been scheduled.

United States

On July 2, 2014, Vringo filed suit in the United States District Court for the Southern District of New York seeking a temporary restraining order and preliminary and permanent injunctions against ZTE, enjoining ZTE’s use of prohibited materials captured under NDA, including but not limited to ZTE’s use of such materials in its antitrust lawsuit in China against Vringo and Vringo Infrastructure. On July 7, 2014, the court granted a temporary restraining order against ZTE’s use of such material. On July 23, 2014, ZTE filed a counterclaim against Vringo. On July 24, 2014, the Court held a hearing on Vringo’s motion for a preliminary injunction against ZTE. A ruling on this motion is pending. On October 2, 2014, Vringo filed a motion for judgment on the pleadings, similar to a motion for summary judgment, asking the court to render a judgment on Vringo’s cause of action based solely on the pleadings of the parties. A ruling on this motion is pending.

On February 5, 2015, ZTE filed suit in the United States District Court for the District of Delaware alleging that Vringo breached its contractual obligations to ETSI, which it assumed from Nokia when it purchased its infrastructure patent portfolio. On February 6, 2015, the Court granted a temporary restraining order and preliminary injunction against Vringo. On February 10, 2015, the Court dissolved the temporary restraining order and preliminary injunction and granted Vringo’s request to transfer the case to the United States District Court for the Southern District of New York.

On February 5, 2015, ZTE filedinter partes review (“IPR”) requests for five of Vringo’s United States Patents. The requests, filed with the Patent Trial and Appeal Board (“PTAB”) of the United States Patent and Trademark Office will remain pending until the PTAB makes a decision on whether to grant the requests and, thus, review the patents. While these patents have counterparts being litigated by Vringo in other parts of the world, none of these United States Patents are currently in litigation.

European Commission

On April 10, 2014, ZTE filed a complaint with the European Commission. We believe that the accusations are not accurate. The European Commission has not yet set the schedule for this matter.

ASUS

Germany

On October 4, 2013 and January 29, 2014, Vringo Germany filed two patent infringement lawsuits against ASUS in the Düsseldorf Regional Court, alleging infringement of two European patents. Those cases were heard by the Court on November 27, 2014. On January 22, 2015, the Court issued its judgment, finding that ASUS does not infringe either patent. On February 17, 2015, Vringo filed notices of appeal for each patent. The appeal process is anticipated to take at least one year.

ASUS filed nullity suits with respect to the first and second European patents in the Federal Patents Court in Munich, Germany, during the second quarter of 2014. Trials in the nullity suits have not been scheduled but are not anticipated before the second quarter of 2016 for the first patent and the second quarter of 2015 for the second patent.

Spain

On February 7, 2014, Vringo Infrastructure filed suit in the Commercial Court of Barcelona alleging infringement of a patent which is the Spanish counter-part of the first European patent filed in Germany. The oral hearing for this case was heard before the Commercial Court of Barcelona on November 25, 2014. Judgment is pending. On December 19, 2014, ASUS filed a nullity suit with respect to the same patent. A schedule for the case has not yet been set.

India

On April 15, 2014, Vringo Infrastructure filed suit in the High Court of Delhi, New Delhi alleging infringement of a patent related to use of dictionaries in search engines preloaded on certain ASUS devices. Google has successfully petitioned to intervene as an interested party and, by right, has filed responsive pleadings. A schedule for the remainder of case has not yet been set.  

Tyco

On April 28, 2014, we entered into ana confidential agreement with Facebook,Tyco that resolved all litigation pending between the parties.

Belkin

On October 1, 2014, we entered into a confidential agreement with Belkin that resolved all litigation pending between the parties.

D-Link

On December 4, 2014, Iron Gate Security, Inc. relating, a wholly-owned subsidiary of Vringo, filed suit against D-Link Corporation and D-Link Systems, Inc., alleging infringement of a United States Patent. A schedule for this matter has not yet been set.

Other Legal Matters

On January 13, 2015, Vringo Infrastructure received a Notice of Anti-Monopoly Investigation Interview from the National Development and Reform Commission of the People’s Republic of China.

Competition

We encounter competition in the area of patent acquisition and enforcement as the number of companies entering this market is increasing. This includes competitors seeking to acquire the same or similar patents and technologies that we may seek to acquire. Most of our competitors have much longer operating histories, and significantly greater financial and human resources, than we have. Entities such as VirnetX (NYSE:VHC), Acacia Research Corporation (NASDAQ:ACTG), Interdigital, Inc. (NASDAQ: IDCC), RPX Corporation (NASDAQ:RPXC) and others presently market themselves as being in the business of creating, acquiring, licensing or leveraging the value of intellectual property assets. We expect others to enter the market as the true value of intellectual property is increasingly recognized and validated.

Employees

As of February 20, 2015, we have 13 full time employees. We do not have employees that are represented by a labor union or are covered by a collective bargaining agreement. We consider our relationship with our employees to be good.

Our Company

Our website address is www.vringoinc.com. Reference in this Annual Report on Form 10-K to this website address does not constitute incorporation by reference of the information contained on the website. We make our filings with the Securities and Exchange Commission, or the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and amendments to the useforegoing reports, available free of charge on or through our Facetones mark and domain name (the “Facetones Mark”). Priorwebsite as soon as reasonably practicable after we file these reports with, or furnish such reports to, the agreement,SEC. In addition, we post the parties had a potential dispute regardingfollowing information on our website:

our corporate code of conduct and our insider trading compliance manual; and
charters for our audit committee, nominating and corporate governance committee, and compensation committee.

The public may read and copy any materials that we file with the Facetones Mark. By entering intoSEC at the agreement,SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the potential dispute has been favorably resolved to the satisfaction of both parties. The agreement clarifies our permitted useoperation of the Facetones MarkPublic Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including making certain changes to its U.S. trademark application to clarifyus, that file electronically with the description ofSEC. The public can obtain any documents that we file with the Facetones service and agreeing to certain limitations on its use of the Facetones Mark.SEC athttp://www.sec.gov.

 

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Exercise of Warrants

Between February 6 and February 14, 2012, we entered into agreements with holders of certain of our outstanding warrants (the “Holders”), pursuant to which the Holders exercised warrants to purchase 3,828,993 shares of our common stock for aggregate proceeds to us of $3.6 million. We issued new five-year 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.

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 Bridge and Conversion Warrants, previously classified as a long-term liability, were exercised for aggregate proceeds of $3.6 million. In addition, as part of the transaction, certain holders of the exercised warrants were granted additional warrants to purchase approximately 2.66 million of our shares. According 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 to the accompanying consolidated financial statements), is an increase of approximately $4.1 million in our total stockholder’s equity.

We believe that, as a result of the warrant exercise, we will regain compliance with the Exchange’s listing standards. While the NYSE Amex has not initiated delisting proceedings, there is no assurance that it will not do so in the future.

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 accessible by a user on a mobile phone, and a website, together 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): 

Celcom AxiataBerhad, or Celcom, a mobile carrier in Malaysia, with 11.0 million subscribers. Celcom is one of the largest mobile telecommunications operators in Malaysia with the widest national 2G and 3G coverage in the country, with 23 thousand subscribers to our paid service. Celcom is a Vodafone partner and is part of the Axiata Group of Companies, one of the world’s largest telecommunications companies with more than 160 million customers across 10 Asian markets (launched in October 2011);

Maxis Mobile Services SDN BHD, or Maxis, a mobile carrier in Malaysia with 11.4 million subscribers, of which there are 133 thousand subscribers to our paid service and an additional 7 thousand subscribers on a free trial basis (launched in September 2009);

Emirates Telecommunications Corporation, or Etisalat, a mobile carrier with 7.3 million subscribers in the United Arab Emirates and which has more than 94.0 million subscribers worldwide, where we have launched our products and services and have 23 thousand subscribers to our paid service, (launched in January 2010);

Everything Everywhere Limited (EEL), a mobile carrier with almost 30.0 million subscribers in the United Kingdom. Our video ringtone platform launched was with Orange UK, a large mobile communications company and subsidiary of EEL, with 16.0 million subscribers and we have 30 thousand subscribers to our paid service (launched in February 2011);

Starhub, a mobile carrier with 2.0 million subscribers in Singapore (initially launched in February 2011 and re-launched in the first quarter 2012);

RTL in Belgium, part of the Bertelsman RTL Television network, has offered together with us, a subscription service on all three Belgian mobile operators (with a combined subscriber base of 1 million) that includes RTL content (launched in June 2010 with limited subscribers due to regulatory limitations introduced on mobile services);

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Hungama, a content and mobile services aggregator in India. The service with Hungama is being offered to customers of 15 different mobile carriers in India. Our paid service was on temporary hold as a result of regional legalities in India, however we re-launched the service in March 2012 in partnership with Hungama and Tata DOCOMO; and

Emirates Integrated Telecommunications Company (du Networks), a mobile carrier with 5.0 million subscribers in the United Arab Emirates, where we have launched our products and services in February 2012.

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 planned 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.

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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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ITEM 1A. RISK FACTORS

 

Our business, financial condition, and results of operations and the trading price of our common stock could be materially adversely affected by any of the following risks as well as the other risks highlighted elsewhere in this Annual Report on Form 10-K, particularly the discussions about regulation, competition and intellectual property. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impairmaterially affect our business operations.

 

We may not be able to consummateraise additional capital. Moreover, additional financing may have an adverse effect on the value of the equity instruments held by our Merger with Innovate/Protect.stockholders.

 

On March 12, 2012, we entered into a Merger Agreement, pursuantWe may choose 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 consummation of the transaction with Innovate/Protect is subject to stockholders approval and other closing conditions. We have expended significant effort and management attention on the proposed transaction. There is no assurance that the transaction will be approved. For example, our stockholders may not approve the transaction. 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.

The issuance of our shares of common stock to Innovate/Protect stockholdersraise additional funds in connection with any potential acquisition of patent portfolios or other intellectual property assets or operating businesses. In addition, we may also need additional funds to respond to business opportunities and challenges, including our ongoing operating expenses, protection of our assets, development of new lines of business and enhancement of our operating infrastructure. While we will need to seek additional funding, we may not be able to obtain financing on acceptable terms, or at all. In addition, the Mergerterms of our financings may be dilutive to, or otherwise adversely affect, holders of our common stock. We may also seek additional funds through arrangements with collaborators or other third parties. We may not be able to negotiate arrangements on acceptable terms, if at all. If we are unable to obtain additional funding on a timely basis, we may be required to curtail or terminate some or all of our business plans. Any such financing that we undertake will substantially dilute the voting power oflikely be dilutive to our current stockholders.

 

Our ability to raise capital through equity or equity-linked transactions may be limited.

Pursuant

In order for us to raise capital privately through equity or equity-linked transactions, stockholder approval is required to enable us to issue more than 19.99% of our outstanding shares of common stock pursuant to the termsrules and regulations of the Merger Agreement, itNASDAQ Capital Market. Should stockholders not approve such issuances, one means to raise capital could be through debt (if such financing is anticipated that we will issue equity instruments to Innovate/Protect stockholders representing approximately 67.55%available), which could have a material adverse effect on our consolidated balance sheet and overall financial condition.

We currently have 17,402,654 warrants outstanding which can be exercised for 17,402,654 shares of the outstanding equity instruments of the combined company calculated on a fully diluted basis as of immediately following the completion of the Merger. After such issuance, ourcommon stock and incentive equity instruments outstanding immediately prior to the completion of the Merger will represent approximately 32.45% of the outstanding equity instruments of the combined company, calculated on a fully diluted basis as of immediately following the completion of the Merger. Accordingly, the issuance of our equity instruments Innovate/Protect stockholders in connection with the Merger will significantly reduce the relative voting power of each sharepurchase 9,248,700 shares of our common stock held bygranted to our current stockholders.management, employees, directors and consultants. Substantially all of these aforementioned outstanding equity instruments are currently “out of the money” and therefore our ability to raise capital through the exercise of these outstanding instruments are significantly limited.

 

To date, we have generated only losses, which are expectedThere is substantial doubt concerning our ability to continue for the foreseeable future.as a going concern.

 

AsOur consolidated financial statements have been prepared assuming that we will continue as a going concern which contemplates the realization of December 31, 2011, we had a cash balanceassets and satisfaction of $1.2 million and $1 millionliabilities in the normal course 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.

business. We expect our netto incur further losses to continue in the foreseeable future, as we continue to growoperations of our user basebusiness and have been dependent on funding our operations through carrier partnerships, continue to ensure we have broad handset reach, enhance our viralthe issuance and social tools, maintain and grow our product and technology portfolio, build a strong revenue basesale 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 significantequity securities. These circumstances raise substantial doubt about our ability to continue our activities as a going concern.

We are still As a development stage company. Our operations are subject to allresult 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, complicationsthis uncertainty and delays frequently encountered in connection with a new business, especially technology start-up companies. We cannot provide any assurance that our business objectives will be accomplished. All of our audited consolidated financial statements since inception have contained a statement by our management that raisesthe substantial doubt about us being ableour ability to continue as a going concern unless we are able to raise additional capital. Our financial statements do not include any adjustment relating to the recoveryas of December 31, 2014, KPMG LLP, our independent registered public accounting firm, issued a report dated March 16, 2015, stating its opinion that our recurring losses from operations, negative cash flows from operating activities, and classificationpotential insufficiency of recorded asset amountscash or the amount and classificationavailable sources of liabilities that might be necessary should our operations cease.

We believe that current cash levels will be sufficientliquidity to support our activity intocurrent operating requirements raise substantial doubt as to our ability to continue as a going concern. Investors in our securities should review carefully the fourth quarterreport of 2012. The continuationKPMG LLP. Management’s plans include increasing revenue through the licensing of our business is dependent uponintellectual property, strategic partnerships, and litigation, when required, which may be resolved through a settlement or collection. We also intend to continue to expand our planned operations through acquisitions and monetization of additional patents, other intellectual property or operating businesses. However, no assurance can be given at this time as to whether we will be able to achieve these objectives or whether we will have the successful consummationsources of our Mergerliquidity for follow through with Innovate/Protect, or similar merger or acquisition, financing and upon the further development of our products.these plans.

 

The exercise of a substantial number of warrants or options by our security holders may have an adverse effect on the market price of our common stock.

 

Should our currentlycurrent warrants outstanding warrants be exercised, there willwould be an additional 7,885,04217,402,654 shares of common stock eligible for trading in the public market. In addition, weThe incentive equity instruments currently have options outstanding to purchase 4,718,4509,248,700 shares of our common stock granted as of the reporting date, to our management, employees, directors and consultants. In March 2012, our Board approved participation of all outstanding options in future dividends, as well as,consultants are subject to acceleration of vesting of all outstanding options, if certain market conditions are met. In addition, all outstanding options granted75% and 100% (according to members of the Board shall fully vest ifagreement signed with each grantee), upon a Board member ceases to be a director at any time during the six-month period immediately following asubsequent change of control. Certain options which are outstanding have exercise prices that are below, and in some cases significantly below, recent market price. Such securities, if exercised, will increase the number of issued and outstanding shares of our common stock. Therefore, the sale, or even the possibility of sale, of the shares of common stock underlying the warrants and options could have an adverse effect on the market price for our securities and/or on our ability to obtain future financing.

Our limited operating history makes it difficult to evaluate our current business and future prospects.

To date, our business is focused on the assertion of our patent portfolio of which the earliest patent was acquired by us in June 2011. Therefore, we not only have a limited operating history, but also a limited track record in executing our business model which includes, among other things, creating, prosecuting, licensing, litigating or otherwise monetizing our patent assets. Our limited operating history makes it difficult to evaluate our current business model and future prospects.

In light of the costs, uncertainties, delays and difficulties frequently encountered by companies in the early stages of development with no operating history, there is a significant risk that we will not be able to:

implement or execute our current business plan, or demonstrate that our business plan is sound; and/or

raise sufficient funds in the capital markets to effectuate our long-term business plan.

If we are unable to execute any one of the foregoing or similar matters relating to our operations, our business may fail.

We commenced legal proceedings against security and communications companies, and we expect such proceedings to be time-consuming and costly, which may adversely affect our financial condition and our ability to operate our business.

To license or otherwise monetize the patent assets that we own, we commenced legal proceedings against a number of large, multi-national companies, pursuant to which we allege that such companies infringe on one or more of our patents. Our viability is highly dependent on the outcome of these litigations, and there is a risk that we may be unable to achieve the results we desire from such litigation, failure from which would harm our business to a great degree. In addition, the defendants in these litigations have substantially more resources than we do, which could make our litigation efforts more difficult.

We anticipate that legal proceedings may continue for several years and may require significant expenditures for legal fees and other expenses. Disputes regarding the assertion of patents and other intellectual property rights are highly complex and technical. Once initiated, we may be forced to litigate against other parties in addition to the originally named defendants. Our adversaries may allege defenses and/or file counterclaims for, among other things, revocation of our patents or file collateral litigations or initiate investigations in the United States, Europe, India, and China or elsewhere in an effort to avoid or limit liability and damages for patent infringement. If such actions are successful, they may preclude our ability to derive licensing revenue from the patents currently being asserted.

Additionally, we anticipate that our legal fees and other expenses will be material and will negatively impact our financial condition and results of operations and may result in our inability to continue our business. We estimate that our legal fees over the next twelve months will be significant for these enforcement actions. Expenses thereafter are dependent on the outcome of the status of the litigation. Our failure to monetize our patent assets would significantly harm our business.

Further, should we be deemed the losing party in certain of our litigations, we may be liable for some or all of our opponents’ legal fees. In addition, in connection with litigation, we have made several affirmative financial guarantees to courts around the world, and might face the need to make additional guarantees in the future.

In any of our applications to the Court in the UK ZTE litigation or for the entire UK ZTE litigation, we may be held responsible for a substantial percentage of the defendant’s legal fees for the relevant application or for the litigation. These fees may be substantial. Pursuant to negotiation with ZTE’s United Kingdom subsidiary, we placed two written commitments, in November 2012 and May 2013, to ensure payment should a liability by Vringo Infrastructure arise as a result of the two cases we filed. To date, ZTE has asserted that its anticipated fees in defending the UK litigation may be approximately $5,800,000. With respect to the first filed UK case, all claims other than the remedies for the patent found infringed and valid as amended have been dismissed. As such, any remaining costs where Vringo was not the “commercial victor” as defined under UK procedural law can be assessed. With respect to the second filed UK case, we withdrew our claims on two of the three patents-in-suit on February 17, 2015. Vringo anticipates any costs, to the extent that they are assessed, will not exceed the amount of the written commitments related to the cases which is approximately $2,900,000 each.

In Australia, should we be deemed the losing party in any of our applications to the Court or for the entire litigation, we may be held responsible for a substantial percentage of the defendant’s legal fees for the relevant application or for the litigation. These fees may be substantial. In addition, pursuant to negotiations with ZTE’s Australian subsidiary, we placed a written commitment in April 2014 to ensure payment should a liability by Vringo Infrastructure arise as a result of the case filed. The average weighted exercise priceamount of all currently outstanding warrantssuch commitment cannot be reasonably estimated at this time, and options,we assess the likelihood of such payment as remote.

In Germany, the amount of fees payable by a losing party is determined based on certain possible statutory levels of “value in dispute.” The value in dispute is only very loosely correlated to the actual value of any potential final settlement or license. Under the current statute, our risk is capped at approximately $1,000,000 in legal fees were the court to determine that the value in dispute is at the highest tier under law.

In Germany, should the court order an injunction, for it to be enforced, we will have to pay a security based on the relevant statutory rate. In our litigations against ZTE and ASUS the statutory rate is approximately $1,400,000 for each patent asserted. We have already deposited a bond of €1,000,000 on May 5, 2014 (approximately $1,216,000 as of March 30, 2012,December 31, 2014) in one of our cases. The statutory rate is $3.17 per share.only loosely correlated to any actual harm the defendant may suffer from an injunction. The district court judge is entitled to increase the amount of the security. Generally, the courts take the value in dispute as the amount payable as security. Should the injunction be successfully overturned on appeal, we may be obligated to compensate the defendant for any damages allegedly suffered as a result of the enforcement of the injunction, which would be ascertained through separate damages proceedings. Should the judgment which granted the injunction be affirmed on appeal, however, the amount paid as security would be returnable to us in full. 

In France, should we be deemed to be the losing party, it is more likely than not that we will be ordered to pay a contribution to ZTE’s attorney and expert fees. The court in France will make an assessment of winning party’s costs during the course of the proceeding on the merits, and at its discretion order the losing party to pay a portion of those costs, typically between 40 and 60%.

 

UnderIn Spain, should we be deemed to be the termslosing party to the nullity suit or our counterclaims against ZTE, it is more likely than not that we will be ordered to pay a contribution to ZTE’s attorney and expert fees. The same would apply for our claims against Asus. The court in Spain will make an assessment of winning party’s costs during the course of the Merger Agreement,proceeding on the merits, and at its discretion order the losing party to pay a portion of those costs. We estimate the maximum exposure related to this suit to be approximately €90,000 with respect to ZTE and approximately €60,000 with respect to Asus.

In Brazil, as a condition of the relief requested, we deposited R$2,020,000 (approximately $752,000 as of December 31, 2014) as a surety against the truth of the allegations contained in the complaint. Unless ZTE is the prevailing party and proves that actual material damages were suffered while the requested relief was in place, the funds are returnable at the end of the litigation.

In addition, we may be required to grant additional written commitments, as necessary, in connection with our commenced proceedings against ZTE Corporation and its subsidiaries in various countries. As of today, we cannot estimate our potential future liability. However, should we be successful on any court applications, for example, in the UK, Australia, France, or Germany or the entire litigation and/or litigations, our adversary may be responsible for a substantial percentage of our legal fees.  

Further, if any of the patents in suit are found not infringed or invalid, it is highly unlikely that the relevant patents would be viewed as essential and therefore infringed by all unlicensed market participants.

There is a risk that a court will issue Innovate/Protect shareholders warrantsfind our patents invalid, not infringed or unenforceable and/or that the USPTO or other relevant patent offices in various countries will either invalidate the patents or materially narrow the scope of their claims during the course of a reexamination, opposition or other such proceeding. In addition, even with a positive trial court verdict, the patents may be invalidated, found not infringed or rendered unenforceable on appeal. This risk may occur either presently or from time to purchase 15,959,838 sharestime in connection with future litigations we may bring. If this were to occur, it would have a material adverse effect on the viability of our company and our operations.

We believe that certain companies infringe certain of our patents, but recognize that obtaining and collecting a judgment against such companies may be difficult or impossible. Patent litigation is inherently risky and the outcome is uncertain. Some of the parties that we believe infringe on our patents are large and well-financed companies with substantially greater resources than ours. We believe that these parties would devote a substantial amount of resources in an attempt to avoid or limit a finding that they are liable for infringing on our patents or, in the event liability is found, to avoid or limit the amount of associated damages. In addition, there is a risk that these parties may file reexaminations or other proceedings with the USPTO or other government agencies in the United States or abroad in an attempt to invalidate, narrow the scope or render unenforceable the patents we own.

In addition, as part of our ongoing legal proceedings, the validity and/or enforceability of our patents-in-suit is often challenged in a court or an administrative proceeding. On August 15, 2014, the Federal Circuit reversed a judgment of the United States District Court for the Eastern District of Virginia by holding that the asserted claims of the patents-in-suit in I/P Engine's litigation against AOL Inc., Google Inc. et al. are invalid for obviousness. During the third quarter of 2014, we experienced a decline in our common stock at an exercise priceprice.

Moreover, in connection with any of $1.76 per share. our present or future patent enforcement actions, it is possible that a defendant may request and/or a court may rule that we violated relevant statues, regulations, rules or standards relating to the substantive or procedural aspects of such enforcement actions in the United States or abroad. In such event, a court or other regulatory agency may issue monetary sanctions against us or our operating subsidiaries or award attorneys’ fees and/or expenses to one or more defendants, which could be material, and if we or our subsidiaries are required to pay such monetary sanctions, attorneys’ fees and/or expenses, such payment could materially harm our operating results and financial position.

In addition, all outstanding warrantsit is difficult in general to purchase Innovate/Protect’s common stock that are outstanding and unexercised immediately priorpredict the outcome of patent enforcement litigation at the trial or appellate level. In the United States, there is a higher rate of appeals in patent enforcement litigation than in standard business litigation. The defendant to any case we bring, may file as many appeals as allowed by right, including to the Merger agreement, shallfirst, second and/or final courts of appeal (in the United States those courts would be exchanged for 250,000 sharesthe Federal Circuit and Supreme Court, respectively). Such appeals are expensive and time-consuming, and the outcomes of our common stocksuch appeals are sometimes unpredictable, resulting in increased costs 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.reduced or delayed revenue.

 

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We may not be able to successfully monetize the patents we acquired from Nokia, nor any of the other patent acquisitions, thus we may fail to realize all of the anticipated benefits of such acquisition. 

There is no assurance that we will be able to successfully monetize the patent portfolio that we acquired from Nokia, nor any other patent acquisitions. The patents we acquired from Nokia could fail to produce anticipated benefits, or could have other adverse effects that we currently do not foresee. Failure to successfully monetize these patent assets may have a material adverse effect on our business, financial condition and results of operations.

In addition, the acquisition of a patent portfolio is subject to a number of risks, including, but not limited to the following:

There is a significant time lag between acquiring a patent portfolio and recognizing revenue from those patent assets, if at all. During that time lag, material costs are likely to be incurred that would have a negative effect on our results of operations, cash flows and financial position.

The integration of a patent portfolio is a time consuming and expensive process that may disrupt our operations. If our integration efforts are not successful, our results of operations could be harmed. In addition, we may not achieve anticipated synergies or other benefits from such acquisition.

Therefore, there is no assurance that we will be able to monetize an acquired patent portfolio and recoup our investment.

We may seek to internally develop new inventions and intellectual property, which would take time and would be costly. Moreover, the failure to obtain or maintain intellectual property rights for such inventions would lead to the loss of our investments in such activities.

Members of our management team have experience as inventors. As such, part of our 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 a material and adverse effect on our business. There is also the risk that our initiatives in this regard would not yield any viable new inventions or technology, which would lead to a loss of our investments in time and resources in such activities.

In addition, even if we are able to internally develop new inventions, in order for those inventions to be viable and to compete effectively, we would need to develop and maintain them, and they would heavily rely on, a proprietary position with respect to such inventions and intellectual property. However, there are significant risks associated with any such intellectual property we may develop principally, including the following:

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 cannot be certain that patents will be issued as a result of any future applications, or that any of our patents, once issued, will provide us with adequate protection from competing products. For example, issued patents may be circumvented or challenged, declared invalid or unenforceable, or narrowed in scope. In addition, since publication of discoveries in scientific or patent literature often lags behind actual discoveries, we cannot be certain that we will be the first to make our additional new inventions or to file patent applications covering those inventions. It is also possible that others may have obtained or may obtain issued patents that could prevent us from commercializing our products or require us to obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct our business. As to those patents that we may license or otherwise monetize, our rights will depend on maintaining our obligations to the licensor under the applicable license agreement, and we may be unable to do so. Our failure to obtain or maintain intellectual property rights for our inventions would lead to the loss of our investments in such activities, which would have a material and adverse effect on our company.

Moreover, patent application delays could cause delays in recognizing revenue from our internally generated patents and could cause us to miss opportunities to license patents before other competing technologies are developed or introduced into the market.

New legislation, regulations or court rulings related to enforcing patents could harm our business and operating results.

Intellectual property is the subject of intense scrutiny by the courts, legislatures and executive branches of governments around the world. Various patent offices, governments or intergovernmental bodies (like the European Commission) may implement new legislation, regulations or rulings that impact the patent enforcement process or the rights of patent holders and such changes could negatively affect our 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 our ability to assert our patent or other intellectual property rights.

In September 2013, the Federal Trade Commission announced that it is planning to gather information from approximately 25 companies that are in the business of buying and asserting patents in order to develop a better understanding of how those companies do business and impact innovation and competition. Both the Federal Trade Commission and European Commission are actively considering what the appropriate restrictions are on the ability of owners of patents declared to technical standards to receive both injunctions and royalties.

Furthermore, United States patent laws have been amended by the Leahy-Smith America Invents Act (“America Invents Act”). The America Invents Act includes a number of significant changes to U.S. patent law. In general, the legislation attempts to address issues surrounding the enforceability of patents and the increase in patent litigation by, among other things, establishing new procedures for patent litigation. For example, the America Invents Act changes the way that parties may be joined in patent infringement actions, increasing the likelihood that such actions will need to be brought against individual parties allegedly infringing by their respective individual actions or activities. At this time, it is not clear what, if any, impact the America Invents Act will have on the operation of our enforcement business. However, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the enforcement of our patented technologies, which could have a material adverse effect on our business and financial condition.

In addition, the U.S. Department of Justice (“DOJ”) has conducted reviews of the patent system to evaluate the impact of patent assertion entities on industries in which those patents relate. It is possible that the findings and recommendations of the DOJ could impact the ability to effectively license and enforce standards-essential patents and could increase the uncertainties and costs surrounding the enforcement of any such patented technologies.

Furthermore, in various pending litigation and appeals in the United States Federal courts, various arguments and legal theories are being advanced to potentially limit the scope of damages that a patent licensing company such as us might be entitled to. Any one of these pending cases could result in new legal doctrines that could make our existing or future patent portfolios less valuable or more costly to enforce.

Further, and in general, it is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become enacted as laws. Compliance with any new or existing laws or regulations could be difficult and expensive, affect the manner in which we conduct our business and negatively impact our business, prospects, financial condition and results of operations. That said, to date, we do not believe that any existing or proposed statutory or regulatory change has materially affected our business.

Further, the leadership changes in the European Commission (“EC”) make it challenging to predict whether and how the EC will shift its focus from its prior stances regarding the enforcement of intellectual property rights and the relationship between such rights and European competition law.

Additionally, there are numerous initiatives being pursued in multiple countries including India and Brazil, regarding when and how intellectual property rights should be enforced as well as the relationship between enforcement and other laws, including relevant anti-trust or competition law. It is too early to state with any degree of certainty the impact that such initiatives may have on our business.

Additionally, the political and legal climate in China appears to have changed and is causing significant challenges for foreign companies that attempt to enforce their intellectual property rights against Chinese business whether such rights are enforced in China or elsewhere in the world. At this time, it is unclear what if any impact this change in climate will have on our business.

If we fail to comply with the continued listing requirements of the NASDAQ Capital Market, our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.

Our common stock is listed for trading on the NASDAQ Capital Market (“NASDAQ”). We must satisfy NASDAQ’s continued listing requirements, including, among other things, a minimum closing bid price requirement of $1.00 per share for 30 consecutive business days. If a company trades for 30 consecutive business days below the $1.00 minimum closing bid price requirement, NASDAQ will send a deficiency notice to the company, advising that it has been afforded a "compliance period" of 180 calendar days to regain compliance with the applicable requirements. Thereafter, if such a company does not regain compliance with the bid price requirement, a second 180-day compliance period may be available.  

A delisting of our common stock from NASDAQ could materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, employees and fewer business development opportunities.

On December 18, 2014, we received a notification letter from NASDAQ informing us that for the last 30 consecutive business days, the bid price of our securities had closed below $1.00 per share. This notice has no immediate effect on our NASDAQ listing and we have 180 calendar days, or until June 16, 2015, to regain compliance. To regain compliance, the closing bid price of our securities must be at least $1.00 per share for a minimum of ten consecutive business days. If we do not regain compliance by June 16, 2015, we may be eligible for additional time to regain compliance or if we are otherwise not eligible, we may request a hearing before a hearings panel.

Acquisitions of additional patent assets may be time consuming, complex and costly, which could adversely affect our operating results.

Acquisitions of patents or other intellectual property assets, which are and will be critical to our business plan, are often time consuming, complex and costly to consummate. We may utilize many different transaction structures in our acquisitions and the terms of such acquisition agreements tend to be heavily negotiated. As a result, we expect to incur significant operating expenses and will likely be required to raise capital during the negotiations.

Even if we are able to acquire particular patents or other intellectual property assets, there is no guarantee that we will generate sufficient revenue related to those assets to offset the acquisition costs. While we will seek to conduct confirmatory due diligence on the patents or other intellectual property assets we are considering for acquisition, we may acquire such assets from a seller who does not have proper title to those assets. In those cases, we may be required to spend significant resources to defend our interest in such assets and, if we are not successful, our acquisition may be invalid, in which case we could lose part or all of our investment in those assets.

We may also identify patents or other intellectual property assets that cost more than we are prepared to spend with our own capital resources. We may incur significant costs to organize and negotiate a structured acquisition that does not ultimately result in an acquisition of any patents or other intellectual property assets or, if consummated, proves to be unprofitable for us. These higher costs could adversely affect our operating results, and if we incur losses, the value of our securities will decline.

In addition, we may acquire patents and technologies that are in the early stages of adoption in the commercial, industrial and consumer markets. Demand for some of these technologies will likely be untested and may be subject to fluctuation based upon the rate at which our licensees will adopt our patents and technologies in their products and services. As a result, there can be no assurance as to whether technologies we acquire or develop will have value that we can monetize.

In certain acquisitions of patent assets, we may seek to defer payment or finance a portion of the acquisition price. This approach may put us at a competitive disadvantage and could result in harm to our business.

We have limited capital and may seek to negotiate acquisitions of patent or other intellectual property assets where we can defer payments or finance a portion of the acquisition price. These types of debt financing or deferred payment arrangements may not be as attractive to sellers of patent assets as receiving the full purchase price for those assets in cash at the closing of the acquisition. As a result, we might not compete effectively against other companies in the market for acquiring patent assets, some of whom have greater cash resources than we have.

Our confidential information may be disclosed by other parties.

We routinely enter into non-disclosure agreements with other parties, including but not limited to vendors, law firms, parties with whom we are engaged in negotiations, and employees. However, there exists a risk that those other parties will not honor their contractual obligations to not disclose our confidential information. This may include parties who breach such obligations in the context of confidential settlement offers and/or negotiations. In addition, there exists a risk that, upon such breach and subsequent dissemination of our confidential information, third parties and potential licensees may seek to use such confidential information to their advantage and/or to our disadvantage including in legal proceedings in which we are involved. Our ability to act against such third parties may be limited, as we may not be in privity of contract with such third parties.

Competition is intense in the industries in which our subsidiaries do business and as a result, we may not be able to grow or maintain our market share for our technologies and patents.

We expect to encounter competition in the area of patent acquisition and enforcement as the number of companies entering this market is increasing. This includes competitors seeking to acquire the same or similar patents and technologies that we may seek to acquire. As new technological advances occur, many of our patented technologies may become obsolete before they are completely monetized. If we are unable to replace obsolete technologies with more technologically advanced patented technologies, then this obsolescence could have a negative effect on our ability to generate future revenues.

Our licensing business also competes with venture capital firms and various industry leaders for technology licensing opportunities. Many of these competitors may have more financial and human resources than we do. As we become more successful, we may find more companies entering the market for similar technology opportunities, which may reduce our market share in one or more technology industries that we currently rely upon to generate future revenue.

Weak global economic conditions may cause infringing parties to delay entering into licensing agreements, which could prolong our litigation and adversely affect our financial condition and operating results.

Our business plan depends significantly on worldwide economic conditions, and the United States and world economies have recently experienced weak economic conditions. Uncertainty about global economic conditions poses a risk as businesses may postpone spending in response to tighter credit, negative financial news and declines in income or asset values. This response could have a material negative effect on the willingness of parties infringing on our assets to enter into licensing or other revenue generating agreements voluntarily. Entering into such agreements is critical to our business plan, and our failure to do so could cause material harm to our business.

  

Future sales of our shares of common stock by our stockholders could cause the market price of our common stock to drop significantly, even if our business is otherwise performing well.

 

 We currently have 13,861,423As of February 20, 2015, we had 93,404,895 shares of common stock issued and outstanding, excluding shares of common stock issuable upon exercise of warrants, options or options.restricted stock units (“RSU”). As shares saleable under Rule 144 are sold or as restrictions on resale need,lapse, the market price of our common stock could drop significantly, if the holders of restricted shares sell them, or are perceived by the market as intending to sell them. This decline in our stock price could occur even if our business is otherwise performing well. We anticipate filing Registration Statements in the near term for the common stock shares underlying (a) the 2,672,756 new warrants issued in February 2012 (including 11,834 warrants issued to our placement agent) and (b) 4,718,450 options currently outstanding under our 2006 Stock Option Plan.

 

UnderTechnology company stock prices are especially volatile, and this volatility may depress the termsprice of our common stock.

The stock market has experienced significant price and volume fluctuations, and the Merger Agreement, we will issue Innovate/Protect shareholders 16,972,977market prices of technology companies have been highly volatile. We believe that various factors may cause the market price of our common stock shares and Series A Convertible Preferred stock, convertible into 21,026,637 of our common stock shares. In addition, all outstanding warrants to purchase Innovate/Protect’s common stock that are outstanding and unexercised immediately prior tofluctuate, perhaps substantially, including, among others, the Merger agreement, 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. Upon the consummation of the Merger, if consummated, the number of outstanding shares of common stock (calculated on a fully diluted basis) held by our security holders will significantly increase.following:

  

If 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 rights 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 not 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.

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.

 

The possibilitymarket prices of extensive delaysthe securities of technology companies have been highly volatile and are likely to remain highly volatile in the patent issuance process could effectively reducefuture. The stock market as a whole also has experienced extreme price and volume fluctuations that have affected the term during which a marketed product is protected 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 delaysmarket price of many technology companies in product development or findways 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 been unrelated to defend against litigation and pay damages and our business and prospects may be adversely affected.

If a third party were to assertthese companies' operating performance. Furthermore, we believe 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 availablefluctuations 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 servicestock price can also be impacted 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.

10

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.

11

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.
investor confidence.

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.

Our ability to raise capital through equity or equity-linked transactions may be limited.

In order for us to raise capital through equity or equity-linked transactions, stockholder approval is required to enable us to issue more than 19.99% of our outstanding shares of common stock pursuant to the rules and regulations of the NYSE Amex. Should stockholders not approve such issuances, our sole means to raise capital would be through debt, which could have a material adverse effect on our balance sheet and overall financial condition.

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:

a limited availability for market quotations for our securities;

reduced liquidity with respect to our securities;

a determination that our common stock is a “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common stock;

limited amount of news and analyst coverage; and

a decreased ability to issue additional securities or obtain additional financing in the future.

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.

12

If there are significant shifts in the political, economic and military conditions in Israel and its neighbors, it could have a material adverse effect on our business relationships and profitability.

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, which 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. The value of the New Israeli Shekel, or NIS, against the United States Dollar, the Euro and other currencies may fluctuate and is affected by, among other things, changes in Israel’s political and economic conditions. Any significant revaluation of the NIS may materially and adversely affect our cash flows, revenues and financial condition. Fluctuations in the NIS exchange rate, or even the appearance of instability in such exchange rate, could adversely affect our ability to operate our business.

The termination or reduction of tax and other incentives 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 programs will continue to be available in the future 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.

 

ItemITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.Not applicable.

 

ITEM 2. PROPERTIES

 

Our New York office, which serves as our corporate U.S. executive office, is located at 44 W. 28th Street780 3rd Avenue, New York, New York. The per annumannual rent for this officespace is approximately $35 thousand. The research and development facility of our subsidiary is located on the 2nd floor of the BIG Center Building, in 1 Yigal-Allon St, Beit-Shemesh, Israel. The facility is subject to a 2-year lease$403,000 and the annual rent is approximately $65 thousand. Both of these leases will expirelease expires in May 2012.October 2019. We believe that our existing facilities are adequate to accommodate our business needs.

ITEM 3. LEGAL PROCEEDINGS

 

Search Patents

On September 15, 2011, our wholly-owned subsidiary, I/P Engine initiated litigation in the United States District Court, Eastern District of Virginia, against AOL Inc., Google, Inc., IAC Search & Media, Inc., Gannett Company, Inc., and Target Corporation (collectively, the "Defendants") for infringement of claims of U.S. Patent Nos. 6,314,420 and 6,775,664, which I/P Engine acquired from Lycos, Inc.

Trial commenced on October 16, 2012, and the case was submitted to the jury on November 1, 2012. On November 6, 2012, the jury ruled in favor of I/P Engine and against the Defendants. After upholding the validity of the patents-in-suit, and determining that the asserted claims of the patents were infringed by the defendants, the jury found that reasonable royalty damages should be based on a "running royalty," and that the running royalty rate should be 3.5%. The jury also awarded I/P Engine a total of approximately $30.5 million. On November 20, 2012, the clerk entered the District Court's final judgment.

On January 3, 2014, the District Court ordered that I/P Engine recover an additional sum of $17.32 million from Defendants for supplemental damages and prejudgment interest. On January 21, 2014, the District Court ruled that Defendants' alleged design-around is "nothing more than a colorable variation of the system adjudged to infringe," and accordingly I/P Engine "is entitled to ongoing royalties as long as Defendants continue to use the modified system." On January 28, 2014, the District Court ruled that the appropriate ongoing royalty rate for Defendants' continued infringement of the patents-in-suit that "would reasonably compensate [I/P Engine] for giving up [its] right to exclude yet allow an ongoing willful infringer to make a reasonable profit" is a rate of 6.5% of the 20.9% royalty base previously set by the District Court. The Defendants also filed a separate appeal related to these matters.

On August 15, 2014, the Federal Circuit held that the asserted claims of the patents-in-suit are invalid for obviousness. On August 20, 2014, Vringo announced that I/P Engine would seek en banc review of the Federal Circuit's decision.

On October 15, 2014, I/P Engine filed a petition for rehearing en banc, in which it argues that the majority's opinion in this case presents important questions of law and is at odds with a series of Supreme Court and Federal Circuit decisions which do not allow appellate judges to disregard a jury's detailed findings under these circumstances. I/P Engine argued that review is particularly appropriate here, where the panel majority not only failed to adopt the proper legal standard, but explicitly rejected it.

On December 15, 2014, the Federal Circuit denied I/P Engine's petition for rehearing of the case en banc and consequently, we announced thatI/P Engine will seek review by the U.S. Supreme Court of the Federal Circuit's decision.

The court dockets for the foregoing cases are publicly available on the Public Access to Court Electronic Records website, www.pacer.gov, which is operated by the Administrative Office of the U.S. Courts and the website for the Supreme Court of the United States, www.supremecourt.gov.

Infrastructure Patents

As one of the means of realizing the value of the patents on telecom infrastructure, our wholly-owned subsidiaries, Vringo Infrastructure, Vringo, Inc. and Vringo Germany have filed a number of suits against ZTE, ASUS, D-Link, and certain of their subsidiaries, affiliates and other companies in the United States, European jurisdictions, India, Australia, Brazil, and Malaysia alleging infringement of certain U.S., European, Indian, Australian, Brazilian, and Malaysian patents.

ZTE

United Kingdom

On October 5, 2012, Vringo Infrastructure filed a suit in the UK High Court of Justice, Chancery Division, Patents Court, alleging infringement of three European patents. Subsequently, ZTE responded to the complaint with a counterclaim for invalidity of the patents-in-suit. Vringo Infrastructure filed a second UK suit on December 3, 2012, alleging infringement of three additional European patents.

In March 2014, Vringo Infrastructure withdrew its claim to one of the patents included in the first suit. Another patent included in the first suit was heard in a trial that commenced on October 28, 2014.

On November 28, 2014, the Court found the patent valid as amended and infringed by ZTE. Following the Court’s ruling, ZTE applied to introduce new prior art and re-argue the validity of the patent; the application was rejected on January 30, 2015. The parties will submit pleadings on remedies over the next several months. A hearing to determine the nature and course of the remedies phase of the litigation is scheduled for May 2015.

On February 17, 2015, in order to streamline and expedite the further phases of its litigation in the United Kingdom, avoid unnecessary expense, and following the receipt of information from ZTE that ZTE intends to only sell equipment in the United Kingdom that is not fully compliant with standards of ETSI, Vringo withdrew its infringement claims against ZTE on three of the four remaining European Patents in suit in the United Kingdom. Vringo’s claim against ZTE for infringement of the UK part of the remaining European Patent is still pending, and is currently scheduled to be heard by the Court in a trial starting on June 8, 2015.

Germany

On November 15, 2012, Vringo Germany filed a suit in the Mannheim Regional Court in Germany, alleging infringement of a European patent. The litigation was expanded to include a second European patent on February 21, 2013. On November 4, 2013, Vringo Germany filed a further brief with respect to the proceedings of the first European patent suit, asserting infringement by ZTE eNode B infrastructure equipment used in 4G networks. Vringo Germany re-filed the first European patent case in the Regional Court of Düsseldorf on December 5, 2014.

On December 17, 2013, the Court issued its judgment in the second European patent case, finding that ZTE infringed that patent and ordering an accounting and an injunction upon payment of the appropriate bonds. On February 19, 2014, Vringo Germany filed suit in the Mannheim Regional Court seeking enforcement of the accounting ordered and a further order that non-compliance be subject to civil and criminal penalties. On May 5, 2014, we paid a bond of €1,000,000 (approximately $1,216,000 as of December 31, 2014) to the Court in order to enforce the injunction against ZTE. On December 27, 2013, ZTE filed a notice of appeal of the Mannheim Regional Court’s judgment in the second European patent case, and on January 24, 2014, ZTE filed an emergency motion with the Court of Appeals seeking a stay of the judge’s order pending appeal. On February 24, 2014, ZTE’s motion was denied. A hearing in the appeal is scheduled for the third quarter of 2015.

On September 13, 2013 and January 28, 2014, Vringo Germany filed two suits in the Regional Court of Düsseldorf, alleging infringement of two additional European patents. Those cases were heard by the Court on November 27, 2014. On January 22, 2015, the Court issued its judgment, finding that ZTE does not infringe either patent. On February 17, 2015, Vringo filed notices of appeal for each patent. The appeal process is anticipated to take at least one year.

ZTE filed nullity suits with respect to the first and second European patents in the Federal Patents Court in Munich, Germany during the second and fourth quarters, respectively, of 2013. Trial in the nullity suit with respect to the first European patent took place on March 4, 2015. The Court indicated that it will present its findings in a written decision, which is likely to be released in the second quarter of 2015.Trial in the nullity suit with respect to the second European patent has not yet been scheduled.

ZTE filed a nullity suit with respect to the third European patent in the Federal Patents Court in Munich, Germany, in the fourth quarter of 2013. A schedule has not yet been set and the trial is not anticipated before the third quarter of 2015. In addition, ZTE filed a nullity suit with respect to the fourth European patent in the Federal Patents Court in Munich, Germany in the second quarter of 2014. A schedule has not yet been set and the trial is not anticipated before the third quarter of 2015.

China

ZTE has filed 33 reexamination requests of Vringo’s Chinese patents with the PRB of the State Intellectual Property Office of the People’s Republic of China. To date, the PRB has upheld the validity of eleven of Vringo’s patents and has held that seven of Vringo’s patents are invalid. Vringo has filed appeals on the PRB’s decision on the seven patents that are held invalid. The appeal process is expected to take at least one year. The remaining reexamination requests remain pending, with decisions expected to be rendered on a rolling basis.

On February 21, 2014, ZTE filed a civil complaint against Vringo and Vringo Infrastructure in the Shenzhen Intermediate Court alleging that Vringo violated China’s antimonopoly laws. Vringo received notice of the action on June 26, 2014. Vringo intends to vigorously contest all aspects of this action in the appropriate manner. On July 28, 2014, Vringo filed a motion to have this complaint dismissed due to lack of jurisdiction. On August 6, 2014, the Court dismissed this motion. Vringo filed an appeal of the dismissal, which was denied by the Court. Vringo is considering all aspects of this case, including further appeals.

France

On March 29, 2013, Vringo Infrastructure filed a patent infringement lawsuit in France in the Tribunal de Grande Instance de Paris, alleging infringement of the French part of two European patents. Vringo Infrastructure filed the lawsuit based on particular information uncovered during a seizure to obtain evidence of infringement, known as a saisie-contrefaçon, which was executed at two of ZTE's facilities in France. The oral hearing in relation to these patents is scheduled for April 13, 2015 before the 3rddivision of the 3rd chamber of the Tribunal de Grande Instance de Paris (specializing in IP matters). 

Australia

On June 11, 2013, Vringo Infrastructure filed a patent infringement lawsuit in the Federal Court of Australia in the New South Wales registry, alleging infringement by ZTE of two Australian patents. In March 2015, the Court granted Vringo’s request to join ZTE as a party to the action. We currently anticipate that the Court will set a trial date in 2015.

Spain

On September 6, 2013, Vringo Infrastructure filed a preliminary inquiry order against ZTE in the Commercial Court of Madrid, Spain, requiring ZTE to provide discovery relating to alleged infringement of a patent which is the Spanish counter-part of the second European patent filed in Germany.  In light of ZTE’s non-responsiveness to the order, on March 24, 2014 the Court granted our request to seek discovery of four of ZTE’s Spanish customers. We have received responses from all four customers. On July 31, 2014, ZTE filed a nullity suit in the Commercial Court of Madrid seeking to invalidate two of the Spanish counter-parts of Vringo’s European patents, including the patent found valid as amended and infringed in the United Kingdom.

India

On November 7, 2013, we and our subsidiary, Vringo Infrastructure, filed a patent infringement lawsuit in the High Court of Delhi at New Delhi, India, alleging infringement of an Indian patent related to CDMA. On November 8, 2013, the Court granted an ex-parte preliminary injunction and appointed commissioners to inspect ZTE’s facilities and collect evidence. ZTE appealed the preliminary injunction and, on December 12, 2013, the Court instituted an interim arrangement. On February 3, 2014, we filed a motion for contempt for ZTE’s failure to comply with the Court’s order, and requested that the Court order ZTE to pay an increased bond. A ruling on this motion is pending.

On January 31, 2014, we and our subsidiary, Vringo Infrastructure, filed a patent infringement lawsuit in the High Court of Delhi at New Delhi, alleging infringement of a second Indian patent related to GSM Infrastructure. The Court granted an ex-parte preliminary injunction and appointed commissioners to inspect ZTE’s facilities and collect evidence. ZTE appealed the preliminary injunction and, on August 13, 2014, the Court instituted an interim arrangement. On August 30, 2014, we filed a motion for contempt for ZTE’s failure to comply with the Court’s order, and requested that the Court order ZTE to pay an increased bond. A ruling on this motion is pending.

Brazil

On April 14, 2014, Vringo Infrastructure filed a patent infringement lawsuit in the 5th Trial Court of Rio de Janeiro State Court in Brazil, alleging infringement of a Brazilian patent related to 3G/4G/LTE infrastructure. This is the Brazilian counterpart to the patent found to be valid as amended and infringed in the United Kingdom. On April 15, 2014, the court granted an ex-parte preliminary injunction restraining ZTE from manufacturing, using, offering for sale, selling, installing, testing, or importing such infrastructure equipment, subject to a fine. To enforce the injunction, the Company posted a bond of approximately R$ 2,020,000 (approximately $752,000 as of December 31, 2014) with the court on April 17, 2014. ZTE has filed numerous appeals against the injunction since, all of which have been rejected.

On July 17, 2014, ZTE filed a nullity suit in the Federal district court in Rio de Janiero, Brazil, against both Vringo and the Brazilian patent office, seeking to invalidate Vringo’s Brazilian patent. A schedule for the remainder of this matter has not yet been set.

Malaysia

On June 23, 2014, Vringo Infrastructure filed a patent infringement lawsuit against ZTE in the High Court of Malaya at Kuala Lumpur. The Court is expected to hear the case in the fourth quarter of 2015.

Romania

On June 23, 2014, Vringo Infrastructure filed a patent infringement lawsuit against ZTE in the Bucharest Tribunal Civil Section. On July 1, 2014, the court granted an ex-parte preliminary injunction, ordering ZTE to cease any importation, exportation, introduction on the market, offer for sale, storage, sale, trade, distribution, promotion, or any other business activity regarding the infringing product. ZTE appealed the injunction and, on October 10, 2014, the Bucharest Court of Appeal suspended enforcement of the injunction in light of ZTE’s allegations that it was immediately subject to approximately €31,500,000 in contract losses, pending the outcome of the appeal. On January 8, 2015, the Court rejected ZTE’s appeal, and reinstated the injunction with immediate effect. The Court ordered Vringo to pay a bond of €240,000 in order to continue to enforce the injunction. On February 4, 2015, the Court rejected ZTE’s request for the Court to order Vringo to pay an increased bond of €40,000,000, in a final decision that may not be appealed. Vringo paid the €240,000 bond on February 11, 2015.

Netherlands

On May 28, 2014, Vringo Infrastructure commenced legal proceedings, pursuant to European Anti-Piracy Regulations, Number 1383/2003, Article 11 against ZTE in the District Court of The Hague. ZTE has filed an invalidity lawsuit for the patent-in-suit. On August 19, 2014, Vringo Infrastructure filed another suit at the District Court of The Hague, which subsumed the May 18, 2014 lawsuit. A schedule has not yet been set in this matter.

On June 4, 2014, ZTE filed suit in the District Court of Rotterdam against Vringo and Vringo Infrastructure for the alleged wrongful detention of goods under the relevant anti-piracy regulations. A schedule has not yet been set in this matter.

On July 24, 2014, ZTE filed a request with the District Court of The Hague to seek the release of ZTE UMTS products being held by Dutch customs officials and to order Vringo to ask the Dutch customs authorities to stop their actions against ZTE’s products based on the Anti-Piracy Regulations of the European Union. On October 24, 2014, the President of the Court denied ZTE’s requests, and upheld the detention of ZTE’s goods, finding, prima facie, that ZTE has infringed one of Vringo’s European patents, upholding the validity of that patent, and rejecting ZTE’s argument that Vringo has violated European competition law by enforcing that patent. ZTE was also ordered to pay Vringo’s legal costs of approximately $250,000. ZTE may choose to appeal this decision.

On October 23, 2014, ZTE filed suit in the District Court of The Hague seeking the invalidity of Vringo’s European Patent that is the subject of the other proceedings taking place in the same Court. A hearing in this matter has not yet been scheduled.

United States

On July 2, 2014, Vringo filed suit in the United States District Court for the Southern District of New York seeking a temporary restraining order and preliminary and permanent injunctions against ZTE, enjoining ZTE’s use of prohibited materials captured under NDA, including but not limited to ZTE’s use of such materials in its antitrust lawsuit in China against Vringo and Vringo Infrastructure. On July 7, 2014, the court granted a temporary restraining order against ZTE’s use of such material. On July 23, 2014, ZTE filed a counterclaim against Vringo. On July 24, 2014, the Court held a hearing on Vringo’s motion for a preliminary injunction against ZTE. A ruling on this motion is pending. On October 2, 2014, Vringo filed a motion for judgment on the pleadings, similar to a motion for summary judgment, asking the court to render a judgment on Vringo’s cause of action based solely on the pleadings of the parties. A ruling on this motion is pending.

On February 5, 2015, ZTE filed suit in the United States District Court for the District of Delaware alleging that Vringo breached its contractual obligations to ETSI, which it assumed from Nokia when it purchased its infrastructure patent portfolio. On February 6, 2015, the Court granted a temporary restraining order and preliminary injunction against Vringo. On February 10, 2015, the Court dissolved the temporary restraining order and preliminary injunction and granted Vringo’s request to transfer the case to the United States District Court for the Southern District of New York.

On February 5, 2015, ZTE filedinter partes review (“IPR”) requests for five of Vringo’s United States Patents. The requests, filed with the Patent Trial and Appeal Board (“PTAB”) of the United States Patent and Trademark Office will remain pending until the PTAB makes a decision on whether to grant the requests and, thus, review the patents. While these patents have counterparts being litigated by Vringo in other parts of the world, none of these United States Patents are currently in litigation.

European Commission

On April 10, 2014, ZTE filed a complaint with the European Commission. We believe that the accusations are not accurate. The European Commission has not yet set the schedule for this matter.

ASUS

Germany

On October 4, 2013 and January 29, 2014, Vringo Germany filed two patent infringement lawsuits against ASUS in the Düsseldorf Regional Court, alleging infringement of two European patents. Those cases were heard by the Court on November 27, 2014. On January 22, 2015, the Court issued its judgment, finding that ASUS does not infringe either patent. On February 17, 2015, Vringo filed notices of appeal for each patent. The appeal process is anticipated to take at least one year.

ASUS filed nullity suits with respect to the first and second European patents in the Federal Patents Court in Munich, Germany, during the second quarter of 2014. Trials in the nullity suits have not been scheduled but are not anticipated before the second quarter of 2016 for the first patent and the second quarter of 2015 for the second patent.

Spain

On February 7, 2014, Vringo Infrastructure filed suit in the Commercial Court of Barcelona alleging infringement of a patent which is the Spanish counter-part of the first European patent filed in Germany. The oral hearing for this case was heard before the Commercial Court of Barcelona on November 25, 2014. Judgment is pending. On December 19, 2014, ASUS filed a nullity suit with respect to the same patent. A schedule for the case has not yet been set.

India

On April 15, 2014, Vringo Infrastructure filed suit in the High Court of Delhi, New Delhi alleging infringement of a patent related to use of dictionaries in search engines preloaded on certain ASUS devices. Google has successfully petitioned to intervene as an interested party to anyand, by right, has filed responsive pleadings. A schedule for the remainder of case has not yet been set.  

Tyco

On April 28, 2014, we entered into a confidential agreement with Tyco that resolved all litigation in any court,pending between the parties.

Belkin

On October 1, 2014, we entered into a confidential agreement with Belkin that resolved all litigation pending between the parties.

D-Link

On December 4, 2014, Iron Gate Security, Inc., a wholly-owned subsidiary of Vringo, filed suit against D-Link Corporation and management isD-Link Systems, Inc., alleging infringement of a United States Patent. A schedule for this matter has not awareyet been set.

Other Legal Matters

On January 13, 2015, Vringo Infrastructure received a Notice of any contemplated proceeding by any government authority against us.Anti-Monopoly Investigation Interview from the National Development and Reform Commission of the People’s Republic of China.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.applicable.

 

13

PART II

 

ITEM 5. MARKET FOR THE REGISTRANT'SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock has beenwas listed on the NYSE AmexMKT until April 29, 2013, under the symbol "VRNG" since July 27, 2010.“VRNG.” As of April 30, 2013, our common stock is listed on the NASDAQ Capital Market under the same symbol “VRNG.” The following table sets forth, for the periods indicated, the high and low sales prices for our common stock:stock as reported by the NYSE MKT and the NASDAQ Capital Market:

 

 High   Low   High Low 
Year ending December 31, 2011        
Year ended December 31, 2014        
First quarter $2.30  $1.49  $5.45  $2.90 
Second quarter $2.45  $1.01   4.27   2.91 
Third quarter $2.05  $1.14   3.66   0.67 
Fourth quarter $1.64  $0.99  $1.14  $0.49 
        
  High   Low 
Year ending December 31, 2010        
Third quarter $3.35  $1.25 
Fourth quarter $3.10  $2.04 

  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 

 

Our public warrants have beenwere listed on the NYSE AmexMKT until April 30, 2013, under the symbol "VRNGW" since July 27, 2010.“VRNGW.” As of April 30, 2013, our public warrants were listed on the NASDAQ Capital Market under the same symbol “VRNGW.” The following table sets forth, for the periods indicated, the high and low sales prices for our public warrants:warrants as reported by the NYSE MKT and the NASDAQ Capital Market:  

  High  Low 
Year ended December 31, 2014        
First quarter $2.00  $0.85 
Second quarter  1.40   0.80 
Third quarter  1.14   0.07 
Fourth quarter $0.12  $0.01 

 

 High  Low  High Low 
Year ending December 31, 2011        
Year ended December 31, 2013        
First quarter $0.26  $0.04  $1.45  $1.00 
Second quarter $0.25  $0.01   1.54   0.85 
Third quarter $0.15  $0.00   1.49   0.79 
Fourth quarter $0.12  $0.01  $1.38  $0.82 
        
  High   Low 
Year ending December 31, 2010        
Third quarter $0.35  $0.16 
Fourth quarter $0.39  $0.09 

 

HoldersStockholders

 

As of March 27, 2012,February 20, 2015, we had 61 holders11 stockholders of record of the 93,404,895 outstanding shares of our common stock. This does not reflect persons or entities that hold their stock in nominee or "street" name through various brokerage firms.

 

Dividend Policy

 

We have never declared or paid any cash dividends on our capital stock, and do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance our operations and to expand our business. Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our financial condition, operating results, capital requirements and other factors that our board of directors considers appropriate.

 

Issuer Purchases of Equity Securities

 

None.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

ITEM 6. SELECTED FINANCIAL DATA

 

We are a smaller reporting companyThe consolidated selected balance sheet data as of December 31, 2014 and therefore, we are2013 and the consolidated selected statements of operations data for the years ended December 31, 2014, 2013 and 2012 set forth below have been derived from our audited consolidated financial statements included elsewhere herein, and should be read in conjunction with those financial statements (including notes thereto). The consolidated selected balance sheet data as of December 31, 2011 and the consolidated selected statement of operations data for the period from June 8, 2011 through December 31, 2011 have been derived from audited consolidated financial statements not requiredincluded herein, but which were previously filed with the SEC. The financial statements for periods prior to providethe Merger reflect the historical results of I/P, and the financial statements for all periods from July 19, 2012 reflect the results of the combined company.

The information required bybelow should be read in conjunction with the consolidated financial statements (and notes thereon) and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in Item 7 of this Item ofAnnual Report on Form 10-K.

 

14

Consolidated Statements of Operations Data

  For the Years Ended December 31,  For the period
from June 8, 2011
through
December 31,
 
  2014  2013  2012  2011 
             
Revenue $1,425,000  $1,100,000  $100,000  $ 
Operating legal costs  25,368,000   21,590,000   10,010,000   1,233,000 
Amortization and impairment of intangibles  5,123,000   3,445,000   1,692,000   328,000 
Research and development  889,000   1,512,000   543,000    
General and administrative  15,484,000   15,330,000   10,226,000   1,185,000 
Goodwill impairment  65,757,000          
Operating loss from continuing operations  (111,196,000)  (40,777,000)  (22,371,000)  (2,746,000)
Loss from continuing operations before income taxes  (109,222,000)  (41,748,000)  (18,409,000)  (2,754,000)
Income tax expense            
Loss from continuing operations  (109,222,000)  (41,748,000)  (18,409,000)  (2,754,000)
Loss from discontinued operations  (455,000)  (10,685,000)  (2,432,000)   
Net loss  (109,677,000)  (52,433,000)  (20,841,000)  (2,754,000)
                 
Net loss per share $(1.23) $(0.63) $(0.53) $(0.33)
Diluted net loss per share $(1.24) $(0.63) $(0.61) $(0.33)

Consolidated Balance Sheet Data

 At December, 
  2014  2013  2012  2011 
             
Cash and cash equivalents $16,023,000  $33,586,000  $56,960,000  $5,212,000 
Total assets $37,435,000  $123,810,000  $157,786,000  $8,314,000 
Total liabilities $6,255,000  $9,528,000  $9,454,000  $3,649,000 
Total stockholders’ equity $31,180,000  $114,282,000  $148,332,000  $4,665,000 

 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, our consolidated financial statements (including notes to the consolidated financial statements) and the other consolidated financial information appearing elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. Actual results and timing of events could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

Overview

Vringo strives to develop, acquire, license and protect innovation worldwide. We are currently focused on identifying, generating, acquiring, and deriving economic benefits from intellectual property assets. We plan to continue to expand our portfolio of intellectual property assets through acquiring and internally developing new technologies. We intend to monetize our technology portfolio through a variety of value enhancing initiatives, including, but not limited to:

licensing,

strategic partnerships, and

litigation.

 

We providewere incorporated in Delaware on January 9, 2006 and completed an initial public offering in June 2010. On July 19, 2012, Vringo closed the Merger with I/P.

On August 9, 2012, we entered into a rangepatent purchase agreement with Nokia, comprising of software products124 patent families with counterparts in certain jurisdictions world-wide. The total consideration paid for mobile video entertainment, personalizationthe portfolio was $22,000,000. Under the terms of the purchase agreement, to the extent that the gross revenue generated by such portfolio exceeds $22,000,000, we are obligated to pay a royalty of 35% of such excess. The portfolio encompasses technologies relating to telecom infrastructure, including communication management, data and signal transmission, mobility management, radio resources management and services. Declarations were filed by Nokia indicating that 31 of the 124 patent families acquired may be essential to wireless communications standards. We also acquired certain patent portfolios during 2012 and 2013, and have filed over 60 internally developed patent applications since the Merger.

On February 18, 2014, we closed a transaction with InfoMedia for the sale of certain assets and the assignment of certain agreements related to our mobile social applications. Our comprehensive software platforms include applications that allow users to: (i) create, downloadapplication business. As consideration, we received 18 Class B shares of InfoMedia, which represent an 8.25% ownership interest in InfoMedia. InfoMedia is a privately owned, UK based, provider of customer relationship management and sharemonetization technologies to mobile video entertainment content in the form of video ringtones for mobile phones, (ii) create social picture ringtonecarriers and ringback content in the form of animated slideshows sourced from friends’ social networks, (iii) create ReMixed video clips from artists and branded content, and (iv) utilize Fan Loyalty mobile applications for contestant based reality TV shows. We believe that our services represent the next stage in the evolution of the mobile content and mobile social applications market. We anticipate that the mobile content and service market will begin to migrate from standard audio ringtones and content to high-quality video services, with social networking capability and integration with web systems. We also believe that social network information and updates will be shared regularly when friends regularly communicate by voice and by text. Our video ringtone solutions and other mobile social and video applications, which encompass a suite of mobile and PC-based tools, enable users to create, download and share video and other social content with ease asdevice manufacturers. As part of the normal communication process,transaction, we will have the opportunity to license certain intellectual property assets and provide our business partners with a consumer-friendlysupport InfoMedia to identify and easy-to-integrate monetization platform.protect new intellectual property.

 

We are a development stage company. From inception through December 31, 2011, we have raised approximately $31.8 million. These amounts have been used to finance our operations, as until now, we have not yet generated any significant revenues. From inception through December 31, 2011, we recorded losses of $37.5 million and net cash outflow from operations of $29.3 million. Our average monthly cash burn rate from operations for the year ended December 31, 2011, was approximately $0.45 million.

In July 2011, we raised an aggregate amount 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,June 19, 2014, we entered into agreements with holders (the “Holders”) of certain of our outstanding Special Bridge and Conversion Warrants,warrant holders, pursuant to which the Holderswarrant holders exercised for cash 5,697,227 of their outstanding Series 1 and Series 2 warrants, with an exercise price of $1.76 per share. In addition, we granted such warrant holders unregistered warrants of the Company to purchase 3,828,993 sharesan aggregate of our common stock for aggregate proceeds of $3.6 million. Refer also to Note 17 to the accompanying financial statements.

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 of5,412,366 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$5.06 per share.share (the “June 2014 Warrants”). The issuedJune 2014 Warrants expire on June 21, 2015 and outstanding warrantbecause such warrants do not bear any down-round protection clauses, they are classified as equity instruments. As a result of these transactions, we received approximately $10 million of cash proceeds.

Financial Conditions

Since January 2012, we have raised approximately $100,710,000 which has been used to purchase Innovate/Protect Common Stock shall be exchangedfinance our operations. As of now, we have not yet generated any significant revenues. For the years ended December 31, 2014, 2013 and 2012, we recorded net losses (including non-cash expenses) of $109,677,000, $52,433,000, and 20,841,000, respectively. The net loss for 250,000 sharesthe year ended December 31, 2014 includes a non-cash goodwill impairment charge of Vringo$65,757,000 that was recorded during the fourth quarter of 2014 in connection with our annual goodwill impairment test. As a result of the first step of the goodwill impairment test, it was determined that the fair value of the reporting unit did not exceed its carrying amount as of December 31, 2014, mainly due to the decline of our common stock price during the fourth quarter of 2014. Accordingly, we performed the second step of the goodwill impairment test and 850,000 warrantsdetermined that the implied value of its goodwill was zero. Refer to purchase 850,000 sharesNote 6 of Vringo Common Stockthe accompanying consolidated financial statements for further discussion of this impairment charge.

Net cash used in operations during the years ended December 31, 2014, 2013 and 2012 was approximately $28,382,000, $23,465,000, and $14,468,000, respectively. Our average monthly use of cash from operations for the years ended December 31, 2014, 2013 and 2012 was approximately $2,365,000, $1,955,000 and $1,205,000, respectively. This is not necessarily indicative of the future use of our working capital. In addition, we paid approximately $2,404,000 in deposits with an exercise pricecourts during 2014 related to proceedings in Germany, Brazil, and Malaysia.

Our operating plans include increasing revenue through the licensing of $1.76 per share.our intellectual property, strategic partnerships, and litigation, when required, which may be resolved through a settlement or collection. Disputes regarding the assertion of patents and other intellectual property rights are highly complex and technical. The majority of our expenditures consist of costs related to our four litigation campaigns. A large percentage of these costs were incurred in the United Kingdom, Australia, Germany, Brazil, the Netherlands, and France. In civil law jurisdictions, such as Germany, France, Spain, and others, the majority of costs are incurred in the early stages of litigation. With respect to our litigation in such countries, the respective campaigns are currently in the later stages and therefore we have already incurred the large majority of the related anticipated costs. As such, based on our plans, costs in these jurisdictions are projected to be lower in 2015 and other future periods.

Despite our plans, our legal proceedings may continue for several years and may require significant expenditures for legal fees and other expenses. Further, should we be deemed the losing party in certain of our litigations, we may be liable for some or all of our opponents’ legal fees. In addition, in connection with litigation, we have made several affirmative financial guarantees to courts around the world, and might face the need to make additional guarantees in the future.

 

In addition, at the effectiveour plans to continue to expand our planned operations through acquisitions and monetization of additional patents, other intellectual property or operating businesses may be time of the Merger, each outstandingconsuming, complex and unexercised optioncostly to purchase Innovate/Protect Common Stock (each a “Innovate/Protect Stock Option”), whether vested or unvested will be converted intoconsummate. We may utilize many different transaction structures in our acquisitions 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 ussuch acquisition agreements tend to be heavily negotiated. Our ability to raise capital may be exercised solelylimited. Even if we are able to acquire particular patents or other intellectual property assets, there is no guarantee that we will generate sufficient revenue related to those assets to offset the acquisition costs. Therefore, no assurance can be given at this time as to whether we will be able to achieve our objectives or whether we will have the sources of liquidity 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.follow through with our operating plans.

 

Immediately following the completion of the Merger, the former stockholders of Innovate/Protect are expectedIn addition, until we generate sufficient revenue, we may need 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. There 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 warrantsraise additional funds, which may be adversely affected. We are currently evaluatingachieved through the effectissuance of the proposed Merger on ouradditional equity or debt, or through loans from financial statements. We believe such effect will be material.

15

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.institutions. There can be no assurance, however, that any such opportunities will materialize. AllWe may also be able to raise additional funds through the exercise 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 realizationsoutstanding warrants and options, however, substantially all 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 wesuch outstanding equity instruments 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) persuasive evidence of an arrangement exists, (ii) collectioncurrently “out of the fee is probable, (iii) the sales price is fixed and determinable and (iv) delivery has occurred or services have been rendered. Our subscription service 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 of third party expenses directly related to providing our service in launched markets. In addition, these costs include royalty fees for content sales and amortization of prepaid content licenses. Cost of revenue does not include expenses related to product development, integration, and support. These costs are included in research and development and marketing expenses.

Research and development expenses

 Research and development expenses consist primarily of salary expenses of our development and quality assurance engineers in our research and development facility in Israel, outsourcing of certain development activities, preparation of patent filings, labor cost incurred in connection with customer integration, server and support functions for our development environment.

Marketing expenses

Marketing expenses include the salary of all business development and marketing 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.

General and administrative expenses

General and administrative expenses primarily include the salary of our finance and administrative personnel, rental costs, legal and accounting fees, insurance, telephone and other office expenses including depreciation and amortization.

Non-operating income (expenses)

Non-operating income (expenses) includes transaction gains (losses) from foreign exchange rate differences, interest on deposits, bank charges, interest and discount amortization expenses on our venture loan and Convertible Notes. In addition, non-operating income (expenses) includes a gain on restructuring of venture loan in light of the settlement agreement signed June 8, 2011. As well as fair value adjustments of derivative liabilities on account of the Special Bridge Warrants and the Conversion Warrants, which are highly influenced by our stock price at the period end (revaluation date).

Income taxes

Our effective tax rate differs from the statutory federal rate primarily due to differences between income and expense recognition prescribed by income tax regulations and generally accepted accounting principles. We utilize different methods and useful lives for depreciating and amortizing property and equipment and different methods and timing for certain expenses. Furthermore, permanent differences arise from certain income and expense items recorded for financial reporting purposes but not recognizable for income tax purposes. In addition, our income tax expense has been adjusted for the effect of foreign income from our wholly owned subsidiary. At December 31, 2011, our deferred tax assets generated from our U.S. activities were entirely offset by a valuation allowance because realization depends on generating future taxable income, which, in our estimation, is not more likely than not to be generated. The deferred tax assets and liabilities generated from our subsidiary's operations are not offset by an allowance, as in our estimation, they are more likely than not to be realized.

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.

16

Results of Operations

Year ended December 31, 2011, 2010 and the development stage period (cumulative from inception through December 31, 2011)

Revenue

  Year Ended December 31,  Cumulative
 from inception to
December 31,
 
  2011  2010  Change  2011 
  U.S.$ thousands 
Revenue  718   211   507   949 

During the year ended December 31, 2011, we recorded revenues of $718 thousand, which represents an increase of $507 thousand (or 240%) from revenues recorded for the year ended December 31, 2010. The increase was mainly due to increased video ringtone subscription revenue in Malaysia ($312 thousand in 2011, compared to the $94 thousand in 2010), and the United Arab Emirates ($90 thousand in 2011, compared to the $54 thousand in 2010), development of Facetones™ ($75 thousand recognized in 2011), development of Fan Loyalty application ($80 thousand recognized 2011), Video ReMix platform ($30 thousand recognized in 2011). In the first quarter of 2012, the number of subscribers in Malaysia was reduced due to system updates of recycled numbers from the regulated carrier database. We do not expect this change to have a material effect on our future revenue.

At the end of 2009 we commenced monetization of our subscription service by launching with carriers primarily in Malaysia and Armenia. As a result, the increase in revenue in 2010, in the total amount of $191 thousand, was mainly related to revenues from those revenue-sharing agreements. In Malaysia, we recognized $94 thousand (compared to $2 thousand in 2009). In Armenia we recognized $35 thousand (compared to $17 thousand in 2009). In addition, we recorded $54 thousand from subscription service launched in 2010 in the United Arab Emirates.

From inception through December 31, 2011, we recorded revenues of $949 thousand, 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.

We expect to continue to generate a substantial portion of our future revenues from: (i) Facetones™ preloads through the agreement with ZTE, (ii) Facetones™ app, Video ReMix, and Fan Loyalty application platforms, (iii) revenue-sharing agreements in Malaysia, Singapore, United Arab Emirates and UK.

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 

During the year ended December 31, 2011 our cost of revenue was $155 thousand, which represents an increase of $180 thousand (-14%) from our cost of revenue for the year ended December 31, 2010. Our cost of revenue is mainly comprised of cost of services related to the provision of content to end-users and cost of hosted servers needed to support our service in markets where we have launched our product. The decrease in cost of revenue recorded year ended December 31, 2011, compared with year ended December 31, 2010, is mainly related to a decrease in content purchases and content related amortization expenses.

We commenced monetization of our subscription service model at the end of 2009. As a result, cost of revenue recorded in 2010 increased by 481%, 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.

17

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 from $2,503 thousand to $2,017 thousand (-19%) during the year ended December 31, 2011, compared to the year ended December 31, 2010. The decrease is primarily due to lower salary and compensation expenses, a result of salary reductions (a decrease of $351 thousand compared to 2010), offset by the effect of a separation agreement signed with one of our officers, and lower consulting costs (a decrease of $170 thousand compared to 2010), all as part of the cost saving plan implemented by us 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.

From inception through December 31, 2011, research and development expenses amounted to approximately $13.4 million. Of this amount, approximately $8.7 million was attributed to salaries and related expenses, $0.5 million to share based payments, $2.1 million was attributed to sub-contracting and consulting services, $0.9 million was attributed to operating expenses, $0.3 million was attributed to overhead and $0.9 million was attributed to patent expenses.

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 increasemoney” 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, mainlydecline 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 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.

18

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 was attributed to various office expenses, $2.1 million was attributed to professional fees and $0.5 million was attributed to depreciation and amortization.

We expect that our general and administrative expenses will increase, as we expect to incur significant costs in connection with future merger, acquisition and financing activities. These costs will be reflected in increased accounting, legal and insurance costs, as well as, increased costs related to meeting our obligations under the Sarbanes-Oxley Act. We also expect that our compensation costs will increase significantly due to the recording of expense related to management share based compensation.

Non-operating income (expense), Net

  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)

During the year ended December 31, 2011, we recorded net non-operating expense in the amount of $1.0 million, compared to a net non-operating expense in the amount of $ 3.4 million, in the year ended December 31, 2010.

During the year ended December 31, 2011, we recorded $1.0 million income in connection with the settlement of the venture loan. This income was offset by non-operating expense of approximately $0.4 million recorded in connection with the revaluation 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 recording of the Bridge Notes, issued on 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, as a result of the conversion of the Bridge Notes we recorded an additional interest expense of approximately $1.1 million on account of the beneficial conversion feature from the loan and an additional $0.1 million on account of the additional Special Bridge Warrants issued to investors 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 for 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 the Special Bridge Warrants and the Conversion Warrants, and $1.3 million expense recorded in connection with amortization of discount on Convertible Notes.

19

We expect that our non-operating expenses will remain high and volatile, as we continue to fund our operations through additional financing. In particular, non-operating expenses will be affected by the adjustments to fair value of our derivative instruments. Fair value of these derivative instruments depends on variety of assumptions, such as estimations regarding triggering of down-round protection and estimated future share price. An estimated increase in the price of our common stock increases the value of the warrants and thus results in a loss on our statement of operations. In addition, high estimated probability of a down round protection, increases the value of the warrants and again results in a loss on our statement of operations. Also see Note 11 to the accompanying financial statements.

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 

During the year ended December 31, 2011, we recorded income tax expenseprice which began in the total amountthird quarter of $90 thousand, which reflects an increase of $55 thousand compared to tax expense of $35 thousand recorded in the year ended December 31, 2010. In addition, income tax expense recorded during the year ended December 31, 2010, which reflects a decrease of $38 thousand compared to tax expense of $73 thousand recorded in the year ended December 31, 2009. Taxes on income are mainly due to taxable profits generated by our subsidiary, as a result of the intercompany cost plus agreement between us and the subsidiary, whereby the subsidiary performs development and other services for us and is reimbursed for its expenses plus 8%. In addition, during the year ended December 31, 2011 and 2010, we recorded income tax expense of $35 thousand and $5 thousand, respectively, in connection with tax withheld at source by our partner in Malaysia, which we do not expect to be reclaimed.

From inception through December 31, 2011, income tax expense totaled $119 thousand. We expect tax expense to increase as our business grows and as our subsidiary continues to profit from the cost plus agreement.

Liquidity and Capital Resources

As of December 31, 2011, we had a cash balance of $1.2 million and $1million in net working capital. The decrease of $4.2 million in our cash balance from December 31, 2010, was mainly due to cash used by us in our business operations ($ 5.4million) and venture loan repayment ($2.1 million), offset by the receipt of the funds from the Convertible Notes ($2.5 million) and the December 2011 financing ($0.85 million). As of December 31, 2011, our total deficit in stockholders' equity was $1.2 million, mainly due to continued operating deficits from inception to date, and partially due to the classification of the Special Bridge Warrants and the Conversion Warrants as derivative liabilities rather than equity securities.

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 additional warrants to purchase approximately 2.66 million of our shares. According 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 to the accompanying financial statements), is an increase of approximately $4.1 million in our total stockholder’s equity.

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.

2014.

We anticipate that we will continue to issue equity and/or debt securities as a sourceseek additional sources of liquidity, when needed, until we generate positive cash flowflows to support our operations. We cannot give any assurance that the necessary capital will be raised or that, if funds are raised, it will be on favorable terms. If we are unable to obtain additional funding on a timely basis, we may be required to curtail or terminate some of our business plans. Any future sales of securities to finance our operations may require stockholder approval and will dilute existing stockholders' ownership. We cannot guarantee when or if we will ever generate positive cash flow.flows.

 

20

The circumstances described above raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements have been prepared assuming that we will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

Results of Operations

Revenue

Revenue from patent licensing and enforcement is recognized when collection is reasonably assured, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and delivery of the service has been rendered. We use management's best estimate of selling price for individual elements in multiple-element arrangements, where vendor specific evidence or third party evidence of selling price is not available.

Currently, our revenue arrangements provide for the payment of contractually determined fees in consideration for the grant of certain intellectual property rights related to our patents. These rights typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patents, (ii) the release of the licensee from certain claims, and (iii) the dismissal of any pending litigation. The intellectual property rights granted may be perpetual in nature, extending until the expiration of the related patents, or can be granted for a defined, relatively short period of time, with the licensee possessing the right to renew the agreement at the end of each contractual term for an additional minimum upfront payment. Pursuant to the terms of these agreements, we have no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on our part to maintain or upgrade the related technology, or provide future support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement, or upon receipt of the minimum upfront payment for term agreement renewals. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, upon receipt of the minimum upfront fee for term agreement renewals, and when all other revenue recognition criteria have been met.

Operating legal costs

Operating legal costs mainly include expenses incurred in connection with our patent licensing and enforcement activities, patent-related legal expenses paid to external patent counsel (including contingent legal fees), licensing and enforcement related research, consulting and other expenses paid to third parties, as well as related internal payroll expenses and stock-based compensation.  

Amortization and impairment of intangibles

Amortization of intangibles represents the amortization expense of our acquired patents which is recognized on a straight-line basis over the remaining legal life of the patents. Impairment charges related to our acquired patents are recorded when an impairment indicator exists and the carrying amount of the related asset exceeds its fair value.

Research and development expenses

Research and development expenses consist primarily of the cost of our development personnel, as well as of the cost of outsourced development services.

General and administrative expenses

General and administrative expenses include management and administrative personnel, public and investor relations, overhead/office costs and various professional fees, as well as insurance, non-operational depreciation and amortization. 

Goodwill impairment

Goodwill is reviewed for impairment at least annually, and when triggering events occur, in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). Impairment charges related to our goodwill are recorded based on the results of such impairment tests, if required.

Non-operating income (expenses)

Non-operating income (expenses) includes transaction gains (losses) from foreign exchange rate differences, interest on deposits, bank charges, as well as fair value adjustments related to our derivative warrant liabilities. The value of such derivative warrant liabilities is highly influenced by assumptions used in its valuation, as well as by our stock price at the period end (revaluation date). 

Income taxes

As of December 31, 2014, deferred tax assets generated from our U.S. activities were offset by a valuation allowance because realization depends on generating future taxable income, which, in our estimation, is not more likely than not to be generated before such net operating loss carryforwards expire.

Prior to the sale of our mobile social application business, our subsidiary in Israel generated net taxable income from services it provided to us. The subsidiary in Israel charged us for research, development, certain management and other services provided to us, plus a profit margin on such costs, which was 8%. In the zone where the production facilities of the subsidiary in Israel were located, the statutory tax rate was 12.5% in 2013.  

Year ended December 31, 2014 compared to the year ended December 31, 2013

Revenue

  Year ended December 31, 
  2014  2013  Change 
Revenue $1,425,000  $1,100,000  $325,000 

During the year ended December 31, 2014, we recorded total revenue of $1,425,000, which represents an increase of $325,000 (or 29.5%) as compared to the year ended December 31, 2013. Revenue during the year ended December 31, 2014 was due to certain one-time payments in connection with license and settlement agreements for certain of our owned intellectual property. Revenue during the year ended December 31, 2013 of $1,100,000 mostly relates to a one-time payment in connection with the license and settlement agreement entered into with Microsoft for $1,000,000.

We seek to generate revenue through the monetization of our intellectual property through licensing, strategic partnerships and litigation, when required, which may be resolved through a settlement or collection. We also intend to continue to expand our planned operations through acquisitions and monetization of additional patents, other intellectual property or operating businesses. In particular, following the incorporation of our subsidiary in Germany and the acquisition of a patent portfolio from Nokia, we intend to continue to expand our intellectual property monetization efforts worldwide. 

Acquisitions of patents or other intellectual property assets are often time consuming, complex and costly to consummate. We may utilize many different transaction structures in our acquisitions and the terms of such acquisition agreements tend to be heavily negotiated. Our ability to raise capital may be limited. Even if we are able to acquire particular patents or other intellectual property assets, there is no guarantee that we will generate sufficient revenue related to those assets to offset the acquisition costs. We anticipate that our legal proceedings may continue for several years and may require significant expenditures for legal fees and other expenses. Disputes regarding the assertion of patents and other intellectual property rights are highly complex and technical.

Operating legal costs

  Year ended December 31, 
  2014  2013  Change 
Operating legal costs $25,368,000  $21,590,000  $3,778,000 

During the year ended December 31, 2014, our operating legal costs were $25,368,000, which represents an increase of $3,778,000 (or 17.5%) from operating legal costs recorded for the year ended December 31, 2013. This increase was primarily due to the timing and nature of consulting and patent litigation costs related to legal proceedings against Google and ZTE. During the year ended December 31, 2014, there were costs associated with the oral argument heard in the appeals court in May 2014 in connection with our legal proceedings against Google. With respect to our legal proceedings against ZTE, costs during the year ended December 31, 2014 were associated with our continued worldwide litigation efforts, including commencement of legal actions in Brazil, Malaysia, Spain, Netherlands, and other countries. In addition, we incurred costs during the current period in the U.S. related to our efforts in obtaining the temporary restraining order and preliminary and permanent injunctions against ZTE related to its use of prohibited materials captured under a non-disclosure agreement. There was also an increase in stock-based compensation expense (approximately $122,000) due to the expansion of our in-house legal department staff.

It is uncertain whether our operating legal costs will increase over time. Though we aim to diversify our portfolio of products and increase our intellectual property monetization efforts, we have also increased the size of our in-house legal department staff as mentioned above. The goal is to decrease our overall legal expenses by performing more work in-house, which we believe will cost less than outsourcing to external firms. There is no guarantee, however, that an in-house team will be less expensive or more efficient than outsourcing this work. Moreover, as we expand the scope of our monetization efforts, the amount of legal work will increase leading to a concomitant increase in our operating legal costs, regardless of if such work is performed in-house or outsourced.  

Amortization and impairment of intangibles

  Year ended December 31, 
  2014  2013  Change 
Amortization and impairment of intangibles $5,123,000  $3,445,000  $1,678,000 

During the year ended December 31, 2014, amortization expense and impairment charges related to our intangibles totaled $5,123,000 which represents an increase of $1,678,000 (or 48.7%) from amortization and impairment of intangibles recorded for the year ended December 31, 2013. Currently, our intangible assets consist of our patent portfolios which are amortized over their remaining useful lives (i.e., through the expiration date of the patent). During the third quarter of 2014, we recorded an impairment charge of $1,355,000 related to the patent portfolio containing the patents-in-suit in I/P Engine's litigation against AOL Inc., Google Inc. et al. There were no impairment charges related to our patents during the year ended December 31, 2013. The remaining increase of $323,000 during the current period was due to the additional amortization of patent portfolios that were acquired during the fourth quarter of 2013.

Research and development

  Year ended December 31, 
  2014  2013  Change 
Research and development $889,000  $1,512,000  $(623,000)

During the years ended December 31, 2014 and 2013, our research and development expenses amounted to $889,000 and $1,512,000, respectively. These amounts exclude research and development expenses related to our mobile social application business which is presented in discontinued operations. The decrease of $623,000 (or 41.2%) is primarily due to a decrease in costs related to third party consultants who were engaged on certain projects during 2013. Such projects had ended prior to 2014 and therefore these third party consultants were no longer utilized in the current period.

As mentioned above, in February 2014, we sold our mobile social application business to InfoMedia. As part of the sale agreement, the employment of our mobile products and services personnel were assumed by InfoMedia. 

General and administrative

  Year ended December 31, 
  2014  2013  Change 
General and administrative $15,484,000  $15,330,000  $154,000 

During the year ended December 31, 2014, general and administrative expenses increased by $154,000 (or 1.0%), to $15,484,000, compared to $15,330,000 that was recorded during the year ended December 31, 2013. The overall increase in general and administrative expenses was primarily due to increased costs in connection with our efforts to consolidate our executive management and finance functions in a centralized location. In addition, there was an increase in corporate legal, insurance, and accounting costs as compared to the prior year.

Goodwill impairment

  Year ended December 31, 
  2014  2013  Change 
Goodwill impairment $65,757,000  $  $65,757,000 

During the year ended December 31, 2014 we performed our annual test for goodwill impairment. Based on the first step of the goodwill impairment test, it was determined that the fair value of the reporting unit did not exceed its carrying amount as of December 31, 2014, mainly due to the decline of our common stock price during the fourth quarter of 2014. Accordingly, we performed the second step of the goodwill impairment test and determined that the implied value of our goodwill was zero. As a result, we recorded a goodwill impairment charge of $65,757,000, reducing our goodwill balance to zero as of December 31, 2014. Refer to Note 6 to the accompanying consolidated financial statements for further discussion.

Non-operating income (expense), net

  Year ended December 31, 
  2014  2013  Change 
Non-operating income (expense), net $1,974,000  $(971,000) $2,945,000 

During the year ended December 31, 2014, we recorded non-operating income, net, of $1,974,000 compared to non-operating expense, net, of $971,000 during the year ended December 31, 2013. Included in non-operating income, net, for the year ended December 31, 2014 is approximately $2,201,000 related to a decrease in the fair value of our derivative warrant liabilities during the year. The fair value of our derivative warrant liabilities depends on a variety of assumptions and is significantly driven by our common stock price on the fair value measurement date. An increase in the price of our common stock increases the value of the warrants, resulting in a loss on our consolidated statements of operations. A decrease in the price of our common stock decreases the value of the warrants, resulting in a gain on our consolidated statements of operations.

During the third and fourth quarter of 2014, we experienced a decline in our common stock price. The increase in income related to the fair value of our derivative warrant liabilities during the current year was directly attributable to this common stock price decline. During the year ended December 31, 2013, a charge of $1,574,000 was recorded related to the removal of the down-round protection clause in certain then outstanding Series 1 Warrants. This charge was partially offset by income of $421,000 related to a decrease in fair value of our then remaining derivative warrant liabilities.

We expect that our non-operating income (expense) will remain highly volatile, and we may choose to fund our operations through additional financing. In particular, non-operating income (expense) will continue to be affected by the adjustments to fair value of our derivative instruments. In addition to our common stock price, the fair value of these derivative instruments is impacted by assumptions regarding triggering of down-round protection. A higher estimated probability of a down-round protection increases the value of the warrants, resulting in a loss on our consolidated statements of operations. A lower estimated probability of a down-round protection decreases the value of the warrants, resulting in a gain on our consolidating statements of operations. Also refer to Note 9 to the accompanying consolidated financial statements.  

Loss from discontinued mobile social application operations

  Year ended December 31, 
  2014  2013  Change 
Revenue $37,000  $224,000  $(187,000)
Operating expenses  (266,000)  (3,334,000)  3,068,000 
Loss on impairment     (7,253,000)  7,253,000 
Operating loss  (229,000)  (10,363,000)  10,134,000 
Non-operating income (expense)  20,000   (65,000)  85,000 
Loss before taxes on income  (209,000)  (10,428,000)  10,219,000 
Income tax expense  (246,000)  (257,000)  11,000 
Loss from discontinued operations $(455,000) $(10,685,000) $10,230,000 

On February 18, 2014, we executed the sale of our mobile social application business to InfoMedia, receiving eighteen (18) Class B shares of InfoMedia as consideration, which represent an 8.25% ownership interest. Additionally, our Chief Executive Officer was appointed as a full voting member on InfoMedia’s board of directors and we received a number of customary protective rights. The InfoMedia Class B shares are accounted for as a cost-method investment. Cash requirements for termination of mobile operations included mainly post-employment obligations, were incurred during the six month period ended June 30, 2014, and are considered to be immaterial.

During the year ended December 31, 2014, operating expenses decreased by $3,068,000 (or 92.0%), to $266,000, from $3,334,000 recorded during the year ended December 31, 2013. This decrease is primarily due to the fact that there were no substantial operating expenses and no amortization related to acquired technology during the current year as the related asset was classified as held for sale as of December 31, 2013 and was subsequently sold to InfoMedia in February 2014.

During the fourth quarter of 2013, an impairment loss of $7,253,000 was recorded in connection with the sale of our mobile social application business, which represents the excess of the carrying value (which includes the portion of goodwill allocated to the mobile social application business) over the estimated fair value of the related asset group. The fair value of the related asset group was estimated using an income approach by developing a discounted future net cash flows model. Refer to Note 8 to the accompanying consolidated financial statements for further discussion of the accounting related to this transaction.  

Year ended December 31, 2013 compared to the year ended December 31, 2012

Revenue

  Year ended December 31, 
  2013  2012  Change 
Revenue $1,100,000  $100,000  $1,000,000 

During the year ended December 31, 2013, we recorded total revenue (excluding mobile social application business revenue included within discontinued operations) of $1,100,000, which represents an increase of $1,000,000 (or 1,000%) from revenues recorded for the year ended December 31, 2012. Revenue during the year ended December 31, 2013 mostly relates to a one-time payment in connection with the license and settlement agreement entered into with Microsoft for $1,000,000. In 2012, our revenue consisted of proceeds from a partial settlement with AOL in the total amount of $100,000.

Operating legal costs

  Year ended December 31, 
  2013  2012  Change 
Operating legal costs $21,590,000  $10,010,000  $11,580,000 

During the year ended December 31, 2013, our operating legal costs were $21,590,000, which represents an increase of $11,580,000 (or 116%) from operating legal costs recorded during the year ended December 31, 2012. The increase was mainly related to consulting and litigation costs in connection with our worldwide proceedings against ZTE, which commenced in the fourth quarter of 2012. This increase was partially offset by a decrease in litigation costs relating to proceedings against Google. Further, stock-based compensation costs increased ($1,221,000, compared to $523,000 in 2012) due to our efforts to increase our in-house legal department staff.

Amortization and impairment of intangibles

  Year ended December 31, 
  2013  2012  Change 
Amortization and impairment of intangibles $3,445,000  $1,692,0000  $1,753,000 

The increase in amortization and impairment of intangibles ($3,445,000, compared to $1,692,000 in 2012) was mainly due to a full year of amortization of the patents acquired from Nokia, compared to partial year amortization in 2012. There were no impairment charges related to our patents during the years ended December 31, 2013 or 2012.

Research and development

  Year ended December 31, 
  2013  2012  Change 
Research and development $1,512,000  $543,000  $969,000 

During the year ended December 31, 2013 and 2012, our research and development expenses (excluding mobile social application business research and development expense included within discontinued operations) amounted to $1,512,000 and $543,000, respectively. The increase of $969,000 (or 178%) was primarily due to increased development team cost ($520,000, compared to $173,000 in 2012), and related non-cash, stock-based compensation cost ($470,000, compared to $366,000 in 2012). In addition, this increase was due to an increase in consulting costs ($499,000, compared to $0 in 2012).

General and administrative

  Year ended December 31, 
  2013  2012  Change 
General and administrative $15,330,000  $10,226,000  $5,104,000 

During the year ended December 31, 2013, general and administrative expenses increased by $5,104,000 (or 50%), to $15,330,000, from $10,226,000 recorded during the year ended December 31, 2012. General and administrative expenses increased mostly due to an increase in payroll expense ($2,349,000, compared to $1,301,000 in 2012), an increase in stock-based compensation expense ($10,037,000, compared to $6,731,000 in 2012), and increased various professional fees ($2,093,000, compared to $1,544,000 in 2012).  

Non-operating income (expense), net

  Year ended December 31, 
  2013  2012  Change 
Non-operating income (expense), net $(971,000) $3,962,000  $(4,933,000)

During the year ended December 31, 2013, we recorded non-operating expense in the amount of $971,000, compared to non-operating income in the amount of $3,962,000 recorded in the year ended December 31, 2012. During the year ended December 31, 2013, we recorded approximately $421,000 of income related to a decrease in the fair value of our derivative warrant liabilities. In addition, during the year ended December 31, 2013, a charge of $1,574,000 was recorded related to the removal of the down-round protection clause in certain then outstanding Series 1 Warrants. During the year ended December 31, 2012, our non-operating income, net, included a gain of $6,847,000 in the fair value of derivative warrants which was partially offset by an expense of$2,883,000 incurred in connection with the issuance of warrants during October 2012.

Loss from discontinued mobile social application operations

  Year ended December 31, 
  2013  2012  Change 
Revenue $224,000  $269,000  $(45,000)
Operating expenses  (3,334,000)  (2,666,000)  (668,000)
Loss on impairment  (7,253,000)     (7,253,000)
Operating loss  (10,363,000)  (2,397,000)  (7,966,000)
Non-operating income (expense)  (65,000)  20,000   (85,000)
Loss before taxes on income  (10,428,000)  (2,377,000)  (8,051,000)
Income tax expense  (257,000)  (55,000)  (202,000)
Loss from discontinued operations $(10,685,000) $(2,432,000) $(8,253,000)

On February 18, 2014, we executed the sale of our mobile social application business to InfoMedia, receiving eighteen (18) Class B shares of InfoMedia as consideration, which represent an 8.25% ownership interest. Additionally, our Chief Executive Officer was appointed as a full voting member on InfoMedia’s board of directors and we received a number of customary protective rights. The InfoMedia Class B shares are accounted for as a cost-method investment. 

During the year ended December 31, 2013, we recorded revenues of $224,000, which represents a decrease of $45,000 (or 17%) from revenues recorded for the year ended December 31, 2012. Mobile revenue recorded in 2012 only reflect our revenue from the day of the Merger. Mobile revenue in 2013 decreased, compared to 2012, mainly due to a one-time development project with Nokia, for a total amount of $100,000, recorded in 2012. In 2013, due to the change in mobile strategy for Nokia and its announced sale of its handset business to Microsoft, there was significant impact on the personnel and budgets dedicated to development partner relations. As a result, no new revenue contracts were issued for app customization on Nokia devices during 2013.

During the year ended December 31, 2013, operating expenses increased by $668,000 (or 25%), to $3,334,000, from $2,666,000 recorded during the year ended December 31, 2012. Operating expenses increased mostly due to full year amortization of our technology, ($1,688,000 amortization expense, compared to $763,000 in 2012). This increase was partially offset by the decrease in stock-based compensation costs ($365,000, compared to $467,000 in 2012).

During the fourth quarter of 2013, an impairment loss of $7,253,000 was recorded in connection with the sale of our mobile social application business, which represents the excess of the carrying value (which includes the portion of goodwill allocated to the mobile social application business) over the estimated fair value of the related asset group. The fair value of the related asset group was estimated using an income approach by developing a discounted future net cash flows model. Refer to Note 8 to the accompanying consolidated financial statements for further discussion of the accounting related to this transaction.  

During the year ended December 31, 2013, we recorded income tax expense of $257,000, which represents an increase of $202,000 (or 354%) from income tax expense recorded for the year ended December 31, 2012. In general, current taxes on income are mainly due to taxable profits generated by our subsidiary in Israel, as a result of the intercompany cost plus agreement between us and the subsidiary in Israel, whereby the subsidiary in Israel performs development and other services for us and is reimbursed for its expenses plus 8% profit. For financial statements purposes, these profits are eliminated upon consolidation.

Taxes on Income

As of December 31, 2014, our estimated aggregate total net tax loss carryforwards ("NOL") was approximately $117 million for U.S. federal, state and local purposes expiring 20 years from the respective tax years to which they relate. The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of NOL and tax credits in the event of an ownership change of a corporation. Thus, our ability to utilize all such NOL and credit carryforwards may be limited.

A valuation allowance has been recorded against the net deferred tax asset in the U.S., as it is in the opinion of our management that it is more likely than not that the operating loss carryforwards will not be utilized in the foreseeable future.

We file our tax returns in the U.S. federal jurisdiction, as well as in various state and local jurisdictions. Vringo, Inc. has open tax years for 2010 through 2014. As of December 31, 2014, all tax years for our subsidiary Innovate/Protect are still open. The Israeli subsidiary files its income tax returns in Israel. As of December 31, 2014, the Israeli subsidiary has open tax years for 2010 through 2014.

We did not have any material unrecognized tax benefits as of December 31, 2014. We do not expect to record any additional material provisions for unrecognized tax benefits within the next year.  

Liquidity and Capital Resources

As of December 31, 2014, we had a cash balance of $16,023,000. This represents a decrease of $17,563,000 from our cash balance on December 31, 2013, which is mainly due to net cash used by us in our business operations of approximately $28,382,000 during the year ended December 31, 2014. Our average monthly cash spent in operations for the years ended December 31, 2014 and 2013 was approximately $2,365,000 and $1,955,000, respectively. The majority of these expenditures consisted of costs related to our four litigation campaigns. In our case against Google et al., we incurred costs related to the preparation for the oral argument, which was heard before the Federal Circuit on May 6, 2014, in addition to other related costs. In our cases against ZTE and ASUS, we incurred costs related to the preparation and filing of briefs and other court documents, as well as case preparation and management. A large percentage of these costs were incurred in the United Kingdom, Australia, Germany, Brazil, the Netherlands, and France. In civil law jurisdictions, such as Germany, France, Spain, and others, the majority of costs are incurred in the early stages of litigation and we anticipate that the costs in these jurisdictions will be lower in future periods. In our case against Tyco, we incurred costs related to the preparation and filing of briefs and other court documents, case preparation and management, and the worldwide resolution of litigation between the parties. In addition, we paid approximately $2,404,000 in deposits with courts related to proceedings in Germany, Brazil, and Malaysia.

The overall decrease in our cash balance from expenditures related to our litigation campaigns was partially offset by approximately $13,452,000 that was received in connection with the exercises of warrants and stock options that occurred during the year ended December 31, 2014, as described below. As of December 31, 2014 and 2013, our total stockholders' equity was $31,180,000 and $114,282,000, respectively. The decrease in stockholders’ equity of $83,102,000 since December 31, 2013 is mainly due to the operating loss during 2014 which includes a non-cash goodwill impairment charge of $65,757,000 that was recorded during the fourth quarter of 2014.

During the year ended December 31, 2014, a total of 6,415,992 warrants to purchase an aggregate of 6,415,992 shares of our common stock, at an exercise price of $1.76 per share, were exercised by our warrant holders, pursuant to which we received $11,292,000. These proceeds are most significantly attributable to the execution of the agreements with certain of our warrant holders described above in connection with the June 2014 Warrants. In addition, 1,126,815 options to purchase 1,126,815 shares of our common stock were exercised during the year ended December 31, 2014. As a result, we received $2,160,000 during 2014.

Our operating plans include increasing revenue through the licensing of our intellectual property, strategic partnerships, and litigation, when required, which may be resolved through a settlement or collection. Disputes regarding the assertion of patents and other intellectual property rights are highly complex and technical. The majority of our expenditures consist of costs related to our four litigation campaigns. A large percentage of these costs were incurred in the United Kingdom, Australia, Germany, Brazil, the Netherlands, and France. In civil law jurisdictions, such as Germany, France, Spain, and others, the majority of costs are incurred in the early stages of litigation. With respect to our litigation in such countries, the respective campaigns are currently in the later stages and therefore we have already incurred the large majority of the related anticipated costs. As such, based on our plans, costs in these jurisdictions are projected to be lower in 2015 and other future periods.

Despite our plans, our legal proceedings may continue for several years and may require significant expenditures for legal fees and other expenses. Further, should we be deemed the losing party in certain of our litigations, we may be liable for some or all of our opponents’ legal fees. In addition, in connection with litigation, we have made several affirmative financial guarantees to courts around the world, and might face the need to make additional guarantees in the future.

In addition, our plans to continue to expand our planned operations through acquisitions and monetization of additional patents, other intellectual property or operating businesses may be time consuming, complex and costly to consummate. We may utilize many different transaction structures in our acquisitions and the terms of such acquisition agreements tend to be heavily negotiated. Our ability to raise capital may be limited. Even if we are able to acquire particular patents or other intellectual property assets, there is no guarantee that we will generate sufficient revenue related to those assets to offset the acquisition costs. Therefore, no assurance can be given at this time as to whether we will be able to achieve our objectives or whether we will have the sources of liquidity for follow through with our operating plans.

We anticipate that we will continue to seek additional sources of liquidity, when needed, until we generate positive cash flows to support our operations. We cannot give any assurance that the necessary capital will be raised or that, if funds are raised, it will be on favorable terms. If we are unable to obtain additional funding on a timely basis, we may be required to curtail or terminate some of our business plans. Any future sales of securities to finance our operations may require stockholder approval and will dilute existing stockholders' ownership. We cannot guarantee when or if we will ever generate positive cash flows.

The circumstances described above raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements have been prepared assuming that we will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

 

Cash flows

 

  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,  Change  Change 
  2014  2013  2012  2014 vs. 2013  2013 vs. 2012 
Net cash used in operating activities $(28,382,000) $(23,465,000) $(14,468,000) $(4,917,000) $(8,997,000)
Net cash used in investing activities $(2,650,000) $(1,636,000) $(19,476,000) $(1,014,000) $17,840,000)
Cash provided by financing activities $13,452,000  $1,564,000  $85,694,000  $11,888,000  $(84,130,000)

Operating activities

 

During the year ended December 31, 2011,2014, net cash used in operating activities totaled $5.4 million.$28,382,000. During the year ended December 31, 2010,2013, net cash used in operating activities totaled $6.4 million.$23,465,000. The $1.1 million decrease$4,917,000 increase in net cash used in operating activities was primarilymainly due to increase in revenue and a reduction in workforce relatedincreased litigation costs in connection with the cost reduction plan implemented in the early part of 2011.

Duringdescribed above.During the year ended December 31, 2009,2012, net cash used in operating activities totaled $4.8 million.$14,468,000. The $8,997,000 increase of $1.6 millionin net cash used in operating activities compared to 2009,the year ended December 31, 2013 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.

 

We expect ourOur net cash used in operating activities to decreasecould increase if we engage in the future asbusiness development activities. As we expect to move towards greater revenue generation.generation in the future, we expect that these amounts will be offset over time by the collection of revenues. There is no guarantee that we will generate sufficient revenue to offset future operating expenses and our ability to raise additional capital may be limited.

 

Investing activities

 

During the year ended December 31, 2011,2014, net cash used in investing activities totaled $6 thousand. These included$2,650,000. During the year ended December 31, 2013, net cash used in investing activities totaled $1,636,000. Net cash used in investing activities during the year ended December 31, 2014 is mostly comprised of the $2,404,000 deposited with courts that is described above. Net cash used in investing activities during the year ended December 31, 2013 was primarily due to a decrease in restricted depositpatent purchase during that year in the total amount of $21 thousand and$1,420,000. There was also an increase in fixed asset purchases in 2011, in the total amount of $27 thousand. Fixed asset purchases induring the year ended December 31, 2010 amounted to $86 thousand2014 as compared to $34 thousand for the year ended December 31, 2009. The increase in fixed asset purchases in 2010 was due to the need to replace certain fixed assets that had fully depreciated and to improve the servers in the research and development facility of our Israeli subsidiary.2013.

 

During the year ended December 31, 2010, net cash provided by investing activities totaled $2.5 million. During the year ended December 31, 2009,2012, net cash used in investing activities totaled $2.6 million. This increase of $5.1 million provided by$19,476,000. The decrease in cash used in investing activities isas compared to the year ended December 31, 2013, was primarily due to a patent purchase during 2013 in the releasetotal amount of proceeds$1,420,000, compared to the cost of patents acquired from Nokia in 2012, for $22,548,000. There was also a decrease in fixed asset purchases during the bridge financing from escrow, whichyear ended December 31, 2013 as compared to the year ended December 31, 2012. In addition, in 2012, cash used in investing activities was slightly offset by $3,326,000 recorded in connection with the purchaseconsummation of fixed assets.the Merger.

 

We expect that net cash used in investing activities will mildly increase as we intend to continue to upgradeacquire additional intellectual property assets and invest surplus cash, according to our computers and software in 2012. Moreover, as our service continues to grow, we will need to increase our server capacity to meet the needs of our customers.investment policy.

 

Financing activities

 

During the year ended December 31, 2011, net2014, cash provided by financing activities totaled $1.2 million,$13,452,000, which relates to funds that we received from the repaymentexercises of warrants and settlement of the venture loanstock options in the total amount of $2.1 million on$11,292,000 and $2,160,000, respectively. During the one hand,year ended December 31, 2013, cash provided by financing activities totaled $1,564,000, which relates to funds received from the exercises of warrants and receipt of proceeds from issuance of Convertible Notes,stock options in the total amount of $2.5 million, plus, receipt of proceeds from December 2011 financing in the total amount of $0.85 million, on the other. See also Notes 8, 9$590,000 and 11, to the accompanying financial statements.$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 proceedsAugust and October 2012 registered direct financings, in which we raised approximately $31,148,000 and $44,962,000, respectively. Additionally, we received as a resultfunds from the exercise of our IPO,warrants and options in the total amount of $12,784,000 during 2012. Cash provided by these financing activities were partially offset by repayment of principal on the venture loan,a note payable to Hudson Bay Master Fund Ltd., in the total amount of $0.8 million.$3,200,000 during 2012.

 

DuringA significant portion of our issued and outstanding warrants, for which the year ended December 31, 2009, net cash providedunderlying shares of common stock held by financing activities totaled $2.2 million, which relatesnon-affiliates are freely tradable, are currently “out of the money.” Therefore, the potential of additional incoming funds from exercises by our warrant holders is currently very limited. To the extent that this portion of our issued and outstanding warrants were “in the money”, it could be used as a source of additional funding if the warrant holders choose to issuance of Bridge Notes, 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.exercise.

 

Until we reach profitability, we expect we will continueWe may also choose to explore financing opportunities, through private and public investments and merger and acquisition activity. Other than the proposed mergerraise additional funds in connection 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 benefitsany acquisitions of ourpatent portfolios or other intellectual property portfolio, add significant talent in technological innovation, and potentially enhance our 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. The completion of the Merger is subject to a number of conditions and therewe may pursue. There can be no assurance, however, that any such opportunity will materialize. Moreover, any such financing would likely be dilutive to our current stockholders.

Off-Balance Sheet Arrangements

From October 2012 through the conditionsfiling date of this Annual Report on Form 10-K, our subsidiaries filed patent infringement lawsuits against the subsidiaries of ZTE Corporation in the United Kingdom, France, Germany, Australia, India, Brazil, Malaysia, Romania, and the Netherlands. Should we be deemed the losing party in any of its applications to the completioncourt in the UK, we may be held responsible for a portion of the Merger will be satisfied anddefendant’s legal fees for the Merger will be consummated.

21

Inrelevant application or for the litigation. Pursuant to negotiation with ZTE’s UK subsidiary, in the United Kingdom, we placed two written commitments to ensure the payment of a potential liability by Vringo Infrastructure resulting for the two cases filed in the fourth quarter of 2011, we announced an agreement with ZTE Corporation, the largest handset maker in China2012 and fourth-largest globally, to preload the Facetones™ application on Android handsets, which is scheduled to commence in the second quarter of 2012.2013, which the defendants estimated to be approximately $2,900,000 each. With respect to the first written commitment, we believe that Vringo’s commitments will be shortly discharged, since with respect to the first filed UK case, all claims other than the remedies for the patent found infringed and valid as amended, have been dismissed. As partsuch, any remaining costs where Vringo was not the “commercial victor” as defined under UK procedural law can be assessed. With respect to the second filed UK case, we withdrew our claims on two of the commercial termsthree patents-in-suit on February 17, 2015. Vringo anticipates any costs, to the extent that they are assessed, will not exceed the amount of the agreement, these handsets will be sold via mobile phone operators and through various OEM contractswritten commitments related to brand name handset manufacturers. Similar arrangement are being pursued with other handset manufacturers, although there can be no assurance that any such opportunities may arise.each case.

 

We are currently in discussions with several potential strategic partners and mobile carriers and we will be pursuing additional agreements over the next 12 to 24 months. In addition, we are continuingmay be required to explore further opportunitiesgrant additional written commitments, as necessary, in connection with our commenced proceedings against ZTE Corporation in Europe, Brazil, India and Australia. It should be noted, however, that if we were successful on any court applications or the entirety of any litigation, ZTE Corporation would be responsible for strategic business alliances, however, there can be no assurance that any such opportunities may arise, or that any such opportunities will be consummated.a substantial portion of our legal fees.

 

Off-Balance Sheet Arrangements

 WeOther than the arrangements described in the preceding paragraph, we have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

 

Contractual Obligations

The following table summarizes our future contractual obligations beginning on January 1, 2015:

  Payments Due by Period 
  Total  Less than 1
Year
  1-3 Years  3-5 Years  More than 5
Years
 
Operating leases $1,943,000  $370,000  $810,000  $763,000  $ 
Total $1,943,000  $370,000  $810,000  $763,000  $ 

In July 2012, we signed a rental agreement for our corporate executive office in New York for an annual rental fee of approximately $137,000 (subject to certain adjustments) which was to expire in September 2015. However, in January 2014, we entered into an amended lease agreement with the landlord for a different office space within the same building. The initial annual rental fee for this new office is approximately $403,000 (subject to certain future escalations and adjustments) beginning when the new office space was available on August 1, 2014. This lease will expire in October 2019. 

Critical Accounting EstimatesPolicies

 

While our significant accounting policies are more fully described in the notes to our audited consolidated financial statements for the year ended December 31, 2011,2014, we believe the following accounting policies to be the most critical in understanding the judgments and estimates we useused in preparing our consolidated financial statements for the year ended December 31, 2011. 

2014. 

Goodwill

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is reviewed for impairment at least annually, and when triggering events occur, in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles — Goodwill and Other. We have one reporting unit for Stock-based Compensationpurposes of evaluating goodwill impairment and perform our annual goodwill impairment test on December 31.

 

We account for stock-based awards under FASB ASC718, "Compensation—Stock Compensation" (formerly SFAS 123R, "Share-Based Payment"), which requires measurement of compensation cost for stock-based awards athave the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If we can support the conclusion that it is not more likely than not that the fair value onof a reporting unit is less than its carrying amount, then we would not need to perform the datetwo-step impairment test for the reporting unit. If we cannot support such a conclusion or do not elect to perform the qualitative assessment, then the first step of grant and the recognitiongoodwill impairment test is used to identify potential impairment by comparing the fair value of compensation over the service periodreporting unit with its carrying amount, including goodwill. Fair value of the reporting unit is determined using certain valuation techniques, including the estimation of an implied control premium, in which the awards are expectedaddition to vest. In addition, for options granted to consultants, FASB ASC 505-50, "Equity-Based Payments to Non Employees" is applied. Under this pronouncement,our market capitalization on the measurement date as the market capitalization is derived on a non-controlling basis.

If the fair value of the option occurs onreporting unit exceeds its carrying value, then the earliersecond step of counterparty performance or performance commitment.the impairment test (measurement) does not need to be performed. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the entity must perform the second step of the impairment test. Under the second step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The grantimplied fair value of goodwill is revalued at everydetermined by allocating the fair value of the reporting date untilunit in a manner similar to an acquisition price allocation and the measurement date. The estimationresidual fair value after this allocation is the implied fair value of stock-based awards that will ultimately vest requiresthe reporting unit goodwill. A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting unit and the implied fair value of goodwill.

Our market capitalization is sensitive to the extent actual results differvolatility of our stock price. On August 15, 2014, our stock price opened at $3.18, reached a low of $0.67, and closed at $0.88. The closing price of our stock on September 30, 2014 was $0.95. The average closing price of our stock from our estimates, such amounts will be recordedAugust 15, 2014 through September 30, 2014 was approximately $1.05, ranging from $0.95 to $1.40 during that time period. During the third quarter of 2014, the decline in stock price was deemed a “triggering” event requiring the performance of an interim goodwill impairment test as a cumulative adjustment in the period estimates are revised. We consider various factors when estimating expected forfeitures, including historical experience. Actual results may differ substantially from these estimates.of September 30, 2014.

 

We performed the first step of the goodwill impairment test as of September 30, 2014 in order to identify potential impairment by comparing the fair value of the reporting unit with its carrying amount, including goodwill. The fair value of the reporting unit is based upon our market capitalization on the measurement date, as the market capitalization is derived on a non-controlling basis, and an estimated implied control premium, which was determined with the assistance of a third party valuation specialist. We believe that this is the most appropriate valuation technique for determining the fair value of the reporting unit for various reasons. First, our common shares are publicly traded on NASDAQ. Therefore, active quoted market prices can be readily observed and Vringo has a widely distributed shareholder base which provides for a substantial amount of daily trading volume. As such, we believe that the quoted market price is a good representation of a fair value of one share of Vringo, or a fractional interest in Vringo. Secondly, quoted market prices of an individual security may not be representative of the fair value of the reporting unit as a whole. For example, there may be a premium that an acquiring entity might pay for a controlling interest compared to the amount an investor would be willing to pay for a non-controlling interest. The implied control premium selected was developed based on certain observable market data of comparable companies in the intellectual property, internet software and services, telecommunications, and biotechnology industries.

We also considered the use other valuation approaches to determine the fair value of stock options grantedthe reporting unit, including an income approach and other market approaches. When considering the use of an income approach for determining the fair value of the reporting unit, we considered using valuation techniques such as a discounted cash flows model. However, it was determined that, due to employees, directors and consultants using the Black-Scholes-Mertonfactors specific to Vringo and the Lattice (for out-of-money option grantsnature of its operations, the use of such techniques would impose significant feasibility hurdles and would not yield an effective result. First, we do not have a history of revenue to employeesuse for purposes of projecting future earnings and directors)revenue streams. Secondly, our future earnings and revenue are heavily contingent upon the outcomes of certain litigation and settlements which are difficult to predict with a sufficient degree of precision. As such, we concluded that an income approach would not add meaningfully to the determination of fair value of the reporting unit.

When considering the use of other market approaches for determining the fair value of the reporting unit, we considered using relevant information generated by market transactions of comparable companies such as multiples of earnings and revenue. It was determined, however, that there was a lack of publicly available information with respect to comparable entities within the intellectual property market space that would enable us to gather useful information for purposes of such valuation models, those requiretechniques. Additionally, the fact that we have not yet experienced significant revenue or earnings poses limitations to the use of a market multiples approach. As such, we concluded that this technique would not yield an effective result.

Based upon the first step of the goodwill impairment test performed as of September 30, 2014, we determined that the fair value of the reporting unit was in excess of its carrying amount by approximately 14% and therefore the second step of the goodwill impairment test was not required at that time. We believe that we made reasonable estimates and assumptions regardingto calculate the expectedfair value of the reporting unit as of the interim impairment test measurement date.

We performed our annual goodwill impairment test as of December 31, 2014. We performed the first step of the goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, including goodwill. Similar to the interim goodwill impairment test described above, the fair value of the reporting unit was determined with the assistance of a third party valuation specialist using certain valuation techniques, including the estimation of an implied control premium, in addition to our market capitalization on the measurement date, as the market capitalization is derived on a non-controlling basis. The implied control premium selected was consistent with the control premium utilized in the interim goodwill impairment test described above, as no new significant observable market data of comparable companies was available.

During the fourth quarter of 2014, our stock price volatility,declined and our closing stock price December 31, 2014 was $0.55. This decline in stock price resulted in a significantly lower market capitalization than that used when performing the risk-free interestinterim goodwill impairment test described above. Based upon the first step of the goodwill impairment test performed as of December 31, 2014, we determined that the fair value of the reporting unit did not exceed its carrying amount and therefore the second step of the goodwill impairment test was required.


In performing the second step of the goodwill impairment test, we compared the carrying value of goodwill to its implied fair value. In estimating the implied fair value of goodwill, we assign the fair value of the reporting unit to all of the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. As part of this step, we estimated the fair value of our patents using an income approach. The key assumptions for this approach are projected future cash flows, ranges of royalty rates as determined by management in consultations with valuation experts, and a discount rate which is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the dividend yield, andprojected future cash flows. As a result, it was determined that our intangible assets were not impaired as of December 31, 2014.

Based on the estimated periodimplied fair value of time option grants willgoodwill, we recorded an impairment charge of $65,757,000 to reduce the carrying value of goodwill to its implied fair value, which was determined to be outstanding before they are ultimately exercised. Due to insufficient history, we estimate our expected stock volatility relying significantly on historical stock volatility from comparable companies.zero. This impairment charge is included in Goodwill impairment in the consolidated statement of operations for the year ended December 31, 2014.

 

These option pricing models utilize various inputs and assumptions, which are highly subjective. Had we used different assumptions, our results may have been significantly different. For further information on judgments and assessments used, referRefer to Note 116 to the accompanying consolidated financial statements.

22

Valuationstatements for further discussion 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 amountinterim goodwill impairment test performed as 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 increasedSeptember 30, 2014 and the number of Special Bridge Warrants outstanding was adjusted to 2,528,615.

Asannual goodwill impairment test performed as of December 31, 2011,2014. Additionally, we recognized an impairment charge related to goodwill of approximately $208,000 during the Special Bridge Warrants were revalued usingfourth quarter of 2013 in connection with the Black-Scholes-Merton and the Monte-Carlo models. As the termssale 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.our mobile social application business. Refer to Notes 10, 11 and 17Note 8 to the accompanying consolidated financial statements.statements for further discussion.

Intangible assets

 

UponIntangible assets include purchased patents which are recorded based on the consummationcost to acquire them. These assets are amortized over their remaining estimated useful lives, which are periodically evaluated for reasonableness. Our intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of our intangible assets, we must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the IPO,respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also the Bridge Notes automatically converted into 864,332 sharesmagnitude of common stockany such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and 1,728,664 warrants (the "Conversion Warrants").involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment charges related to our intangible assets. 

During the third quarter of 2014, we determined that there were impairment indicators related to certain of our patents. A significant factor that was considered when making this determination included the announcement of the Federal Circuit’s decision on August 15, 2014 described in Item 1. It was concluded that this factor was deemed a “triggering” event requiring that the related patent assets be tested for impairment as of September 30, 2014. In performing this impairment test, we determined that the patent portfolio containing the patents-in-suit in I/P Engine's litigation against AOL Inc., Google Inc. et al, which represents an asset group, was subject to impairment testing. In the first step of the impairment test, we utilized our projections of future undiscounted cash flows based on our existing plans for the patents. As a result, it was determined that these projections of future undiscounted cash flows were less than the carrying value of the asset group. Accordingly, we performed the second step of the impairment test to measure the potential impairment by calculating the asset group’s fair value. This resulted in an impairment of $1,355,000 during the third quarter of 2014, related to the asset group, which represents the difference between the fair value and the carrying value of the asset group. The Conversion Warrants have down-round protection clauses, i.e.impairment charge is included in Amortization and impairment of intangibles in the accompanying consolidated statement of operations for the year ended December 31, 2014. There were no impairment charges related to our patents during the years ended December 31, 2013 and 2012.

During the fourth quarter of 2013, we recorded an impairment loss of $7,045,000 related to technology assets in connection with the sale of our mobile social application business, which was completed in February 2014. This amount was calculated based upon a discounted future cash flows model. Significant judgments and assumptions inherent in a new issuancediscounted cash flow valuation include the selection of common shares at a lower price thanappropriate discount rates, estimating the current exercise price,amount and timing of estimated future cash flows and identification of appropriate continuing growth rate assumptions. The discount rates used in the current exercise price will be adjustedanalysis were intended to reflect the risk inherent in the projected future cash flows generated by the respective asset group. Such judgments and assumptions, particularly related to mobile technology, are sensitive to rapid changes in the industry and technological advances.

Refer to Note 6 to the new issuance price. The Conversion Warrants were revaluedaccompanying consolidated financial statements for further discussion of impairment charges recorded during the third quarter of 2014 and the fourth quarter of 2013, related to our intangible assets.

Fair value measurements

Our derivative warrant liabilities are measured at fair value. Such warrants are classified within Level 3 of the fair value hierarchy because they are valued using the Black-Scholes-Merton and the Monte-Carlo models and classified as a(as these warrants include down-round protection clauses), which utilize significant inputs that are unobservable in the market. The inputs to estimate the fair value of our derivative long-term liability. The assumptions used in this calculation forwarrant liabilities are the datecurrent market price of our common stock, the exercise price of the IPO were 54%warrant, the warrant’s remaining expected term, the volatility of our common stock price, our assumptions regarding the probability and timing of a down-round protection triggering event and the risk-free interest rate. The tables below illustrate the unobservable inputs estimated by management on the respective balance sheet dates:

December 31, 2014:  

DescriptionValuation techniqueUnobservable inputsRange
Conversion Warrants, derivative Reload Warrants andBlack-Scholes-Merton and theVolatility56.55% – 77.06%
derivative Series 1 WarrantsMonte-Carlo modelsRisk free interest rate0.13% – 0.87%
Expected term, in years0.48 – 2.55
Dividend yield0%
Probability and timing of down-round triggering event

50% occurrence in

June 2015

December 31, 2013:  

DescriptionValuation techniqueUnobservable inputsRange
Special Bridge Warrants, Conversion Warrants, derivativeBlack-Scholes-Merton and theVolatility46.85% – 52.63%
Reload Warrants and derivative Series 1 WarrantsMonte-Carlo modelsRisk free interest rate0.16% – 1.11%
Expected term, in years0.99 – 3.55
Dividend yield0%
Probability and timing of down-round triggering event

5% occurrence in

December 2014

The fair value measurements of the derivative warrant liabilities are evaluated by management to ensure that changes are consistent with expectations of management based upon the sensitivity and nature of the related inputs. Significant changes in any of those inputs in isolation can result in a significant change in the fair value measurement. Generally, an increase in the market price of our common stock, an increase in the volatility of our common stock, an increase in the remaining term of the warrant, or an increase of a probability of a down-round triggering event would each result in a directionally similar change in the estimated fair value of our derivative warrant liabilities. Such changes would increase the associated liability while decreases in these assumptions would decrease the associated liability. An increase in the risk-free interest rate or a decrease in the positive differential between the warrant’s exercise price and the market price of 2.1%,our common stock would result in a decrease in the estimated lifefair value measurement of 5 yearsthe warrants and thus a decrease in the associated liability. We have not, and do not plan to, declare dividends on our common stock, and as such, there is no dividend yield. Thechange in the estimated 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 17derivative warrant liabilities due 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.

assumption. 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 above-mentioned warrants will be outstanding before they are ultimately exercised,inputs noted above, the recorded expense,gain or loss, our net loss and net loss per share amounts could have been significantly different.

Accounting for Income TaxesStock-based compensation

 

As partStock-based compensation is recognized as an expense in the accompanying consolidated statements of operations and such cost is measured at the grant-date fair value of the processequity-settled award. The fair value of preparing our consolidated financial statements, we are requiredstock options is estimated at the date of grant using the Black-Scholes-Merton option-pricing model. The expense is recognized on a straight-line basis over the requisite service period. We use the simplified method to estimate the expected term of options due to insufficient history and high turnover in the past. The contractual life of options granted under our income taxes in each2006 and 2012 option plans are 6 and 10 years, respectively. Since our Company lacks sufficient history, expected volatility is estimated based on the average historical volatility of similar entities with publicly traded shares. The risk-free rate for the expected term of the jurisdictionsoption is based on the U.S. Treasury yield curve at the date of grant.

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which we operate. This process involves management estimating our actual current tax exposure together with assessingthose temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result inare expected to be recovered or settled. The effect on deferred tax assets and liabilities which are included within our consolidated balance sheet. We must then assessof a change in tax rates is recognized in income in the likelihoodperiod that ourincludes the enactment date. A valuation allowance is provided for the amount of deferred tax assets will be recovered from future taxable income and, to the extent we believe that, recovery isbased on available evidence, are not more likely than not we must establishto be realized. Tax benefits related to excess deductions on stock-based compensation arrangements are recognized when they reduce taxes payable.

In assessing the need for a valuation allowance, we look at cumulative losses in recent years, estimates of future taxable earnings, feasibility of tax planning strategies, the realizability of tax benefit carryforwards, and other relevant information. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. Ultimately, the actual tax benefits to be realized will be based upon future taxable earnings levels, which are very difficult to predict. In the event that actual results differ from these estimates in future periods, we will be required to adjust the valuation allowance.

Significant management judgment is required in determiningevaluating our provisionfederal, state and foreign tax positions and in the determination of its tax provision. Despite management's belief that our liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matters. We may adjust these accruals as relevant circumstances evolve, such as guidance from the relevant tax authority, its tax advisors, or resolution of issues in the courts. Our tax expense includes the impact of accrual provisions and changes to accruals that it considers appropriate. These adjustments are recognized as a component of income taxes, our deferred tax assetsexpense entirely in the period in which new information is available. We record interest related to unrecognized tax benefits in interest expense and liabilitiespenalties in the accompanying consolidated statements of operations as general and any valuation allowance recorded against our net deferred tax assets. At December 31, 2011, we have fully offset our U.S. net deferred tax asset with a valuation allowance. Our lack of earnings history and the uncertainty surrounding our ability to generate U.S. taxable income prior to the expiration of such deferred tax assets were the primary factors considered by management in establishing the valuation allowance.administrative expenses.

 

ASC 740, "Income Taxes" (formerly FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an InterpretationWe recognize the effect of FASB Statement 109"), prescribes how a company should recognize, measure, present and disclose in its financial statements uncertainincome tax positions that the company has taken or expects to take on a tax return. Additionally, foronly if those positions are more likely than not of being sustained. Recognized income tax positions to qualify for deferred tax benefit recognition under ASC 740,are measured at the position must have at least a "more likelylargest amount that is greater than not" chance50 percent of being sustained upon challenge byrealized. Changes in recognition or measurement are reflected in the respective taxing authorities,period in which criteria is a matter of significant judgment. the change in judgment occurs.

 

Recently Issued Accounting Pronouncementsissued accounting pronouncements

 

In December 2011,July 2013, the FinancialFASB issued Accounting Standards BoardUpdate (“FASB”ASU”) issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2011-112013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides guidance on the presentation of unrecognized tax benefits. This guidance requires an entity to disclose information about offsettingpresent an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and related arrangementsthe entity does not intend to enable users ofuse, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance is effective beginning January 1, 2014 and is to understandbe applied prospectively with retroactive application permitted. We adopted this guidance as of January 1, 2014, as required. There was no material impact of the effect of those arrangements on its financial position, and to allow investors to better compareaccompanying consolidated financial statements preparedresulting from the adoption.

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This guidance changes the criteria for reporting a discontinued operation while enhancing disclosures in this area. This standard will be effective for us beginning January 1, 2015. Early adoption of the standard is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. We are currently evaluating the impact of the adoption on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers (Topic 606), which impacts virtually all aspects of an entity's revenue recognition. The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact of the adoption on our consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-10,Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation, which removes the definition of development stage entity, as was previously defined under U.S. GAAP, withthereby removing the financial reporting distinction between development stage entities and other reporting entities. In addition, the ASU eliminates the requirements for development stage entities to (i) present inception-to-date information in their financial statements, prepared under International(ii) label the financial statements as those of a development stage entity, (iii) disclose a description of the development stage activities in which the entity is engaged, and (iv) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage. This guidance is effective for annual reporting periods beginning after December 31, 2014 and early adoption of the standard is permitted. We adopted this guidance during the second quarter of 2014.

In August 2014, the FASB issued ASU No. 2014-15,Presentation of Financial Reporting Standards (IFRS)Statements (Topic 205): Going Concern. The new standards arestandard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. This guidance is effective for annual periods beginning January 1, 2013,fiscal years, and interim periods within those annual periods. Retrospective applicationfiscal years, beginning after December 15, 2016 and early adoption is required.permitted. We will implementare currently evaluating the provisionsimpact of ASU 2011-11 as of January 1, 2013. We do not expect this pronouncement to have a material impactthe adoption on our consolidated financial statements.

 

ITEM:ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Financial instruments which potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We maintain our cash and cash equivalents with various major financial institutions. These major financial institutions are located in the United States and our policy is designed to limit exposure to any one institution.

The primary objective of our investment activities is to preserve principal while concurrently maximizing the income we receive from our investments without significantly increasing risk. To minimize risks in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in securities such as commercial paper and money market funds. As of December 31, 2014 and 2013, our cash was mostly held in money market funds in the amounts of $13,085,000 and $3,184,000, respectively. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. Accordingly, a smaller reporting company and therefore,100 basis point increase in interest rates or a 10% decline in the value of the United States equity markets would not be expected to have a material impact on the value of such money market funds.

A portion of our expenses are denominated in foreign currencies. If the value of the U.S. dollar weakens against the value of these currencies, there will be a negative impact on our operating costs. In addition, we are not requiredsubject to provide information required by this Itemthe risk of Form 10-K.exchange rate fluctuations to the extent we hold monetary assets and liabilities in these currencies.

23

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Our Consolidated Financial Statementsconsolidated financial statements required by this Item are set forth in Item 15 beginning on page F-1 of this Annual Report.Report on Form 10-K.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures:Procedures

 

Our management, with the participation of our Chief Executive Officer (principalprincipal executive officer)officer and our Chief Financial Officer (principalprincipal financial officer), evaluatedofficer, after evaluating the effectiveness of our disclosure controls and procedures as of December 31, 2011. The term "disclosure controls and procedures," as(as defined in Rules 13a-15(e) and 15d-15(e) underof the Securities Exchange Act meansof 1934, as amended) as of the end of the period covered by this Annual Report on Form 10-K, have concluded that, based on such evaluation, our disclosure controls and other procedures of a company that are designed at a reasonable assurance level and are effective to ensureprovide reasonable assurance that information required to be disclosed by a companyus in the reports that it fileswe file or submitssubmit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC’s rules and forms. Disclosure controlsforms, and procedures include, without limitation, controls and procedures designed to ensure that such information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company'sour management, including itsour principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures,

Changes in Internal Control Over Financial Reporting

There were no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgmentchanges in evaluating the cost-benefit relationship of possible controls and procedures. Based onour internal control over financial reporting, identified in connection with the evaluation of our disclosure controls and procedures as ofsuch internal control that occurred during the fourth quarter ended December 31, 2011,2014 that have materially affected, or are reasonably likely to materially affect, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were ineffective for the reasons set forth below.internal control over financial reporting.

 

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.

Management’s Annual Report on Internal Control Over Financial Reporting:Reporting

  

We areOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in accordance withRules 13a-15(f) and 15d-15(f) under the Securities Exchange Act Rule 13a-15. Withof 1934, as amended. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the participationrisk that controls may become inadequate because of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer), ourchanges in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2011,2014, based on the criteria establishedframework in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (1992 framework). Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2011, based on those criteria. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.2014.

 

Changes in Internal Controls:

DuringThe Company’s independent registered public accounting firm, KPMG LLP, has issued an audit report on the year ended December 31, 2011, there were no changes in ourCompany’s internal control over financial reporting, identified in connection with the evaluation required by paragraph (d)which appears below.

Report of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, ourIndependent Registered Public Accounting Firm

The Board of Directors and Stockholders

Vringo, Inc.:

We have audited Vringo, Inc.’s internal control over financial reporting.reporting as of December 31, 2014, based onInternal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Vringo, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Vringo, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established inInternal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Vringo, Inc. and subsidiaries as of December 31, 2014, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended, and our report dated March 16, 2015 expressed an unqualified opinion on those consolidated financial statements.

Our report on the consolidated financial statements dated March 16, 2015 contains an explanatory paragraph that the Company has suffered recurring losses from operations and negative cash flows from operating activities and may not have sufficient cash or available sources of liquidity to support operating requirements that raises substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ KPMG LLP

New York, New York

March 16, 2015

 

ITEM 9B. OTHER INFORMATION

 

None.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive OfficersAgePosition
Seth M. Siegel *(1)(3)58Chairman of the Board
Andrew Perlman34Chief Executive Officer, President and Director
Ellen Cohl45Chief Finance Officer
Philip Serlin *(2)51Director
John Engelman *56Director
Geoffrey M. Skolnik *(2)71Director
Edo Segal42 Director

*Independent Director
(1)Member of Compensation Committee.
(2)Member of Audit Committee
(3)Member of Nominating and Corporate Governance Committee

The following is a brief summary of the background of each of our directors and executive officers. In addition, the following brief summary includes specific information about each director's experience, qualifications, attributes or skills that led the board to the conclusion that the individual is qualified to serve on our board, in light of our business and structure. There are no family relationships among any of the directors or executive officers.

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 knowledgeInformation called for by this Item may be found in our definitive Proxy Statement in connection with our 2015 Annual Meeting of consumer brands and marketing, as well as his leadership experience at The Beanstalk Group qualifies himStockholders to serve on our board of directors. His extensive experiencebe filed 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 ledSEC under 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.

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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.

26

The Compensation Committee is authorized to:

review and recommend the compensation arrangements for management, including the compensation for our chief executive officer;

• establish and review general compensation policies with the objective of attracting and retaining superior talent, rewarding individual performance and achieving our financial goals;

administer our stock incentive plans; and

• prepare the report of the Compensation Committee that SEC rules require to be included in our annual meeting proxy statement.

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:

approve and retain the independent auditors to conduct the annual audit of our books and records;

review the proposed scope and results of the audit;

review and pre-approve the independent auditor's audit and non-audit services rendered;

approve the audit fees to be paid;

review accounting and financial controls with the independent auditors and our financial and accounting staff;

review and approve transactions between us and our directors, officers and affiliates;

recognize and prevent prohibited non-audit services;

establish procedures for complaints received by us regarding accounting matters;

oversee internal audit functions;

prepare the report of the Audit Committee that SEC rules require to be included in our annual meeting proxy statement.

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:

identify and nominate members of the board of directors;

oversee the evaluation of the board of directors and management;

develop and recommend corporate governance guidelines to the board of directors;

evaluate the performance of the members of the board of directors;

make recommendations to the board of directors as to the structure, composition and functioning of the board of directors and its committees.

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.

27

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.this Item 10.

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.

 

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

The following table summarizes the compensation awarded to, earned or paid by us to our Chief Executive Officer and other named executive officers for the fiscal years ended December 31, 2011 and 2010: 

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 

(1)Based upon an average exchange rate of 3.58 and 3.73 between the NIS and U.S. Dollar for 2011 and 2010, respectively.
(2)Amounts represent the aggregate grant date fair value in accordance with FASB ASC Topic 718. For the assumptions made in the valuation of our equity awards see Note 11 to the accompanying consolidated financial statements.
(3)Subsequent to the balance sheet date, in March 2012, we entered into a separation agreement with our former Chief Executive Officer, Jonathan Medved. According to the terms of the separation agreement, 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.
(4)On July 31, 2011, Stuart Frohlich resigned his position as Chief Operating Officer of Vringo, Inc. As part of his separation agreement, 20,000 of his $0.01 options to purchase shares of our common stock were accelerated.
(5)Represents contributions to: (a) continued education fund (Keren Hishtalmut), (b) retirement plan feature of Managers' Insurance (Kupat Gemel), (c) disability insurance (Ovdan Kosher Avoda) and (d) statutory national insurance (Bituach Leumi) in the aggregate total amount of $67,580 in 2011 and $58,324 in 2010. In addition, includes payments associated with possession of company-leased vehicle in the amount of $19,578 in 2011 and $18,735 in 2010. Additionally, includes life insurance (Keyman insurance) in the aggregate amount of $17,019 in 2011 and $14,103 in 2010.
(6)Represents contributions to: (a) continued education fund (Keren Hishtalmut), (b) retirement plan feature of Managers' Insurance (Kupat Gemel), (c) disability insurance (Ovdan Kosher Avoda) and (d) statutory national insurance (Bituach Leumi) in the aggregate total amount of $30,898 in 2011 and $26,177 in 2010. Additionally, includes local travel reimbursement in the aggregate amount of $5,943 in 2011 and $5,099 in 2010.
(7)

Represents contributions to: (a) continued education fund (Keren Hishtalmut), (b) retirement plan feature of Managers' Insurance (Kupat Gemel), (c) disability insurance (Ovdan Kosher Avoda) and (d) statutory national insurance (Bituach Leumi) in the aggregate total amount of $19,938 in 2011 and $31,187in 2010.

In addition, includes payments associated with possession of company-leased vehicle in the amount of $11,159 in 2011 and $12,706 in 2010.

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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 dateInformation called 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 andby this 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 2015 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,” “Compensation Discussion and Analysis,” “Management and Corporate Governance,” “Compensation Committee Report,” “Compensation Practices and Policies Related to Risk Management” 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.

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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.Item 11.

  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 

(1)25% of the options awards vest in arrears on the date which is twelve months after the applicable vesting commencement date, subject to the optionee's continuous service status on such date. The remaining 75% of the options vest in twelve equal quarterly increments (6.25% per quarter) over the subsequent three years, subject to the optionee's continuous service status on the relevant vesting date.
(2)25% of the options awards vest in arrears on the date which is twelve months after the applicable vesting commencement date, subject to the optionee's continuous service status on such date. The remaining 75% of the options vest in equal annual increments (25% per year) over the subsequent three years, subject to the optionee's continuous service status on the relevant vesting date.
(3)33% of the options awards vest in arrears on the date which is twelve months after the applicable vesting commencement date, subject to the optionee's continuous service status on such date. The remaining 67% of the options vest in two equal annual increments (33% per year) over the subsequent two years, subject to the optionee's continuous service status on the relevant vesting date.
(4)Reflects option expiration dates per separation agreement signed in March 2012.
(5)For additional option grants related subsequent events, also refer to Note 17 to the accompanying consolidated financial statements.

30

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 

(1)Amounts represent the aggregate grant date fair value in accordance with FASB ASC Topic 718. See Note 11 of the consolidated financial statements for the year ended December 31, 2011, for the assumptions made in the valuation of the equity awards.
(2)Mr. Siegel performs his duties as Board Chairman and as member of the Compensation Committee and Nominating and Corporate Governance Committee, on a volunteer basis. As of December 31, 2011, 313,333 options were outstanding, of which 117,500 were exercisable.
(3)Represents payment to Mr. Serlin for Board services and for Audit Committee Chairmanship. As of December 31, 2011, 45,000 options were outstanding, of which 15,625 were exercisable.
(4)Represents fees paid to two corporations under Mr. Segal's control. As of December 31, 2011, 100,000 options were outstanding, of which 47,083 were exercisable.
(5)Represents payment to Mr. Simon for Board services and for membership on both the Compensation Committee and Nominating and Corporate Governance Committee, through October 1, 2011. As of October 1, 2011, Mr. Simon has left the Board of Directors to serve on the Advisory Board. As of December 31, 2011, 59,334 options were outstanding, of which 21,042 were exercisable.
(6)Represents fee earned by Mr. Engelman for Board services through December 31, 2011. As of December 31, 2011, 42,500 options were outstanding, of which 10,625 were exercisable.
(7)Represents fee earned by Mr. Skolnik for Board services from June 22, 2011 through December 31, 2011. As of December 31, 2011, there were no options outstanding.

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.

31

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table and accompanying footnotes set forth certain information asInformation called for by this Item may be found in our definitive Proxy Statement in connection with our 2015 Annual Meeting of March 30, 2012, with respect to the ownership of our common stock by:

·each person or group who beneficially owns more than 5% of our common stock;

·each of our directors and officers; and

·all of our directors and officers as a group.

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.this Item 12.

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%

*Less than 1%

(1)Unless otherwise indicated, the business address of the individuals is c/o Vringo Inc., 44 W. 28th Street New York, New York, 10001
(2)Assumes the full exercise of all options and warrants held by the principal stockholders that are exercisable within 60 days of March 30, 2012.
(3)All ownership is direct beneficial ownership, except for 19,165 shares held in a trust controlled by Seth Siegel.
(4)Based on information included on Form 3, Form 4, Form 4/A or Schedule 13G filed with the SEC.
(5)Percentage of common stock excludes the exercise of all options and warrants held by the holder that are not exercisable within 60 days.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The following is a description of transactions that we entered intoInformation called for by this Item may be found in our definitive Proxy Statement in connection with our executive officers, directors or 5% stockholders during2015 Annual Meeting of Stockholders to be filed with the past two years. We believe that all ofSEC under the transactions described below were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. All future related party transactions will be approvedcaptions “Certain Relationships and Related Person Transactions” and “Management and Corporate Governance” and is incorporated by our audit committee or a majority of our independent directors who do not have an interestreference in the transaction and who will have access, at our expense, to our independent legal counsel.this Item 13.

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.

32

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Our auditors from inceptionInformation called for by this Item may be found in our definitive Proxy Statement in connection with our 2015 Annual Meeting of Stockholders to be filed with the SEC under the caption “Independent Registered Public Accounting Firm” and through the year ended December 31, 2011 were Somekh Chaikin, Certified Public Accountants (Israel), a member firm of KPMG International. All of the services describedis incorporated by reference in the following fee table were pre-approved by our Audit Committee.this Item 14.

 

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

(1)This category includes fees associated with the annual audits of our financial statements, quarterly reviews of our financial statements, and services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements. In addition, fees paid in 2010, include amounts of $210,000 paid in connection with our IPO and $71,000 paid as issuance cost in connection with our IPO.

(2)This category includes audit related fees. In particular, 2011 fees include $44,000 paid in connection with merger and acquisition activities.
(3)Tax fees represent the aggregate fees billed for tax compliance, tax advice, and tax planning.
 (4)Consistent with SEC policies and guidelines regarding audit independence, the Audit Committee is responsible for the pre-approval of all audit and permissible non-audit services provided by our principal independent accountants on a case-by-case basis. Our Audit Committee has established a policy regarding approval of all audit and permissible non-audit services provided by our principal independent accountants. Our Audit Committee pre-approves these services by category and service. Our Audit Committee has pre-approved all of the services provided by our principal independent accountants in 2011.

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.

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a)(1)Financial Statements and SchedulesStatements. For the financial statements included in this annual report, see “Index to the Financial Statements” on page F-1.

 

See(a)(2) Financial Statement Schedules. All schedules are omitted because they are not applicable or because the required information is included in the financial statements or notes thereto.

(a)(3) Exhibits. The list of exhibits filed as a part of this annual report is set forth on the Exhibit Index immediately following the signature page ofpreceding such exhibits and is incorporated by reference in this Annual Report on Form 10-K.Item 15(a)(3).

(b) Exhibits. See Exhibit Index.

(c) Separate Financial Statements and Schedules. None.

 

3341
 

 

Vringo, Inc. and SubsidiarySubsidiaries

(a Development Stage Company)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

  

 Page
ReportReports of Independent Registered Public Accounting FirmFirmsF-243 - 44
  
Consolidated Balance SheetsF-3-F-445
  
Consolidated Statements of OperationsF-546
  
Statements of Changes in Stockholders' Equity (Deficit)F-6-F-747
  
Consolidated Statements of Cash FlowsF-848
  
Notes to the Consolidated Financial StatementsF-10-F-2549 - 68

 

F-142
 

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders

Vringo, Inc. (a Development Stage Company):

 

We have audited the accompanying consolidated balance sheetssheet of Vringo, Inc. (a Development Stage Company) and Subsidiary (collectively "the Company")subsidiaries as of December 31, 2011 and 20102014, and the related consolidated statements of operations, changes in stockholders'stockholders’ equity, (deficit) and cash flows for each of the years in the two-year period ended December 31, 2011, and for the cumulative period from January 9, 2006 (inception of operations) through December 31, 2011.year then ended. These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.audit.

 

We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits provideaudit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vringo, Inc. (a Development Stage Company) and Subsidiarysubsidiaries as of December 31, 2011 and 20102014, and the results of their operations and their cash flows for each of the years in the two-year periodyear then ended, December 31, 2011, and for the cumulative period from January 9, 2006 (inception of operations) through December 31, 2011, in conformity with U.S. generally accepted accounting principles.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notenote 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a deficit in stockholders' equitynegative cash flows from operating activities and may not have sufficient cash or available sources of liquidity to support operating requirements that raiseraises substantial doubt about its ability to continue as a going concern. Management'sManagement’s plans in regard to these matters are also described in Notenote 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Isr.)
A member firm of KPMG International
Jerusalem, Israel
March 30, 2012

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Vringo, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established inInternal Control – Integrated Framework (1992)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

F-2

 

/s/ KPMG LLP

New York, New York

March 16, 2015

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Vringo, Inc.:

We have audited the accompanying consolidated balance sheets of Vringo, Inc. and Subsidiarysubsidiaries (a development stage company) (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2013 and 2012 and for the period from June 8, 2011 (inception) to December 31, 2013. We also have audited Vringo Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992), issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

(

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a Development Stage Company)test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vringo, Inc. and subsidiaries (a development stage company) as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years then ended, and for the cumulative period from June 8, 2011 (date of inception) to December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

/s/ Somekh Chaikin

A member firm of KPMG International

Jerusalem, Israel

March 10, 2014

Vringo, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(inIn thousands, except share and per share data)

   

  December 31, 
2014
  December 31, 
2013
 
Current assets        
Cash and cash equivalents $16,023  $33,586 
Assets held for sale     787 
Deposits with courts  2,067    
Other current assets  510   455 
Total current assets  18,600   34,828 
Property and equipment, at cost, net of $389 and $134 accumulated depreciation
as of December 31, 2014 and 2013, respectively
  221   230 
Intangible assets, net  17,625   22,748 
Goodwill     65,757 
Other assets  989   247 
Total assets $37,435  $123,810 
         
Current liabilities        
Accounts payable and accrued expenses $4,731  $5,445 
Derivative warrant liabilities  1   43 
Total current liabilities  4,732   5,488 
         
Long-term liabilities        
Derivative warrant liabilities $174  $4,040 
Other liabilities  1,349    
Commitments and contingencies (Note 14)        
         
Stockholders’ equity        
Series A Convertible Preferred stock, $0.01 par value per share; 5,000,000 authorized; none issued and outstanding      
Common stock, $0.01 par value per share 150,000,000 authorized; 93,404,895 and 84,502,653 issued and outstanding as of December 31, 2014 and 2013, respectively  934   845 
Additional paid-in capital  215,951   189,465 
Accumulated deficit  (185,705)  (76,028)
         
Total stockholders’ equity $31,180  $114,282 
         
Total liabilities and stockholders’ equity $37,435  $123,810 

     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 

The accompanying notes form an integral part of these consolidated financial statements.

Vringo, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

  For the year ended December 31, 
  2014  2013  2012 
Revenue $1,425  $1,100  $100 
             
Costs and Expenses*            
Operating legal costs  25,368   21,590   10,010 
Amortization and impairment of intangibles  5,123   3,445   1,692 
Research and development  889   1,512   543 
General and administrative  15,484   15,330   10,226 
Goodwill impairment  65,757       
Total operating expenses  112,621   41,877   22,471 
Operating loss from continuing operations  (111,196)  (40,777)  (22,371)
Non-operating income (expense), net  (162)  225   (2)
Gain (loss) on revaluation of warrants  2,201   (1,196)  6,847 
Issuance of warrants  (65)     (2,883)
Loss from continuing operations before income taxes  (109,222)  (41,748)  (18,409)
Income tax expense         
Loss from continuing operations  (109,222)  (41,748)  (18,409)
Loss from discontinued operations before income taxes (including impairment loss of $0, $7,253, and $0 in 2014, 2013, and 2012, respectively)*  (209)  (10,428)  (2,377)
Income tax expense  (246)  (257)  (55)
Loss from discontinued operations  (455)  (10,685)  (2,432)
Net loss $(109,677) $(52,433) $(20,841)
Loss per share:            
Basic            
Loss per share from continuing operations  (1.22)  (0.50)  (0.47)
Loss per share from discontinued operations  (0.01)  (0.13)  (0.06)
Total net loss per share $(1.23) $(0.63) $(0.53)
Diluted            
Loss per share from continuing operations  (1.23)  (0.50)  (0.55)
Loss per share from discontinued operations  (0.01)  (0.13)  (0.06)
Total net loss per share $(1.24) $(0.63) $(0.61)
Weighted-average number of shares outstanding during the period:            
Basic  89,640,330   83,201,691   39,111,176 
Diluted  90,489,740   83,280,873   41,664,676 
* Includes stock-based compensation expense, as follows:            
Operating legal costs $1,343  $1,221  $523 
Research and development  431   470   366 
General and administrative  9,042   10,037   6,731 
Discontinued operations  151   365   467 
  $10,967  $12,093  $8,087 

The accompanying notes form an integral part of these consolidated financial statements.

Vringo, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(In thousands)

  Common 
stock
  Additional
paid-in capital
  Accumulated 
deficit
  Total 
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 
Recording of equity instruments upon Merger, net of fair value of issued warrants of $21,954 and issuance costs of $463  152   54,809      54,961 
Issuance of warrants (Note 11)     2,883      2,883 
Conversion of Series A Convertible Preferred stock, classified as equity  201   (201)      
Exercise of stock options  8   501      509 
Exercise of warrants  76   22,856      22,932 
Issuance of shares in connection with a financing round, net of issuance costs of $52  96   31,052      31,148 
Shares issued for acquisition of patents (Note 6)  2   748      750 
Issuance of shares in connection with a financing round, net of issuance costs of $39  103   44,859      44,962 
Stock-based compensation, including grants of shares to consultants  3   8,084      8,087 
Net loss for the year        (20,841)  (20,841)
Balance as of December 31, 2012 $819  $171,108  $(23,595) $148,332 
Exercise of stock options and vesting of restricted stock units (“RSU”)  22   952      974 
Exercise of warrants  4   1,394      1,398 
Conversion of derivative warrants into equity warrants     3,918      3,918 
Stock-based compensation     12,093      12,093 
Net loss for the year        (52,433)  (52,433)
Balance as of December 31, 2013 $845  $189,465  $(76,028) $114,282 
Exercise of stock options and vesting of RSU  21   2,139      2,160 
Issuance of warrants (Note 11)     65      65 
Exercise of warrants  64   12,935      12,999 
Issuance of common stock for services  4   380      384 
Stock-based compensation     10,967      10,967 
Net loss for the year        (109,677)  (109,677)
Balance as of December 31, 2014 $934  $215,951  $(185,705) $31,180 

The accompanying notes form an integral part of these consolidated financial statements.

Vringo, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

  For the year ended December 31, 
  2014  2013  2012 
Cash flows from operating activities            
Net loss $(109,677) $(52,433) $(20,841)
Adjustments to reconcile net cash flows used in operating activities:            
Items not affecting cash flows            
Depreciation and amortization  4,023   5,220   2,501 
Impairment of goodwill and intangibles (Notes 6 and 8)  67,112   7,253    
Change in deferred tax assets and liabilities        (58)
Stock-based compensation  10,967   12,093   8,087 
Issuance of warrants  65      2,883 
Assignment of patents     (100)   
Change in fair value of warrants  (2,201)  1,196   (6,847)
Exchange rate loss (gain), net  192   (97)  8 
Changes in assets and liabilities            
Decrease (increase) in other assets  374   (135)  (208)
Increase in payables and accruals  763   3,538   7 
Net cash used in operating activities  (28,382)  (23,465)  (14,468)
Cash flows from investing activities            
Acquisition of property and equipment  (246)  (23)  (208)
Acquisition of patents     (1,420)  (22,548)
Cash acquired as part of acquisition of Vringo (Note 7)        3,326 
Increase in deposits  (2,404)  (193)  (46)
Net cash used in investing activities  (2,650)  (1,636)  (19,476)
Cash flows from financing activities            
Exercise of stock options  2,160   974   509 
Exercise of warrants  11,292   590   12,275 
Proceeds from issuance of common stock, net of issuance costs        76,110 
Repayment of note payable        (3,200)
Cash provided by financing activities  13,452   1,564   85,694 
Effect of exchange rate changes on cash and cash equivalents  17   163   (2)
Decrease (increase) in cash and cash equivalents  (17,563)  (23,374)  51,748 
Cash and cash equivalents at beginning of period  33,586   56,960   5,212 
Cash and cash equivalents at end of period $16,023  $33,586   56,960 
Supplemental disclosure of cash flows information            
Income taxes paid     34   7 
Non-cash investing and financing transactions            
Non-cash acquisition of cost method investment  787       
Conversion of derivative warrants into common stock  1,707   808   10,657 
Conversion of derivative warrants into equity warrants     3,918    
Non-cash acquisition of patents through issuance of common stock (Note 6)        750 
Conversion of Series A Convertible Preferred stock, classified as mezzanine equity, into common stock, prior to the Merger        76 
Conversion of Series A Convertible Preferred stock, classified as mezzanine equity, into common stock, upon the Merger        1,724 
Conversion of Series A Convertible Preferred stock, classified as equity, into common stock, after the Merger        201 

 

The accompanying notes form an integral part of these consolidated financial statements.

 

F-3

Vringo, Inc. and SubsidiarySubsidiaries

(a Development Stage Company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(inIn thousands, except for share and per share data)

     December 31, 2011  December 31, 2010 
  Note  U.S.$  U.S.$ 
Current liabilities            
Deferred tax liabilities, netshort-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 

*Amounts recorded as of December 31, 2011 and 2010 include $10 and $20 to a related party, respectively.

The accompanying notes form an integral part of these consolidated financial statements.

F-4

Vringo, Inc. and Subsidiary

(a Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except share and per share data)

     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 

*Includes expenses in the total amount of $53, $450 and $1,103 to related parties for the years ended 2011 and 2010 and for the cumulative period from inception until December 31, 2011, respectively.

The accompanying notes form an integral part of these consolidated financial statements.

F-5

Vringo, Inc. and Subsidiary

(a Development Stage Company)

STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(in thousands)

           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.

The accompanying notes form an integral part of these consolidated financial statements.

F-6

Vringo, Inc. and Subsidiary

(a Development Stage Company)

STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(in thousands)

           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.

The accompanying notes form an integral part of these consolidated financial statements.

F-7

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 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.

F-8

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.

F-9

Vringo, Inc. and Subsidiary

(a Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 –1. General

Overview

 

Vringo, Inc. (a Development Stage Company) (the "Parent") was incorporated in Delaware on January 9, 2006 and commenced operations during, together with its consolidated subsidiaries (“Vringo” or the first quarter of 2006. The Parent formed a wholly-owned subsidiary, Vringo (Israel) Ltd. (the "Subsidiary"“Company”) in March 2006, primarily for the purpose of providing research and development services, as detailed in the intercompany service agreement. The Parent and the Subsidiary are collectively referred to herein as the "Company".

The Company, is engaged in developing software platformsthe development and applications for mobile phones. The Company develops and provides a wide varietymonetization of mobile video services, including a comprehensive platform that allows users to create, download and share video ringtones.intellectual property worldwide. The Company's proprietary ringtone platform includes social networking capabilityintellectual property portfolio consists of over 600 patents and integration with web systems.patent applications covering telecom infrastructure, internet search and mobile technologies. The Company’s patents and patent applications have been developed internally or acquired from third parties. In potential acquisitions, the Company seeks to purchase all of, or interests in, technology and intellectual property in exchange for cash, the Company’s securities and/or interests in the monetization of those assets. Revenue from this aspect of Vringo’s business can be generated through licensing and litigation efforts.

 

The Company is stillAs further described in Note 7, Vringo closed a merger transaction (the “Merger”) with Innovate/Protect, Inc., a privately held corporation (“I/P”), on July 19, 2012. This transaction was accounted for as a reverse acquisition in accordance with generally accepted accounting principles in the development stage. There is no certainty regardingUnited States of America (“U.S. GAAP”) and as a result, I/P was deemed to be the Company's ability to completeacquiring company for accounting purposes. Accordingly, 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 exercisableCompany’s financial statements 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. Immediatelyperiods prior to the closingMerger reflect the historical results of I/P, and the Company’s financial statements for all periods from July 19, 2012 reflect the results of the offering,combined company.

Prior to December 31, 2013, the Company's outstanding sharesCompany operated a global platform for the distribution of preferred stock were exchanged for shares of common stockmobile social applications and the services that it developed. On February 18, 2014, the Company effected a 1 for 6 reverse stock splitexecuted the sale of its common stock.mobile social application business to InfoMedia Services Limited (“InfoMedia”), receiving an 8.25% ownership interest as consideration (Note 8). As part of the transaction, the Company will have the opportunity to license certain intellectual property assets and support InfoMedia to identify and protect new intellectual property.

Infrastructure Patents

On August 9, 2012, the Company entered into a patent purchase agreement with Nokia Corporation ("Nokia"), comprising of 124 patent families with counterparts in certain jurisdictions world-wide. The portfolio encompasses technologies relating to telecom infrastructure, including communication management, data and signal transmission, mobility management, radio resources management and services. Declarations were filed by Nokia indicating that 31 of the 124 patent families acquired may be essential to wireless communications standards. The Company issued a stock dividend to holdersalso acquired certain patent portfolios during 2012 and 2013, and have filed over 60 internally developed patent applications since the Merger. As one of the preferred stock priormeans of realizing the value of the patents on telecom infrastructure, the Company has filed a number of suits against ZTE Corporation (“ZTE”), ASUSTeK Computer Inc. (“ASUS”), D-Link Corporation, and certain of their subsidiaries, affiliates and other companies in the United States, European jurisdictions, India, Australia, Brazil, and Malaysia alleging infringement of certain U.S., European, Indian, Australian, Brazilian, and Malaysian patents.

To date, in connection with the filed suits against ZTE, Vringo patents have been found to be infringed in the United Kingdom and Germany, and preliminary relief has been granted in India, Brazil, Romania, and the Netherlands. Separately, Vringo has entered into settlement and license agreements with ADT, Tyco, and Belkin.

Search Patents

On September 15, 2011, the Company’s wholly-owned subsidiary, I/P Engine, Inc. (“I/P Engine”), initiated litigation against AOL Inc., Google, Inc., IAC Search & Media, Inc., Gannett Company, Inc., and Target Corporation (collectively, the "Defendants") for infringement of claims of certain of its owned patents. Trial commenced during 2012, and, on November 6, 2012, the jury ruled in favor of I/P Engine and against the Defendants. After upholding the validity of the patents-in-suit, and determining that the asserted claims of the patents were infringed by the Defendants, the jury found that reasonable royalty damages should be based on a "running royalty," and that the running royalty rate should be 3.5%. The jury also awarded I/P Engine a total of approximately $30.5 million. In January 2014, the United States District Court, Eastern District of Virginia (the “District Court”) ordered that I/P Engine recover an additional sum of $17.32 million from the Defendants for supplemental damages and prejudgment interest. Further, the District Court ruled that the appropriate ongoing royalty rate for Defendants' continued infringement of the patents-in-suit is a rate of 6.5% of the 20.9% royalty base previously set by the District Court. These rulings were appealed by the Defendants and the oral argument was heard before the United States Court of Appeals for the Federal Circuit (“Federal Circuit”) on May 6, 2014.

On August 15, 2014, the Federal Circuit reversed the judgment of the District Court by holding that the asserted infringement claims by the Company of the patents-in-suit are invalid for obviousness. The Company filed a petition with the Federal Circuit on October 15, 2014 seeking en banc review of the decision. On October 20, 2014, the Federal Circuit invited the defendants/appellants to respond to the split and exchange. All share and per-share information in these consolidated financial statements have been adjusted to give effect topetition.  On December 15, 2014, the reverse stock split. On July 27, 2010, the units were separated into their components and the shares and warrants began to trade separately. Upon separationFederal Circuit denied I/P Engine's petition for rehearing of the units into sharescase en banc and warrants,consequently, the units ceased trading.Company announced that I/P Engine will seek review by the U.S. Supreme Court of the Federal Circuit’s decision.

 

Despite the foregoing, there is still significant doubt as to the abilityFinancial conditions

As of December 31, 2014, the Company to continue operating ashad a "going concern".cash balance of $16,023. The Company has incurred significant losses since its inception and expects that it will continue to operate at a net lossCompany’s average monthly cash spent in operations for the foreseeable future. For the yearyears ended December 31, 20112014 and for2013 was approximately $2,365 and $1,955, respectively. In addition, the cumulative period from inception untilCompany paid approximately $2,404 in deposits with courts during 2014 related to proceedings in Germany, Brazil, and Malaysia, which are included in Deposits with courts in the consolidated balance sheet as of December 31, 2011, the Company incurred net losses of $7.5 million and $37.4 million, respectively.2014.

 

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,June 19, 2014, the Company entered into agreements with holders (the “Holders”) of certain of its outstanding Special Bridge and Conversion Warrants,warrant holders, pursuant to which the Holderswarrant holders exercised for cash 5,697,227 of their outstanding Series 1 and Series 2 warrants, to purchase 3,828,993 shares of our common stock for aggregate proceeds of $3.6 million (“February 2012 warrant exercise”). In addition, certain Holders were granted additional warrants to purchase2,660,922 shares of common stock of the Company, atwith an exercise price of $1.76 per share.The total issuance costsCompany granted such warrant holders unregistered warrants of the Company to purchase an aggregate of 5,412,366 shares of the Company’s common stock, par value $0.01 per share, at an exercise price of $5.06 per share (the “June 2014 Warrants”). As a result of these transactions, the Company received $10,027 of proceeds. In addition, 1,126,815 options to purchase 1,126,815 shares of the Company’s common stock were $65 thousand. See also Note 17.exercised during the year ended December 31, 2014. As a result, the Company received $2,160 of proceeds.

 

As of December 31, 2014 and 2013, the Company’s total stockholders' equity was $31,180 and $114,282, respectively. The Company believesdecrease in stockholders’ equity since December 31, 2013 is mainly due to the operating loss during the year ended 2014, which includes a non-cash goodwill impairment charge of $65,757 that following the February 2012 warrant exercise, its current cash levels will be sufficient to support its activity intowas recorded during the fourth quarter of 2012. On March 13, 2012,2014 in connection with the annual goodwill impairment test performed by the Company. As a result of the first step of the goodwill impairment test, it was determined that the fair value of the reporting unit did not exceed its carrying amount as of December 31, 2014, mainly due to the decline of the Company’s common stock price during the fourth quarter of 2014. Accordingly, the Company entered into an agreement and Plan of Merger Agreement (“Merger Agreement”), pursuant to which Innovate/Protect, Inc. (“I/P”) will merge with and into VIP Merger Sub, Inc., a wholly owned subsidiaryperformed the second step of the Company (“Merger Sub”), with Merger Sub beinggoodwill impairment test and determined that the surviving corporationimplied value of its goodwill was zero. Refer to Note 6 for further discussion of this impairment charge.

The Company’s operating plans include efforts to increase revenue through an exchangethe licensing of capital stockits intellectual property, strategic partnerships, and litigation, when required, which may be resolved through a settlement or collection. Disputes regarding the assertion of I/P for capital stockpatents and other intellectual property rights are highly complex and technical. The majority of the Company. The consummationCompany’s expenditures consist of costs related to the Company’s four litigation campaigns. In the case against Google et al., the Company incurred costs during 2014 related to the preparation for the oral argument, which was heard before the Federal Circuit in May 2014, in addition to other related costs. In the cases against ZTE and ASUS, the Company incurred costs during 2014 related to the preparation and filing of briefs and other court documents, as well as case preparation and management. A large percentage of these costs were incurred in the United Kingdom, Australia, Germany, Brazil, the Netherlands, and France. In civil law jurisdictions, such as Germany, France, Spain, and others, the majority of costs are incurred in the early stages of litigation. With respect to the Company’s litigation in such countries, the respective campaigns are currently in the later stages and therefore the Company has already incurred the large majority of the Merger Agreement is subjectrelated anticipated costs. As such, based on the Company’s plans, costs in these jurisdictions are projected to stockholder approvalbe lower in 2015 and other closing conditions. future periods. 

Despite the Company’s plans, its legal proceedings may continue for several years and may require significant expenditures for legal fees and other expenses. Further, should the Company be deemed the losing party in certain of its litigations, it may be liable for some or all of its opponents’ legal fees. In addition, in connection with litigation, the Company has made several affirmative financial guarantees to courts around the world, and might face the need to make additional guarantees in the future. Refer to Note 14 for the Company’s disclosures of its commitments and contingencies for the assessments made by the Company with respect to legal fees and guarantees.

In addition, the Company’s plans to continue to expand its planned operations through acquisitions and monetization of additional patents, other intellectual property or operating businesses may be time consuming, complex and costly to consummate. The Company may utilize many different transaction structures in its acquisitions and the terms of such acquisition agreements tend to be heavily negotiated. The Company’s ability to raise capital may be limited. Even if the Company is exploring further opportunities, including merger and acquisitions and/able to acquire particular patents or additional financing necessaryother intellectual property assets, there is no guarantee that it will generate sufficient revenue related to ensure thatthose assets to offset the acquisition costs. Therefore, no assurance can be given at this time as to whether the Company will continuebe able to operate as a going concern.achieve its objectives or whether it will have the sources of liquidity for follow through with its operating plans.

In addition, until the Company generates sufficient revenue, the Company may need to raise additional funds, which may be achieved through the issuance of additional equity or debt, or through loans from financial institutions. There can be no assurance, however, that any such opportunities will materialize. See descriptionThe Company may also be able to raise additional funds through the exercise of its outstanding warrants and options, however, substantially all of such outstanding equity instruments are currently “out of the money” due to the decline in Note 17.the Company’s common stock price which began in the third quarter of 2014.

 

TheseThe circumstances discussed above raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s consolidated financial statements werehave been prepared using principles applicable toassuming that it will continue as a going concern which contemplates the realization of assets and liquidationsatisfaction 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.

F-10

Vringo, Inc. and Subsidiary

(a Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

business.

Note 2 - Significant2. 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 presentedhave been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.

 

(b) Development stage enterprise

The Company's principal activities to date have been the research and development of its products and the Company has not generated significant revenues from its planned, principal operations. Accordingly, the Company's financial statements are presented as those of a development stage enterprise.

(c) Translation into U.S. dollars

The currency of the primary economic environment in which the operations of the Company are conducted is the U.S. dollar ("dollar" or "$"). Therefore, the dollar has been determined to be the Company's functional currency. Transactions in foreign currency (primarily in New Israeli Shekels "NIS") are recorded at the exchange rate as of the transaction date. All exchange gains and losses from remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected as finance expense in the statement of operations, as they arise.At December 31, 2011, the exchange rate was $1 = NIS 3.821 (December 31, 2010 — $1 = NIS 3.549). The average exchange rate for the year ended December 31, 2011 was $1 = 3.578 NIS (December 31, 2010 — $1 = NIS 3.733).

(d) Use of estimates

 

The preparation of accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as atof the date of the consolidated financial statements and the reported amounts of revenues and expenses duringfor the reporting period.periods presented. Actual results may differ from such estimates. Significant items subject to such estimates and assumptions include timingthe valuation of goodwill and realizationthe Company’s intangibles assets, the useful lives of the Company’s intangible assets, the valuation of the Company’s derivative warrants, the valuation of stock-based compensation, deferred tax assets and liabilities, allowances for doubtful accounts, valuation of convertible preferred and common stock, warrants and derivative instruments, share-based payments, warrants, income tax uncertainties and other contingencies.

(c) Translation into U.S. dollars

The current economic environment has increasedCompany conducts certain transactions in foreign currencies, which are recorded at the degreeexchange rate as of uncertainty inherentthe transaction date. All exchange gains and losses occurring from the remeasurement of monetary balance sheet items denominated in those estimates and assumptions.non-dollar currencies are reflected as non-operating income or expense in the consolidated statements of operations.

 

(e)(d) Cash and cash equivalents

 

For the purposeThe Company invests its cash in money market funds with financial institutions. The Company has established guidelines relating to diversification and maturities of these financial statements, allits investments in order to minimize credit risk and maintain high liquidity of funds. All highly liquid investments with original maturities of three months or less at acquisition date are considered cash equivalents.

 

(f) Accounts receivables and allowance for doubtful accounts

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)(e) Derivative instruments

 

The Company recognizes all derivative instruments as either assets or liabilities in the consolidated balance sheetsheets at their respective fair values. The Company's derivative instruments, include a Special Bridge Warrantwhich are discussed in Notes 9 and a Conversion Warrant which11, have been recorded as a liability,liabilities at fair value, and are revalued at each reporting date, with changes in the fair value of the instruments included in the statementconsolidated statements of operations as non-operating income (expense).

(f) Intangible assets

Intangible assets include purchased patents which are recorded based on the cost to acquire them. These assets are amortized over their remaining estimated useful lives, which are periodically evaluated for reasonableness. The Company’s intangible assets are reviewed for impairment whenever events or expense.changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of the Company's intangible assets, the Company must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, the Company may be required to record impairment charges related to its intangible assets. Refer to Note 6 for further discussion of impairment charges recorded by the Company during the third quarter of 2014 and the fourth quarter of 2013, related to its intangible assets.

(g) Goodwill

 

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is reviewed for impairment at least annually, and when triggering events occur, in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles - Goodwill and Other. The Company has one reporting unit for purposes of evaluating goodwill impairment and performs its annual goodwill impairment test on December 31.

The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would not need to perform the two-step impairment test for the reporting unit. If the Company cannot support such a conclusion or the Company does not elect to perform the qualitative assessment, then the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of the reporting unit with its carrying amount, including goodwill. Fair value of the reporting unit is determined using certain valuation techniques, including the estimation of an implied control premium, in addition to the Company’s market capitalization on the measurement date as the market capitalization is derived on a non-controlling basis.

If the fair value of the reporting unit exceeds its carrying value, then the second step of the impairment test (measurement) does not need to be performed. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the entity must perform the second step of the impairment test. Under the second step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to an acquisition price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. A significant amount of judgment is required in performing goodwill impairment tests including estimating the fair value of a reporting unit and the implied fair value of goodwill. Refer to Note 6 for further discussion of the interim goodwill impairment test performed by the Company as of September 30, 2014 and the annual goodwill impairment test performed by the Company as of December 31, 2014.

(h) Property and equipment

 

Property and equipment is stated at historical cost, net of accumulated depreciation. Depreciation is calculated according to theon a straight-line methodbasis over the estimated useful lives of the assets. Annual depreciation ratesThe useful lives of the Company’s property and equipment are as follows:based on estimates of the period over which the Company expects the assets to be of economic benefit to the Company. 

The following table summarizes the estimate useful lives of the Company’s property and equipment categories: 

 

  %No. of Years 
Office furniture and equipment 7-333 
Computers and related equipment 2-333
Leasehold improvementsShorter of the useful life of the asset or the term of the lease 

 

Leasehold improvements are amortized over the shorter of the useful life of the asset or the term of the lease.

 

(i) Revenue recognition

Revenue from subscription servicespatent licensing and software development and licensesenforcement is recognized if collection of the relevant receivablecollectability is probable,reasonably assured, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and delivery of the service has been rendered. Revenues from non-refundable up-front fees are recognized according to the guidance in SAB Topic 13.A.3.f. As these up-front fees relate to the hosting of the service over a period of the contract, the Company recognizes these up-front fees over the life time of the contract. According to ASU 2009-13, Revenue Recognition (Topic 605), which was early-adopted by the Company in 2009, theThe Company uses management's best estimate of selling price for individual elements in multiple-element arrangements, where other sourcesvendor specific evidence or third party evidence of evidence are unavailable.

F-11

Vringo, Inc. and Subsidiary

(a Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)selling price is not available. 

 

Note 2 - Significant AccountingCurrently, the Company’s revenue arrangements provide for the payment of contractually determined fees and Reporting Policies (cont'd)other consideration for the grant of certain intellectual property rights related to the Company’s patents. These rights typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patents, (ii) the release of the licensee from certain claims, and (iii) the dismissal of any pending litigation. The intellectual property rights granted typically extend until the expiration of the related patents. Pursuant to the terms of these agreements, the Company has no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on the Company’s part to maintain or upgrade the related technology, or provide future support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement, or upon receipt of the upfront payment. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, upon receipt of the upfront fee, and when all other revenue recognition criteria have been met. 

 

(j) Cost of revenue

Cost of revenue consists primarily of direct costs that the Company pays to third parties in order to operateits products in launched markets.These expenses include the costs associated with production servers serving the end-users, royalty fees for content sales, amortization of prepaid content licenses.

(k) Research and development

Research and development expenses are expensed as incurred and consist primarily of payroll and facilities charges associated with the research, development and integration of our current and future products.

(l) Advertising and PromotionalOperating legal costs

 

We expense advertisingOperating legal costs mainly include expenses incurred in connection with the Company’s patent licensing and promotional costs in the period in which they are incurred. For the years ended December 31, 2011, 2010,enforcement activities, patent-related legal expenses paid to external patent counsel (including contingent legal fees), licensing and cumulative from inception till December 31, 2011, advertisingenforcement related research, consulting and promotionalother expenses totaled approximately $271 thousand, $141 thousand,paid to third parties, as well as related internal payroll expenses and $923 thousand, respectively.stock-based compensation.  

(m) Accounting for share-based payments(k) Stock-based compensation

 

Share-based paymentStock-based compensation is recognized as an expense in the financialconsolidated statements of operations and such cost is measured at the grant-date fair value of the equity-settled award. The fair value of stock options is estimated at the date of grant using the Black-Scholes-Merton option-pricing model. The expense is recognized using theon a straight-line method,basis, over the requisite service period,period. The Company uses the simplified method to estimate the expected term of options due to insufficient history and high turnover in the past. The contractual life of options granted under the Company’s 2006 and 2012 option plans are 6 and 10 years, respectively. Since the Company lacks sufficient history, expected volatility is reducedestimated based on the average historical volatility of similar entities with publicly traded shares. The risk-free rate for estimated forfeitures.the expected term of the option is based on the U.S. Treasury yield curve at the date of grant.

(n)(l) Income taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not more likely than not to be realized. Tax benefits related to excess deductions on stock-based compensation arrangements are recognized when they reduce taxes payable.

 

In assessing the need for a valuation allowance, the Company looks at cumulative losses in recent years, estimates of future taxable earnings, feasibility of on-going tax planning strategies, the realizability of tax benefit carryforwards, and other relevant information. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. Ultimately, the actual tax benefits to be realized will be based upon future taxable earnings levels, which are very difficult to predict. In the event that actual results differ from these estimates in future periods, the Company will be required to adjust the valuation allowance.

Significant judgment is required in evaluating the Company's federal, state and foreign tax positions and in the determination of its tax provision. Despite management's belief that the Company's liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matters. The Company may adjust these accruals as relevant circumstances evolve, such as guidance from the relevant tax authority, its tax advisors, or resolution of issues in the courts. The Company's tax expense includes the impact of accrual provisions and changes to accruals that it considers appropriate, as well as related interest and penalties.appropriate. These adjustments are recognized as a component of income tax expense entirely in the period in which they are identified.

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.

The Company recognizes the effect of income tax expense.

(o) Reverse stock splitpositions 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% of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

 

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)(m) Net loss per common share data

 

Basic net loss per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock plus dilutive potential common stock considered outstanding during the period.However, as the Company generated net losses in all periods presented, some potentially dilutive securities comprised mainly ofthat relate to the continuing operations, including certain warrants and stock options, arewere not reflected in diluted net loss per share because the effectimpact of such shares isinstruments was anti-dilutive.

F-12

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)

(q) Long lived assets

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)(n) Commitments and Contingenciescontingencies

 

Liabilities for loss contingencies arising from assessments, estimates or other sources are to be recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs expected to be incurred in connection with a loss contingency are expensed as incurred.

 

(s)(o) Fair value measurements

 

The Company measures fair value in accordance with FASB ASC 820-10, "FairFair Value Measurements and Disclosures" (formerly SFAS 157, "Fair Value Measurements")Disclosures. FASB ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received to sellby selling an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, FASB ASC 820-10 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

 

53

Level 1-1: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

 

Level 2 -: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3 -: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

 

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

(t)(p) Recently issued and adopted accounting standardspronouncements

 

In December 2011,July 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides guidance on the presentation of unrecognized tax benefits. This guidance requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance is effective beginning January 1, 2014 and is to be applied prospectively with retroactive application permitted. The Company adopted this guidance as of January 1, 2014, as required. There was no material impact of the consolidated financial statements resulting from the adoption.

In April 2014, the FASB issued ASU No. 2011-11, Balance Sheet2014-08, Presentation of Financial Statements (Topic 210)205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requiresof Disposals of Components of an entity to disclose information about offsetting and related arrangements to enable usersEntity. This guidance changes the criteria for reporting a discontinued operation while enhancing disclosures in this area. This standard will be effective for the Company beginning January 1, 2015. Early adoption of the standard is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements to understandpreviously issued or available for issuance. The Company is currently evaluating the effectimpact of those arrangementsthe adoption on its consolidated financial position, andstatements.

In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers (Topic 606), which impacts virtually all aspects of an entity's revenue recognition. The core principle of the new standard is that revenue should be recognized to allow investorsdepict the transfer of promised goods or services to better comparecustomers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of the adoption on its consolidated financial statements preparedstatements.

In June 2014, the FASB issued ASU No. 2014-10,Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation, which removes the definition of development stage entity, as was previously defined under U.S. GAAP, withthereby removing the financial reporting distinction between development stage entities and other reporting entities. In addition, the ASU eliminates the requirements for development stage entities to (i) present inception-to-date information in their financial statements, prepared under International(ii) label the financial statements as those of a development stage entity, (iii) disclose a description of the development stage activities in which the entity is engaged, and (iv) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage. This guidance is effective for annual reporting periods beginning after December 31, 2014 and early adoption of the standard is permitted. The Company adopted this guidance during the second quarter of 2014.

In August 2014, the FASB issued ASU No. 2014-15,Presentation of Financial Reporting Standards (IFRS)Statements (Topic 205): Going Concern. The new standards arestandard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. This guidance is effective for annual periods beginning January 1, 2013,fiscal years, and interim periods within those annual periods. Retrospective applicationfiscal years, beginning after December 15, 2016 and early adoption is required.permitted. The Company will implementis currently evaluating the provisionsimpact of ASU 2011-11 as of January 1, 2013. The impactthe adoption on ourits consolidated financial statements is believed to be immaterial.statements.

   

(u)(q) Reclassification

 

Certain balances have been reclassified to conform to current year presentation.presentation requirements including discontinued operations.

 

F-13

Note 3. Net Loss per Common Share

 

The table below presents the computation of basic and diluted net losses per common share: 

Vringo, Inc. and Subsidiary

(a Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

  For the year ended December 31, 
  2014  2013  2012 
Basic Numerator:            
Loss from continuing operations attributable to shares of common stock $(109,222) $(41,748) $(18,409)
Loss from discontinued operations attributable to shares of common stock  (455) $(10,685) $(2,432)
Net loss attributable to shares of common stock $(109,677) $(52,433) $(20,841)
Basic Denominator:            
Weighted average number of shares of common stock outstanding during the period  89,640,330   83,097,667   38,949,305 
Weighted average number of penny stock options     104,024   161,871 
Basic common stock shares outstanding  89,640,330   83,201,691   39,111,176 
Basic loss per common stock share from continuing operations $(1.22) $(0.50) $(0.47)
Basic loss per common stock share from discontinued operations  (0.01) $(0.13) $(0.06)
Basic net loss per common stock share $(1.23) $(0.63) $(0.53)
             
Diluted Numerator:            
Net loss from continuing operations attributable to shares of common stock $(109,222) $(41,748) $(18,409)
Increase in net loss attributable to derivative warrants $(2,201) $(59) $(4,701)
Diluted net loss from continuing operations attributable to shares of common stock $(111,423) $(41,807) $(23,110)
Diluted net loss from discontinued operations attributable to shares of common stock $(455) $(10,685) $(2,432)
Diluted net loss attributable to shares of common stock $(111,878) $(52,492) $(25,542)
             
Diluted Denominator:            
Basic common stock shares outstanding  89,640,330   83,201,691   39,111,176 
Shares assumed issued upon exercise of derivative warrants during the period  849,410   79,182   2,553,500 
Diluted common stock shares outstanding  90,489,740   83,280,873   41,664,676 
Diluted loss per common stock share from continuing operations $(1.23) $(0.50) $(0.55)
Diluted loss per common stock share from discontinued operations $(0.01) $(0.13) $(0.06)
Diluted net loss per common stock share $(1.24) $(0.63) $(0.61)
             
Net loss per share data presented excludes from the calculation of diluted net loss the following potentially dilutive securities, as they had an anti-dilutive impact:            
Both vested and unvested options to purchase an equal number of shares of common stock of the Company  8,052,345   10,407,157   8,957,054 
Unvested RSU to issue an equal number of shares of common stock of the Company  1,196,357   2,161,402   3,125,000 
Common stock shares granted, but not yet vested     30,046   92,903 
Warrants to purchase an equal number of shares of common stock of the Company  16,553,243   18,261,031   3,787,628 
Total number of potentially dilutive instruments, excluded from the calculation of net loss per share  25,801,945   30,859,636   15,962,585 

  

Note 3 -4. 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 

Note 4 - Prepaid Expenses and Other Current Assets

  As of December 31, 
  2011  2010 
  U.S.$ thousands  U.S.$ thousands 
Government institutions  6   30 
Prepaid expenses and others  181   138 
   187   168 
  As of December 31, 
  2014  2013 
Cash denominated in U.S. dollars $2,897  $24,628 
Money market funds denominated in U.S. dollars  13,085   3,184 
Cash in currency other than U.S. dollars  41   5,774 
  $16,023  $33,586 

 

Note 5 -5. Property and Equipment

 

 As of December 31, 
 2011  2010  As of December 31, 
 U.S.$ thousands  U.S.$ thousands  2014 2013 
Computers, software and equipment  475   452  $207  $171 
Furniture and fixtures  42   38   201   83 
Leasehold improvements  81   81   202   110 
  598   571   610   364 
Less: accumulated depreciation and amortization  (454)  (393)
Less: accumulated depreciation  (389)  (134)
  144   178  $221  $230 

 

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. During the years 2011ended December 31, 2014, 2013 and 2010,2012, the Company recorded $61 thousand$255, $87 and $87 thousand$46 of depreciation and amortization expense, respectively, and $454 thousand cumulatively from inception.respectively. 

 

Note 6 - Accounts Payable6. Goodwill and Accrued Expenses

  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 PayIntangible Assets

 

Under Israeli law,Intangible assets

The following table provides information regarding the Subsidiary is required to make severance payments to dismissed employees, and employees leaving employment in certain other circumstances. AllCompany’s intangible assets, which consist 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.its patents:

  December 31, 2014  December 31, 2013  Weighted average 
amortization period (years)
Patents  28,213   28,213  8.9
Less: accumulated amortization  (9,233)  (5,465)  
Less: impairment of patents  (1,355)     
  $17,625  $22,748   

 

The recorded severance liability represents special contractual amountsCompany’s patents consist of three major patent portfolios, which were acquired from third parties, as well as a number of internally developed patents. The costs related to beinternally developed patents are expensed as incurred.

In August 2012, the Company purchased a portfolio from Nokia consisting of various patents and patent applications. The portfolio encompasses a broad range of technologies relating to telecom infrastructure, including communication management, data and signal transmission, mobility management, radio resources management and services. The total consideration paid 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).

F-14

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. As a result$548. Under the terms of the draw-down,purchase agreement, to the extent that the gross revenue generated by such portfolio exceeds $22,000, the Company is obligated to pay a royalty of 35% of such excess. The Company has not recorded any amounts in respect of this contingent consideration, as both the amounts of future potential revenue, if any, and the timing of such revenue cannot be reasonably estimated. 

In October 2012, the Company’s subsidiary entered into a patent purchase agreement. As partial consideration, the Company issued to the lenders warrants to purchase 152,602 shares of series B convertible preferred stock.

On December 29, 2009, the Company entered into a Loan Modification Agreement (the "LMA") with the lenders of the venture loan pursuant to which principal payments were deferred until the consummation of the IPO. The new facility bore an interest rate of 9.5% per annum with an effective interest rate of 18%. In connection with the LMA, the original warrants previously issued to the lenders were terminated and the Company issued the lenders new warrants ("Senior Lenders Warrants") to purchase 250,000160,600 shares of common stock at an exercise priceto the seller with a fair value of $2.75 per share.$750. In exchange,addition, under the lenders grantedterms of the purchase agreement, 20% of the gross revenue collected will be payable to the seller as a royalty. The Company has not recorded any amounts in respect of this contingent consideration, as both the amounts of future potential revenue, if any, and the timing of such revenue cannot be reasonably estimated. In October 2013, the Company a six month moratorium on principal paymentspurchased an additional patent portfolio for approximately $1,400 which includes certain costs related to the venture loan and extended the repayment period for one year until March 2013. After the principal moratorium, under the modified bank repayment terms, the principal and interest were repaid in monthly paymentsacquisition of $142 thousand each.patents.

 

The Senior Lender Warrants were exercisable at any time beforeCompany’s patents are amortized over their expected useful lives (i.e., through the tenth anniversary of the date they were issued. On theexpiration date of the LMA,patent). During the loanyears ended December 31, 2014, 2013, and 2012, the Company recorded amortization expense of $3,768, $3,445 and $1,692, respectively, related to its patents. Additionally, during the years ended December 31, 2013 and 2012, the Company recorded amortization expense of $1,688 and $763, respectively, related to the Company’s acquired technology which is further explained in Note 7.

During the third quarter of 2014, the Company determined that there were impairment indicators related to certain of its patents. A significant factor that was recorded at fair marketconsidered when making this determination included the announcement of the Federal Circuit’s decision on August 15, 2014 described in Note 1. The Company concluded that this factor was deemed a “triggering” event requiring that the related patent assets be tested for impairment during the third quarter of 2014. In performing this impairment test, the Company determined that the patent portfolio containing the patents-in-suit in I/P Engine's litigation against AOL Inc., Google Inc. et al, which represents an asset group, was subject to impairment testing. In the first step of the impairment test, the Company utilized its projections of future undiscounted cash flows based on the Company’s existing plans for the patents. As a result, it was determined that the Company’s projections of future undiscounted cash flows were less than the carrying value of $3.70 million, the warrants were recorded at $500 thousand, representingasset group. Accordingly, the Company performed the second step of the impairment test to measure the potential impairment by calculating the asset group’s fair value. This resulted in an impairment of $1,355 during the third quarter of 2014, related to the asset group, which represents 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 loanasset group. The impairment charge is included in Amortization and impairment of intangibles in the consolidated statements of operations. There were no impairment charges related to the Company’s patents during the years ended December 31, 2013 and 2012.

Estimated amortization expense for each of the five succeeding years, of the Company’s patents owned at December 31, 2014 is as follows:

Year ending December 31, Amount 
2015 $3,195 
2016  2,878 
2017  2,806 
2018  2,783 
2019  2,478 
2020 and thereafter  3,485 
  $17,625 

During the fourth quarter of 2013, the Company recorded an impairment loss of $7,045 related to its acquired technology (Note 8) in connection with the sale of its mobile social application business. Refer to Note 8 for further discussion. The acquired technology is included in assets held for sale in the consolidated balance sheet as of December 31, 2013 at fair value.

Goodwill

Interim Impairment Test Performed

The Company’s market capitalization, as further described in Note 2, is sensitive to the volatility of the Company’s stock price. On August 15, 2014, the Company’s stock price opened at $3.18, reached a low of $0.67, and closed at $0.88. The closing price of the Company’s stock on September 30, 2014 was $0.95. The average closing stock price of the Company from August 15, 2014 through September 30, 2014 was approximately $1.05, ranging from $0.95 to $1.40 during that time period. During the third quarter of 2014, the decline in stock price experienced by the Company was deemed a “triggering” event requiring that goodwill be tested for impairment as of September 30, 2014.

The Company performed the first step of the goodwill impairment test as of September 30, 2014 in order to identify potential impairment by comparing the fair market value of the loan and the warrants resulted in a loss on the extinguishment of debt in thereporting unit with its carrying amount, of $180 thousand.including goodwill. The fair value of the loanreporting unit is based upon the Company’s market capitalization on the measurement date, as the market capitalization is derived on a non-controlling basis, and an estimated implied control premium, which was assessed using an interest rate of 12%, which represented market conditions for a similar loan.

On June 8, 2011, the Company entered into a Settlement Agreement (the “Settlement Agreement”)determined with the lendersassistance of a third party valuation specialist. The Company believes that this is 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 part 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 exchangemost appropriate valuation technique 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 aside in the restricted account. The difference betweendetermining the fair market value of the reporting unit for various reasons. First, the Company’s common shares of common stock issuedare publicly traded on NASDAQ. Therefore, active quoted market prices can be readily observed and the Company has a widely distributed shareholder base which provides for a substantial amount of daily trading volume. As such, the Company believes that the quoted market price is a good representation of a fair value of one share of the Company, or a fractional interest in the Company. Secondly, quoted market prices of an individual security may not be representative of the fair value of the cancelled Senior Lender Warrants, amountingreporting unit as a whole. For example, there may be a premium that an acquiring entity might pay for a controlling interest compared to $213 thousand,the amount an investor would be willing to pay for a non-controlling interest. The implied control premium selected was recordeddeveloped based on certain observable market data of comparable companies in the statementintellectual property, internet software and services, telecommunications, and biotechnology industries.

The Company also considered the use other valuation approaches to determine the fair value of stockholders’ equity (deficit). the reporting unit, including an income approach and other market approaches. When considering the use of an income approach for determining the fair value of the reporting unit, the Company considered using valuation techniques such as a discounted cash flows model. However, it was determined that, due to factors specific to the Company and the nature of its operations, the use of such techniques would impose significant feasibility hurdles and would not yield an effective result. First, the Company does not have a history of revenue to use for purposes of projecting future earnings and revenue streams. Secondly, the Company’s future earnings and revenue are heavily contingent upon the outcomes of certain litigation and settlements which are difficult to predict with a sufficient degree of precision. As such, the Company concluded that an income approach would not add meaningfully to the determination of fair value of the reporting unit.

When considering the use of other market approaches for determining the fair value of the reporting unit, the Company considered using relevant information generated by market transactions of comparable companies such as multiples of earnings and revenue. It was determined, however, that there was a lack of publicly available information with respect to comparable entities within the intellectual property market space that would enable the Company to gather useful information for purposes of such valuation techniques. Additionally, the fact that the Company has not yet experienced significant revenue or earnings poses limitations to the use of a market multiples approach. As such, the Company concluded that this technique would not yield an effective result.

Based upon the first step of the goodwill impairment test performed as of September 30, 2014, the Company determined that the fair value of the reporting unit was in excess of its carrying amount by approximately 14% and therefore the second step of the goodwill impairment test was not required at that time. The Company believes it made reasonable estimates and assumptions to calculate the fair value of the reporting unit as of the interim impairment test measurement date.

Annual Impairment Test Performed

The Company performed its annual goodwill impairment test as of December 31, 2014. The Company performed the first step of the goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, including goodwill. Similar to the interim goodwill impairment test described above, the fair value of the reporting unit was determined with the assistance of a third party valuation specialist using certain valuation techniques, including the estimation of an implied control premium, in addition to the Company’s market capitalization on the measurement date, as the market capitalization is derived on a non-controlling basis. The implied control premium selected was consistent with the control premium utilized in the interim goodwill impairment test described above, as no new significant observable market data of comparable companies was available.

During the fourth quarter of 2014, the Company’s stock price declined and the closing price of the Company’s stock on December 31, 2014 was $0.55. This decline in stock price resulted in a significantly lower market capitalization than that used when performing the interim goodwill impairment test described above. Based upon the first step of the goodwill impairment test performed as of December 31, 2014, the Company determined that the fair value of the reporting unit did not exceed its carrying amount and therefore the second step of the goodwill impairment test was required.


In addition,performing the difference betweensecond step of the goodwill impairment test, the Company compared the carrying value of goodwill to its implied fair value. In estimating the loanimplied fair value of goodwill, the Company assigns the fair value of the reporting unit to all of the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. As part of this step, the Company estimated the fair value of its patents using an income approach. The key assumptions for this approach are projected future cash flows, ranges of royalty rates as determined by management in consultations with valuation experts, and a discount rate which is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the total sumprojected future cash flows. As a result, it was determined that the Company’s intangible assets were not impaired as of future paymentsDecember 31, 2014.

Based on the loan, includingestimated implied fair value of goodwill, the above mentioned $213 thousand, netCompany recorded an impairment charge of legal fees, resulted$65,757, to reduce the carrying value of goodwill to its implied fair value, which was determined to be zero. This impairment charge is included in a gain on restructuring of debt,Goodwill impairment in the total amountconsolidated statement of $963 thousand, recorded in the statements of operations. Basic and diluted per share gain on restructuring of venture loanoperations for the year ended December 31, 2011 is $0.15 (cumulative - $0.52).2014.

 

Changes in the balance of the venture loan are as follows:Other

 

U.S.$ thousands
Loan balance at January 1, 20103,703
Loan repayments(757)
Amortization of loan discount227
Loan balance at December 31, 20103,173
Repayment as per Settlement Agreement(1,382)
Loan repayments(713)
Amortization of loan discount98
Gain on restructuring of venture loan(963)
Issuance of shares in consideration of restructuring of venture loan(213)
Loan balance at December 31, 2011

Additionally, the Company recognized an impairment charge related to goodwill of approximately $208 during the fourth quarter of 2013 in connection with the sale of its mobile social application business.  Refer to Note 8 for further discussion.

 

Note 9 - Convertible Notes7. Business Combination

 

InAs described in Note 2, I/P consummated the Merger with Vringo on 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 amount19, 2012. The consideration consisted 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 intovarious equity instruments, including: shares of common stock, at a conversion price equal tooptions, preferred stock and warrants. Upon completion of the lowerMerger, (i) all then outstanding 6,169,661 common stock shares of (i) the closing priceI/P, par value $0.0001 per share, were exchanged for 18,617,569, shares of the Company’s common stock, onpar value $0.01 per share, and (ii) all outstanding shares of Series A Convertible Preferred Stock of I/P, par value $0.0001 per share, were exchanged for 6,673 shares of Vringo’s Series A Convertible Preferred Stock, par value $0.01 per share, which shares were convertible into 20,136,445 shares of common stock of Vringo. In addition, Vringo issued to the announcement dateholders of the note offering, (ii) the closing priceI/P capital stock an aggregate of 15,959,838 warrants to purchase an aggregate of 15,959,838 shares of the Company’s common stock on the closing datewith an exercise price of the note offering$1.76 per share. The Company recorded such warrants as long-term derivative liabilities (refer to Note 11). In addition, all outstanding and (iii) a ten percent (10%) discountunexercised options 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 ofpurchase I/P common stock, in a private placement. Pursuant to the December 2011 financing, all Convertible Notes (and accrued interest)whether vested or unvested, were converted into 2,671,02641,178 options to purchase the Company’s common stock. Immediately following the completion of the Merger, the former stockholders of I/P owned approximately 55.04% of the outstanding common stock of the combined company (or 67.61% of the outstanding shares of the Company’s common stock.The conversionstock, calculated on a fully diluted basis), and Vringo’s stockholders prior to the Merger owned approximately 44.96% of the Convertible Notes triggered anti-dilution provisions in certain of our outstanding warrants (see Note 11).

Ascommon stock of the datecombined company (or 32.39% of the issuanceoutstanding shares of the Convertible Notes, an amount of $89 thousandits common stock calculated on a fully diluted basis). This transaction was initially allocated to additional paid-in capitalaccounted for as a reverse acquisition in respect of the beneficial conversion feature,accordance 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 discountU.S. GAAP 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 thousandI/P was deemed to be the acquiring company for accounting purposes. The total purchase price of $75,654 was allocated to the assets acquired and liabilities assumed as follows. Registration and issuance cost, in the total amount of $463, was recorded inagainst the statement of operations, as interest expense.additional paid-in capital.

F-15
  Allocation of purchase 
  price 
Cash and cash equivalents $3,326 
Working capital (excluding cash and cash equivalents)  (740)
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 

 

Vringo, Inc.The fair values of the identified intangible assets were estimated by the Company using an income approach valuation model. Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. Indications of value are developed by discounting future net cash flows to their present value at market-based rates of return. The goodwill recognized as a result of the acquisition is primarily attributable to the value of the workforce and Subsidiary

(other intangible asset arising as a Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)result of operational synergies, products, and similar factors which could not be separately identified. The useful life of the intangible assets for amortization purposes was determined considering the period of expected cash flows used to measure the fair value of the intangible assets adjusted as appropriate for the entity-specific factors including legal, regulatory, contractual, competitive economic or other factors that may limit the useful life of intangible assets. Goodwill recognized is not deductible for income tax purposes.

 

Note 10 -8. Discontinued Operations and Assets Held For Sale

On December 31, 2013, the Company entered into a definitive asset purchase agreement with InfoMedia for the sale of all assets and the assignment of all agreements related to the Company’s mobile social application business. The closing of the transaction occurred on February 18, 2014 (“Closing”). 

In connection with the asset purchase agreement, an impairment loss of $7,253 was recorded during the fourth quarter of 2013, which represents the excess of the carrying value (which includes the portion of goodwill allocated to the mobile social application business) over the estimated fair value of the asset group. The fair value of the asset group was estimated using an income approach by developing a discounted, future, net cash flows model. The following table presents the carrying amounts of the major classes of assets from discontinued mobile social application in the Company’s consolidated balance sheet as of December 31, 2013. As of December 31, 2013, there were no liabilities classified as held for sale and no liabilities were transferred to InfoMedia upon Closing.

  As of December 31, 
  2013 
Cash $48 
Accounts receivable  102 
Goodwill at carrying amount of $208, net of $208 loss on impairment   
Acquired technology at carrying amount of $10,133 (Note 7), net of $2,451 accumulated amortization and $7,045 loss on impairment  637 
Total assets held for sale $787 

Upon Closing, as consideration for the assets and agreements related to the Company’s mobile social application business, the Company received 18 Class B shares of InfoMedia, which represent an 8.25% ownership interest in InfoMedia. Additionally, the Company’s Chief Executive Officer was appointed as a full voting member on InfoMedia’s board of directors and the Company received a number of customary protective rights. The InfoMedia Class B shares are accounted for as a cost-method investment at the carrying amount of $787 and are included in Other assets in the consolidated balance sheet as of December 31, 2014. During the year ended December 31, 2014, there were no events or changes in circumstances that would indicate that the carrying amount of this investment may no longer be recoverable.

Additionally, in connection with the asset purchase agreement, the requirement to report the results of the Company’s mobile social application business as discontinued operations was triggered as of December 31, 2014. The following tables represent the components of operating results from discontinued operations, as presented in the consolidated statements of operations: 

  As of December 31, 
  2014  2013  2012 
Revenue $37  $224  $269 
Operating expenses  (266)  (3,334)  (2,666)
Loss on impairment     (7,253)   
Operating loss  (229)  (10,363)  (2,397)
Non-operating income (expense)  20   (65)  20 
Loss before taxes on income  (209)  (10,428)  (2,377)
Income tax expense  (246)  (257)  (55)
Loss from discontinued operations $(455) $(10,685) $(2,432)

Note 9. Fair Value Measurements

 

The following table presents the placement in the fair value hierarchy of liabilities measured at fair value on a recurring basis as of December 31, 2014 and 2013:

     Fair value measurement at reporting date using 
     Quoted prices in       
     active markets  Significant other  Significant 
     for identical  observable  unobservable 
Derivative warrant liabilities Balance  assets (Level 1)  inputs (Level 2)  inputs (Level 3) 
As of December 31, 2014 $175        $175 
As of December 31, 2013 $4,083        $4,083 

The Company measures its cash equivalents, Special Bridge Warrants and Conversion Warrantsderivative warrant liabilities at fair value. Cash equivalents are classified within Level 1 because they are valued using quoted active market prices. The Special Bridge Warrants, and Conversion Warrants, the derivative Reload Warrants and the derivative Series 1 Warrants (as defined in Note 11) are classified within Level 3 because they are valued using the Black-Scholes-Merton and the Monte-Carlo models (as these warrants include a down-round protection clause, see Note 11)clauses), which utilize significant inputs that are unobservable in the market such as the expected stock price volatility, dividend yield, probability and timing of the down-round being triggered and the remaining period of time the warrants will be outstanding before they expire.market.

 

The following table presents the placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a recurringnon-recurring basis as of December 31, 2011 and 2010:2013 (there were no such assets or liabilities as of December 31, 2014):

 

     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 

  Fair value measurement at reporting date using 
    Quoted prices in     
    active markets  Significant other  Significant 
    for identical  observable  unobservable 
  Balance  assets (Level 1)  inputs (Level 2)  inputs (Level 3) 
Assets held for sale $787  $150     $637 

  

In addition to the above, the Company'sCompany’s financial instruments atas of December 31, 20112104 and 2010,2013 consisted of cash, cash equivalents, receivables, accounts receivable, long-term deposits, accrued expenses,payable and the venture loan (December 31, 2010, only).deposits. The carrying amounts of all the aforementioned financial instruments approximate fair value, except for the fair value of the venture loan, for the year ended December 31, 2010, for which the carrying amount of the venture loan was $3,173 thousand and the fair value was estimated at $3,317 thousand.

value. The following table summarizes the changes in the Company'sCompany’s liabilities measured at fair value on a recurring basis 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 

2014, 2013 and 2012:

F-1660
 

  

Note 11 - Stockholders' Equity (Deficit)

(a) Common Stock

  Level 3 
Balance at January 1, 2012 $ 
Derivative warrants issued to I/P’s shareholders in connection with the Merger  21,954 
Fair value of derivative warrants issued  3,162 
Fair value adjustment, prior to exercise of warrants, included in consolidated statement of operations  156 
Exercise of derivative warrants  (10,657)
Fair value adjustment at end of period, included in consolidated statement of operations  (7,003)
Balance at December 31, 2012  7,612 
Net impact of removal of down-round clause in Series 1 Warrant  (2,300)
Fair value adjustment, prior to exercise of warrants, included in consolidate statement of operations  9 
Exercise of derivative warrants  (808)
Fair value adjustment at end of period, included in consolidated statement of operations  (430)
Balance at December 31, 2013 $4,083 
Fair value adjustment, prior to exercise of warrants, included in consolidated statement of operations  56 
Exercise of derivative warrants  (1,707)
Fair value adjustment at end of period, included in consolidated statement of operations  (2,257)
Balance at December 31, 2014  175 

 

In June 2010, the Company completed an IPO of 2,392,000 units (see Note 1).Valuation processes for Level 3 Fair Value Measurements

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 2,671,026 shares of common stock were issued to the Convertible Notes holders. In addition, pursuant to the commencementThe fair value measurements of the above mentioned financing round, the Company issued 208,159 shares of common stock to one of its consultants.

Subsequentderivative warrant liabilities related to the balance sheet date, between February 6 and February 14, 2012, 3,828,993 of the Company’s outstanding Special Bridge Warrants, and Conversion Warrants, were exercised. As a result,Reload Warrants and Series 1 Warrants are evaluated by management to ensure that changes are consistent with expectations of management based upon the Company issued 3,828,993 sharessensitivity and nature of common stock. See Note 17.the following inputs.

 

The following table summarizes information about the Company's issued and outstanding common stock from inception through December 31, 2011, on a post-split basis:

2014:  

Description Shares of common stockValuation techniqueUnobservable inputsRange 
Conversion Warrants, derivative Reload Warrants and 0.01$ par valueBlack-Scholes-Merton and theVolatility56.55% – 77.06% 
Balance as of January 9, 2006 (inception)derivative Series 1 Warrants 
Issuance of common stock to two founders for a net amount of $5Monte-Carlo models 83
Stock dividend of 3,999 shares for each share of outstanding stock in their respective classesRisk free interest rate 333,2500.13% – 0.87% 
    
Balance as of December 31, 2006Expected term, in years 333,333
Issuance of common stock in lieu of beneficial conversion terms contained in the convertible loan agreement33,4490.48 – 2.55 
    
Balance as of December 31, 2007Dividend yield 366,782
Issuance of common stock0% 
    
Balance asProbability and timing of December 31, 2008down-round triggering event 

50% occurrence in

June 2015

366,782

December 31, 2013:  

DescriptionValuation techniqueUnobservable inputsRange 
Issuance of common stockSpecial Bridge Warrants, Conversion Warrants, derivative Black-Scholes-Merton and theVolatility46.85% – 52.63%
Reload Warrants and derivative Series 1 WarrantsMonte-Carlo modelsRisk free interest rate0.16% – 1.11% 
    
Balance as of December 31, 2009Expected term, in years 366,782
Issuance of common stock, in connection with IPO (see Note 1)2,392,000
Exchange of series A convertible preferred stock for common stock(see Note 11 b)392,315
Conversion of Bridge notes (see Note 1)864,332
Stock dividend(see Note 11 b)311,451
Exchange of series B convertible preferred stock for common stock(see Note 11 b)765,466
Exercise of charitable warrants11,044
Exercise of lead investor warrants (see Note 11 f)241,173
Exercise of stock options60,5170.99 – 3.55 
    Dividend yield0% 
Balance as of December 31, 2010  5,405,080
ExerciseProbability and timing of lead investor warrants (see Note 11 f)down-round triggering event 241,173
Exercise of stock options341,913
Issuance of common stock,

5% occurrence in connection venture loan settlement (see Note 8)

250,000
Exercise of charitable warrants19,862
Issuance of common stock, to consultants208,159
Conversion of convertible notes (see Note 9)2,671,026
Issuance of common stock, in connection with

December 2011 financing

817,303
Balance as of December 31, 20119,954,5162014

 

(b) Preferred Stock

On May 8, 2006, the Company issued 98 shares of series A convertible preferred stock (on a post-split basis) for a net amount of $2.35 million. On August 8, 2006, the Company declared a stock dividend of approximately 3,999 shares for each share of outstanding stock in their respective classes. The Company treated this transaction as a stock dividend with no adjustment to the par value per respective share due to legal restrictions. Upon the consummation of the IPO, the Series A convertible preferred stock were granted a 15% stock dividend, and then exchanged for shares of common stock and recorded as such (see table above).

On July 30, 2007, the Company issued 765,466 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).

F-17

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 adopted the 2006 Stock Option Plan, pursuant to which 880 thousand shares of common stock were reserved for issuance. On July 30, 2007, the Company 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 in the Stock Option Plan was increased to 14.14 million.

(d) Stock options

The Stock Option Plan provides for grants or sales of common stock options to employees, directors and consultants. Options granted in connection 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 service 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.

As of December 31, 2011, there were approximately 11.5 million shares of common stock available for future grants.

On March 17, 2010, the Board approved the granting of options to management, directors and consultants. The Board approved the granting of 1,392,000 options at an exercise price of $0.01. These options vest yearly over three and four year periods, according to the applicable schedule of each optionee. The Board also approved the granting of 1,420,000 options at an exercise price of $5.50 to its employees, directors and consultants. These options vest over four years. Vesting of options granted during 2010 commenced in June through December 2010, according to the applicable schedule of each optionee, and when the terms were communicated.

The fair value of the optionsassets held for sale as of December 31, 2013 (Note 8) was determined by estimating the present value of the expected future cash flows associated with that asset or asset group by using certain unobservable market inputs. These inputs included discount rates, estimated future cash flows and certain continuing growth rate assumptions. The discount rates are intended to employeesreflect the risk inherent in the projected future cash flows generated by the respective asset or asset group. The inputs used in the valuation were sensitive to certain factors related to mobile social application technology such as rapid changes in the industry and directors grantedtechnological advances.

Sensitivity of Level 3 measurements to changes in 2010 was calculated usingsignificant unobservable inputs

The inputs to estimate the Lattice model which takes into considerationfair value of the shareCompany’s derivative warrant liabilities are the current market price atof the date of grant,Company’s common stock, the exercise price of the option,warrant, its remaining expected term, the expected lifevolatility of the option, risk free interest rates, expected dividend,Company’s common stock price, the Company’s assumptions regarding the probability and timing of a down-round protection triggering event 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 raterate. Significant changes in any of 2.11%-2.83% andthose inputs in isolation can result in a significant change in the fair value measurement. Generally, an expectedincrease in the market price of the Company’s shares of common stock, an increase in the volatility of 56.11%-64.3% and no dividend yield. Thethe Company’s shares of common stock, an increase in the remaining term of the warrant, or an increase of a probability of a down-round triggering event would each result in a directionally similar change in the estimated fair value of the common stock used for this calculation was $2.49-$2.62. The fair value of options to non-employees is calculated usingCompany’s warrants. Such changes would increase 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 2012associated liability while decreases in these assumptions would decrease the Board of Directors approvedassociated liability. An increase in 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 or a decrease in the positive differential between the warrant’s exercise price and the market price of 0.71%-1.19%the Company’s shares of common stock would result in a decrease in the estimated fair value measurement of the warrants and an expected volatility of 67.26%-75.78%thus a decrease in the associated liability. The Company has not, and does not plan to, declare dividends on its common stock, and as such, there is no dividend yield. Thechange in the estimated fair value of the common stock used for this calculation was $0.96-$1.21 and nowarrants due to the dividend yield. The Company expects that the total value of the options granted will be approximately $467 thousand.

F-18

Vringo, Inc. and Subsidiary

(a Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)assumption.

 

Note 11 - Stockholders' Equity (Deficit) (cont'd)10. Stock-based Compensation

 

(e)The Company has a stock-based compensation plan available to grant stock options and RSU to the Company’s directors, employees and consultants. Under the 2012 Employee, Director and Consultant Equity Incentive Plan (the “Plan”), a maximum of 15,600,000 shares of common stock may be awarded. The Plan was approved by the Company’s stockholders on July 19, 2012, following the Merger, replacing Vringo’s then existing 2006 Stock option activityOption Plan (the “2006 Plan”). The maximum number of available common shares under the Plan is made up of the 9,100,000 previously available common shares under the 2006 Plan and 6,500,000 newly available common shares. As of December 31, 2014, 5,793,420 shares were available for future grants under the Plan. Total stock-based compensation expense for the years ended December 31, 2014, 2013, and 2012 was $10,967, $12,093, and $8,087, respectively.

 

The following table summarizes information aboutillustrates the stock option activity foroptions granted during the year ended December 31, 2011:

        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 for2014. There were no RSU granted during the year ended December 31, 2010:2014.

 

        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) $2.87 
Outstanding at December 31, 2010  2,378,908    128,000     
Exercisable at December 31, 2010   128,804   32,150     
TitleGrant dateNo. of 
options
Exercise
price
Fair market
value at
grant date
Vesting termsAssumptions used in
Black-Scholes option pricing
model
Directors, Management, and EmployeesJanuary - December 20141,300,000$ 1.18 - $ 4.10$ 0.65 - $ 2.32Over 1 year for
Directors; Over 3 years
for Management and
Employees
Volatility: 57.75 % – 62.00%
Risk free interest rate: 1.82% - 2.06%
Expected term, in years: 5.31-5.81
Dividend yield: 0.00%

 

For cumulative periodCertain options granted to officers, directors and certain key employees are subject to acceleration of vesting of 75% - 100% (according to the agreement signed with each grantee), upon a subsequent change of control.

The following tables summarize information about stock options and RSU activity during the year 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.2014:

  RSU  Options 
  No. of
RSU
  Weighted average
grant date fair
value
  No. of
options
  Weighted average
exercise price
  Exercise price
range
 Weighted average
grant date fair
value
 
Outstanding at January 1, 2014  2,161,403  $3.61   10,457,159  $3.23  $0.01 – $5.50 $2.50 
Granted        1,300,000  $3.77       $1.18 – $4.10 $2.04 
Vested/Exercised  (959,421) $3.59   (1,126,815) $1.92  $0.01 – $3.72 $1.31 
Forfeited  (5,625) $3.72   (2,083,333) $3.53  $2.96 – $3.72 $2.49 
Expired        (494,666) $4.28  $0.96 – $5.50 $1.94 
Outstanding at December 31, 2014  1,196,357  $3.64   8,052,345  $3.36  $0.96 – $5.50 $2.24 
Exercisable at December 31, 2014        6,172,691  $3.36  $0.96 – $5.50    
  Non-vested stock options:  Non-vested RSU: 
  No. of options  Weighted average
 grant date fair
 value
  No. of RSUs  Weighted average
 grant date fair
 value
 
Balance at January 1, 2014  4,593,680  $2.36   2,161,403  $3.61 
Granted  1,300,000  $3.77     $ 
Vested  (3,343,193) $2.39   (959,421) $3.59 
Forfeited  (670,833) $2.30   (5,625) $3.72 
Balance at December 31, 2014  1,879,654  $2.21   1,196,357  $3.64 

 

The following table summarizes information about employee and non-employee stock options outstanding as of December 31, 2011:2014:

 

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         
Exercise price No. options outstanding No. options exercisable Weighted average remaining
 contractual life (years)
 
$0.01-1.00 61,178 61,178 6.94 
$1.01-2.00 845,667 754,001 8.22 
$2.01-3.00 585,000 337,082 8.53 
$3.01-4.00 5,323,000 4,066,263 8.30 
$4.01-5.00 1,025,000 741,667 9.15 
$5.01-6.00 212,500 212,500 5.48 
   8,052,345 6,172,691   

 

As of December 31, 2011,2014, the total aggregate intrinsic values of options outstanding and options exercisable were zero since these instruments were “out-of-the-money” as of December 31, 2014. As of December 31, 2013, the total aggregate intrinsic value of options outstanding was $593 thousand, ofand options exercisable $107 thousandwas $2,558 and of options exercised $816 thousand.$2,445, respectively. As of December 31, 2010,2012, the total aggregate intrinsic value of both the options outstanding and options exercisable was $0 thousand, the$3,548 and $3,200, respectively. The total aggregate intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $134 thousand. $2,363, $1,322, and $2,417, respectively.

The total fair value of stock options that vested in the years ended December 31, 2011, 20102014, 2013, and cumulative from inception till2012 was $7,987, $7,807, and $5,927, respectively. As of December 31, 2011 amounts2014, there was approximately $7,575 of total unrecognized share-based payment cost related to $1,761 thousand, $206 thousandnon-vested options, shares and $3,015 respectively. TheRSUs, granted under the incentive stock option plans. Overall, the cost is expected to be recognized over a weighted average grant date fair value of options granted during the years ended December 31, 2011, 2010 and cumulative from inception till December 31, 2011 was $0.91, $1.69 and $1.57, respectively.

F-19

1.25 years.

 

Vringo, Inc. and Subsidiary

(The Company did not recognize tax benefits related to its stock-based compensation as there is a Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)full valuation allowance recorded.

 

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)11. Warrants

 

The following table summarizes information about warrant activity during the year ended December 31, 2014: 

  No. of warrants  Weighted average
exercise price
  Exercise
price range
 
Outstanding at January 1, 2014  18,427,478  $3.15   $ 0.94 – $5.06 
Granted  5,412,366  $5.06  $5.06 
Exercised  (6,415,992) $1.76  $1.76 
Expired  (21,198) $0.94  $0.94 
Outstanding at December 31, 2014  17,402,654  $4.26   $ 0.94 – $5.06 

Conversion Warrants, Special Bridge Warrants and Reload Warrants

On December 29, 2009, the Company consummated a Bridge Financing pursuant to which it 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. The Special Bridge Warrants have down-round protection clauses and their fair value is calculated using the Black-Scholes-Merton model at every reporting period. Upon the consummationAs part of the IPO, the CompanyMerger, on July 19, 2012, Vringo issued a further 69,132 Special Bridge Warrants to the holders of the Bridge Notes to reflect the final offering price of the IPO units. TheseI/P’s stockholders 8,299,115 warrants were valued on the date of the IPO by using the Black-Scholes-Merton model.

Upon the consummation of the IPO, the Bridge Notes were automatically converted into 864,332 shares of common stock and 1,728,664 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 shares of common stock at $1.04 per share, a 20% discount to 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-round and anti-dilution provisions in outstanding Special Bridge and Conversion Warrants. As a result, the number of shares issuable to the holders of the Special Bridge Warrants was adjusted to 2,528,615 and the exercise price for both Special Bridge and Conversion Warrants adjusted to $0.94.

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 exercise amount remains 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 Conversion Warrants were revalued using the Black-Scholes-Merton and the Monte-Carlo models. As the terms of these warrants include a down-round protection clause, 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. 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: 70.98% 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 $0.99. Also see Note 10.

Subsequent to the balance sheet date, between February 6 and February 14, 2012, the Company entered into agreements with Holders, pursuant to which the Holders exercised 2,274,235Special Bridge and 1,554,758 Conversion Warrants to purchase an aggregate of 3,828,993 shares of the Company's common stock for aggregate proceeds to the Company of $3.6 million. In addition, the Company 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 exerciseand contractual term of the5 years (“Series 1 Warrant”). These warrants (“Reload Warrants”). A portion of the Reload warrantsbear down-round protection clauses and as a result, they will bewere initially classified as a long- termlong-term derivative liability and recorded at fair value. See also Note 17.

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 abovementionedIn addition, I/P’s stockholders received another 7,660,722 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$1.76 per share in exchange for grantingand contractual term of 5 years (“Series 2 Warrant”). As the Company a six month moratorium on principal payments and an additional year for the repaymentSeries 2 Warrants do not have down-round protection clauses, they were classified as equity. As 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.

F-20

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 receivedMerger, Vringo’s outstanding 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 receivedalso included certain derivative 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, 2012, the Placement Agent Warrants were exercised.

IPO warrants

In June 2010, upon completion 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$0.94 per share, with a remaining contractual term of 2.44 years (the “Special Bridge Warrants” and the shares and“Conversion Warrants”); certain derivative 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$1.76 per share, with a remaining contractual term of the donation was calculated using the Black-Scholes-Merton model with an expected life of 6.334.55 years a risk-free interest rate of 2.7%, an expected volatility of 56.1%(the “Preferential Reload Warrants”); 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 grantedcertain warrants, to purchase 40 thousand shares of common stockclassified as a charitable donation. 20 thousand of these warrants were grantedequity, at an exercise price of $5.50$1.76 per share, with a remaining contractual term of 4.55 years (the “non-Preferential Reload Warrants”). In addition, warrants that were issued upon completion of Vringo’s public offering in June 2010 were also outstanding upon the Merger. These warrants are publicly traded and the remaining 20 thousandare exercisable until June 21, 2015, at an exercise price of $0.01$5.06 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,

On October 12, 2012, the Company issued 19,862 sharesentered into an agreement with certain of common stock upon exerciseits warrant holders, pursuant to which, on October 23 and 24, 2012, the holders exercised in cash 3,721,062 of 20 thousand charitabletheir outstanding warrants, with an exercise price of $1.76 per share. In exchange, the Company granted such warrant holders unregistered warrants of the Company to purchase an aggregate of 3,000,000 shares of the Company’s common stock, par value $0.01 per share, at an exercise price of $5.06 per share (the “October 2012 Warrants”). The contractual life of these warrants is 2.66 years and because such warrants do not bear any down-round protection clauses they were classified as equity instruments. The 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 during the year ended December 31, 2012.

As part of the issuance of the October 2012 Warrants, the down-round protection clause in 2,173,852 then outstanding Series 1 Warrants was removed. Because such warrants were no longer subject to down-round protection they were re-measured at fair value and classified as equity instruments. The overall impact of the removal of the down-round warrant protection, which was not material, was recorded during the year ended December 31, 2013. As a result, during the year ended December 31, 2013, the Company recorded an additional non-operating expense of $1,617, and re-classified $3,918 from derivative liabilities on account of warrants to stockholders’ equity.

On June 19, 2014, the Company entered into agreements with certain of its warrant holders, pursuant to which the warrant holders exercised for cash 5,697,227 of their outstanding Series 1 and Series 2 warrants, with an exercise price of $1.76 per share. The Company granted such warrant holders unregistered warrants of the Company to purchase an aggregate of 5,412,366 shares of the Company’s common stock, par value $0.01 per share, at an exercise price of $5.06 per share (the “June 2014 Warrants”). The June 2014 Warrants expire on June 21, 2015 and because such warrants do not bear any down-round protection clauses, they are classified as equity instruments. As a result of these transactions, the Company received $10,027 of proceeds.

The June 2014 Warrants were valued on the grant date (June 20, 2014) using the following assumptions: volatility: 40.05%, stock price: $3.33, risk free interest rate: 0.15% and dividend yield: 0%. The new warrants issued in connection with the exercise of warrants that were classified as liabilities were accounted for as an inducement and therefore an amount of $65, which is based on the fair value of the new warrants, was recorded as a non-operating expense during the second quarter of 2014. The new warrants issued in connection with the exercise of warrants that were classified as equity, which were fair valued at $611, were recorded as equity.

The below is a summary of the Company’s outstanding warrants as of December 31, 2014:

  No. outstanding  No. 
outstanding
classified as
equity
  No. 
outstanding
classified as
liabilities*
  Exercise price  Remaining
contractual life
Series 1 Warrants  1,490,250   64,621   1,425,629  $1.76    2.55 years
Series 2 Warrants  1,943,523   1,943,523     $1.76    2.55 years
Conversion Warrants  14,492      14,492  $0.94    0.48 years
Reload Warrants  758,023   597,414   160,609  $1.76    2.10 years
IPO Warrants  4,784,000   4,784,000     $5.06    0.48 years
October 2012 Warrants  3,000,000   3,000,000     $5.06     0.48 years
June 2014 Warrants  5,412,366   5,412,366     $5.06     0.48 years
Outstanding at December 31, 2014  17,402,654   15,801,924   1,600,730       

* These warrants bear down-round protection clauses and as a result, they are classified as derivative liabilities and recorded at fair value.  

 

Note 12 –Revenue12. Revenue from Settlements and Licensing Agreements

 

  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 

On May 30, 2013, the Company’s subsidiary entered into a settlement and license agreement with Microsoft Corporation to resolve its patent litigation pending in the U.S. District Court for the Southern District of New York (I/P Engine, Inc. v. Microsoft Corporation, Case No. 1:13-cv-00688 (SDNY)). According to the agreement, Microsoft Corporation paid the Company $1,000 and agreed to pay 5% of any future amount Google pays for its use of the patents acquired from Lycos. The parties also agreed to a limitation on Microsoft Corporation's total liability, which would not impact the Company unless the amounts received from Google substantially exceed the judgment previously awarded. In addition, the parties also entered into a patent assignment agreement, pursuant to which Microsoft Corporation assigned six patents to I/P Engine. The assigned patents relate to telecommunications, data management, and other technology areas.

 

F-21

On April 28, 2014, the Company entered into a confidential agreement with Tyco that resolved all litigation pending between the parties.

 

Vringo, Inc. and SubsidiaryOn October 1, 2014, the Company entered into a confidential agreement with Belkin that resolved all litigation pending between the parties.

(a Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Note 13. Income Taxes  

 

Note 13- InterestFor the years ended December 31, 2014, 2013 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 - Income Taxes

The Components of income (loss)2012, loss from continuing operations before income taxes:

  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)

Income tax benefit (expense) attributable to the operating losstaxes consists 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 
U.S.            
Current  (43)     (43)
Deferred         
             
Non-U.S            
Current     98   2 
Deferred  (47)  (133)  (78)
   (90)  (35)  (119)

F-22
  2014  2013  2012 
Domestic $(108,828) $(41,204) $(17,673)
Foreign  (394)  (544)  (736)
  $(109,222) $(41,748) $(18,409)

 

Vringo, Inc. and Subsidiary

(a Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 14 - Income Taxes (cont'd)

IncomeThere was no income tax benefit (expense)expense attributable to continuing operations for the years ended December 31, 20112014, 2013 and 2010, and2012. Income tax expense attributable to discontinued operations for the cumulative period from inception untilyears ended December 31, 2011,2014, 2013 and 2012 consisted of the following:

  2014  2013  2012 
Foreign            
Current $(246) $(245) $(112)
Deferred     (12)  57 
  $(246) $(257) $(55)

Income tax expense attributable to continuing operations differed from the amounts computed by applying the applicable U.S. federal income tax rate of 35% (34% in 2010) to loss 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, 
  2014  2013  2012 
Loss from continuing operations before taxes on income $(109,222) $(41,748) $(18,409)
Tax rate  35%  35%  35%
             
Computed "expected" tax benefit  38,228   14,612   6,443 
Change in valuation allowance  (13,864)  (10,398)  (7,461)
Nondeductible expenses  (25,070)  (6,812)  (15)
State and local income tax, net of federal income tax expense  793   2,714   1,197 
Other items  (87)  (116)  (164)
Income tax expense attributable to continuing operations $  $  $ 

The tax effects of temporary differences which give rise to deferred income tax assets and liabilities at December 31, 2014 and 2013 are as follows:

  December 31, 
  2014  2013 
Deferred income tax assets:        
Net operating loss carryforwards $43,558  $29,918 
Stock-based compensation  4,789   8,104 
Impairment of patents and other  341   7 
Total gross deferred income tax assets  48,688   38,029 
         
Less:        
Valuation allowance  (48,688)  (37,758)
Deferred income tax liability for acquired technology     (264)
         
Net deferred income tax assets $  $7 

 

The Company assesses the need for a valuation allowance related to its deferred income tax assets by considering whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. A valuation allowance has been recorded against the Company’s deferred income tax assets, as it is in the opinion of management that it is more likely than not that the net operating loss carryforwards ("NOL") will not be utilized in the foreseeable future. The valuation allowance will be reduced when and if the Company determines that the deferred income tax assets are more likely than not to be realized. The following table presents the changes to valuation allowance during the periods presented: 

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  10,398 
Charged to cost and expenses – discontinued operations  3,086 
As of December 31, 2013 $37,758 
Charged to cost and expenses – continuing operations  13,864 
Charged to cost and expenses – discontinued operations  299 
Return to provision true-up and other  (3,233)
As of December 31, 2014 $48,688 

* The NOL amounts are presented before Internal Revenue Code, Section 382 limitations.

As of December 31, 2014, the Company’s estimated aggregate total net tax loss carryforwards ("NOL")NOL was approximately $117,000 for U.S. federal, state and local purposes in the amount of approximately $33.2 million expiring 20 years from the respective tax years to which they relaterelate. The Company has NOL beginning within 2006. The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of NOL and tax credits in the event of an ownership change of a corporation. Thus, in accordance with Internal Revenue Code, Section 382, the Company's IPO, recent financing activities, as well as, the potential Merger with I/P (See Note 17), may limit the Parent'sCompany’s ability to utilize its NOL’sall such NOL and credit carryforwards although the Parent has not yet determined to what extent. The deferred tax asset in respect of the tax loss carryforwards has been fully offset by a valuation allowance as in the opinion of the Company's management; it is more likely than not that the tax loss carryforwards will notmay be utilized in the foreseeable future. No valuation allowance has been provided for the non-U.S. deferred tax assets, as they are more likely than not to be realized. 

As of December 31, 2011, there were net deferred liabilities of $42 thousand, which consisted of short-term deferred liabilities of $67 thousand, net of long-term deferred assets of $25 thousand. As of December 31, 2010, there were net deferred liabilities of $23 thousand, which consisted of short-term deferred liabilities of $50 thousand, net of long-term deferred assets of $27 thousand. The deferred tax assets (liabilities) of the Subsidiary are expected to be utilized in future years. These deferred tax assets (liabilities) arise from the following types of temporary differences:

  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 2009 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 no material impact on the Company's financial position or results of operations, since the Subsidiary is a Beneficiary Enterprise, as explained below.

F-23

Vringo, Inc. and Subsidiary

(a Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 14- Income Taxes (cont'd)limited.

 

The 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 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 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% for 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 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 chose to irrevocably implement the new legislation amendment while waiving benefits provided under the current law. As of the balance sheet date, the Subsidiary believes that it is in compliance with the conditions of the Beneficiary Enterprise program.

The Parent filesCompany filed its tax returns in the U.S. federal jurisdiction, as well as in various state &and local jurisdictions. The ParentVringo, Inc. has open tax assessmentsyears for 2010 through 2014. As of December 31, 2014, all tax years for the years 2008 through 2011.Company’s subsidiary Innovate/Protect are still open. The SubsidiaryIsraeli subsidiary files its income tax returns in Israel. As of December 31, 2011,2014, the SubsidiaryIsraeli subsidiary has open tax assessmentsyears for the years 20072010 through 2011. In February 2011, the Israeli tax authority initiated an audit of the Subsidiary’s tax returns for the 2007 through 2009 tax years. To date, the Subsidiary has not received any findings from the said audit. The Subsidiary’s assessment for the tax year 2007 was deemed final after the balance sheet date.2014.

 

The Company did not have any material unrecognized tax benefits as of December 31, 2014. The Company does not expect to record any provisionadditional material provisions for unrecognized tax benefits in 2011 and 2010, and does not expect this amount to change significantly within the next twelve months.year.

  

Note 15 -14. Commitments and Contingencies

Litigation and legal proceedings

The Company retains the services of professional service providers, including law firms that specialize in intellectual property licensing, enforcement and patent law. These service providers are often retained on an hourly, monthly, project, contingent or a blended fee basis. In contingency fee arrangements, a portion of the legal fee is based on predetermined milestones or the Company’s actual collection of funds. The Company accrues contingent fees when it is probable that the milestones will be achieved and the fees can be reasonably estimated.

The Company’s subsidiaries have filed patent infringement lawsuits against the subsidiaries of ZTE and its subsidiaries in the United Kingdom, France, Germany, Netherlands, Australia, India, Brazil, Malaysia, and Romania, and against ASUS and its subsidiaries in Germany, Spain and India. In such jurisdictions, an unsuccessful plaintiff may be required to pay a portion of the other party’s legal fees. In addition, the Company may be required to grant additional written commitments, as necessary, in connection with its commenced proceedings against ZTE and its subsidiaries in various countries. It should be noted, however, that if the Company were successful on any court applications or the entirety of any litigation, the defendants may be responsible for a substantial portion of the Company’s legal fees.

Pursuant to negotiation with ZTE’s United Kingdom subsidiary, the Company made two written commitments, in November 2012 and May 2013, representing payment should a liability by Vringo Infrastructure arise as a result of the two cases it has filed. Each of the cases filed include three patents which the Company has alleged are infringed by ZTE. The defendants estimated the total possible liability to be no more than approximately $2,900 for each case.

In March 2014, the Company withdrew its claim to one of the patents included in the first case against ZTE’s United Kingdom subsidiary.

In November 2014, with respect to another patent included in the first case, the Court found that Vringo’s patent is valid as amended and infringed by ZTE.

On February 17, 2015, in order to streamline and expedite the further phases of its litigation against ZTE’s United Kingdom subsidiary and following information received from ZTE that it intends to only sell equipment in the United Kingdom that is not fully compliant with standards of the European Telecommunications Standards Institute (“ETSI”), the Company withdrew its infringement claims against ZTE on three of the four remaining patents-in-suit in the UK suit. The Company’s claim for infringement of the remaining patent in the UK is still pending, and is scheduled to be heard by the Court in a trial starting on June 8, 2015.Consequently, the Company is liable for the net amount of ZTE's legal fees which will be determined and paid at the end of the case. As of December 31, 2014, the Company recorded its best estimate of this liability, which is presented in Other liabilities included in the consolidated balance sheet as of December 31, 2014.

On September 13, 2013 and January 28, 2014, Vringo Germany filed two suits in the Regional Court of Düsseldorf, alleging infringement of two European patents by ZTE’s German subsidiary. Those cases were heard by the Court on November 27, 2014. On January 22, 2015, the Court issued its judgment, finding that ZTE does not infringe either patent. On February 17, 2015, Vringo filed notices of appeal for each patent. The appeal process is anticipated to take at least one year.

On May 5, 2014, the Company deposited a bond of €1,000 (approximately $1,216 as of December 31, 2014) to enforce an injunction against ZTE in Germany. Should the injunction be successfully overturned on appeal, the Company may be obligated to compensate ZTE for any damages allegedly suffered as a result of the enforcement of the injunction, which would be ascertained through separate damages proceedings. Should the judgment which granted the injunction be affirmed on appeal, however, the amount paid as security would be returnable to the Company in full. The Company has assessed the likelihood of the injunction being successfully overturned on appeal as remote.

In Brazil, as a condition of the relief requested, the Company deposited R$2,020 on April 17, 2014 (approximately $752 as of December 31, 2014), as a surety against the truth of allegations contained in the complaint. This deposit is returnable at the end of the litigation unless ZTE is the prevailing party and proves that actual material damages were suffered while the requested relief was in place. The Company has assessed the likelihood of ZTE doing so as remote.

The bond deposit in Germany and the surety deposit in Brazil are included in Deposits with courts in the consolidated balance sheet as of December 31, 2014.

Leases

In July 2012, the Company signed a rental agreement for its corporate executive office in New York for an annual rental fee of approximately $137 (subject to certain adjustments) which was to expire in September 2015. However, in January 2014, the Company entered into an amended lease agreement with the landlord for a different office space within the same building. The initial annual rental fee for this new office is approximately $403 (subject to certain future escalations and adjustments) beginning when the new office space was available on August 1, 2014. This lease will expire in October 2019. Rent expense for operating leases for the years ended December 31, 2014, 2013 and 2012 were $366, $230, and $120, respectively.

 

Future minimum lease payments under non-cancelable operating leases for office space, and cars, as of December 31, 2011,2014, are as follows:

 

  U.S.$ 
  thousands 
Year ending December 31,    
2012  66 
2013  27 
  93 
Year ending December 31, Amount 
2015 $370 
2016  403 
2017  407 
2018  416 
2019  347 
 Total $1,943 

 

Rent expense for operating leases

Note 15. Quarterly Financial Information (unaudited)

The following is a summaryof the Company's selected quarterly financial data for the years ended December 31, 2011, 20102014 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 2006.2013:

2014 First  Second  Third  Fourth 
             
Revenue $250  $800  $150  $225 
Operating loss from continuing operations  (9,825)  (10,353)  (15,196)  (75,822)
Loss from continuing operations  (10,900)  (10,049)  (12,376)  (75,897)
Loss from discontinued operations  (209)        (246)
Net loss  (11,109)  (10,049)  (12,376)  (76,143)
                 
Net loss per share $(0.13) $(0.12) $(0.13) $(0.81)
Diluted net loss per share $(0.13) $(0.12) $(0.16) $(0.82)

2013 First  Second  Third  Fourth 
             
Revenue $  $1,100  $  $ 
Operating loss from continuing operations  (10,499)  (8,755)  (10,519)  (11,004)
Loss from continuing operations  (10,859)  (10,229)  (9,849)  (10,811)
Loss from discontinued operations  (1,105)  (711)  (711)  (8,158)
Net loss  (11,964)  (10,940)  (10,560)  (18,969)
                 
Net loss per share $(0.15) $(0.13) $(0.13) $(0.23)
Diluted net loss per share $(0.15) $(0.13) $(0.13) $(0.23)

  

Note 16 -16. Risks and Uncertainties

 

 (a)New legislation, regulations or rulings that impact the patent enforcement process or the rights of patent holders could negatively affect the Company’s current business model. For example, limitations on the ability to bring patent enforcement claims, limitations on potential liability for patent infringement, lower evidentiary standards for invalidating patents, increases in the cost to resolve patent disputes and other similar developments could negatively affect the Company’s ability to assert its patent or other intellectual property rights.

(b)The patents owned by the Company are presumed to be valid and enforceable. As part of the Company’s ongoing legal proceedings, the validity and/or enforceability of its patents is often challenged in a court or an administrative proceeding. On August 15, 2014, the Federal Circuit reversed a judgment of the United States District Court for the Eastern District of Virginia by holding that the asserted claims of the patents-in-suit in I/P Engine's litigation against AOL Inc., Google Inc. et al. are invalid for obviousness. Additionally, during the second half of 2014, the Patent Re-Examination Board of the State Intellectual Property Office of the People’s Republic of China held that seven of the Company's Chinese patents are invalid. The Company is appealing these decisions. The Company’s other patents have not been declared to be invalid or unenforceable to date.

(c)

Financial instruments which potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable.equivalents. The Company maintains its cash and cash equivalents with various major financial institutions. These major financial institutions are located in Israel and the United States and the Company’s policy is designed to limit exposure to any one institution. With respect to accounts receivable, the Company is subject to a concentration of credit risk, as a majority of its outstanding trade receivables relate to sales to a limited number of customers.

 

(b)The Company's video ringtone data is hosted at a remote location. Although the Company has full alternative site data backed up, it does not have data hosting redundancy and are thus exposed to the business risk of significant service interruptions to its video ringtone service.

(c)The Company’s Facetones™ application creates an 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 the Company’s application to access photos on its site, the Company’s revenue from this application and projected growth could be harmed.

 (d)

A significant portion of the Company'sCompany’s expenses are denominated in NIS. The Company expects this level of NIS expenses to continue for the foreseeable future.foreign currencies. If the value of the U.S. dollar weakens against the value of NIS,these currencies, there will be a negative impact on the Company'sCompany’s operating costs. In addition, to the extent the Company holds monetary assets and liabilities that are denominated in currencies other than the U.S. dollar, the Company will beis subject to the risk of exchange rate fluctuations.fluctuations to the extent it holds monetary assets and liabilities in these currencies.

 

 (e)The wireless industry in which the Company conducts its business is characterized by rapid technological changes, frequent new product innovations, changes in customer requirements and expectations and evolving industry standards.

F-24

Vringo, Inc. and Subsidiary

(a Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 17- Subsequent Events

(a)In January and February 2012, the Company's Board of Directors (the "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). The Company expects that the total valuemay choose to raise additional funds in connection with any potential acquisition of the options granted will be approximately $467 thousand.Also refer to Note 11.
(b)In January 2012, the Board approved a one year acceleration of option vesting for all option holders, except for the Company’s new Chief Executive Officer who will obtain 50% acceleration on all his unvested options, should the Company be subject to a change of control in a merger and/patent portfolios or acquisition transaction. In addition, in March 2012, the Board approved participation of all outstanding options in future dividends, as well as, acceleration of vesting if certain market conditions are met. Moreover, all outstanding options granted to members of the Board shall fully vest if a Board member ceases to be a director at any time during the six-month period immediately following a change of control. The Company is currently evaluating the effect of this decision and estimates that the effect on its financials might be material.
(c)Between February 6 and February 14, 2012, the Company entered into agreements with holders of certain of its outstanding warrants (the “Holders”), pursuant to which the Holders exercised warrants to purchase 3,828,993 shares of the Company's common stock for aggregate proceeds to the Company of $3.6 million.other intellectual property assets or operating businesses. In addition, the Company issuedmay also need additional funds to respond to business opportunities and challenges, including its ongoing operating expenses, protection of its assets, development of new warrantslines of business and enhancement of its operating infrastructure. While the Company may need to purchase an aggregate of 2,660,922 shares of common stockseek additional funding, it may not be able to obtain financing on acceptable terms, or at an exercise price of $1.76 per share in consideration forall. If the immediate exercise of the warrants. The Company is currently evaluating the effect of this warrant issuance. The Company believes that the impact on its financial statements will be material.
(d)On March 12, 2012, the Company entered into a Merger Agreement pursuant to which I/P will merge with and into Merger Sub, a wholly owned subsidiary of the Company, with Merger Sub being the surviving corporation through an exchange of capital stock of I/P for capital stock of the Company. Under the terms of the Merger Agreement, the Company will issue I/P stockholders 16,972,977 shares of the Company’s common stock and 21,026,637 Series A Preferred Stock, convertible into 21,026,637 of the Company’s shares of common stock. In addition, the Company will issue I/P stockholders warrants to purchase 15,959,838 shares of common stock at an exercise price of $1.76 per share. In addition, all outstanding warrants to purchase I/P’s common stock that are outstanding and unexercised immediately prior to the completion of the Merger Agreement, shall be exchanged for 250,000 shares of Vringo common stock and 850,000 warrants to purchase 850,000 shares of the Company’s common stock with an exercise price of $1.76 per share. Immediately following the completion of the Merger, former stockholders of I/P are expected to own approximately 55.41% of the outstanding common stock of the combined company, and current stockholders of Vringo are expected to own approximately 44.59% of the outstanding common stock of the combined company (without taking into account the possible exercise of any other type of outstanding equity interest issued). The Company has expended significant effort and management attention on the proposed transaction. There is no assurance that the transaction will be consummated, including failureunable to obtain stockholders approval. If the transaction is not consummated for any reason, the Company’s business and operations, as well as the market priceadditional funding on a timely basis, it may be required to curtail or terminate some of its stock and warrants may be adversely affected. For accounting purposes, based on the Company’s 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, I/P’s assets and liabilities will be presented at its pre-combination amounts, and the Company’s assets and liabilities will be recognized and measured in accordance with the guidance for business combinations in ASC 805. The Company is currently evaluating the effect of this on its financial statements and believes such effect will be material.
(e)In March 2012, the Company signed a separation agreement with its 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 previously 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, the Company granted Mr. Medved with an additional 100,000 options at market value, as part of the grant described in Note 17 f below. Although the Company has a previous provision for its former CEO’s severance obligations (see Note 7) and although, the total effect of the aforementioned was not yet fully estimated, the Company believes that the overall financial impact of the above will be material.
(f)In March 2012, the Company's Board approved the granting of 1,700,000 options to Board and management (including the 100,000 options granted to its former CEO, see Note 17 e) at an exercise price of $1.65 per share. These options will vest quarterly over three years. Although the Company did not yet determine the fair value of this option grant, it believes the overall financial impact to be material.plans. 

F-25

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned thereunto, duly authorized on the 30th16th day of March, 2012.2015.

 

 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, withPursuant to the powerrequirements of substitution, for him or her in any and all capacities, to sign any amendments toSecurities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and to filein the same, with exhibits theretocapacities indicated below and other documents in connection therewith, withon 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.dates indicated.

  

Signature Title 

Signature

Title

Date

     

/s/    Andew PerlmanANDREW D. PERLMAN

 Chief Executive Officer President and Director (PrincipalMarch 16, 2015
Andrew D. PerlmanExecutive Officer) 
/s/    ANASTASIA NYRKOVSKAYAChief Financial Officer (Principal Financial OfficerMarch 30, 201216, 2015
Anastasia Nyrkovskayaand Principal Accounting Officer)
/s/    ANDREW KENNEDY LANGDirectorMarch 16, 2015
Andrew PerlmanKennedy Lang    
     

/s/    sEllen Cohl/    JOHN ENGELMAN

 Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)Director March 30, 201216, 2015
Ellen CohlJohn Engelman    
     

/s/    Seth M. Siegel

Chairman of the Board of DirectorsMarch 30, 2012
Seth M. Siegel

s/s/    Edo Segal    H. VAN SINCLAIR

 Director March 30, 201216, 2015
Edo SegalH. Van Sinclair    
     

/s/    sPhilip Serlin/    DONALD E. STOUT

 Director March 30, 201216, 2015
Philip SerlinDonald E. Stout    
     

/s/    sJohn Engelman/    ASHLEY C. KELLER

 Director March 30, 201216, 2015
John EngelmanAshley C. Keller    
     

/s/    sGeoffrey Skolnik/    NOEL J. SPIEGEL

 Director March 30, 201216, 2015
Geoffrey SkolnikNoel J. Spiegel    

Exhibits

Index 

Exhibit

No.

 Description
 2.1Agreement 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)
   
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference from Exhibit 3.1 to our Annual Report on Form 10-K filed on March 3, 2014)
 3.2Amended and Restated Bylaws (incorporated by reference from our Registration Statement on Form S-1 filed on January 29, 2010)
 3.3Certificate 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)
 4.1Specimen common stock certificate (incorporated by reference from our Registration Statement on Form S-1 filed on May 18, 2010)
   
3.2Amended and Restated Bylaws (incorporated by reference from our Registration Statement on Form S-1 filing on January 29, 2010)
4.1Specimen unit certificate (incorporated by reference from our Registration Statement on Form S-1 filing on May 18, 2010)
4.2Specimen common stock certificate (incorporated by reference from our Registration Statement on Form S-1 filing on May 18, 2010)
4.3 Specimen warrant certificate (incorporated by reference from our Registration Statement on Form S-1 filingfiled on May 18, 2010)
   
4.4 4.3 Form of Warrant Agreement (incorporated by reference from our Registration Statement on Form S-1 filingfiled on March 29, 2010)
   
4.6 4.4 Form of Special Bridge Warrants (incorporated by reference from our Registration Statement on Form S-1 filingfiled on January 29, 2010)
   
4.7 4.5† Form of Management Option Agreement (incorporated by reference from our Registration Statement on Form S-1 filingfiled on March 29, 2010)
   
10.1^ 4.6 Master Content Provider Agreement,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)
 4.7Form 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)
 4.8Form 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)
 4.9Form 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)
4.10Form of Warrant, dated June 3, 2009,20, 2014 (incorporated by reference from our Quarterly Report on Form 10-Q for the period ended June 30, 2014 filed on August 6, 2014)
10.1†Vringo, Inc. 2012 Employee, Director and betweenConsultant Equity Incentive Plan (incorporated by reference from our Quarterly Report on Form 10-Q for the Registrant and Maxis Mobile Services SDN BHDperiod 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-1 filingS-8 filed on January 29, 2010)July 26, 2012)
   
10.2^10.3† MarketingForm of Restricted Stock Unit Agreement dated June 30, 2009, by and between the Registrant and Emirates Telecommunications Corporation (incorporated by reference from our Registration Statement on Form S-1 filingS-8 filed on January 29, 2010)July 26, 2012)
   
10.3^10.4† MarketingEmployment Agreement, dated December 29, 2009,February 13, 2013, by and between the RegistrantVringo and Hungama Digital Media Entertainment Pvt. Ltd.Andrew D. Perlman (incorporated by reference from our Registration StatementAnnual Report on Form S-1 filing10-K for the period ended December 31, 2012 filed on January 29, 2010)March 21, 2013)
10.5†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)
   
10.4Summary of Rental Agreement, dated March 27, 2006, by and between Registrant and BIG Power Centers (incorporated by reference from our Registration Statement on Form S-1 filing on January 29, 2010)
10.5Employment Agreement, dated March 18, 2010, by and between the Registrant and Andrew Perlman (incorporated by reference from our Registration Statement on Form S-1 filing on March 29, 2010)
10.6^Marketing Agreement, dated February 2, 2010, by and between the Registrant and RTL Belgium S.A. (incorporated by reference from our Registration Statement on Form S-1 filing on March 29, 2010)
10.7Agreement on Cooperation, dated July 15, 2010, between the Company and Retromedya (incorporated by reference from our Current Report on Form 8-K filed on July 19, 2010)
10.8^Marketing Agreement, dated August 19, 2010, between the Company and Everything Everywhere Limited. (incorporated by reference from our Form 10-Q filing on November 15, 2010)
10.9^Collaboration Agreement, dated September 15, 2010, between the Company and Starhub Mobile PTE Ltd. (incorporated by reference from our Form 10-Q filing on November 15, 2010)
10.10Employment Agreement, dated December 15, 2010, by and between the Company and Ellen Cohl (incorporated by reference from our Current Report on Form 8-K filed on December 20, 2010)
10.1110.6 Intercompany Cost Plus Agreement (incorporated by reference from our Form 10-K filing on March 31, 2011)
   
10.12*^10.7†† License agreement with ZTE Corporation,, dated November 2, 2011 (incorporated by reference from our 10-K filed on March 30, 2012)
10.8†Employment Agreement, dated May 7, 2013, by and between Vringo and David L. Cohen (incorporated by reference from Exhibit 10.19 to our Annual Report on Form 10-K filed on March 3, 2014)
 10.9Lease, 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 by First Amendment to Lease, dated January 24, 2014 (incorporated by reference from Exhibit 10.21 to our Annual Report on Form 10-K filed on March 3, 2014)
10.10††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)
10.11Form 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)
10.12Form 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)
10.13†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)
10.14Employment Agreement, dated December 19, 2014, by and between Vringo, Inc. and Anastasia Nyrkovskaya (incorporated by reference from our Current Report on Form 8-K filed on December 19, 2014)
10.15Consulting Agreement, dated December 19, 2014, by and between Vringo, Inc. and Alexander R. Berger (incorporated by reference from our Current Report on Form 8-K filed on December 19, 2014)
   
21* ListSubsidiaries of Subsidiaries
Vringo, Inc.
   
23.1* Consent of Independent Registered Public Accounting FirmKPMG LLP, independent registered public accounting firm

 

24.1* Power
23.2*Consent of Attorney (included on signature page)Somekh Chaikin, a member firm of KPMG International, independent registered public accounting firm
   
31.1* Certification of Principal Executive Officer Pursuantpursuant to Rule 13-14(a) of the Securities Exchange Act, of 1934,Rules 13a – 14(a) and 15d – 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002
   
31.2* Certification of Principal Financial Officer Pursuantpursuant to Rule 13-14(a) of the Securities Exchange Act of 1934,Rules 13a – 14(a) and 15d – 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002
   
32.1*32** CertificationCertifications of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.2002
101.INS*XBLR Instance Document
   
32.2*101.SCH* Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.XBLR Taxonomy Extension Schema Document

 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.
*Filed herewith

  

72