UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20142015
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)
| Delaware | 20-4988129 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer |
780 Third Avenue, 12thFloor New York, NY | 10017 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (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 |
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 (Check one):
| Large accelerated filer | ¨ | Accelerated filer | ||
Non-accelerated filer [Do not check if a smaller reporting company] | ¨ | Smaller reporting company |
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 The NASDAQ Stock Market LLC on June 30, 20142015 was $290,632,195.$49,466,000.
As of February 20, 2015, 93,404,895March 10, 2016, 14,956,026 shares of the registrant's common stock wereare 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.None.
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Table of Contents
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relating, among other matters, to our anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products and services, anticipated market performance and similar matters.
These risks and uncertainties, many of which are beyond our control, include:
the impact of the business and asset acquisitions we make on our business and operating results;
unexpected trends in the mobile phone and telecom computing industries and potential technology obsolescence;
competitive conditions within our industries.
Forward-looking statements may 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 contribute to such differences include, but are not limited to, those discussed in this Annual Report on Form 10-K, and in particular, the risks 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 (“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.
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Overview
Vringo, Inc. (“Vringo”) strives to develop, acquire, licenseis engaged in the innovation, development 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 portfoliomonetization of intellectual property, assets through acquiringas well as the commercialization and internally developing new technologies. We intend to monetize our technology portfolio through a varietydistribution of value enhancing initiatives, including, but not limited to:wire-free power and rugged computing devices. Our company has three operating segments:
We were incorporated in Delaware on January 9, 2006 and completed an initial public offering in June 2010.
On July 19, 2012, Vringo closedwe consummated a merger transaction (the “Merger”) with Innovate/Protect, Inc., then a privately held Delaware corporation (“I/P”).
On August 9, 2012, we entered intoacquired a patent purchase agreement withportfolio from Nokia Corporation (“Nokia”), comprisingcomprised of 124 patent families with counterparts in certain jurisdictions world-wide. The total consideration paidworldwide, for the portfolio was $22,000,000. Under the terms of the purchase agreement, to the extent that the gross revenue, generatedas defined by such portfoliothe agreement, exceeds $22,000,000, we are obligated to pay Nokia a royalty of 35% of such excess.
On October 15, 2015, we acquired 100% of International Development Group Limited (“IDG”), a holding company, including its two subsidiaries: fliCharge International Ltd. (“Fli Charge”) and Group Mobile International, LLC (“Group Mobile”). IDG owned 70% of Fli Charge and 100% of Group Mobile. The purchase was a stock purchase whereby we acquired the entire interest in IDG in exchange for shares of our Series B Convertible Preferred Stock (“Series B Preferred”) and unregistered shares of our common stock. The total value of the consideration was $5,571,000. On December 28, 2015, we acquired the remaining 30% of Fli Charge from third party shareholders in exchange for shares of our unregistered common stock. Refer to Business – Recent Developments for further discussion.
Fli Charge owns a patented conductive wire-free charging technology and is focused on the development and commercialization of its technology through the direct to consumer sale of enablements as well as partnerships and licensing agreements in various industries. Fli Charge is currently working with partners that are interested in implementing Fli Charge technology for smart furniture, Original Equipment Manufacturers (“OEM”) and after-market automobiles, and vaporizers. Fli Charge’s business model is to license its technology in exchange for recurring licensing revenue, as well as to manufacture and commercialize its own conductive charging pads and associated cases for phones, tablets and laptops.
Group Mobile is a full service reseller of rugged computers, rugged tablets, rugged mobile devices, accessories and other related products geared toward emergency first responders, municipalities and corporations. In addition, Group Mobile specializes in high-quality customer support.
Prior to December 31, 2013, we operated a global platform for the distribution of mobile social applications and services. On February 18, 2014, we sold our mobile social application business to InfoMedia Services Limited (“InfoMedia”), receiving an 8.25% ownership interest in InfoMedia as consideration and a seat on the board of directors of InfoMedia. As part of the transaction, we have the opportunity to license certain intellectual property assets and work with InfoMedia to identify and protect new intellectual property.
Each of our operating segments is described below.
Intellectual Property
Our Intellectual Property operating segment is engaged in the innovation, development and monetization of intellectual property. Our portfolio consists of over 600 patents and patent applications covering telecom infrastructure, internet search, ad-insertion and mobile technologies; it includes the following key categories:
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On February 18, 2014,Currently, 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 partbelieve that 28 of the transaction,124 acquired patent families are actually essential.
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 assemblepurchased a portfolio of quality assets with short and long-term revenue opportunities.
Intellectual Property
Search Patents
On September 15, 2011, our wholly-owned subsidiary, I/P Engine, Inc. (“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 submittedpatents invented by Tayo Akadiri relating 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 thecontent distribution. The portfolio includes seven 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 longwell 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 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
several pending patent applications. As one of the means of realizing the value of thethese patents, on telecom infrastructure, our wholly-owned subsidiaries, Vringo Infrastructure, Inc. (“Vringo Infrastructure”), Vringo, Inc. and Vringo Germany GmbH (“Vringo Germany”) have filed a number of suits against ZTE Corporation (“ZTE”), ASUSTeK Computer Inc. (“ASUS”), D-Link Corporation (“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 17,20, 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 Germanywe 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 suitDirecTV in the United States District Court for the Southern District of New York seekingYork.
We are currently focused on identifying, generating, acquiring and deriving economic benefits from intellectual property assets and we monetize our technology portfolio through a temporary restraining order and preliminary and permanent injunctions against ZTE, enjoining ZTE’s usevariety of prohibited materials captured under NDA,value enhancing initiatives, including, but not limited to licensing, litigation and strategic partnerships. For further information regarding our intellectual property enforcement activities, refer to Part I, Item 3, Legal Proceedings, in this Annual Report on Form 10-K.
Fli Charge
Fli Charge is a wire-free power company dedicated to making it easier for people to power and charge the multitude of mobile electronic devices they use on a daily basis. By eliminating the need to search and compete for outlets and charging cables, we are improving the powering and charging experience for all battery and DC powered devices.
Fli Charge designs, develops, licenses, manufactures and markets wire-free conductive power and charging solutions. Fli Charge is currently working with partners in several verticals to bring products to market. These verticals include education, office, hospitality, automotive and consumer electronics among others. To date, we have not yet generated any substantial revenue from our products. We believe that Fli Charge’s patented technology is the only wire-free power solution that is fully interoperable between different mobile devices ranging from smartphones to power tools, and many more. Fli Charge’s wire-free power solution can simultaneously power multiple devices on the same pad no matter their power requirements or positions on the pad.
The Fli Charge ecosystem consists of power pads or surfaces as well as devices that are connected to or embedded with Fli Charge enabling technology. Fli Charge pads and surfaces are connected to a power source or battery. The surface of the pad has conductive contact strips that provide power and are constantly monitored by control circuitry that immediately halts power transfer if an unapproved load or short-circuit condition is detected. Fli Charge-enabled devices are embedded with the Fli Charge contact enablement that consists of four contact points, known as the Fli Charge “constellation.” The constellation is designed to make an immediate and continuous electrical connection with the contact strips regardless of the device’s orientation on the pad. The enablement monitors the power coming from the pad and ensures that the correct amount of power goes to the device. Once an approved Fli Charge device is placed on a pad, power is transferred immediately to charge or power the device.
There are several competing wire-free charging technologies on the market or under development today. The most popular competing technology is inductive wireless charging in which magnetic induction uses a magnetic coil to create resonance, which can transmit energy over a relatively short distance. The amount of power delivered is a function of the size of the coils, and the coils must be aligned and paired within a typical distance of less than one inch. Products utilizing magnetic induction have been available for 10+ years in products such as rechargeable electronic toothbrushes and pace makers. The leading inductive technologies deliver a maximum of 10-15 watts. Other competing technologies include magnetic resonance, RF harvesting, laser and ultrasound.
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As compared to each of the competing wire-free technologies above, we believe that our conductive technology exhibits many competitive advantages including:
charge rates/efficiency – Fli Charge pads charge devices nearly as fast as plugging them into a wall outlet;
multiple devices – Fli Charge pads can charge or power multiple devices at the same time without reducing the charging speed;
safety – Fli Charge’s technology is as safe as plugging devices into a wall outlet;
maximum power – Fli Charge pads can supply as much as 150 watts of power, which is enough to charge or power devices with relatively high power requirements such as power tool batteries and flat screen monitors;
positioning freedom – Fli Charge’s technology allows for devices to be placed in any orientation, anywhere on the pad, without sacrificing any charging speed; and
compatibility – all Fli Charge enabled electronic devices are compatible with all Fli Charge pads.
Group Mobile
Group Mobile is a provider of rugged, mobile and field-use computing products, serving customers worldwide. Group Mobile provides total hardware solutions, carrying rugged laptops, tablets, and handheld computers. Group Mobile also carries rugged mobile printers, vehicle computer docking and mounting gear, power accessories, wireless communication products, antennas, carrying cases, and all the peripherals, accessories, and add-ons needed to maximize productivity in a mobile- or field-computing environment. Group Mobile operates a full-service ecommerce website with live chat, up-to-date product information, and computer system configuration capabilities.
Group Mobile purchases rugged mobile computing equipment and complementary products from its primary distribution and manufacturing partners and sells them to enterprise, reseller, and retail customers. Our primary customers range from corporations to local governments, emergency first responders and healthcare organizations. We believe that Group Mobile’s business is characterized by gross profits as a percentage of revenue slightly higher than is commonly found in resellers of computing devices. The market for rugged mobile computing products is trending towards an increase in the volume of unit sales combined with declining unit prices as the business transitions from primarily being comprised of laptops to one primarily comprised of rugged tablets. As this transition has occurred, Group Mobile is seeing shortened product life cycles and industry specific devices for segments such as healthcare. Group Mobile sets sale prices based on the market supply and demand characteristics for each particular product. Group Mobile is highly dependent on the end-market demand for rugged mobile computing products, which is influenced by many factors including the introduction of new IT products by OEM, replacement cycles for existing rugged mobile computing products, overall economic growth, local and state budgets, and general business activity.
Product costs represent the single largest expense and product inventory is one of the largest working capital investments for Group Mobile. Group Mobile’s primary suppliers include Synnex Corporation, Ingram Micro Inc., Xplore Technologies Corporation and Flextronics International Ltd., which combined represent approximately 80% of Group Mobile’s inventory purchases. We have reseller agreements with most of our OEM and distribution partners. These agreements usually provide for nonexclusive resale and distribution rights. The agreements are generally short-term, subject to periodic renewal, and often contain provisions permitting termination by either our supplier or us without cause upon relatively short notice. Furthermore, product procurement from the OEM suppliers is a highly complex process and as such, efficient and effective purchasing operations are critical to Group Mobile’s success.
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Our Strategy
Our strategy for our Intellectual Property operating segment is to continue to monetize our existing portfolio of intellectual property through licensing and strategic partnerships. In addition, we plan to continue to enhance our intellectual property rights around our Fli Charge technology and products.Fli Charge plans to strengthen and develop partnerships in numerous markets, including automotive, education, office, healthcare, power tools and vaporizers.We believe that growth in Group Mobile’s revenue can be achieved by adding new products, by exploring new distribution verticals, such as military and government, and by increasing the sales team’s geographic coverage.
Recent Developments
ZTE Agreement
On December 7, 2015, we entered into a confidential settlement and license agreement (the “Settlement Agreement”) with ZTE Corporation and its affiliates (“ZTE”), pursuant to which: (i) ZTE paid us a total of $21,500,000 net of any withholding, value added or other taxes; (ii) the parties withdrew all pending litigations and proceedings against each other including the litigations related to ZTE’s usebreach of such materialsits non-disclosure agreement with Vringo; and (iii) we granted ZTE a non-exclusive, non-transferable, worldwide perpetual license of certain of our owned patents and patent applications.
Acquisition
On October 15, 2015, we completed the acquisition of IDG. Pursuant to the Purchase Agreement, we acquired 100% of the capital stock of IDG, including two of IDG’s subsidiaries, Fli Charge, in its antitrust lawsuitwhich IDG owned 70% of the capital stock and controls the operations, and the wholly-owned Group Mobile.
As consideration for the acquisition, we issued an equivalent of 1,666,667 common shares(after giving effect to the one-for-ten reverse stock split),which were issued as follows: (i) 1,604,167 shares of our newly designated Series B Convertible Preferred Stock (“Series B Preferred”), convertible into 1,604,167 shares of our common stock, (ii) 57,500 shares of our unregistered common stock issued to one of the sellers, who is a former Chief Executive Officer and Director, in China against Vringoconsideration of his forgiveness of debt and Vringo Infrastructure. On July 7, 2014,(iii) 5,000 shares of our common stock for transaction related services.
A total of 240,625 Series B Preferred shares were placed in escrow to secure certain of 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,sellers’ indemnity obligations under the Court held a hearing on Vringo’s motionPurchase Agreement 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, similarperiod of up 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.12 months.
On February 5,November 27, 2015 ZTE filed suitand pursuant to its terms, all Series B Preferred outstanding shares were converted into our unregistered shares of common stock, resulting in the United States District Courtissuance of the 1,604,167 shares of common stock.
Purchase consideration value was determined based on the market value of our shares of common stock at the date of the transactions, discounted for the Districtfact that the shares are restricted as to their marketability for a period of Delaware alleging that Vringo breached its contractual obligations to ETSI, which it assumedsix months 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,issuance date. Total purchase value of consideration of 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.acquisition was valued at $5,571,000.
On February 5,December 28, 2015, ZTE filedinter partes review (“IPR”) requests for five of Vringo’s United States Patents. The requests, filedwe acquired the remaining 30% interest in Fli Charge from third parties. In conjunction with the Patent Trialtransaction, we issued 110,000 shares of our unregistered common stock for total consideration valued at $262,000. The value of the consideration for financial reporting purposes was determined based on the market value of our shares at the date of the transaction, discounted due to the restricted nature of the shares and Appeal Board (“PTAB”the effect this has on their marketability.
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Notes Financing
On May 4, 2015 (the “Closing Date”), we entered into a securities purchase agreement with certain institutional investors in a registered direct offering of $12,500,000 of Senior Secured Convertible Notes (the “Notes”) and warrants to purchase 537,500 shares of our common stock(after giving effect to the one-for-ten reverse stock split). On the Closing Date, we issued the Notes, which are convertible into shares of our common stock at $10.00 per share, bear 8% interest and mature in 21 months from the date of issuance, unless earlier converted. In addition, we issued 537,500 warrants to purchase shares of our common stock, which are exercisable at $10.00 per share for a period of five years, beginning on November 4, 2015. In connection with the issuance of the Notes and the warrants, we received net cash proceeds of $12,425,000. We also incurred third party costs directly associated with the issuance of Notes of $218,000, which are capitalized as debt issuance costs and included in other current assets, and are amortized over the term of the Note. Our obligations under the outstanding Notes are secured by a first priority perfected security interest in substantially all of our U.S. assets. In addition, stock of our certain subsidiaries was pledged. The outstanding Notes contain customary events of default, as well as covenants which include restrictions on our assumption of new debt. As of December 31, 2015, all covenants were met and there were no events of default.
The principal amount of the outstanding Notes is being repaid monthly, and we may make such payments and related interest payments in cash or, subject to certain conditions, in registered shares of our common stock, at our election. If we choose to repay the Notes in shares of our common stock, the shares are issued at a 15% discount, based on the then-current market price data of our common stock. We may also repay the Notes in advance of the maturity schedule subject to early repayment penalties.
During August 2015, the holders of the Notes accelerated six principal installments in exchange for common stock as permitted under the securities purchase agreement. The Notes are now expected to mature in July 2016.
During the year ended December 31, 2015, we made principal payments in the aggregate amount of $8,294,000. We elected to make a total of $595,000 of these principal payments in cash and the remaining $7,699,000 in shares of our common stock, which were issued at a 15% discount to the then current market price. As such, we issued approximately 2,070,000 shares(after giving effect to the one-for-ten reverse stock split)in lieu of principal payments for the year ended December 31, 2015, and recorded $1,373,000 extinguishment of debt expense on the consolidated statement of operations for the year ended December 31, 2015.
Reverse Stock Split
On November 27, 2015, we implemented a one-for-ten reverse split of our issued and outstanding shares of common stock (the "Reverse Stock Split"), as authorized at a special meeting of our stockholders held on November 16, 2015. The Reverse Stock Split became effective at the opening of trading on the NASDAQ on November 27, 2015. As of November 27, 2015, every 10 shares of our issued and outstanding common stock were combined into one share of our common stock, except to the extent that the Reverse Stock Split resulted in any of our stockholders owning a fractional share, which was rounded up to the next highest whole share. In connection with the Reverse Stock Split, there was no change in the nominal par value per share of $0.01.
All references in this Annual Report on Form 10-K to number of shares of common stock, price per share and weighted average shares of common stock have been adjusted to reflect the Reverse Stock Split on a retroactive basis for all periods presented, unless otherwise noted.
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NASDAQ
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. On June 17, 2015, we received a letter from NASDAQ notifying us that we had been granted an additional 180-day period, or until December 14, 2015, to regain compliance with the minimum $1.00 bid price per share requirement for continued listing on the NASDAQ Capital Market, as set forth in NASDAQ Listing Rule 5810(c)(3)(A)(ii). On December 14, 2015, as a result of the Reverse Stock Split on November 27, 2015, we received a letter from The NASDAQ Stock Market LLC notifying us that we regained compliance with The NASDAQ Stock Market's minimum bid price continued listing requirement. The letter noted that because the closing bid price of our common stock has been at $1.00 per share or greater for the last 10 consecutive trading days, we have regained compliance with Listing Rule 5550(a)(2) and the matter is now closed.
Competition
Each of our three reporting segments operates in different competitive environments.
Intellectual Property
After a period of intense competition from public and private companies for the acquisition of intellectual property assets, prices have dropped substantially. Due to the many patent sales and divestments over the past few years, many companies continue to seek to monetize intellectual property by licensing their patents to companies in a number of technology sectors. This has occurred in an increasingly challenging and changing legal environment for monetizing patents. Relatively new procedures at the United States Patent and Trademark Office will remain pending untilas well as 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 partsanticipation of the world, noneUnified European Patent Court have created uncertainty as to the value of patent assets. In addition, many of these United States Patentsintellectual property-focused companies incurred significant up-front costs, are currently in litigation.
European Commission
On April 10, 2014, ZTE filed a complaintfaced 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 infringementsignificant operating expenses, and/or undertook large amounts 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 a confidential agreement with 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., 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.debt. Entities such as VirnetX (NYSE:VHC), Acacia Research Corporation (NASDAQ:ACTG), Interdigital, Inc. (NASDAQ:IDCC), RPX Corporation (NASDAQ:RPXC), Marathon Patent Group (NASDAQ:MARA) 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
Fli Charge
There are several competing wire-free charging technologies on the market or under development today. The most popular competing technology is inductive wireless charging in which magnetic induction uses a magnetic coil to create resonance, which can transmit energy over very short distances. Power is delivered as a function of coil size, and coils must be directly paired within a typical distance of less than one inch. Products utilizing magnetic induction have been available for 10+ years in products such as rechargeable electronic toothbrushes and pace makers. Other competing technologies include magnetic resonance, RF harvesting, laser and ultrasound. Most competitors utilize these competing technologies and not our technology.
Group Mobile
Our rugged devices reselling business is regionally focused with the true valuemajority of intellectual property is increasingly recognizedour customers having direct relationships with local sales staff. Most competitors are private companies that have limited infrastructure. We believe that our key competitive advantages are knowledge, service and validated.breadth of product relative to these competitors. As we restructure the business, we also believe that we will be able to further improve our service and overall shopping experience.
Employees
As of February 20, 2015,March 10, 2016, we have 13 full time24 full-time and 3 part-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 relationshiprelationships with our employees to be good.
Our Company
We were incorporated in Delaware as a corporation on January 9, 2006 and completed an initial public offering in June 2010. Our principal executive offices are located at 780 Third Avenue, 12th Floor, New York, New York 10017. Our telephone number is (212) 309-7549 and our website address is www.vringoinc.com.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 foregoing reports, available free of charge on or through our website as soon as reasonably practicable after we file these reports with, or furnish such reports to, the SEC. In addition, we post the following information on our website:
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charters for our audit committee, compensation committee, and nominating and corporate governance committee, and compensation committee.
The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public 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 us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC athttp://www.sec.gov.
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Our business, financial condition, 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.10-K. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may materially affect our business, financial condition and results of operations.
Risks Related to our Financial Condition and Capital Requirements
We may not be able to raise additional capital. Moreover, additional financing may have an adverse effect on the value of the equity instruments held by our stockholders.
We may choose to raise 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 willmay need to seek additional funding, we may not be able to obtain financing on acceptable terms, or at all. In addition, the terms 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 likely be dilutive to our current stockholders.
Global economic conditions may cause counterparties to our negotiations to delay entering into licensing agreements, product purchase agreements or other business arrangements, which could adversely affect our business, financial condition and operating results.
Our business plan depends significantly on worldwide economic conditions, and the United States and world economies have recently experienced fluctuating 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 to enter into revenue generating agreements in a timely manner. Entering into such agreements is critical to our business plan, and our failure to do so could cause material harm to our business, financial condition and results of operations.
The indebtedness created by the sale of the Notes and any future indebtedness we incur exposes us to risks that could adversely affect our business, financial condition and results of operations.
We incurred an aggregate principal amount of $12,500,000 of senior secured indebtedness represented by the Notes in May 2015, of which $1,749,000 remains outstanding as of March 10, 2016. Our indebtedness and the covenants associated with our indebtedness could have significant negative consequences for our business, financial condition and results of operations, including:
In order forWe cannot provide assurance that we will continue to maintain sufficient cash reserves or that our business will generate cash flow from operations at levels sufficient to permit us to raise capital privately through equitypay principal, premium, if any, and interest on our indebtedness, or equity-linked transactions, stockholder approval isthat our cash needs will not increase. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to enable us to issue more than 19.99%comply with the various requirements of our outstanding shares of common stock pursuant toexisting indebtedness, the rules and regulationsNotes or any indebtedness which we may incur in the future, we would be in default, which would permit the holders of the NASDAQ Capital Market. Should stockholders not approveNotes and such issuances, one meansother indebtedness to raise capitalaccelerate the maturity of the Notes and such other indebtedness and could be through debt (ifcause defaults under the Notes and such financing is available), whichother indebtedness. Any default under the Notes or such other indebtedness could have a material adverse effect on our consolidated balance sheetbusiness, financial condition and overall financial condition.results of operations.
We currently have 17,402,654 warrants outstanding which can be exercised for 17,402,654 shares of common stock and incentive equity instruments outstanding to purchase 9,248,700 shares of our common stock grantedRisks Related to our 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.
There is substantial doubt concerning 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. We expect to incur further losses in the operations of our business and have been dependent on funding our operations through the issuance and sale of equity securities. These circumstances raise substantial doubt about our ability to continue as a going concern. As a result of this uncertainty and the substantial doubt about our ability to continue as a going concern as 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 potential insufficiency of cash or available sources of liquidity to support our current operating requirements raise substantial doubt as to our ability to continue as a going concern. Investors in our securities should review carefully the report of KPMG LLP. Management’s 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. 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 sources of liquidity for follow through with 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 current warrants outstanding be exercised, there would be an additional 17,402,654 shares of common stock eligible for trading in the public market. The incentive equity instruments currently outstanding to purchase 9,248,700 shares of our common stock granted to our management, employees, directors and consultants are subject to acceleration of vesting of 75% and 100% (according to the agreement signed with each grantee), upon a subsequent change of control. 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:
If we are unable to execute any one of the foregoing or similar matters relating to our operations, our business may fail.Business Operations
We commenced legal proceedings against security, content distribution and communications companies, and wetelecommunications companies. 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 thereThere is a risk that we may be unable to achieve the results we desire from such litigation, failure from which wouldmay harm our business to a great degree.business. 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 yearsyears. While we have endeavored, where possible, to engage counsel on a full or partial contingency basis, proceedings may commence that fall outside of our contingency arrangements with counsel 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.
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We have commenced licensing discussions with security, content distribution and telecommunications companies and we anticipateexpect that our legal feesthese discussions may be time consuming and other expenses will be material and will negatively impact our financial condition and results of operations andmay either, absent any litigation we initiate, fail to lead to a license, or may result in litigations commenced by the potential licensee.
To license or otherwise monetize the patent assets that we own, we have attempted to commence licensing discussions with a number of large, multi-national companies, during the course of which we allege that such companies infringe one or more of our inability to continuepatents. The future viability of our business. We estimate that our legal fees over the next twelve months will be significant for these enforcement actions. Expenses thereafter arelicensing program is highly 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,these discussions, and there is a risk that we may be liable for someunable to achieve the results we desire from such negotiations and be forced either to accept minimal royalties or allcommence litigations against the alleged infringer. In addition, the recipients of our opponents’ legal fees. In addition,licensing overtures have substantially more resources than we do, which could make our licensing efforts more difficult. Furthermore, due to changes in connection with litigation, we have made several affirmative financial guaranteesthe approach to courtspatent laws around the world and might faceit has become much easier for potential licensees to commence legal actions to revoke or otherwise nullify our patents in lieu of engaging in bona fide licensing discussions. There is a real risk that any potential licensee we approach would rather commence legal action to revoke our patents than engage in any licensing discussions whatsoever.
Should we determine the need to make additional guaranteescommence legal proceedings against a potential licensee, we anticipate facing the risks noted 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 amount of such commitment cannot be reasonably estimated atrisk factor immediately preceding this time, and 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 December 31, 2014) in one of our cases. The statutory rate is 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%.
In Spain, should we be deemed to be the losing 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 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.one.
There is a risk that a court will find 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 time in connection with future litigations we may bring. If this were to occur, it would have a materialmaterially 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,Various adjudicatory bodies have previously found our patents invalid in China, France, Germany, the Federal Circuit reversed a judgment ofNetherlands, Spain, and the United States, District Court forand invalidity actions remain pending in China, Germany, the Eastern District of Virginia by holding thatNetherlands, and before 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 price.European Patent Office.
Moreover, in connection with any of 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, it is difficult in general to predict 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 first, second and/or final courts of appeal (in the United States those courts would be the Federal Circuit and Supreme Court, respectively). Such appeals are expensive and time-consuming, and the outcomes of such appeals are sometimes unpredictable, resulting in increased costs and reduced or delayed revenue.
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:
Therefore, there is no assurance that we will be able to monetize an acquired patent portfolio and recoup our investment.
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.
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”), the body - which among other functions – administers European Union (“EU”) competition or anti-trust law, 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.
Moreover, in August of 2015 the European Court of Justice (the “ECJ”), the highest court in the EU in matters of European law, issued its opinion and judgment in Huawei Technologies v. Co. Ltd. V. ZTE Corp., ZTE Deutschland GmbH, ECLI:EU:C:2015:477. The ECJ opinion provided a number of guidelines regarding the enforcement of standard-essential patents (“SEPs”) which, while informative, still leave a number of details in the implementation of those guidelines open to interpretation by the national courts and the EC. While we believe that our historical and current activities fall squarely within the ECJ’s guidelines, given the newness of the decision and the lack of interpretive case law, it is challenging to predict whether the EC or relevant national courts will agree.
Additionally, the political and legal climate in China appears to be 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.
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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:
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
The expected benefits of the acquisition of IDG may not be realized.
The success of the acquisition of IDG will depend, in large part, on our ability to grow the IDG businesses and maximize operating results. Failure to effectively manage growth could result in difficulty or delays in fulfilling product orders, difficulty in engaging and/or retaining customers, declines in quality or customer satisfaction, increases in costs, or other operational difficulties. Any of these difficulties could adversely impact our business performance and operating results.
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In addition, there is intenseno assurance that our efforts in managing growth will succeed, as growth is subject to factors that we do not control. These factors may include such things as the reactions of third parties with whom we enter into contracts and do business, unanticipated liabilities, the loss of key employees or customers and the reactions of investors and analysts.
The mobile computing industry is characterized by rapid technological change, and the success of Group Mobile depends upon the frequent enhancement of existing products and services and timely introduction of new products and services that meet our customers’ needs.
Customer requirements for mobile computing products and services are rapidly evolving and technological changes in our industry occur rapidly. To keep up with new customer requirements and distinguish us from our competitors in the industries in which our subsidiaries do business of reselling rugged devices, we must frequently introduce new products and asservices and enhancements of existing products and services. Enhancing existing products and services and developing new products and services is a result,complex and uncertain process. Furthermore, we may not be able to growlaunch new or maintainimproved products or services before our market share forcompetition launches comparable products or services. Any of these factors could cause our technologies and patents.business or results or operations to suffer.
If we successfully commercially launch a product, and our product does not achieve widespread market acceptance, we will not be able to generate the revenue necessary to support our business.
Achieving acceptance of a wire-free recharging system as a preferred method to recharge low-power fixed and mobile electronic devices will be crucial to our continued success. Consumers and commercial customers will not begin to use or increase the use of our product unless they agree that the convenience of our solution would be worth the additional expense of purchasing our system. We expecthave no history of marketing any product and we and our commercialization partners may fail to encounter competitiongenerate significant interest in the areainitial commercial products or any other product we or our partners may develop. These and other factors, including the following factors, may affect the rate and level of patent acquisition and enforcement as the numbermarket acceptance:
If we are unable to replace obsolete technologies with more technologically advanced patented technologies, then this obsolescence could have a negative effect onachieve or maintain market acceptance, our ability to generate future revenues.business would be significantly harmed.
Our licensing business also competes with venture capital firmsThe consumer electronics and various industry leaders formobile computing industries are subject to intense competition and rapid technological change, which may result in products or new solutions that are superior to our technology licensing opportunities. Many of these competitors may have more financial and human resources than we do. As we become more successful,under development or other future products we may find more companies enteringbring to market from time to time. If we are unable to anticipate or keep pace with changes in the market for similar technology opportunities, whichmarketplace and the direction of technological innovation and customer demands, our products may reducebecome less useful or obsolete and our market shareoperating results will suffer.
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The consumer electronics and mobile computing industries in one or more technology industriesgeneral and the power, recharging and alternative recharging segments of that industry in particular are subject to intense and increasing competition and rapidly evolving technologies. Because our products are expected to have long development cycles, we currently rely uponmust anticipate changes in the marketplace and the direction of technological innovation and customer demands. To compete successfully, we will need to generate future revenue.demonstrate the advantages of our products and technologies over well-established alternative solutions, products and technologies, as well as newer methods of power delivery and convince consumers and enterprises of the advantages of our products and technologies.
Weak global economic conditions may cause infringing parties
Group Mobile depends on a small number of OEMs to delay entering into licensing agreements, whichsupply the products and services that it sells and the loss of, or a material change in, a business relationship with a major OEM supplier, could prolong our litigation and adversely affect our operations, cash flow, and financial conditionposition.
Group Mobile’s future success is highly dependent on its relationships with a small number of OEM suppliers. Group Mobile’s primary suppliers include Synnex Corporation, Ingram Micro Inc., Xplore Technologies Corporation and operating results.Flextronics International Ltd., which combined represent approximately 80% of Group Mobile’s inventory purchases. OEM supplier agreements typically are short-term and may be terminated without cause upon short notice. The loss or deterioration of our relationship with any of our major OEM suppliers, the authorization by OEM suppliers of additional distributors, the sale of products by OEM suppliers directly to our reseller and retail customers and end-users, or our failure to establish relationships with new OEM suppliers or to expand the distribution and supply chain services that we provide OEM suppliers could adversely affect our operations, cash flows, and financial position. In addition, OEM suppliers may face liquidity or solvency issues that in turn could negatively affect our operations, cash flows, and financial position.
We could become subject to product liability claims, product recalls, and warranty claims that could be expensive, divert management’s attention and harm our business.
Our business plan depends significantly on worldwide economic conditions,exposes us to potential liability risks that are inherent in the marketing and sale of products used by consumers. We may be held liable if our technology under development now or in the United Statesfuture causes injury or death or is found otherwise unsuitable during usage. Our technology under development incorporates sophisticated components and world economies have recently experienced weak economic conditions. Uncertainty about global economic conditions posescomputer software. Complex software can contain errors, particularly when first introduced. In addition, new products or enhancements may contain undetected errors or performance problems that, despite testing, are discovered only after installation.
In addition, if a risk as businessesproduct we designed is defective, whether due to design or manufacturing defects, improper use of the product or other reasons, we or our strategic partners may postpone spendingbe required to notify regulatory authorities and/or to recall the product. A required notification to a regulatory authority or recall could result in response to tighter credit, negative financial news and declinesan investigation by regulatory authorities of our products, which could in income or asset values. This response could have a material negative effectturn result in required recalls, restrictions on the willingnesssale of parties infringing on our assets to enter into licensingthe products or other penalties. The adverse publicity resulting from any of these actions could adversely affect the perception of our customers and potential customers. These investigations or recalls, especially if accompanied by unfavorable publicity, could result in our incurring substantial costs, loss of revenue generating agreements voluntarily. Entering into such agreements is critical toand damaging our business plan, and our failure to do so could cause materialreputation, each of which would harm to our business.
Future salesWe intend to pursue licensing of our shareswire-free charging technology as a primary means of common stock by our stockholders could causecommercialization but we may not be able to secure advantageous license agreements.
We are pursuing the market pricelicensing of our common stockwire-free technology as a primary means of commercialization. There can be no assurance that we will be able to drop significantly, even ifachieve partnerships and reach licensing arrangements. Furthermore, the timing and volume of revenue earned from license agreements will be outside of our business is otherwise performing well.control.
As 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 restricted stock units (“RSU”). As shares saleable under Rule 144 are sold or as restrictions on resale lapse, the market price of 16
Risks Related to 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.Capital Stock
Technology and intellectual property company stock prices are especially volatile, and this volatility may depress the price of our common stock.
The stock market has experienced significant price and volume fluctuations, and the market prices of technology companies have been highly volatile. We believe that various factors may cause the market price of our common stock to fluctuate, perhaps substantially, including, among others, the following:
| • | developments or disputes concerning our patents; | |
| • | announcements of developments in our patent enforcement actions; | |
| • | additions to or departures of our key personnel; | |
| • | announcements of technological innovations by us or our competitors; | |
| • | announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, capital commitments, new technologies, or patents; | |
| • | new regulatory pronouncements and changes in regulatory guidelines; | |
| • | changes in financial estimates or recommendations by securities analysts; and | |
| • | general and industry-specific economic conditions. |
The market prices of the securities of technology companies have been highly volatile and are likely to remain highly volatile in the future. The stock market as a whole also has experienced extreme price and volume fluctuations that have affected the market price of many technology companies in ways that may have been unrelated to these companies' operating performance. Furthermore, we believe that fluctuations in our stock price can also be impacted by court rulings and/or other developments in our patent licensing and enforcement actions and stock price may reflect certain future growth and profitability expectations. If we fail to meet these expectations then our stock price may significantly decline which could have an adverse impact on investor confidence.
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.
As of March 10, 2016, we have 14,956,026 shares of common stock issued and outstanding (after giving effect to the Reverse Stock Split), excluding shares of common stock issuable upon exercise of warrants, options or restricted stock units. As shares saleable under Rule 144 are sold or as restrictions on resale 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.
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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 warrants outstanding as of March 10, 2016 be exercised, there would be an additional 1,006,679 shares of common stock eligible for trading in the public market (after giving effect to the Reverse Stock Split). The incentive equity instruments currently outstanding to purchase 816,484 shares of our common stock (after giving effect to the Reverse Stock Split) granted to our management, employees, directors and consultants are subject to acceleration of vesting of 75% and 100% (according to the agreement signed with each grantee) upon a subsequent change of control. 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.
We have no current plans to pay dividends on our common stock, and you may not receive funds without selling your common stock.
We have not declared or paid any cash dividends on our common stock, nor do we expect to pay any cash dividends on our common stock for the foreseeable future. We currently intend to retain any additional future earnings to finance our operations and growth and, therefore, we have no plans to pay cash dividends on our common stock at this time. Any future determination to pay cash dividends on our common stock will be at the discretion of our board of directors and will be dependent on our earnings, financial condition, operating results, capital requirements, any contractual restrictions, and other factors that our board of directors deems relevant.
Accordingly, our investors may have to sell some or all of their common stock in order to generate cash from your investment. You may not receive a gain on your investment when you sell our common stock and may lose the entire amount of your investment.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
Our New York office, which serves as our corporate U.S. office, is located at 780 3rdThird Avenue, 12th Floor, New York, New York. The annual rent for this space is approximately $403,000 and the lease expires in October 2019. Our Group Mobile office is located at 5590 W. Chandler Blvd, Ste.3, Chandler, Arizona. The annual rent for this space is approximately $70,000 and the lease expires on June 30, 2016. We believe that our facilities are adequate to accommodate our business needs.
Infrastructure Patents
As one of the means of realizing the value of the patents on telecom infrastructure, Vringo, Inc. and our wholly-owned subsidiaries, Vringo Infrastructure, Inc. (“Vringo Infrastructure”) and Vringo Germany GmbH (“Vringo Germany”) have filed a number of suits against certain telecom and infrastructure companies.
ZTE
On December 7, 2015, we entered into the Settlement Agreement with ZTE, pursuant to which: (i) ZTE paid us a total of $21,500,000, net of all withholding, value added or other taxes; (ii) the parties withdrew all pending litigations and proceedings against each other including the litigations related to ZTE’s breach of its non-disclosure agreement with Vringo; and (iii) we granted ZTE certain rights with respect to our patents including a non-exclusive, non-transferable, worldwide perpetual license to certain of our owned patents and patent applications.
Pursuant to the Settlement Agreement, the parties have taken steps to withdraw all pending litigations and proceedings against one another. To date, proceedings in Brazil and Romania have yet to be formally closed, though the parties are currently working together to cause those proceedings to be formally closed.
In several jurisdictions, though ZTE requested that government organizations close proceedings against Vringo, those organizations make such determinations on their own volition. In China, ZTE requested that the National Developmental and Reform Commission (“NDRC”) conclude its investigation against Vringo; however, the NDRC has not yet closed its investigation. In addition, ZTE requested that the European Commission close its file on Vringo following ZTE’s withdrawal of its complaint against Vringo. On February 1, 2016, the European Commission confirmed that it would close its file on ZTE’s complaint against Vringo.
In addition, in China and the Netherlands, Vringo continues to appeal patent invalidity rulings issued in connection with proceedings originally brought by ZTE. In each instance, ZTE has indicated that it will not oppose Vringo’s appeals, though Vringo must still plead its case before the respective adjudicatory body in each jurisdiction. In addition, the European Patent Office has not yet dismissed an opposition action filed on one of Vringo’s recently issued European patents, and has requested that Vringo defend this action even though ZTE has indicated that it would not continue to pursue the action.
ASUS
Vringo has filed patent infringement lawsuits against ASUSTek Computer Inc. and its subsidiaries (collectively, “ASUS”) in Germany, India, and Spain.
In Germany, on January 22, 2015, the Düsseldorf Regional Court found that ASUS does not infringe either of the patents-in-suit. Vringo filed notices of appeal for each patent, and appeals are not expected to be heard until at least the second quarter of 2016. ASUS filed nullity suits with respect to those patents-in-suit in the Federal Patents Court in Munich, Germany, during the second quarter of 2014. On January 28, 2016, the Court found one of the patents-in-suit invalid; Vringo plans to appeal this ruling. The nullity hearing on the second patent-in-suit is expected to occur in the first quarter of 2017.
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In India, Vringo’s suit against ASUS pending before the High Court of Delhi, New Delhi is not expected to be heard until the fourth quarter of 2016.
In Spain, Vringo awaits the ruling of the Commercial Court of Barcelona in Vringo’s lawsuit against ASUS, alleging infringement of one of same patents-in-suit in Vringo’s litigation against ASUS in Germany. On February 4, 2016, the Court held its hearing in ASUS’ lawsuit seeking to invalidate that same patent and on March 1, 2016, the Court found the patent invalid. Vringo’s opening brief on appeal of the invalidity decision is due on March 21, 2016.
Content Distribution
In 2012, we purchased a portfolio of patents invented by Tayo Akadiri relating to content distribution. The portfolio includes seven patents as well as several pending patent applications. As one of the means of realizing the value of these patents, on October 20, 2015, we filed suit against DirecTV in the United States District Court for the Southern District of New York.
Search Patents
On September 15, 2011, our wholly-owned subsidiary, I/P Engine, Inc. (“I/P Engine”) initiated litigation in the United States District Court, for the Eastern District of Virginia, against AOL Inc., Google, Inc., IAC Search & Media, Inc., Gannett Company, Inc., and Target Corporation (collectively, the "Defendants"“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 Court of Appeals for the Federal Circuit (“Federal Circuit”) held that the asserted claims of the patents-in-suit asserted by I/P Engine against the Defendants 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 seeksought 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.(“Supreme Court”), of the Federal Circuit’s opinion and, on October 5, 2015, the Supreme Court denied Vringo’s petition for a writ of certiorari.
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 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 a confidential agreement with 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., 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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Reverse Stock Split
On November 27, 2015, we implemented the Reverse Stock Split, as authorized at a special meeting of our stockholders held on November 16, 2015. As of November 27, 2015, every 10 shares of our issued and outstanding common stock were combined into one share of our common stock, except to the extent that the Reverse Stock Split resulted in any of our stockholders owning a fractional share, which was rounded up to the next highest whole share. In connection with the Reverse Stock Split, there was no change in the nominal par value per share of $0.01.
All references in this Annual Report on Form 10-K to number of shares of common stock, price per share and weighted average shares of common stock have been adjusted to reflect the Reverse Stock Split on a retroactive basis for all periods presented, unless otherwise noted.
Market Information
Our common stock was listed on the NYSE MKT until April 29, 2013, under the symbol “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 as reported by the NYSE MKT and the NASDAQ Capital Market:Market, with prices prior to November 27, 2015 adjusted to account for our 1-for-10 reverse stock split that occurred on that date:
| High | Low | High | Low | |||||||||||||
| Year ended December 31, 2014 | ||||||||||||||||
| Year ended December 31, 2015 | ||||||||||||||||
| First quarter | $ | 5.45 | $ | 2.90 | $ | 9.80 | $ | 4.60 | ||||||||
| Second quarter | 4.27 | 2.91 | 7.70 | 5.50 | ||||||||||||
| Third quarter | 3.66 | 0.67 | 7.40 | 3.90 | ||||||||||||
| Fourth quarter | $ | 1.14 | $ | 0.49 | $ | 6.00 | $ | 2.00 | ||||||||
| High | Low | High | Low | |||||||||||||
| Year ended December 31, 2013 | ||||||||||||||||
| Year ended December 31, 2014 | ||||||||||||||||
| First quarter | $ | 3.83 | $ | 2.70 | $ | 54.50 | $ | 29.00 | ||||||||
| Second quarter | 3.50 | 2.65 | 42.70 | 29.10 | ||||||||||||
| Third quarter | 3.90 | 2.61 | 36.60 | 6.70 | ||||||||||||
| Fourth quarter | $ | 3.34 | $ | 2.64 | $ | 11.40 | $ | 4.90 | ||||||||
Our publicOn June 21, 2015, our publicly traded warrants were listed on the NYSE MKT until April 30, 2013, under the symbol “VRNGW.” Asto purchase 478,400 shares of April 30, 2013, our public warrants werecommon stock at an exercise price of $50.60, then listed on the NASDAQ Capital Market under the same symbol “VRNGW.“VRNGW,” The following table sets forth, for the periods indicated, the high and low sales prices for our public warrants as reported by the NYSE MKT and the NASDAQ Capital Market: expired.
| 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 | |||||||
| Year ended December 31, 2013 | ||||||||
| First quarter | $ | 1.45 | $ | 1.00 | ||||
| Second quarter | 1.54 | 0.85 | ||||||
| Third quarter | 1.49 | 0.79 | ||||||
| Fourth quarter | $ | 1.38 | $ | 0.82 | ||||
Stockholders
As of February 20, 2015,March 10, 2016, we had 11have 32 stockholders of record of the 93,404,89514,956,026 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 boardBoard of directorsDirectors and will be dependent upon our financial condition, operating results, capital requirements and other factors that our boardBoard of directorsDirectors considers appropriate. Our outstanding Notes contain certain restrictions on our ability to declare or pay cash dividends.
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Issuer Purchases of Equity Securities
None.
Unregistered Sales of Equity Securities and Use of Proceeds
None.In conjunction with our acquisition of IDG on October 15, 2015, we issued Series B Preferred shares as purchase consideration, which were converted into unregistered shares of our common stock, in an aggregate of 1,604,167 shares. We also issued to one of the sellers, who is a former chief executive officer and director, 57,500 shares of our unregistered common stock in consideration of his forgiveness of debt. In addition, we issued to a finder a warrant to purchase up to an aggregate of 50,000 unregistered shares of our common stock, at an exercise price of $5.00 per share (after giving effect to the Reverse Stock Split) expiring on April 15, 2021. On December 28, 2015, we acquired the remaining 30% interest in Fli Charge from third parties and, as consideration, issued 110,000 shares of our unregistered common stock. The issuance of shares of our common stock was made in reliance on the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
The consolidated selected balance sheet dataNot required as of December 31, 2014 and 2013 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 included herein, but which were previously filed with the SEC. The financial statements for periods prior to the Merger reflect the historical results of I/P, and the financial statements for all periods from July 19, 2012 reflect the results of the combinedwe are a smaller reporting company.
The information below 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 Annual Report on Form 10-K. 22
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, licenseInc. (“Vringo”) is engaged in the innovation, development 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 portfoliomonetization of intellectual property, assets through acquiringas well as the commercialization and internally developing new technologies. We intend to monetize our technology portfolio through a varietydistribution of value enhancing initiatives, including, but not limited to:wire-free power and rugged computing devices. Our company has three operating segments:
We were incorporated in Delaware on January 9, 2006 and completed an initial public offering in June 2010. On July 19, 2012, Vringo closed the Mergerwe consummated a merger with Innovate/Protect, Inc., then a privately held Delaware corporation (“I/P.P”).
On August 9, 2012, we entered intoacquired a patent purchase agreement withportfolio from Nokia comprisingCorporation (“Nokia”), comprised of 124 patent families with counterparts in certain jurisdictions world-wide. The total consideration paidworldwide, for the portfolio was $22,000,000. Under the terms of the purchase agreement, to the extent that the gross revenue generatedas defined by such portfolioagreement exceeds $22,000,000, we are obligated to pay a royalty of 35% of such excess.
On October 15, 2015, we acquired 100% of International Development Group Limited (“IDG”), a holding company including its two subsidiaries: fliCharge International Ltd. (“Fli Charge”) and Group Mobile International LLC (“Group Mobile”). IDG owned 70% of Fli Charge and 100% of Group Mobile. The portfolio encompasses technologies relatingpurchase was a stock purchase whereby we acquired the entire interest in IDG in exchange for shares in Vringo. The total value of the consideration was $5,571,000. On December 28, 2015, we acquired the remaining 30% of Fli Charge from third party shareholders in exchange for 110,000 shares in Vringo.
Prior to telecom infrastructure, including communication management, data and signal transmission, mobility management, radio resources managementDecember 31, 2013, we operated a global platform for the distribution of mobile social applications 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 tosold our mobile social application business. As consideration, we received 18 Class B shares ofbusiness to InfoMedia which representServices Limited (“InfoMedia”), receiving an 8.25% ownership interest in InfoMedia. InfoMedia isas consideration and a privately owned, UK based, providerseat on the board of customer relationship management and monetization technologies to mobile carriers and device manufacturers.directors of InfoMedia. As part of the transaction, we will have the opportunity to license certain intellectual property assets and supportwork with InfoMedia to identify and protect new intellectual property.
On June 19, 2014, we entered into agreements with certainSegments
We operate in three operating segments: Intellectual Property, Fli Charge and Group Mobile.
Our Strategy and Outlook
Our strategy for our Intellectual Property operating segment is to continue to monetize our existing portfolio of our warrant holders, pursuant to which the warrant holders exercised for cash 5,697,227 of their outstanding Series 1intellectual property through licensing and Series 2 warrants, with an exercise price of $1.76 per share.strategic partnerships. In addition, we granted such warrant holders unregistered warrants of the Companyplan to purchase an aggregate of 5,412,366 shares of our common stock, par value $0.01 per share, at an exercise price of $5.06 per share (the “June 2014 Warrants”). The June 2014 Warrants expire on June 21, 2015 and because such warrants do not bear any down-round protection clauses, they are classified as equity instruments. As a result of these transactions, we received approximately $10 million of cash proceeds.
Financial Conditions
Since January 2012, we have raised approximately $100,710,000 which has been usedcontinue to finance 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 the year ended December 31, 2014 includes a non-cash goodwill impairment charge of $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 determined that the implied value of its goodwill was zero. Refer to Note 6 of the 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 courts during 2014 related to proceedings in Germany, Brazil, and Malaysia.
Our operating plans include increasing revenue through the licensing ofenhance our intellectual property strategicrights around our Fli Charge technology and products.Fli Charge plans to strengthen and develop partnerships in numerous markets including automotive, education, office, healthcare, power tools and litigation, when required,vaporizers.Group Mobile is a supplier of built-to-order rugged computers, mobile devices and accessories. We plan to increase Group Mobile’s revenue, which maywe believe can 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,achieved by adding new products, exploring new distribution verticals, such as Germany, France, Spain,military and others,government, and increasing 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.sales team’s geographic coverage.
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.
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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.
In addition, until we generate sufficient revenue, we 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. We may also be able to raise additional funds through the exercise of our outstanding warrants and options, however, substantially all of such outstanding equity instruments are currently “out of the money” due to the decline in our common stock price which began in the third quarter of 2014.
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.
Results of Operations
Revenue
Revenue from patent licensing and enforcement is recognized when collectionif collectability is reasonably assured, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and delivery of the service has been rendered. 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 related to intellectual property provide for the payment of contractually determined fees inand other 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, extendingtypically extend 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.patents. 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.payment. 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.
We record revenue from the product sales of Fli Charge and Group Mobile when title and risk of loss are passed to the customer, there is persuasive evidence of an arrangement for sale, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Our shipping terms typically specify F.O.B. destination, at which time title and risk of loss have passed to the customer. At the time of sale of hardware products, we record an estimate for sales returns and allowances based on historical experience. Hardware products sold by us are warranted by the vendor.
Group Mobile uses drop-shipment arrangements with many of its hardware vendors and suppliers to deliver products directly to customers. Revenue for drop-shipment arrangements is recorded on a gross basis upon delivery to the customer with contract terms that typically specify F.O.B. destination. Revenue is recognized on a gross basis as Group Mobile is the principal in the transaction as the primary obligor in the arrangement, assumes the inventory risk if the product is returned by the customer, sets the price of the product to the customer, assumes credit risk for the amounts invoiced, and works closely with the customers to determine their hardware specifications.
Freight billed to customers is recognized as net product revenue and the related freight costs as a cost of goods sold.
Deferred revenue includes (i) payments received from customers in advance of providing the product and (ii) amounts deferred if other conditions of revenue recognition have not 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. In addition, amounts received by us for reimbursements of legal fees in connection with our litigation campaigns are recorded in operating legal costs as an offset to legal expense.
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Amortization and impairment of intangibles
Amortization of intangibles represents the amortization expense of our acquired patents which ispatent portfolios and other intangible assets are recognized on a straight-line basis over the remaining legaluseful life of the patents.intangible assets (i.e., through the expiration date of the patent). Impairment charges related to our acquired patentsintangible assets 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 recorded in 2015 relates to the acquisition of IDG. 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 the Notes, deposits, bank charges, as well as fair value adjustments related to our derivative warrant liabilities.liabilities and conversion feature. 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, 2014,2015, 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.
PriorSegment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the enterprise’s chief operating decision maker ("CODM"), or decision making group, in deciding how to allocate resources and in assessing performance. We conduct our business through three operating segments, which are also our reportable segments: Intellectual Property, Fli Charge and Group Mobile.
Organizing our business through three operating segments allows us to align our resources and manage the saleoperations. We determine our operating segments based on a number of factors our management uses to evaluate and run our business operations, including similarities of customers, products and technology. Our Chief Executive Officer is our CODM, who regularly reviews operating segment revenue and operating income (loss)when assessing financial results of operating segments and allocating resources.
We measure the performance of our mobile social application business,operating segments based upon operating segment revenue and operating income (loss). Operating segment operating income (loss)includes revenue and expenses incurred directly by the operating segment, including material legal costs, cost of goods sold, selling, marketing, and administrative expenses. All corporate overhead expenses have been allocated into the Intellectual Property operating segment. No revenue from transactions between 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, whichoperating segments 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. recorded.
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Year ended December 31, 20142015 compared to the year ended December 31, 20132014
Revenue
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| Revenue | $ | 1,425,000 | $ | 1,100,000 | $ | 325,000 | ||||||
We generate revenue through our three operating segments: Intellectual Property,Fli Charge and Group Mobile.
| Year ended December 31, | ||||||||||||
| 2015 | 2014 | Change | ||||||||||
| Intellectual Property | $ | 21,750,000 | $ | 1,425,000 | $ | 20,325,000 | ||||||
| Fli Charge | 2,000 | — | 2,000 | |||||||||
| Group Mobile | 935,000 | — | 935,000 | |||||||||
| Total Revenue | $ | 22,687,000 | $ | 1,425,000 | $ | 21,262,000 | ||||||
During the year ended December 31, 2015, we recorded total revenue of $22,687,000, which represents an increase of $21,262,000 (or 1,492.1%) compared to the year ended December 31, 2014. The increase in 2015 was mainly due to our Intellectual Property operating segment for the amount received in connection with an executed confidential settlement and license agreement with ZTE for a total of $21,500,000. Our Fli Charge and Group Mobile operating segments combined for total product revenue of $937,000 for the period from October 15, 2015 through December 31, 2015. We did not recognize any revenue from Fli Charge or Group Mobile prior to October 15, 2015, the date on which we acquired the entities through our acquisition of IDG. During the year ended December 31, 2014, we recorded total licensing revenue of $1,425,000 for our Intellectual Property segment, 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 licensesettlement and settlementlicense 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 seekintend to generate revenue through the monetizationcontinue to monetize our existing portfolio of our intellectual property through licensing and strategic partnerships and litigation, when required, which may be resolved through a settlement or collection. We also intendpartnerships. In addition, we plan 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 expandenhance our intellectual property monetization efforts worldwide. rights around our Fli Charge technology and products.Fli Charge plans to strengthen and develop partnerships in numerous markets including automotive, education, office, healthcare, power tools and vaporizers.Group Mobile is a supplier of built-to-order rugged computers, mobile devices and accessories. We believe that growth in Group Mobile’s revenue can be achieved by adding new products, exploring new distribution verticals, such as military and government, and increasing the sales team’s geographic coverage.
AcquisitionsCost 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.goods sold
Operating legal costsWe incur cost of goods sold through two of our operating segments:Fli Charge and Group Mobile.
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| Operating legal costs | $ | 25,368,000 | $ | 21,590,000 | $ | 3,778,000 | ||||||
| Year ended December 31, | ||||||||||||
| 2015 | 2014 | Change | ||||||||||
| Fli Charge | $ | 7,000 | $ | — | $ | 7,000 | ||||||
| Group Mobile | 793,000 | — | 793,000 | |||||||||
| Total cost of goods sold | $ | 800,000 | $ | — | $ | 800,000 | ||||||
During the year ended December 31, 2014,2015, we recorded total cost of goods sold of $800,000, which represents the costs of products sold by Fli Charge and Group Mobile from October 15, 2015 through December 31, 2015. We did not recognize any cost of goods sold for Fli Charge or Group Mobile prior to October 15, 2015, the date on which we acquired the entities through our acquisition of IDG. We expect the cost of goods sold to increase over time as we incur the full results of operations of bothFli Charge and Group Mobile in the periods subsequent to the acquisition. We expect our cost of goods sold to increase as our product revenue increases.
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Operating legal costs
We incur operating legal costs through our Intellectual Property operating segment only.
| Year ended December 31, | ||||||||||||
| 2015 | 2014 | Change | ||||||||||
| Operating legal costs | $ | 18,553,000 | $ | 25,368,000 | $ | (6,815,000 | ) | |||||
During the year ended December 31, 2015, our operating legal costs were $25,368,000,$18,553,000, which represents an increasea decrease of $3,778,000$6,815,000 (or 17.5%26.9%) from operating legal costs recorded for the year ended December 31, 2013.2014. This increasedecrease was primarily due to the timing and nature of consulting and patent litigation costs related to legal proceedings against GoogleZTE 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, the Netherlands, Romania, 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 ordercountries, all of which continued into 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.throughout 2015.
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 tothere were costs associated with the oral argument heard in the appeals court in May 2014 in connection with our intangibles totaled $5,123,000 which represents an increase of $1,678,000 (or 48.7%) from amortization and impairment of intangibles recorded forlegal proceedings against Google. We did not incur significant expenses in connection with our legal proceedings against Google during the year ended December 31, 2013. Currently,2015.
We expect that our legal costs will continue to significantly decrease over time.
Amortization and impairment of intangible assets
| Year ended December 31, | ||||||||||||
| 2015 | 2014 | Change | ||||||||||
Amortization and impairment of intangible assets | $ | 3,295,000 | $ | 5,123,000 | $ | (1,828,000 | ) | |||||
During the year ended December 31, 2015, amortization expense related to our intangible assets consisttotaled $3,295,000, which represents a decrease of our patent portfolios which are amortized over their remaining useful lives (i.e.$1,828,000 (or 35.7%), throughcompared to amortization expense recorded during the expiration date of the patent). During the third quarter of 2014, we recorded an impairment charge of $1,355,000 relatedyear ended December 31, 2014. The decrease in amortization expense was mainly due to the patent portfolio containing the patents-in-suitimpairment of patents involved in I/P Engine's litigation against AOL Inc., Google Inc. et al. There were no impairment charges related to our patents during, in the year ended December 31, 2013.amount of $1,355,000, which was recorded in the third quarter of 2014. The remaining increaseoverall decrease in amortization was reduced by the addition of $323,000 during the current period was due to the additional amortization of patent portfolios that werenewly acquired duringintangible assets identified in our acquisition of IDG, in the amount of $101,000 recorded in 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. 2015.
General and administrative
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| General and administrative | $ | 15,484,000 | $ | 15,330,000 | $ | 154,000 | ||||||
| Year ended December 31, | ||||||||||||
| 2015 | 2014 | Change | ||||||||||
| General and administrative | $ | 10,383,000 | $ | 16,373,000 | $ | (5,990,000 | ) | |||||
During the year ended December 31, 2014,2015, general and administrative expenses increaseddecreased by $154,000$5,990,000 (or 1.0%36.6%), to $15,484,000,$10,383,000, compared to $15,330,000 that was$16,373,000 recorded during the year ended December 31, 2013.2014. The overall increasedecrease in general and administrative expenses was primarily due to increased costsa significant decrease in connection with our effortsthe stock-based compensation expense for 2015 as compared to consolidate our executive management and finance functions2014. The reason for the decrease was attributable to several factors. Stock-based compensation awards granted during July 2012 fully vested in a centralized location.2015. In addition, there was an increasewere forfeitures of certain equity awards held by our former Chief Operating Officer and certain employees during 2014 and the first half of 2015. Also, the awards associated with the current period expense were valued lower than the awards associated with the prior period expense, mostly due to the decrease in our common stock price, which also contributed to the decrease in stock-based compensation expense.
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Lastly, we completed consolidation of corporate legal, insurance,functions in New York in 2014 and accountingimplemented cost savings strategies in 2015 that resulted in a decrease in payroll expense and office administration costs, as compared to the prior year.period.
Goodwill impairment
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| Goodwill impairment | $ | 65,757,000 | $ | — | $ | 65,757,000 | ||||||
| Year ended December 31, | ||||||||||||
| 2015 | 2014 | Change | ||||||||||
| Goodwill impairment | $ | — | $ | 65,757,000 | $ | (65,757,000 | ) | |||||
During the year ended December 31, 2014 we performed our annual impairment test for goodwill impairment. Based on the first step of the goodwill impairment test,in 2014, it was determined that the fair value of the reporting unit at that time (Intellectual Property) 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. Asas a result, we recorded a goodwill impairment charge of $65,757,000, reducing our$65,757,000. There was no impairment of goodwill balance to zero as of December 31, 2014. Refer to Note 6 to the accompanying consolidated financial statements for further discussion.2015.
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 | |||||
| Year ended December 31, | ||||||||||||
| 2015 | 2014 | Change | ||||||||||
| Non-operating income (expense), net | $ | (1,780,000 | ) | $ | 1,974,000 | $ | (3,754,000 | ) | ||||
During the year ended December 31, 2015, we recorded non-operating expense, net, in the amount of $1,780,000 compared to non-operating income, net, in the amount of $1,974,000 recorded during the year ended December 31, 2014. The non-operating expense recognized in the year ended December 31, 2015 was driven by various factors. There was an increase in interest expense of $2,594,000, primarily due to the interest recorded related to the Notes, which includes amortization of the debt discount, amortization of debt issuance costs, and coupon interest calculated using the effective interest method. In addition, we elected to repay all but one of the 2015 principal installments in shares of our common stock, which were issued at a discount of 15% to market prices. This resulted in $1,373,000 recorded as a loss on the extinguishment of debt. The current period expense also relates to foreign exchange losses in connection with our deposits with courts.
The non-operating expenses reported during the year ended December 31, 2015 were reduced by a gain on the revaluation of the derivative warrant liabilities and conversion feature related to the securities purchase agreement. On May 4, 2015, the net proceeds received were allocated among the Notes, the derivative warrant liabilities, and the conversion feature issued to the holders of the Notes. The derivative warrant liabilities and conversion feature were then revalued and marked to market as of the balance sheet date, which resulted in a gain of $2,544,000.
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 of income related to a decrease in the fair value of our derivative warrant liabilities duringliabilities. This was reduced by $65,000 of expense recorded in connection with the year. The fair valueissuance 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 increasewarrants 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.June 2014.
We expect that our non-operating income (expense) will remain highly volatile, and we may choose to fund our operations through additional financing.financing, which may include derivative instruments. In particular, non-operating income (expense) will continue to be affected by the adjustments to the fair value of our derivative instruments. In addition to our common stock price, the fairFair value of these derivative instruments is impacted bydepends on a variety of assumptions, such as estimations regarding triggering of down-round protection. A higherprotection and estimated probabilityfuture share price. An estimated increase in the price of a down-round protectionour common stock increases the value of the warrants resultingand thus results 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.
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Loss from discontinued mobile social application operations
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
| 2014 | 2013 | Change | 2015 | 2014 | Change | |||||||||||||||||||
| Revenue | $ | 37,000 | $ | 224,000 | $ | (187,000 | ) | $ | — | $ | 37,000 | (37,000 | ) | |||||||||||
| Operating expenses | (266,000 | ) | (3,334,000 | ) | 3,068,000 | — | (266,000 | ) | 266,000 | |||||||||||||||
| Loss on impairment | — | (7,253,000 | ) | 7,253,000 | ||||||||||||||||||||
| Operating loss | (229,000 | ) | (10,363,000 | ) | 10,134,000 | — | (229,000 | ) | 229,000 | |||||||||||||||
| Non-operating income (expense) | 20,000 | (65,000 | ) | 85,000 | — | 20,000 | (20,000 | ) | ||||||||||||||||
| Loss before taxes on income | (209,000 | ) | (10,428,000 | ) | 10,219,000 | — | (209,000 | ) | 209,000 | |||||||||||||||
| Income tax expense | (246,000 | ) | (257,000 | ) | 11,000 | — | (246,000 | ) | 246,000 | |||||||||||||||
| Loss from discontinued operations | $ | (455,000 | ) | $ | (10,685,000 | ) | $ | 10,230,000 | $ | — | $ | (455,000 | ) | 455,000 | ||||||||||
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 onof 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 that2015, there were no substantial operating expenses and no amortizationresults from discontinued operations since all 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 withactivities ceased when 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.executed.
Taxes on Income
As of December 31, 2014,2015, our estimated aggregate total net tax loss carryforwards ("NOL") waswere approximately $117 million$123,591,000 for U.S. federal, state and local purposes expiring 20 years from the respective tax years to which they relate. The NOL amounts are presented before Internal Revenue Code, Section 382 limitations ("Section 382"). 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 NOLs available following our merger completed in 2012 that are not subject to limitation amount to $83,990,000. The remaining NOL of $39,601,000 are subject to the net deferred tax asset in the U.S., as itlimitation of Section 382. The annual limitation 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.approximately $2,000,000.
We filefiled our tax returns in the U.S. federal jurisdiction, as well as in various state and local jurisdictions. Vringo, Inc. hasWe have open tax years for 20102012 through 2014. As of December 31, 2014,2015, all tax years for our subsidiary Innovate/ProtectI/P are still open. TheWe filed our Israeli subsidiary files itssubsidiary’s income tax returns in Israel. AsIsrael prior to closing the business in the first quarter of December 31, 2014, the Israeli subsidiary has2014; there are no open tax years for 2010 through 2014.years.
We did not have any material unrecognized tax benefits as of December 31, 2014.2015. 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, 2014,2015, we had a cash balance of $16,023,000.$24,951,000. This represents a decreasean increase of $17,563,000 from$8,928,000 compared to our cash balance on December 31, 2013, which2014. The increase in liquidity is mainly due to net cash used$21,500,000 received in December 2015 as part of the confidential settlement and license agreement (the “Settlement Agreement”) with ZTE and a total of $12,500,000 received from the sale of the Notes and warrants in May 2015, reduced by us$595,000 repaid on account of principal. In light of the Settlement Agreement with ZTE in December 2015, we expect our business operationsoverall legal costs to decrease drastically in 2016.
Based on current operating plans, we expect to have sufficient funds for at least the next 12 months and beyond. In addition, we may choose to raise additional funds in connection with potential acquisitions of approximately $28,382,000operating assets, patent portfolios or other businesses that we may pursue. There can be no assurance, however, that any such opportunities will materialize.
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The majority of our expenditures 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 expenditures2015 consisted of costs related to our fourcontinued worldwide 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 during the year ended December 31, 2015 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,UK and the Netherlands, and France.U.S. In civil law jurisdictions, such as Germany France,and 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. InWe expect that our case against Tyco, we incurredtotal legal costs relatedwill continue to the preparation and filing of briefs and other court documents, case preparation and management, and the worldwide resolution of litigation between the parties. significantly decrease over time.
In addition, we paid approximately $2,404,000 inmade deposits with courts during 2014 and 2015, related to our proceedings in Germany, Brazil, Romania and Malaysia.
The overall decrease Deposits with courts paid in our cashlocal currency are remeasured on the balance from expendituressheet date based on the related to our litigation campaigns was partially offset by approximately $13,452,000foreign exchange rate on 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.date. As of December 31, 2014 and 2013, our total stockholders' equity2015, deposits with courts totaled $1,930,000, of which $1,279,000 was $31,180,000 and $114,282,000, respectively. The decreasesubsequently returned to us 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.February 2016 from Germany.
Our operating plans for our Intellectual Property operating segment include increasing revenuefurther monetization of our existing portfolio of intellectual property through the licensing ofand strategic partnerships. In addition, we plan to continue to enhance our intellectual property strategicrights around our Fli Charge technology and products.Fli Charge plans to strengthen and develop partnerships in numerous markets including automotive, education, office, healthcare, power tools and litigation, when required, which mayvaporizers.We believe that growth in Group Mobile’s revenue can 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,achieved by adding new products, exploring new distribution verticals, such as Germany, France, Spain,military and others,government, and increasing 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.sales team’s geographic coverage.
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, | 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 | ) | |||||||||
| Year ended December 31, | ||||||||||||
| 2015 | 2014 | Change | ||||||||||
| Net cash used in operating activities | $ | (2,571,000 | ) | $ | (28,382,000 | ) | $ | 25,811,000 | ||||
| Net cash used in investing activities | $ | (104,000 | ) | $ | (2,650,000 | ) | $ | 2,546,000 | ||||
Net cash provided by financing activities | $ | 11,597,000 | $ | 13,452,000 | $ | (1,855,000 | ) | |||||
Operating activities
During the year ended December 31, 2014,2015, net cash used in operating activities totaled $28,382,000. During the year ended December 31, 2013,$2,571,000 compared to net cash used in operating activities totaled $23,465,000. The $4,917,000 increase in net cash used in operating activities was mainly due to increased litigation costs described above.Duringof $28,382,000 during the year ended December 31, 2012, net cash used in operating activities totaled $14,468,000.2014. The $8,997,000 increase in net cash used in operating activities compared to the year ended December 31, 2013decrease of $25,811,000 was mainly due to increasedthe amount spent on our continued worldwide litigation costs, as well as an increasecampaigns referenced above, significantly reduced by the amounts received in costconnection with the Settlement Agreement with ZTE and certain one-time payments in connection with settlement and license agreements for certain of our in-house staff.owned intellectual property.
Our net cash used in operating activities could increase if we engage in future business development activities. As we expect to move towards greater revenue generation in the future, we expect that these amounts will be offset over time by the collection of revenues.revenue. 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, 2014,2015, net cash used in investing activities totaled $2,650,000. During the year ended December 31, 2013,$104,000, a decrease of $2,546,000 from net cash used in investing activities totaled $1,636,000.during the year ended December 31, 2014. The $104,000 represents the deposit we made to a Romanian court to enforce an injunction against ZTE in Romania and the deposit we made in Germany to enforce the review of accounting records, reduced by the cash acquired as part of the acquisition of IDG in the fourth quarter of 2015. Net cash used in investing activities during the year ended December 31, 2014 iswas 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 patent purchase during that year in the total amount of $1,420,000.Germany, Brazil and Malaysia. There was also an increase in fixed asset purchases during the year ended December 31, 2014 as compared to the year ended December 31, 2013.2014.
During the year ended December 31, 2012, net cash used in investing activities totaled $19,476,000. The decrease in cash used in investing activities as compared to the year ended December 31, 2013, was primarily due to a patent purchase during 2013 in the total amount of $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 year ended December 31, 2013 as compared to the year ended December 31, 2012. In addition, in 2012, cash used in investing activities was offset by $3,326,000 recorded in connection with the consummation of the Merger. 30
We expect that net cash used in investing activities will increase as we intend to continue to acquire additional intellectual property assets and invest surplus cash, according to our investment policy.
Financing activities
During the year ended December 31, 2015, we received net proceeds of $12,425,000 from the sale of $12,500,000 of Notes and warrants to purchase up to 537,500 shares of our common stock. This amount was reduced by debt issuance costs that were paid in relation to the agreement and principal repaid in cash during the year. During the year ended December 31, 2014, cash provided by financing activities totaled $13,452,000, which relatesrelated to funds that we received from the exercises of warrants and stock options in the total amount of $11,292,000 and $2,160,000, respectively. During the 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 stock options in the total amount of $590,000 and $974,000, respectively.
During the year ended December 31, 2012, net cash provided by financing activities totaled $85,694,000, which relates to the August and October 2012 registered direct financings, in which we raised approximately $31,148,000 and $44,962,000, respectively. Additionally, we received funds from the exercise of 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 a note payable to Hudson Bay Master Fund Ltd., in the total amount of $3,200,000 during 2012.
A significant portion of our issued and outstanding warrants, for which the underlying shares of common stock held by non-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 portionany of our issued and outstanding warrants were “in the money”,money,” it could be used as a source of additional funding if the warrant holders choose to exercise.exercise their warrants for cash.
We may also choose to raise additional funds in connection with any acquisitions of patent portfolios or other intellectual property assets, patent portfolios or other businesses that we 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 filing dateAs part of this Annual Report on Form 10-K, our subsidiaries filed patent infringement lawsuitslitigation 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 anyas part of its applications to the courtstandard legal procedures in the UK, we may be held responsible for a portion of the defendant’s legal fees for the relevant application or for the litigation. Pursuant to negotiation with ZTE’s UK subsidiary, in the United Kingdom, we placed two written commitments to ensure the payment of a potential liability by Vringo Infrastructure resulting for the two cases filed in the fourth quarter of 2012 and second quarter of 2013, which the defendants estimated to be approximately $2,900,000 each. With respect to the first written commitment,These commitments were fully discharged in December 2015 after we believe that Vringo’s commitments will be shortly discharged, sincereached a confidential settlement and license agreement with respect to the first filed UK case,ZTE and all claims other than the remedies for the patent found infringed and valid as amended, have beencases were 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 each case.
In addition,Our subsidiaries filed patent infringement lawsuits against ASUS Corporation in various countries. Should we be deemed the losing party, we may be required to grant additional written commitments, as necessary, in connection with our commenced proceedings against ZTE Corporation in Europe, Brazil, India and Australia. It should be noted, however, that if we were successful on any court applications or the entirety of any litigation, ZTE Corporation would beheld responsible for a substantial portion of ourthe defendant’s legal fees.fees for the relevant application or for the litigation.
Other than the arrangements described in the preceding paragraph, we have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
Contractual Obligations
The following table summarizes our future contractual obligations beginning on 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 Policies
While our significant accounting policies are more fully described in the notes to our audited consolidated financial statements for the year ended December 31, 2014,2015, which appear elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be the most critical in understanding the judgments and estimates we used in preparing our consolidated financial statements for the year ended December 31, 2014. 2015.
Revenue recognition
Revenue from patent licensing and enforcement is recognized if collectability is reasonably assured, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and delivery of the service has been rendered. 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.
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Currently, revenue arrangements related to intellectual property provide for the payment of contractually determined fees and other 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 typically extend until the expiration of the related patents. 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 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.
We record revenue from the product sales of Fli Charge and Group Mobile when title and risk of loss are passed to the customer, there is persuasive evidence of an arrangement for sale, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Our shipping terms typically specify F.O.B. destination, at which time title and risk of loss have passed to the customer. At the time of sale of hardware products, we record an estimate for sales returns and allowances based on historical experience. Hardware products we sell are warranted by the vendor.
Group Mobile uses drop-shipment arrangements with many of its hardware vendors and suppliers to deliver products directly to customers. Revenue for drop-shipment arrangements is recorded on a gross basis upon delivery to the customer with contract terms that typically specify F.O.B. destination. Revenue is recognized on a gross basis as Group Mobile is the principal in the transaction as the primary obligor in the arrangement, assumes the inventory risk if the product is returned by the customer, sets the price of the product to the customer, assumes credit risk for the amounts invoiced, and works closely with the customers to determine their hardware specifications.
Freight billed to customers is recognized as net product revenue and the related freight costs as a cost of goods sold.
Deferred revenue includes (i) payments received from customers in advance of providing the product and (ii) amounts deferred if other conditions of revenue recognition have not been met.
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.Other. We have one reporting unit for purposes of evaluating goodwill impairment and perform our annual goodwill impairment test on December 31.
We have the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If we can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then we would not need to perform the two-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 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 our market capitalization on the measurement date as the market capitalization is derived on a non-controlling basis.
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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.
Our market capitalization is sensitive to the volatilityThere were no indications 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 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 was deemed a “triggering” event requiring the performance of an interim goodwill impairment test as of September 30, 2014.December 31, 2015.
We
When 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 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, we considered using valuation techniques such as a discounted cash flows model. However, it was determined that, due to factors specific to Vringo and the nature 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 use for purposes of projecting future earnings and 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 techniques. 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 to calculate the fair 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 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 interim 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 projected 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 implied fair value of goodwill, we recorded an impairment charge, which was recorded in the consolidated statement of operations for the year ended December 31, 2014, of $65,757,000 to reduce the carrying value of goodwill to its implied fair value, which was determined to be zero. This impairment charge is included in Goodwill impairment in the consolidated statement of operations for the year ended December 31, 2014.
Refer to Note 6 to the accompanying consolidated financial statements for further discussion of the interim goodwill impairment test performed as of September 30, 2014 and the annual goodwill impairment test performed as of December 31, 2014. Additionally, we recognized an impairment charge related to goodwill of approximately $208,000 during the fourth quarter of 2013 in connection with the sale of our mobile social application business. Refer to Note 8 to the accompanying consolidated financial statements for further discussion.
Intangible assets
Intangible assets include purchased patents, which are recorded based on the cost to acquire them. Thesethem, as well as trade names, customer relationships and technology, which were acquired as part of the acquisition of IDG in the fourth quarter of 2015 and are recorded based on the estimated fair value in purchase price allocation. The intangible 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 respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change in the future, we may be required to record impairment charges related to our intangible assets.
There were no indications of impairment as of December 31, 2015.
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.which they held that the claims of the patents-in-suit asserted by I/P Engine against the Defendants are invalid for obviousness. 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 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 discounted cash flow valuation include the selection of appropriate discount rates, estimating the amount and timing of estimated future cash flows and identification of appropriate continuing growth rate assumptions. The discount rates used in the analysis 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.
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Refer to Note 6 to the accompanying 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 and conversion feature are measured at fair value. Such warrantsliabilities are classified within Level 3 of the fair value hierarchy because they are valued using the Black-Scholes-Merton and the Monte-Carlo models (as these warrants include down-round protection clauses), which utilize significant inputs that are unobservable in the market. The inputs to estimate the fair value of our derivative warrant liabilities and conversion feature are the current market price of our common stock, the exercise price of the warrant and conversion feature, the warrant’swarrants’ and conversion feature’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, 2014:2015:
| Description | Valuation technique | Unobservable inputs | Range | |||||
| Conversion | Volatility | 82.46 | % | |||||
| Risk free interest rate | 0.46 | % | ||||||
| Expected term, in years | 0.51 | |||||||
| Conversion price | $10.00 | |||||||
| May 2015 Warrants | Black-Scholes-Merton | Volatility | 79.13 | % | ||||
| Risk free interest rate | 1.68 | % | ||||||
| Expected term, in years | 4.34 | |||||||
| Dividend yield | 0.00 | % | ||||||
December 31, 2014:
| Description | Valuation technique | Unobservable inputs | Range | |||||
| Conversion Warrants, derivative Reload | Black-Scholes-Merton and | Volatility | 56.55% - 77.06 | % | ||||
| Warrants and derivative Series 1 Warrants | the Monte-Carlo models | Risk free interest rate | 0.13% - 0.87 | % | ||||
| Expected term, in years | 0.48 | |||||||
| Dividend yield | ||||||||
| 0.00 |
| % | ||||||
December 31, 2013:
|
The fair value measurements of the derivative warrant liabilities and conversion feature 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,warrants or conversion feature, 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.liabilities and conversion feature. 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’swarrants’ or conversion feature’s exercise price and the market price of our common stock would result in a decrease in the estimated fair value measurement of the warrants and conversion feature 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 change in the estimated fair value of the derivative warrant liabilities and conversion feature due to the dividend assumption. Had we made different assumptions about the inputs noted above, the recorded gain or loss, our net loss and net loss per share amounts could have been significantly different.
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Stock-based compensation
Stock-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 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 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 2006 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 option 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 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, 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 judgment is required in evaluating our federal, 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 tax expense entirely in the period in which new information is available. We record interest related to unrecognized tax benefits in interest expense and penalties in the accompanying consolidated statements of operations as general and administrative expenses.
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 percent of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
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Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the enterprise’s chief operating decision maker ("CODM"), or decision making group, in deciding how to allocate resources and in assessing performance. We conduct our business through three operating segments, which are also our reportable segments: Intellectual Property, Fli Charge and Group Mobile.
Organizing our business through three operating segments allows us to align our resources, review and monitor performance, and make operating decisions. We determine our operating segments based on a number of factors our management uses to evaluate and run our business operations, including similarities of customers, products and technology. Our Chief Executive Officer is our CODM, who regularly reviews operating segment revenue and operating income (loss)when assessing financial results of operating segments and allocating resources.
We measure the performance of our operating segments based upon operating segment revenue and operating income (loss). Operating segment operating income (loss)includes revenue and expenses incurred directly by the operating segment, including material costs, service costs, research and development and selling, marketing, and administrative expenses. All corporate overhead expenses have been allocated into the Intellectual Property segment. No revenue from transactions between our operating segments was recorded.
Recently issued accounting pronouncements
In 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. We adopted this guidance as of January 1, 2014, as required. There was no material impact of the accompanying consolidated financial statements resulting from the adoption.
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This guidance changes the criteria for reporting a discontinued operation while enhancing disclosures in this area. This standard will be effective for us beginning January 1, 2015. Early adoption of the standard is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. We are currently evaluating the impact of the adoption on our consolidated financial statements.
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 was amended in July 2015 and is effective for annual reporting periods beginning after December 15, 2016.2017. 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, thereby removing the financial reporting distinction between development stage entities and other reporting entities. In addition, the ASU eliminates the requirements for development stage entities to (i) present inception-to-date information in their financial statements, (ii) label the financial statements as those of a development stage entity, (iii) disclose a description of the development stage activities in which the entity is engaged, and (iv) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage. This guidance is effective for annual reporting periods beginning after December 31, 2014 and early adoption of the standard is permitted. We adopted this guidance during the second quarter of 2014.
In August 2014, the FASB issued ASU No. 2014-15,Presentation of Financial Statements (Topic 205): Going ConcernConcern.. The new standard 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 fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 and early adoption is permitted. We are currently evaluating the impact of the adoption on our consolidated financial statements.
In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity.The new standard clarifies how current U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and early adoption is permitted. We are currently evaluating the impact of the adoption on our consolidated financial statements.
In April 2015, the FASB issuedASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the corresponding debt liability, consistent with debt discounts. The new standard does not change the amortization of debt issuance costs, which are reported as interest expense in the consolidated statements of operations. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years and early adoption is permitted. We are currently evaluating the impact of the adoption on our consolidated financial statements.
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In July 2015, the FASB issued ASU No. 2015-11,Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires an entity to measure in-scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2016. We are currently evaluating the impact of the adoption on our consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17,Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the consolidated balance sheet. The amendments in the update require that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those fiscal years and may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. We are currently evaluating the impact of the adoption on our consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01,Financial Instruments—Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. With respect to our consolidated financial statements, the most significant impact relates to the accounting for equity investments. It will impact the disclosure and presentation of financial assets and liabilities. The amendments in this update are effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Early adoption by public entities is permitted only for certain provisions. We are currently in the process of evaluating the impact of the adoption on our consolidated financial statements.
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 institutionsNot required as we are located in the United States and our policy is designed to limit exposure to any one institution.a smaller reporting company.
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 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 subject to the risk of exchange rate fluctuations to the extent we hold monetary assets and liabilities in these currencies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements required by this Item are set forth in Item 15 beginning on page F-1 of this Annual 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
Our management, with the participation of our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 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 procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officers,officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
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Changes in Internal Control Over Financial Reporting
On October 15, 2015, we acquired International Development Group Limited (“IDG”). During the quarterly period ended December 31, 2015, IDG's processes and systems were discrete and did not significantly impact internal control over financial reporting at our other subsidiaries. Our management performed due diligence procedures associated with the acquisition of IDG.
There were no other changes in our internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the fourth quarter ended December 31, 20142015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report of Management on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 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 risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management conducted an evaluation ofassessed the effectiveness of our internal control over financial reporting as of December 31, 2014,2015 based on the framework inInternal Control—Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework). Commission.
Based on this evaluation,our assessment, management concludedbelieves that, as of December 31, 2015 our internal control over financial reporting wasis effective as of December 31, 2014.based on those criteria.
The Company’sOur independent registered public accounting firm, KPMGCohnReznick LLP has issued an audit report on the Company’sour assessment of our internal control over financial reporting, which appears below.
The scope of management's assessment of the effectiveness of internal control over financial reporting includes all of our subsidiaries except for IDG. Our consolidated revenue for the year ended December 31, 2015 was $22,687,000, of which IDG represented $937,000, and our total assets as of December 31, 2015 were $50,532,000, of which IDG represented $7,812,000.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Vringo, Inc.:
We have audited Vringo, Inc.’s and subsidiaries’ internal control over financial reporting as of December 31, 2014,2015, based on criteria established inInternal Control – Integrated Framework (1992)(2013)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 of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’sVringo’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 includedrisk and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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As described in the accompanying Report of Management on Internal Control over Financial Reporting, management has excluded IDG from its assessment of internal control over financial reporting as of December 31, 2015 because it was acquired by the Company in a purchase business combination on October 15, 2015. We have also excluded IDG from our audit of internal control over financial reporting.
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 accounting principles generally accepted accounting principles.in the United States of America. 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 accounting principles generally accepted accounting principles,in the United States of America, 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. and its subsidiaries have maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014,2015, based on the criteria established inInternal Control – Integrated Framework (1992)(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Commission.
We have 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, 2014,2015, and the related consolidated statementsstatement of operations, changes in stockholders’ equity and cash flows for the year then ended of Vringo, Inc. and its subsidiaries, and our report dated March 16, 201510, 2016, 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.thereon.
/s/ KPMGCohnReznick LLP
New York,Jericho, New York
March 16, 201510, 2016
None.Not applicable.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information called for by this Item may be found in our definitive Proxy Statement in connection with our 2015 Annual MeetingDirectors and Executive Officers
Our Board of StockholdersDirectors currently consists of seven (7) members. Prior to be filed witheach annual meeting of stockholders, the SEC underBoard of Directors considers the captions “Managementrecommendations of the Nominating and Corporate Governance Matters,Committee and votes to nominate individuals for election or re-election for a term of one year or until their successors are duly elected and qualify or until their earlier death, resignation, or removal. Election takes place at our annual meeting of stockholders.
Set forth below are the names of our current directors and executive officers, their ages, their position(s) with the Company, if any, their principal occupations or employment for at least the past five years, the length of their tenure as directors and the names of other public companies in which such persons hold or have held directorships during the past five years. Our executive officers are appointed by, and serve at the discretion of, our Board of Directors. There are no family relationships among any of the directors or executive officers. Additionally, information about the specific experience, qualifications, attributes or skills that led to our Board of Directors’ conclusion that each person listed below should serve as a director is set forth below:
| Name | Age | Position(s) with the Company | ||
| Andrew D. Perlman | 38 | Chief Executive Officer and Director | ||
| Anastasia Nyrkovskaya | 39 | Chief Financial Officer and Treasure | ||
| David L. Cohen, Esq. | 45 | Chief Legal and Intellectual Property Officer | ||
| Cliff Weinstein | 34 | President of Fli Charge and Executive Vice President of Vringo, Inc. | ||
| H. Van Sinclair* | 63 | Lead Independent Director | ||
| John Engelman* | 60 | Director | ||
| Noel J. Spiegel* | 68 | Director | ||
| Donald E. Stout* | 69 | Director | ||
| Bruce T. Bernstein* | 52 | Director | ||
| Richard K. Abbe* | 45 | Director |
| * | Independent director. |
Our independent directors hold positions on the three committees of our Board of Directors as follows:
| Committee | H. Van Sinclair | John Engelman | Noel J. Spiegel | Donald E. Stout | Bruce T. Bernstein | Richard K. Abbe | ||||||
| Audit | X | X (Chair) | X | |||||||||
| Compensation | X | X | X (Chair) | |||||||||
| Nominating and Corporate Governance | X (Chair) | X |
On February 8, 2016, Ashley C. Keller resigned from his position as a member of the Board of Directors and as a member of all committees of the Board of Directors on which he served. Upon the recommendation of the Nominating and Corporate Governance Committee, the Board of Directors appointed Bruce T. Bernstein as a member of the Board of Directors effective immediately, to fill the vacancy created by the resignation of Mr. Keller from the Board of Directors and to hold office until his successor is duly elected and qualified. Effective as of February 8, 2016, Mr. Bernstein serves on the Audit Committee and on the Compensation Committee of the Board of Directors. On February 8, 2016, John Engelman relinquished his role as Chairman of the Compensation Committee, and was replaced by Mr. Bernstein.
On March 9, 2016, upon the recommendation of the Nominating and Corporate Governance Committee, the Board of Directors appointed Richard K. Abbe as a member of the Company’s Board of Directors effective immediately and to hold office until his successor is duly elected and qualified.
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Andrew Kennedy Lang served as our President, Chief Technology Officer (“CTO”) and as a member of our Board of Directors since July 19, 2012 and until June 22, 2015, and served as President, Chief Executive Officer (“CEO”), CTO and a director of Innovate/Protect from June 22, 2011 to July 19, 2012. On June 22, 2015, we entered into an amendment to Mr. Lang’s employment agreement, dated June 22, 2011. Pursuant to the amendment, Mr. Lang’s role changed from President and CTO to a new role as the Head of Technology. Mr. Lang also resigned from his position as a member of the Board of Directors effective June 22, 2015.
Andrew D. Perlman has served as our CEO since March 2012, as our President from April 2010 to July 2012 and as a member of 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 (“EMI”), 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 was the General Manager of our operations in the United States and also served as our Senior Vice President Content & Community, in which he 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. (“Classic Media”), a global media company with a portfolio of kids, family and pop-culture entertainment brands. In his position with Classic Media, Mr. Perlman led the company’s partnerships across video gaming, online and mobile distribution. From June 2001 to May 2005, Mr. Perlman served as General Manager for the Rights Group, LLC and its predecessors, a mobile content, marketing and mobile fan club company, where he oversaw mobile marketing campaigns for major international brands such as Visa and Pepsi, and such artists as Britney Spears and Justin Timberlake. Mr. Perlman holds a Bachelor of Arts (“B.A.”) in Business Administration from the School of Business and Public Management at The George Washington University.
We believe Mr. Perlman’s prior experience in licensing intellectual property and deal structuring qualifies him to serve on our Board of Directors. His additional experience and insights gained over the past six years at Vringo are a significant contribution to the Company and the Board of Directors.
Cliff Weinstein has served as the Executive Vice President of Vringo, Inc. since March 2012 and President of Fli Charge since late 2015. Mr. Weinstein is responsible for the company’s mergers and acquisitions (“M&A”) and capital market strategy as well as being primarily responsible for the Fli Charge business verticle. From 2003 to 2012, Mr. Weinstein was a partner and Senior Vice President of Institutional Sales at Maxim Group, an investment banking, securities and wealth management firm. Mr. Weinstein received his B.A. from Fordham University.
Anastasia Nyrkovskaya joined the Company in May 2013 as our Chief Financial Officer. Ms. Nyrkovskaya oversees all aspects of the finance and accounting functions, including: SEC and internal financial reporting, budgeting and forecasting, tax planning and reporting, human resources, and operational matters. Prior to joining the Company, from 2006, Ms. Nyrkovskaya served as Vice President and Assistant Global Controller and Vice President, Corporate Finance and Business Development at NBCUniversal Media, LLC (“NBCUniversal Media”). She was responsible for technical accounting areas, policies and internal controls. She also structured merger and acquisition transactions, partnerships, joint ventures and dispositions, as well as debt activities and restructurings. From 1998 to 2006, Ms. Nyrkovskaya served in the Audit and Assurance practice at KPMG LLP. Ms. Nyrkovskaya is a Certified Public Accountant and received an advanced degree in economics and business administration from Moscow State University of Publishing and Printing Arts.
David L. Cohen, Esq. has served as our Secretary since January 15, 2015, Chief Legal and Intellectual Property Officer since May 7, 2013, as our Head of Litigation, Licensing and Intellectual Property from July 19, 2012 to May 7, 2013, and as Innovate/Protect’s Special Counsel from May 20, 2012 to July 19, 2012. Mr. Cohen oversees the Company’s worldwide efforts in intellectual property development and monetization. Prior to joining Vringo, Mr. Cohen was Senior Litigation Counsel at Nokia, where among his other duties, he oversaw many of Nokia’s litigations. Mr. Cohen has also worked in private practice at Lerner David Littenberg Krumholz & Mentlik, LLP from 2004 to 2007 and at Skadden, Arps, Slate, Meagher & Flom LLP from 2000 to 2004. Before practicing law, Mr. Cohen earned a B.A. and a Master of Arts (“M.A.”) from the Johns Hopkins University in the history of science and history; a Master of Philosophy in the history and philosophy of science from Cambridge University, an M.A. (with distinction) in legal and political theory from University College London, and a Juris Doctor (“J.D.”) (cum laude) from Northwestern University School of Law (“Northwestern”), where he was an associate editor of the Law Review. Mr. Cohen received the Sara Norton prize from Cambridge University and the First Prize in Lowden-Wigmore Prizes for Legal Scholarship from Northwestern. Mr. Cohen clerked for The Honorable Chief Judge Gregory W. Carman of the Court of International Trade.
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H. Van Sinclair has been a director at Vringo since July 19, 2012 and was a director of Innovate/Protect from November 7, 2011 through the consummation of the merger with Vringo. Since 2003, Mr. Sinclair has served as President, CEO and General Counsel of The RLJ Companies (“RLJ”), the investment company organized by Robert L. Johnson, the founder of Black Entertainment Television. RLJ owns or holds interests in diverse businesses, including private equity, financial services, asset management, insurance services, automobile dealerships, film production, sports and entertainment and video lottery terminal gaming. Mr. Sinclair currently serves as a director of RLJ Entertainment, Inc. a publicly traded company in the media rights business, and formerly served as President and a director of RLJ Acquisition, Inc., a publicly traded special purpose acquisition company that is now a subsidiary through merger of RLJ Entertainment, Inc. Mr. Sinclair also sits on additional boards RLJ’s portfolio investment companies. Mr. Sinclair has also served as Vice President of Legal and Business Affairs for RLJ Urban Lodging Funds, a private equity fund which concentrated on limited and focused service hotels; for RLJ Development, RLJ’s hotel and hospitality company; and as Acting President of the Charlotte Bobcats (now the Charlotte Hornets), the NBA franchise located in Charlotte, North Carolina. Mr. Sinclair has also served as a director of Urban Trust Bank, a federal thrift headquartered in Orlando, Florida, where he chaired the Audit Committee. Prior to joining RLJ, Mr. Sinclair specialized in complex commercial disputes and litigation for 28 years with the Washington, D.C. based law firm Arent Fox, PLLC (“Arent Fox”). In the late 1990’s, Mr. Sinclair became the partner in charge of litigation at Arent Fox, and today remains of counsel to the firm. Mr. Sinclair holds a Bachelor’s degree in Mathematics and a Master’s degree in business administration from the University of Rochester, and a J.D. from The George Washington University.
We believe Mr. Sinclair’s experiences in commercial disputes, litigation, and board service on other public companies qualify him to serve on our Board of Directors.
John Engelman has been our director since December 2010. Mr. Engelman also serves as an independent director of Hemisphere Media Group, Inc., a publically traded Hispanic media company that owns and operates television stations and cable networks in the United States, Puerto Rico and Latin America. Mr. Engelman was a co-founder of Classic Media, Inc. (“Classic Media”), a global media company specializing in family and children’s entertainment where he served as co-chief executive officer until 2012. During that time, he launched television and consumer products driven brands based on iconic entertainment properties such as Lassie, Casper the Friendly Ghost, Frosty the Snowman and Bullwinkle and Rocky. Mr. Engelman developed monetization strategies and oversaw the roll up of intellectual property assets from diverse rights holders. In August 2012, Classic Media was acquired by DreamWorks Animation SKG where Mr. Engelman currently co-heads the DreamWorks Classics division. From 2007 to 2009, Mr. Engelman was co-chief executive officer of Boomerang Media, Inc. (“Boomerang Media”), an acquisition company controlled by GTCR Golder Rauner. From 1997 to 2001, he was an operating partner with Pegasus Capital Advisors and a managing director of Brener International Group, LLC. From 1991 to 1996, Mr. Engelman was President of Broadway Video, Inc., a producer of live television and motion pictures. He began his career as a partner at the Los Angeles law firm of Irell & Manella. Mr. Engelman has a J.D. from Harvard Law School and a B.A. in Government from Harvard College.
We believe Mr. Engelman’s experience in the media and entertainment industries qualifies him to serve on our Board of Directors. His experience gained both as an executive at Classic Media and Boomerang Media are contributions to us and the Board of Directors.
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Noel J. Spiegel has been our director since May 6, 2013. Mr. Spiegel is currently a director of American Eagle Outfitters, Inc., where he serves as chairman of the Audit Committee and a member of the Compensation Committee, a director of Radian Group, Inc., where he serves as a member of the Audit Committee, and a director of vtv Therapeutics, Inc, where he serves as chairman of the Audit Committee. Mr. Spiegel was a partner at Deloitte & Touche LLP (“Deloitte”), where he practiced from September 1969 until his retirement in May 2010. In his over forty year career at Deloitte, he served in numerous management positions, including Deputy Managing Partner, member of the Executive Committee and Partner-in-Charge of Audit Operations in Deloitte’s New York Office. Mr. Spiegel also served as Managing Partner of Deloitte’s Transaction Assurance practice, Global Offerings and International Financial Reporting Standards practice, and Technology, Media and Telecommunications practice for the Northeast Region. Mr. Spiegel holds a B.S. from Long Island University, and attended the Advanced Management Program at Harvard Business School.
We believe that Mr. Spiegel’s tenure of over forty years at Deloitte, coupled with his experience on public company boards of directors, qualifies him to serve on our Board of Directors.
Donald E. Stout has been a director at Vringo since July 19, 2012 and was a director of Innovate/Protect from November 7, 2011 through the consummation of the merger with Vringo. In a career spanning over forty years, Mr. Stout has been involved in virtually all facets of intellectual property law. Mr. Stout is a partner at a law firm Fitch, Even, Tabin & Flannery LLP since 2015 and he had been a senior partner at the law firm of Antonelli, Terry, Stout & Kraus, LLP from 1982 to 2015. As an attorney in private practice, Mr. Stout has focused on litigation, licensing and representation of clients before the United States Patent and Trademark Office (“USPTO”) in diverse technological areas. From 1971 to 1972, Mr. Stout worked as a law clerk for two members of the USPTO Board of Appeals and, from 1968 to 1972. Mr. Stout was an assistant examiner at the USPTO, where he focused on patent applications covering radio and television technologies. Mr. Stout has written and prosecuted hundreds of patent applications in diverse technologies, rendered opinions on patent infringement and validity, and has testified as an expert witness regarding obtaining and prosecuting patents. Mr. Stout is also the co-founder of NTP Inc., which licensed Research in Motion (RIM), the maker of the Blackberry handheld devices, for $612.5 million to settle a patent infringement action. Mr. Stout also serves on the Board of Directors of Tessera Technologies, Inc. (TSRA). Mr. Stout is a member of the bars of the District of Columbia and Virginia, and is admitted to practice before the Supreme Court of the United States, the Court of Appeals for the Federal Circuit and the USPTO. Mr. Stout holds a Bachelor’s degree in Electrical Engineering, with distinction, from Pennsylvania State University, and a J.D., with honors, from The George Washington University.
We believe Mr. Stout’s experience in intellectual property law qualifies him to serve on our Board of Directors.
Bruce T. Bernstein joined our Board of Directors on February 8, 2016. Mr. Bernstein has over thirty years of experience in the securities industry, primarily as senior portfolio manager for two alternative finance funds as well as in trading and structuring of arbitrage strategies. Mr. Bernstein has served as President of Rockmore Capital, LLC since 2006, the manager of a direct investment and lending fund with peak assets under management of $140 million. Previously, he served as Co-President of Omicron Capital, LP, an investment firm based in New York, which he joined in 2001. Omicron Capital focused on direct investing and lending to public small cap companies and had peak assets under management of $260 million. Prior to joining Omicron Capital, Mr. Bernstein was with Fortis Investments Inc., where he was Senior Vice President in the bank’s Global Securities Arbitrage business unit, specializing in equity structured products and equity arbitrage and then President in charge of the bank’s proprietary investment business in the United States. Prior to Fortis, Mr. Bernstein was Director in the Equity Derivatives Group at Nomura Securities International specializing in cross-border tax arbitrage, domestic equity arbitrage and structured equity swaps. Mr. Bernstein started his career at Kidder Peabody, where he rose to the level of Assistant Treasurer. Mr. Bernstein also serves as a member of the Board of Directors of XpresSpa Holdings, the leading airport spa company in the world, based in New York. Mr. Bernstein is also a member of the board of Summit Digital Health, a laser based blood glucose monitor distributor, based in New Jersey. Mr. Bernstein holds a B.B.A. from City University of New York (Baruch).
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We believe Mr. Bernstein’s extensive experience in the securities industry qualifies him to serve on our Board of Directors.
Richard K. Abbe joined our Board of Directors on March 9, 2016. Mr. Abbe is the Co-founder and is a Principal and Managing Partner of Iroquois Capital Management, LLC, the Investment Advisor to Iroquois Capital LP and Iroquois Capital (offshore) Ltd. Mr. Abbe has served as Co-Chief Investment Officer of Iroquois Capital since its inception in 2003. Previously, Mr. Abbe co-founded and served as Co-Chief Investment Officer of Vertical Ventures, LLC, a merchant bank. Prior to that, he was employed by Lehman Brothers and served as Senior Managing Director at Gruntal & Company, LLC, where he also served on the firm’s Board of Directors. Mr. Abbe also previously served as Founding Partner at Hampshire Securities. He currently serves on the investment committee of Hobart and William Smith Colleges endowment Fund.
We believe Mr. Abbe’s extensive experience in the securities industry qualifies him to serve on our Board of Directors.
Director Independence
Our Board of Directors has reviewed the materiality of any relationship that each of our directors has with the Company, either directly or indirectly. Based upon this review, our Board of Directors has determined that H. Van Sinclair, John Engelman, Noel J. Spiegel, Donald E. Stout, Bruce T. Bernstein and Richard K. Abbe are “independent directors” as such term is defined by rules of The NASDAQ Stock Market LLC.
Committees of the Board of Directors and Meetings
Meeting Attendance. During the fiscal year ended December 31, 2015, there were sixteen (16) meetings and five (5) actions by unanimous written consent of our Board of Directors, and there were eight (8) meetings and eight (8) actions by unanimous written consent of our various committees of the Board of Directors. No director attended fewer than 75% of the total number of meetings of the Board of Directors and of committees of the Board of Directors on which he served during fiscal 2015. The Board of Directors has adopted a policy under which each member of the Board of Directors is strongly encouraged but not required to attend each annual meeting of our stockholders.
Audit Committee. Our Audit Committee met six (6) times and there were four (4) actions by unanimous written consent of our Audit Committee during fiscal 2015. This committee currently has three (3) members, Noel J. Spiegel (Chairman), H. Van Sinclair and Bruce T. Bernstein. Ashley C. Keller served as a member of the Audit Committee through February 8, 2016. Mr. Bernstein joined the Audit Committee on February 8, 2016. Our Audit Committee’s role and responsibilities are set forth in the Audit Committee’s written charter and include the authority to retain and terminate the services of our independent registered public accounting firm. In addition, the Audit Committee reviews our annual and quarterly financial statements, considers matters relating to accounting policy and internal controls and reviews the scope of annual audits. All members of the Audit Committee satisfy the current independence standards promulgated by the United States Securities and Exchange Commission (“SEC”) and The NASDAQ Stock Market (“NASDAQ”), as such standards apply specifically to members of audit committees. The Board of Directors has determined that both Messrs. Spiegel and Sinclair are “audit committee financial experts,” “Sectionas defined by the SEC in Item 407 of Regulation S-K.
A copy of the Audit Committee’s written charter is publicly available through the “Investors – Corporate Governance” section of our website atwww.vringoip.com.
Compensation Committee. Our Compensation Committee met one (1) time and there were four (4) actions by unanimous written consent of our Compensation Committee during fiscal 2015. This committee currently has three (3) members, Bruce T. Bernstein (Chairman), Donald E. Stout and Noel J. Spiegel. John Engelman served as Chairman of the Compensation Committee through February 8, 2016. Mr. Bernstein joined the Compensation Committee as Chairman on February 8, 2016. Ashley C. Keller served as a member of the Compensation Committee through January 15, 2015. Mr. Stout joined the Compensation Committee on January 15, 2015.
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Our Compensation Committee’s role and responsibilities are set forth in the Compensation Committee’s written charter and include reviewing, approving and making recommendations regarding our compensation policies, practices and procedures to ensure that legal and fiduciary responsibilities of the Board of Directors are carried out and that such policies, practices and procedures contribute to our success. Our Compensation Committee also administers our 2012 Employee, Director and Consultant Equity Incentive Plan, as amended (the “2012 Plan”) and our 2006 Stock Option Plan (the “2006 Plan”). The Compensation Committee is responsible for the determination of the compensation of our CEO, and shall conduct its decision making process with respect to that issue without the CEO present, and establishment and reviewing general compensation policies with the objective of attracting and retaining superior talent, rewarding individual performance and achieving our financial goals. The Compensation Committee has the authority to directly retain the services of independent consultants and other experts to assist in fulfilling its responsibilities. During fiscal year 2015, the Compensation Committee did not engage third party compensation consultants.
All members of the Compensation Committee qualify as independent under the definition promulgated by NASDAQ. A copy of the Compensation Committee’s written charter is publicly available through the “Investors – Corporate Governance” section of our website atwww.vringoip.com.
Nominating and Corporate Governance Committee. Our Nominating and Corporate Governance Committee met two (2) times during fiscal year 2015 and currently has two (2) members, H. Van Sinclair (Chairman) and Donald E. Stout. Ashley C. Keller served as a member of the Nominating and Corporate Governance Committee through February 8, 2016. Mr. Stout joined the Nominating and Corporate Governance Committee on February 8, 2016. The Nominating Committee’s role and responsibilities are set forth in the Nominating Committee’s written charter and is authorized to:
We have no formal policy regarding board diversity. Our Nominating and Corporate Governance Committee and Board of Directors may therefore consider a broad range of factors relating to the qualifications and background of nominees, which may include diversity, which is not only limited to race, gender or national origin. Our Nominating and Corporate Governance Committee’s and Board of Directors’ priority in selecting board members is identification of persons who will further the interests of our stockholders through his or her established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members and professional and personal experiences and expertise relevant to our growth strategy.
All members of the Nominating and Corporate Governance Committee qualify as independent under the definition promulgated by NASDAQ. In addition, under our current corporate governance policies, the Nominating and Corporate Governance Committee may consider candidates recommended by stockholders as well as from other sources such as other directors or officers, third party search firms or other appropriate sources. For all potential candidates, the Nominating and Corporate Governance Committee may consider all factors it deems relevant, such as a candidate’s personal integrity and sound judgment, business and professional skills and experience, independence, knowledge of the industry in which we operate, possible conflicts of interest, diversity, the extent to which the candidate would fill a present need on the Board of Directors, and concern for the long-term interests of the stockholders. In general, persons recommended by stockholders will be considered on the same basis as candidates from other sources.
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A copy of the Nominating and Governance Committee’s written charter is publicly available through the “Investors – Corporate Governance” section of our website atwww.vringoip.com.
Stockholder Communications to the Board of Directors
Generally, stockholders who have questions or concerns should contact our Investor Relations department at 1-646-532-6777. However, any stockholders who wish to address questions regarding our business directly with the board of directors, or any individual director, should submit his or her questions to via e-mail atcweinstein@vringoinc.com. Communications will be distributed to the board of directors, or to any individual director or directors as appropriate, depending on the facts and circumstances outlined in the communications. Items that are unrelated to the duties and responsibilities of the Board of Directors may be excluded, such as:
In addition, any material that is unduly hostile, threatening, or illegal in nature may be excluded, provided that any communication that is filtered out will be made available to any outside director upon request.
Board Leadership Structure and Role in Risk Oversight
Mr. Perlman currently serves as our CEO and Mr. Sinclair, a non-management director, serves as our lead independent director. If the Board of Directors convenes for a special meeting, the non-management directors will meet in executive session if circumstances warrant. Mr. Sinclair, as lead independent director, will preside over executive sessions of the Board of Directors.
The Board of Directors oversees our business and considers the risks associated with our business strategy and decisions. The Board of Directors 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 of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance”
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our directors, executive officers and “Codebeneficial owners of more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in the ownership of our common stock and other equity securities. Such persons are required to furnish us copies of all Section 16(a) filings.
Based solely upon a review of the copies of the forms furnished to us, we believe that our officers, directors and beneficial owners of more than 10% of our common stock complied with all applicable filing requirements during the fiscal year ended December 31, 2015.
Code of Conduct and Ethics” is incorporated by reference in this Item 10.Ethics
We have adopted a code of conduct and ethics that applies to all of our employees, including our CEO and chief financial and accounting officers. The text of the code of conduct and ethics is posted on the “Investors – Corporate Governance” section of our website atwww.vringoip.com, and will be made available to stockholders without charge, upon request, in writing to the Corporate Secretary at 780 Third Avenue, 12th Floor, New York, New York 10017. Disclosure regarding any amendments to, or waivers from, provisions of the code of conduct and ethics that apply to our directors, principal executive and financial officers will be included in a Current Report on Form 8-K within four business days following the date of the amendment or waiver, unless website posting or the issuance of a press release of such amendments or waivers is then permitted by the rules of NASDAQ.
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ITEM 11. EXECUTIVE COMPENSATION
Information calledSummary Compensation Table
The following table shows the total compensation paid or accrued during the fiscal years ended December 31, 2015 and 2014 to (1) our Chief Executive Officer, (2) our President of Fli Charge and Executive Vice President, (3) our Chief Financial Officer and Treasurer, and (4) our Chief Legal and Intellectual Property Officer and Secretary, who are all of our named executive officers as of December 31, 2015.
| Name and principal position | Year | Salary ($) | Stock awards ($) | Option awards ($) (1) | All other compensation ($) | Total ($) | ||||||||||||||||||
| Andrew D. Perlman | 2015 | 415,000 | — | — | — | 415,000 | ||||||||||||||||||
| Chief Executive Officer | 2014 | 400,000 | — | — | — | 400,000 | ||||||||||||||||||
| Cliff Weinstein | 2015 | 325,000 | — | — | — | 325,000 | ||||||||||||||||||
| President of Fli Charge and Executive Vice President | 2014 | 312,500 | — | — | — | 312,500 | ||||||||||||||||||
| Anastasia Nyrkovskaya | 2015 | 317,197 | — | — | — | 317,197 | ||||||||||||||||||
| Chief Financial Officer and Treasurer | 2014 | 312,938 | — | 695,051 | — | 1,007,989 | ||||||||||||||||||
| David L. Cohen, Esq. | 2015 | 317,197 | — | — | — | 317,197 | ||||||||||||||||||
| Chief Legal and Intellectual Property Officer and Secretary | 2014 | 312,938 | — | 231,684 | — | 544,622 | ||||||||||||||||||
| (1) | Amounts represent the aggregate grant date fair value in accordance with FASB ASCTopic 718. For the assumptions made in the valuation of our equity awards see Notes 2 and 11 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015. |
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Narrative Disclosure to Summary Compensation Table
Andrew D. Perlman
On March 18, 2010, we entered into an employment agreement with Andrew D. Perlman which provided for 90 days’ notice of termination by this Itemthe Company other than for cause or by Mr. Perlman in order to resign. During the term of his employment, through March 31, 2012, Mr. Perlman’s annual base salary was $175,000. In addition, he was eligible to receive $5,000 at the end of each quarter.
In March 2012, Mr. Perlman was appointed as our Chief Executive Officer. In connection with Mr. Perlman’s new position, the Board of Directors agreed to the following revised employment terms: base salary of $250,000 per year and severance equal to one year’s base salary to be paid in the event he ceases to be our Chief Executive Officer pursuant to a change of control transaction.
On February 13, 2013, we entered into a new employment agreement with Mr. Perlman. Mr. Perlman’s employment agreement has a term of three (3) years. Mr. Perlman and the Company have agreed to commence negotiations to enter into a new employment agreement at least six (6) months prior to the expiration of the three-year term and to conclude those negotiations no later than the date that is three (3) months prior to the expiration of the term of the employment agreement. Under the terms of the new employment agreement, Mr. Perlman received a base salary of $385,000 effective January 1, 2013 until December 31, 2013. From January 1, 2014 to December 31, 2014, Mr. Perlman received a base salary of $400,000. From January 1, 2015 through the remainder of the term of the employment agreement, Mr. Perlman will be entitled to receive a base salary of $415,000. In addition, Mr. Perlman will be eligible to participate in any annual bonus or other incentive compensation program that we may adopt from time to time for our executive officers.
On October 13, 2015, we entered into an amendment to the existing employment agreement with Mr. Perlman, pursuant to which, the employment period under the employment agreement was extended to December 31, 2017. Moreover, as per the amendment, before March 15, 2016, our Compensation Committee shall establish a bonus plan, according to which Mr. Perlman may be foundeligible to receive an annual performance bonus for the year ended December 31, 2015 and/or for any future year, according to corporate and personal goals, as shall be established by the Compensation Committee. The bonus entitlement and the amount shall be at the sole discretion of the Compensation Committee, and Mr. Perlman is to be employed on the date of payment to be eligible for, and to be deemed having earned, such annual bonus.
In the event the employment agreement is terminated for (i) Good Reason by Mr. Perlman, or (ii) by us without Cause, Mr. Perlman shall be entitled to receive an amount of base salary (at the rate of base salary in effect immediately prior to such termination) equal to the lesser of (x) one times the base salary and (y) two times the base salary payable for the number of full months remaining in the employment period, and COBRA continuation coverage paid in full by us for up to a maximum of twelve months following the date of termination. “Cause” as used in Mr. Perlman’s employment agreement means: (a) the willful and continued failure of Mr. Perlman to perform substantially his duties and responsibilities for the Company (other than any such failure resulting from his death or disability) after a written demand by the Board of Directors for substantial performance is delivered to Mr. Perlman by the Company, which specifically identifies the manner in which the Board of Directors believes that Mr. Perlman has not substantially performed his duties and responsibilities, which willful and continued failure is not cured by Mr. Perlman within thirty days of his receipt of such written demand; (b) the conviction of, or plea of guilty or nolo contendere to a felony, (c) an intentional breach of his non-compete obligations, (d) an intentional breach of the non-disclosure and non-solicitation agreement; or (e) a unanimous good faith finding by the Board of Directors that Mr. Perlman has engaged in fraud, dishonesty, gross negligence or misconduct which, if curable, has not been cured within thirty days after his receipt of a written notice from the Board of Directors stating with reasonable specificity the basis of such finding. “Good Reason” as used Mr. Perlman’s employment agreement means (a) the assignment, without Mr. Perlman’s consent, to Mr. Perlman of duties that result in a substantial diminution of the duties that he assumed; provided, however, the failure of Mr. Perlman to be reelected to the Board of Directors shall not be deemed to be a diminution of duties; (b) the assignment, without Mr. Perlman’s consent, of a title that is subordinate to the title Chief Executive Officer; (c) a reduction in Mr. Perlman’s base salary; (d) the Company’s requirement that Mr. Perlman regularly report to work in a location that is more than fifty miles from the Company’s current New York office, without Mr. Perlman’s consent; (e) a change in reporting relationship, provided however, that Good Reason does not include a change in the reporting relationship whereby Mr. Perlman will report to the Board of Directors of an acquiring company after a change of control (as that term is defined in the Company’s 2012 Employee, Director and Consultant Equity Incentive Plan); or (f) a material breach by the Company of Mr. Perlman’s employment agreement.
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Mr. Perlman’s employment agreement requires Mr. Perlman to assign intellectual property which he conceives or reduces to practice during his employment to us and to maintain our definitive Proxy Statementconfidential information during employment and thereafter. Mr. Perlman is also subject to a non-competition and a non-solicitation provision for a period of two years following termination of his employment.
Cliff Weinstein
On February 13, 2013, we entered into a new employment agreement with Mr. Weinstein. Mr. Weinstein’s employment agreement has a term of three (3) years. Mr. Weinstein and the Company have agreed to commence negotiations to enter into a new employment agreement at least six (6) months prior to the expiration of the three-year term and to conclude those negotiations no later than the date that is three (3) months prior to the expiration of the term of the employment agreement. Under the terms of the new employment agreement, Mr. Weinstein received a base salary of $300,000, effective January 1, 2013 until December 31, 2013. From January 1, 2014 to December 31, 2014, Mr. Weinstein received a base salary of $312,500. From January 1, 2015 through the remainder of the term of the employment agreement, Mr. Weinstein was entitled to receive a base salary of $325,000. In addition, Mr. Weinstein will be eligible to participate in any annual bonus or other incentive compensation program that we may adopt from time to time for our executive officers.
On October 13, 2015, we entered into an amendment to the existing employment agreement with Mr. Weinstein, pursuant to which, the employment period under the employment agreement was extended to December 31, 2017. In addition, as per the amendment, before March 15, 2016, our Compensation Committee shall establish a bonus plan, according to which Mr. Weinstein may be eligible to receive an annual performance bonus for the year ended December 31, 2015 and/or for any future year, according to corporate and personal goals, as shall be established by the Compensation Committee. The bonus entitlement and the amount shall be at the sole discretion of the Compensation Committee, and Mr. Weinstein is to be employed on the date of payment to be eligible for and to be deemed having earned, such annual bonus.
In the event the employment agreement is terminated for (i) Good Reason by Mr. Weinstein, or (ii) by us without Cause, Mr. Weinstein shall be entitled to receive an amount of base salary (at the rate of base salary in effect immediately prior to such termination) equal to the lesser of (x) one times the base salary and (y) two times the base salary payable for the number of full months remaining in the employment period, and COBRA continuation coverage paid in full by us for up to a maximum of twelve months following the date of termination. “Cause” as used in Mr. Weinstein’s employment agreement means: (a) the willful and continued failure of Mr. Weinstein to perform substantially his duties and responsibilities for the Company (other than any such failure resulting from his death or disability) after a written demand by the Board of Directors for substantial performance is delivered to Mr. Weinstein by the Company, which specifically identifies the manner in which the Board of Directors believes that Mr. Weinstein has not substantially performed his duties and responsibilities, which willful and continued failure is not cured by Mr. Weinstein within thirty days of his receipt of such written demand; (b) the conviction of, or plea of guilty or nolo contendere to a felony, (c) an intentional breach of his non-compete obligations, (d) an intentional breach of the non-disclosure and non-solicitation agreement; or (e) a unanimous good faith finding by the Board of Directors that Mr. Weinstein has engaged in fraud, dishonesty, gross negligence or misconduct which, if curable, has not been cured within thirty days after his receipt of a written notice from the Board of Directors stating with reasonable specificity the basis of such finding. “Good Reason” as used Mr. Weinstein’s employment agreement means (a) the assignment, without Mr. Weinstein’s consent, to Mr. Weinstein of duties that result in a substantial diminution of the duties that he assumed; provided, however, the failure of Mr. Weinstein to be reelected to the Board of Directors shall not be deemed to be a diminution of duties; (b) the assignment, without Mr. Weinstein’s consent, of a title that is subordinate to the title of Executive Vice President; (c) a reduction in Mr. Weinstein’s base salary; (d) the Company’s requirement that Mr. Weinstein regularly report to work in a location that is more than fifty miles from the Company’s current New York office, without Mr. Weinstein’s consent; (e) a change in reporting relationship, provided however, that Good Reason does not include a change in the reporting relationship whereby Mr. Weinstein will report to the CEO of an acquiring company after a change of control (as that term is defined in the Company’s 2012 Employee, Director and Consultant Equity Incentive Plan); or (f) a material breach by the Company of Mr. Weinstein’s employment agreement.
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Anastasia Nyrkovskaya
On December 19, 2014, we entered into an employment agreement with Ms. Nyrkovskaya for an eighteen month term. Under the terms of her employment agreement, Ms. Nyrkovskaya’s annual base salary was $315,000. In the event the employment agreement is terminated for (i) Good Reason by Ms. Nyrkovskaya, or (ii) by the Company without Cause, Ms. Nyrkovskaya shall be entitled to receive an amount of base salary at the rate of base salary in effect immediately prior to such termination equal to twelve months of base salary, and COBRA continuation coverage paid in full by the Company for up to a maximum of twelve months following the date of termination.
In case the agreement is terminated by Ms. Nyrkovskaya without Good Reason, she shall provide the Company with a written notice, at least ninety calendar days prior to such termination. "Cause" as used in Ms. Nyrkovskaya’s employment agreement means: (a) the willful and continued failure of Ms. Nyrkovskaya to perform substantially her duties and responsibilities for the Company (other than any such failure resulting from her death or disability) after a written demand by the chief executive officer for substantial performance is delivered to Ms. Nyrkovskaya by the Company, which specifically identifies the manner in which the chief executive officer believes that Ms. Nyrkovskaya has not substantially performed her duties and responsibilities, which willful and continued failure is not cured by Ms. Nyrkovskaya within thirty days of her receipt of such written demand; (b) the conviction of, or plea of guilty or nolo contendere to a felony, (c) breach of her non-compete obligations, (d) breach of the non-disclosure and non-solicitation agreement; or (e) a good faith finding by the chief executive officer that Ms. Nyrkovskaya has engaged in fraud, intentional dishonesty, or gross negligence. "Good Reason" as used Ms. Nyrkovskaya’s employment agreement means (a) the assignment, without Ms. Nyrkovskaya’s consent, to Ms. Nyrkovskaya of duties that result in a substantial diminution of the duties that she assumed; (b) the assignment, without Ms. Nyrkovskaya’s consent, of a title that is subordinate to the title Chief Financial Officer; (c) a reduction in Ms. Nyrkovskaya’s base salary; (d) the Company’s requirement that Ms. Nyrkovskaya regularly report to work in a location that is more than fifty miles from the Company’s current New York office, without Ms. Nyrkovskaya’s consent; (e) a material breach by the Company of the agreement during its term. Ms. Nyrkovskaya’s employment agreement also includes a covenant not to compete with the Company or solicit any material commercial relationships of the Company for a period of one year after Ms. Nyrkovskaya is actually no longer employed by the Company.
On October 13, 2015, we entered into an amendment to the existing employment agreement with Ms. Nyrkovskaya, pursuant to which, the employment period under the employment agreement was extended to December 31, 2017. In addition, the annual base salary of Ms. Nyrkovskaya was increased from $315,000 to $325,000. Moreover, as per the amendment, before March 15, 2016, our Compensation Committee shall establish a bonus plan, according to which Ms. Nyrkovskaya may be eligible to receive an annual performance bonus for the year ended December 31, 2015 and/or for any future year, according to corporate and personal goals, as shall be established by the Compensation Committee. The bonus entitlement and the amount shall be at the sole discretion of the Compensation Committee and Ms. Nyrkovskaya is to be employed on the date of payment to be eligible for, and to be deemed having earned, such annual bonus.
David L. Cohen, Esq.
On July 19, 2012, we assumed all of the duties, obligations and liabilities of Innovate/Protect under the employment agreement with David L. Cohen. Mr. Cohen’s employment was at will, meaning that either the employee or the Company may have terminated the relationship with or without cause, without any prior notice. Under the terms of his agreement, Mr. Cohen was entitled to receive a base salary of $200,000. Pursuant to the consummation of the merger, on August 10, 2012, Mr. Cohen’s compensation was increased to $300,000.
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On May 7, 2013, we entered into a new employment agreement with Mr. Cohen for a three-year term, unless sooner terminated, in accordance with the terms set therein. Under the terms of his employment agreement, Mr. Cohen received a base salary of $300,000. In the event the employment agreement is terminated for (i) Good Reason by Mr. Cohen, or (ii) by the Company without Cause, Mr. Cohen shall be entitled to receive an amount of base salary (at the rate of base salary in effect immediately prior to such termination) equal to twelve months of base salary, and COBRA continuation coverage paid in full by the Company for up to a maximum of twelve months following the date of termination.
On October 13, 2015, we entered into an amendment to the existing employment agreement with Mr. Cohen, pursuant to which, the employment period under the employment agreement was extended to December 31, 2017. In addition, the annual base salary of Mr. Cohen was increased from $315,000 to $325,000. Moreover, as per the amendment, before March 15, 2016, our Compensation Committee shall establish a bonus plan, according to which Mr. Cohen may be eligible to receive an annual performance bonus for the year ended December 31, 2015 and/or for any future year, according to corporate and personal goals, as shall be established by the Compensation Committee. The bonus entitlement and the amount shall be at the sole discretion of the Compensation Committee and Mr. Cohen is to be employed on the date of payment to be eligible for, and to be deemed having earned, such annual bonus.
In case the agreement is terminated by Mr. Cohen without Good Reason, he shall provide the Company with a written notice, at least ninety calendar days prior to such termination. “Cause” as used in Mr. Cohen’s employment agreement means: (a) the willful and continued failure of Mr. Cohen to perform substantially his duties and responsibilities for the Company (other than any such failure resulting from his death or disability) after a written demand by the Board of Directors for substantial performance is delivered to Mr. Cohen by the Company, which specifically identifies the manner in which the Board of Directors believes that Mr. Cohen has not substantially performed his duties and responsibilities, which willful and continued failure is not cured by Mr. Cohen within thirty days of his receipt of such written demand; (b) the conviction of, or plea of guilty or nolo contendere to a felony, (c) an intentional breach of his non-compete obligations, (d) an intentional breach of the non-disclosure and non-solicitation agreement; or (e) a unanimous good faith finding by the Board of Directors or the chief executive officer that Mr. Cohen has engaged in fraud, dishonesty, gross negligence. “Good Reason” as used Mr. Cohen’s employment agreement means (a) the assignment, without Mr. Cohen’s consent, to Mr. Cohen of duties that result in a substantial diminution of the duties that he assumed; (b) the assignment, without Mr. Cohen’s consent, of a title that is subordinate to the title Chief Legal and Intellectual Property Officer; (c) a reduction in Mr. Cohen’s base salary; (d) the Company’s requirement that Mr. Cohen regularly report to work in a location that is more than fifty miles from the Company’s current New York office, without Mr. Cohen’s consent; (e) a material breach by the Company of the agreement during its term. Mr. Cohen’s employment agreement also includes a covenant not to compete with the Company or solicit any material commercial relationships of the Company for a period of two years after Mr. Cohen is actually no longer employed by the Company.
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Outstanding Equity Awards at 2015 Fiscal Year End
The following table sets forth information regarding grants of stock options and unvested stock awards outstanding on the last day of the fiscal year ended December 31, 2015, to each of our NEOs.
| Options Awards | Stock Awards | ||||||||||||||||||||||
| Name | Number of | Number of | Option | Option | Number of shares or units that have not vested (#)(*) | Market value of shares or units that have not vested ($)(*)(**) | |||||||||||||||||
| Andrew D. Perlman | 9,000 | — | 55.00 | March 17, 2016 | — | — | |||||||||||||||||
| Andrew D. Perlman | 9,000 | — | 55.00 | January 31, 2017 | — | — | |||||||||||||||||
| Andrew D. Perlman(2) | — | — | — | — | 4,375 | 10,806 | |||||||||||||||||
| Andrew D. Perlman(1) | — | — | — | — | 25,312 | 62,521 | |||||||||||||||||
| Andrew D. Perlman(2) | 32,816 | — | 16.50 | March 13, 2018 | — | — | |||||||||||||||||
| Andrew D. Perlman(2) | 127,500 | — | 37.20 | July 26, 2022 | — | — | |||||||||||||||||
| Andrew D. Perlman(2) | 62,500 | — | 31.80 | February 11, 2023 | — | — | |||||||||||||||||
| Cliff Weinstein(2) | 15,250 | — | 16.50 | March 13, 2018 | — | — | |||||||||||||||||
| Cliff Weinstein(2) | 75,000 | — | 37.20 | July 26, 2022 | — | — | |||||||||||||||||
| Cliff Weinstein(2) | 42,500 | — | 31.80 | February 11, 2023 | — | — | |||||||||||||||||
| Cliff Weinstein(1) | — | — | — | — | 15,000 | 37,050 | |||||||||||||||||
| Cliff Weinstein(2) | — | — | — | — | 3,125 | 7,719 | |||||||||||||||||
| Anastasia Nyrkovskaya(2) | 27,500 | 2,500 | 28.50 | May 6, 2023 | — | — | |||||||||||||||||
| Anastasia Nyrkovskaya(2) | 20,000 | 10,000 | 41.00 | February 20, 2024 | — | — | |||||||||||||||||
| David L. Cohen, Esq.(2) | 10,000 | — | 37.20 | July 26, 2022 | — | — | |||||||||||||||||
| David L. Cohen, Esq. (2) | 47,667 | — | 34.40 | August 8, 2022 | — | — | |||||||||||||||||
| David L. Cohen, Esq. (2) | 20,000 | — | 31.80 | February 11, 2023 | — | — | |||||||||||||||||
| David L. Cohen, Esq. (2) | 6,667 | 3,333 | 41.00 | February 20, 2024 | — | — | |||||||||||||||||
| David L. Cohen, Esq. (2) | — | — | — | — | 1,875 | 4,631 | |||||||||||||||||
| David L. Cohen, Esq. (1) | — | — | — | — | 1,250 | 3,088 | |||||||||||||||||
| (*) | The number of underlying shares of common stock and price per share of common stock has been adjusted to reflect the 1:10 Reverse Stock Split on a retroactive basis. For more information, see the accompanying financial statements. |
| (**) | The market value is determined by multiplying the number of shares by $2.47, the closing price of our common stock on NASDAQ on December 31, 2015, the last day of our fiscal year. |
| (1) | Vests in equal quarterly increments (6.25% per quarter), subject to the participant's continuous service on the relevant vesting date. |
| (2) | Vests in twelve equal quarterly increments (8.33% per quarter) over the three years, subject to the participant's continuous service on the relevant vesting date. |
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Pension Benefits
We do not have any qualified or non-qualified defined benefit plans.
Nonqualified Deferred Compensation
We do not have any nonqualified defined contribution plans or other deferred compensation plans.
Potential Payments upon Termination or Change-In-Control
The following summarizes the potential payments to each of our named executive officers as of December 31, 2015 upon termination or change-in-control. The discussion assumes that such event occurred on December 31, 2015, the last business day of our fiscal year, at which time the closing price of our common stock as listed on NASDAQ was $2.47 per share. For a further discussion of these provisions see the “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table” above.
Andrew D. Perlman
In the event Mr. Perlman’s employment was terminated for (i) Good Reason by Mr. Perlman, or (ii) by the Company without Cause on December 31, 2015, Mr. Perlman would have received severance in the amount of one year of base salary and COBRA payments totaling approximately $40,775. In addition, in the event a change-in-control had occurred on December 31, 2015, Mr. Perlman would have received severance in the amount of one year of base salary, or $415,000, and 75% acceleration of certain unvested RSUs amounting to $54,995 as of December 31, 2015. In addition, upon change-in-control, Mr. Perlman would have been entitled to receive 75% acceleration of certain unvested options, which were all out-of-the-money as of December 31, 2015.
Cliff Weinstein
In the event Mr. Weinstein’s employment was terminated for (i) Good Reason by Mr. Weinstein, or (ii) by the Company without Cause on December 31, 2015, Mr. Weinstein would have received severance in the amount of one year of base salary, or $325,000, and COBRA payments totaling approximately $40,775. In addition, upon change-in-control, Mr. Weinstein would have been entitled to receive 75% acceleration of certain unvested RSUs amounting to $33,577 as of December 31, 2015 and would have been entitled to receive 75% acceleration of certain unvested options, which were all out-of-the-money as of December 31, 2015.
Anastasia Nyrkovskaya
In the event Ms. Nyrkovskaya’s employment was terminated for (i) Good Reason by Ms. Nyrkovskaya, or (ii) by the Company without Cause on December 31, 2015, Ms. Nyrkovskaya would have received severance in the amount of one year of base salary, or $325,000, and COBRA payments totaling approximately $40,775. In addition, upon change-in-control, Ms. Nyrkovskaya would have been entitled to receive 75% acceleration of certain unvested options, which were all out-of-the-money as of December 31, 2015.
David L. Cohen, Esq.
In the event Mr. Cohen’s employment was terminated for (i) Good Reason by Mr. Cohen, or (ii) by the Company without Cause on December 31, 2015, Mr. Cohen would have received severance in the amount of one year of base salary, or $325,000, and COBRA payments totaling approximately $40,775. In addition, upon change-in-control, Mr. Cohen would have been entitled to receive 75% acceleration of certain unvested RSUs amounting to $5,789 as of December 31, 2015 and would have been entitled to receive 75% acceleration of certain unvested options, which were all out-of-the-money as of December 31, 2015.
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Director Compensation
The following table sets forth the compensation of persons who served as non-employee members of our Board of Directors during the fiscal year ended December 31, 2015. Directors who are employed by us are not compensated for their service on our Board of Directors.
| Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) (1) | Option Awards ($) (1) | All other compensation ($) | Total ($) | |||||||||||||||
| Ashley C. Keller(2) | 35,000 | — | 37,652 | — | 72,652 | |||||||||||||||
| Donald E. Stout(3) | 35,000 | — | 37,652 | — | 72,652 | |||||||||||||||
| Noel J. Spiegel(4) | 35,000 | — | 37,652 | — | 72,652 | |||||||||||||||
| John Engelman(5) | 35,000 | — | 37,652 | — | 72,652 | |||||||||||||||
| H. Van Sinclair(6) | 35,000 | — | 37,652 | — | 72,652 | |||||||||||||||
| (1) | Amounts represent the aggregate grant date fair value in accordance with FASB ASCTopic 718. See Notes 2 and 11 of the consolidated financial statements disclosed in the Form 10-K for the year ended December 31, 2015, for the assumptions made in the valuation of the equity awards. |
| (2) | As of December 31, 2015, Mr. Keller held 29,550 fully vested options (after giving effect to the one-for-ten reverse stock split). |
| (3) | As of December 31, 2015, Mr. Stout held 46,618 fully vested options (after giving effect to the one-for-ten reverse stock split). |
| (4) | As of December 31, 2015, Mr. Spiegel held 28,000 fully vested options (after giving effect to the one-for-ten reverse stock split). |
| (5) | As of December 31, 2015, Mr. Engelman held 65,250 fully vested options (after giving effect to the one-for-ten reverse stock split). |
(6) | As of December 31, 2015, Mr. Sinclair held 42,500 fully vested options (after giving effect to the one-for-ten reverse stock split). |
On February 8, 2016, Ashley C. Keller resigned from his position as a member of the Board of Directors and as a member of all committees of the Board of Directors on which he served. Upon the recommendation of the Nominating and Corporate Governance Committee, the Board of Directors appointed Bruce T. Bernstein as a member of the Board of Directors effective immediately, to fill the vacancy created by the resignation of Mr. Keller from the Board of Directors and to hold office until his successor is duly elected and qualified.
We reimburse each member of our Board of Directors for reasonable travel and other out-of-pocket expenses in connection with attending meetings of the Board of Directors.
On January 22, 2015, we granted to each of our 2015 Annual Meetingnon-employee directors 10,000 options at an exercise price of Stockholders$5.90 per share (after giving effect to be filedthe one-for-ten reverse stock split), which vested evenly over four quarters, beginning with the SEC under the captions “Executive Officerquarter ended March 31, 2015, and Director Compensation,” “Compensation Discussion and Analysis,” “Management and Corporate Governance,” “Compensation Committee Report,” “Compensation Practices and Policies Relatedagreed to Risk Management” and is incorporated by referencepay each director an annual cash retainer of $35,000 payable quarterly in this Item 11.arrears.
In 2016, we continue to pay our non-employee directors a cash retainer of $35,000 payable quarterly in arrears.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information 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 captions “SecuritySecurity Ownership of Certain Beneficial Owners and Management”Management
The following table sets forth certain information with respect to the beneficial ownership of our common stock as of March 10, 2016 for (a) each stockholder known by us to own beneficially more than 5% of our common stock (b) our named executive officers, (c) each of our directors, and “Equity(d) all of our current directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. We deem shares of common stock that may be acquired by an individual or group within 60 days of March 10, 2016 pursuant to the exercise of options or warrants, and vesting of RSUs to be outstanding for the purpose of computing the percentage ownership of such individual or group. However, such shares of common stock are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. Except as indicated in footnotes to this table, we believe that the stockholders named in this table have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by them based on information provided to us by these stockholders. Percentage of ownership is based on 14,956,026 shares of common stock outstanding on March 10, 2016.
| Name and Address of Beneficial Owner(1) | Amount and Nature of Beneficial Ownership | Percent of Class | ||||||
| Five percent or more beneficial owners: | ||||||||
| Andrew Kennedy Lang(2) | 746,822 | 5.2 | % | |||||
Directors and named executive officers: | ||||||||
| Richard K. Abbe(3) | 318,529 | 2.1 | % | |||||
| Andrew D. Perlman(4) | 294,933 | 1.9 | % | |||||
| Cliff Weinstein(5) | 199,418 | 1.3 | % | |||||
| Donald E. Stout(6) | 165,220 | 1.1 | % | |||||
| David L. Cohen, Esq.(7) | 91,836 | * | ||||||
| John Engelman(8) | 83,908 | * | ||||||
| H. Van Sinclair(9) | 74,916 | * | ||||||
| Anastasia Nyrkovskaya(10) | 54,100 | * | ||||||
| Noel J. Spiegel(11) | 35,500 | * | ||||||
| Bruce T. Bernstein(12) | — | — | ||||||
| All current directors and officers as a group (10 individuals)(13): | 1,318,360 | 8.2 | % | |||||
| * | Less than 1%. |
| (1) | Unless otherwise indicated, the business address of the individuals is c/o Vringo Inc., 780 Third Avenue, 12th Floor, New York, NY 10017. |
| (2) | Includes options to purchase 33,334 shares of our common stock and warrants to purchase 205,242 shares of our common stock exercisable within the next 60 days. 234,452 shares and 96,504 shares issuable upon exercise of warrants are held by Innovation Spring LLC. Innovation Spring Trust is the sole member and the 100% owner of Innovation Spring LLC. Mr. Andrew C. Lang, the father of Mr. Andrew Kennedy Lang, has the sole power to vote or direct the vote over the shares held by Innovation Spring LLC. |
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| (3) | Mr. Abbe is a member of Iroquois Capital Management L.L.C. who has the authority and responsibility for the investments made on behalf of Iroquois Master Fund Ltd. (the “Fund”). Mr. Abbe is a member and general partner of Iroquois Capital Investment Group LLC (“ICIG”) and as such may be deemed to be the beneficial owner of all shares of common stock held by the Fund and ICIG. 4,816 shares of common stock were held by the Fund and 1,963 shares of common stock were held ICIG. Warrants to purchase 225,750 shares of common stock are held by the Fund and warrants to purchase 86,000 shares of common stock are held by ICIG. |
| (4) | Includes options to purchase 231,816 shares of our common stock and warrants to purchase 4,000 shares of our common stock exercisable within the next 60 days. |
| (5) | Includes options to purchase 132,750 shares of our common stock exercisable within the next 60 days. |
| (6) | Includes options to purchase 46,618 shares of our common stock and warrants to purchase 30,220 shares of our common stock exercisable within the next 60 days. 30,220 shares issuable upon exercise of warrants are held by the Donald E. and Mary Stout Trust. |
| (7) | Includes options to purchase 85,166 shares of our common stock exercisable within the next 60 days. |
| (8) | Includes options to purchase 65,250 shares of our common stock exercisable within the next 60 days. |
| (9) | Includes options to purchase 42,500 shares of our common stock and warrants to purchase 4,971 shares of our common stock exercisable within the next 60 days. |
| (10) | Includes options to purchase 52,500 shares of our common stock exercisable within the next 60 days. |
| (11) | Includes options to purchase 28,000 shares of our common stock exercisable within the next 60 days. |
| (12) | Does not currently own any equity in the Company. |
| (13) | See footnotes (4 – 12). |
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Equity Compensation Plan Information” and is incorporated by referenceInformation
The following table provides certain aggregate information, as of December 31, 2015, with respect to all of our equity compensation plans then in this Item 12.effect:
| Plan Category | (a)
No. of securities to be | (b)
Weighted-average | (c)
No. of securities remaining column (a)) | |||||||||
| Total equity compensation plans approved by security holders (1)(2) | 920,646 | $ | 30.16 | 933,460 | ||||||||
| Equity compensation plans not approved by security holders (3) | 4,118 | $ | 9.94 | — | ||||||||
| (1) | These plans consist of the 2012 Plan, as amended on November 16, 2015, and the 2006 Plan. Under the amended 2012 Plan, a maximum of 2,100,000 shares of common stock may be awarded(after giving effect to the one-for-ten reverse stock split). The 2012 Plan was originally approved by the Company’s stockholders on July 19, 2012, following the merger with Innovate/Protect, replacing Vringo’s then existing 2006 Plan. |
| (2) | The numbers of securities to be issued upon exercise of outstanding equities are 822,830 and 97,816, respectively for the 2012 Plan and the 2006 Plan. The weighted-average exercise prices of outstanding options are $31.52 and $24.72 for the 2012 Plan and the 2006 Plan, respectively. |
| (3) | This plan consists of Innovate/Protect’s 2011 Equity Incentive Plan assumed by us in connection with the merger, which provided for incentive stock options, nonqualified stock options, stock appreciation rights, restricted stocks, restricted stock units, stock bonus awards and performance compensation awards to be issued to directors, officers, managers, employees, consultants and advisors of Innovate/Protect and its affiliates, as defined in the plan(after giving effect to the one-for-ten reverse stock split).As of the merger, no further issuances can be made under this plan and any forfeitures cannot be reused. |
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEINDEPENDENCE.
Information called forRelated Person Transactions Approval Policy
All related party transactions must be approved by our Audit Committee or a majority of our independent directors who do not have an interest in the transaction and who will have access, at our expense, to our independent legal counsel.
Transactions with Related Persons
There were no related party transactions to report during the year ended December 31, 2015.
Director Independence and Committee Qualifications
Our Board of Directors has reviewed the materiality of any relationship that each of our directors has with Vringo, either directly or indirectly. Based upon this Item may be foundreview, we believe that Messrs. Sinclair, Engelman, Spiegel, Stout, Bernstein and Abbe qualify as independent directors in our definitive Proxy Statement in connection with our 2015 Annual Meeting of Stockholders to be filedaccordance with the SECstandards set by NASDAQ, as well as Rule 10A-3 promulgated under the captions “Certain RelationshipsSecurities Exchange Act of 1934, as amended (“the Exchange Act”). Accordingly, our Board of Directors is comprised of a majority of independent directors as required by NASDAQ rules. The Board has also determined that each member of the Audit Committee, the Compensation Committee and Related Person Transactions” and “Managementthe Nominating and Corporate Governance”Governance Committee meets the independence requirements applicable to each such committee member prescribed by NASDAQ and is incorporated by referencethe SEC. The Board has further determined that Messrs. Sinclair, Spiegel and Bernstein are “audit committee financial experts” as defined in this Item 13.the rules of the SEC.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information calledIn July 2015, CohnReznick LLP was selected by our Audit Committee as our independent registered public accounting firm for the fiscal year ended December 31, 2015. This selection was ratified by this Item may be foundour stockholders at the 2015 annual meeting held onNovember 16, 2015. In decidingto select CohnReznick LLP, the Audit Committee carefully considered the qualifications of CohnReznick LLP, including its reputation for integrity, quality, and competence in the fields of accounting and auditing. Further, the Audit Committee reviewed auditor independence issues and existing commercial relationships with CohnReznick LLP. The Audit Committee concluded that independence of CohnReznick LLP was not impaired for the fiscal year ended December 31, 2015. KPMG LLP served as our definitive Proxy Statementindependent registered public accounting firm for the fiscal year ended December 31, 2014. For the fiscal years ended December 31, 2015 and 2014, we incurred the following fees for the services of CohnReznick LLP and KPMG LLP.
| 2015 | 2014 | |||||||
| Audit fees(1): | $ | 392,500 | 462,500 | |||||
| Tax fees(2): | — | 25,000 | ||||||
| Total | $ | 392,500 | $ | 487,500 | ||||
| (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. The audit fees incurred in 2015 were comprised of $248,250, which were incurred by CohnReznick LLP from the time of appointment on July 13, 2015 and $144,250 incurred by KPMG LLP. The fees of $462,500 in 2014 were incurred by KPMG LLP. | |
| (2) | Tax fees represent the aggregate fees for tax compliance, tax advice, and tax planning services provided by KPMG Israel related to our Israeli subsidiary. |
Pre-Approval of Audit and Non-Audit Services
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 independent registered public accounting firm 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 independent registered public accounting firm. Our Audit Committee pre-approves these services by category and service. Our Audit Committee has pre-approved all of the services provided by our independent registered public accounting firms in connection with our 2015 Annual Meeting of Stockholders to be filed with the SEC under the caption “Independent Registered Public Accounting Firm” and is incorporated by reference in this Item 14.2014.
58
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements. For the financial statements included in this annual report,Annual Report on Form 10-K, see “Index to the Financial Statements” on page F-1.
(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 reportAnnual Report on Form 10-K is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated by reference in this Item 15(a)(3).
(b) Exhibits. See Exhibit Index.
(c) Separate Financial Statements and Schedules. None.
59
Vringo, Inc. and Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| F-1 |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Vringo, Inc.:
We have audited the accompanying consolidated balance sheet of Vringo, Inc. and subsidiaries as of December 31, 2015, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year then ended. Vringo, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements 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 the consolidated 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 management, as well as evaluating the overall financial statement presentation. We believe that our audit 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. and subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Vringo, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2015, based on criteria established inInternal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2016 expressed an unqualified opinion thereon.
/s/ CohnReznick LLP
Jericho, New York
March 10, 2016
| F-2 |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Vringo, Inc.:
We have audited the accompanying 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. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements 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 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 management, as well as evaluating the overall financial statement presentation. We believe that our audit 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. and subsidiaries as of December 31, 2014, and the results of their operations and their cash flows for the year then ended, 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 note 1 to the consolidated financial statements, theThe 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. Management’s plans in regard to these matters are also described in note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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.
/s/ KPMG LLP
New York, New York
March 16, 2015
Report of Independent Registered Public Accounting Firm
F-3
The Board of Directors and Stockholders
Vringo, Inc.:
We have audited the accompanying consolidated balance sheets of Vringo, Inc. and subsidiaries (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 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
CONSOLIDATED BALANCE SHEETS
(In 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, 2015 | December 31, 2014 | |||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 24,951 | $ | 16,023 | ||||
| Deposits with courts | 1,930 | 2,067 | ||||||
| Other current assets | 1,396 | 510 | ||||||
| Total current assets | 28,277 | 18,600 | ||||||
| Intangible assets, net | 16,476 | 17,625 | ||||||
| Goodwill | 4,863 | — | ||||||
| Other assets | 916 | 1,210 | ||||||
| Total assets | $ | 50,532 | $ | 37,435 | ||||
| Current liabilities | ||||||||
| Accounts payable, accrued expenses and other current liabilities | $ | 6,030 | $ | 4,732 | ||||
| Senior secured convertible notes, net | 3,184 | �� | — | |||||
| Total current liabilities | 9,214 | 4,732 | ||||||
| Long-term liabilities | ||||||||
| Derivative warrant liabilities | $ | 416 | $ | 174 | ||||
| Other liabilities | 386 | 1,349 | ||||||
| Commitments and contingencies (Note 17) | ||||||||
| Stockholders’ equity* | ||||||||
| Series A Convertible Preferred stock, $0.01 par value per share; 500,000 shares authorized; none issued and outstanding | — | — | ||||||
| Series B Convertible Preferred stock, $0.01 par value per share, 5,000,000 shares authorized; 1,666,667 shares issued and none outstanding | — | — | ||||||
| Common stock, $0.01 par value per share 150,000,000 shares authorized; 13,220,050 and 9,340,490 shares issued and outstanding as of December 31, 2015 and 2014, respectively | 132 | 93 | ||||||
| Additional paid-in capital | 237,246 | 216,792 | ||||||
| Accumulated deficit | (196,862 | ) | (185,705 | ) | ||||
| Total stockholders’ equity | 40,516 | 31,180 | ||||||
| Total liabilities and stockholders’ equity | $ | 50,532 | $ | 37,435 | ||||
*Adjusted to reflect the impact of the 1:10 reverse stock split that became effective on November 27, 2015.
The accompanying notes form an integral part of these consolidated financial statements.
| F-4 |
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 | |||||||
| For the year ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Revenue | ||||||||
| Licensing revenue | $ | 21,750 | $ | 1,425 | ||||
| Product revenue | 937 | — | ||||||
| Total revenue | 22,687 | 1,425 | ||||||
| Costs and expenses** | ||||||||
| Cost of goods sold | 800 | — | ||||||
| Operating legal costs | 18,553 | 25,368 | ||||||
Amortization and impairment of intangible assets | 3,295 | 5,123 | ||||||
| General and administrative | 10,383 | 16,373 | ||||||
| Goodwill impairment | — | 65,757 | ||||||
| Total operating expenses | 33,031 | 112,621 | ||||||
| Operating loss from continuing operations | (10,344 | ) | (111,196 | ) | ||||
| Non-operating expense, net | (357 | ) | (162 | ) | ||||
| Gain on revaluation of warrants and conversion feature | 2,544 | 2,201 | ||||||
| Interest expense | (2,594 | ) | — | |||||
| Extinguishment of debt | (1,373 | ) | — | |||||
| Issuance of warrants | — | (65 | ) | |||||
| Loss from continuing operations before income taxes | (12,124 | ) | (109,222 | ) | ||||
| Income tax benefit | 866 | — | ||||||
| Loss from continuing operations | (11,258 | ) | (109,222 | ) | ||||
| Loss from discontinued operations before income taxes | — | (209 | ) | |||||
| Income tax expense | — | (246 | ) | |||||
| Loss from discontinued operations | — | (455 | ) | |||||
| Net loss | (11,258 | ) | (109,677 | ) | ||||
Net loss attributable to the noncontrolling interest | 101 | — | ||||||
Net loss attributable to the Company | $ | (11,157 | ) | $ | (109,677 | ) | ||
| Loss per share*: | ||||||||
| Basic | ||||||||
| Loss per share from continuing operations | $ | (1.09 | ) | $ | (12.18 | ) | ||
| Loss per share from discontinued operations | — | (0.06 | ) | |||||
| Total net loss per share | $ | (1.09 | ) | $ | (12.24 | ) | ||
| Diluted | ||||||||
| Loss per share from continuing operations | $ | (1.09 | ) | $ | (12.31 | ) | ||
| Loss per share from discontinued operations | — | (0.05 | ) | |||||
| Total net loss per share | $ | (1.09 | ) | $ | (12.36 | ) | ||
| Weighted-average number of shares outstanding during the year*: | ||||||||
| Basic | 10,217,734 | 8,964,033 | ||||||
| Diluted | 10,217,734 | 9,048,974 | ||||||
| ** Includes stock-based compensation expense, as follows: | ||||||||
| Operating legal costs | $ | 761 | $ | 1,343 | ||||
| General and administrative | 4,303 | 9,473 | ||||||
| Discontinued operations | — | 151 | ||||||
| Total stock-based compensation expense | $ | 5,064 | $ | 10,967 | ||||
*Adjusted to reflect the impact of the 1:10 reverse stock split that became effective on November 27, 2015.
The accompanying notes form an integral part of these consolidated financial statements.
| F-5 |
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 | |||||||
| Common stock* | Additional paid-in capital* | Accumulated deficit | Total Vringo | Non- controlling Interest | Total | |||||||||||||||||||
| Balance as of January 1, 2014, unadjusted | $ | 845 | $ | 189,465 | $ | (76,028 | ) | $ | 114,282 | $ | — | $ | 114,282 | |||||||||||
| Adjustment for reverse stock split 10:1, effective November 27, 2015 | (760 | ) | 760 | — | — | — | — | |||||||||||||||||
| Balance as of January 1, 2014, as adjusted | 85 | 190,225 | (76,028 | ) | 114,282 | — | 114,282 | |||||||||||||||||
| Exercise of stock options and vesting of RSUs | 2 | 2,158 | — | 2,160 | — | 2,160 | ||||||||||||||||||
| Issuance of warrants | — | 65 | — | 65 | — | 65 | ||||||||||||||||||
| Exercise of warrants | 6 | 12,993 | — | 12,999 | — | 12,999 | ||||||||||||||||||
| Issuance of common stock for services | — | 384 | — | 384 | — | 384 | ||||||||||||||||||
| Stock-based compensation | — | 10,967 | — | 10,967 | — | 10,967 | ||||||||||||||||||
| Net loss for the year | — | — | (109,677 | ) | (109,677 | ) | — | (109,677 | ) | |||||||||||||||
| Balance as of December 31, 2014, as adjusted | 93 | 216,792 | (185,705 | ) | 31,180 | — | 31,180 | |||||||||||||||||
| Reclassification of derivative Reload Warrants and Series 1 Warrants to equity warrants | — | 175 | — | 175 | — | 175 | ||||||||||||||||||
| Issuance of equity warrants | — | 114 | — | 114 | — | 114 | ||||||||||||||||||
| Issuance of common stock for repayment of convertible debt and related interest | 21 | 9,370 | — | 9,391 | — | 9,391 | ||||||||||||||||||
| Issuance of common stock for acquisition of IDG | 18 | 5,731 | — | 5,749 | 101 | 5,850 | ||||||||||||||||||
| Stock-based compensation | — | 5,064 | — | 5,064 | — | 5,064 | ||||||||||||||||||
| Net loss for the year | — | — | (11,157 | ) | (11,157 | ) | (101 | ) | (11,258 | ) | ||||||||||||||
| Balance as of December 31, 2015 | $ | 132 | $ | 237,246 | $ | (196,862 | ) | $ | 40,516 | $ | — | $ | 40,516 | |||||||||||
*Adjusted to reflect the impact of the 1:10 reverse stock split that became effective on November 27, 2015.
The accompanying notes form an integral part of these consolidated financial statements.
| F-6 |
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 | |||||||||
| For the year ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (11,258 | ) | $ | (109,677 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Items not affecting cash flows | ||||||||
| Depreciation and amortization | 3,516 | 4,023 | ||||||
| Impairment of goodwill and intangible assets | — | 67,112 | ||||||
| Change in deferred tax assets and liabilities | (866 | ) | — | |||||
| Amortization of debt discount | 2,014 | — | ||||||
| Amortization of debt issuance costs | 145 | — | ||||||
| Stock-based compensation | 5,064 | 10,967 | ||||||
| Issuance of warrants | 114 | 65 | ||||||
| Loss on extinguishment of debt | 1,707 | — | ||||||
| Issuance of shares of common stock related to the acquisition of IDG | 17 | — | ||||||
| Change in fair value of derivative warrant liabilities and conversion feature | (2,544 | ) | (2,201 | ) | ||||
| Exchange rate loss, net | 346 | 192 | ||||||
| Changes in assets and liabilities net of effects of acquisition | ||||||||
| Decrease (increase) in other assets | (243 | ) | 374 | |||||
| Increase (decrease) in payables and accruals | (583 | ) | 763 | |||||
| Net cash used in operating activities | (2,571 | ) | (28,382 | ) | ||||
| Cash flows from investing activities | ||||||||
| Acquisition of property and equipment | — | (246 | ) | |||||
| Cash acquired as part of the acquisition of IDG (1) | 144 | — | ||||||
| Increase in deposits | (248 | ) | (2,404 | ) | ||||
| Net cash used in investing activities | (104 | ) | (2,650 | ) | ||||
| Cash flows from financing activities | ||||||||
| Exercise of stock options | — | 2,160 | ||||||
| Exercise of warrants | — | 11,292 | ||||||
| Net proceeds from senior secured convertible notes and warrants | 12,425 | — | ||||||
| Repayment of notes payable | (610 | ) | — | |||||
| Debt issuance costs | (218 | ) | — | |||||
| Net cash provided by financing activities | 11,597 | 13,452 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 6 | 17 | ||||||
| Decrease (increase) in cash and cash equivalents | 8,928 | (17,563 | ) | |||||
| Cash and cash equivalents at beginning of the year | 16,023 | 33,586 | ||||||
| Cash and cash equivalents at end of the year | $ | 24,951 | $ | 16,023 | ||||
| Supplemental disclosure of cash flows information | ||||||||
| Income taxes paid | $ | — | $ | — | ||||
| Non-cash investing and financing transactions | ||||||||
| Non-cash acquisition of cost method investment | — | 787 | ||||||
| Conversion of derivative warrant liabilities into common stock | — | 1,707 | ||||||
| Change in classification of derivative warrant liabilities into equity warrants | 175 | — | ||||||
| Issuance of common stock to repay $8,032 of debt and interest | 9,391 | — | ||||||
| Debt discount | 2,961 | — | ||||||
| (1) Cash acquired as part of the acquisition of IDG | ||||||||
| Working capital (excluding cash and cash equivalents) | 454 | — | ||||||
| Intangible assets | (2,146 | ) | — | |||||
| Goodwill | (4,863 | ) | — | |||||
| Deferred tax liabilities | 866 | — | ||||||
| Fair value of Vringo shares issued ($5,571 on October 15, 2015 and $262 on December 28, 2015) | 5,833 | — | ||||||
| 144 | — | |||||||
The accompanying notes form an integral part of these consolidated financial statements.
| F-7 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share and per share data)
Note 1. General
Overview
Vringo, Inc., together with its consolidated subsidiaries (“Vringo” or the “Company”), is engaged in the innovation, development and monetization of intellectual property, worldwide.as well as the commercialization and distribution of wire-free power and rugged computing devices. The Company's intellectual property portfolio consists of over 600 patentsCompany has three operating segments:
The Company was incorporated in Delaware on January 9, 2006 and patent applications covering telecom infrastructure, internet search and mobile technologies. The Company’s patents and patent applications have been developed internally or acquired from third parties. In potential acquisitions,completed an initial public offering in June 2010. On July 19, 2012, Vringo closed the Merger with I/P. On August 9, 2012, the Company seeksacquired a patent portfolio from Nokia, comprised of 124 patent families with counterparts in certain jurisdictions worldwide, for $22,000. Under the terms of the purchase agreement, to the extent that the gross revenue as defined by the agreement exceeds $22,000, the Company is obligated to pay a royalty of 35% of such excess.
On October 15, 2015, the Company acquired 100% of International Development Group Limited (“IDG”), a holding company consisting of two subsidiaries, Fli Charge and Group Mobile. IDG owned 70% of Fli Charge and 100% of Group Mobile. The acquisition was a stock purchase all of, or interestswhereby Vringo acquired its entire interest in technology and intellectual propertyIDG in exchange for cash,shares in Vringo. The total value of the Company’s securities and/or interestsconsideration was $5,571. On December 28, 2015, Vringo acquired the remaining 30% of Fli Charge from third party shareholders in the monetization of those assets. Revenue from this aspect of Vringo’s business can be generated through licensing and litigation efforts.exchange for shares in Vringo.
As further describedFli Charge owns a patented conductive wire-free charging technology and is focused on the development and commercialization of its technology through the direct to consumer sale of enablements as well as partnerships and licensing agreements in Note 7, Vringo closedvarious industries. Fli Charge is currently working with partners that are interested in implementing Fli Charge technology for smart furniture, Original Equipment Manufacturers “OEM” and after-market automobiles, and vaporizers. Fli Charge’s business model is to license its technology in exchange for recurring licensing revenue as well as to manufacture and commercialize its own conductive charging pads and associated cases for phones, tablets and laptops.
Group Mobile is a merger transaction (the “Merger”) with Innovate/Protect, Inc., a privately held corporation (“I/P”), on July 19, 2012. This transaction was accountedfull service reseller of rugged computers, rugged tablets, rugged mobile devices, accessories and other related products geared toward emergency first responders, municipalities and corporations. In addition, Group Mobile specializes in high-quality customer support for as a reverse acquisition in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and as a result, I/P was deemed to be the acquiring company for accounting purposes. Accordingly, the Company’s financial statements for periods prior to the Merger reflect the historical results of I/P, and the Company’s financial statements for all periods from July 19, 2012 reflect the results of the combined company.those products.
Prior to December 31, 2013, the CompanyVringo operated a global platform for the distribution of mobile social applications and the services that it developed.services. On February 18, 2014, the Company executed the sale ofsold its mobile social application business to InfoMedia Services Limited (“InfoMedia”), receiving an 8.25% ownership interest in InfoMedia as consideration (Note 8).and a seat on the board of directors of InfoMedia. As part of the transaction, the Company will havehas the opportunity to license certain intellectual property assets and supportwork with InfoMedia to identify and protect new intellectual property.
Infrastructure PatentsEach of the Company’s operating segments are described below.
On August 9, 2012,Intellectual Property
Vringo’s Intellectual Property operating segment is engaged in the Company entered into ainnovation, development and monetization of intellectual property. The Company’s portfolio consists of over 600 patents and patent purchase agreement with Nokia Corporation ("Nokia"), comprising of 124 patent families with counterparts in certain jurisdictions world-wide. Theapplications covering telecom infrastructure, internet search, ad-insertion and mobile technologies; it includes the following key categories:
| F-8 |
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 Easternfor the Southern District of Virginia (the “District Court”) orderedNew York.
Vringo is currently focused on identifying, generating, acquiring, and deriving economic benefits from intellectual property assets and the Company monetizes its technology portfolio through a variety of value enhancing initiatives, including, but not limited to licensing, litigation and strategic partnerships.
Fli Charge
Fli Charge is a wire-free power company dedicated to making it easier for people to power and charge the multitude of mobile electronic devices they use on a daily basis. By eliminating the need to search and compete for outlets and charging cables, Fli Charge is improving the powering and charging experience for all battery and DC powered devices.
Fli Charge designs, develops, licenses, manufactures and markets wire-free conductive power and charging solutions. Fli Charge is currently working with partners in several verticals to bring products to market. These verticals include education, office, hospitality, automotive and consumer electronics among others. To date, Fli Charge has not yet generated any substantial revenue from its products. Fli Charge’s patented technology is the only wire-free power solution that I/P Engine recoveris fully interoperable between different mobile devices ranging from smartphones to power tools, and many more. Fli Charge’s wire-free power solution can simultaneously power multiple devices on the same pad no matter their power requirements or positions on the pad.
The Fli Charge ecosystem consists of power pads or surfaces as well as devices that are connected to or embedded with Fli Charge enabling technology. Fli Charge pads and surfaces are connected to a power source or battery. The surface of the pad has conductive contact strips that provide power and are constantly monitored by control circuitry that immediately halts power transfer if an additional sumunapproved load or short-circuit condition is detected. Fli Charge-enabled devices are embedded with the Fli Charge contact enablement that consists of $17.32 millionfour contact points, known as the Fli Charge “constellation.” The constellation is designed to make an immediate and continuous electrical connection with the contact strips regardless of the device’s orientation on the pad. The enablement monitors the power coming from the Defendants for supplemental damagespad and prejudgment interest. Further, the District Court ruledensures that the appropriate ongoing royalty ratecorrect amount of power goes to the device. Once an approved Fli Charge device is placed on a pad, power is transferred immediately to charge or power the device.
| F-9 |
Group Mobile
Group Mobile is a provider of rugged, mobile and field-use computing products, serving customers worldwide. Group Mobile provides total hardware solutions, including rugged laptops, tablets, and handheld computers. Group Mobile also carries rugged mobile printers, vehicle computer docking and mounting gear, power accessories, wireless communication products, antennas, carrying cases, and other peripherals, accessories, and add-ons needed to maximize productivity in a mobile- or field-computing environment. Group Mobile operates a full-service ecommerce website with live chat, up-to-date product information, and computer system configuration capabilities. Group Mobile’s goal is to ensure that its customers purchase the best product for Defendants' continued infringementtheir specific requirements.
Group Mobile purchases rugged mobile computing equipment and complementary products from its primary distribution and manufacturing partners and sells them to enterprise, reseller, and retail customers. Group Mobile’s primary customers range from corporations to local governments, emergency first responders and healthcare organizations. Group Mobile believes that its business is characterized by gross profits as a percentage of revenue slightly higher than is commonly found in resellers of computing devices. The market for rugged mobile computing products is trending towards an increase in the volume of unit sales combined with declining unit prices as the business transitions from primarily being comprised of laptops to one primarily comprised of rugged tablets. As this transition has occurred, Group Mobile is seeing shortened product life cycles and industry specific devices for segments such as healthcare. Group Mobile sets sale prices based on the market supply and demand characteristics for each particular product. Group Mobile is highly dependent on the end-market demand for rugged mobile computing products, which is influenced by many factors including the introduction of new IT products by OEM, replacement cycles for existing rugged mobile computing products, overall economic growth, local and state budgets, and general business activity.
Product costs represent the single largest expense and product inventory is one of the patents-in-suitlargest working capital investments for Group Mobile. Group Mobile’s primary suppliers include Synnex Corporation, Ingram Micro Inc., Xplore Technologies Corporation and Flextronics International Ltd., which combined represent approximately 80% of Group Mobile’s inventory purchases. We have reseller agreements with most of our OEM and distribution partners. These agreements usually provide for nonexclusive resale and distribution rights. The agreements are generally short-term, subject to periodic renewal, and often contain provisions permitting termination by either our supplier or us without cause upon relatively short notice. Furthermore, product procurement from the OEM suppliers is a ratehighly complex process and, as such, efficient and effective purchasing operations are critical to Group Mobile’s success.
Recent Developments
ZTE Agreement
On December 7, 2015, the Company entered into a confidential settlement and license agreement (the “Settlement Agreement”) with ZTE Corporation and its affiliates (“ZTE”), pursuant to which: (i) ZTE paid the Company a total of 6.5%$21,500, net of any withholding, value added or other taxes; (ii) the 20.9% royalty base previously setparties withdrew all pending litigations and proceedings against each other including the litigations related to ZTE’s breach of its non-disclosure agreement with Vringo; and (iii) the Company granted ZTE a non-exclusive, non-transferable, worldwide perpetual license of certain patents and patent applications owned 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.Company.
Acquisition
On AugustOctober 15, 2014,2015, the Federal Circuit reversed the judgmentCompany acquired 100% of IDG, a holding company consisting of two subsidiaries, Fli Charge and Group Mobile. IDG owned 70% of Fli Charge and 100% of Group Mobile. The acquisition was a stock purchase whereby Vringo acquired its entire interest in IDG in exchange for shares in Vringo. The total value of the District Court by holdingconsideration was $5,571. On December 28, 2015, Vringo acquired the remaining 30% of Fli Charge from third party shareholders in exchange for shares in Vringo.
| F-10 |
Notes Financing
On May 4, 2015 (the “Closing Date”), Vringo entered into a securities purchase agreement with certain institutional investors in a registered direct offering of $12,500 of Senior Secured Convertible Notes (the “Notes”) and warrants to purchase 537,500 shares of its common stock(after giving effect to the one-for-ten reverse stock split). On the Closing Date, the Company issued the Notes, which are convertible into shares of its common stock at $10.00 per share, bear 8% interest and mature in 21 months from the date of issuance, unless earlier converted. In addition, the Company issued 537,500 warrants to purchase shares of its common stock, which are exercisable at $10.00 per share for a period of five years, beginning on November 4, 2015. In connection with the issuance of the Notes and the warrants, the Company received net cash proceeds of $12,425. During the year ended December 31, 2015, the Company made principal and interest payments in the aggregate amount of $8,294.
Reverse Stock Split
On November 27, 2015, we implemented a one-for-ten reverse split of our issued and outstanding shares of common stock (the "Reverse Stock Split"), as authorized at a special meeting of our stockholders held on November 16, 2015. The Reverse Stock Split became effective at the opening of trading on the NASDAQ on November 27, 2015. As of November 27, 2015, every 10 shares of our issued and outstanding common stock were combined into one share of our common stock, except to the extent that the asserted infringement claims byReverse Stock Split resulted in any of our stockholders owning a fractional share, which was rounded up to the Companynext highest whole share. In connection with the Reverse Stock Split, there was no change in the nominal par value per share of $0.01.
All references in this Annual Report on Form 10-K to number of shares of common stock, price per share and weighted average shares of common stock have been adjusted to reflect the Reverse Stock Split on a retroactive basis for all periods presented, unless otherwise noted.
NASDAQ
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. On June 17, 2015, we received a letter from NASDAQ notifying us that we had been granted an additional 180-day period, or until December 14, 2015, to regain compliance with the minimum $1.00 bid price per share requirement for continued listing on the NASDAQ Capital Market, as set forth in NASDAQ Listing Rule 5810(c)(3)(A)(ii). On December 14, 2015, as a result of the patents-in-suit are invalidReverse Stock Split on November 27, 2015, we received a letter from The NASDAQ Stock Market LLC notifying us that we regained compliance with The NASDAQ Stock Market's minimum bid price continued listing requirement. The letter noted that because the closing bid price of our common stock has been at $1.00 per share or greater for obviousness. The Company filed a petitionthe last 10 consecutive trading days, we have regained compliance with Listing Rule 5550(a)(2) and 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 petition. On December 15, 2014, the Federal Circuit denied I/P Engine's petition for rehearing of the case en banc and consequently, the Company announced that I/P Engine will seek review by the U.S. Supreme Court of the Federal Circuit’s decision.matter is now closed.
Financial conditions
As of December 31, 2014,2015, the Company had a cash balance of $16,023.$24,951 and deposit with courts, which are included in current assets, of $1,930. In February 2016, $1,279 of the deposits with courts were repaid to the Company. The Company’s average monthly cash spent in operations, including the revenue, for the years ended December 31, 20142015 and 20132014 was approximately $214 and $2,365, and $1,955, respectively. In addition, the Company 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, 2014.
On June 19, 2014,May 4, 2015, the Company entered into agreementsa securities purchase agreement with certain institutional investors in a registered direct offering of its warrant holders, pursuant to which the warrant holders exercised for cash 5,697,227$12,500 of their outstanding Series 1Notes 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 5,412,366up to 537,500 shares of the Company’s common stock, par value $0.01which are exercisable at $10.00 per share for a period of five years. The Notes are repaid monthly in cash or shares 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 shareselection of the Company’s common stock were exercised duringCompany. The total amount of principal outstanding under 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' equityNotes was $31,180 and $114,282, respectively. The decrease 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 was recorded during the fourth quarter of 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$4,206 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 performed the second step of the goodwill impairment test and determined that the implied value of its goodwill was zero. Refer to Note 6 for further discussion of this impairment charge.2015.
The Company’s operating plans include efforts to increase revenue through the licensing of its 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 the Company’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 related anticipated costs. As such, based on the Company’s plans, costs in these jurisdictions are projected to be lower in 2015 and other future periods.
| F-11 |
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 able to acquire particular patents or other intellectual property assets, there is no guarantee that it 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 the Company will be able to 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. The 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 the Company’s common stock price which began in the third quarter of 2014.
The circumstances discussed above raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
Note 2. Accounting and Reporting Policies
(a) Basis of presentation and principles of consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP. As a result of Vringo’s acquisition of IDG in the fourth quarter of 2015, Vringo incorporated IDG and its subsidiaries’ financial information in its consolidated balance sheet as of December 31, 2015, and the related consolidated statement of operations, changes in stockholders’ equity and cash flows for the period from the date of acquisition. All significant intercompany balances and transactions have been eliminated in consolidation.
(b) Use of estimates
The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from such estimates. Significant items subject to such estimates and assumptions include the valuation of goodwill and the 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, income tax uncertainties, and other contingencies.
(c) Translation into U.S. dollars
The Company conducts certain transactions in foreign currencies, which are recorded at the exchange rate as of the transaction date. All exchange gains and losses occurring from the remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected as non-operating income or expense in the consolidated statements of operations.
(d) Cash and cash equivalents
The Company investsdeposits its cash in money market fundschecking accounts with financial institutions. The Company has established guidelines relating to diversification and maturities of its investments in order to minimize credit risk and maintain high liquidity of funds. All highly liquid investments with original maturities of three months or less at acquisition date are considered cash equivalents.
(e) Derivative instruments
The Company recognizes all derivative instruments as either assets or liabilities in the consolidated balance sheets at their respective fair values. The Company's derivative instruments which are discussed in Notes 9 and 11, have been recorded as liabilities at fair value, and are revalued at each reporting date, with changes in the fair value of the instruments included in the consolidated statements of operations as non-operating income (expense). The Company reviews the terms of features embedded in non-derivative instruments to determine if such features require bifurcation and separate accounting as derivative financial instruments. Equity-linked derivative instruments are evaluated in accordance with FASB Accounting Standard Codification 815-40, “Contracts in an Entity’s Own Equity” to determine if such instruments are indexed to the Company’s own stock and qualify for classification in equity.
(f) Accounts receivable
Accounts receivable are recorded net of an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. In developing the allowance, the Company considers historical loss experience, the overall quality of the receivable portfolio and specifically identified customer risks. The Company periodically reviews the adequacy of the allowance and the factors used in the estimation making adjustments to the estimate as necessary. Accounts receivable are included in other current assets on the consolidated balance sheets. Refer to Note 13, Other Current Assets, for further information.
| F-12 |
(f)(g) Inventory
Inventory is valued at the lower of cost or market value. Cost is determined using a weighted-average cost method. The Company periodically reviews inventory for potential obsolescence based upon an aging analysis of the inventory on hand, specifically known inventory-related risks, and assumptions about future demand and market conditions. Inventory items determined to be impaired based on such review are reduced to their net realizable value. Inventoryis included in other current assets on the consolidated balance sheets. Refer to Note 13, Other Current Assets, for further information.
(h) Intangible assets
Intangible assets include purchased patents, which are recorded based on the cost to acquire them. Thesethem, as well as trade names, customer relationships and technology, which were acquired as part of the acquisition of IDG in the fourth quarter of 2015 and are recorded based on the estimated fair values in purchase price allocation. The intangible 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 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)(i) 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 hasOther. Prior to the acquisition of IDG, Vringo had one reporting unit for purposes of evaluating goodwill impairment and performsperforming 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, then 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 entityCompany 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
There were no indications of the interim goodwill impairment test performed byas of December 31, 2015.
| F-13 |
When the Company asperformed the first step of September 30, 2014 and theits annual goodwill impairment test performed by the Company as of December 31, 2014.2014, 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 performing the second step of the goodwill impairment test, the Company compared the carrying value of goodwill to its implied fair value. In estimating the implied fair value of goodwill, the Company assigned 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 projected future cash flows. Based on the estimated implied fair value of goodwill, the Company recorded an impairment charge in the consolidated statement of operations for the year ended December 31, 2014 of $65,757 to reduce the carrying value of goodwill to its implied fair value, which was determined to be zero.
(h) Property and equipment
Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. The useful lives of the Company’s property and equipment are based on estimates of the period over which the Company expects the assets to be of economic benefit to the Company.
The following table summarizes the estimate useful lives of the Company’s property and equipment categories:
(i)(j) Revenue recognition
Revenue from patent licensing and enforcement is recognized if collectability is reasonably assured, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and delivery of the service has been rendered. The Company uses management's best estimate of selling price for individual elements in multiple-element arrangements, where vendor specific evidence or third party evidence of selling price is not available.
Currently, the Company’s revenue arrangements related to intellectual property provide for the payment of contractually determined fees and other consideration for the grant of certain intellectual property rights related to the Company’s patents. These rights typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patents, (ii) the release of the licensee from certain claims, and (iii) the dismissal of any pending litigation. The intellectual property rights granted typically extend until the expiration of the related patents. Pursuant to the terms of these agreements, the Company has no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on the Company’s part to maintain or upgrade the related technology, or provide future support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement, or upon receipt of the upfront payment. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, upon receipt of the upfront fee, and when all other revenue recognition criteria have been met.
The Company records revenue from the product sales of Fli Charge and Group Mobile when title and risk of loss are passed to the customer, there is persuasive evidence of an arrangement for sale, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Company’s shipping terms typically specify F.O.B. destination, at which time title and risk of loss have passed to the customer. At the time of sale of hardware products, the Company records an estimate for sales returns and allowances based on historical experience. Hardware products sold by the Company are warranted by the vendor.
Group Mobile uses drop-shipment arrangements with many of its hardware vendors and suppliers to deliver products directly to customers. Revenue for drop-shipment arrangements is recorded on a gross basis upon delivery to the customer with contract terms that typically specify F.O.B. destination. Revenue is recognized on a gross basis as Group Mobile is the principal in the transaction as the primary obligor in the arrangement, assumes the inventory risk if the product is returned by the customer, sets the price of the product to the customer, assumes credit risk for the amounts invoiced, and works closely with the customers to determine their hardware specifications.
Freight billed to customers is recognized as net product revenue and the related freight costs as a cost of goods sold.
| F-14 |
Deferred revenue includes: (i) payments received from customers in advance of providing the product and (ii) amounts deferred if other conditions of revenue recognition have not been met.
(j)(k) Segment reporting
The Company operates in three operating segments: Intellectual Property, Fli Charge and Group Mobile. Intellectual Property is engaged in the innovation, development and monetization of mobile technologies and intellectual property. Fli Charge develops wireless charging devices and licenses technology to various channels and applications. Group Mobile provides rugged, mobile and field-use computing products to customers through their e-commerce platform.
(l) Operating legal costs
Operating legal costs mainly include expenses incurred in connection with the Company’s patent licensing and enforcement activities, patent-related legal expenses paid to external patent counsel, (includingincluding contingent legal fees),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. In addition, amounts received by the Company for reimbursements of legal fees in connection with its litigation campaigns are recorded in operating legal costs as an offset to legal expense.
(k)(m) Stock-based compensation
Stock-based compensation is recognized as an expense in the consolidated statements of operations and such cost is measured at the grant-date fair value of the equity-settled award. The fair value of stock options is estimated at the date of grant using the Black-Scholes-Merton option-pricing model. The expense is recognized on a straight-line basis, over the requisite service 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 estimated based on thea weighted average historical volatility of similarthe Company and comparable entities with publicly traded shares. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve at the date of grant.
(l)(n) Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not more likely than not to be realized. Tax benefits related to excess deductions on stock-based compensation arrangements are recognized when they reduce taxes payable.
In assessing the need for a valuation allowance, the Company looks at cumulative losses in recent years, estimates of future taxable earnings, feasibility of tax planning strategies, the realizability of tax benefit carryforwards, and other relevant information. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. Ultimately, the actual tax benefits to be realized will be based upon future taxable earnings levels, which are very difficult to predict. In the event that actual results differ from these estimates in future periods, the Company will be required to adjust the valuation allowance.
| F-15 |
Significant judgment is required in evaluating the Company's federal, state and foreign tax positions and in the determination of its tax provision. Despite management's belief that the Company's liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matters. The Company may adjust these accruals as relevant circumstances evolve, such as guidance from the relevant tax authority, its tax advisors, or resolution of issues in the courts. The Company's tax expense includes the impact of accrual provisions and changes to accruals that it considers appropriate. These adjustments are recognized as a component of income tax expense entirely in the period in which new information is available. The Company records interest related to unrecognized tax benefits in interest expense and penalties in the consolidated statements of operations as general and administrative expenses.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
(m)(o) Net loss per common share
Basic net loss per share is computed by dividing the net loss attributable to the Company 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 attributable to the Company for the period by the weighted-average number of shares of common stock plus dilutive potential common stock considered outstanding during the period. However, as the Company generated net losses in all periods presented, some potentially dilutive securities that relate to the continuing operations, including certain warrants and stock options, were not reflected in diluted net loss per share because the impact of such instruments was anti-dilutive.
(n)(p) Commitments and contingencies
Liabilities for loss contingencies arising from assessments, estimates or other sources are to be recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs expected to be incurred in connection with a loss contingency are expensed as incurred.
(o)(q) Fair value measurements
The Company measures fair value in accordance with FASB ASC 820-10,Fair Value Measurements and Disclosures. FASB ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received by selling an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, FASB ASC 820-10 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: 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.
(p)(r) Recently issued accounting pronouncements
In 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. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This guidance changes the criteria for reporting a discontinued operation while enhancing disclosures in this area. This standard will be effective for the Company beginning January 1, 2015. Early adoption of the standard is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers (Topic 606), which impacts virtually all aspects of an entity's revenue recognition. The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance was amended in July 2015 and is effective for annual reporting periods beginning after December 15, 2016.2017. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.
| F-16 |
In June 2014, the FASB issued ASU No. 2014-10,Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation, which removes the definition of development stage entity, as was previously defined under U.S. GAAP, thereby removing the financial reporting distinction between development stage entities and other reporting entities. In addition, the ASU eliminates the requirements for development stage entities to (i) present inception-to-date information in their financial statements, (ii) label the financial statements as those of a development stage entity, (iii) disclose a description of the development stage activities in which the entity is engaged, and (iv) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage. This guidance is effective for annual reporting periods beginning after December 31, 2014 and early adoption of the standard is permitted. The Company adopted this guidance during the second quarter of 2014.
In August 2014, the FASB issued ASU No. 2014-15,Presentation of Financial Statements (Topic 205): Going Concern. The new standard 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 fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 and early adoption is permitted. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.
In November 2014, the FASB issued ASU 2014-16,Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity. The new standard clarifies how current U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and early adoption is permitted. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03,Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the corresponding debt liability, consistent with debt discounts. The new standard does not change the amortization of debt issuance costs, which are reported as interest expense in the consolidated statements of operations. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years and early adoption is permitted. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11,Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires an entity to measure in-scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2016. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17,Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the consolidated balance sheet. The amendments in the update require that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those fiscal years and may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01,Financial Instruments – Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. With respect to our consolidated financial statements, the most significant impact relates to the accounting for equity investments. It will impact the disclosure and presentation of financial assets and liabilities. The amendments in this update are effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Early adoption by public entities is permitted only for certain provisions. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
| F-17 |
(q)(s) Reclassification
Certain balances have been reclassified to conform to presentation requirements, including discontinued operations.to retroactively present the effect of the reverse stock split.
Note 3. Net Loss per Common Share
On November 27, 2015, the Company effected a one-for-ten reverse stock split of its issued and outstanding shares of common stock. As a result, all references to number of shares of common stock, price per share and weighted average shares of common stock have been adjusted to reflect the one-for-ten reverse stock split on a retroactive basis for all periods presented, unless otherwise noted.
The table below presents the computation of basic and diluted net losses per common share:
| For the year ended December 31, | For the year ended December 31, | |||||||||||||||||||
| 2014 | 2013 | 2012 | 2015 | 2014 | ||||||||||||||||
| Basic Numerator: | ||||||||||||||||||||
| Loss from continuing operations attributable to shares of common stock | $ | (109,222 | ) | $ | (41,748 | ) | $ | (18,409 | ) | $ | (11,157 | ) | $ | (109,222 | ) | |||||
| Loss from discontinued operations attributable to shares of common stock | (455 | ) | $ | (10,685 | ) | $ | (2,432 | ) | — | (455 | ) | |||||||||
| Net loss attributable to shares of common stock | $ | (109,677 | ) | $ | (52,433 | ) | $ | (20,841 | ) | $ | (11,157 | ) | $ | (109,677 | ) | |||||
| 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 shares of common stock outstanding during the year | 10,217,734 | 8,964,033 | ||||||||||||||||||
| 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 | 10,217,734 | 8,964,033 | |||||||||||||||
| Basic loss per common stock share from continuing operations | $ | (1.22 | ) | $ | (0.50 | ) | $ | (0.47 | ) | $ | (1.09 | ) | $ | (12.18 | ) | |||||
| Basic loss per common stock share from discontinued operations | (0.01 | ) | $ | (0.13 | ) | $ | (0.06 | ) | — | (0.06 | ) | |||||||||
| Basic net loss per common stock share | $ | (1.23 | ) | $ | (0.63 | ) | $ | (0.53 | ) | $ | (1.09 | ) | $ | (12.24 | ) | |||||
| Diluted Numerator: | ||||||||||||||||||||
| Net loss from continuing operations attributable to shares of common stock | $ | (109,222 | ) | $ | (41,748 | ) | $ | (18,409 | ) | $ | (11,157 | ) | $ | (109,222 | ) | |||||
| Increase in net loss attributable to derivative warrants | $ | (2,201 | ) | $ | (59 | ) | $ | (4,701 | ) | — | (2,201 | ) | ||||||||
| Diluted net loss from continuing operations attributable to shares of common stock | $ | (111,423 | ) | $ | (41,807 | ) | $ | (23,110 | ) | (11,157 | ) | (111,423 | ) | |||||||
| Diluted net loss from discontinued operations attributable to shares of common stock | $ | (455 | ) | $ | (10,685 | ) | $ | (2,432 | ) | — | (455 | ) | ||||||||
| Diluted net loss attributable to shares of common stock | $ | (111,878 | ) | $ | (52,492 | ) | $ | (25,542 | ) | $ | (11,157 | ) | $ | (111,878 | ) | |||||
| Diluted Denominator: | ||||||||||||||||||||
| Basic common stock shares outstanding | 89,640,330 | 83,201,691 | 39,111,176 | 10,217,734 | 8,964,033 | |||||||||||||||
| Shares assumed issued upon exercise of derivative warrants during the period | 849,410 | 79,182 | 2,553,500 | |||||||||||||||||
| Shares assumed issued upon exercise of derivative warrants during the year | — | 84,941 | ||||||||||||||||||
| Diluted common stock shares outstanding | 90,489,740 | 83,280,873 | 41,664,676 | 10,217,734 | 9,048,974 | |||||||||||||||
| Diluted loss per common stock share from continuing operations | $ | (1.23 | ) | $ | (0.50 | ) | $ | (0.55 | ) | $ | (1.09 | ) | $ | (12.31 | ) | |||||
| Diluted loss per common stock share from discontinued operations | $ | (0.01 | ) | $ | (0.13 | ) | $ | (0.06 | ) | — | (0.05 | ) | ||||||||
| Diluted net loss per common stock share | $ | (1.24 | ) | $ | (0.63 | ) | $ | (0.61 | ) | $ | (1.09 | ) | $ | (12.36 | ) | |||||
| 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 | 871,484 | 805,235 | |||||||||||||||
| 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 | |||||||||||||||||
| Unvested RSUs to issue an equal number of shares of common stock of the Company | 53,280 | 119,636 | ||||||||||||||||||
| Warrants to purchase an equal number of shares of common stock of the Company | 16,553,243 | 18,261,031 | 3,787,628 | 1,006,679 | 1,655,324 | |||||||||||||||
| Conversion feature of Senior Secured Notes | 1,250,000 | — | ||||||||||||||||||
| Total number of potentially dilutive instruments, excluded from the calculation of net loss per share | 25,801,945 | 30,859,636 | 15,962,585 | 3,181,443 | 2,580,195 | |||||||||||||||
| F-18 |
Note 4. Cash and Cash Equivalents
| As of December 31, | As of December 31, | |||||||||||||||
| 2014 | 2013 | 2015 | 2014 | |||||||||||||
| Cash denominated in U.S. dollars | $ | 2,897 | $ | 24,628 | $ | 24,918 | $ | 2,897 | ||||||||
| Money market funds denominated in U.S. dollars | 13,085 | 3,184 | — | 13,085 | ||||||||||||
| Cash in currency other than U.S. dollars | 41 | 5,774 | 33 | 41 | ||||||||||||
| $ | 16,023 | $ | 33,586 | $ | 24,951 | $ | 16,023 | |||||||||
Note 5. Property and EquipmentBusiness Combination
| As of December 31, | ||||||||
| 2014 | 2013 | |||||||
| Computers, software and equipment | $ | 207 | $ | 171 | ||||
| Furniture and fixtures | 201 | 83 | ||||||
| Leasehold improvements | 202 | 110 | ||||||
| 610 | 364 | |||||||
| Less: accumulated depreciation | (389 | ) | (134 | ) | ||||
| $ | 221 | $ | 230 | |||||
On October 15, 2015, the Company acquired IDG. Pursuant to the Purchase Agreement, the Company acquired 100% of the capital stock of IDG. Fli Charge, in which IDG owned 70% of the capital stock and control of its operations, and the wholly-owned Group Mobile were also acquired through the purchase of IDG. Fli Charge owns patented conductive wire-free charging technology and is focused on innovation, sales, manufacturing and licensing its technology in various industries, such as automotive, furniture and others. Group Mobile is a company with full service customer support in rugged computers, mobile devices and accessories.
DuringAs consideration for the years ended December 31, 2014, 2013 and 2012,acquisition, the Company issued an equivalent of 1,666,667 common shares(after giving effect to the Reverse Stock Split), which were issued as follows: (i) 1,604,167 shares of the Company’s newly designated Series B Convertible Preferred Stock (“Series B Preferred”), convertible into 1,604,167 shares of the Company’s common stock, (ii) 57,500 shares of the Company’s unregistered common stock issued to one of the sellers, who is a former Chief Executive Officer and Director, in consideration of his forgiveness of debt and (iii) 5,000 shares of the Company’s common stock for transaction related services. A total of 240,625 Series B Preferred shares were placed in escrow to secure certain of the sellers’ indemnity obligations under the Purchase Agreement for a period of up to 12 months. On November 27, 2015, all Series B Preferred outstanding shares were converted into unregistered common stock of the Company, resulting in the 1,604,167 shares of common stock.
Purchase consideration value was determined based on the market value of the Company’s common shares at the date of the transactions, discounted for the fact that the shares are restricted as to their marketability for a period of six months from the issuance date.
The transaction has been accounted for as a business combination. Assets acquired and liabilities assumed were recorded $255, $87at their fair values at the closing date. The purchase price consideration is as follows:
October 15, 2015 Acquisition: | Fair Value | |||
| Series B Preferred Stock | $ | 5,378 | ||
| Debt assumed, settled in shares | 193 | |||
| Total share value issued | $ | 5,571 | ||
The purchase price for the acquisition was allocated to the net tangible and $46intangible assets based on their fair values as of depreciationthe closing date. The excess of the purchase price over the net tangible assets and intangible assets was recorded as goodwill.
| F-19 |
The purchase price allocation is as follows:
| Fair Value | ||||
| Assets: | ||||
| Cash and cash equivalents | $ | 144 | ||
| Accounts receivable | 245 | |||
| Inventory | 234 | |||
| Prepaid expenses | 18 | |||
| Current Assets | 641 | |||
| Intangible assets | 2,146 | |||
| Goodwill | 4,863 | |||
| Total Assets | 7,650 | |||
| Liabilities: | ||||
| Accounts payable | 464 | |||
| Credit line | 270 | |||
| Accrued expenses | 44 | |||
| Other current liabilities | 173 | |||
| Deferred tax liabilities | 866 | |||
| Total liabilities | 1,817 | |||
| Noncontrolling interest in Fli Charge | 262 | |||
| Total | $ | 5,571 | ||
The allocation of the purchase price was based upon a valuation and the Company's estimates and assumptions, which are subject to change within the measurement period (up to one year from the acquisition dates). The principal area of potential purchase price adjustments relate to the shares placed in escrow.
In connection with the acquisition, the Company also entered into a Consulting Agreement with IDG’s former Chief Executive Officer and director for an initial term of six months, which may be extended on a month-to-month basis or longer thereafter, and the payment of $9 per month. The Company also issued to a finder a warrant to purchase up to an aggregate of 50,000 shares of common stock of the Company, at an exercise price of $5.00 per share, expiring on April 15, 2021. The fair value of the warrant was $114 and was recorded as an expense respectively. in general and administrative expenses.
On December 28, 2015, the Company acquired the remaining 30% interest in Fli Charge from third parties. In conjunction with the transaction, the Company issued 110,000 shares of its unregistered common stock for total consideration of $262. The fair value of the consideration for financial reporting purposes was determined based on the market value of the shares at the date of the transaction, discounted due to the restricted nature of the shares and the effect this has on their marketability. The issuance of these shares have no impact on the allocation of the purchase consideration pursuant to FASB ASC 810 and was recorded as an equity transaction.
| F-20 |
Note 6. Goodwill and Intangible Assets
Intangible assets
The following table provides information regarding the Company’s intangible assets, which consist of its patents:the following:
| 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 | |||||||
| December 31, 2015 | December 31, 2014 | |||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted average amortization period (years) | ||||||||||||||||||||||
| Patents | $ | 28,213 | $ | (13,782 | ) | $ | 14,431 | $ | 28,213 | $ | (10,588 | ) | $ | 17,625 | 8.60 | |||||||||||||
| Additions during the year (Note 5): | ||||||||||||||||||||||||||||
| Customer relationships | 1,163 | (62 | ) | 1,101 | — | — | 3.91 | |||||||||||||||||||||
| Trade name | 504 | (21 | ) | 483 | — | — | 4.90 | |||||||||||||||||||||
| Technology | 479 | (18 | ) | 461 | — | — | 5.68 | |||||||||||||||||||||
| Total intangible assets | $ | 30,359 | $ | (13,883 | ) | $ | 16,476 | $ | 28,213 | $ | (10,588 | ) | $ | 17,625 | ||||||||||||||
The Company’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 internally developed patents are expensed as incurred.
In August 2012, the Company purchased a portfolio from Nokia consisting of variousThe Company’s patents and patent applications. The portfolio encompasses a broad range of technologies relating to telecom infrastructure, including communication management, data and signal transmission, mobility management, radio resources management and services. The total consideration paid for the portfolio was $22,000. In addition, the Company capitalized certain costs related to the acquisition of patents in the total amount of $548. Under the terms of the purchase agreement, to the extent that the gross revenue generated by such portfolio exceeds $22,000, the Company is obligated to pay a royalty of 35% of such excess. The Company has not recorded any amounts in respect of this contingent consideration, as both the amounts of future potential revenue, if any, and the timing of such revenue cannot be reasonably estimated.
In October 2012, the Company’s subsidiary entered into a patent purchase agreement. As partial consideration, the Company issued 160,600 shares of common stock to the seller with a fair value of $750. In addition, under the terms of the purchase agreement, 20% of the gross revenue collected will be payable to the seller as a royalty. The Company has not recorded any amounts in respect of this contingent consideration, as both the amounts of future potential revenue, if any, and the timing of such revenue cannot be reasonably estimated. In October 2013, the Company purchased an additional patent portfolio for approximately $1,400 which includes certain costs related to the acquisition of patents.
The Company’s patentsother intangible assets are amortized over their expected useful lives (i.e., through the expiration date of the patent). During the years ended December 31, 2014, 2013,2015 and 2012,2014, the Company recorded amortization expense of $3,768, $3,445$3,295 and $1,692,$3,768, 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.intangible assets.
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 considered when making this determination included the announcement of the Federal Circuit’s decision on August 15, 2014, described in Note 1.which they held that the claims of the patents-in-suit asserted by I/P Engine against the Defendants are invalid for obviousness. 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 the asset 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 value and the carrying value of the asset group. The impairment charge is included in Amortizationamortization and impairment of intangibles in the consolidated statementsstatement of operations.operations for the year ended December 31, 2014. There were no impairment charges related to the Company’s patents during the yearsyear ended December 31, 2013 and 2012.2015.
Estimated amortization expense for each of the five succeeding years, of the Company’s patents ownedintangible assets at December 31, 20142015 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 | |||
| Year ending December 31, | Amount | |||
| 2016 | $ | 3,362 | ||
| 2017 | 3,291 | |||
| 2018 | 3,268 | |||
| 2019 | 2,874 | |||
| 2020 | 1,692 | |||
| Thereafter | 1,989 | |||
| $ | 16,476 | |||
| F-21 |
DuringGoodwill
The following table provides information regarding the Company’s goodwill:
| For the year ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Balance as of January 1: | $ | — | $ | 67,757 | ||||
| Acquisition of IDG (Note 5): | ||||||||
| Fli Charge goodwill | 757 | — | ||||||
| Group Mobile goodwill | 4,106 | — | ||||||
| Goodwill impairment | — | (67,757 | ) | |||||
| $ | 4,863 | $ | — | |||||
As of December 31, 2015, goodwill related to the purchase of IDG, which was consummated during the fourth quarter of 2013, the Company recorded an2015. There were no indicators of 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 value of the reporting unit with its carrying amount, including goodwill. The fair value of the reporting 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 determined with the assistance of a third party valuation specialist. The Company believes that this is the most appropriate valuation technique for determining the fair value of the reporting unit for various reasons. First, the Company’s common shares are 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 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.
The Company also considered the use other valuation approaches to determine the fair value of 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 Performed2015.
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.$5.50. 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 performing the second step of the goodwill impairment test, the Company compared the carrying value of goodwill to its implied fair value. In estimating the implied 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 projected future cash flows. As a result, it was determined that the Company’s intangible assets were not impaired as of December 31, 2014.
Based on the estimated implied fair value of goodwill, the Company recorded an impairment charge of $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 Goodwillgoodwill impairment in the consolidated statement of operations for the year ended December 31, 2014.
OtherNote 7. Segment Information
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.
| For the year ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Revenue: | ||||||||
| Intellectual Property | $ | 21,750 | $ | 1,425 | ||||
| Fli Charge | 2 | — | ||||||
| Group Mobile | 935 | — | ||||||
| Total Revenue | $ | 22,687 | $ | 1,425 | ||||
| Segment operating loss: | ||||||||
| Intellectual Property | $ | (9,854 | ) | $ | (45,439 | ) | ||
| Fli Charge | (139 | ) | — | |||||
| Group Mobile | (351 | ) | — | |||||
| Total Segment operating loss | $ | (10,344 | ) | $ | (45,439 | ) | ||
| Unallocated expenses, net: | ||||||||
| Goodwill impairment | — | (65,757 | ) | |||||
| Total unallocated expenses, net | — | (65,757 | ) | |||||
| Non-operating income (expense), net | (1,780 | ) | 1,974 | |||||
| Loss before income tax benefit (expense) | $ | (12,124 | ) | $ | (109,222 | ) | ||
| Assets: | ||||||||
| Intellectual Property | $ | 42,721 | $ | 37,435 | ||||
| Fli Charge | 6,228 | — | ||||||
| Group Mobile | 1,583 | — | ||||||
| Total Assets | $ | 50,532 | $ | 37,435 | ||||
Note 7. Business Combination
As described in Note 2, I/P consummated the Merger with Vringo on July 19, 2012. The consideration consisted of various equity instruments, including: shares of common stock, options, preferred stockGeneral and warrants. Upon completion of the Merger, (i) all then outstanding 6,169,661 common stock shares of I/P, par value $0.0001 per share, were exchanged for 18,617,569, shares of the Company’s common stock, par value $0.01 per share, and (ii) all outstanding shares of Series A Convertible Preferred Stock of I/P, par value $0.0001 per share, were exchanged for 6,673 shares of 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 holders of I/P capital stock an aggregate of 15,959,838 warrants to purchase an aggregate of 15,959,838 shares of the Company’s common stock with an exercise price of $1.76 per share. The Company recorded such warrants as long-term derivative liabilities (refer to Note 11). In addition, all outstanding and unexercised options to purchase I/P common stock, whether vested or unvested, were converted into 41,178 options to purchase the Company’s common stock. Immediately following the completion of the Merger, the former stockholders of I/P owned approximately 55.04% of the outstanding common stock of the combined company (or 67.61% of the outstanding shares of the Company’s common stock, calculated on a fully diluted basis), and Vringo’s stockholders prior to the Merger owned approximately 44.96% of the outstanding common stock of the combined company (or 32.39% of the outstanding shares of its common stock calculated on a fully diluted basis). This transaction was accounted for as a reverse acquisition in accordance with U.S. GAAP and as a result, I/P was deemed to be the acquiring company for accounting purposes. The total purchase price of $75,654 wasadministrative costs are allocated to the assets acquired and liabilities assumed as follows. Registration and issuance cost, in the total amount of $463, was recorded against the additional paid-in capital.Intellectual Property segment.
| 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 | ||
| F-22 |
The fair values of the identified intangible assets were estimated by the Company using an income approach valuation model. Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. Indications of value are developed by discounting future net cash flows to their present value at market-based rates of return. The goodwill recognized as a result of the acquisition is primarily attributable to the value of the workforce and other intangible asset arising as a result of operational synergies, products, and similar factors which could not be separately identified. The useful life of the intangible assets for amortization purposes was determined considering the period of expected cash flows used to measure the fair value of the intangible assets adjusted as appropriate for the entity-specific factors including legal, regulatory, contractual, competitive economic or other factors that may limit the useful life of intangible assets. Goodwill recognized is not deductible for income tax purposes.
Note 8. Discontinued OperationsRevenue from Settlements and Assets Held For SaleLicensing Agreements
On December 31, 2013,7, 2015, the Company entered into a definitive asset purchaseconfidential settlement and license agreement (the “Settlement Agreement”) with ZTE Corporation and its affiliates (“ZTE”), pursuant to which: (i) ZTE paid the Company a total of $21,500, net of any withholding, value added or other taxes; (ii) the parties withdrew all pending litigations and proceedings against each other including the litigations related to ZTE’s breach of its non-disclosure agreement with InfoMedia forVringo; and (iii) the saleCompany granted ZTE a non-exclusive, non-transferable, worldwide perpetual license of all assetscertain patents and patent applications owned by 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”). Company.
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, the Company recorded total licensing revenue of $1,425, which was due to certain one-time payments in connection with settlement and license agreements for certain of its owned intellectual property.
Note 9. Senior Secured Convertible Notes
On May 4, 2015 (the “Closing Date”), the Company entered into a securities purchase agreement with certain institutional investors in a registered direct offering of $12,500 of Senior Secured Convertible Notes (the “Notes”) and warrants to purchase 537,500 shares of the Company’s common stock(after giving effect to the Reverse Stock Split). On the Closing Date, the Company issued the Notes, which are convertible into shares of the Company’s common stock at $10.00 per share, bear 8% interest and mature in 21 months from the date of issuance, unless earlier converted. In addition, the Company issued 537,500 warrants to purchase shares of the Company’s common stock, which are exercisable at $10.00 per share for a period of five years, beginning on November 4, 2015. In connection with the issuance of the Notes and the warrants, the Company received net cash proceeds of $12,425. The Company also incurred third party costs directly associated with the issuance of Notes of $218, which are capitalized as debt issuance costs and included in other current assets, and are amortized over the term of the Note. The Company’s obligations under the outstanding Notes are secured by a first priority perfected security interest in substantially all of the Company’s U.S. assets. In addition, stock of certain subsidiaries of the Company has been pledged. The outstanding Notes contain customary events of default, as well as covenants which include restrictions on the assumption of new debt by the Company. As of December 31, 2015, all covenants were met and there were no events or changes in circumstances that would indicate that the carryingof default.
The principal amount of this investmentthe outstanding Notes is being repaid monthly, and the Company may no longer be recoverable.make such payments and related interest payments in cash or, subject to certain conditions, in registered shares of the Company’s common stock, at its election. On each of the principal installment dates, the Company’s scheduled principal amortization payment is an amount equal to $595. If the Company chooses to repay the Notes in shares of its common stock, the shares are issued at a 15% discount, based on the then-current market price data of the Company’s common stock. The Company may also repay the Notes in advance of the maturity schedule subject to early repayment penalties. The holders of the Notes may accelerate up to six principal installment payments on each of the principal installment dates. The Company may choose to settle such amounts in cash or shares issued at a 15% discount, based on the then-current market price data of the Company’s common stock. Further, the Notes contain provisions that under certain events of default, as defined in the agreement, the amount owed could increase by amounts ranging from 115% to 120% of the face value depending on when the event occurred, and additionally, the interest rates would increase to 16.5% per annum upon the occurrence and continuance of an event of default. In addition, the Company may choose to repay the Notes early at a premium ranging from 115% to 120% of the face value depending on when the election is made.
| F-23 |
The 8% interest is paid quarterly, beginning July 1, 2015, and the Company may make such payments in cash or registered shares of the Company’s common stock, at its election. If the Company chooses to repay the Notes in shares of its common stock, the shares for the payment of interest are issued at the then-current market price of the Company’s common stock.
Additionally,Upon issuance of the Notes on May 4, 2015, the Company recorded the following:
| Net cash proceeds from the Notes ($12,500 less investors issuance costs of $75) | $ | 12,425 | ||
| Debt discount: | ||||
| May 2015 Warrants | 1,717 | |||
| Conversion feature | 1,244 | |||
| Total Debt discount attributed to Warrants and Conversion feature | 2,961 | |||
| Net Total – May 4, 2015 | 9,464 | |||
| Debt discount amortization | 2,014 | |||
| Debt repayments | (8,294 | ) | ||
| Net Total – December 31, 2015 (presented as short-term) | $ | 3,184 |
The debt discount is attributable to the value of the separately accounted for conversion feature and May 2015 Warrants issued in connection with the asset purchase agreement,financing. The embedded conversion feature derivatives relate to the requirement to reportconversion option, redemption in case of an event of default, and redemption in the resultscase of a change in control features of the Company’s mobile social application businessNotes. The embedded derivatives were evaluated under FASB ASCTopic 815-15, were bifurcated from the debt host, and were classified as discontinued operationsliabilities in the consolidated balance sheet. The debt discount is amortized using the effective interest method over the term of the Notes. For the year ended December 31, 2015, the Company recorded a total of $2,014 of debt discount amortization, which was triggeredrecorded as an interest expense in the consolidated statement of operations. In addition, for the year ended December 31, 2015, the Company recorded $145 of amortization of debt issuance costs included in interest expense and recorded an interest accrual of $96 included in accounts payable, accrued expenses and other current liabilities as of December 31, 2014.2015.
During August 2015, the holders of the Notes accelerated six principal installments in exchange for common stock as permitted under the securities purchase agreement. The following tables representdebt is now expected to mature in July 2016.
During the components of operating results from discontinued operations, as presentedyear ended December 31, 2015, the Company made principal payments in the aggregate amount of $8,294. The Company elected to make a total of $595 of these principal payments in cash and the remaining $7,699 of principal payments in shares of the Company’s common stock, which are issued at a 15% discount to the then current market price. As such, the Company issued 2,070,000 shares(after giving effect to the Reverse Stock Split)in lieu of principal payments and interest payments for the year ended December 31, 2015, and recorded $1,373 extinguishment of debt expense on the consolidated statementsstatement of operations: operations for the year ended December 31, 2015.
| 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 | ) | |||
| F-24 |
Note 9.10. 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, 20142015 and 2013:December 31, 2014:
| 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 | ||||||||||
| 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) | |||||||||||||
| December 31, 2015: | ||||||||||||||||
| May 2015 Warrants | $ | 416 | $ | — | $ | — | $ | 416 | ||||||||
| Conversion feature | $ | 1 | $ | — | $ | — | $ | 1 | ||||||||
| December 31, 2014: | ||||||||||||||||
| Conversion Warrants, the derivative Reload Warrants and the derivative Series 1 Warrants | $ | 175 | $ | — | $ | — | $ | 175 | ||||||||
The Company measures its derivative warrant liabilities at fair value. The Special Bridge Warrants, Conversion Warrants, the derivative Reload Warrants and the derivative Series 1 Warrants (as defined in Note 11) arewere classified within Level 3 because they arewere valued using the Black-Scholes-Merton and the Monte-Carlo models, (asas these warrants includeincluded down-round protection clauses),clauses, which utilize significant inputs that are unobservable in the market. On January 1, 2015, the down-round protection clauses associated with all of the Company’s outstanding derivative warrant liabilities expired and, as a result, these warrants no longer meet the criteria for liability classification. As such, the related liabilities were revalued as of January 1, 2015 and the balance of $175, which was comprised of long-term derivative warrant liabilities of $174 and short-term derivative warrant liabilities of $1, was reclassified to equity.
The following table presentsMay 2015 Warrants were classified within Level 3 because they were valued using the placementBlack-Sholes-Merton model, which utilizes significant inputs that are unobservable in the fair value hierarchy of assetsmarket. They are recorded as derivative warrant liabilities as they are freestanding instruments and there are several features within the warrants that may require the Company to cash settle or partially cash settle. In particular, the Company may have to cash settle, partially cash settle, or make cash payments to the holders including cash settlement upon exercise when insufficient shares are authorized to be issued, and that the Company is obligated to issue registered shares when the warrants are exercised. The derivative warrant liabilities are initially measured at fair value on a non-recurring basis as of December 31, 2013 (there were no such assets or liabilities as of December 31, 2014):and marked to market at each balance sheet date.
| 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 | |||||||||
The conversion feature was classified within Level 3 because it was valued using the Monte-Carlo model, which utilizes significant inputs that are unobservable in the market. The embedded conversion feature derivatives relate to the conversion option, redemption in case of an event of default, and redemption in the case of a change in control features of the Notes. The conversion feature was separated from the host debt contract and accounted for as a derivative instrument because the feature is not clearly and closely related to the debt host and a separate instrument with the same terms as the embedded derivative would be a derivative instrument.
In addition to the above, the Company’s financial instruments as of December 31, 21042015 and 20132014 consisted of cash, cash equivalents, receivables, accounts payable, deposits and deposits.Notes. The carrying amounts of all the aforementioned financial instruments approximate fair value. value because of the short-term maturities of these instruments.
The following table summarizes the changes in the Company’s liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the yearsyear ended December 31, 2014, 2013 and 2012:2015:
| Conversion Warrants, the derivative Reload Warrants and the derivative Series 1 Warrants | May 2015 Warrants | Conversion feature | ||||||||||
| December 31, 2014 | $ | 175 | $ | — | $ | — | ||||||
| Reclassification of derivative Reload Warrants and Series 1 Warrants to equity warrants | (175 | ) | — | — | ||||||||
| Issuance of Notes and May 2015 Warrants | — | 1,717 | 1,244 | |||||||||
| Gain on revaluation of warrants and conversion feature | — | (1,301 | ) | (1,243 | ) | |||||||
| December 31, 2015 | $ | — | $ | 416 | $ | 1 | ||||||
| F-25 |
| 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 | |||
During August 2015, the holders of the Notes accelerated six principal installments in exchange for common stock as permitted under the securities purchase agreement. The debt is now expected to mature in July 2016. These events resulted in a significant decline in the value of the conversion feature between May 4, 2015 and December 31, 2015, which resulted in a concurrent gain on the revaluation of the conversion feature.
Valuation processes for Level 3 Fair Value Measurements
The fairFair value measurementsmeasurement of the derivative warrant liabilities related tofalls within Level 3 of the Special Bridge Warrants, Conversion Warrants, Reload Warrants and Series 1 Warrantsfair value hierarchy. The fair value measurements are evaluated by management to ensure that changes are consistent with expectations of management based upon the sensitivity and nature of the following inputs.
December 31, 2015:
| Description | Valuation technique | Unobservable inputs | Range | |||||
| Conversion feature | Monte-Carlo model | Volatility | 82.46 | % | ||||
| Risk free interest rate | 0.46 | % | ||||||
| Expected term, in years | 0.51 | |||||||
| Conversion price | $10.00 | |||||||
| May 2015 Warrants | Black-Scholes-Merton | Volatility | 79.13 | % | ||||
| Risk free interest rate | 1.68 | % | ||||||
| Expected term, in years | 4.34 | |||||||
| Dividend yield | 0.00 | % | ||||||
December 31, 2014:
| Description | Valuation technique | Unobservable inputs | Range | |||||
| Conversion Warrants, derivative Reload | Black-Scholes-Merton and | Volatility | 56.55% | |||||
| Warrants and derivative Series 1 Warrants | the Monte-Carlo models | Risk free interest rate | 0.13% | |||||
| Expected term, in years | 0.48 | |||||||
| Dividend yield | ||||||||
| ||||||||
December 31, 2013:
| 0% | |||||||
|
The fair value of the assets 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 reflect the risk inherent in the projected future cash flows generated by the respective asset or asset group. The inputs used in the valuation were sensitive to certain factors related to mobile social application technology such as rapid changes in the industry and technological advances.
Sensitivity of Level 3 measurements to changes in significant unobservable inputs
The inputs to estimate the fair value of the Company’s derivative warrant liabilities areand conversion feature were the current market price of the Company’s common stock, the exercise price of the warrant, itswarrants and conversion feature, their remaining expected term, the volatility of the Company’s common stock price the Company’s assumptions regarding the probability and timing of a down-round protection triggering event and the risk-free interest rate.rate over the expected term. Significant changes in any of those inputs in isolation can result in a significant change in the fair value measurement.
Generally, an increase in the market price of the Company’s shares of common stock, an increase in the volatility of the Company’s shares of common stock, and an increase in the remaining term of the warrant, or an increase of a probability of a down-round triggering eventwarrants and conversion feature would each result in a directionally similar change in the estimated fair value of the Company’s warrants. Such changes would increase the associated liability while decreases in these assumptions would decrease the associated liability. An increase in the risk-free interest rate or a decrease in the positive differential between the warrant’swarrants’ and conversion feature’s exercise priceprices and the market price of the Company’s shares of common stock would result in a decrease in the estimated fair value measurement of the warrants and thus a decrease in the associated liability. The Company has not, and does not plan to, declare dividends on its common stock, and as such, there is no change in the estimated fair value of the warrants and conversion feature due to the dividend assumption.
| F-26 |
Note 10.11. Stock-based Compensation
The Company has a stock-based compensation plan available to grant stock options and RSURSUs to the Company’s directors, employees and consultants. Under the 2012 Employee, Director and Consultant Equity Incentive Plan (the “Plan”), a maximum of 15,600,0001,560,000 shares of common stock may be awarded. Theawarded(after giving effect to the one-for-ten reverse stock split). In 2015, the Company amended its Plan, so that a maximum of shares of common stock that may be awarded was approved by the Company’s stockholders on July 19, 2012, following the Merger, replacing Vringo’s then existing 2006 Stock Option 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.increased to 2,100,000. As of December 31, 2014, 5,793,4202015, 933,460 shares were available for future grants under the Plan. Total stock-based compensation expense for the years ended December 31, 2015 and 2014 2013,was $5,064 and 2012 was $10,967, $12,093, and $8,087, respectively.
The following table illustrates the stock options granted during the year ended December 31, 2014.2015. There were no RSURSUs granted during the year ended December 31, 2014.2015.
| Title | Grant date | No. of options | Exercise price | Fair market value at grant date | Vesting terms | Assumptions used in Black-Scholes model | ||||||||
| Directors | January | $ | $ | Over 1 year for for | Volatility: Risk free interest rate: Expected term, in years: Dividend yield: 0.00% | |||||||||
Certain options granted to officers, directors and certain key employees are subject to acceleration of vesting of 75% - 100% (according to the agreement signed with each grantee), upon a subsequent change of control.control event.
The following tables summarize information about stock options and RSU activity during the year ended December 31, 2014:2015:
| 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 | ||||||||||
| RSUs | Options | |||||||||||||||||||||||
| No. of RSUs | Weighted average grant date fair value | No. of options | Weighted average exercise price | Exercise price range | Weighted average grant date fair value | |||||||||||||||||||
| Outstanding at December 31, 2014 | 119,636 | $ | 36.40 | 805,235 | $ | 33.60 | $9.60 - $55.00 | $ | 22.40 | |||||||||||||||
| Granted | — | — | 115,000 | $ | 5.45 | $5.10 - $5.90 | $ | 3.52 | ||||||||||||||||
| Vested/Exercised | (30,991 | ) | $ | 36.51 | — | — | — | — | ||||||||||||||||
| Forfeited | (35,365 | ) | $ | 36.31 | (48,751 | ) | $ | 19.41 | $5.10 - $37.60 | $ | 11.13 | |||||||||||||
| Expired | — | — | — | — | — | — | ||||||||||||||||||
| Outstanding at December 31, 2015 | 53,280 | $ | 36.31 | 871,484 | $ | 30.65 | $5.10 - $55.00 | $ | 20.49 | |||||||||||||||
| Exercisable at December 31, 2015 | — | — | 815,361 | $ | 31.49 | $5.10 - $55.00 | ||||||||||||||||||
| 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, 2015 | 187,965 | $ | 22.10 | 119,636 | $ | 36.40 | ||||||||||
| Granted | 115,000 | $ | 3.52 | — | $ | — | ||||||||||
| Vested | (214,631 | ) | $ | 17.18 | (30,991 | ) | $ | 36.51 | ||||||||
| Forfeited | (32,211 | ) | $ | 8.48 | (35,365 | ) | $ | 36.31 | ||||||||
| Balance at December 31, 2015 | 56,123 | $ | 10.66 | 53,280 | $ | 36.31 | ||||||||||
| F-27 |
The following table summarizes information about employee and non-employee stock options outstanding as of December 31, 2014:2015:
| Exercise price | No. options outstanding | No. options exercisable | Weighted average remaining contractual life (years) | |||||||||||||||||||
| Exercise price range | Exercise price range | No. options outstanding | No. options exercisable | Weighted average remaining contractual life (years) | ||||||||||||||||||
| $ | 0.01-1.00 | 61,178 | 61,178 | 6.94 | 0.01-10.00 | 98,618 | 70,285 | 4.18 | ||||||||||||||
| $ | 1.01-2.00 | 845,667 | 754,001 | 8.22 | 10.00-20.00 | 84,566 | 79,567 | 4.88 | ||||||||||||||
| $ | 2.01-3.00 | 585,000 | 337,082 | 8.53 | 20.00-30.00 | 46,000 | 41,000 | 7.50 | ||||||||||||||
| $ | 3.01-4.00 | 5,323,000 | 4,066,263 | 8.30 | 30.00-40.00 | 518,550 | 514,926 | 7.20 | ||||||||||||||
| $ | 4.01-5.00 | 1,025,000 | 741,667 | 9.15 | 40.00-50.00 | 102,500 | 88,333 | 8.15 | ||||||||||||||
| $ | 5.01-6.00 | 212,500 | 212,500 | 5.48 | 50.00-60.00 | 21,250 | 21,250 | 1.09 | ||||||||||||||
| 8,052,345 | 6,172,691 | 871,484 | 815,361 | |||||||||||||||||||
As of December 31, 2015 and 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 and options exercisable was $2,558 and $2,445, respectively. As of December 31, 2012, the total aggregate intrinsic value of options outstanding and options exercisable was $3,548 and $3,200, respectively.these dates. The total aggregate intrinsic value of options exercised during the yearsyear ended December 31, 2014 2013 and 2012 was $2,363, $1,322, and $2,417, respectively.$2,363. There were no options exercised during the year ended December 31, 2015.
The total fair value of stock options that vested in the years ended December 31, 2015 and 2014 2013,was $3,687 and 2012 was $7,987, $7,807, and $5,927, respectively. As of December 31, 2014,2015, there waswere approximately $7,575$1,420 of total unrecognized share-basedstock-based payment cost related to non-vested options, shares and RSUs, granted under the incentive stock option plans. Overall, the cost is expected to be recognized over a weighted average of 1.251.05 years.
The Company did not recognize tax benefits related to its stock-based compensation as there is a full valuation allowance recorded.
Note 11.12. Warrants
The following table summarizes information about warrant activity during the year ended December 31, 2014: 2015:
| 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 | ||||||||
| No. of warrants | Weighted average exercise price | Exercise price range | ||||||||||
| December 31, 2014 | 1,740,265 | $ | 42.26 | $9.40 - $50.60 | ||||||||
| Granted | 587,500 | $ | 9.57 | $5.00 - $10.00 | ||||||||
| Expired on June 21, 2015 | (1,321,086 | ) | $ | 50.55 | $9.40 - $50.60 | |||||||
| December 31, 2015 | 1,006,679 | $ | 12.92 | $10.00 - $17.60 | ||||||||
As part
On May 4, 2015, the Company issued warrants to purchase up to 537,500 of its shares of common stock in conjunction with the issuance of the Merger, on July 19, 2012, Vringo issuedNotes. The warrants are exercisable at $10.00 per share and are exercisable for a period of five years.
In October 2015, in connection with the purchase of IDG, the Company granted the finder with warrants to I/P’s stockholders 8,299,115 warrantspurchase up to 50,000 of its shares of common stock, at an exercise price of $1.76$5.00 per share and contractual term(the “October 2015 Warrants”).
Prior to June 21, 2015, the Company had public warrants to purchase 478,400 shares of 5 years (“Series 1 Warrant”). These warrants bear down-round protection clauses and as a result, they were initially classified as a long-term derivative liability and recorded at fair value. In addition, I/P’s stockholders received another 7,660,722 warrantscommon stock at an exercise price of $1.76 per share$50.60, which were listed on the NASDAQ Capital Market under the symbol “VRNGW,” and contractual termadditional warrants which were privately held to purchase 842,686 shares of 5 years (“Series 2 Warrant”). As the Series 2 Warrants do not have down-round protection clauses, they were classified as equity. Ascommon stock, all of which expired on June 21, 2015.
Certain of the Merger, Vringo’sCompany’s outstanding warrants also included certain derivative warrants, at an exercise price of $0.94 per share, with a remaining contractual term of 2.44 years (the “Special Bridge Warrants” and the “Conversion Warrants”); certain derivative warrants, at an exercise price of $1.76 per share, with a remaining contractual term of 4.55 years (the “Preferential Reload Warrants”); and certain warrants,are classified as equity at an exercise pricewarrants and certain are classified as derivative warrant liabilities. The Company’s outstanding equity warrants as of $1.76 per share,December 31, 2015 consist of the following:
| No. outstanding | Exercise price | Remaining contractual life | Expiration Date | |||||||||
| Series 1 Warrants | 149,025 | $ | 17.60 | 1.55 years | July 19, 2017 | |||||||
| Series 2 Warrants | 194,352 | $ | 17.60 | 1.55 years | July 19, 2017 | |||||||
| Reload Warrants | 75,802 | $ | 17.60 | 1.10 years | February 6, 2017 | |||||||
| October 2015 Warrants | 50,000 | $ | 5.00 | 5.29 years | April 15, 2021 | |||||||
| Outstanding as of December 31, 2015 | 469,179 | |||||||||||
| F-28 |
The Company’s outstanding derivative warrant liabilities as of December 31, 2015 consist of the following:
| No. outstanding | Exercise price | Remaining contractual life | Expiration Date | |||||||||
| May 2015 Warrants | 537,500 | $ | 10.00 | 4.34 years | May 4, 2020 | |||||||
Note 13. Other Current Assets
As of December 31, 2015 and 2014, the Company’s other current assets were comprised of the following:
| For the year ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Prepaid expenses | $ | 674 | $ | 482 | ||||
| Inventory | 379 | — | ||||||
| Accounts receivable | 246 | — | ||||||
| Other | 97 | 28 | ||||||
| Balance as of December 31 | $ | 1,396 | $ | 510 | ||||
Note 14. Accounts Payable, Accrued Expenses and Other Current Liabilities
As of December 31, 2015 and 2014, the Company’s accounts payable, accrued expenses and other current liabilities were comprised of the following:
| For the year ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Accounts payable | $ | 4,278 | $ | 3,598 | ||||
| Accrued liabilities | 607 | 465 | ||||||
| Tax liabilities | 538 | 559 | ||||||
| Other | 607 | 110 | ||||||
| Balance as of December 31 | $ | 6,030 | $ | 4,732 | ||||
On July 12, 2015, Group Mobile amended its existing loan agreement with Oklahoma Fidelity Bank, a remaining contractual termdivision of 4.55 years (the “non-Preferential Reload Warrants”). In addition, warrants that were issued upon completionFidelity Bank. The total amount of Vringo’s public offeringthe loan is $300 and it bears a variable interest, which is the lower of the Wall Street Journal prime rate plus 1% or 5% annually. The maturity date of the loan is July 12, 2016. The outstanding balance on the loan as of December 31, 2015 was $268 and is included in June 2010 were also outstanding uponaccounts payable, accrued expenses and other current liabilities on the Merger. These warrants are publicly tradedconsolidated balance sheets.
Note 15. Discontinued Operations and are exercisable until June 21, 2015, at an exercise price of $5.06 per share.Assets Held For Sale
On October 12, 2012,February 18, 2014, the Company entered into an agreement with certainexecuted the sale of its warrant holders, pursuantmobile social application business to which, on October 23InfoMedia. As consideration for the assets and 24, 2012,agreements related to the holders exercised in cash 3,721,062 of their outstanding warrants, with an exercise price of $1.76 per share. In exchange,Company’s mobile social application business, the Company granted such warrant holders unregistered warrantsreceived 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 of InfoMedia’s board of directors and the Company to purchase an aggregatereceived a number of 3,000,000customary protective rights. The InfoMedia Class B 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 wasare accounted for as an inducement, therefore ana cost-method investment at the carrying amount of $2,883 was recorded$787 and are included in other assets in the consolidated balance sheets as a non-operating expense duringof December 31, 2015 and 2014. 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 warrants2015, there were no events or changes in circumstances that would indicate that the carrying amount of this investment may no longer subject to down-round protection they were re-measured at fair value and classified as equity instruments. The overall impactbe recoverable.
| F-29 |
In connection with the sale 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,its mobile social application business, the Company recorded an additional non-operating expense of $1,617, and re-classified $3,918 from derivative liabilities on account of warrantsis required to stockholders’ equity.
On June 19, 2014,present 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 sharesresults of the Company’s common stock, par value $0.01 per share, at an exercise pricemobile social application business as discontinued operations in the consolidated statements of $5.06 per share (the “June 2014 Warrants”).operations. The June 2014 Warrants expire on June 21, 2015 and because such warrants do not bear any down-round protection clauses, they are classifiedfollowing table represents the components of operating results from discontinued operations, as equity instruments. As a resultpresented in the consolidated statements of these transactions, the Company received $10,027 of proceeds.operations:
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.
| As of December 31, | ||||||||
| 2015 | 2014 | |||||||
| Revenue | $ | — | $ | 37 | ||||
| Operating expenses | — | (266 | ) | |||||
| Operating loss | — | (229 | ) | |||||
| Non-operating income (expense) | — | 20 | ||||||
| Loss before taxes on income | — | (209 | ) | |||||
| Income tax expense | — | (246 | ) | |||||
| Loss from discontinued operations | $ | — | $ | (455 | ) | |||
Note 12. Revenue from Settlements and Licensing Agreements
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.
On April 28, 2014, the Company entered into a confidential agreement with Tyco that resolved all litigation pending between the parties.
On October 1, 2014, the Company entered into a confidential agreement with Belkin that resolved all litigation pending between the parties.
Note 13.16. Income Taxes
For the years ended December 31, 2015 and 2014, 2013 and 2012,the loss from continuing operations before taxes consists of the following:
| 2014 | 2013 | 2012 | 2015 | 2014 | ||||||||||||||||
| Domestic | $ | (108,828 | ) | $ | (41,204 | ) | $ | (17,673 | ) | $ | (12,072 | ) | $ | (108,828 | ) | |||||
| Foreign | (394 | ) | (544 | ) | (736 | ) | (52 | ) | (394 | ) | ||||||||||
| $ | (109,222 | ) | $ | (41,748 | ) | $ | (18,409 | ) | $ | (12,124 | ) | $ | (109,222 | ) | ||||||
There was no income
Income tax expense (benefit) attributable to continuing operations for the years ended December 31, 2014, 2013 and 2012. Income tax expense attributable to discontinued operations for the years ended December 31, 2014, 20132015 and 20122014 consisted of the following:
| 2014 | 2013 | 2012 | ||||||||||
| Foreign | ||||||||||||
| Current | $ | (246 | ) | $ | (245 | ) | $ | (112 | ) | |||
| Deferred | — | (12 | ) | 57 | ||||||||
| $ | (246 | ) | $ | (257 | ) | $ | (55 | ) | ||||
| 2015 | 2014 | |||||||
| Continued operations: | ||||||||
| Current: | ||||||||
| Federal | $ | — | $ | — | ||||
| State | — | — | ||||||
| Deferred: | ||||||||
| Federal | (866 | ) | — | |||||
| State | — | — | ||||||
| $ | (866 | ) | $ | — | ||||
| Discontinued operations: | ||||||||
| Current: | ||||||||
| Federal | $ | — | $ | (246 | ) | |||
| State | — | — | ||||||
| Deferred: | ||||||||
| Federal | — | — | ||||||
| State | — | — | ||||||
| $ | — | $ | (246 | ) | ||||
Income tax expense attributable to continuing operations differed from the amounts computed by applying the applicable U.S. federal income tax rate to loss from continuing operations before taxes on income as a result of the following:
| 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 | $ | — | $ | — | $ | — | ||||||
| For the year ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Loss from continuing operations before taxes on income | $ | (12,124 | ) | $ | (109,222 | ) | ||
| Tax rate | 35 | % | 35 | % | ||||
| Computed "expected" tax benefit | 4,243 | 38,228 | ||||||
| State taxes, net of federal income tax benefit | 294 | 793 | ||||||
| Change in valuation allowance | (3,627 | ) | (13,864 | ) | ||||
| Nondeductible expenses | (64 | ) | (25,070 | ) | ||||
| Other items | 20 | (87 | ) | |||||
| Income tax benefit attributable to continuing operations | $ | 866 | $ | — | ||||
| F-30 |
The taxDeferred income taxes reflect the net effects of temporary differences which give rise tobetween the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred income tax assets and liabilities atare as follows as of December 31, 20142015 and 2013 are as follows:2014:
| December 31, | December 31, | |||||||||||||||
| 2014 | 2013 | 2015 | 2014 | |||||||||||||
| Deferred income tax assets: | ||||||||||||||||
| Net operating loss carryforwards | $ | 43,558 | $ | 29,918 | $ | 44,756 | $ | 43,558 | ||||||||
| Stock-based compensation | 4,789 | 8,104 | 4,839 | 4,789 | ||||||||||||
| Impairment of patents and other | 341 | 7 | ||||||||||||||
| Total gross deferred income tax assets | 48,688 | 38,029 | ||||||||||||||
Patents and other | 1,212 | 341 | ||||||||||||||
| Net deferred income tax assets | 50,807 | 48,688 | ||||||||||||||
| Less: | ||||||||||||||||
| Valuation allowance | (48,688 | ) | (37,758 | ) | (50,807 | ) | (48,688 | ) | ||||||||
| 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 Company acquired IDG in the fourth quarter of 2015 and, as a result of the acquisition, all components of IDG’s deferred tax liabilities were recorded as part of the acquisition and were netted with similar deferred tax assets of the Company. This resulted in the reduction of the valuation allowance of $866.
The valuation allowance for 2015 is $50,807, which will be reduced whenif and ifwhen the Company determines that the deferred income tax assets are more likely than not to be realized.
The following table presents the changes to the valuation allowance during the periodsyears 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 January 1, 2014 | $ | 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 | ||
| Charged to cost and expenses – continuing operations | 3,627 | |||
| Charged to cost and expenses – discontinued operations | (299 | ) | ||
| Return to provision true-up and other | (1,209 | ) | ||
| As of December 31, 2015 | $ | 50,807 |
As of December 31, 2014,2015, the Company’s estimated aggregate total net tax loss carryforwards NOL was approximately $117,000were $123,591 for U.S. federal, state and local purposes expiring 20 years from the respective tax years to which they relate. The Company has NOL beginning in 2006.amounts are presented before Internal Revenue Code, Section 382 limitations ("Section 382"). 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, the Company’s ability to utilize all such NOL and credit carryforwards may be limited. The NOL available post-merger that the Company completed in 2012 that are not subject to limitation amount to $83,990. The remaining NOLs of $39,601 are subject to the limitation of Section 382. The annual limitation is approximately $2,000.
The Company filedfiles its tax returns in the U.S. federal jurisdiction, as well as in various state and local jurisdictions. Vringo, Inc. has open tax years for 20102012 through 2014. As of December 31, 2014,2015, all tax years for the Company’s subsidiary Innovate/Protect are still open. The Company’s Israeli subsidiary filesfiled its income tax returns in Israel. AsIsrael prior to closing the business in the first quarter of December 31, 2014, the Israeli subsidiary has2014; there are no open tax years for 2010 through 2014.years.
| F-31 |
The Company did not have any material unrecognized tax benefits as of December 31, 2014.2015. The Company does not expect to record any additional material provisions for unrecognized tax benefits within the next year.
Note 14.17. Commitments and Contingencies
Litigation and legal proceedings
TheZTE
On December 7, 2015, the Company retainsentered into the services of professional service providers, including law firms that specialize in intellectual property licensing, enforcementSettlement Agreement with ZTE, pursuant to which the parties withdrew all pending litigations and proceedings against each other and the Company granted ZTE a non-exclusive, non-transferable, worldwide perpetual license to certain patents and patent law. These service providersapplications owned by the Company.
Pursuant to the Settlement Agreement, the parties have taken steps to withdraw all pending litigations and proceedings against one another. As such, the Company reversed $1,059 of contingent liabilities related to potential legal fees that were previously accrued for proceedings in the UK, France, and Germany. To date, proceedings in Brazil and Romania have yet to be formally closed, although the parties are often retainedcurrently working together to formally close proceedings in each of those countries.
In several jurisdictions, although ZTE requested that government organizations close proceedings against Vringo, the organizations make such determinations on an hourly, monthly, project, contingent or a blended fee basis.their own volition. 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 probableChina, ZTE requested that the milestones will be achievedNational Developmental and Reform Commission (“NDRC”) conclude its investigation against Vringo. However, the NDRC has not yet closed its investigation. In addition, ZTE requested that the European Commission close its file on Vringo following ZTE’s withdrawal of its complaint against Vringo. On February 1, 2016, the European Commission confirmed that it would close its file on ZTE’s complaint against Vringo.
In addition, in China and the fees can be reasonably estimated.Netherlands, Vringo continues to appeal patent invalidity rulings issued in connection with proceedings originally brought by ZTE. In each instance, ZTE has indicated that it will not oppose Vringo’s appeals, although Vringo must still plead its case before the respective adjudicatory body in each jurisdiction. In addition, the European Patent Office (“EPO”) has not yet dismissed an opposition action filed on one of Vringo’s recently issued European patents, and the EPO may require Vringo to defend this action even though ZTE has indicated that it will not continue to pursue the action.
The Company’s subsidiaries haveASUS
Vringo has 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 ASUSASUSTek Computer Inc. and its subsidiaries in Germany, SpainIndia, and India. In such jurisdictions, an unsuccessful plaintiffSpain. Should the Company be deemed the losing party, it may be required to payheld responsible for a portion of the other party’sdefendant’s legal fees. In addition,fees for 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 ifrelevant application or for 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.litigation.
Pursuant to negotiationOther
The Company is also engaged in additional litigation, for which no contingent liability is recorded.
Deposits with ZTE’s United Kingdom subsidiary, thecourts
The Company made two written commitments,deposits with courts during 2015 and 2014, related to its proceedings in November 2012Germany, Brazil, Romania and May 2013, representing payment should a liability by Vringo Infrastructure ariseMalaysia. Deposits with courts paid in local currency are remeasured on the balance sheet date based on the related foreign exchange rate on that date. As of December 31, 2015, deposits with courts, which are recorded as a resultcurrent assets, totaled $1,930, 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$1,279 was subsequently returned to be no more than approximately $2,900 for each case.
In March 2014, the Company withdrew its claim to one of the patents includedus 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.2016. 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.deposits with courts totaled $2,067.
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.
| F-32 |
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,January 2014, the Company signed a rentalentered into an amended lease agreement for its corporate executive office in New York for an annual rental feethe lease 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 on August 1, 2014, which was the date when the new office space was available on August 1, 2014.available. This lease will expire in October 2019. Group Mobile has a lease for its office space in Chandler, AZ. The annual rental fee is approximately $72; the current lease expires on June 30, 2016.
Rent expense for operating leases for the years ended December 31, 2015 and 2014 2013were $381 and 2012 were $366, $230, and $120, respectively.
Future minimum lease payments under non-cancelable operating leases for office space, as of December 31, 2014,2015, are as follows:
| Year ending December 31, | Amount | Amount | ||||||
| 2015 | $ | 370 | ||||||
| 2016 | 403 | $ | 439 | |||||
| 2017 | 407 | 407 | ||||||
| 2018 | 416 | 416 | ||||||
| 2019 | 347 | 347 | ||||||
| Total | $ | 1,943 | $ | 1,609 | ||||
Note 15. Quarterly Financial Information (unaudited)18. Subsequent Events
On March 9, 2016, the Company amended the Notes, which were originally issued on May 4, 2015, and entered into an exchange note agreement (the “Exchange Note Agreement”).
Pursuant to the Exchange Note Agreement, the Company issued to the investors an aggregate of 703,644 shares of its common stock, par value $0.01 per share, in exchange for the reduction of $1,267 of the outstanding aggregate principal amount of the Notes. As a result, the outstanding aggregate principal amount under the Notes is reduced from $3,016 to $1,749. The Notes are no longer convertible and the outstanding aggregate principal amount will be payable by the Company on the maturity date, which was extended to June 30, 2017, in cash only at 102%, which is equal to $1,784. The interest rate has increased from 8% to 10% per annum and is payable monthly beginning on April 1, 2016. The Company agreed to maintain a cash balance, including cash equivalents, of no less than $2,900 throughout the duration of the Notes.
In addition, the Company agreed to reduce the exercise price of the May 2015 Warrants to purchase an aggregate of 537,500 shares of the Company’s common stock originally issued to the investors on May 4, 2015 from $10.00 to $3.00 per share, and the parties also agreed to remove from the warrants certain anti-dilution features.
In connection with the foregoing amendments, the Company paid a restructuring fee in the amount of $50.
The followingCompany is a summarycurrently in the process of evaluating the Company's selected quarterly financial dataaccounting for the years ended December 31, 2014 and 2013:
this transaction.
| 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. Risks and Uncertainties
| ||
| ||
|
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 1610th day of March, 2015.2016.
| VRINGO, INC. | ||
| By: | /s/ Andrew D. Perlman | |
| Andrew D. Perlman | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
Pursuant to the requirements of Securities 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 in the capacities indicated below and on the dates indicated.
| Signature | Title | Date | ||
| /s/ ANDREW D. PERLMAN | Chief Executive Officer and Director (Principal | March | ||
| Andrew D. Perlman | Executive Officer) | |||
| /s/ ANASTASIA NYRKOVSKAYA | Chief Financial Officer (Principal Financial Officer | March | ||
| Anastasia Nyrkovskaya | and Principal Accounting Officer) | |||
| / | Director | March | ||
| / | Director | March | ||
| / | Director | March | ||
| / | Director | March | ||
| / | Director | March | ||
/ | Director | March | ||
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Exhibits Index
| Exhibit No. | Description | |
| 2.1 | Agreement and Plan of Merger by and among Vringo, Inc., VIP Merger Sub, Inc. and Innovate/Protect, Inc., dated as of March 12, 2012 (incorporated by reference from Exhibit 2.1 to our Current Report on Form 8-K filed on March 14, 2012) | |
| Amended and Restated Certificate of Incorporation, | ||
| 3.2 | Amended and Restated Bylaws (incorporated by reference from our Registration Statement on Form S-1 filed on January 29, 2010) | |
| 3.3 | Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock (incorporated by reference from Exhibit 3.2 to our Current Report on Form 8-K filed on July 20, 2012) | |
| 3.4 | Certificate of Designations of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (incorporated by reference from Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on October 16, 2015) | |
| 4.1 | Specimen common stock certificate (incorporated by reference from our Registration Statement on Form S-1 filed on May 18, 2010) | |
| 4.2 | ||
| Form of Warrant Agreement (incorporated by reference from our Registration Statement on Form S-1 filed on March 29, 2010) | ||
| Form of Special Bridge Warrants (incorporated by reference from our Registration Statement on Form S-1 filed on January 29, 2010) | ||
| Form of Management Option Agreement (incorporated by reference from our Registration Statement on Form S-1 filed on March 29, 2010) | ||
| 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) | ||
| Form of Reload Warrants (incorporated by reference from our Quarterly Report on Form 10-Q for the period ended March 31, 2012 filed on May 15, 2012) | ||
| Form of Series 1 Warrant (incorporated by reference from Annex F to our Registration Statement on Form S-4 (File No. 333-180609) originally filed with the SEC on April 6, 2012) | ||
| Form of Series 2 Warrant (incorporated by reference from Annex G to our Registration Statement on Form S-4 (File No. 333-180609) originally filed with the SEC on April 6, 2012) | ||
| Form of Warrant, dated June 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) | ||
| 4.10 | Form of Warrant (incorporated by reference from Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on October 16, 2015) | |
| 4.11 | Form of Notes (incorporated by reference from Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on May 4, 2015) | |
| 4.12 | Form of Warrant (incorporated by reference from Exhibit 10.3 to our Current Report on Form 8-K filed with the SEC on May 4, 2015) |
61
| 4.13 | Form of Base Indenture between Vringo, Inc. and Computershare Trust Company, N.A. (incorporated by reference from Exhibit 10.4 to our Current Report on Form 8-K filed with the SEC on May 4, 2015) | |
| 4.14 | Form of First Supplemental Indenture (incorporated by reference from Exhibit 10.5 to our Current Report on Form 8-K filed with the SEC on May 4, 2015) | |
| 10.1† | Vringo, Inc. 2012 Employee, Director and Consultant Equity Incentive Plan, as amended (incorporated by reference from Appendix C of our | |
| 10.2† | Form of Stock Option Agreement (incorporated by reference from our Registration Statement on Form S-8 filed on July 26, 2012) | |
| 10.3† | Form of Restricted Stock Unit Agreement (incorporated by reference from our Registration Statement on Form S-8 filed on July 26, 2012) | |
| 10.4† | Employment Agreement, dated February 13, 2013, by and between Vringo and Andrew D. Perlman (incorporated by reference from our Annual Report on Form 10-K for the period ended December 31, 2012 filed on 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) | |
| 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) | ||
| Lease, dated July 10, 2012, by and between Vringo, Inc. and Teachers Insurance and Annuity Association of America, for the benefit of its separate Real Estate Account Landlord (incorporated by reference from our Quarterly Report on Form 10-Q for the period ended September 30, 2012 filed on November 14, 2012), as amended 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) | ||
| 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) | ||
| Form of Subscription Agreement, dated October 4, 2012, by and between Vringo, Inc. and each of the investors (incorporated by reference from our Current Report on Form 8-K filed on October 5, 2012) | ||
| Form of Subscription Agreement, dated August 9, 2012, by and between Vringo, Inc. and each of the investors (incorporated by reference from our Current Report on Form 8-K filed on August 9, 2012) | ||
| 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) |
62
| Employment 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) | ||
| Consulting 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) | ||
| 10.14†* | Employment Agreement, dated February 13, 2013, by and between Vringo, Inc. and Cliff Weinstein | |
| 10.15††* | Confidential Settlement and License Agreement, dated as of December 3, 2015, by between ZTE Corporation, for itself and on behalf of its affiliates and Vringo, for itself and on behalf of its affiliates | |
| 10.16 | Securities Purchase Agreement, dated May 4, 2015, between Vringo, Inc. and the investors named therein (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on May 4, 2015) | |
| 10.17 | Form of Security Agreement in favor of Iroquois Master Fund Ltd. as collateral agent (incorporated by reference from Exhibit 10.6 to our Current Report on Form 8-K filed with the SEC on May 4, 2015) | |
| 10.18 | Form of Stock Purchase Agreement, dated as of October 15, 2015, by and between Vringo, Inc., International Development Group Limited, the sellers party thereto and the sellers’ representative (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on October 16, 2015) | |
| 10.19† | Amendment No. 1 to Employment Agreement dated August 20, 2015, by and between Vringo, Inc. and Andrew D. Perlman (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on August 21, 2015) | |
| 10.20† | Amendment No. 2 to Employment Agreement, dated October 13, 2015, by and between Vringo, Inc. and Andrew D. Perlman (incorporated by reference from Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on October 16, 2015) | |
| 10.21† | Amendment No. 1 to Employment Agreement, dated October 13, 2015, by and between Vringo, Inc. and Anastasia Nyrkovskaya (incorporated by reference from Exhibit 10.3 to our Current Report on Form 8-K filed with the SEC on October 16, 2015) | |
| 10.22† | Amendment No. 1 to Employment Agreement, dated October 13, 2015, by and between Vringo, Inc. and David L. Cohen (incorporated by reference from Exhibit 10.4 to our Current Report on Form 8-K filed with the SEC on October 16, 2015) | |
| 10.23† | Amendment No. 3 to Employment Agreement, dated as of June 22, 2015, by and between Vringo, Inc. and Andrew Kennedy Lang (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on June 24, 2015) | |
| 10.24†* | Amendment to Employment Agreement dated October 13, 2015, by and between Vringo, Inc. and Cliff Weinstein | |
| 21* | Subsidiaries of Vringo, Inc. |
63
| 23.1* | Consent of | |
| 23.2* | Consent of | |
| 31.1* | Certification of Principal Executive Officer pursuant to Exchange Act, Rules 13a – 14(a) and 15d – 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a – 14(a) and 15d – 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32** | Certifications 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 |
| 101.INS* | XBLR Instance Document | |
| 101.SCH* | 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. |