UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 2013
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from 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 Identification No.) | |
780 3rd | 10017 | |
(Address of principal executive offices) | (Zip Code) |
(212) 309-7549
(Registrant’s Telephone Number, Including Area Code)
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 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 | ¨ | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨ No xAs of November 5, 2013, 84,125,738July 25, 2014, 92,545,862 shares of the registrant’s common stock were outstanding.
VRINGO, INC.
Table of Contents
Page | |||
| PART I. FINANCIAL INFORMATION | 3 | ||
Item 1. | 3 | ||
Item 2. | 17 | ||
Item 3. | |||
Item 4. | |||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 5. | |||
Item 6. | |||
Vringo, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands)
| September 30, 2013 | December 31, 2012 | ||||||
| Current assets | |||||||
| Cash and cash equivalents | $ | 40,436 | $ | 56,960 | |||
| Short-term investments | 673 | — | |||||
| Accounts receivable | 98 | 151 | |||||
| Prepaid expenses and other current assets | 656 | 318 | |||||
| Total current assets | 41,863 | 57,429 | |||||
| Long-term deposit | 46 | 54 | |||||
| Property and equipment, at cost, net of $119 and $47 accumulated depreciation and amortization, as of September 30, 2013 and December 31, 2012, respectively | 249 | 294 | |||||
| Intangible assets, net | 30,360 | 34,044 | |||||
| Goodwill | 65,965 | 65,965 | |||||
| Total assets | $ | 138,483 | $ | 157,786 | |||
| Current liabilities | |||||||
| Accounts payable and accrued expenses | $ | 4,011 | $ | 1,444 | |||
| Accrued employee compensation | 256 | 398 | |||||
| Total current liabilities | 4,267 | 1,842 | |||||
| Long-term liabilities | |||||||
| Derivative liabilities on account of warrants | 4,126 | 7,612 | |||||
| Commitments and contingencies | |||||||
| 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; 84,120,724 and 81,889,226 issued and outstanding as of September 30, 2013 and December 31, 2012, respectively | 841 | 819 | |||||
| Additional paid-in capital | 186,308 | 171,108 | |||||
| Deficit accumulated during the development stage | (57,059) | (23,595) | |||||
| Total stockholders’ equity | 130,090 | 148,332 | |||||
| Total liabilities and stockholders’ equity | $ | 138,483 | $ | 157,786 | |||
| June 30, 2014 (Unaudited) | December 31, 2013 | |||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 31,654 | $ | 33,586 | ||||
| Assets held for sale | — | 787 | ||||||
| Deposits with courts | 2,304 | — | ||||||
| Other current assets | 224 | 455 | ||||||
| Total current assets | 34,182 | 34,828 | ||||||
| Property and equipment, at cost, net of $348 and $134 accumulated depreciation, as of June 30, 2014 and December 31, 2013, respectively | 161 | 230 | ||||||
| Intangible assets, net | 20,823 | 22,748 | ||||||
| Goodwill | 65,757 | 65,757 | ||||||
| Other assets | 1,034 | 247 | ||||||
| Total assets | $ | 121,957 | $ | 123,810 | ||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 4,582 | $ | 5,146 | ||||
| Accrued employee compensation | 36 | 299 | ||||||
| Derivative warrant liabilities | 89 | 43 | ||||||
| Total current liabilities | 4,707 | 5,488 | ||||||
| Long-term liabilities | ||||||||
| Derivative warrant liabilities | $ | 3,015 | $ | 4,040 | ||||
| Other liabilities | 69 | — | ||||||
| Commitments and contingencies (Note 10) | ||||||||
| Stockholders’ equity | ||||||||
| Series A Convertible Preferred stock, $0.01 par value per share; 5,000,000 authorized; none issued and outstanding | — | — | ||||||
| Common stock, $0.01 par value per share 150,000,000 authorized; 92,545,862 and 84,502,653 issued and outstanding as of June 30, 2014 and December 31, 2013, respectively | 925 | 845 | ||||||
| Additional paid-in capital | 210,427 | 189,465 | ||||||
| Accumulated deficit | (97,186 | ) | (76,028 | ) | ||||
| Total stockholders’ equity | $ | 114,166 | $ | 114,282 | ||||
| Total liabilities and stockholders’ equity | $ | 121,957 | $ | 123,810 | ||||
The accompanying notes form an integral part of these consolidated financial statements.
Vringo, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
| Three months ended September 30, | Nine months ended September 30, | Cumulative from Inception to September 30, | ||||||||||||||
| 2013 | 2012 | 2013 | 2012 | 2013 | ||||||||||||
| Revenue | $ | 50 | $ | 266 | $ | 1,276 | $ | 266 | $ | 1,645 | ||||||
| Costs and Expenses* | ||||||||||||||||
| Cost of revenue | 6,725 | 3,415 | 19,557 | 5,976 | 33,630 | |||||||||||
| Research and development | 700 | 997 | 2,110 | 997 | 3,850 | |||||||||||
| Marketing, general and administrative | 3,801 | 6,364 | 11,806 | 7,508 | 23,876 | |||||||||||
| Total operating expenses | 11,226 | 10,776 | 33,473 | 14,481 | 61,356 | |||||||||||
| Operating loss | (11,176) | (10,510) | (32,197) | (14,215) | (59,711) | |||||||||||
| Non-operating income | 30 | 82 | 76 | 82 | 114 | |||||||||||
| Non-operating expense | (30) | (12) | (76) | (19) | (104) | |||||||||||
| Gain (loss) on revaluation of derivative warrants | 645 | 7,240 | (1,220) | 7,240 | 5,627 | |||||||||||
| Issuance of warrants | — | — | — | — | (2,883) | |||||||||||
| Loss before taxes on income | (10,531) | (3,200) | (33,417) | (6,912) | (56,957) | |||||||||||
| Income tax benefit (expense) | (29) | 76 | (47) | 76 | (102) | |||||||||||
| Net loss | $ | (10,560) | $ | (3,124) | $ | (33,464) | $ | (6,836) | $ | (57,059) | ||||||
| Basic net loss per common share | $ | (0.13) | $ | (0.06) | $ | (0.40) | $ | (0.27) | $ | (1.23) | ||||||
| Diluted net loss per common share | $ | (0.13) | $ | (0.18) | $ | (0.40) | $ | (0.40) | $ | (1.26) | ||||||
| Weighted average number of shares used in computing net loss per common share: | ||||||||||||||||
| Basic: | 83,538,767 | 48,790,819 | 82,882,405 | 25,611,159 | 46,339,586 | |||||||||||
| Diluted: | 86,101,857 | 58,227,100 | 82,972,082 | 35,047,440 | 47,800,063 | |||||||||||
| * Includes stock-based compensation expense, as follows: | ||||||||||||||||
| Cost of revenue | $ | 298 | $ | 318 | $ | 894 | $ | 318 | $ | 1,417 | ||||||
| Research and development | 177 | 452 | 613 | 452 | 1,305 | |||||||||||
| Marketing, general and administrative | 2,383 | 4,592 | 7,468 | 4,762 | 14,814 | |||||||||||
| $ | 2,858 | $ | 5,362 | $ | 8,975 | $ | 5,532 | $ | 17,536 | |||||||
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Revenue | $ | 800 | $ | 1,100 | $ | 1,050 | $ | 1,100 | ||||||||
| Costs and Expenses* | ||||||||||||||||
| Operating legal costs | 5,982 | 4,790 | 10,857 | 10,189 | ||||||||||||
| Amortization of intangibles | 968 | 839 | 1,925 | 1,678 | ||||||||||||
| Research and development | 217 | 467 | 442 | 737 | ||||||||||||
| General and administrative | 3,986 | 3,759 | 8,004 | 7,750 | ||||||||||||
| Total operating expenses | 11,153 | 9,855 | 21,228 | 20,354 | ||||||||||||
| Operating loss from continuing operations | (10,353 | ) | (8,755 | ) | (20,178 | ) | (19,254 | ) | ||||||||
| Non-operating income, net | 21 | 17 | 22 | 32 | ||||||||||||
| Gain (loss) on revaluation of warrants | 348 | (1,491 | ) | (728 | ) | (1,866 | ) | |||||||||
| Issuance of warrants | (65 | ) | — | (65 | ) | — | ||||||||||
| Loss from continuing operations before income taxes | (10,049 | ) | (10,229 | ) | (20,949 | ) | (21,088 | ) | ||||||||
| Income tax expense | — | — | — | — | ||||||||||||
| Loss from continuing operations | (10,049 | ) | (10,229 | ) | (20,949 | ) | (21,088 | ) | ||||||||
| Loss from discontinued operations before income taxes* | — | (709 | ) | (209 | ) | (1,798 | ) | |||||||||
| Income tax expense | — | (2 | ) | — | (18 | ) | ||||||||||
| Loss from discontinued operations | — | (711 | ) | (209 | ) | (1,816 | ) | |||||||||
| Net loss | $ | (10,049 | ) | $ | (10,940 | ) | $ | (21,158 | ) | $ | (22,904 | ) | ||||
| Loss per share: | ||||||||||||||||
| Basic | ||||||||||||||||
| Loss per share from continuing operations | (0.12 | ) | (0.12 | ) | (0.24 | ) | (0.26 | ) | ||||||||
| Loss per share from discontinued operations | (0.00 | ) | (0.01 | ) | (0.00 | ) | (0.02 | ) | ||||||||
| Total net loss per share | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.24 | ) | $ | (0.28 | ) | ||||
| Diluted | ||||||||||||||||
| Loss per share from continuing operations | (0.12 | ) | (0.12 | ) | (0.24 | ) | (0.26 | ) | ||||||||
| Loss per share from discontinued operations | (0.00 | ) | (0.01 | ) | (0.00 | ) | (0.02 | ) | ||||||||
| Total net loss per share | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.24 | ) | $ | (0.28 | ) | ||||
| Weighted-average number of shares outstanding during the period: | ||||||||||||||||
| Basic | 87,210,483 | 82,739,447 | 86,337,006 | 82,552,710 | ||||||||||||
| Diluted | 88,515,948 | 82,739,447 | 86,337,006 | 82,552,710 | ||||||||||||
| * Includes stock-based compensation expense, as follows: | ||||||||||||||||
| Operating legal costs | $ | 385 | $ | 301 | $ | 728 | $ | 595 | ||||||||
| Research and development | 108 | 114 | 215 | 248 | ||||||||||||
| General and administrative | 2,525 | 2,515 | 4,724 | 5,043 | ||||||||||||
| Discontinued operations | — | 92 | 151 | 230 | ||||||||||||
| $ | 3,018 | $ | 3,022 | $ | 5,818 | $ | 6,116 | |||||||||
The accompanying notes form an integral part of these consolidated financial statements.
Vringo, Inc. and Subsidiaries
CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands)
| Common stock | Additional paid-in capital | Deficit accumulated during the development stage | Total | ||||||||||
| Balance as of June 8, 2011 (Inception) | $ | — | $ | — | $ | — | $ | — | |||||
| Issuance of shares of common stock | 170 | 4,975 | — | 5,145 | |||||||||
| Stock-based compensation | — | 474 | — | 474 | |||||||||
| Net loss for the period | — | — | (2,754) | (2,754) | |||||||||
| Balance as of December 31, 2011 | 170 | 5,449 | (2,754) | 2,865 | |||||||||
| Conversion of Series A Preferred Convertible Preferred stock, classified as mezzanine equity | 8 | 68 | — | 76 | |||||||||
| Stock-based compensation, including grant of shares to consultants | 3 | 8,084 | — | 8,087 | |||||||||
| Recording of equity instruments upon Merger, net of fair value of issued warrants $21,954 and issuance cost of $463 | 152 | 54,809 | — | 54,961 | |||||||||
| Issuance of warrants | — | 2,883 | — | 2,883 | |||||||||
| Conversion of Series A Preferred Convertible Preferred stock, classified as equity | 201 | (201) | — | — | |||||||||
| Exercise of warrants | 76 | 22,856 | — | 22,932 | |||||||||
| Exercise of stock options | 8 | 501 | — | 509 | |||||||||
| Issuance of shares in connection with a financing round, net of issuance cost of $52 | 96 | 31,052 | — | 31,148 | |||||||||
| Shares issued for acquisition of patents | 2 | 748 | 750 | ||||||||||
| Issuance of shares in connection with a financing round, net of issuance cost of $39 | 103 | 44,859 | — | 44,962 | |||||||||
| Net loss for the year | — | — | (20,841) | (20,841) | |||||||||
| Balance as of December 31, 2012 | 819 | 171,108 | (23,595) | 148,332 | |||||||||
| Exercise of stock options and vesting of Restricted Stock Units (“RSU”) | 18 | 955 | — | 973 | |||||||||
| Exercise of warrants | 4 | 1,352 | — | 1,356 | |||||||||
| Conversion of derivative warrants into equity warrants | — | 3,918 | — | 3,918 | |||||||||
| Stock-based compensation | — | 8,975 | — | 8,975 | |||||||||
| Net loss for the period | — | — | (33,464) | (33,464) | |||||||||
| Balance as of September 30, 2013 | $ | 841 | $ | 186,308 | $ | (57,059) | $ | 130,090 |
| Common stock | Additional paid-in capital | Accumulated deficit | Total | |||||||||||||
| Balance as of December 31, 2013 | $ | 845 | $ | 189,465 | $ | (76,028 | ) | $ | 114,282 | |||||||
| Exercise of stock options and vesting of restricted stock units (“RSU”) | 16 | 2,144 | — | 2,160 | ||||||||||||
| Issuance of warrants (Note 8) | — | 65 | — | 65 | ||||||||||||
| Exercise of warrants | 64 | 12,935 | — | 12,999 | ||||||||||||
| Stock-based compensation | — | 5,818 | — | 5,818 | ||||||||||||
| Net loss for the period | — | — | (21,158 | ) | (21,158 | ) | ||||||||||
| Balance as of June 30, 2014 | $ | 925 | $ | 210,427 | $ | (97,186 | ) | $ | 114,166 | |||||||
| Common stock | Additional paid-in capital | Accumulated deficit | Total | |||||||||||||
| Balance as of December 31, 2012 | $ | 819 | $ | 171,108 | $ | (23,595 | ) | $ | 148,332 | |||||||
| Exercise of stock options and vesting of RSU | 10 | 143 | — | 153 | ||||||||||||
| Exercise of warrants | 1 | 249 | — | 250 | ||||||||||||
| Conversion of derivative warrants into equity warrants | — | 3,748 | — | 3,748 | ||||||||||||
| Stock-based compensation | — | 6,116 | — | 6,116 | ||||||||||||
| Net loss for the period | — | — | (22,904 | ) | (22,904 | ) | ||||||||||
| Balance as of June 30, 2013 | $ | 830 | $ | 181,364 | $ | (46,499 | ) | $ | 135,695 | |||||||
The accompanying notes form an integral part of these consolidated financial statements.
Vringo, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Nine months ended September 30, | Cumulative from Inception to September 30, | |||||||||
| 2013 | 2012 | 2013 | ||||||||
| Cash flows from operating activities | ||||||||||
| Net loss | $ | (33,464) | $ | (6,836) | $ | (57,059) | ||||
| Adjustments to reconcile net cash flows used in operating activities: | ||||||||||
| Items not affecting cash flows | ||||||||||
| Depreciation and amortization | 3,856 | 1,211 | 6,686 | |||||||
| Change in deferred tax assets and liabilities | 1 | (162) | (57) | |||||||
| Stock-based compensation | 8,975 | 5,532 | 17,536 | |||||||
| Issuance of warrants | — | — | 2,883 | |||||||
| Assignment of patents | (100) | — | (100) | |||||||
| Change in fair value of warrants | 1,220 | (7,240) | (5,627) | |||||||
| Exchange rate (gain) losses | 11 | (6) | 19 | |||||||
| Changes in current assets and liabilities | ||||||||||
| Increase in receivables, prepaid expenses and other current assets | (283) | (504) | (517) | |||||||
| Increase in payables and accruals | 2,400 | 2,043 | 2,856 | |||||||
| Net cash used in operating activities | (17,384) | (5,962) | (33,380) | |||||||
| Cash flows from investing activities | ||||||||||
| Acquisition of property and equipment | (27) | (151) | (244) | |||||||
| Deposit in short-term investments | (673) | — | (673) | |||||||
| Acquisition of patents | — | (22,548) | (25,944) | |||||||
| Decrease (increase) in deposits | 8 | (46) | (38) | |||||||
| Cash acquired as part of acquisition of Vringo (1) | — | 3,326 | 3,326 | |||||||
| Net cash used in investing activities | $ | (692) | $ | (19,419) | $ | (23,573) | ||||
| Six months ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (21,158 | ) | $ | (22,904 | ) | ||
| Adjustments to reconcile net cash flows used in operating activities: | ||||||||
| Items not affecting cash flows | ||||||||
| Depreciation and amortization | 2,139 | 2,567 | ||||||
| Stock-based compensation | 5,818 | 6,116 | ||||||
| Issuance of warrants | 65 | — | ||||||
| Assignment of patents | — | (100 | ) | |||||
| Change in fair value of warrants | 728 | 1,866 | ||||||
| Exchange rate loss (gain), net | (35 | ) | 4 | |||||
| Changes in current assets and liabilities | ||||||||
| Decrease in other current assets | 231 | 73 | ||||||
| Increase (decrease) in payables and accruals | (743 | ) | 1,412 | |||||
| Net cash used in operating activities | (12,955 | ) | (10,966 | ) | ||||
| Cash flows from investing activities | ||||||||
| Acquisition of property and equipment | (145 | ) | (31 | ) | ||||
| Increase in short-term investments | — | (3,120 | ) | |||||
| Decrease (increase) in deposits | (2,304 | ) | 8 | |||||
| Net cash used in investing activities | (2,449 | ) | (3,143 | ) | ||||
| Cash flows from financing activities | ||||||||
| Exercise of stock options | 2,160 | 153 | ||||||
| Exercise of warrants | 11,292 | 174 | ||||||
| Cash provided by financing activities | 13,452 | 327 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 20 | 10 | ||||||
| Decrease in cash and cash equivalents | (1,932 | ) | (13,772 | ) | ||||
| Cash and cash equivalents at beginning of period | 33,586 | 56,960 | ||||||
| Cash and cash equivalents at end of period | $ | 31,654 | $ | 43,188 | ||||
| Supplemental disclosure of cash flows information | ||||||||
| Income taxes paid | — | 3 | ||||||
| Non-cash investing and financing transactions | ||||||||
| Non-cash acquisition of cost method investment | 787 | — | ||||||
| Conversion of derivative warrants into common stock | 1,707 | 76 | ||||||
| Conversion of derivative warrants into equity warrants | — | 3,748 | ||||||
The accompanying notes form an integral part of these consolidated financial statements.
Vringo, Inc. and Subsidiaries
| Nine months ended September 30, | Cumulative from Inception to September 30, | |||||||||
| 2013 | 2012 | 2013 | ||||||||
| Cash flows from financing activities | ||||||||||
| Proceeds from issuance of common stock, net of issuance cost of $52 | $ | — | $ | 31,148 | $ | 31,148 | ||||
| Proceeds from issuance of common stock, net of issuance cost of $39 | — | — | 44,962 | |||||||
| Repayment of note payable—related party | — | (3,200) | — | |||||||
| Proceeds from issuance of preferred stock | — | — | 1,800 | |||||||
| Proceeds from issuance of common stock | — | — | 5,145 | |||||||
| Exercise of stock options | 973 | 171 | 1,482 | |||||||
| Exercise of warrants | 566 | 1,598 | 12,841 | |||||||
| Net cash provided by financing activities | 1,539 | 29,717 | 97,378 | |||||||
| Effect of exchange rate changes on cash and cash equivalents | 13 | 1 | 11 | |||||||
| Increase (decrease) in cash and cash equivalents | (16,524) | 4,337 | 40,436 | |||||||
| Cash and cash equivalents at beginning of period | 56,960 | 5,212 | — | |||||||
| Cash and cash equivalents at end of period | $ | 40,436 | $ | 9,549 | $ | 40,436 | ||||
| Supplemental disclosure of cash flows information | ||||||||||
| Interest paid | — | 9 | 17 | |||||||
| Income taxes paid | 22 | 10 | 32 | |||||||
| Non-cash investing and financing transactions | ||||||||||
| Conversion of Series A preferred stock to common stock shares | — | — | 39 | |||||||
| Exercise of derivative warrants | 790 | 596 | 11,447 | |||||||
| Non cash acquisition of patents through issuance of common stock shares | — | — | 750 | |||||||
| Conversion of derivative warrants into equity warrants | 3,918 | — | 3,918 | |||||||
| Conversion of Series A Convertible Preferred stock, classified as mezzanine equity, into common stock, prior to the Merger | — | 76 | 76 | |||||||
| Conversion of Series A Convertible Preferred stock, classified as mezzanine equity, into common stock, upon Merger | — | 1,724 | 1,724 | |||||||
| Conversion of Series A Convertible Preferred stock, classified as equity, into common stock, post-Merger | — | 201 | 201 | |||||||
| (1) Cash acquired as part of acquisition of Vringo | ||||||||||
| Working capital (excluding cash and cash equivalents) | $ | 740 | ||||||||
| Long term deposit | (8) | |||||||||
| Fixed assets, net | (124) | |||||||||
| Goodwill | (65,965) | |||||||||
| Technology | (10,133) | |||||||||
| Fair value of Legal Parent’s shares of common stock and vested $0.01 options | 58,211 | |||||||||
| Fair value of warrants and vested stock options | 17,443 | |||||||||
| Long-term liabilities | 3,162 | |||||||||
| $ | 3,326 | |||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except for share and per share data)
Note 1. General
Vringo, Inc., together with its consolidated subsidiaries (the(“Vringo” or the “Company”), is engaged in the development and monetization of intellectual property worldwide. The Company's intellectual property portfolio consists of over 500600 patents and patent applications covering telecom infrastructure, internet search and mobile technologies. The Company’s patents and patent applications have been developed internally andor acquired from third parties. ThePrior to December 31, 2013, the Company operatesoperated a global platform for the distribution of mobile social applications and the services that it develops.
Note 2. Accounting and PlanReporting Policies
(a) Basis of Merger, dated aspresentation and principles of March 13, 2012 (the “Merger Agreement”), by and among Vringo, I/P and VIP Merger Sub, Inc., a wholly-owned subsidiary of Vringo (“Merger Sub”). Pursuant to the Merger Agreement, I/P became a wholly-owned subsidiary of Vringo through a merger of I/P with and into Merger Sub, and the former stockholders of I/P received shares of Vringo that constituted a majority of the outstanding shares of Vringo.
The accompanying interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles generally accepted in the United States of America (“U.S. GAAP”). Accordingly, the Company’s for interim financial statements for periods prior to the Merger reflect the historical results of I/P,information and the Company’s financial statements for all periods from July 19, 2012 reflect the results of the combined company. Unless specifically noted otherwise, as used throughout these consolidated financial statements, the term “Company” refers to the combined company after the Merger, and the business of I/P before the Merger. The terms I/P and Vringo or Legal Parent refer to such entities’ standalone businesses prior to the Merger.
(b) Development stage enterpriseUse of estimates
The Company’s principal activitiespreparation of accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date have been focused on developmentof the consolidated financial statements and enforcementthe reported amounts of its intellectual property,revenues and onexpenses for the researchperiods presented. Actual results may differ from such estimates. Significant items subject to such estimates and developmentassumptions include the useful lives of its products. To date, the Company has not generated significant revenues from its principal operations. Accordingly, the Company’s financial statements are presented as thoseintangible assets, the valuation of a development stage enterprise.
The Company conducts significantcertain 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 statementconsolidated statements of operations, as they arise.
(e)(d) Cash and cash equivalents
The Company invests its cash in commercial paper, money market deposits and money market funds with financial institutions. The Company has established guidelines relating to diversification and maturities of its investments in order to minimize credit risk and maintain high liquidity of funds. All highly liquid investments with original maturities of three months or less at acquisition date are considered cash equivalents.
(e) Derivative instruments
The Company recognizes all derivative instruments as either assets or liabilities in the consolidated balance sheets at their respective fair values. The Company's derivative instruments, which are discussed in Notes 6 and 8, have been recorded as liabilities at fair value, and are revalued at each reporting date, with changes in the fair value of the instruments included in the consolidated statements of operations as non-operating income (expense).
| 7 |
(f) Revenue recognition
Revenue from patent licensing and enforcement subscription services and software development is recognized if collectioncollectability is probable,reasonably assured, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and delivery of the service has been rendered. The Company uses management's best estimate of selling price for individual elements in multiple-element arrangements, where vendor specific evidence or third party evidence of selling price is not available.
Currently, the Company’s revenue arrangements provide for the payment of contractually determined fees and other sourcesconsideration for the grant of evidence are unavailable.
(g) Cost of revenueOperating legal costs
Operating legal costs mainly includesinclude expenses incurred in connection with the Company’s patent licensing and enforcement activities, such aspatent-related legal fees,expenses paid to external patent counsel (including contingent legal fees), licensing and enforcement related research, consulting costs, patent maintenance and other related expenses paid to third parties, as well as internal payroll expenses and stock-based compensation.
(h) Recently Issued Accounting Pronouncements
In July 2013, the amortizationFinancial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”)No. 2013-11, Presentation of acquired patentsan 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 technology. Legal costs incurredthe entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in connectionthe financial statements as a liability and should not be combined with ongoing litigation are expenseddeferred 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 incurred. Cost 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 also includes expenses directly relatedrecognition. The core principle of the new standard is that revenue should be recognized to providing mobiledepict the transfer of promised goods or services to customers in launched markets.an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is effective for annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of the adoption on its consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-10,Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation, which removes the definition of development stage entity, as was previously defined under U.S. GAAP, thereby removing the financial reporting distinction between development stage entities and other reporting entities. In addition, these costs include royalty feesthe ASU eliminates the requirements for content salesdevelopment 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 amortization(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 prepaid content licenses. Costthe standard is permitted. The Company adopted this guidance during the second quarter of revenue does not include expenses related2014.
(i) Reclassification
Certain balances have been reclassified to product development, integration or support, as these are included in research and development expenses.
(h)
Note 3. Computation of Net lossLoss per share data
Basic net loss per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock plus dilutive potential common stock considered outstanding during the period. SuchHowever, as the Company generated net losses in all periods presented, some potentially dilutive shares consistsecurities 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 incremental shares that would be issued upon exercise of the Company’s derivative warrants.such instruments was anti-dilutive. The table below presents the computation of basic and diluted net losses per common shareshare:
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Basic Numerator: | ||||||||||||||||
| Loss from continuing operations attributable to shares of common stock | $ | (10,049 | ) | $ | (10,229 | ) | $ | (20,949 | ) | $ | (21,088 | ) | ||||
| Loss from discontinued operations attributable to shares of common stock | — | (711 | ) | $ | (209 | ) | $ | (1,816 | ) | |||||||
| Net loss attributable to shares of common stock | $ | (10,049 | ) | $ | (10,940 | ) | $ | (21,158 | ) | $ | (22,904 | ) | ||||
| Basic Denominator: | ||||||||||||||||
| Weighted average number of shares of common stock outstanding during the period | 87,210,483 | 82,625,295 | 86,337,006 | 82,406,883 | ||||||||||||
| Weighted average number of penny stock options | — | 114,152 | — | 145,827 | ||||||||||||
| Basic common stock shares outstanding | 87,210,483 | 82,739,447 | 86,337,006 | 82,552,710 | ||||||||||||
| Basic loss per common stock share from continuing operations | $ | (0.12 | ) | $ | (0.12 | ) | $ | (0.24 | ) | $ | (0.26 | ) | ||||
| Basic loss per common stock share from discontinued operations | $ | (0.00 | ) | (0.01 | ) | $ | (0.00 | ) | $ | (0.02 | ) | |||||
| Basic net loss per common stock share | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.24 | ) | $ | (0.28 | ) | ||||
| Diluted Numerator: | ||||||||||||||||
| Net loss from continuing operations attributable to shares of common stock | $ | (10,049 | ) | $ | (10,229 | ) | $ | (20,949 | ) | $ | (21,088 | ) | ||||
| Increase in net loss attributable to derivative warrants | $ | (348 | ) | $ | — | $ | — | $ | — | |||||||
| Diluted net loss from continuing operations attributable to shares of common stock | $ | (10,397 | ) | $ | (10,229 | ) | $ | (20,949 | ) | $ | (21,088 | ) | ||||
| Diluted net loss from discontinued operations attributable to shares of common stock | $ | — | $ | (711 | ) | $ | (209 | ) | $ | (1,816 | ) | |||||
| Diluted net loss attributable to shares of common stock | $ | (10,397 | ) | $ | (10,940 | ) | $ | (21,158 | ) | $ | (22,904 | ) | ||||
| Diluted Denominator: | ||||||||||||||||
| Basic common stock shares outstanding | 87,210,483 | 82,739,447 | 86,337,006 | 82,552,710 | ||||||||||||
| Weighted average number of derivative warrants outstanding during the period | 1,305,465 | — | — | — | ||||||||||||
| Diluted common stock shares outstanding | 88,515,948 | 82,739,447 | 86,337,006 | 82,552,710 | ||||||||||||
| Diluted loss per common stock share from continuing operations | $ | (0.12 | ) | $ | (0.12 | ) | $ | (0.24 | ) | $ | (0.26 | ) | ||||
| Diluted loss per common stock share from discontinued operations | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.00 | ) | $ | (0.02 | ) | ||||
| Diluted net loss per common stock share | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.24 | ) | $ | (0.28 | ) | ||||
| Net loss per share data presented excludes from the calculation of diluted net loss the following potentially dilutive securities, as they had an anti-dilutive impact: | ||||||||||||||||
| Both vested and unvested options at $0.96-$5.50 exercise price, to purchase an equal number of shares of common stock of the Company | 10,102,094 | 11,805,940 | 10,102,094 | 11,805,940 | ||||||||||||
| Unvested penny options to purchase an equal number of shares of common stock of the Company | — | 2,375 | — | 2,375 | ||||||||||||
| Unvested RSUs to issue an equal number of shares of common stock of the Company | 1,657,890 | 2,815,794 | 1,657,890 | 2,815,794 | ||||||||||||
| Common stock shares granted, but not yet vested | — | 61,478 | — | 61,478 | ||||||||||||
| Warrants to purchase an equal number of shares of common stock of the Company | 15,801,923 | 18,764,114 | 17,423,851 | 18,764,114 | ||||||||||||
| Total number of potentially dilutive instruments, excluded from the calculation of net loss per share | 27,561,907 | 33,449,701 | 29,183,835 | 33,449,701 | ||||||||||||
| 9 |
Note 4. Discontinued Operations and Assets Held For Sale
On December 31, 2013, the Company entered into a definitive asset purchase agreement with InfoMedia for the periods presented:
| Cumulative | ||||||||||||||||
| from Inception | ||||||||||||||||
| Three months ended September 30, | Nine months ended September 30, | to September 30, | ||||||||||||||
| 2013 | 2012 | 2013 | 2012 | 2013 | ||||||||||||
| Basic Numerator: | ||||||||||||||||
| Net loss attributable to shares of common stock | $ | (10,560) | $ | (3,124) | $ | (33,464) | $ | (6,836) | $ | (57,059) | ||||||
| Basic Denominator: | ||||||||||||||||
| Weighted average number of shares of common stock outstanding during the period | 83,450,697 | 48,437,587 | 82,757,899 | 25,493,415 | 46,229,656 | |||||||||||
| Weighted average number of penny stock options | 88,070 | 353,232 | 124,506 | 117,744 | 109,930 | |||||||||||
| Basic common stock shares outstanding | 83,538,767 | 48,790,819 | 82,882,405 | 25,611,159 | 46,339,586 | |||||||||||
| Basic net loss per common stock share | $ | (0.13) | $ | (0.06) | $ | (0.40) | $ | (0.27) | $ | (1.23) | ||||||
| Diluted Numerator: | ||||||||||||||||
| Net loss attributable to shares of common stock | $ | (10,560) | $ | (3,124) | $ | (33,464) | $ | (6,836) | $ | (57,059) | ||||||
| Increase in net loss attributable to derivative warrants | (758) | $ | (7,240) | $ | (53) | $ | (7,240) | $ | (3,387) | |||||||
| Diluted net loss attributable to shares of common stock: | $ | (11,318) | $ | (10,364) | $ | (33,517) | $ | (14,076) | $ | (60,446) | ||||||
| Diluted Denominator: | ||||||||||||||||
| Basic common shares outstanding | 83,538,767 | 48,790,819 | 82,882,405 | 25,611,159 | 46,339,586 | |||||||||||
| Weighted average number of derivative warrants outstanding during the period | 2,563,090 | 9,436,281 | 89,677 | 9,436,281 | 1,460,477 | |||||||||||
| Diluted common stock shares outstanding | 86,101,857 | 58,227,100 | 82,972,082 | 35,047,440 | 47,800,063 | |||||||||||
| Diluted net loss per common stock share | $ | (0.13) | $ | (0.18) | $ | (0.40) | $ | (0.40) | $ | (1.26) | ||||||
| Net loss per share data presented excludes from the calculation of diluted net loss the following potentially dilutive securities, as of September 30 of the applicable period, as they had an anti-dilutive impact: | ||||||||||||||||
| Both vested and unvested options at $0.96-$5.50 exercise price, to purchase an equal number of shares of common stock of the Company | 10,225,387 | 9,160,429 | 10,225,387 | 9,160,429 | 10,225,387 | |||||||||||
| Unvested penny options to purchase an equal number of shares of common stock of the Company | — | 30,250 | — | 30,250 | — | |||||||||||
| Unvested RSUs to issue an equal number of shares of common stock of the Company | 2,411,771 | 3,126,667 | 2,411,771 | 3,126,667 | 2,411,771 | |||||||||||
| Common stock shares granted, but not yet vested | 45,762 | 108,625 | 45,762 | 108,625 | 45,762 | |||||||||||
| Warrants to purchase an equal number of shares of common stock of the Company | 15,829,262 | 12,814,533 | 18,289,611 | 12,814,533 | 15,115,357 | |||||||||||
| Total number of potentially dilutive instruments, excluded from the calculation of net loss per share: | 28,512,182 | 25,240,504 | 30,972,531 | 25,240,504 | 27,798,277 | |||||||||||
Upon Closing, as consideration for the assets and agreements related to the Company’s mobile social application business, the Company received 18 Class B shares of InfoMedia, which represent an 8.25% ownership interest in InfoMedia. Additionally, the Company’s Chief Executive Officer was appointed as a full voting member on InfoMedia’s board of directors and the Company received a number of customary protective rights. The InfoMedia Class B shares were accounted for as a cost-method investment at the carrying amount of $787 and are included in Other assets in the consolidated balance sheet as of June 30, 2014. During the six month period ended June 30, 2014, there were no events or changes in circumstances that would indicate that the carrying amount of this investment may no longer be recoverable.
In connection with the asset purchase agreement, the requirement to report the results of the Company’s mobile social application business as discontinued operations was triggered. The following tables represent the components of operating results from discontinued operations, as presented in the consolidated statements of operations:
| Three months ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Revenue | $ | — | $ | 61 | ||||
| Operating expenses | — | (748 | ) | |||||
| Operating loss | — | (687 | ) | |||||
| Non-operating expense | — | (22 | ) | |||||
| Loss before taxes on income | — | (709 | ) | |||||
| Income tax expense | — | (2 | ) | |||||
| Loss from discontinued operations | $ | — | $ | (711 | ) | |||
| Six months ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Revenue | $ | 37 | $ | 126 | ||||
| Operating expenses | (266 | ) | (1,893 | ) | ||||
| Operating loss | (229 | ) | (1,767 | ) | ||||
| Non-operating income (expense) | 20 | (31 | ) | |||||
| Loss before taxes on income | (209 | ) | (1,798 | ) | ||||
| Income tax expense | — | (18 | ) | |||||
| Loss from discontinued operations | $ | (209 | ) | $ | (1,816 | ) | ||
In addition, the following table presents the carrying amounts of the major classes of assets from the discontinued mobile social application business in the Company’s consolidated balance sheet as of December 31, 2013. These assets were transferred to InfoMedia upon Closing. As of December 31, 2013, there were no liabilities classified as held for sale and no liabilities were transferred to InfoMedia upon Closing.
| As of December 31, | ||||
| 2013 | ||||
| Cash | $ | 48 | ||
| Accounts receivable | 102 | |||
| Goodwill at carrying amount of $208, net of $208 loss on impairment | — | |||
| Acquired technology at carrying amount of $10,133, net of $2,451 accumulated amortization and $7,045 loss on impairment | 637 | |||
| Total assets held for sale | $ | 787 | ||
Note 3.5. Intangible Assets
| As of September 30, 2013 | As of December 31, 2012 | Weighted average amortization period (years) | |||||||
| Acquired technology (see Note 5) | $ | 10,133 | $ | 10,133 | 6.0 | ||||
| Patents | 26,794 | 26,694 | 8.5 | ||||||
| Total | 36,927 | 36,827 | |||||||
| Less: accumulated amortization | (6,567) | (2,783) | |||||||
| $ | 30,360 | $ | 34,044 | ||||||
| As of June 30, 2014 | As of December 31, 2013 | Weighted average amortization period (years) | ||||||||
| Patents | 28,213 | 28,213 | 8.3 | |||||||
| Less: accumulated amortization | (7,390 | ) | (5,465 | ) | ||||||
| $ | 20,823 | $ | 22,748 | |||||||
The Company’s intangible assets consist of its patents which are amortized over their expected useful lives (i.e., through the Merger, the Company’s subsidiary acquired patents from Lycos, Inc. The gross carrying amount of those patents is comprisedexpiration date of the original purchase price of $3,200 and $196 of associated patent acquisition costs.
| Period ending December 31, | Amount | |
| 2013 (three months ending December 31, 2013) | $ | 1,257 |
| 2014 | 5,009 | |
| 2015 | 5,009 | |
| 2016 | 4,618 | |
| 2017 and thereafter | 14,467 | |
| $ | 30,360 | |
Note 4.6. Fair Value Measurements
The Company measures fair value in accordance with ASCFASB Accounting Standards Codification (“ASC”) 820-10, “Fair Value Measurements and Disclosures” (formerly SFAS 157, “Fair Value Measurements”). 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 2 Inputs: Inputs are based uponOther than quoted prices for similar instrumentsincluded in active markets, quoted prices for identical or similar instruments in marketsLevel 1 inputs that are not active and model-based valuation techniquesobservable for which all significant inputs are observable in the marketasset or can be corroborated by observable market dataliability, either directly or indirectly, for substantially the full term of the assetsasset or liabilities.
Level 3 Inputs::Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The following table presents the placement in the fair value hierarchy of liabilities measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013:
| Fair value measurement at reporting date using | ||||||||||||||||
| Quoted prices in | ||||||||||||||||
| active markets | Significant other | Significant | ||||||||||||||
| for identical | observable | unobservable | ||||||||||||||
| Derivative warrant liabilities | Balance | assets (Level 1) | inputs (Level 2) | inputs (Level 3) | ||||||||||||
| As of June 30, 2014 | $ | 3,104 | — | — | $ | 3,104 | ||||||||||
| As of December 31, 2013 | $ | 4,083 | — | — | $ | 4,083 | ||||||||||
The Company measures its derivative liabilities at fair value. The Special Bridge Warrants, Conversion Warrants, Preferentialthe derivative Reload Warrants and majority ofthe derivative Series 1 Warrants (as they are defined in Note 6)8) are classified within Level 3 because they are valued using the Black-Scholes-Merton and the Monte-Carlo models (as these warrants include down-round protection clauses), which utilize significant inputs that are unobservable in the market.
The following table presents the Company’splacement in the fair value hierarchy of assets and liabilitiesthat are measured at fair value on a recurringnon-recurring basis as of September 30, 2013 and December 31, 2012, aggregated by the level in the fair-value hierarchy within which those measurements fall:
| Fair value measurement at reporting date using | |||||||||||
| Quoted prices in | |||||||||||
| active markets | Significant other | Significant | |||||||||
| for identical | observable | unobservable | |||||||||
| Derivative liabilities on account of warrants | Balance | assets (Level 1) | inputs (Level 2) | inputs (Level 3) | |||||||
| As of September 30, 2013 | $ | 4,126 | — | — | $ | 4,126 | |||||
| As of December 31, 2012 | $ | 7,612 | — | — | $ | 7,612 | |||||
| Fair value measurement at reporting date using | ||||||||||||||||
| Quoted prices in | ||||||||||||||||
| active markets | Significant other | Significant | ||||||||||||||
| for identical | observable | unobservable | ||||||||||||||
| Balance | assets (Level 1) | inputs (Level 2) | inputs (Level 3) | |||||||||||||
| Assets held for sale | $ | 787 | $ | 150 | — | $ | 637 | |||||||||
In addition to the above, the Company’s financial instruments at Septemberas of June 30, 20132014 and December 31, 20122013 consisted of cash, cash equivalents, short-term investments, accounts receivable,receivables, accounts payable and long term deposits. The carrying amounts of all the aforementioned financial instruments approximate fair value. The following table summarizes the changes in the Company’s liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six month period from Inception through Septemberended June 30, 2013:
| Level 3 | ||||
| Balance at Inception | $ | — | ||
| Balance at December 31, 2011 | — | |||
| Derivative warrants issued to I/P’s shareholders in connection with the Merger, July 19, 2012 | 21,954 | |||
| Fair value of derivative warrants issued by Legal Parent | 3,162 | |||
| Fair value adjustment, prior to exercise of warrants, included in statement of operations | 156 | |||
| Exercise of derivative warrants | (10,657) | |||
| Fair value adjustment at end of period, included in statement of operations | (7,003) | |||
| Balance at December 31, 2012 | 7,612 | |||
| Net impact of removal of down-round clause in Series 1 Warrant (see Note 6) | (2,300) | |||
| Fair value adjustment, prior to exercise of warrants, included in statement of operations | 15 | |||
| Exercise of derivative warrants | (790) | |||
| Fair value adjustment at end of period, included in statement of operations | (411) | |||
| Balance at September 30, 2013 | $ | 4,126 | ||
| Level 3 | ||||
| Balance at December 31, 2013 | $ | 4,083 | ||
| Fair value adjustment, prior to exercise of warrants, included in Consolidated Statement of Operations | 56 | |||
| Exercise of derivative warrants | (1,707 | ) | ||
| Fair value adjustment at end of period, included in Consolidated Statement of Operations | 672 | |||
| Balance at June 30, 2014 | $ | 3,104 | ||
Fair value measurement of the derivative liability on account ofwarrant liabilities related to the Special Bridge Warrants, Conversion Warrants, Preferential Reload Warrants and Series 1 Warrants (as defined in Note 6)8) fall within Level 3 of the fair value hierarchy. The fair value measurements are evaluated by management to ensure that changes are consistent with expectations of management based upon the sensitivity and nature of the inputs.
| Description | Valuation technique | Unobservable inputs | Range | ||||
| Special Bridge Warrants, Conversion Warrants, derivative | Black-Scholes-Merton and the | Volatility | |||||
| Reload Warrants and derivative Series 1 Warrants | Monte-Carlo models | Risk free interest rate | |||||
| Expected term, in years | |||||||
| Dividend yield | 0% | ||||||
| Probability and timing of down-round triggering event | 5% occurrence in December |
The fair value of the assets held for sale as of December 31, 2013 (Note 4) was determined by estimating the present value of the expected future cash flows associated with that asset or asset group by using certain unobservable market inputs. These inputs included discount rates, estimated future cash flows and certain continuing growth rate assumptions. The discount rates are intended to reflect the risk inherent in the projected future cash flows generated by the respective asset or asset group. The inputs used in the valuation were sensitive to certain factors related to mobile social application technology such as rapid changes in the industry and technological advances.
Sensitivity of Level 3 measurements to changes in significant unobservable inputs
The inputs to estimate the fair value of the Company’s derivative warrant liabilityliabilities are the current market price of the Company’s shares of common stock, the exercise price of the warrant, its remaining expected term, the volatility of the Company’s common stock market price, the Company’s estimationsassumptions regarding the probability and timing of a down-round protection triggering event and the risk-free interest rate. Significant changes in any of those inputs in isolation can result in a significant change in the fair value measurement. Generally, a positive changean increase in the market price of the Company’s common stock, and an increase in the volatility of the Company’s shares of common stock, or an increase in the remaining term of the warrant, or an increase of a probability of a down-round triggering event would each result in a directionally similar change in the estimated fair value of the Company’s warrants and thus anwarrants. Such changes would increase in the associated liability and vice-versa.while decreases in these assumptions would decrease the associated liability. An increase in the risk-free interest rate or a decrease in the positive differential between the warrant’s exercise price and the market price of the Company’s shares of common stock would result in a decrease in the estimated fair value measurement of the warrants and thus a decrease in the associated liability. The Company has not, nor plansand does not plan to, declare dividends on its shares of common stock, and thus,as such, there is no change in the estimated fair value of the warrants due to the dividend assumption.
Note 5. Business Combination
The consideration consisted of various equity instruments, including: shares of common stock, preferredCompany has a stock-based compensation plan available to grant stock options and warrants. The purpose of the Merger was to increase the combined company's intellectual property portfolio and array of products, to gain access to capital markets, among other reasons. Upon completion of the Merger, (i) all then outstanding 6,169,661 common stock shares of I/P, par value $0.0001 per share, were exchanged for 18,617,569, shares of the Company’s common stock, par value $0.01 per share, and (ii) all then outstanding shares of Series A Convertible Preferred Stock of I/P, par value $0.0001 per share, were exchanged for 6,673 shares of the Legal Parent’s Series A Convertible Preferred Stock, par value $0.01 per share, which shares were convertible into 20,136,445 shares of common stock of the Legal Parent. In addition, the Legal Parent issued to the holders of I/P capital stock an aggregate of 15,959,838 warrants to purchase an aggregate of 15,959,838 shares of the Company’s common stock with an exercise price of $1.76 per share. The Company recorded such warrants as a derivative long-term liability in the total amount of $21,954. In addition, all outstanding and unexercised options to purchase I/P common stock, whether vested or unvested, were converted into 41,178 options to purchase the Company’s common stock. Immediately following the completion of the Merger, the former stockholders of I/P owned approximately 55.04% of the outstanding common stock of the combined company (or 67.61% of the outstanding shares of the Company’s common stock, calculated on a fully diluted basis), and the Legal Parent’s stockholders prior to the Merger owned approximately 44.96% of the outstanding common stock of the combined company (or 32.39% of the outstanding shares of its common stock calculated on a fully diluted basis). For accounting purposes, I/P was identified as the accounting “acquirer”, as it is defined in FASB Topic ASC 805. The total purchase price of $75,654 was allocated to the assets acquired and liabilities assumed of the Legal Parent. Registration and issuance cost, in the total amount of $463, was recorded against the additional paid-in capital.
| Allocation of purchase price | |||||
| Current assets, net of current liabilities | $ | 2,586 | |||
| Long-term deposit | 8 | ||||
| Property and equipment | 124 | ||||
| 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 penny options granted to employees, management and consultants | 58,211 | ||||
| Total estimated purchase price | $ | 75,654 | |||
| Cumulative from Inception to September 30, 2013 | Nine month period ended September 30, 2012 | Three month period ended September 30, 2012 | |||||||||||||||||
| Revenue | Net Loss | Revenue | Net Loss | Revenue | Net Loss | ||||||||||||||
| Total amount | $ | 2,285 | $ | (73,855) | $ | 487 | $ | (18,298) | $ | 281 | $ | (6,632) | |||||||
The following table illustrates the common stock options granted for the ninesix month period ended SeptemberJune 30, 2013:
| Title | Grant date | No. of options | Exercise price | grant date | Vesting terms | Assumptions used in Black-Scholes option pricing model | |||||||||||||||
| Directors, Management, | 1,200,000 | $ | 4.10 | $ | 2.32 | Over Directors; Over 3 years for Management and Employees | |||||||||||||||
| Volatility: 57.75 % – 62.00% Risk free interest | |||||||||||||||||||||
| rate: 1.82% - 2.06% Expected term, in | |||||||||||||||||||||
| years: 5.31-5.81 Dividend | yield: 0.00% | ||||||||||||||||||||
| Title | Grant date | No. of RSUs | Exercise price | Share price at grant date | Vesting terms | |||||||||||
| Management, directors and employees | February-May 2013 | 656,250 | — | $2.95-$3.18 | Over 0.67-3 years | |||||||||||
| Consultants | January 2013 | 33,000 | — | $3.26 | Over 0.75 years | |||||||||||
Certain options granted to officers, directors and certain key employees are subject to acceleration of vesting of 75%75% - 100%100% (according to the agreement signed with each optionee)grantee), upon a subsequent change of control.
The following table summarizes information aboutactivity related to stock options and RSU and stock option activity for the ninesix month period ended SeptemberJune 30, 2013:
| RSUs | Options | ||||||||||||||||||
| No. of RSUs | Weighted average grant date fair value | No. of options | Weighted average exercise price | Exercise price range | Weighted average grant date fair value | ||||||||||||||
| Outstanding at January 1, 2013 | 3,125,000 | $ | 3.72 | 9,149,105 | $ | 3.33 | $0.01 – $5.50 | $ | 2.57 | ||||||||||
| Granted | 689,250 | $ | 3.17 | 3,223,333 | $ | 3.14 | $2.85 – $3.30 | $ | 2.22 | ||||||||||
| Vested/Exercised | (1,092,270) | $ | 3.62 | (717,735) | $ | 1.36 | $0.01 – $3.18 | $ | 2.96 | ||||||||||
| Forfeited | (310,209) | $ | 3.66 | (417,821) | $ | 3.51 | $0.01 – $5.50 | $ | 2.44 | ||||||||||
| Expired | — | — | (954,868) | $ | 5.04 | $0.01 – $5.50 | $ | 1.58 | |||||||||||
| Outstanding at September 30, 2013 | 2,411,771 | $ | 3.61 | 10,282,014 | $ | 3.24 | $0.01 – $5.50 | $ | 2.53 | ||||||||||
| Exercisable at September 30, 2013 | — | — | 5,099,098 | $ | 3.04 | $0.01 – $5.50 | |||||||||||||
| RSUs | Options | |||||||||||||||||||||
| No. of RSUs | Weighted average grant date fair value | No. of options | Weighted average exercise price | Exercise price range | Weighted average grant date fair value | |||||||||||||||||
| Outstanding at January 1, 2014 | 2,161,403 | $ | 3.61 | 10,457,159 | $ | 3.23 | $0.01 – $5.50 | $ | 2.50 | |||||||||||||
| Granted | — | — | 1,200,000 | $ | 3.98 | $3.12 - $4.10 | $ | 2.16 | ||||||||||||||
| Vested/Exercised | (500,388 | ) | $ | 3.59 | (1,126,815 | ) | $ | 1.92 | $0.01 – $3.72 | $ | 1.31 | |||||||||||
| Forfeited | (3,125 | ) | $ | 3.72 | (95,833 | ) | $ | 3.71 | $3.24 - $3.72 | $ | 2.19 | |||||||||||
| Expired | — | — | (332,416 | ) | $ | 4.60 | $0.96 – $5.50 | $ | 1.97 | |||||||||||||
| Outstanding at June 30, 2014 | 1,657,890 | $ | 3.62 | 10,102,095 | $ | 3.41 | $0.96 – $5.50 | $ | 2.30 | |||||||||||||
| Exercisable at June 30, 2014 | — | — | 6,099,385 | $ | 2.28 | $0.96 – $5.50 | ||||||||||||||||
The Company cumulatively did not createrecognize tax benefits related to its stock-based compensation due toas there is a full valuation allowance.
Note 8. Warrants
The following table summarizes information about warrant activity for the ninesix month period ended SeptemberJune 30, 2013:
| No. of warrants | Weighted average exercise price | Exercise price range | ||||||||
| Outstanding at January 1, 2013 | 18,863,261 | $ | 3.11 | $0.94 – $5.06 | ||||||
| Exercised | (421,493) | $ | 1.34 | $0.94 – $1.76 | ||||||
| Outstanding at September 30, 2013 | 18,441,768 | $ | 3.15 | $0.94 – $5.06 | ||||||
| No. of warrants | Weighted average exercise price | Exercise price range | ||||||||||
| Outstanding at January 1, 2014 | 18,427,478 | $ | 3.15 | $ 0.94 – $5.06 | ||||||||
| Granted | 5,412,366 | $ | 5.06 | $ | 5.06 | |||||||
| Exercised | (6,415,992 | ) | $ | 1.76 | $ | 1.76 | ||||||
| Outstanding at June 30, 2014 | 17,423,852 | $ | 4.26 | $ 0.94 – $5.06 | ||||||||
On June 19, 2012, the Legal Parent issued to I/P’s stockholders 8,299,115 warrants at an exercise price of $1.76 per share and contractual term of 5 years (“Series 1 Warrant”). These warrants bear down-round protection clauses and as a result, they were initially classified as a long-term derivative liability and recorded at fair value. In addition, I/P’s stockholders received another 7,660,722 warrants at an exercise price of $1.76 per share and contractual term of 5 years (“Series 2 Warrant”). As the Series 2 Warrants do not have down-round protection clauses, they were classified as equity.
The Company’s outstanding warrants consist of the following:
| No. outstanding | No. outstanding classified as equity | No. outstanding classified as liabilities* | Exercise price | Remaining contractual life | ||||||||||||||
| Series 1 Warrants | 1,490,250 | 64,621 | 1,425,629 | $ | 1.76 | 3.05 years | ||||||||||||
| Series 2 Warrants | 1,943,523 | 1,943,523 | — | $ | 1.76 | 3.05 years | ||||||||||||
| Conversion Warrants | 14,492 | — | 14,492 | $ | 0.94 | 0.98 years | ||||||||||||
| Special Bridge Warrants | 21,198 | — | 21,198 | $ | 0.94 | 0.50 years | ||||||||||||
| Reload Warrants | 758,023 | 597,414 | 160,609 | $ | 1.76 | 2.61 years | ||||||||||||
| Initial Public Offering Warrants | 4,784,000 | 4,784,000 | — | $ | 5.06 | 0.98 years | ||||||||||||
| October 2012 Warrants | 3,000,000 | 3,000,000 | — | $ | 5.06 | 0.98 years | ||||||||||||
| June 2014 Warrants** | 5,412,366 | 5,412,366 | — | $ | 5.06 | 0.98 years | ||||||||||||
| Outstanding at June 30, 2014 | 17,423,852 | 15,801,924 | 1,621,928 | |||||||||||||||
* These warrants bear down-round protection clauses and as a result, they are classified as derivative liabilities and recorded at fair value.
** The June 2014 Warrants were valued on the grant date (June 20, 2014) using the following assumptions: volatility: 68.1%40.05%, sharestock price: $3.50-$3.77,$3.33, risk free interest rate: 0.724%0.15% and dividend yield: 0%0%. The fair value ofnew warrants issued in exchange forconnection with the exercise of the Company’s derivative warrants wasclassified as liabilities were accounted for as an inducement and therefore an amount of $2,883,$65, which is based on the fair value of the new warrants, was recorded as a non-operating expense. Asexpense during the second quarter of September 30, 2013, all October 20122014. The new warrants issued in connection with the exercise of warrants classified as equity, which were outstanding.
Note 7.9. Revenue from SettlementSettlements and Licensing Agreement
On May 30, 2013,April 28, 2014, the Company’s subsidiaryCompany entered into a settlement and licenseconfidential agreement with Microsoft Corporation to resolve its patentTyco that resolved all litigation pending inbetween the U.S. District Court for the Southern District of New York (I/P Engine, Inc. v. Microsoft Corporation, Case No. 1:13-cv-00688 (SDNY)). According to the agreement, Microsoft Corporation paid the Company $1,000 and agreed to pay 5% of any future amount Google pays for its use of the patents acquired from Lycos. The parties also agreed to a limitation on Microsoft Corporation's total liability, which would not impact the Company unless the amounts received from Google substantially exceed the judgment previously awarded. In addition, the parties also entered into a patent assignment agreement, pursuant to which Microsoft Corporation assigned six patents to I/P Engine. The assigned patents relate to telecommunications, data management, and other technology areas.
Note 8.10. Commitments and Contingencies
(a) Litigation and legal proceedings
The Company retains the services of professional service providers, including law firms that specialize in intellectual property licensing, enforcement and patent law. These service providers are often retained on an hourly, monthly, project, contingent or a blended fee basis. In contingency fee arrangements, a portion of the legal fee is based on predetermined milestones or the Company’s actual collection of funds. The Company accrues contingent fees when it is probable that the milestones will be achieved and the fees can be reasonably estimated.
The Company’s subsidiaries have filed patent infringement lawsuits against the subsidiaries of ZTE Corporation in the United Kingdom, France, Germany, Australia, India, Brazil, Malaysia, and Australia Romania, and against ASUSTeK Computer, Inc. and ASUS Computer GmbH in Germany,.
Pursuant to negotiations with ZTE’s Australian subsidiary, the Company placed a written commitment in April 2014 to ensure payment should a liability by Vringo Infrastructure arise as a result of the case filed. The amount of such commitment cannot be reasonably estimated at this time and the Company assesses the likelihood of such payment as remote. In addition, in Brazil, as a condition of the relief requested, the Company deposited approximately $904 as a surety against the truth of allegations contained in the complaint. Unless ZTE is the prevailing party and proves that actual material damages were suffered while the requested relief was in place, the funds are returnable at the end of the litigation. The $1,400 bond deposit in Germany and the $904 surety deposit in Brazil are included in Deposits with courts in the consolidated balance sheet as of June 30, 2014.
In addition, the Company may be required to grant additional guarantees,written commitments, as necessary, in connection with its commenced proceedings against ZTE Corporation and its subsidiaries in Europe and Australia.various countries. It should be noted, however, that if the Company were successful on any court applications or the entirety of any litigation, ZTE Corporation wouldmay be responsible for a substantial portion of the Company’s legal fees.
Leases
In July 2012, the Company hassigned a rental agreement for its corporate executive office in New York for an annual rental fee of approximately $137 (subject to certain adjustments) which was to expire in September 2015. However, in January 2014, the Company entered into various operatingan amended lease agreements.agreement with the landlord for a different office space within the same building. The initial annual rental fee for this new office is approximately $403 (subject to certain future escalations and adjustments) beginning when the new office space is available, which is expected to be in the third quarter of 2014. This lease will expire five years and three months after the new office space is available. Rent expense which is primarily for its office spaces,operating leases for the ninethree and six month periods ended SeptemberJune 30, 20132014 were $70 and 2012, was $175 and $62,$182, respectively. Rent expense for operating leases for the three and six month periods ended SeptemberJune 30, 2013 were $63 and 2012 was $68 and $40,$107, respectively. The cumulative expense for the period from Inception until September 30, 2013, was $306.
| Period ending December 31, | Amount | |||
| 2013 (three months ending December 31, 2013) | $ | 56 | ||
| 2014 | 179 | |||
| 2015 | 104 | |||
| $ | 339 | |||
Note 9.11. Risks and Uncertainties
| (a) | New legislation, regulations or rulings that impact the patent enforcement process or the rights of patent holders, could negatively affect the Company’s current business model. For example, limitations on the ability to bring patent enforcement claims, limitations on potential liability for patent infringement, lower evidentiary standards for invalidating patents, increases in the cost to resolve patent disputes and other similar developments could negatively affect the Company’s ability to assert its patent or other intellectual property rights. |
| (b) | The patents owned by the Company are presumed to be valid and enforceable. As part of the Company’s ongoing legal proceedings, the validity and/or enforceability of its patents is often challenged in a court or an administrative |
| (c) | Financial instruments which potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash | ||
| (d) | A portion of the Company’s expenses are denominated in |
| 16 |
This Quarterly Report on Form 10-Q contains forward-looking statements“forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained herein that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).amended. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,“anticipates,” “believe,“believes,” “can,” “continue,“continues,” “could,” “estimate,“estimates,” “expect,“expects,” “intend,“intends,” “may,” “will be,” “plan,“plans,” “project,“projects,” “seek,“seeks,” “should,” “target,“targets,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included in our Annual Report on Form 10-K filed on March 21, 201310, 2014 and any future reports we file with the Securities and Exchange Commission.Commission (“SEC”). The forward-looking statements set forth herein speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. In this report, “Vringo,” the “Company,” “we,” “us,” and “our” refer to Vringo, Inc.statements, except as required by law.
All references in this Quarterly Report on Form 10-Q to “we,” “us” and “our” refer to Vringo, Inc., a Delaware corporation, and its consolidated subsidiaries for periods after the closing of the Merger, and to I/P and its consolidated subsidiaries for periods prior to the closing of the Merger unless the context requires otherwise.
Overview
Vringo, (Israel) Ltd., for the primary purpose of providing research and development services. On July 19, 2012, Innovate/Protect, Inc., (“I/P”Vringo”) merged with us through an exchange of equity instruments of I/P for those of Vringo. The Merger was accounted for as a reverse acquisition under which I/P was considered the accounting acquirer of Vringo. As such, the financial statements of I/P are treated as the historical financial statements of the combined company, with the results of Vringo included from July 19, 2012.
The accompanying unauditedinterim consolidated financial statements include the accounts of I/P, Legal Parent and their wholly-owned subsidiaries, and are presented in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). All significant intercompany balances and transactions have been eliminated in consolidation. These financial statements include the results of operations of I/P and subsidiaries for all periods presented, with the results of operations of the Legal Parent and its subsidiaries for the period from July 19, 2012 (the effective date of the Merger) through September 30, 2013. Moreover, common stock amounts presented for comparative periods differ from those previously presented by I/P, due to application of accounting requirements applicable to a reverse acquisition.
Our Strategy
We manage an intellectual property portfolio consisting of over 500600 patents and patent applications, covering telecom infrastructure, internet search and mobile technologies. These patents and patent applications have been developed internally andor acquired from third parties. We innovate, acquire, license and protect technology and intellectual property rights worldwide. We continually striveseek to expand our portfolio of rightsintellectual 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, and/orour securities of our company and/or interests in the monetization of those assets. Our revenue from this aspect of our business can be generated through licensing and litigation efforts. We engage in robust due diligence and a principled risk underwriting process to evaluate the merits and potential value of any acquisition or partnership. We seek to structure the terms of our acquisitions and partnerships in a manner that will achieve the highest risk-adjusted returns possible. We believe that our capital resources and potential access to capital, together with the experience of our management team and board of directors, will allow us to assemble a portfolio of quality assets with short and long-term revenue opportunities.
| 17 |
Intellectual Property
Search Patents
In June 2011, I/P Engine acquired eight patents from patent licensingLycos, Inc. (“Lycos”) through its wholly-owned subsidiary, I/P Engine. On September 15, 2011, I/P Engine initiated litigation in the United States District Court, Eastern District of Virginia, against Google Inc., and enforcement, subscription services and software development is recognized if collection is probable, persuasive evidencecertain of an arrangement exists, the sales price is fixed or determinable and deliveryits customers (“Defendants”) for infringement of two of the service has been rendered.patents acquired from Lycos.
On November 6, 2012, a jury in Norfolk, Virginia unanimously returned a verdict in favor of I/P Engine. The Company uses management's best estimate of selling pricejury verdict is available athttp://bit.ly/QBRt5S. On November 20, 2012, the District Court issued a ruling that asserted patents were not invalid as obvious, and the Court entered final judgment which can be found athttp://bit.ly/1hqlUpD.
On January 3, 2014, the District Court ordered that I/P Engine recover an additional sum from the Defendants for individual elements in multiple-element arrangements, where other sources of evidence are unavailable.
Both I/P Engine and the Defendants have appealed the case to the U.S. Court of our developmentAppeals for the Federal Circuit. The case number for the District Court case is 2:11 CV 512-RAJ. The case numbers for the cases in the Court of Appeals for the Federal Circuit are 13-1307, 13-1313, 14-1233 and operations personnel, as well14-1289. On May 6, 2014, the United States Court of Appeals for the Federal Circuit heard oral argument in I/P Engine, Inc., Plaintiff-Cross Appellant v. AOL Inc., Google Inc., IAC Search & Media, Inc., Gannett Company, Inc. and Target Corporation, Defendants-Appellants, Appeal Nos. 13-1307 and 13-1313. The Court's decision in the case is pending as of the costfiling date of outsourced development services.
Requests for reexamination are a standard tactic used by defendants in patent litigation cases. Google has previously filed four separate requests for reexamination of the Preferential Reload Warrants, Special Bridge Warrants, Series 1 Warrants and the Conversion Warrants. The value of such derivative liabilities is highly influenced by assumptions used in its valuation, as well as by our stock pricetwo asserted patents at the period end (revaluation date).
On January 31, 2013, I/P Engine initiated litigation in the foreseeable future.
| Three months ended September 30, | Nine months ended September 30, | Cumulative from Inception through September 30, | ||||||||||||||||||||
| 2013 | 2012 | Change | 2013 | 2012 | Change | 2013 | ||||||||||||||||
| Revenue | $ | 50,000 | $ | 266,000 | $ | (216,000) | $ | 1,276,000 | $ | 266,000 | $ | 1,010,000 | $ | 1,645,000 | ||||||||
Infrastructure Patents
On August 9, 2012, we entered into a patent purchase agreement with Nokia Corporation ("Nokia"), comprising of 124 patent families with counterparts world-wide. The total consideration paid for the portfolio was $22,000,000. Under the terms of the purchase agreement, to the extent that the gross revenue generated by such portfolio exceeds $22,000,000, we are obligated to pay a royalty of 35% of such excess. The portfolio encompasses technologies relating to telecom infrastructure, including communication management, data and signal transmission, mobility management, radio resources management and services. Declarations were filed by Nokia indicating that 31 of the 124 patent families acquired may be essential to wireless communications standards. Copies of the declarations are available on our website at http://www.vringoip.com/documents/FG/vringo/ip/99208_Nokia_ETSI_Declarations.pdf.
As one of the means of realizing the value of the patents on telecom infrastructure, our wholly-owned subsidiaries, Vringo Infrastructure, Inc. (“Vringo Infrastructure”), Vringo, Inc. and Vringo Germany GmbH (“Vringo Germany”) have filed a number of suits against ZTE Corporation (“ZTE”), ASUSTeK Computer Inc. (“ASUS”), and Tyco Integrated Security, LLC (“Tyco”) and certain of their subsidiaries, affiliates and other companies in the United States, European jurisdictions, India, Australia, Brazil, and Malaysia alleging infringement of certain U.S., European, Indian, Australian, Brazilian, and Malaysian patents.
ZTE
United Kingdom
On October 5, 2012, Vringo Infrastructure, filed a suit in the UK High Court of Justice, Chancery Division, Patents Court, alleging infringement of certain European patents. Subsequently, ZTE responded to the complaint on December 19, 2012 with a counterclaim for invalidity of the patents in suit. Vringo Infrastructure filed a further UK suit on December 3, 2012, alleging infringement of additional European patents. In the first UK suit, trial is scheduled for October 2014 and in the second UK suit, trial is scheduled for June 2015.
Germany
On November 15, 2012, Vringo Germany filed a suit in the Mannheim Regional Court in Germany, alleging infringement of a European patent. The litigation was expanded to include a second European patent on February 21, 2013. On November 4, 2013, we filed a further brief with respect to the proceedings of the first European patent suit, asserting infringement by ZTE eNode B infrastructure equipment used in 4G networks.
The hearing for the first European patent case has been postponed by mutual agreement with ZTE; no date has been set for reinstatement. On December 17, 2013, the Court issued its judgment in the second European patent case, finding that ZTE infringed that patent and ordered an accounting and an injunction upon payment of the appropriate bonds. On February 19, 2014, Vringo Germany filed suit in the Mannheim Regional Court seeking enforcement of the accounting ordered and a further order that non-compliance be subject to civil and criminal penalties. On May 5, 2014, we paid a bond of approximately $1,400,000 to the Court in order to enforce the injunction against ZTE. Trial in the suit to enforce the accounting is scheduled for September 2014.
On December 27, 2013, ZTE filed a notice of appeal of the Mannheim Regional Court’s judgment in the second European patent case, and on January 24, 2014, ZTE filed an emergency motion with the Court of Appeals seeking a stay of the judge’s order pending appeal. On February 24, 2014, ZTE’s motion was denied.
On September 13, 2013 and January 28, 2014, Vringo Germany filed two suits in the Regional Court of Düsseldorf, alleging infringement of two additional European patents. Both cases are scheduled to be heard in November 2014. On April 23, 2014, Google commenced the process to intervene in the fourth filed suit as an interested third party. As a result of this process, Google is entitled to file defensive briefs in tandem with ZTE.
ZTE filed nullity suits with respect to the first and second European patents in the Federal Patents Court in Munich, Germany during the second and fourth quarters, respectively, of 2013. Trials in the nullity suits have not been scheduled. ZTE filed a nullity suit with respect to the third European patent in the Federal Patents Court in Munich, Germany, in the fourth quarter of 2013. A schedule has not yet been set and the trial is not anticipated before the third quarter of 2015. In addition, ZTE filed a nullity suit with respect to the fourth European patent in the Federal Patents Court in Munich, Germany in the second quarter of 2014. A schedule has not yet been set and the trial is not anticipated before the third quarter of 2015.
China
In November and December 2012, ZTE filed reexamination requests in China against three Chinese patents owned by Vringo before the Patent Reexamination Board of the Patent Office of the People’s Republic of China. On July 3, 2013, the patent rights for one of those patents was upheld. On May 30, 2014, the patent rights for another one of those patents was upheld. The oral hearing for the remaining patent occurred on January 23, 2014, for which the ruling is still pending. Between December 20 and December 28, 2013, ZTE filed four more additional reexamination requests against four other Chinese patents owned by Vringo. Vringo filed responses for these four patents in early May 2014. The oral hearing for one of the patents occurred on June 17, 2014. Oral hearings for the remaining three patents are expected to occur later in the year.
Between May and July of 2014, ZTE filed reexamination requests in China against 25 additional Chinese patents owned by Vringo before the Patent Reexamination Board of the Patent Office of the People’s Republic of China. Vringo’s initial responses are due in August of 2014. The remaining schedule in these 25 new re-examinations is not yet available.
On February 21, 2014, ZTE filed a civil antitrust complaint against Vringo and Vringo Infrastructure in the Shenzhen Intermediate Court. Vringo received notice of the action on June 26, 2014. Vringo intends to vigorously contest all aspects of this action in the appropriate manner. A schedule for the case has not yet been set.
France
On March 29, 2013, Vringo Infrastructure filed a patent infringement lawsuit in France in the Tribunal de Grande Instance de Paris, alleging infringement of the French part of two European patents. Vringo Infrastructure filed the lawsuit based on particular information uncovered during a seizure to obtain evidence of infringement, known as a saisie-contrefaçon, which was executed at two of ZTE's facilities in France. The oral hearing in relation to these patents has been scheduled for December 2014 before the 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. We currently anticipate that the Court will set a trial date in 2015.
Spain
On September 6, 2013, Vringo Infrastructure filed a preliminary inquiry order against ZTE in the Commercial Court of Madrid, Spain, requiring ZTE to provide discovery relating to alleged infringement of a patent which is the Spanish counter-part of the second European patent filed in Germany. In light of ZTE’s non-responsiveness to the order, on March 24, 2014 the Court granted our request to seek discovery of four of ZTE’s Spanish customers. We have received responses from all four customers.
India
On November 7, 2013, we, along with our subsidiary, Vringo Infrastructure, filed a patent infringement lawsuit in the High Court of Delhi at New Delhi, India, alleging infringement of an Indian patent related to CDMA. On November 8, 2013, the Court granted an ex-parte preliminary injunction and appointed commissioners to inspect ZTE’s facilities and collect evidence. ZTE appealed the preliminary injunction and, on December 12, 2013, the appellate panel instituted an interim arrangement, requiring ZTE to file an accounting affidavit disclosing the number of CDMA devices sold by its entities in India, revenue derived therefrom, and other supporting documentation. The Court also required ZTE to pay a bond approximately $800,000, directed Indian customs authorities to notify us when all relevant ZTE goods are imported into India, and required ZTE to give us the opportunity to inspect those goods. ZTE filed its accounting affidavit on January 13, 2014.
On February 3, 2014, we filed a motion for contempt for ZTE’s failure to comply with the Court’s order, and requested that the Court order ZTE to pay an increased bond.
On January 31, 2014, we and our subsidiary, Vringo Infrastructure, filed a patent infringement lawsuit in the High Court of Delhi at New Delhi, alleging infringement of a second Indian patent related to GSM Infrastructure. The Court, finding a prima facie case of infringement, granted an ex-parte preliminary injunction, restraining ZTE and its officers, directors, agents, distributors and customers from importing, selling, offering for sale, advertising, installing, or operating any infringing products, and giving us the right to inspect any infringing goods arriving in India, which are to be detained by customs authorities. The judge granted the injunction after ruling that we would suffer an irreparable loss if such an injunction were not put into place. ZTE subsequently appealed the injunction. On August 5, 2014, ZTE's appeal was heard by the Court. A ruling is pending.
Brazil
On April 14, 2014, Vringo Infrastructure filed a patent infringement lawsuit in the 5th Trial Court of Rio de Janeiro State Court in Brazil, alleging infringement of a Brazilian patent related to 3G/4G/LTE infrastructure. On April 15, 2014, the court granted an ex-parte preliminary injunction restraining ZTE from manufacturing, using, offering for sale, selling, installing, testing, or importing such infrastructure equipment, subject to a fine. To enforce the injunction, the Company posted a bond of approximately $904,000 with the court on April 17, 2014. On May 9, 2014, ZTE filed an interlocutory appeal against the injunction. This appeal was denied by the Court on June 16, 2014.
On July 17, 2014, ZTE filed a nullity suit in the Federal district court in Rio de Janiero, Brazil, against both Vringo and the Brazilian patent office, seeking to invalidate Vringo’s Brazilian patent.
Malaysia
On June 23, 2014, Vringo Infrastructure filed a patent infringement lawsuit against ZTE in the High Court of Malaya at Kuala Lumpur. A schedule has not yet been set in this matter.
Romania
On June 23, 2014, Vringo Infrastructure filed a patent infringement lawsuit against ZTE in the Bucharest Tribunal Civil Section. On July 1, 2014, the court granted an ex-parte preliminary injunction, ordering ZTE to cease any importation, exportation, introduction on the market, offer for sale, storage, sale, trade, distribution, promotion, or any other business activity regarding the infringing product. The remaining schedule has not yet been set in this matter.
Netherlands
On May 28, 2014, Vringo Infrastructure commenced legal proceedings, pursuant to European Anti-Piracy Regulations, Number 1383/2003, Article 11 against ZTE in the District Court of The Hague. A schedule has not yet been set in this matter.
On June 4, 2014, ZTE filed suit in the District Court of Rotterdam against Vringo and Vringo Infrastructure for the alleged wrongful detention of goods under the relevant anti-piracy regulations. A schedule has not yet been set in this matter.
On July 24, 2014, ZTE filed an action for a preliminary injunction in District Court of The Hague against Vringo Infrastructure for the release of allegedly wrongfully detained goods. This matter will be heard on September 16, 2014.
United States
On July 2, 2014, Vringo filed suit in the United States District Court for the Southern District of New York seeking a temporary restraining order and preliminary and permanent injunctions against ZTE, enjoining ZTE’s use of prohibited materials captured under NDA, including but not limited to ZTE’s use of such materials in its antitrust lawsuit in China against Vringo and Vringo Infrastructure. On July 7, 2014, the court granted a temporary restraining order against ZTE’s use of such material. On July 23, 2014, ZTE filed a counterclaim against Vringo.
European Commission
On April 10, 2014, ZTE filed a complaint with the European Commission. We believe that the accusations are not accurate. The European Commission has not yet set the schedule for this matter.
ASUS
Germany
On October 4, 2013 and January 29, 2014, Vringo Germany filed two patent infringement lawsuits against ASUS in the Düsseldorf Regional Court, alleging infringement of two European patents. The cases are scheduled to be heard in November 2014.
ASUS filed nullity suits with respect to the first and second European patents in the Federal Patents Court in Munich, Germany, during the second quarter of 2014. Trials in the nullity suits have not been scheduled but are not anticipated before the second quarter of 2016 for the first patent and the second quarter of 2015 for the second patent.
Spain
On February 7, 2014, Vringo Infrastructure filed suit in the Commercial Court of Barcelona alleging infringement of a patent which is the Spanish counter-part of the first European patent filed in Germany. The oral hearing for this case is scheduled to be heard before the Commercial Court of Barcelona in November 2014.
India
On April 15, 2014, Vringo Infrastructure filed suit in the High Court of Delhi, New Delhi alleging infringement of a patent related to use of dictionaries in search engines preloaded on certain ASUS devices. A schedule for the case has not yet been set.
Tyco
On April 28, 2014, the Company entered into a confidential agreement with Tyco that resolved all litigation pending between the parties.
Sale of mobile social application business to InfoMedia Services Limited (“InfoMedia”)
On December 31, 2013, we entered into a definitive asset purchase agreement with InfoMedia for the sale of certain assets (mostly comprised of acquired technology) and the assignment of certain agreements related to our mobile social application business. The closing of the transaction occurred on February 18, 2014 (“Closing”). Upon Closing, as consideration for the assets and agreements related to our mobile social application business, we received 18 Class B shares of InfoMedia, which represent an 8.25% ownership interest in InfoMedia.
InfoMedia is a privately owned, UK based, provider of customer relationship management and monetization technologies to mobile carriers and device manufacturers. As part of the transaction, we will have the opportunity to license certain intellectual property assets and support InfoMedia to identify and protect new intellectual property. Additionally, our Chief Executive Officer was appointed as a full voting member on InfoMedia’s board of directors and we received a number of customary protective rights.
June 2014 Warrants
On June 19, 2014, we entered into agreements with certain of our warrant holders, pursuant to which the warrant holders exercised for cash 5,697,227 of their outstanding Series 1 and Series 2 warrants, with an exercise price of $1.76 per share. In addition, we granted such warrant holders unregistered warrants of the Company to purchase an aggregate of 5,412,366 shares of our common stock, par value $0.01 per share, at an exercise price of $5.06 per share (the “June 2014 Warrants”). The June 2014 Warrants expire on June 21, 2015 and because such warrants do not bear any down-round protection clauses, they are classified as equity instruments. As a result of these transactions, we received approximately $10 million of proceeds.
Results of Operations
Overview
Revenue
Revenue from patent licensing and enforcement is recognized when collection is reasonably assured, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and delivery of the service has been rendered. We use management's best estimate of selling price for individual elements in multiple-element arrangements, where vendor specific evidence or third party evidence of selling price is not available.
Currently, our revenue arrangements provide for the payment of contractually determined fees in consideration for the grant of certain intellectual property rights related to our patents. These rights typically include some combination of the following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patents, (ii) the release of the licensee from certain claims, and (iii) the dismissal of any pending litigation. The intellectual property rights granted may be perpetual in nature, extending until the expiration of the related patents, or can be granted for a defined, relatively short period of time, with the licensee possessing the right to renew the agreement at the end of each contractual term for an additional minimum upfront payment. Pursuant to the terms of these agreements, we have no further obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on our part to maintain or upgrade the related technology, or provide future support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases, and other significant deliverables upon execution of the agreement, or upon receipt of the minimum upfront payment for term agreement renewals. As such, the earnings process is complete and revenue is recognized upon the execution of the agreement, upon receipt of the minimum upfront fee for term agreement renewals, and when all other revenue recognition criteria have been met.
Operating legal costs
Operating legal costs mainly include expenses incurred in connection with our patent licensing and enforcement activities, patent-related legal expenses paid to external patent counsel (including contingent legal fees), licensing and enforcement related research, consulting and other expenses paid to third parties, as well as internal payroll expenses and stock-based compensation.
Amortization of intangibles
Amortization of intangibles represents the amortization expense of our acquired patents which is recognized on a straight-line basis over the remaining legal life of the patents.
Research and development expenses
Research and development expenses consist primarily of the cost of our development personnel, as well as of the cost of outsourced development services.
General and administrative expenses
General and administrative expenses include management and administrative personnel, public and investor relations, overhead/office costs and various professional fees, as well as insurance, non-operational depreciation and amortization.
Non-operating income (expenses)
Non-operating income (expenses) includes transaction gains (losses) from foreign exchange rate differences, interest on deposits, bank charges, as well as fair value adjustments related to our derivative warrant liabilities. The value of such derivative warrant liabilities is highly influenced by assumptions used in its valuation, as well as by our stock price at the period end (revaluation date).
| 23 |
Income taxes
At June 30, 2014, deferred tax assets generated from our U.S. activities were offset by a valuation allowance because realization depends on generating future taxable income, which, in our estimation, is not more likely than not to be generated before such net operating loss carryforwards expire.
Prior to the sale of our mobile social application business, our subsidiary in Israel generated net taxable income from services it provided to us. The subsidiary in Israel charged us for research, development, certain management and other services provided to us, plus a profit margin on such costs, which was 8%. In the zone where the production facilities of the subsidiary in Israel were located, the statutory tax rate was 12.5% in 2013.
Three month period ended June 30, 2014 compared to the three month period ended June 30, 2013
Revenue
| Three months ended June 30, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| Revenue | $ | 800,000 | $ | 1,100,000 | $ | (300,000 | ) | |||||
During the three month period ended June 30, 2014, we recorded total revenue of $800,000, which represents a decrease of $300,000 (or 27.3%) as compared to the three month period ended June 30, 2013. The current period revenue was due to a one-time payment in connection with a license and settlement agreement for certain of our owned intellectual property. Revenue during the three month period ended June 30, 2013 of $1,100,000 mostly relates to a one-time payment in connection with the license and settlement agreement entered into with Microsoft for $1,000,000.
We seek to generate revenue through the monetization of our intellectual property through licensing, orstrategic partnerships and litigation, when required, which may be resolved through a settlement or collection. We also intend to continue to expand our planned operations through acquisitions and monetization of additional patents, other intellectual property or operating businesses. In particular, following the incorporation of our subsidiary in Germany and the acquisition of a patent portfolio from Nokia, we intend to continue to expand our intellectual property monetization efforts worldwide.
We anticipate that our legal proceedings may continue for several years and may require significant expenditures for legal fees and other expenses. Disputes regarding the assertion of revenue
| Three months ended September 30, | Nine months ended September 30, | Cumulative from Inception through September 30, | ||||||||||||||||||||
| 2013 | 2012 | Change | 2013 | 2012 | Change | 2013 | ||||||||||||||||
| Cost of services provided | $ | 23,000 | $ | 18,000 | $ | 5,000 | $ | 73,000 | $ | 18,000 | $ | 55,000 | $ | 120,000 | ||||||||
| Amortization of intangibles | $ | 1,276,000 | $ | 878,000 | $ | 398,000 | $ | 3,800,000 | $ | 1,189,000 | $ | 2,611,000 | $ | 6,583,000 | ||||||||
| Operating legal | $ | 5,426,000 | $ | 2,519,000 | $ | 2,907,000 | $ | 15,684,000 | $ | 4,769,000 | $ | 10,915,000 | $ | 26,927,000 | ||||||||
| Total | $ | 6,725,000 | $ | 3,415,000 | $ | 3,310,000 | $ | 19,557,000 | $ | 5,976,000 | $ | 13,581,000 | $ | 33,630,000 | ||||||||
Operating legal costs
| Three months ended June 30, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| Operating legal costs | $ | 5,982,000 | $ | 4,790,000 | $ | 1,192,000 | ||||||
During the three month period ended SeptemberJune 30, 2013,2014, our cost of revenue was $6,725,000,operating legal costs were $5,982,000, which represents an increase of $3,310,000 (97%$1,192,000 (or 24.9%) from operating legal costs recorded for the three months ended June 30, 2013. This increase was primarily due to the timing and nature of consulting and patent litigation costs related to legal proceedings against Google and ZTE. During the three month period ended June 30, 2014, there were costs associated with the oral argument heard in the appeals court in May 2014 in connection with our legal proceedings against Google. With respect to our legal proceedings against ZTE, costs during the three month period ended June 30, 2014 were associated with our continued worldwide litigation efforts including commencement of legal actions in Brazil, Malaysia, Spain, Netherlands, and other countries.
It is uncertain whether our operating legal costs will increase over time. Though we aim to diversify our portfolio of products and increase our intellectual property monetization efforts, we have also increased the size of our in-house legal department staff as mentioned above. The goal is to decrease our overall legal expenses by bringing more work in-house, which we believe will cost less than outsourcing to external firms. There is no guarantee, however, that an in-house team will be less expensive or more efficient than outsourcing this work. Moreover, as we expand the scope of revenueour monetization efforts, the amount of legal work will increase leading to a concomitant increase in our operating legal costs, regardless of whether such work is performed in-house or outsourced.
Amortization of intangibles
| Three months ended June 30, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| Amortization of intangibles | $ | 968,000 | $ | 839,000 | $ | 129,000 | ||||||
During the three month period ended June 30, 2014, amortization expense related to our intangibles was $968,000 which represents an increase of $129,000 (or 15.4%) from amortization of intangibles recorded for the three month period ended SeptemberJune 30, 2012.2013. Currently, our intangible assets consist of our patent portfolios which are amortized over their remaining useful lives (i.e., through the expiration date of the patent). The increase in cost of revenue, comparedduring the current quarter was due to the third quarteradditional patent portfolios that were acquired during the second half of 2012, was mainly related2013.
Research and development
| Three months ended June 30, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| Research and development | $ | 217,000 | $ | 467,000 | $ | (250,000 | ) | |||||
During the three month periods ended June 30, 2014 and 2013, our research and development expenses amounted to significant consulting$217,000 and litigation costs, ($5,127,000, compared to $2,201,000 in the third quarter of 2012), mainly related to the commenced legal proceedings against ZTE, as well as increased amortization$467,000, respectively. The prior period amount excludes research and development expenses related to patents acquired ($851,000, comparedour mobile social application business which is presented in discontinued operations. The decrease of $250,000 (or 53.5%) is primarily due to $540,000a 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 third quarter of 2012), and amortization of acquired Vringo technology, the valuecurrent period.
As mentioned above, in February 2014, we sold our mobile social application business to which was allocated upon consummationInfoMedia. As part of the Merger ($425,000, compared to $338,000 insale agreement, the third quarteremployment of 2012).
General and increase our intellectual property. With the goal of monetizing our intellectual property, we intend to commence new licensing and litigation campaigns which are expected to be costly.
| Three months ended September 30, | Nine months ended September 30, | Cumulative from Inception through September 30, | ||||||||||||||||||||
| 2013 | 2012 | Change | 2013 | 2012 | Change | 2013 | ||||||||||||||||
| Research and development | $ | 700,000 | $ | 997,000 | $ | (297,000) | $ | 2,110,000 | $ | 997,000 | $ | 1,113,000 | $ | 3,850,000 | ||||||||
| Three months ended June 30, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| General and administrative | $ | 3,986,000 | $ | 3,759,000 | $ | 227,000 | ||||||
During the three month period ended SeptemberJune 30, 2013 and 2012, our research and development expense amounted to $700,000 and $997,000, respectively. The decrease of $297,000 (or 30%) was primarily due to reduced development team cost ($210,000, compared to $454,000 in the third quarter of 2012), and related non cash, stock-based compensation cost ($177,000, compared to $452,000 in the third quarter of 2012). This decrease was offset by an increase in consulting costs ($285,000, compared to $14,000 in the third quarter of 2012). These expenses relate to the cost of our research and development efforts in the U.S.
| Three months ended September 30, | Nine months ended September 30, | Cumulative from Inception through September 30, | ||||||||||||||||||||
| 2013 | 2012 | Change | 2013 | 2012 | Change | 2013 | ||||||||||||||||
| Marketing, general and administrative | $ | 3,801,000 | $ | 6,364,000 | $ | (2,563,000) | $ | 11,806,000 | $ | 7,508,000 | $ | 4,298,000 | $ | 23,876,000 | ||||||||
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| Three months ended September 30, | Nine months ended September 30, | Cumulative from Inception through September 30, | ||||||||||||||||||||
| 2013 | 2012 | Change | 2013 | 2012 | Change | 2013 | ||||||||||||||||
| Non-operating income (expense), net | $ | 645,000 | $ | 7,310,000 | $ | (6,665,000) | $ | (1,220,000) | $ | 7,303,000 | $ | (8,523,000) | $ | 2,754,000 | ||||||||
| Three months ended June 30, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| Non-operating income (expense), net | $ | 304,000 | $ | (1,474,000 | ) | $ | 1,778,000 | |||||
During the three month period ended SeptemberJune 30, 2013,2014, we recorded non-operating income in the amount of $645,000,$304,000 compared to non-operating incomeexpense in the amount of $7,310,000 recorded in$1,474,000 during the three month period ended SeptemberJune 30, 2012. Following the Merger, in the third quarter of 2012, our non-operating income (expense), net, included mainly the impact of changes in fair value of our derivative warrants, the fair value of which is highly affected by our share price at the measurement date. Consequently, as of September 30, 2012, we recorded an income of $7,240,000 due to the decrease of our share price at quarter end, compared to the price on the date of the Merger.2013. During the three month period ended SeptemberJune 30, 2013,2014, we recorded approximately $689,000$348,000 of income related to a decrease in the fair value of our derivative warrant liabilities. This income was partially offset by $65,000 of expense recorded in connection with the issuance of the June 2014 Warrants described above. During the three month period ended June 30, 2013, a charge of $1,574,000 was recorded related to the removal of the down-round protection clause in certain then outstanding Series 1 Warrants. This expense was partially offset by income of $77,000 related to a decrease in fair value of our then remaining derivative warrant liability. The change was mainly due to a decrease in our share price as of the valuation date, compared to the end of the second quarter of 2013.
We expect that our non-operating income (expenses), net,(expense) will remain highly volatile, asand we may choose to fund our operations through additional financing. In particular, non-operating income (expenses), net,(expense) will be affected by the adjustments to fair value of our derivative instruments. Fair value of these derivative instruments depends on a variety of assumptions, such as estimations regarding volatility, triggering of down-round protection and estimated future share price. An estimated increase in the price of our common stock increases the value of the warrants and thus results in a loss on our statement of operations. In addition, increase inhigh estimated probability of a down-round protection increases the value of the warrants and again results in a loss on our statement of operations. Also see Notes 4 and 6refer to Note 8 to the accompanying unaudited consolidated financial statements.
| Three months ended September 30, | Nine months ended September 30, | Cumulative from Inception through September 30, | ||||||||||||||||||||
| 2013 | 2012 | Change | 2013 | 2012 | Change | 2013 | ||||||||||||||||
| Income tax benefit (expense) | $ | (29,000) | $ | 76,000 | $ | (105,000) | $ | (47,000) | $ | 76,000 | $ | (123,000) | $ | (102,000) | ||||||||
Loss from discontinued mobile social application operations
| Three months ended June 30, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| Revenue | $ | — | $ | 61,000 | $ | (61,000 | ) | |||||
| Operating expenses | — | (748,000 | ) | 748,000 | ||||||||
| Operating loss | — | (687,000 | ) | 687,000 | ||||||||
| Non-operating expense | — | (22,000 | ) | 22,000 | ||||||||
| Loss before taxes on income | — | (709,000 | ) | 709,000 | ||||||||
| Income tax expense | — | (2,000 | ) | 2,000 | ||||||||
| Loss from discontinued operations | $ | — | $ | (711,000 | ) | $ | 711,000 | |||||
On February 18, 2014, we executed the three months ended September 30, 2013,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 recorded income tax expense in the total amountreceived a number of $29,000, compared tocustomary protective rights. The InfoMedia Class B shares are accounted for as a $76,000 tax benefit recorded incost-method investment.
During the three month period ended SeptemberJune 30, 2012. 2014, there were no results from discontinued operations since all related activities ceased when the sale was executed.
Six month period ended June 30, 2014 compared to the six month period ended June 30, 2013
Revenue
| Six months ended June 30, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| Revenue | $ | 1,050,000 | $ | 1,100,000 | $ | (50,000 | ) | |||||
During the ninesix month period ended June 30, 2014, we recorded total revenue of $1,050,000, which represents a decrease of $50,000 (or 4.5%) as compared to the six month period ended June 30, 2013. The current period revenue was due to certain one-time payments in connection with license and settlement agreements for certain of our owned intellectual property. Revenue during the six month period ended June 30, 2013 of $1,100,000 mostly relates to a one-time payment in connection with the license and settlement agreement entered into with Microsoft for $1,000,000.
We seek to generate revenue through the monetization of our intellectual property through licensing, strategic partnerships and litigation, when required, which may be resolved through a settlement or collection. We also intend to continue to expand our planned operations through acquisitions and monetization of additional patents, other intellectual property or operating businesses. In particular, following the incorporation of our subsidiary in Germany and the acquisition of a patent portfolio from Nokia, we intend to continue to expand our intellectual property monetization efforts worldwide.
We anticipate that our legal proceedings may continue for several years and may require significant expenditures for legal fees and other expenses. Disputes regarding the assertion of patents and other intellectual property rights are highly complex and technical.
Operating legal costs
| Six months ended June 30, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| Operating legal costs | $ | 10,857,000 | $ | 10,189,000 | $ | 668,000 | ||||||
During the six month period ended June 30, 2014, our operating legal costs were $10,857,000, which represents an increase of $668,000 (or 6.6%) from operating legal costs recorded for the six months ended SeptemberJune 30, 2013. This increase was primarily due to the timing and nature of consulting and patent litigation costs related to legal proceedings against Google and ZTE. During the six month period ended June 30, 2014, there were costs associated with the oral argument heard in the appeals court in May 2014 in connection with our legal proceedings against Google. With respect to our legal proceedings against ZTE, costs during the six month period ended June 30, 2014 were associated with our continued worldwide litigation efforts including commencement of legal actions in Brazil, Malaysia, Spain, Netherlands, and other countries. Also, there was an increase in stock-based compensation expense (approximately $133,000) due to our efforts to expand our in-house legal department staff.
It is uncertain whether our operating legal costs will increase over time. Though we aim to diversify our portfolio of products and increase our intellectual property monetization efforts, we have also increased the size of our in-house legal department staff as mentioned above. The goal is to decrease our overall legal expenses by bringing more work in-house, which we believe will cost less than outsourcing to external firms. There is no guarantee, however, that an in-house team will be less expensive or more efficient than outsourcing this work. Moreover, as we expand the scope of our monetization efforts, the amount of legal work will increase leading to a concomitant increase in our operating legal costs, regardless of if such work is performed in-house or outsourced.
Amortization of intangibles
| Six months ended June 30, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| Amortization of intangibles | $ | 1,925,000 | $ | 1,678,000 | $ | 247,000 | ||||||
During the six month period ended June 30, 2014, amortization expense related to our intangibles was $1,925,000 which represents an increase of $247,000 (or 14.7%) from amortization of intangibles recorded for the six month period ended June 30, 2013. Currently, our intangible assets consist of our patent portfolios which are amortized over their remaining useful lives (i.e., through the expiration date of the patent). The increase during the current period was due to the additional patent portfolios that were acquired during the second half of 2013.
Research and development
| Six months ended June 30, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| Research and development | $ | 442,000 | $ | 737,000 | $ | (295,000 | ) | |||||
During the six month periods ended June 30, 2014 and 2013, our research and development expenses amounted to $442,000 and $737,000, respectively. These amounts exclude research and development expenses related to our mobile social application business which is presented in discontinued operations. The decrease of $295,000 (or 40.0%) is primarily due to a decrease in costs related to third party consultants who were engaged on certain projects during 2013. Such projects had ended prior to 2014 and therefore these third party consultants were no longer utilized in the current period.
As mentioned above, in February 2014, we sold our mobile social application business to InfoMedia. As part of the sale agreement, the employment of our mobile products and services personnel were assumed by InfoMedia.
General and administrative
| Six months ended June 30, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| General and administrative | $ | 8,004,000 | $ | 7,750,000 | $ | 254,000 | ||||||
During the six month period ended June 30, 2014, general and administrative expenses increased by $254,000 (or 3.3%), to $8,004,000, compared to $7,750,000 that was recorded during the six month period ended June 30, 2013. The overall increase in general and administrative expenses was primarily due to increased costs in connection with our efforts to consolidate our executive management and finance functions in a centralized location. In addition, there was an increase in corporate legal, insurance, and accounting costs as compared to the prior period.
Non-operating income (expense), net
| Six months ended June 30, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| Non-operating income (expense), net | $ | (771,000 | ) | $ | (1,834,000 | ) | $ | 1,063,000 | ||||
During the six month period ended June 30, 2014, we recorded income taxnon-operating expense in the total amount of $47,000,$771,000 compared to a $76,000 tax benefit recordednon-operating expense in the nineamount of $1,834,000 recorded during the six month period ended SeptemberJune 30, 2012.2013. During the six month period ended June 30, 2014, we recorded approximately $728,000 of expense related to an increase in the fair value of our derivative warrant liabilities and $65,000 of expense recorded in connection with the issuance of the June 2014 Warrants described above. During the six month period ended June 30, 2013, a charge of $1,574,000 was recorded related to the removal of the down-round protection clause in certain then outstanding Series 1 Warrants. In general, current taxesaddition, expense of $292,000 was recorded related to an increase in fair value of our then remaining derivative warrant liabilities.
We expect that our non-operating income (expense) will remain highly volatile, and we may choose to fund our operations through additional financing. In particular, non-operating income (expense) will be affected by the adjustments to fair value of our derivative instruments. Fair value of these derivative instruments depends on incomea variety of assumptions, such as estimations regarding triggering of down-round protection and estimated future share price. An estimated increase in the price of our common stock increases the value of the warrants and thus results in a loss on our statement of operations. In addition, high estimated probability of a down-round protection increases the value of the warrants and again results in a loss on our statement of operations. Also refer to Note 8 to the accompanying unaudited consolidated financial statements.
Loss from discontinued mobile social application operations
| Six months ended June 30, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| Revenue | $ | 37,000 | $ | 126,000 | $ | (89,000 | ) | |||||
| Operating expenses | (266,000 | ) | (1,893,000 | ) | 1,627,000 | |||||||
| Operating loss | (229,000 | ) | (1,767,000 | ) | 1,538,000 | |||||||
| Non-operating income (expense) | 20,000 | (31,000 | ) | 51,000 | ||||||||
| Loss before taxes on income | (209,000 | ) | (1,798,000 | ) | 1,589,000 | |||||||
| Income tax expense | — | (18,000 | ) | 18,000 | ||||||||
| Loss from discontinued operations | $ | (209,000 | ) | $ | (1,816,000 | ) | $ | 1,607,000 | ||||
On February 18, 2014, we executed the sale of our mobile social application business to InfoMedia, receiving eighteen (18) Class B shares of InfoMedia as consideration, which represent an 8.25% ownership interest. Additionally, our Chief Executive Officer was appointed as a full voting member on InfoMedia’s board of directors and we received a number of customary protective rights. The InfoMedia Class B shares are accounted for as a cost-method investment. Cash requirements for termination of mobile operations included mainly post-employment obligations, were incurred during the six month period ended June, 2014, and are considered to be immaterial.
During the six month period ended June 30, 2014, operating expenses decreased by $1,627,000 (or 85.9%), to $266,000, from $1,893,000 recorded during the six month period ended June 30, 2013. This decrease is primarily due to taxable profits generated by our subsidiary in Israel,the fact that there were no substantial operating expenses and no amortization related to acquired technology during the current year 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 servicesrelated asset was classified as held for us and is reimbursed for its expenses plus 8% profit. For financial statements purposes, these profits are eliminated upon consolidation.
Taxes on Income
As of June 30, 2014, our estimated aggregate total net tax loss carryforwards ("NOL") was approximately $96 million for U.S. federal, state and local purposes expiring 20 years from the respective tax years to which they relate (beginning with 2006 for the Legal Parent and 2011 for I/P).relate. The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of NOL and tax credits in the event of an ownership change of a corporation. Thus, in accordance with Internal Revenue Code, Section 382, our initial public offering, financing activities, as well as the Merger, has significantly limited our ability to utilize all such NOL’sNOL and credit carryforwards.
A valuation allowance has been recorded against the net deferred tax asset in the U.S., as it is in the opinion of our management that it is more likely than not that the operating loss carryforwards will not be utilized in the foreseeable future.
We file our tax returns in the U.S. federal jurisdiction, as well as in various state and local jurisdictions. Vringo, Inc. has open tax assessmentsyears for the years 20092010 through 2012.2013. As of SeptemberJune 30, 2013,2014, all tax assessmentsyears for I/PInnovate/Protect are still open. The Israeli subsidiary files its income tax returns in Israel. As of SeptemberJune 30, 2013,2014, the Israeli subsidiary has open tax assessmentsyears for the years 20092010 through 2012.
We did not have any material unrecognized tax liability in connection with the acquired technology. This deferred tax liability was offset by a deferred tax asset in the same amount. The deferred tax asset in respect of the remaining tax loss carryforwards has been offset by a valuation allowance as in our opinion it is more likely than not that the tax loss carryforwards will not be utilized in the foreseeable future. No valuation allowance has been provided for the deferred tax assets of the Israeli subsidiary sincebenefits as of SeptemberJune 30, 2013, they are more likely than2014. We do not expect to be realized.
As of SeptemberJune 30, 2013,2014, we had a cash balance of $40,436,000 and $37,596,000 in net working capital. The$31,654,000. This represents a decrease of $16,524,000 in$1,932,000 from our cash balance fromon December 31, 2012, was2013, which is mainly due to net cash used by us in our business operations in the total amount of approximately $17,384,000, offset by $1,539,000 received from$12,955,000 during the exercise of options and warrants.
The overall decrease in our cash balance from expenditures related to our litigation campaigns was partially offset by approximately $13,500,000 that was received in connection with the exercises of warrants and stock options that occurred during the six month period ended June 30, 2014, as described below. As of June 30, 2014, our total stockholders' equity was $114,166,000 which is consistent with the balance as of December 31, 2013.
During the six month period ended June 30, 2014, a total of 6,415,992 warrants to purchase an aggregate of 421,4936,415,992 shares of our common stock,
Based on current operating plans, we expect to have sufficient funds for our operations for at least the next twelve months. In addition, until we generate sufficient revenue, we may chooseneed to raise additional funds, in connection with potential acquisitionswhich can be achieved through the exercise of patent portfoliosour outstanding warrants and options, the issuance of additional equity or other intellectual property assets that we may pursue.through loans from financial institutions. There can be no assurance, however, that any such opportunities will materialize.
We anticipate that we will continue to search for additional sources of liquidity, when needed, until we generate positive cash flows to support our operations. We cannot give any assurance that the necessary capital will be raised or that, if funds are raised, it will be on favorable terms. Any future sales of securities to finance our operations may require stockholder approval and will dilute existing stockholders' ownership. We cannot guarantee when or if we will ever generate positive cash flows.
Cash flows
| Nine months ended September 30, | Cumulative from Inception through September 30, | ||||||||||||
| 2013 | 2012 | Change | 2013 | ||||||||||
| Net cash used in operating activities | $ | (17,384,000) | $ | (5,962,000) | $ | (11,422,000) | $ | (33,380,000) | |||||
| Net cash used in investing activities | $ | (692,000) | $ | (19,419,000) | $ | 18,727,000 | $ | (23,573,000) | |||||
| Net cash provided by financing activities | $ | 1,539,000 | $ | 29,717,000 | $ | (28,178,000) | $ | 97,378,000 | |||||
| Six months ended June 30, | ||||||||||||
| 2014 | 2013 | Change | ||||||||||
| Net cash used in operating activities | $ | (12,955,000 | ) | $ | (10,966,000 | ) | $ | (1,989,000 | ) | |||
| Net cash used in investing activities | $ | (2,449,000 | ) | $ | (3,143,000 | ) | $ | 694,000 | ||||
| Cash provided by financing activities | $ | 13,452,000 | $ | 327,000 | $ | 13,125,000 | ||||||
Operating activities
During the ninesix month periodsperiod ended SeptemberJune 30, 2013 and 2012,2014, net cash used in operating activities totaled $17,384,000 and $5,962,000, respectively.$12,955,000. During the six months period ended June 30, 2013, net cash used in operating activities totaled $10,966,000. The $11,422,000$1,989,000 increase in net cash used in operating activities was mainly due to increased litigation costs described above, as well as an increase in cost of our in-house staff, hired sincewhich was expanded during the Merger in July 19, 2012.
Our net cash used in operating activities tocould increase due to further development of ourif we engage in future business development of our products and enhancement of our intellectual property.activities. As we expect to move towards greater revenue generation in the future, we believeexpect that these amounts will be offset over time by the collection of revenue.
During the ninesix month periodsperiod ended SeptemberJune 30, 2013 and 2012,2014, net cash used in investing activities totaled $692,000 and $19,419,000, respectively. The decrease in$2,449,000. During the six month period ended June 30, 2013, net cash used in investing activities totaled $3,143,000. Net cash used in investing activities during the six month period ended June 30, 2014 is mostly comprised of the $2,304,000 deposited with courts that is described above. Net cash used in investing activities during the six month period ended June 30, 2013 is related to an investment made in commercial paper during that period in the total amount of $18,727,000,$3,120,000. There was primarily duealso an increase in fixed asset purchases during the six month period ended June 30, 2014 as compared to the acquisition of patents from Nokia in the total amount of $22,548,000, in the third quarter of 2012.
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 ninesix month period ended SeptemberJune 30, 2013, net2014, cash provided by financing activities totaled $1,539,000,$13,452,000, which relates to funds that we received from the exercises of warrants and stock options in the total amount of $11,292,000 and $2,160,000, respectively. During the six month period ended June 30, 2013, cash provided by financing activities totaled $327,000, which relates to funds received from the exerciseexercises of warrants and stock options in the total amount of $566,000$174,000 and $973,000,$153,000, respectively. During the nine month period ended September 30, 2012, net cash provided by financing activities totaled $29,717,000, which mainly relates to a private financing round, in which we raised $31,148,000, offset by repayment of notes payable to Hudson Bay, and funds received from exercise of warrants and options in the total amount of $1,769,000.
A significant portion of our issued and outstanding warrants are currently “in the money” and the underlying shares of common stock underlying such warrants held by non-affiliates are freely tradable, with the potential of up to $18.7$7.4 million of additional incoming funds.funds as of June 30, 2014, should the warrant holders choose to exercise. We may choose to raise additional funds in connection with any acquisitionacquisitions of patent portfolios or other intellectual property assets that we may pursue. There can be no assurance, however, that any such opportunity will materialize, and moreover, that any such financing would likely be dilutive to our current stockholders.
Future operations
We are currently pursuing several potential strategic partners and have identifiedconstantly seeking to identify patent portfolios, other intellectual property assets and operating businesses that we may wish to acquire. In addition, we are continuing to explore further opportunities for strategic business alliances. However, there can be no assurance that any such opportunities will be consummated.
Off-Balance Sheet Arrangements
From October 2012 through September 30, 2013,the filing date of this Form 10-Q, our subsidiaries filed patent infringement lawsuits against the subsidiaries of ZTE Corporation in the United Kingdom, France, Germany, Australia, India, Brazil, Malaysia, and Australia.Romania. Should we be deemed the losing party in any of its applications to the court in the UK, we may be held responsible for a portion of the defendant’s legal fees for the relevant application or for the litigation. Pursuant to negotiation with ZTE’s UK subsidiary, in the United Kingdom, we placed two guaranteeswritten 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$2,900,000 each. In addition, we may be required to grant additional guarantees,written commitments, as necessary, in connection with itsour commenced proceedings against ZTE Corporation in Europe, Brazil, India and Australia. It should be noted, however, that if we were successful on any court applications or the entirety of any litigation, ZTE Corporation would be responsible for a substantial portion of our legal fees.
Other than the arrangements described in the preceding paragraph, we have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
Contractual Obligations
The following table summarizes our future contractual obligations beginning on July 1, 2014:
| Remainder of 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | Total | ||||||||||||||||||||||
| Operating leases | $ | 79,000 | $ | 403,000 | $ | 403,000 | $ | 407,000 | $ | 416,000 | $ | 347,000 | $ | 2,055,000 | ||||||||||||||
In July 2012, the Company signed a rental agreement for its corporate executive office in New York for an annual rental fee of approximately $137,000 (subject to certain adjustments) which was to expire in September 2015. However, in January 2014, the Company entered into an amended lease agreement with the landlord for newly renovated office within the same building. The initial annual rental fee for this new office is approximately $403,000 (subject to certain future escalations and adjustments) beginning when the renovations are completed and the new office is available. Until the new office is available, the monthly rent payments are based on the previous annual rental fee. The lease for the New York office will expire five years and three months after the new office is available.
| 31 |
These consolidated financial statements should be read in conjunction with the notes to our audited consolidated financial statements forincluded in our Annual Report on Form 10-K filed with the year ended December 31, 2012, we believe the followingSEC on March 10, 2014, which includes a description of our critical accounting policies to be the most critical in understanding thethat involve subjective and complex judgments and estimates we use in preparing our consolidated financial statements.
Financial instruments which potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We maintain our cash and cash equivalents with various major financial institutions. These major financial institutions are located in the United States and our policy is designed to limit exposure to any one institution.
The primary objective of our investment activities is to preserve principal while concurrently maximizing the income we receive from our investments without significantly increasing risk. To minimize risks in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in securities such as commercial paper and money market funds. As of June 30, 2014 and December 31, 2013, our cash was mostly held in money market funds. 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 a smaller reporting company.
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (Exchange Act)(the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of SeptemberJune 30, 2013,2014, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in 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 chief executive officer and chief financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal ControlsControl Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Search Patents
In June 2011, I/P Engine acquired its initial patent assetseight patents from Lycos, Inc. (“Lycos”) through its wholly-owned subsidiary, I/P Engine, Inc. Such assets were comprised of eight patents relating to information filtering and search technologies. As one means of realizing the value of the patents acquired from Lycos, onEngine. On September 15, 2011, I/P Engine initiated (through its wholly-owned subsidiary I/P Engine) litigation in the United States District Court, Eastern District of Virginia, against AOL Inc. (“AOL”), Google Inc. (“Google”), IAC Search & Media, Inc. (“IAC”), Gannett Company, Inc. (“Gannett”), and Target Corporationcertain of its customers (“Target”) (collectively, the “Defendants”Defendants”) for infringement regardingof two of the patents acquired from Lycos (U.S. Patent Nos. 6,314,420 and 6,775,664) (collectively the “Patents”). The case number is 2:11 CV 512-RAJ/FBS. The court docket for the case, including the parties’ briefs, is publicly available on the Public Access to Court Electronic Records website (“PACER”), www.pacer.gov, which is operated by the Administrative Office of the U.S. Courts.
On November 6, 2012, thea jury in Norfolk, Virginia unanimously returned a verdict as follows: (i)in favor of I/P Engine had proven by a preponderance of the evidence that the Defendants infringed the asserted claims of the patents; and (ii) Defendants had not proven by clear and convincing evidence that the asserted claims of the patents are invalid by anticipation.Engine. The jury also found certain specific facts related to the ultimate question of whether the patents are invalid as obvious. Based on such facts, onverdict is available athttp://bit.ly/QBRt5S. On November 20, 2012, the courtDistrict Court issued a ruling that the patents-in-suitasserted patents were not obvious. The juryinvalid as obvious, and the Court entered final judgment which can be found that reasonable royalty damages should be based on a "running royalty", and that the running royalty rate should be 3.5%athttp://bit.ly/1hqlUpD. The jury also found that the following sums of money, if paid now in cash, would reasonably compensate I/P Engine for the Defendants past infringement: Google: $15,800,000, AOL: $7,943,000, IAC: $6,650,000, Gannett: $4,322, Target: $98,833.
On August 1, 2013,January 3, 2014, the District Court foundordered that I/P Engine is entitled to supplemental damagesrecover an additional sum from October 1, 2012 to November 20, 2012, in an amount to be determined; prejudgment interest from September 15, 2011 to November 20, 2012 in an amount to be determined; and post-judgment interestthe Defendants for Defendants' infringement in an amount to be determined. I/P Engine's motion for an award of post-judgment royalties is pending in the District Court. Motions by I/P Engine for awards of pre-judgment interest, post-judgment interest, supplemental damages and post-judgmentprejudgment interest. This ruling can be found athttp://bit.ly/1iRY5rc. On January 21, 2014, the District Court ruled that the Defendants' alleged design-around was “nothing more than a colorable variation of the system adjudged to infringe,” and accordingly I/P Engine “is entitled to ongoing royalties are pending in U.S.as long as [the] Defendants continue to use the modified system.” This ruling can be found athttp://bit.ly/1rpVeZp. On January 28, 2014, the District Court ruled that the appropriate ongoing royalty rate for Defendants' continued infringement of the patents-in-suit that "would reasonably compensate [I/P Engine] for giving up [its] right to exclude yet allow an ongoing willful infringer to make a reasonable profit" is a rate of 6.5% of the 20.9% royalty base previously set by the District Court.
Both I/P Engine and the Defendants have filed appeals withappealed the case to the U.S. Court of Appeals for the Federal Circuit. The docketcase number for the District Court case is 2:11 CV 512-RAJ. The case numbers for the appealable cases in the Court of Appeals for the Federal Circuit are 13-1307, 13-1313, 14-1233 and 13-1311.14-1289. On May 6, 2014, the United States Court of Appeals for the Federal Circuit heard oral argument in I/P Engine, Inc., Plaintiff-Cross Appellant v. AOL Inc., Google Inc., IAC Search & Media, Inc., Gannett Company, Inc. and Target Corporation, Defendants-Appellants, Appeal Nos. 13-1307 and 13-1313. The parties' filingsCourt's decision in the case is pending as of the filing date of this Form 10-Q.
Requests for reexamination are availablea standard tactic used by defendants in patent litigation cases. Google has previously filed four separate requests for reexamination of the two asserted patents at the USPTO, with the two requests on PACER.
On January 31, 2013, I/P Engine filed an action asserting infringement of U.S. Patent Nos. 6,314,420 and 6,775,664initiated litigation in the United States District Court, Southern District of New York, against Microsoft Corporation (“Microsoft”). On May 30, 2013, our subsidiaryI/P Engine entered into a settlement and license agreement with Microsoft 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, Case No. 1:13-cv-00688 (SDNY)).litigation. According to the agreement, Microsoft paid usI/P Engine $1,000,000 and agreed to pay 5% of any future amount Google pays for its use of the patents acquired from Lycos. The parties also agreed to a limitation on Microsoft's total liability, which would not impact us unless the amounts received from Google substantially exceed the judgment previously awarded. In addition, the parties also entered into a patent assignment agreement, pursuant to which Microsoft assigned six patents to I/P Engine. The assigned patents relate to telecommunications, data management, and other technology areas.
Infrastructure Patents
On August 9, 2012, we entered into a patent purchase agreement with Nokia Corporation ("Nokia"), pursuantcomprising of 124 patent families with counterparts world-wide. The total consideration paid for the portfolio was $22,000,000. Under the terms of the purchase agreement, to which Nokia sold usthe extent that the gross revenue generated by such portfolio exceeds $22,000,000, we are obligated to pay a portfolio consistingroyalty of over 500 patents and patent applications worldwide, including over 100 issued United States patents. We agreed to compensate Nokia with a cash payment and certain ongoing rights in revenues generated from the patent portfolio.35% of such excess. The portfolio encompasses technologies relating to telecom infrastructure, and handsets, including communication management, data and signal transmission, mobility management, radio resources management and services. Declarations have beenwere filed by Nokia indicating that 31 of the 124 patent families acquired may be essential to wireless communications standards. Standards represented in the portfolio are commonly known as 2G, 2.5G, 3G and 4G and related technologies and include GSM, WCDMA, T63, T64, DECT, LTE, and SAE. The purchase price for the portfolio was $22,000,000, and in addition we capitalized acquisition costs of $548,000. To the extent that the gross revenue (as defined in the purchase agreement) generated by such portfolio exceeds $22 million, a royalty of 35% of such excess would be payable to Nokia. The $22 million cash payment was made to Nokia on August 10, 2012. The purchase agreement provides that Nokia and its affiliates will retain a non-exclusive, worldwide and fully paid-up license (without the right to grant sublicenses) to the portfolio for the sole purpose of supplying (as defined in the purchase agreement) Nokia’s products. The purchase agreement also provides that if we bring a proceeding against Nokia or its affiliates within seven years, Nokia shall have the right to re-acquire the patent portfolio for a nominal amount. Further, if we either sell to a third party any assigned essential cellular patent, or more than a certain portionCopies of the other assigned patents (other than in connection with a change of control ofdeclarations are available on our company), or file an action against a telecom provider to enforce any of the assigned patents (other than in response to any specified action filed by a telecom provider against us or our affiliate) which action is not withdrawn after notice from Nokia, then we will be obligated to pay to Nokia a substantial impairment payment.
As one of the means of realizing the value of the patents on telecom infrastructure, our wholly-owned subsidiaries, Vringo Infrastructure, Inc. (“Vringo Infrastructure”), Vringo, Inc. and Vringo Germany GmbH (“Vringo Germany”) have filed a number of suits against ZTE Corporation (“ZTE”), ASUSTeK Computer Inc. (“ASUS”), and Tyco Integrated Security, LLC (“Tyco”) and certain of their subsidiaries, affiliates and other companies in the United States, European jurisdictions, India, Australia, Brazil, and in Australia,Malaysia alleging infringement of certain U.S., European, Indian, Australian, Brazilian, and AustralianMalaysian patents.
ZTE
United Kingdom
On October 5, 2012, Vringo Infrastructure, filed a suit in the UK High Court of Justice, Chancery Division, Patents Court, alleging infringement of certain European Patents (UK) 1,212,919; 1,166,589; and 1,808,029.patents. Subsequently, ZTE (UK) Ltd.’s formal responseresponded to the complaint was received on December 19, 2012 and includedwith a counterclaim for invalidity of the patents in suit. Vringo Infrastructure responded to the defense on January 16, 2013. Vringo Infrastructure filed a further UK suit on December 3, 2012, alleging infringement of additional European Patents (UK) 1,221,212; 1,330,933; and 1,186,119. ZTE (UK) Ltd.’s response to this claim was received on February 27, 2013 and included a counterclaim for invalidity ofpatents. In the patents in suit. Vringo Infrastructure’s reply was filed on March 20, 2013. The UK complaints allege that ZTE’s cellular network elements fall within the scope of all six patents, and ZTE’s GSM/UMTS multi-mode wireless handsets also fall within the scope of at least the 1,808,029 patent. Declarations have been filed at the European Telecommunications and Standards Institute (ETSI) that cover all the patent applications from which the patents in suit are derived. On June 5, 2013, the Court held a case management conference and on June 6, 2013, made an order governing the schedule of the two UK suits. The first UK case will hold asuit, trial with the trial period commencing onis scheduled for October 27, 2014 and in the second UK case will hold asuit, trial with the trial period commencing onis scheduled for June 8, 2015.
Germany
On November 15, 2012, Vringo Germany
filed a suit in the Mannheim Regional Court in Germany, alleging infringement of a EuropeanThe hearing for the first European patent case has been postponed by mutual agreement with ZTE; no date has been set for reinstatement. On December 17, 2013, the Court issued its judgment in the second European patent case, finding that ZTE infringed that patent and ordered an accounting and an injunction upon payment of the additional products accused, it is anticipatedappropriate 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 the court will setnon-compliance be subject to civil and criminal penalties. On May 5, 2014, we paid a new briefing schedule and issue a new hearing date, while the 1,186,119 case is anticipatedbond of approximately $1,400,000 to be heard on November 12, 2013. Pleading on the merits is otherwise closed.
On February 14,December 27, 2013, ZTE filed a nullity suit with respect to European Patent (DE) 1,212,919notice of appeal of the Mannheim Regional Court’s judgment in the Federal Patentssecond European patent case, and on January 24, 2014, ZTE filed an emergency motion with the Court Munich, Germany, alleging invalidityof Appeals seeking a stay of the patent. Vringo filed its responsive pleading on July 25, 2013 and Vringo receivedjudge’s order pending appeal. On February 24, 2014, ZTE’s responsive pleading on September 13, 2013. The Court has not set a deadline for Vringo’s next brief. Trial in the nullity suit has not been scheduled and is not anticipated before July 1, 2014.
On September 13, 2013 and January 28, 2014, Vringo Germany filed a suittwo suits in the Regional Court of Düsseldorf, alleging infringement of two additional European Patent (DE) 0,748,136. Complaints in this action were filed against both ZTE Germany and ZTE China. A case management hearing ispatents. Both cases are scheduled to take place on December 3,be heard in November 2014. On April 23, 2014, Google commenced the process to intervene in the fourth filed suit as an interested third party. As a result of this process, Google is entitled to file defensive briefs in tandem with ZTE.
ZTE filed nullity suits with respect to the first and second European patents in the Federal Patents Court in Munich, Germany during the second and fourth quarters, respectively, of 2013.
China
In November and December 2012, ZTE initiated invalidity proceedingsfiled reexamination requests in China against three Chinese Patents ZL00806049.5; ZL 00812876.6; and ZL200480044232.1,patents owned by Vringo before the Patent Reexamination Board of the Patent Office of the People’s Republic of China. TheseOn July 3, 2013, the patent rights for one of those patents arewas upheld. On May 30, 2014, the Chinese equivalentspatent rights for another one of European Patents 1,212,919; 1,166,589; and 1,808,029. Vringo Infrastructure filed responses to these actions in January and February 2013.those patents was upheld. The oral hearing for ZL200480044232.1 (equivalent to European Patent 1,808,029)the remaining patent occurred on April 10, 2013. On July 3,January 23, 2014, for which the ruling is still pending. Between December 20 and December 28, 2013, our patent rights were upheld.We are currently awaiting information as to whether or not ZTE will appeal this decision.Anfiled four more additional reexamination requests against four other Chinese patents owned by Vringo. Vringo filed responses for these four patents in early May 2014. The oral hearing for ZL00806049.5 (equivalent to European Patent 1,166,589)one of the patents occurred on June 17, 2014. Oral hearings for the remaining three patents are expected to occur later in the year.
Between May 9, 2013 and July of 2014, ZTE filed reexamination requests in China against 25 additional Chinese patents owned by Vringo before the Patent Reexamination Board of the Patent Office of the People’s Republic of China. Vringo’s initial responses are due in August of 2014. The remaining schedule in these 25 new re-examinations is not yet available.
On February 21, 2014, ZTE filed a ruling is still pending.
France
On March 29, 2013, Vringo Infrastructure filed a patent infringement lawsuit in France against ZTE, China and its French subsidiary, ZTE France SASU, in the Tribunal de Grande Instance de Paris, alleging infringement of the French part of two European Patents 1,186,119 and 1,221,212 by ZTE devices, which are believed to fall within the scope of these 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.
Australia
On June 11, 2013, Vringo Infrastructure filed a patent infringement lawsuit against ZTE (Australia) Pty Ltd. (ZTE Australia), an Australian subsidiary of ZTE Corporation. The lawsuit filed in the Federal Court of Australia in the New South Wales registry, allegesalleging infringement by ZTE Australia of two Australian Standard Patents AU 2005/212,893 and AU 773,182. The proceeding has been assigned Case No. NSD1010/2013. The patents in suit relate to telecommunications infrastructure equipment and mobile devices. The pleadings were completed on October 21, 2013 and a further directions conference (similar to a US Rule 16 conference) was held on November 4, 2013.patents. We currently anticipate that the Court will set a trial date in the second half of 2014.
Spain
On September 6, 2013, Vringo Infrastructure filed a preliminary inquiry order against ZTE entities Sociedad Anonima de Comunicaciones Zhong Xing ZTE Corporation, Sucursal en Espana, and ZhongXing Corporation, S.L. in the Commercial Court of Madrid, Spain, requiring the respondent companiesZTE to provide discovery relating to alleged infringement of a patent which is the Spanish Patent
India
On November 11,7, 2013, at which time the respondent companies must produce financial, commercial, bank, and customs documents related to sales of certain ZTE base station products.
On February 3, 2014, we filed a motion for contempt for ZTE’s failure to comply with the Court’s order, and requested that the Court order ZTE to pay an increased bond.
On January 31, 2014, we and our subsidiary, Vringo Infrastructure, filed a patent infringement lawsuit in the High Court of Delhi at New Delhi, alleging infringement of a second Indian patent related to GSM Infrastructure. The Court, finding a prima facie case of infringement, granted an ex-parte preliminary injunction, restraining ZTE and its officers, directors, agents, distributors and customers from importing, selling, offering for sale, advertising, installing, or operating any infringing products, and giving us the right to inspect any infringing goods arriving in India, which are to be detained by customs authorities. The judge granted the injunction after ruling that we would suffer an irreparable loss if such an injunction were not put into place. ZTE subsequently appealed the injunction. On August 5, 2014, ZTE's appeal was heard by the Court. A ruling is pending.
Brazil
On April 14, 2014, Vringo Infrastructure filed a patent infringement lawsuit in the 5th Trial Court of Rio de Janeiro State Court in Brazil, alleging infringement of a Brazilian patent related to 3G/4G/LTE infrastructure. On April 15, 2014, the court granted an ex-parte preliminary injunction restraining ZTE from manufacturing, using, offering for sale, selling, installing, testing, or importing such infrastructure equipment, subject to a fine. To enforce the injunction, the Company posted a bond of approximately $904,000 with the court on April 17, 2014. On May 9, 2014, ZTE filed an interlocutory appeal against the injunction. This appeal was denied by the Court on June 16, 2014.
On July 17, 2014, ZTE filed a nullity suit relatesin the Federal district court in Rio de Janiero, Brazil, against both Vringo and the Brazilian patent office, seeking to devices, including those with hotspot functionality, that provide data services between two different wireless/cellular networks. The schedule hearing for the rest of the case is set for December 3, 2013. The patent in suit relates to devices, including those with hotspot functionality, that provide data services between two different wireless/cellular networks. The schedule hearing for the rest of the case is set for December 3, 2013.
Malaysia
On September 12, 2013,June 23, 2014, Vringo Infrastructure filed a patent infringement lawsuit against ZTE in the High Court of Malaya at Kuala Lumpur. A schedule has not yet been set in this matter.
Romania
On June 23, 2014, Vringo Infrastructure filed a patent infringement lawsuit against ZTE in the Bucharest Tribunal Civil Section. On July 1, 2014, the court granted an ex-parte preliminary injunction, ordering ZTE to cease any importation, exportation, introduction on the market, offer for sale, storage, sale, trade, distribution, promotion, or any other business activity regarding the infringing product. The ADT Corporation, ADT LLC, ADT Security Services, Inc.,remaining schedule has not yet been set in this matter.
Netherlands
On May 28, 2014, Vringo Infrastructure commenced legal proceedings, pursuant to European Anti-Piracy Regulations, Number 1383/2003, Article 11 against ZTE in the District Court of The Hague. A schedule has not yet been set in this matter.
On June 4, 2014, ZTE filed suit in the District Court of Rotterdam against Vringo and Tyco Integrated Security, LLCVringo Infrastructure for the alleged wrongful detention of goods under the relevant anti-piracy regulations. A schedule has not yet been set in this matter.
On July 24, 2014, ZTE filed an action for a preliminary injunction in District Court of The Hague against Vringo Infrastructure for the release of allegedly wrongfully detained goods. This matter will be heard on September 16, 2014.
United States
On July 2, 2014, Vringo filed suit in the United States District Court for the Southern District of Florida.New York seeking a temporary restraining order and preliminary and permanent injunctions against ZTE, enjoining ZTE’s use of prohibited materials captured under NDA, including but not limited to ZTE’s use of such materials in its antitrust lawsuit in China against Vringo and Vringo Infrastructure. On July 7, 2014, the court granted a temporary restraining order against ZTE’s use of such material. On July 23, 2014, ZTE filed a counterclaim against Vringo.
European Commission
On April 10, 2014, ZTE filed a complaint with the European Commission. We believe that the accusations are not accurate. The lawsuit allegesEuropean 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 U.S. Patent No. 6,288,641, entitled "Assembly,two European patents. The cases are scheduled to be heard in November 2014.
ASUS filed nullity suits with respect to the first and Associated Method,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 Remotely Monitoringthe 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 Surveillance Area".
India
On April 15, 2014, Vringo Infrastructure filed suit in the High Court of Delhi, New Delhi alleging infringement of a patent related to use of dictionaries in search engines preloaded on certain ASUS devices. A schedule for the case has not yet been set.
Tyco
On April 28, 2014, the Company entered into a confidential agreement with Tyco that resolved all litigation pending between the parties.
The risk factors set forth below update the risk factors in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012.2013 and Part II, “Item 1A. Risk Factors in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014. In addition to the risk factors below and the risk factors included in our Annual Report on Form 10-K, as updated by our Quarterly Report on Form 10-Q, you should carefully consider the other risks highlighted elsewhere in this report or in our other filings with the Securities and Exchange Commission, which could materially affect our business, financial position and results of operations. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business, financial position and results of operations.
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 these patents.our patent portfolio of which the earliest patent was acquired by us in June 2011. Therefore, we not only have a very 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.
We commenced legal proceedings against the major online search engines, security and communications companies, and we expect such proceedings to be time-consuming and costly, which may adversely affect our financial condition and our ability to operate our business.
To license or otherwise monetize the patent assets that we own, we commenced legal proceedings against the ownersa number of online search engines and otherlarge, multi-national companies, pursuant to which we allege that such companies infringe on one or more of our patents. Our viability is highly dependent on the outcome of these litigations, and there is a risk that we may be unable to achieve the results we desire from such litigation, failure from which failure would harm our business to a great degree. In addition, the defendants in these litigations have substantially more resources than we do, which could make our litigation efforts more difficult.
We anticipate that legal proceedings may continue for several years and may require significant expenditures for legal fees and other expenses. Disputes regarding the assertion of patents and other intellectual property rights are highly complex and technical. Once initiated, we may be forced to litigate against othersother parties in addition to enforce or defend our intellectual property rights or to determine the validity and scope of other parties’ proprietary rights. The defendants or other third parties involved in the lawsuits in which we are involvedoriginally named defendants. Our adversaries may allege defenses and/or file counterclaims for, inter alia, 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 defenses or counterclaimsactions are successful, they may preclude our ability to derive licensing revenue from the patents. A negative outcome of any such litigation, or one or more claims contained within any such litigation, could materially and adversely impact our business. patents currently being asserted.
Additionally, we anticipate that our legal fees and other expenses will be material and will negatively impact our financial condition and results of operations and may result in our inability to continue our business. We estimate that our legal fees over the next twelve months will be significant for these enforcement actions. Expenses thereafter are also dependent on the outcome of current proceedings.the status of the litigation. Our failure to monetize our patent assets would significantly harm our businessbusiness.
Further, should we be deemed the losing party in many 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 financial position.
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.
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 at 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. The estimated value in dispute for each of the four patent infringement cases we have filed against ZTE in Germany, and for each of the two patent infringement cases we have filed against ASUS in Germany is approximately $1,400,000. The estimated value in dispute for each of the three invalidity cases which ZTE has filed against us in Germany is approximately $1,700,000. Under the current statute, our risk is capped at approximately $1,000,000 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 $1,400,000 on May 5, 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 Brazil, as a condition of the relief requested, we deposited $904,000 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.
While we believe that the patents we own are being infringed by certain major online search engines and communications companies, there is a risk that a court will find the patents invalid, not infringed or unenforceable and/or that the U.S. Patent and Trademark Office (USPTO) or other relevant patent office 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 material adverse effect on the viability of our company and our operations.
We believe that certain companies infringe 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.
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 it 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 have acquired from Nokia, andnor 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 have acquired from Nokia.Nokia, nor any of the 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 thea 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 thean acquired patent portfolio and recoup our investment.
We may seek to internally develop new inventions and intellectual property, which would take time and would be costly. Moreover, the failure to obtain or maintain intellectual property rights for such inventions couldwould lead to the loss of our investments in such activities.
Members of our management team have experience as innovators.inventors. As such, part of our business may include the internal development of new inventions or intellectual property that we will seek to monetize. However, this aspect of our business would likely require significant capital and would take time to achieve. Such activities could also distract our management team from its present business initiatives, which could have a material and adverse effect on our business. There is also the risk that our initiatives in this regard would not yield any viable new inventions or technology, which would lead to a loss of our investments in time and resources in such activities.
In addition, even if we are able to internally develop new inventions, in order for those inventions to be viable and to compete effectively, we would need to develop and maintain them, and they would heavily rely on, a proprietary position with respect to such inventions and intellectual property. However, there are significant risks associated with any such intellectual property we may develop principally including the following:
| • | patent applications we may file may not result in issued patents or may take longer than we expect to result in issued patents; | |
| • | we may be subject to opposition proceedings in the U.S. or foreign countries; | |
| • | any patents that are issued to us may not provide meaningful protection; | |
| • | we may not be able to develop additional proprietary technologies that are patentable; | |
| • | other companies may challenge patents issued to us; | |
| • | other companies may have independently developed and/or patented (or may in the future independently develop and patent) similar or alternative technologies, or duplicate our technologies; |
| • | other companies may design around patents we have developed; and | |
| • | enforcement of our patents could be complex, uncertain and very expensive. |
We cannot be certain that patents will be issued as a result of any future applications, or that any of our patents, once issued, will provide us with adequate protection from competing products. For example, issued patents may be circumvented or challenged, declared invalid or unenforceable, or narrowed in scope. In addition, since publication of discoveries in scientific or patent literature often lags behind actual discoveries, we cannot be certain that we will be the first to make our additional new inventions or to file patent applications covering those inventions. It is also possible that others may have 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,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 are 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, or the 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 Vringo’sour business.
Acquisitions of additional patent assets may be time consuming, complex and costly, which could adversely affect our operating results.
Acquisitions of patentpatents 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 the acquisition is ultimately not consummated. Even if we are able to acquire particular patentpatents or other intellectual property assets, there is no guarantee that we will generate sufficient revenue related to those patent assets to offset the acquisition costs. While we will seek to conduct confirmatory due diligence on the patentpatents or other intellectual property assets we are considering for acquisition, we may acquire patentsuch 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 the patentsuch 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 thethose assets.
We may also identify patentpatents 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 patentpatents 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 maintain 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 protectnegotiations. In addition, there exists a risk that, upon such breach and subsequent dissemination of our patent assetsconfidential information, third parties and potential licensees may seek to use such confidential information to their advantage or other intellectual property rights could significantly impairto our return on investment from such assets and harm our brand, business and operating results.
Competition is intense in the industries in which our subsidiaries do business and if granted, may be challenged or invalidated;
We expect to encounter competition in certain foreign countries wherethe 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 doseek to acquire. As new technological advances occur, many of our patented technologies may become obsolete before they are completely monetized. If we are unable to replace obsolete technologies with more technologically advanced patented technologies, then this obsolescence could have a negative effect on our ability to generate future revenues.
Our licensing business in the future or from whichalso competes with venture capital firms and various industry leaders for technology licensing opportunities. Many of these competitors may operate. Ifhave more financial and human resources than we faildo. As we become more successful, we may find more companies entering the market for similar technology opportunities, which may reduce our market share in one or more technology industries that we currently rely upon to maintain, defend or prosecute our patent assets properly, the value of those assets would be reduced or eliminated, and our business would be harmed.
Weak global economic conditions may cause infringing parties to delay entering into licensing agreements, which could prolong our litigation and adversely affect our financial condition and operating results.
Our business plan depends significantly on worldwide economic conditions, and the United States and world economies have recently experienced weak economic conditions. Uncertainty about global economic conditions poses a risk as businesses may postpone spending in response to tighter credit, negative financial news and declines in income or asset values. This response could have a material negative effect on the willingness of parties infringing on our assets to enter into licensing or other revenue generating agreements voluntarily. Entering into such agreements is critical to our business plan, and our failure to do so could cause material harm to our business.
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 November 5, 2013,July 25, 2014, be exercised, there would be an additional 18,441,76817,423,851 shares of common stock eligible for trading in the public market. In addition, we currently have incentive equity instruments outstanding to purchase 12,896,78410,102,094 shares of our common stock granted to our management, employees, directors and consultants. Certain options granted to officers, directors and certain key employees are subject to acceleration of vesting of up to75% and 100% (according to the agreement signed with each grantee), upon a subsequent change of control. Certain options granted in prior years that are outstanding have exercise prices that are below, and in some cases significantly below recent market prices. 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. The average weighted exercise price of all currently outstanding warrants and options, as of November 5, 2013, is $3.18 per share.
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 November 5, 2013,July 25, 2014, we had 84,125,73892,545,862 shares of common stock issued and outstanding, excluding shares of common stock issuable upon exercise of warrants, options or restricted stock units (“RSUs”). 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.
Technology company stock prices are unableespecially 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 adequately protect our intellectual property, we may not be ablefluctuate, 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 compete effectively. In addition, the possibility of extensive delaysremain highly volatile in the patent issuance process could effectively reducefuture. The stock market as a whole also has experienced extreme price and volume fluctuations that have affected the term during which a marketed product is protectedmarket 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 patents.
Our ability to raise capital through equity or equity-linked transactions may be limited.
In order for us to raise capital privately through equity or equity-linked transactions, stockholder approval is required to enable us to issue more than 19.99% of our outstanding shares of common stock pursuant to the rules and regulations of the NASDAQ Capital Market. Should stockholders not approve such issuances, one means to raise capital would be through debt, which could have a material adverse effect on our consolidated balance sheet and overall financial condition.
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 will 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.
None.
None.
Not applicable.
None.
Exhibit | Description | |
Form of warrant, dated June 20, 2014 | ||
31.1* | Certification of Principal Executive Officer | |
31.2* | Certification of Principal Financial Officer | |
| XBRL Instance Document | ||
| XBRL Taxonomy Extension Schema Document | ||
| XBRL Taxonomy Extension Calculation Linkbase Document | ||
| XBRL Taxonomy Extension Definition Linkbase Document | ||
| XBRL Taxonomy Extension Label Linkbase Document | ||
| XBRL Taxonomy Extension Presentation Linkbase Document | ||
* | Filed herewith. | |
** | Furnished herein. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 7th6th day of November, 2013.
VRINGO, INC. | |
By: | /s/ ANASTASIA NYRKOVSKAYA |
| Anastasia Nyrkovskaya | |
Chief Financial Officer | |
(Principal Financial Officer) | |
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