The Company and Summary of Significant Accounting Policies | 9 Months Ended |
Sep. 30, 2013 |
Accounting Policies [Abstract] | ' |
The Company and Summary of Significant Accounting Policies | ' |
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Finjan Holdings, Inc. (the “Company”, or “Finjan Holdings”), a Delaware corporation (formerly Converted Organics, Inc.), has two reportable business segments: a web and network security technology segment focused on licensing and enforcing its technology patent portfolio, operated by its wholly-owned subsidiary Finjan, Inc. (“Finjan”), and an organic fertilizer segment operated by another wholly-owned subsidiary, Converted Organics of California, LLC (“Converted Organics”). |
On June 3, 2013, Converted Organics, Inc. entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Finjan. Effective June 3, 2013 and pursuant to the Merger Agreement, a wholly owned subsidiary merged with and into Finjan and Finjan became a wholly-owned subsidiary of Converted Organics, Inc. (the “Merger”). Concurrent to the Merger on June 3, 2013, Converted Organics, Inc.’s name was changed to Finjan Holdings, Inc. |
Prior to the Merger, Converted Organics, Inc., through its subsidiary Converted Organics, operated an organic fertilizer business. The Company has continued operating the fertilizer business as a segment as described above. |
At the effective time of the Merger, each share of common stock of Finjan that was outstanding immediately prior to the Merger was converted into the right to receive 20,590.596 shares of Finjan Holdings common stock (as adjusted, giving effect to the 1-for-12 reverse stock split that was effected on August 22, 2013). In addition, each option to purchase shares of Finjan common stock that was outstanding immediately prior to the Merger was converted into an option to purchase the number of shares of Finjan Holdings common stock determined by multiplying the number of shares of Finjan common stock subject to the Finjan option by 20,590.596 (as adjusted, giving effect to the 1-for-12 reverse stock split that was effected on August 22, 2013) on the same terms and conditions as were applicable to such Finjan option. The exercise price per share of each Finjan Holdings option was determined by dividing the exercise price of each Finjan option by 20,590.596 (as adjusted, giving effect to the 1-for-12 reverse stock split that was effected on August 22, 2013). |
Effective on June 3, 2013, prior to the consummation of the Merger, the Company effected a 1-for-500 reverse stock split of its issued and outstanding shares of common stock. The accompanying condensed consolidated financial statements include the retroactive effect of the 1- for- 500 and 1-for-12 reverse stock split. |
On June 3, 2013, as a condition to the closing of the Merger, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with each of Hudson Bay Master Fund Ltd. (“Hudson Bay”) and Iroquois Master Fund Ltd. (“Iroquois”). Pursuant to the Exchange Agreement, immediately following the effectiveness of the Merger, Hudson Bay and Iroquois exchanged an aggregate of $1,192,500 principal amount of Converted Organics convertible notes, 13,281 shares of its 1% Series A Convertible Preferred Stock and warrants to purchase an aggregate of 105,554 shares, (on an adjusted basis, after giving effect to the 1-for-500 reverse stock split effected on June 3, 2013 and the1-for-12 reverse stock split, effected on August 22, 2013) of its common stock for an aggregate of 1,789,469 shares of Finjan Holdings common stock, or 8.0% of outstanding common stock immediately following the Merger on a fully-diluted basis. |
Upon completion of the Merger, the former stockholders of Finjan held approximately 91.5% of the outstanding shares of capital stock of Finjan Holdings on a fully-diluted basis, after giving effect to the Merger, the Exchange Agreement and assuming the exercise or conversion of all outstanding class C, D and H warrants and options (but excluding shares underlying options to purchase Finjan common stock which were converted into options to purchase Company common stock pursuant to the Merger Agreement). Accordingly, the Merger represents a change in control of the Company. Upon completion of the Merger, the stockholders and former debt holders of the Company prior to the Merger owned approximately 8.5% of the outstanding shares of capital stock of Finjan Holdings on a fully-diluted basis, without giving effect to the Finjan stock options that were converted into Company options upon the closing of the Merger. |
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Under generally accepted accounting principles in the United States, (“U.S. GAAP”) because Finjan’s former stockholders received the greater portion of the voting rights in the combined entity and Finjan’s senior management represents all of the senior management of the combined entity, the Merger was accounted for as a reverse acquisition under the acquisition method of accounting for business combinations, with Finjan treated as the acquiring company in the Merger for accounting purposes. Accordingly, the assets and liabilities and the historical operations that are reflected in Finjan Holdings condensed consolidated financial statements are those of Finjan and are recorded at the historical cost basis of Finjan. The results of operations of the acquired Converted Organics business have been included in the condensed consolidated statement of operations since the date of Merger. For additional information regarding the Merger, see Note 2. |
The Company intends to carry on Finjan’s business as its principal line of business, although the Company continues to operate its organic fertilizer business through Converted Organics. Finjan was incorporated in the State of Delaware as a wholly-owned subsidiary of Finjan Ltd. and commenced operations in 1997. Finjan previously sold web security solutions, including real-time and behavior-based malware prevention. |
In October 2003, Finjan Ltd. transferred all of its shares in Finjan to Finjan Software, Inc. (“FSI”). As a result of this transfer, Finjan became a wholly-owned subsidiary of FSI. On December 8, 2010, Finjan, Inc. changed its name to FI Delaware, Inc. On October 22, 2012, FI Delaware, Inc. changed its name back to Finjan, Inc. |
In February 2013, Finjan distributed its interests in securities issued by two unaffiliated entities which it previously held to FSI (see Note 3), and made a payment of cash in an amount sufficient to repay and satisfy in full an intercompany loan from FSI to Finjan. Following that distribution, the board of directors and stockholders of FSI approved the dissolution of, and plan of liquidation for, FSI that resulted in, among other things, the distribution of all outstanding Finjan common stock to certain of FSI’s stockholders, whereby Finjan ceased to be a subsidiary of FSI. |
On July 5, 2013, the Company’s stockholders approved an amendment to the Company’s certificate of incorporation that provides for a 1-for-12 reverse stock split that became effective August 22, 2013 resulting in the reduction in the total common share outstanding from 268,420,426 shares to 22,368,415 shares. All references in these unaudited condensed consolidated financial statements to the number of shares, options and other common stock equivalents, price per share and weighted average number of shares outstanding of common stock prior to this reverse stock split have been adjusted to reflect the reverse the stock split on a retroactive basis, unless otherwise noted. |
Unless otherwise indicated or the context otherwise requires, references to “Finjan Holdings,” “the registrant,” or “the Company” refer to Finjan Holdings, Inc., and its consolidated subsidiaries. The disclosures in this quarterly report on Form 10-Q relating to the pre-merger business of Finjan Holdings, Inc., unless noted as being the business of Converted Organics prior to the Merger, pertain to the business of Finjan prior to the Merger. |
BASIS OF PRESENTATION |
These unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission, or “SEC”, for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by U.S. GAAP, can be condensed or omitted. The information included in this quarterly report on Form 10-Q should be read in conjunction with the annual financial statements and accompanying notes of Finjan, Inc. for the years ended December 31, 2012 and 2011, which were included in the Form 8-K filed by the Company on June 3, 2013. The results of operations of the acquired Converted Organics business and the estimated fair market values of the assets acquired and liabilities assumed have been included in the condensed consolidated financial statements of the Company since the date of Merger. |
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In the opinion of management, these condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements of the Company and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of the Company’s financial position and operating results. The results for the three and nine months ended September 30, 2013 are not necessarily indicative of the operating results for the year ending December 31, 2013, for any other interim period or for any future period. |
RECLASSIFICATIONS |
Certain prior period amounts have been reclassified for comparative purposes to conform to the fiscal 2013 presentation. These reclassifications have no impact on the previously reported net income (loss). |
USE OF ESTIMATES |
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to stock-based compensation expense, impairment of intangible assets, the determination of the economic useful life of property and equipment and intangible assets, income taxes and valuation allowances against net deferred tax assets, and the application of the acquisition method of accounting for business combinations. Management bases its estimates on historical experience or on various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates. |
PRINCIPLES OF CONSOLIDATION |
The accompanying condensed consolidated financial statements include the accounts of Finjan Holdings and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. |
ALLOWANCE FOR DOUBTFUL ACCOUNTS |
The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company does not currently require any collateral for accounts receivable. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. Bad debt expense for the three and nine months ended September 30, 2013 and 2012 was not material. The allowance for doubtful accounts as of September 30, 2013 was not material. |
INVENTORIES |
Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories. The Company’s policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. |
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INTANGIBLE ASSETS |
Intangible assets acquired individually, with a group of other assets, or in a business combination, are recorded at fair value. The Company’s identifiable intangible assets are comprised of customer relationships acquired as part of the Merger. The fair value of intangible assets acquired is generally determined based on a discounted cash flow analysis. Identifiable intangible assets are being amortized over the period of estimated benefit using the straight-line method, which approximates the customer attrition rate, reflecting the pattern of economic benefits associated with these assets, and have estimated useful lives of six years. |
GOODWILL |
The Company records goodwill when the purchase price of an acquisition exceeds the fair value of the net tangible and intangible assets as of the date of acquisition. The company performs an annual review of goodwill for indicators of impairment. When it is determined that goodwill may be impaired the Company performs an impairment assessment of the acquired reporting unit and impairment tests using a fair value approach. |
PROPERTY AND EQUIPMENT |
Property and equipment are stated at cost. Depreciation is calculated over the estimated useful lives of the related assets which range from 3 to 10 years. Leasehold improvements are amortized over the shorter of the remaining lease term or the estimated useful economic lives of the related assets. Repairs and maintenance expenditures are expensed as incurred. The costs of additions and betterments are capitalized and expenditures for repairs and maintenance are expensed in the period incurred. When items of property and equipment are sold or retired, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is included in income. |
IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER ACQUIRED INTANGIBLE ASSETS |
Long-lived assets, such as property and equipment and intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. The carrying amount of a long lived asset is not recoverable if it exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposition of the asset. The amount of impairment loss, if any, is measured as the difference between the carrying value of the asset and its estimated fair value. Fair value is estimated based on the best information available and by making necessary estimates, judgments and projections. For purposes of these tests, long-lived assets must be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. |
REVENUE RECOGNITION |
Revenue is recognized when persuasive evidence of an arrangement exists, delivery of the product or service has occurred, all obligations have been performed pursuant to the terms of the agreement, the sales price is fixed or determinable, and collectability is reasonably assured. |
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Revenue from the Company’s web and network security technology business results from grants of licenses to its patents and settlements reached from legal enforcement of the Company’s patent rights. Revenue is recognized when the arrangement with the licensee has been signed and the license has been delivered and made effective, provided license fees are fixed or determinable and collectability is reasonably assured. Revenue from settlements reached on legal enforcement of the Company’s patent rights and the release of the licensee from certain legal claims, is recognized on receipt of the settlement amounts. The Company does not assume future performance obligations in its license arrangements. |
The Company’s organic fertilizer operation generates revenues from two sources, namely, product sales and tip fees. Product sales revenue comes from the sale of fertilizer products and is recognized upon delivery. Tip fee revenue is derived from waste haulers who pay the Company “tip” fees for accepting food waste generated by food distributors such as grocery stores, produce docks and fish markets, food processors and hospitality venues such as hotels, restaurants, convention centers and airports. Tip fee revenue is recognized straight-line over the period the fees are earned. |
LEGAL COSTS |
Legal costs incurred in connection with intellectual property and patent enforcement litigation are recognized as cost of revenue. Other legal expenses incurred in the normal course of the company’s business are expensed when incurred as selling, general and administrative expenses. |
STOCK-BASED COMPENSATION |
The Company accounts for compensation cost for all employee stock-based awards at their fair values on the date of grant, and non-employee stock-based awards at their fair values as measured on their vesting dates. The fair value is recognized as expense over the service period, net of estimated forfeitures, using the straight-line method for share options and restricted stock. The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock-based awards. |
BUSINESS ACQUISITION |
The Company’s condensed consolidated financial statements include the operations of an acquired business after the completion of the acquisition. Acquired businesses are accounted for using the acquisition method of accounting. The acquisition method of accounting for acquired businesses requires, among other things, that most assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Also, transaction costs are expensed as incurred. The excess of the purchase price over the assigned values of the net assets acquired, if any, is recorded as goodwill. |
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NET INCOME (LOSS) PER COMMON SHARE |
Basic net income (loss) per common share is based upon the weighted-average number of common share outstanding. Diluted net income (loss) per common share is based on the weighted-average number of common share outstanding and potentially dilutive common share outstanding. Basic and diluted net income (loss) per common share were computed as follows: |
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| | Three Months Ended September 30, | | | Nine months Ended September 30, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
| | (In thousands, except share and per share data) | |
Numerator: | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (1,376 | ) | | $ | 5,919 | | | $ | (3,334 | ) | | $ | 5,952 | |
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Denominator: | | | | | | | | | | | | | | | | |
Weighted-average common shares, basic | | | 22,348,201 | | | | 20,590,596 | | | | 21,350,498 | | | | 20,590,596 | |
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Weighted-average common shares, diluted | | | 22,348,201 | | | | 20,590,596 | | | | 21,350,498 | | | | 20,590,596 | |
Net income per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | (0.06 | ) | | $ | 0.29 | | | $ | (0.16 | ) | | $ | 0.29 | |
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Diluted | | $ | (0.06 | ) | | $ | 0.29 | | | $ | (0.16 | ) | | $ | 0.29 | |
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Potentially dilutive common shares from employee equity plans and warrants are determined by applying the treasury stock method to the assumed exercise of warrants and share options and are excluded from the computation of diluted net loss per share if their inclusion would be anti-dilutive and consist of the following: |
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| | September 30, 2013 | | | September 30, 2012 | | | | | | | | | |
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Options | | | 1,585,476 | | | | — | | | | | | | | | |
Warrants* | | | — | | | | — | | | | | | | | | |
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Total | | | 1,585,476 | | | | — | | | | | | | | | |
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* | Warrants are currently exercisable for less than one share of common stock, and therefore anti-dilutive, as a result of the 1-for-10 reverse stock split that we effected on November 8, 2011, the 1-for-500 reverse stock split that we effected on March 5, 2012, the 1-for-500 reverse stock split that we effected on June 3, 2013 and the 1-for-12 reverse stock split we effected on August 22, 2013. The warrants are subject to further adjustments in the future, which may have the effect of increasing or decreasing the exercise price and the number of shares issuable upon exercise of the warrants. | | | | | | | | | | | | | | | |
INCOME TAXES |
The Company utilizes the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse and for operating losses and tax credit carry-forwards. |
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The Company is required to evaluate whether its deferred tax assets are realizable on an ongoing basis and to determine whether there is a need for a valuation allowance with respect to such deferred tax assets. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. In evaluating the ability to recover deferred tax assets, the Company considered available positive and negative evidence giving greater weight to its recent cumulative losses and its ability to carryback losses against prior taxable income and lesser weight to its projected financial results. The Company also considered the forecast of future taxable income including the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. |
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED |
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. |
The standard is not effective until on or after December 15, 2013 and early adoption is not mandatory. The Company is assessing the effect the adoption of the standard will have on the consolidated financial position, results of operations or cash flows for subsequent reporting periods. |
SUBSEQUENT EVENTS |
Management has evaluated subsequent events or transactions occurring through the date on which the financial statements were issued. See Note 13. |