UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 June 30,
2015
¨ |
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 Third Avenue, 12th Floor, New York, NY |
|
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 |
x |
|
|
|
|
Non-accelerated filer |
¨ (Do not check if a smaller reporting company) |
Smaller reporting company |
¨ |
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes ¨
No x
As of August 3, 2015, 99,377,749 shares of the
registrant’s common stock were outstanding.
VRINGO, INC.
Table of Contents
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Vringo, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share
data)
| |
June 30, 2015 (Unaudited) | | |
December 31, 2014 | |
Current assets | |
| | | |
| | |
Cash and cash equivalents | |
$ | 20,227 | | |
$ | 16,023 | |
Deposits with courts | |
| 2,117 | | |
| 2,067 | |
Other current assets | |
| 80 | | |
| 510 | |
Total current assets | |
| 22,424 | | |
| 18,600 | |
| |
| | | |
| | |
Intangible assets, net | |
| 16,008 | | |
| 17,625 | |
Other assets | |
| 1,186 | | |
| 1,210 | |
Total assets | |
$ | 39,618 | | |
$ | 37,435 | |
| |
| | | |
| | |
Current liabilities | |
| | | |
| | |
Accounts payable and accrued expenses | |
$ | 7,223 | | |
$ | 4,732 | |
Senior secured convertible notes, net | |
| 8,111 | | |
| — | |
Conversion feature | |
| 719 | | |
| — | |
Total current liabilities | |
| 16,053 | | |
| 4,732 | |
| |
| | | |
| | |
Long-term liabilities | |
| | | |
| | |
Senior secured convertible notes, net | |
| 451 | | |
| — | |
Conversion feature | |
| 40 | | |
| — | |
Derivative warrant liabilities | |
| 1,507 | | |
| 174 | |
Other liabilities | |
| 1,171 | | |
| 1,349 | |
| |
| | | |
| | |
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; 95,946,672 and 93,404,895 issued and outstanding as of June 30, 2015 and December 31, 2014, respectively | |
| 959 | | |
| 934 | |
Additional paid-in capital | |
| 220,627 | | |
| 215,951 | |
Accumulated deficit | |
| (201,190 | ) | |
| (185,705 | ) |
| |
| | | |
| | |
Total stockholders’ equity | |
| 20,396 | | |
| 31,180 | |
| |
| | | |
| | |
Total liabilities and stockholders’ equity | |
$ | 39,618 | | |
$ | 37,435 | |
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 June 30, | | |
Six months ended June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Revenue | |
$ | — | | |
$ | 800 | | |
$ | 150 | | |
$ | 1,050 | |
| |
| | | |
| | | |
| | | |
| | |
Costs and Expenses* | |
| | | |
| | | |
| | | |
| | |
Operating legal costs | |
| 5,464 | | |
| 5,982 | | |
| 8,565 | | |
| 10,857 | |
Amortization of intangibles | |
| 813 | | |
| 968 | | |
| 1,617 | | |
| 1,925 | |
General and administrative | |
| 2,298 | | |
| 4,203 | | |
| 5,296 | | |
| 8,446 | |
Total operating expenses | |
| 8,575 | | |
| 11,153 | | |
| 15,478 | | |
| 21,228 | |
Operating loss from continuing operations | |
| (8,575 | ) | |
| (10,353 | ) | |
| (15,328 | ) | |
| (20,178 | ) |
Non-operating income (expense), net | |
| 46 | | |
| 21 | | |
| (177 | ) | |
| 22 | |
Gain (loss) on revaluation of warrants and conversion feature | |
| 695 | | |
| 348 | | |
| 695 | | |
| (728 | ) |
Interest expense | |
| (465 | ) | |
| — | | |
| (465 | ) | |
| — | |
Extinguishment of debt | |
| (210 | ) | |
| — | | |
| (210 | ) | |
| — | |
Issuance of warrants | |
| — | | |
| (65 | ) | |
| — | | |
| (65 | ) |
Loss from continuing operations before income taxes | |
| (8,509 | ) | |
| (10,049 | ) | |
| (15,485 | ) | |
| (20,949 | ) |
Income tax expense | |
| — | | |
| — | | |
| — | | |
| — | |
Loss from continuing operations | |
| (8,509 | ) | |
| (10,049 | ) | |
| (15,485 | ) | |
| (20,949 | ) |
Loss from discontinued operations before income taxes* | |
| — | | |
| — | | |
| — | | |
| (209 | ) |
Income tax expense | |
| — | | |
| — | | |
| — | | |
| — | |
Loss from discontinued operations | |
| — | | |
| — | | |
| — | | |
| (209 | ) |
Net loss | |
$ | (8,509 | ) | |
$ | (10,049 | ) | |
$ | (15,485 | ) | |
$ | (21,158 | ) |
Loss per share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
| | | |
| | | |
| | | |
| | |
Loss per share from continuing operations | |
$ | (0.09 | ) | |
$ | (0.12 | ) | |
$ | (0.16 | ) | |
$ | (0.24 | ) |
Loss per share from discontinued operations | |
| (0.00 | ) | |
| (0.00 | ) | |
| (0.00 | ) | |
| (0.00 | ) |
Total net loss per share | |
$ | (0.09 | ) | |
$ | (0.12 | ) | |
$ | (0.16 | ) | |
$ | (0.24 | ) |
Diluted | |
| | | |
| | | |
| | | |
| | |
Loss per share from continuing operations | |
$ | (0.09 | ) | |
$ | (0.12 | ) | |
$ | (0.16 | ) | |
$ | (0.24 | ) |
Loss per share from discontinued operations | |
| (0.00 | ) | |
| (0.00 | ) | |
| (0.00 | ) | |
| (0.00 | ) |
Total net loss per share | |
$ | (0.09 | ) | |
$ | (0.12 | ) | |
$ | (0.16 | ) | |
$ | (0.24 | ) |
Weighted-average number of shares outstanding during the period: | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 94,691,624 | | |
| 87,210,483 | | |
| 94,051,814 | | |
| 86,337,006 | |
Diluted | |
| 94,691,624 | | |
| 88,515,948 | | |
| 94,051,814 | | |
| 86,337,006 | |
* Includes stock-based compensation expense, as follows: | |
| | | |
| | | |
| | | |
| | |
Operating legal costs | |
$ | 183 | | |
$ | 385 | | |
$ | 501 | | |
$ | 728 | |
General and administrative | |
| 1,070 | | |
| 2,633 | | |
| 2,624 | | |
| 4,939 | |
Discontinued operations | |
| — | | |
| — | | |
| — | | |
| 151 | |
| |
$ | 1,253 | | |
$ | 3,018 | | |
$ | 3,125 | | |
$ | 5,818 | |
The accompanying notes
form an integral part of these consolidated financial statements.
Vringo, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands)
| |
Common stock | | |
Additional paid-in capital | | |
Accumulated deficit | | |
Total | |
Balance as of December 31, 2014 | |
$ | 934 | | |
$ | 215,951 | | |
$ | (185,705 | ) | |
$ | 31,180 | |
Vesting of restricted stock units (“RSUs”) | |
| 2 | | |
| (2 | ) | |
| — | | |
| — | |
Reclassification of derivative Reload Warrants
and Series 1 Warrants to equity warrants | |
| — | | |
| 175 | | |
| — | | |
| 175 | |
Issuance of common stock | |
| 23 | | |
| 1,378 | | |
| | | |
| 1,401 | |
Stock-based compensation | |
| — | | |
| 3,125 | | |
| — | | |
| 3,125 | |
Net loss for the period | |
| — | | |
| — | | |
| (15,485 | ) | |
| (15,485 | ) |
Balance as of June 30, 2015 | |
$ | 959 | | |
$ | 220,627 | | |
$ | (201,190 | ) | |
$ | 20,396 | |
| |
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 RSUs | |
| 16 | | |
| 2,144 | | |
| — | | |
| 2,160 | |
Issuance of warrants | |
| — | | |
| 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 | |
The accompanying notes form an integral
part of these consolidated financial statements.
Vringo, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| |
Six months ended June 30, | |
| |
2015 | | |
2014 | |
Cash flows from operating activities | |
| | | |
| | |
Net loss | |
$ | (15,485 | ) | |
$ | (21,158 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Items not affecting cash flows | |
| | | |
| | |
Depreciation and amortization | |
| 1,838 | | |
| 2,139 | |
Amortization of debt discount | |
| 289 | | |
| — | |
Amortization of debt issuance costs | |
| 21 | | |
| — | |
Stock-based compensation | |
| 3,125 | | |
| 5,818 | |
Issuance of warrants | |
| — | | |
| 65 | |
Extinguishment of debt | |
| 210 | | |
| — | |
Change in fair value of warrants and conversion feature | |
| (695 | ) | |
| 728 | |
Exchange rate loss (gain) | |
| 187 | | |
| (35 | ) |
Changes in current assets and liabilities | |
| | | |
| | |
Decrease in other current assets | |
| 429 | | |
| 231 | |
Increase (decrease) in payables and accruals | |
| 2,368 | | |
| (743 | ) |
Net cash used in operating activities | |
| (7,713 | ) | |
| (12,955 | ) |
Cash flows from investing activities | |
| | | |
| | |
Acquisition of property and equipment | |
| — | | |
| (145 | ) |
Increase in deposits | |
| (287 | ) | |
| (2,304 | ) |
Net cash used in investing activities | |
| (287 | ) | |
| (2,449 | ) |
Cash flows from financing activities | |
| | | |
| | |
Exercise of stock options | |
| — | | |
| 2,160 | |
Exercise of warrants | |
| — | | |
| 11,292 | |
Net proceeds from senior secured convertible notes and warrants | |
| 12,425 | | |
| — | |
Debt issuance costs | |
| (218 | ) | |
| — | |
Net cash provided by financing activities | |
| 12,207 | | |
| 13,452 | |
| |
| | | |
| | |
Effect of exchange rate changes on cash and cash equivalents | |
| (3 | ) | |
| 20 | |
Increase (decrease) in cash and cash equivalents | |
| 4,204 | | |
| (1,932 | ) |
Cash and cash equivalents at beginning of period | |
| 16,023 | | |
| 33,586 | |
Cash and cash equivalents at end of period | |
$ | 20,227 | | |
$ | 31,654 | |
| |
| | | |
| | |
Non-cash investing and
financing transactions | |
| | | |
| | |
Non-cash acquisition of cost method investment | |
| — | | |
| 787 | |
Conversion of derivative warrants into common stock | |
| — | | |
| 1,707 | |
Issuance of common stock to repay $1,191 of debt | |
| 1,401 | | |
| — | |
Change in classification of derivative warrants to equity warrants | |
| 175 | | |
| — | |
Debt discount | |
| 2,961 | | |
| — | |
The accompanying notes form an integral
part of these consolidated financial statements.
Vringo, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except for share and per
share data)
Note 1. General
Overview
Vringo, Inc., together with its consolidated
subsidiaries (“Vringo” or the “Company”), is engaged in the development and monetization of intellectual
property worldwide. The Company's intellectual property portfolio consists of over 600 patents and patent applications covering
telecom infrastructure, internet search and mobile technologies. The Company’s patents and patent applications have been
developed internally or acquired from third parties. In potential acquisitions, the Company seeks to purchase all of, or interests
in, technology and intellectual property in exchange for cash, the Company’s securities and/or interests in the monetization
of those assets. Revenue from this aspect of Vringo’s business can be generated through licensing and litigation efforts.
Prior to December 31, 2013, the Company
operated a global platform for the distribution of mobile social applications and the services that it developed. On February 18,
2014, the Company executed the sale of its mobile social application business to InfoMedia Services Limited (“InfoMedia”),
receiving an 8.25% ownership interest in InfoMedia as consideration. As part of the transaction, the Company has the opportunity
to license certain intellectual property assets and support InfoMedia to identify and protect new intellectual property.
Infrastructure Patents
The Company’s infrastructure
patents are primarily made up of a patent portfolio purchased from Nokia Corporation (“Nokia”) in 2012. This
patent portfolio is comprised of 124 patent families with counterparts in certain jurisdictions world-wide and encompass
technologies relating to telecom infrastructure, including communication management, data and signal transmission, mobility
management, radio resources management and services. Declarations were filed by Nokia indicating that 31 of the 124 patent
families acquired may be essential to wireless communications standards. The Company also owns other acquired infrastructure
patent portfolios and has filed over 60 internally developed patent applications. As one of the means of realizing the value
of the patents on telecom infrastructure, the Company has filed a number of suits against ZTE Corporation
(“ZTE”), ASUSTeK Computer Inc. (“ASUS”), 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. In response, ZTE Corporation or its affiliates
have filed a number of counterclaims and other responsive cases in various countries such as the United States, certain
European jurisdictions, the People’s Republic of China and others.
To date, in connection with the suits filed
against ZTE, Vringo patents have been found to be infringed in the United Kingdom (“UK”) and Germany, and preliminary
relief has been granted in India, Brazil, Romania, and the Netherlands. Separately, Vringo has entered into settlement and
license agreements with ADT, Tyco, D-Link, and Belkin.
Search Patents
On September 15, 2011, the Company’s
wholly-owned subsidiary, I/P Engine, Inc. (“I/P Engine”), initiated litigation against AOL Inc., Google, Inc., IAC
Search & Media, Inc., Gannett Company, Inc., and Target Corporation (collectively, the “Defendants”) for infringement
of claims of certain of its owned patents. Trial commenced during 2012, and, on November 6, 2012, the jury ruled in favor of I/P
Engine and against the Defendants. After upholding the validity of the patents-in-suit, and determining that the asserted claims
of the patents were infringed by the Defendants, the jury found that reasonable royalty damages should be based on a “running
royalty,” and that the running royalty rate should be 3.5%. The jury also awarded I/P Engine a total of approximately $30,500. In January 2014, the United States District Court, Eastern District of Virginia (the “District Court”) ordered
that I/P Engine recover an additional sum of $17,320 from the Defendants for supplemental damages and prejudgment interest.
Further, the District Court ruled that the appropriate ongoing royalty rate for Defendants' continued infringement of the patents-in-suit
is a rate of 6.5% of the 20.9% royalty base previously set by the District Court. These rulings were appealed by the Defendants
and the oral argument was heard before the United States Court of Appeals for the Federal Circuit (“Federal Circuit”)
on May 6, 2014.
On August 15, 2014, the Federal Circuit
reversed the judgment of the District Court by holding that the claims of the patents-in-suit asserted by the Company against the
Defendants are invalid for obviousness. The Company filed a petition with the Federal Circuit on October 15, 2014 seeking en banc
review of the decision. On October 20, 2014, the Federal Circuit invited the defendants/appellants to respond to the petition. On
December 15, 2014, the Federal Circuit denied I/P Engine's petition for rehearing of the case en banc and consequently, the Company
announced that I/P Engine will seek review by the Supreme Court of the United States (“Supreme Court”) of the Federal
Circuit’s decision. On May 14, 2015, I/P Engine filed a petition for a writ of certiorari with the Supreme Court, which requests
review of the Federal Circuit’s decision.
Financial condition
As of June 30, 2015, the Company had a
cash balance of $20,227. The Company’s average monthly cash spent in operations for the six month periods ended June 30,
2015 and 2014 was approximately $1,285 and $2,159, respectively. In addition, the Company holds $2,117 in deposits with courts
related to proceedings in Germany, Brazil, Romania, and Malaysia. As of June 30, 2015 and December 31, 2014, the Company’s
total stockholders' equity was $20,396 and $31,180, respectively. The decrease in stockholders’ equity since December 31,
2014 is mainly due to the operating loss during the six month period ended June 30, 2015.
On May 4, 2015 (the “Closing
Date”), the Company entered into a securities purchase agreement with certain institutional investors in a registered
direct offering of $12,500 of Senior Secured Convertible Notes (the “Notes”) and warrants to purchase up to
5,375,000 shares of the Company’s common stock. On the Closing Date, the Company issued the Notes, which
are convertible into shares of the Company’s common stock at $1.00 per share, bear 8% interest and mature in 21 months
from the date of issuance, unless earlier converted. In addition, the Company issued 5,375,000 warrants to purchase shares of
the Company’s common stock, which are exercisable at $1.00 per share and are exercisable for a period of five years.
In connection with the issuance of the Notes and warrants, the Company received net cash proceeds of $12,425 on May 5, 2015.
The Company’s obligations under the outstanding Notes are secured by a first priority perfected security interest
in substantially all of the Company’s U.S. assets. In addition, stock of certain subsidiaries of the Company has
been pledged. The outstanding Notes contain customary events of default, as well as covenants which include restrictions on
the assumption of new debt by the Company.
The principal amount of the outstanding
Notes will be repaid monthly, and the Company may make such payments and related interest payments in cash or, subject to certain
conditions, in registered shares of the Company’s common stock, at its election. If the Company chooses to repay the Notes
in shares of its common stock, the shares will be issued at a 15% discount, based on the then-current market price data of the
Company’s common stock. The Company may also repay the Notes in advance of the maturity schedule subject to early repayment
penalties.
The Company’s operating plans include
efforts to increase revenue through the licensing of its intellectual property, strategic partnerships, and litigation, when required,
which may be resolved through a settlement or collection. Disputes regarding the assertion of patents and other intellectual property
rights are highly complex and technical. The majority of the Company’s expenditures consist of costs related to the Company’s
litigation campaigns. In the cases against ZTE and ASUS, the Company incurred costs during the first half of 2015 related
to the preparation and filing of briefs and other court documents, as well as case preparation and management. A large percentage
of these costs were incurred in the UK and the U.S. In civil law jurisdictions, such as Germany, France, Spain, and others, the
majority of costs are incurred in the early stages of litigation. With respect to the Company’s litigation in such countries,
the respective campaigns are currently in the later stages and therefore the Company has already incurred the large majority of
the related anticipated costs. As such, based on the Company’s plans, costs in these jurisdictions are projected to be lower
in the remainder of 2015 and other future periods.
Despite the Company’s plans, its
legal proceedings may continue for several years and may require significant expenditures for legal fees and other expenses. Further,
should the Company be deemed the losing party in certain of its litigations, it may be liable for some or all of its opponents’
legal fees. In addition, in connection with litigation, the Company has made several affirmative financial guarantees to courts
around the world, and might face the need to make additional guarantees in the future.
In addition, the Company’s plans
to continue to expand its planned operations through acquisitions and monetization of additional patents, other intellectual property
or operating businesses may be time consuming, complex and costly to consummate. The Company may utilize many different transaction
structures in its acquisitions and the terms of such acquisition agreements tend to be heavily negotiated. The Company’s
future ability to raise capital, if necessary, may be limited. Even if the Company is able to acquire particular patents or other
intellectual property assets, there is no guarantee that it will generate sufficient revenue related to those assets to offset
the acquisition costs. Therefore, no assurance can be given at this time as to whether the Company will be able to achieve its
objectives or whether it will have the sources of liquidity for follow through with its operating plans.
In addition, until the Company generates
sufficient revenue, the Company may need to raise additional funds, which may be achieved through the issuance of additional equity
or debt, or through loans from financial institutions. There can be no assurance, however, that any such opportunities will materialize. The
Company may also be able to raise additional funds through the exercise of its outstanding warrants and options, however, substantially
all of such outstanding equity instruments are currently “out of the money.”
As a result of the events and circumstances
described above, including the cash proceeds received in connection with the May 2015 financing transaction and the Company’s
operating plans, which include paying the principal and interest related to the Notes in shares of the Company’s common stock,
the Company believes that it currently has sufficient cash to continue its current operations for at least the next twelve months.
Note 2. Accounting and Reporting Policies
(a) Basis of presentation and principles of consolidation
The accompanying interim consolidated
financial statements have been prepared in accordance with generally accepted accounting principles in the United States of
America (“U.S. GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X, and
should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2014. All
adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented have been
reflected by the SEC. Such adjustments are of a normal, recurring nature. The results of operations for the three month and
six month periods ended June 30, 2015 are not necessarily indicative of the results that may be expected for the entire
fiscal year or for any other interim period. All significant intercompany balances and transactions have been eliminated in
consolidation.
(b) Use of estimates
The preparation of accompanying consolidated
financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated
financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from
such estimates. Significant items subject to such estimates and assumptions include the Company’s intangibles assets, the
useful lives of the Company’s intangible assets, the valuation of the Company’s derivative warrants, the valuation
of stock-based compensation, deferred tax assets and liabilities, income tax uncertainties and other contingencies.
(c) Translation into U.S. dollars
The Company conducts certain
transactions in foreign currencies, which are recorded at the exchange rate as of the transaction date. All exchange gains
and losses occurring from the re-measurement of monetary balance sheet items denominated in non-U.S. dollar currencies are
reflected as non-operating income or expense in the consolidated statements of operations.
(d) Cash and cash equivalents
The Company invests its cash in 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
have been recorded as liabilities at fair value, and are revalued at each reporting date, with changes in the fair value of the
instruments included in the consolidated statements of operations as non-operating income (expense). The Company reviews the terms
of features embedded in non-derivative instruments to determine if such features require bifurcation and separate accounting as
derivative financial instruments. Equity–linked derivative instruments are evaluated in accordance with FASB Accounting
Standard Codification 815-40, Contracts in an Entity’s Own Equity to determine if such instruments are indexed to
the Company’s own stock and qualify for classification in equity.
(f) Intangible assets
Intangible assets include purchased patents
which are recorded based on the cost to acquire them. These assets are amortized over their remaining estimated useful lives, which
are periodically evaluated for reasonableness. The Company’s intangible assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability
of the Company's intangible assets, the Company must make estimates and assumptions regarding future cash flows and other factors
to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether
an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates are made at a specific point
in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant
judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If
these estimates or material related assumptions change in the future, the Company may be required to record impairment charges
related to its intangible assets.
(g) Revenue recognition
Revenue from patent licensing and enforcement
is recognized if collectability is reasonably assured, persuasive evidence of an arrangement exists, the sales price is fixed or
determinable and delivery of the service has been rendered. The Company uses management's best estimate of selling price for individual
elements in multiple-element arrangements, where vendor specific evidence or third party evidence of selling price is not available.
Currently, the Company’s revenue
arrangements provide for the payment of contractually determined fees and other consideration for the grant of certain intellectual
property rights related to the Company’s patents. These rights typically include some combination of the following: (i) the
grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patents, (ii) the release
of the licensee from certain claims, and (iii) the dismissal of any pending litigation. The intellectual property rights granted
typically extend until the expiration of the related patents. Pursuant to the terms of these agreements, the Company has no further
obligation with respect to the grant of the non-exclusive retroactive and future licenses, covenants-not-to-sue, releases, and
other deliverables, including no express or implied obligation on the Company’s part to maintain or upgrade the related technology,
or provide future support or services. Generally, the agreements provide for the grant of the licenses, covenants-not-to-sue, releases,
and other significant deliverables upon execution of the agreement, or upon receipt of the upfront payment. As such, the earnings
process is complete and revenue is recognized upon the execution of the agreement, upon receipt of the upfront fee, and when all
other revenue recognition criteria have been met.
(h) Operating legal costs
Operating legal costs mainly include expenses
incurred in connection with the Company’s patent licensing and enforcement activities, patent-related legal expenses paid
to external patent counsel (including contingent legal fees), licensing and enforcement related research, consulting and other
expenses paid to third parties, as well as related internal payroll expenses and stock-based compensation. In addition, amounts
received by the Company for reimbursements of legal fees in connection with its litigation campaigns are recorded in Operating
legal costs as an offset to legal expense.
(i) Stock-based compensation
Stock-based compensation is recognized
as an expense in the consolidated statements of operations and such cost is measured at the grant-date fair value of the equity-settled
award. The fair value of stock options is estimated at the date of grant using the Black-Scholes-Merton option-pricing model. The
expense is recognized on a straight-line basis, over the requisite service period. The Company uses the simplified method to estimate
the expected term of options due to insufficient history and high turnover in the past. Since the Company lacks sufficient history,
expected volatility is estimated based on a weighted average historical volatility of the Company and comparable entities with
publicly traded shares. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve at
the date of grant.
(j) Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU No.
2014-09, Revenue from Contracts with Customers (Topic 606), which impacts virtually all aspects of an entity's revenue
recognition. The core principle of the new standard is that revenue should be recognized to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. This guidance was amended in July 2015 and is effective for annual reporting periods
beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption on its
consolidated financial statements.
In August 2014, the FASB issued ASU No.
2014-15, Presentation of Financial Statements (Topic 205): Going Concern. The new standard provides guidance around management's
responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide
related footnote disclosures. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2016 and early adoption is permitted. The Company is currently evaluating the impact of the adoption on its
consolidated financial statements.
In November 2014, the FASB issued
ASU 2014-16, Derivatives and Hedging: Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the
Form of a Share is More Akin to Debt or to Equity. The new standard clarifies how current U.S. GAAP should be interpreted
in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in
the form of a share. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2015 and early adoption is permitted. The Company is currently evaluating the impact of the adoption on
its consolidated financial statements.
In April 2015, the FASB issued
ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related
to a recognized debt liability be presented in the balance sheet as a direct deduction from the corresponding debt liability,
consistent with debt discounts. The new standard does not change the amortization of debt issuance costs, which are
reported as interest expense in the consolidated statements of operations. This guidance is effective for
financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years
and early adoption is permitted. The Company is currently evaluating the impact of the adoption on its consolidated
financial statements.
(k)
Reclassification
Certain balances have been reclassified to conform to presentation requirements.
Note 3. Intangible Assets
The following table provides information regarding the Company’s
intangible assets, which consist of its patents:
| |
June 30, 2015 | | |
December 31, 2014 | | |
Weighted average amortization period (years) | |
Patents | |
$ | 28,213 | | |
$ | 28,213 | | |
| 8.9 | |
Less: accumulated amortization and impairment | |
| (12,205 | ) | |
| (10,588 | ) | |
| | |
| |
$ | 16,008 | | |
$ | 17,625 | | |
| | |
The Company’s patents consist of
three major patent portfolios, which were acquired from third parties, as well as a number of internally developed patents. The
costs related to internally developed patents are expensed as incurred.
In August 2012, the Company purchased a
portfolio from Nokia consisting of various patents and patent applications as described in Note 1. The total consideration paid
for the portfolio was $22,000 and the Company capitalized certain costs related to the acquisition of patents in the total amount
of $548. Under the terms of the purchase agreement, to the extent that the gross revenue generated by such portfolio exceeds $22,000,
the Company is obligated to pay a royalty of 35% of such excess. The Company has not recorded any amounts in respect of this contingent
consideration, as both the amounts of future potential revenue, if any, and the timing of such revenue cannot be reasonably estimated.
The Company’s patents are amortized
over their expected useful lives (i.e., through the expiration date of the patent). During the three and six month periods ended
June 30, 2015, the Company recorded amortization expense of $813 and $1,617, respectively, related to its patents. During the three
and six month periods ended June 30, 2014, the Company recorded amortization expense of $968 and $1,925, respectively, related
to its patents.
During the third quarter of 2014, the Company
determined that there were impairment indicators related to certain of its patents. A significant factor that was considered when
making this determination included the announcement of the Federal Circuit’s decision on August 15, 2014. The Company concluded
that this factor was deemed a “triggering” event requiring that the related patent assets be tested for impairment
during the third quarter of 2014. In performing this impairment test, the Company determined that the patent portfolio containing
the patents-in-suit in I/P Engine's litigation against AOL Inc., Google Inc. et al, which represents an asset group, was subject
to impairment testing. In the first step of the impairment test, the Company utilized its projections of future undiscounted cash
flows based on the Company’s existing plans for the patents. As a result, it was determined that the Company’s projections
of future undiscounted cash flows were less than the carrying value of the asset group. Accordingly, the Company performed the
second step of the impairment test to measure the potential impairment by calculating the asset group’s fair value. This
resulted in an impairment of $1,355 during the third quarter of 2014, related to the asset group, which represents the difference
between the fair value and the carrying value of the asset group. There were no impairment charges related to the Company’s
patents during the six month periods ended June 30, 2015 and 2014.
Note 4. Net Loss per Common Share
Basic net loss per share is computed by
dividing the net loss for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted
net loss per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock
plus dilutive potential common stock considered outstanding during the period. However, as the Company generated net losses in
all periods presented, some potentially dilutive securities that relate to the continuing operations, including certain warrants
and stock options, were not reflected in diluted net loss per share because the impact of such instruments was anti-dilutive. The
table below presents the computation of basic and diluted net losses per common share:
| |
Three months ended June 30, | | |
Six months ended June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Basic Numerator: | |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations attributable to shares of common stock | |
$ | (8,509 | ) | |
$ | (10,049 | ) | |
$ | (15,485 | ) | |
$ | (20,949 | ) |
Loss from discontinued operations attributable to shares of common stock | |
| — | | |
| — | | |
$ | — | | |
$ | (209 | ) |
Net loss attributable to shares of common stock | |
$ | (8,509 | ) | |
$ | (10,049 | ) | |
$ | (15,485 | ) | |
$ | (21,158 | ) |
Basic Denominator: | |
| | | |
| | | |
| | | |
| | |
Weighted average number of shares of common stock outstanding during the period | |
| 94,691,624 | | |
| 87,210,483 | | |
| 94,051,814 | | |
| 86,337,006 | |
Basic common stock shares outstanding | |
| 94,691,624 | | |
| 87,210,483 | | |
| 94,051,814 | | |
| 86,337,006 | |
Basic loss per common stock share from continuing operations | |
$ | (0.09 | ) | |
$ | (0.12 | ) | |
$ | (0.16 | ) | |
$ | (0.24 | ) |
Basic loss per common stock share from discontinued operations | |
| (0.00 | ) | |
| (0.00 | ) | |
| (0.00 | ) | |
| (0.00 | ) |
Basic net loss per common stock share | |
$ | (0.09 | ) | |
$ | (0.12 | ) | |
$ | (0.16 | ) | |
$ | (0.24 | ) |
| |
| | | |
| | | |
| | | |
| | |
Diluted Numerator: | |
| | | |
| | | |
| | | |
| | |
Net loss from continuing operations attributable to shares of common stock | |
$ | (8,509 | ) | |
$ | (10,049 | ) | |
$ | (15,485 | ) | |
$ | (20,949 | ) |
Increase in net loss attributable to derivative warrants | |
| — | | |
| (348 | ) | |
| — | | |
| — | |
Diluted net loss from continuing operations attributable to shares of common stock | |
| (8,509 | ) | |
| (10,397 | ) | |
| (15,485 | ) | |
| (20,949 | ) |
Diluted net loss from discontinued operations attributable to shares of common stock | |
| — | | |
| — | | |
| — | | |
| (209 | ) |
Diluted net loss attributable to shares of common stock | |
$ | (8,509 | ) | |
$ | (10,397 | ) | |
$ | (15,485 | ) | |
$ | (21,158 | ) |
| |
| | | |
| | | |
| | | |
| | |
Diluted Denominator: | |
| | | |
| | | |
| | | |
| | |
Basic common stock shares outstanding | |
| 94,691,624 | | |
| 87,210,483 | | |
| 94,051,814 | | |
| 86,337,006 | |
Weighted average number of derivative warrants outstanding during the period | |
| — | | |
| 1,305,465 | | |
| — | | |
| — | |
Diluted common stock shares outstanding | |
| 94,691,624 | | |
| 88,515,948 | | |
| 94,051,814 | | |
| 86,337,006 | |
Diluted loss per common stock share from continuing operations | |
$ | (0.09 | ) | |
$ | (0.12 | ) | |
$ | (0.16 | ) | |
$ | (0.24 | ) |
Diluted loss per common stock share from discontinued operations | |
| (0.00 | ) | |
| (0.00 | ) | |
| (0.00 | ) | |
| (0.00 | ) |
Diluted net loss per common stock share | |
$ | (0.09 | ) | |
$ | (0.12 | ) | |
$ | (0.16 | ) | |
$ | (0.24 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss per share data presented excludes from the calculation of diluted net loss the following potentially dilutive securities, as they had an anti-dilutive impact: | |
| | | |
| | | |
| | | |
| | |
Both vested and unvested options to purchase an equal number of shares of common stock of the Company | |
| 8,880,469 | | |
| 10,102,094 | | |
| 8,880,469 | | |
| 10,102,094 | |
Unvested RSUs to issue an equal
number of shares of common stock of the Company | |
| 609,898 | | |
| 1,657,890 | | |
| 609,898 | | |
| 1,657,890 | |
Warrants to purchase an equal number of shares of common stock of the Company | |
| 9,566,795 | | |
| 15,801,923 | | |
| 9,566,795 | | |
| 17,423,851 | |
Conversion feature of Senior Secured Notes | |
| 12,500,000 | | |
| — | | |
| 12,500,000 | | |
| — | |
Total number of potentially dilutive instruments, excluded from the calculation of net loss per share | |
| 31,557,162 | | |
| 27,561,907 | | |
| 31,557,162 | | |
| 29,183,835 | |
Note 5. Discontinued Operations
On February 18, 2014, the Company executed
the sale of its mobile social application business to InfoMedia. As consideration for the assets and agreements related to the
Company’s mobile social application business, the Company received 18 Class B shares of InfoMedia, which represent an 8.25%
ownership interest in InfoMedia. Additionally, the Company’s Chief Executive Officer was appointed as a full voting member
on InfoMedia’s board of directors and the Company received a number of customary protective rights. The InfoMedia Class B
shares are accounted for as a cost-method investment at the carrying amount of $787 and are included in Other assets in the
consolidated balance sheets as of June 30, 2015 and December 31, 2014. During the six month period ended June 30, 2015, 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 sale of its mobile
social application business, the Company is required to present the results of the Company’s mobile social application business
as discontinued operations in the consolidated statements of operations. The following table represents the components of operating
results from discontinued operations for the six month period ended June 30, 2014, as presented in the consolidated statements
of operations:
Revenue | |
$ | 37 | |
Operating expenses | |
| (266 | ) |
Operating loss | |
| (229 | ) |
| |
| | |
Non-operating income | |
| 20 | |
Loss before taxes on income | |
| (209 | ) |
Income tax expense | |
| - | |
Loss from discontinued operations | |
$ | (209 | ) |
Note 6. Senior Secured Convertible Notes
On May 4, 2015 (the “Closing
Date”), the Company entered into a securities purchase agreement with certain institutional investors in a registered
direct offering of $12,500 of Senior Secured Convertible Notes (the “Notes”) and warrants to purchase 5,375,000
shares of the Company’s common stock. On the Closing Date, the Company issued the Notes, which are convertible into
shares of the Company’s common stock at $1.00 per share, bear 8% interest and mature in 21 months from the date of
issuance, unless earlier converted. In addition, the Company issued 5,375,000 warrants to purchase shares of the
Company’s common stock, which are exercisable at $1.00 per share and are exercisable for a period of five years,
beginning on the six month and one day anniversary of their date of issuance. In connection with the issuance of the Notes
and warrants, the Company received net cash proceeds of $12,425 on May 5, 2015. The Company also incurred third party costs
directly associated with the issuance of Notes of $218, which are capitalized as debt issuance costs and included in
Other assets, and are amortized over the term of the Note. The Company’s obligations under the outstanding Notes are
secured by a first priority perfected security interest in substantially all of the Company’s U.S. assets. In addition,
stock of certain subsidiaries of the Company has been pledged. The outstanding Notes contain customary events of default, as
well as covenants which include restrictions on the assumption of new debt by the Company. As of June 30, 2015, all covenants
were met and there were no events of default.
The principal amount of the
outstanding Notes will be repaid monthly, and the Company may make such payments and related interest payments in cash or,
subject to certain conditions, in registered shares of the Company’s common stock, at its election. On each of the
principal installment dates, the Company’s scheduled principal amortization payment will be an amount equal
to $595. If the Company chooses to repay the Notes in shares of its common stock, the shares will be issued at a 15%
discount, based on the then-current market price data of the Company’s common stock. The Company may also repay the
Notes in advance of the maturity schedule subject to early repayment penalties. The holders of the Notes may accelerate up to
six principal installment payments on each of the principal installment dates. The Company may choose to settle such amounts
in cash or shares issued at a 15% discount, based on the then-current market price data of the Company’s common stock.
Further, the Notes contain provisions that under certain events of default, as defined in the agreement, the amount owed
could increase by amounts ranging from 115% to 120% of the face value depending on when the event occurred, and additionally,
the interest rates would increase to 16.5% per annum upon the occurrence and continuance of an event of default. In addition,
the Company may choose to repay the Notes early at a premium ranging from 115% to 120% of the face value depending on when
the election is made.
The 8% interest will be paid quarterly,
starting July 1, 2015, and the Company may make such payments in cash or registered shares of the Company’s common stock,
at its election. If the Company chooses to repay the Notes in shares of its common stock, the shares for the payment of interest
will be issued at the then-current market price of the Company’s common stock.
Upon issuance of the Notes on May 4, 2015,
the Company recorded the following
as of June 30, 2015:
Net cash proceeds from the Notes ($12,500 less investors issuance costs of $75) | |
$ | 12,425 | |
Debt Discount: | |
| | |
May 2015 Warrants | |
| 1,717 | |
Conversion feature | |
| 1,244 | |
| |
| 2,961 | |
Net Total – May 4, 2015 | |
| 9,464 | |
Debt discount amortization | |
| 289 | |
Debt repayments | |
| (1,191 | ) |
Net Total – June 30, 2015 | |
| 8,562 | |
Short-term portion | |
| 8,111 | |
Long-term portion | |
| 451 | |
The debt discount is attributable to
the value of the separately accounted for Conversion feature and May 2015 Warrants issued in connection with the financing.
The embedded Conversion feature derivatives relate to the conversion option, redemption in case of an event of default, and
redemption in the case of a change in control features of the Notes. The embedded derivatives were evaluated under ASC topic
815-15, were bifurcated from the debt host, and were classified as liabilities in the consolidated balance sheet. The debt
discount is amortized using the effective interest method over the term of the Notes. For the three and six months ended June
30, 2015, the Company recorded $289 of debt discount amortization included in interest expense on the consolidated statements
of operations. In addition, the Company recorded $21 amortization of debt issuance costs included in interest expense and
recorded an interest accrual of $155 included in Accounts payable and accrued expenses as of June 30, 2015.
During the three months ended June
30, 2015, the Company made principal payments in the aggregate amount of $1,191. The Company elected to make these principal
payments in shares of the Company’s common stock, which are issued at a 15% discount to the market price. As such, the
Company issued 2,300,000 shares in lieu of principal payments and recorded $210 as extinguishment of debt expense on the
consolidated statements of operations. Subsequent to June 30, 2015, the Company made additional principal payments in the
aggregate amount of $1,524 and an interest payment of $155 in shares of common stock, the latter of which had been accrued
as of June 30, 2015.
See Note 7 and 8 for further detail on the fair value of the
May 2015 Warrants and Conversion feature.
Note 7. Fair Value Measurements
The Company measures fair value in accordance
with FASB Accounting Standard Codification (“ASC”) 820-10, Fair Value Measurements and Disclosures. FASB
ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received by selling an asset
or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement
that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis
for considering such assumptions, FASB ASC 820-10 establishes a three-tier value hierarchy, which prioritizes the inputs used
in the valuation methodologies in measuring fair value:
Level 1: Unadjusted quoted
prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2: Other than quoted
prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially
the full term of the asset or liability.
Level 3: Unobservable inputs
for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing
for situations in which there is little, if any, market activity for the asset or liability at measurement date.
The fair value hierarchy also requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
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, 2015 and December 31, 2014:
| |
| | |
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) | |
June 30, 2015: | |
| | | |
| | | |
| | | |
| | |
May 2015 Warrants | |
$ | 1,507 | | |
$ | — | | |
$ | — | | |
$ | 1,507 | |
Conversion feature | |
$ | 759 | | |
$ | — | | |
$ | — | | |
$ | 759 | |
| |
| | | |
| | | |
| | | |
| | |
December 31, 2014: | |
| | | |
| | | |
| | | |
| | |
Conversion Warrants, the derivative Reload Warrants and the derivative
Series 1 Warrants | |
$ | 175 | | |
$ | — | | |
$ | — | | |
$ | 175 | |
The Company measures its derivative
liabilities at fair value. The Conversion Warrants, the derivative Reload Warrants and the derivative Series 1 Warrants were
classified within Level 3 because they were valued using the Black-Scholes-Merton and the Monte-Carlo models, as these
warrants included down-round protection clauses, which utilize significant inputs that are unobservable in the
market. On January 1, 2015, the down-round protection clauses associated with all of the Company’s outstanding
derivative warrants expired and, as a result, these warrants no longer meet the criteria for liability classification. As
such, the related liabilities were revalued as of January 1, 2015 and the balance of $175, which was comprised of long-term
derivative liability warrants of $174 and short-term derivative liability warrants of $1, was reclassified to equity.
The May 2015 Warrants were
classified within Level 3 because they were valued using the Black-Sholes-Merton model, which utilizes significant inputs that are
unobservable in the market. They are recorded as derivative liability warrants as they are freestanding instruments and there
are several features within the warrants that may require the Company to cash settle or partially cash settle. In particular,
the Company may have to cash settle, partially cash settle, or make cash payments to the holders including cash settlement
upon exercise when insufficient shares are authorized to be issued, and that the Company is obligated to issue
registered shares when the warrants are exercised. The derivative liability is initially measured at fair value and marked to
market at each balance sheet date.
The Conversion feature was classified
within Level 3 because it was valued using the Monte-Carlo model, which utilizes significant inputs that are unobservable in
the market. The embedded Conversion feature derivatives relate to the conversion option, redemption in case of an event of
default, and redemption in the case of a change in control features of the Notes. The Conversion feature was separated from
the host debt contract and accounted for as a derivative instrument because the feature is not clearly and closely related to
the debt host and a separate instrument with the same terms as the embedded derivative would be a derivative instrument.
In addition to the above, the
Company’s financial instruments as of June 30, 2015 and December 31, 2014 consisted of cash, cash equivalents,
receivables, accounts payable and deposits. The carrying amounts of all the aforementioned financial instruments approximate
fair value because of the short-term maturities of these instruments.
The following table summarizes the changes
in the Company’s liabilities measured at fair value using significant unobservable inputs (Level 3) during the six month
period ended June 30, 2015:
| |
Conversion Warrants, the derivative Reload Warrants and the derivative Series 1 Warrants | | |
May 2015 Warrants | | |
Conversion feature | |
December 31, 2014 | |
$ | 175 | | |
$ | — | | |
$ | — | |
Reclassification of derivative Reload Warrants and Series 1 Warrants to equity warrants | |
| (175 | ) | |
| — | | |
| — | |
Issuance of Notes and derivative warrants on May 4, 2015 | |
| — | | |
| 1,717 | | |
| 1,244 | |
Gain on revaluation of warrants and conversion feature | |
| — | | |
| (210 | ) | |
| (485 | ) |
June 30, 2015 | |
| — | | |
| 1,507 | | |
| 759 | |
Valuation processes for Level 3 Fair Value Measurements
Fair value measurement of the derivative
warrant liabilities falls 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.
December 31, 2014:
Description |
|
Valuation technique |
|
Unobservable inputs |
|
Range |
|
Conversion Warrants, derivative Reload Warrants and |
|
Black-Scholes-Merton and the |
|
Volatility |
|
56.55% - 77.06% |
|
derivative Series 1 Warrants |
|
Monte-Carlo models |
|
Risk free interest rate |
|
0.13% - 0.87% |
|
|
|
|
|
Expected term, in years |
|
0.48 - 2.55 |
|
|
|
|
|
Dividend yield |
|
0% |
|
June 30, 2015:
Description |
|
Valuation technique |
|
Unobservable inputs |
|
Range |
|
Conversion feature |
|
Monte-Carlo model |
|
Volatility |
|
91.53% |
|
|
|
|
|
Risk free interest rate |
|
0.44% |
|
|
|
|
|
Expected term, in years |
|
1.50 |
|
|
|
|
|
Conversion price |
|
$1.00 |
|
|
|
|
|
|
|
|
|
May 2015 Warrants |
|
Black-Scholes-Merton |
|
Volatility |
|
77.69% |
|
|
|
|
|
Risk free interest rate |
|
1.70% |
|
|
|
|
|
Expected term, in years |
|
4.84 |
|
|
|
|
|
Dividend yield |
|
0.00% |
|
Sensitivity of Level 3 measurements
to changes in significant unobservable inputs
The inputs to estimate the fair value of
the Company’s derivative warrant liabilities and Conversion feature were the current market price of the Company’s
common stock, the exercise price of the warrants and Conversion feature, their remaining expected term, the volatility of the Company’s
common stock price and the risk-free interest rate over the expected term. Significant changes in any of those inputs in isolation
can result in a significant change in the fair value measurement.
Generally, an increase in the market
price of the Company’s shares of common stock, an increase in the volatility of the Company’s shares of common
stock, and an increase in the remaining term of the warrants and Conversion feature would each result in a directionally
similar change in the estimated fair value of the Company’s warrants. Such changes would increase the associated
liability while decreases in these assumptions would decrease the associated liability. An increase in the risk-free
interest rate or a decrease in the differential between the warrants’ and Conversion feature’s exercise prices
and the market price of the Company’s shares of common stock would result in a decrease in the estimated fair value
measurement and thus a decrease in the associated liability. The Company has not, and does not plan to, declare
dividends on its common stock, and as such, there is no change in the estimated fair value of the warrants and Conversion
feature due to the dividend assumption.
Note 8. Warrants
The following table summarizes information
about warrant activity during the six month period ended June 30, 2015:
| |
No. of warrants | | |
Weighted average exercise price | | |
Exercise price range | |
December 31, 2014 | |
| 17,402,654 | | |
$ | 4.26 | | |
| $0.94 - $5.06 | |
Granted | |
| 5,375,000 | | |
$ | 1.00 | | |
| $1.00 | |
Exercised | |
| — | | |
| — | | |
| — | |
Expired | |
| (13,210,858 | ) | |
$ | 5.06 | | |
| $0.94 - $5.06 | |
June 30, 2015 | |
| 9,566,796 | | |
$ | 1.33 | | |
| $1.00 - $1.76 | |
On May 4, 2015, the Company issued
warrants to purchase up to 5,375,000 of its shares of common stock in conjunction with the issuance of the Senior Secured
Convertible Notes. The warrants are exercisable at $1.00 per share and are exercisable for a period of five years.
Prior to June 21, 2015, the Company had
public warrants to purchase 4,784,000 shares of common stock at an exercise price of $5.06, which were listed on the NASDAQ Capital
Market under the symbol “VRNGW,” and additional warrants which were privately held to purchase 8,426,858 shares of
common stock, all of which expired on June 21, 2015.
Certain of the
Company’s outstanding warrants are classified as equity warrants and certain are classified as derivative liability.
The Company’s outstanding equity warrants as of June 30, 2015 consist of the following:
| |
No. outstanding | | |
Exercise price | | |
Remaining contractual life | |
Expiration Date |
Series 1 Warrants | |
| 1,490,250 | | |
$ | 1.76 | | |
2.05 years | |
July 19, 2017 |
Series 2 Warrants | |
| 1,943,523 | | |
$ | 1.76 | | |
2.05 years | |
July 19, 2017 |
Reload Warrants | |
| 758,023 | | |
$ | 1.76 | | |
1.61 years | |
February 6, 2017 |
Outstanding as of June 30, 2015 | |
| 4,191,796 | | |
| | | |
| |
|
The Company’s outstanding derivative
liability warrants as of June 30, 2015 consist of the following:
| |
No. outstanding | | |
Exercise price | | |
Remaining contractual life | |
Expiration Date |
May 2015 Warrants | |
| 5,375,000 | | |
$ | 1.00 | | |
4.85 years | |
May 4, 2020 |
Note 9. Stock-based Compensation
The Company has a stock-based compensation
plan available to grant stock options and RSUs to the Company’s directors, employees and consultants. Under the 2012 Employee,
Director and Consultant Equity Incentive Plan (the “Plan”), a maximum of 15,600,000 shares of common stock may be awarded.
As of June 30, 2015, 5,296,442 shares were available for future grants under the Plan.
The following table illustrates the stock options granted during
the six month period ended June 30, 2015:
Title |
|
Grant date |
|
No. of
options |
|
|
Exercise price |
|
|
Fair
market value
at
grant date |
|
|
Vesting terms |
|
Assumptions
used in Black-Scholes
Option
pricing model |
Directors and employees |
|
January 2015 |
|
1,150,000 |
|
|
$0.51 - $0.59 |
|
|
$0.33 - $0.38 |
|
|
Over 1 year for Directors; Over 3 years for Employees |
|
Volatility: 74.9 % - 77.1%
Risk free interest rate:
1.27% - 1.51%
Expected term, in years:
5.31 - 5.81
Dividend yield: 0.00% |
Certain options granted are subject to
acceleration of vesting of 75% - 100% (according to the agreement signed with each grantee), upon a subsequent change of control.
The activity related to stock options and
RSUs during the six month period ended June 30, 2015 consisted of the following:
| |
RSUs | | |
Options | |
| |
No. of
RSUs | | |
Weighted average
grant date fair value | | |
No. of
options | | |
Weighted average
exercise price | | |
Exercise price
range | | |
Weighted average
grant date fair value | |
Outstanding at December 31, 2014 | |
| 1,196,357 | | |
$ | 3.64 | | |
| 8,052,345 | | |
$ | 3.36 | | |
| $0.96
- $5.50 | | |
$ | 2.24 | |
Granted | |
| — | | |
| — | | |
| 1,150,000 | | |
$ | 0.54 | | |
| $0.51 - $0.59 | | |
$ | 0.35 | |
Vested/Exercised | |
| (232,813 | ) | |
$ | 3.64 | | |
| — | | |
| — | | |
| — | | |
| — | |
Forfeited | |
| (353,646 | ) | |
$ | 3.63 | | |
| (321,876 | ) | |
$ | 1.47 | | |
| $0.51 - $3.76 | | |
$ | 0.85 | |
Expired | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Outstanding at June 30, 2015 | |
| 609,898 | | |
$ | 3.64 | | |
| 8,880,469 | | |
$ | 3.06 | | |
| $0.51
- $5.50 | | |
$ | 2.04 | |
Exercisable at June 30, 2015 | |
| — | | |
| — | | |
| 7,535,329 | | |
$ | 3.25 | | |
| $0.51
- $5.50 | | |
| | |
The Company did not recognize tax benefits
related to its stock-based compensation as there is a full valuation allowance recorded.
Note 10. Commitments and Contingencies
Litigation and legal proceedings
The Company retains the services of professional
service providers, including law firms that specialize in intellectual property licensing, enforcement and patent law. These service
providers are often retained on an hourly, monthly, project, contingent or a blended fee basis. In contingency fee arrangements,
a portion of the legal fee is based on predetermined milestones or the Company’s actual collection of funds. The Company
accrues contingent fees when it is probable that the milestones will be achieved and the fees can be reasonably estimated.
The Company’s subsidiaries have
filed patent infringement lawsuits against ZTE and its subsidiaries in the UK,
France, Germany, Netherlands, Australia, India, Brazil, Malaysia, and Romania, and against ASUS and its subsidiaries
in Germany, Spain and India. In such jurisdictions, an unsuccessful plaintiff may be required to pay a portion of the
other party’s legal fees. In addition, the Company may be required to grant additional written commitments, as
necessary, in connection with its commenced proceedings against ZTE and its subsidiaries in various countries. However, if
the Company were successful on any court applications or the entirety of any litigation, the defendants may be responsible
for a substantial portion of the Company’s legal fees. In response, ZTE Corporation or its affiliates have filed a
number of counterclaims and other responsive cases in various countries such as the United States, certain European
jurisdictions, the People’s Republic of China, and others.
Pursuant to negotiation with ZTE’s
UK subsidiary, the Company made two written commitments, in November 2012 and May 2013, representing payment should a liability
by Vringo Infrastructure arise as a result of the two cases it has filed. Each of the cases filed include three patents which the
Company has alleged are infringed by ZTE. The defendants estimated the total possible liability to be no more than approximately
$2,900 for each case. The Company recorded its best estimate of its liability in respect of ZTE’s legal fees, which is presented
in Other liabilities included in the consolidated balance sheets as of June 30, 2015 and December 31, 2014, but believes that the
ultimate liability will be significantly less.
In March 2014, the Company withdrew one
of the patents included in the first case against ZTE’s UK subsidiary. ZTE withdrew its invalidity counterclaims.
In November 2014, with respect to another
patent included in the first case, the Court found that Vringo’s patent is valid as amended and infringed by ZTE. ZTE did
not appeal the decision, and the decision is final.
On February 17, 2015, Vringo
withdrew its infringement claims against ZTE on three of the four remaining European Patents in suit in the second litigation in
the UK. ZTE subsequently withdrew its invalidity counterclaims in respect of these three patents.
On April 10, 2015, Vringo
and ZTE reached an agreement in relation to the remaining European Patent in issue (EP (UK) 1 330 933) in the second patent case
in the UK in which the parties will withdraw their respective claims and counterclaims.
On September 13, 2013 and January 28, 2014,
Vringo Germany filed two suits in the Regional Court of Düsseldorf, alleging infringement of two European patents by ZTE’s
German subsidiary. Those cases were heard by the Court on November 27, 2014. On January 22, 2015, the Court issued its judgment,
finding that ZTE does not infringe either patent. On February 17, 2015, Vringo filed notices of appeal for each patent. The appeal
process is anticipated to take at least one year.
On May 5, 2014, the Company deposited
a bond of €1,000 (approximately $1,109 as of June 30, 2015) to enforce an injunction against ZTE in Germany. On May 20,
2015, the Company paid an additional €50 (approximately $57 as of June 30, 2015) to enforce review of
accounting records. Should the injunction be successfully overturned on appeal, the Company may be obligated to
compensate ZTE for any damages allegedly suffered as a result of the enforcement of the injunction, which would be
ascertained through separate damages proceedings. Should the judgment which granted the injunction be affirmed on appeal,
however, the amount paid as security would be returnable to the Company in full. The Company has assessed the likelihood of
the injunction being successfully overturned on appeal as remote.
In Brazil, as a condition of the relief
requested, the Company deposited R$2,020 on April 17, 2014 (approximately $640 as of June 30, 2015), as a surety against the truth
of allegations contained in the complaint. This deposit is returnable at the end of the litigation unless ZTE is the prevailing
party and proves that actual material damages were suffered while the requested relief was in place. The Company has assessed the
likelihood of ZTE doing so as remote.
In Romania, Vringo Infrastructure filed
a patent infringement lawsuit against ZTE in the Bucharest Tribunal Civil Section on June 23, 2014 and 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 Company deposited a
bond of €243 on February 11, 2015 (approximately $270 as of June 30, 2015) with the Court in order to continue to enforce
the injunction.
The bond deposits in Germany and Romania
and the surety deposit in Brazil are included in Deposits with courts in the consolidated balance sheets as of June 30, 2015 and
December 31, 2014.
In the People’s Republic of China, ZTE
has filed 33 reexamination requests of Vringo’s Chinese patents with the Patent Re-Examination Board (“PRB”)
of the State Intellectual Property Office of the People’s Republic of China. To date, the PRB has upheld the validity of
17 of the Company’s patents, partially upheld the validity of two of the Company’s patents, and has held that 12 of
the Company’s patents are invalid. The Company has filed appeals on the PRB’s decision on the patents that have been
held invalid. The appeal process is expected to take at least one year. The remaining reexamination requests remain pending, with
decisions expected to be rendered on a rolling basis.
On February 21, 2014,
ZTE filed a civil complaint against the Company and certain of its subsidiaries in the Shenzhen Intermediate Court alleging
that the Company violated China’s antimonopoly laws. The Company received notice of the action on June 26, 2014. The
Company intends to vigorously contest all aspects of this action in the appropriate manner. On July 28, 2014, the Company
filed a motion to have this complaint dismissed due to lack of jurisdiction. On August 6, 2014, the Court dismissed this
motion. The Company filed an appeal of the dismissal, which was denied by the Court. The Court conducted a hearing on May 29,
2015 for the parties to submit any evidence on which they intended to rely. During this hearing, ZTE amended its complaint to
increase its damages demand. As a result, the Company filed a motion contesting the jurisdiction of the Court, which was
denied. The Company’s appeal of the jurisdictional question is pending. Trial on the merits, which had been scheduled
to begin on June 9, 2015 has been postponed pending Vringo’s appeal. The appellate process is expected to take several
months. The Company has not made a determination of what the potential liability may be should it lose the case in China.
Leases
In July 2012, the Company signed a rental
agreement for its corporate executive office in New York for an annual rental fee of approximately $137 (subject to certain adjustments)
which was to expire in September 2015. In January 2014, the Company entered into an amended lease agreement with the landlord for
a different office space within the same building. The initial annual rental fee for this new office is approximately $403 (subject
to certain future escalations and adjustments) beginning on August 1, 2014, which was the date when the new office space was available.
This lease will expire in October 2019. Rent expense for operating leases for the three and six month periods ended June 30, 2015
were $91 and $183, respectively. Rent expense for operating leases for the three and six month periods ended June 30, 2014 were
$70 and $182, respectively.
Note 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 proceeding. On August 15, 2014, the Federal Circuit reversed a judgment of the
United States District Court for the Eastern District of Virginia by holding that the asserted claims of the patents-in-suit
in I/P Engine's litigation against AOL Inc., Google Inc. et al. are invalid for obviousness. Additionally, during the second
half of 2014, the Patent Re-Examination Board of the State Intellectual Property Office of the People’s Republic of
China held that twelve of the Company's Chinese patents, and partial claims on two of the Company’s other Chinese
patents, are invalid. The Company is appealing these decisions. The Company’s other patents have not been declared to
be invalid or unenforceable to date. |
| | |
| (c) | Financial instruments which potentially subject the Company to significant concentrations of credit
risk consist principally of cash and cash equivalents. The Company maintains its cash and cash equivalents with various major financial
institutions. These major financial institutions are located in the United States and the Company’s policy is designed to
limit exposure to any one institution. |
| | |
| (d) | A portion of the Company’s 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 the Company’s operating
costs. In addition, the Company is subject to the risk of exchange rate fluctuations to the extent it holds monetary assets and
liabilities in these currencies. |
| | |
| (e) | The Notes are repaid on a monthly basis in cash or shares at the Company’s election. If the
Company is unable to satisfy certain equity conditions, it will be required to pay all amounts due on any installment date in cash.
The Company’s ability to timely repay the Notes, to redeem the Notes, and to fund working capital needs and planned capital
expenditures depends on its ability to generate cash flow in the future. If the Company is unable to generate sufficient cash flow
or otherwise obtain funds necessary to make required payments, or if the Company fails to comply with the various requirements
of the Notes, the Company would be in default, which would permit the holders of the Notes to accelerate the maturity of the Notes
and cause a default under the Notes. Any default under the Notes could have a material adverse effect on the Company’s business,
results of operations and financial condition. |
| | |
| (f) | The Company 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, the Company may also need additional
funds to respond to business opportunities and challenges, including its ongoing operating expenses, protection of its assets,
development of new lines of business and enhancement of its operating infrastructure. While the Company may need to seek additional
funding, it may not be able to obtain financing on acceptable terms, or at all. If the Company is unable to obtain additional funding
on a timely basis, it may be required to curtail or terminate some of its business plans. |
| | |
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q
contains “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.
Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipates,” “believes,”
“can,” “continues,” “could,” “estimates,” “expects,” “intends,”
“may,” “will be,” “plans,” “projects,” “seeks,” “should,”
“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
16, 2015 and any future reports we file with the Securities and Exchange 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, 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.
Overview
Vringo, Inc. (“Vringo”) strives
to develop, acquire, license and protect innovation worldwide. We are currently focused on identifying, generating, acquiring,
and deriving economic benefits from intellectual property assets. We plan to continue to expand our portfolio of intellectual property
assets through acquiring and internally developing new technologies. We intend to monetize our technology portfolio through a variety
of value enhancing initiatives, including, but not limited to:
| · | strategic partnerships, and |
On February 18, 2014, we closed a transaction
with InfoMedia Services Limited (“InfoMedia”) for the sale of certain assets and the assignment of certain agreements
related to our mobile social application business. As consideration, we received 18 Class B shares of InfoMedia, which represent
an 8.25% ownership interest in InfoMedia. InfoMedia is a privately owned, United Kingdom (“UK”) based, provider of
customer relationship management and monetization technologies to mobile carriers and device manufacturers. As part of the transaction,
we will have the opportunity to license certain intellectual property assets and support InfoMedia to identify and protect new
intellectual property.
The accompanying interim consolidated financial
statements 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.
Recent Developments
Notes Financing
On May 4, 2015
(the “Closing Date”) we entered into a securities purchase agreement with certain institutional investors in
a registered direct offering of $12,500,000 of Senior Secured Convertible Notes (the “Notes”) and warrants to
purchase up to 5,375,000 shares of our common stock. On the Closing Date, we issued the Notes, which are convertible into
shares of our common stock at $1.00 per share, bear 8% interest and mature in 21 months from the date of issuance, unless
earlier converted. In addition, we issued 5,375,000 warrants to purchase shares of our common stock, which are exercisable at
$1.00 per share and are exercisable for a period of five years beginning on the six month and one day anniversary of their
date of issuance. In connection with the issuance of the Notes and warrants, we received net cash proceeds of $12,425,000
on May 5, 2015. Our obligations under the outstanding Notes are secured by a first priority perfected security interest in
substantially all of our U.S. assets. In addition, stock of certain of our subsidiaries has been pledged. The outstanding
Notes contain customary events of default, as well as covenants which include restrictions on the assumption of new debt by
Vringo.
The principal
amount of the outstanding Notes will be repaid monthly, and we may make such payments and related interest payments in cash
or, subject to certain conditions, in registered shares of our common stock, at our election. If we choose to repay the Notes
in shares of our common stock, the shares will be issued at a 15% discount, based on the then-current market price data of
our common stock. We may also repay the Notes in advance of the maturity schedule subject to early repayment penalties.
NASDAQ
On December 18,
2014, we received a notification letter from NASDAQ informing us that for the last 30 consecutive business days, the bid
price of our securities had closed below $1.00 per share. This notice has no immediate effect on our NASDAQ listing and we
had 180 calendar days, or until June 16, 2015, to regain compliance. We did not regain compliance during such period since
the closing bid price of our securities was not at least $1.00 per share for a minimum of ten consecutive business days. On
June 17, 2015, we received a letter from NASDAQ notifying us that we had been granted an additional 180-day period, or
until December 14, 2015, to regain compliance with the minimum $1.00 bid price per share requirement for continued listing on
the NASDAQ Capital Market, as set forth in NASDAQ Listing Rule 5810(c)(3)(A)(ii). We intend to cure the deficiency during
this extended period by implementing a reverse stock split of our common stock. If we are unable to implement a reverse stock
split and regain compliance with the minimum bid price requirement, we could be delisted.
Our Strategy
We manage an intellectual property portfolio
consisting of over 600 patents and patent applications, covering telecom infrastructure, internet search and mobile technologies.
These patents and patent applications have been developed internally or acquired from third parties. We strive to develop, acquire,
license and protect innovation worldwide. We seek to expand our portfolio of intellectual property through acquisition and development
both internally and with the assistance of third parties. Our goal is to partner with innovators of compelling technologies.
In potential acquisitions, we seek to purchase
all of, or interests in, technology and intellectual property in exchange for cash, our securities and/or interests in the monetization
of those assets. Our revenue from this aspect of our business can be generated through licensing and litigation efforts. We engage
in robust due diligence and a principled risk underwriting process to evaluate the merits and potential value of any acquisition
or partnership. We seek to structure the terms of our acquisitions and partnerships in a manner that will achieve the highest risk-adjusted
returns possible. We believe that our capital resources and potential access to capital, together with the experience of our management
team and board of directors, will allow us to assemble a portfolio of quality assets with short and long-term revenue opportunities.
Intellectual Property
Infrastructure Patents
As one of the means of realizing the
value of the patents on telecom infrastructure, Vringo, Inc. and our wholly-owned subsidiaries, Vringo Infrastructure, Inc.
(“Vringo Infrastructure”) and Vringo Germany GmbH (“Vringo Germany”) have filed a
number of suits against ZTE Corporation (“ZTE”), and ASUSTeK Computer Inc. (“ASUS”) and certain of
their subsidiaries, affiliates and other companies in the United States, European jurisdictions, India, Australia, Brazil,
and Malaysia alleging infringement of certain U.S., European, Indian, Australian, Brazilian, and Malaysian patents.
ZTE
United Kingdom
On October 5, 2012, Vringo Infrastructure
filed a suit in the UK High Court of Justice, Chancery Division, Patents Court, alleging infringement of three European patents.
Subsequently, ZTE responded to the complaint with a counterclaim for invalidity of the patents-in-suit. Vringo Infrastructure filed
a second UK suit on December 3, 2012, alleging infringement of three additional European patents.
In March 2014, Vringo Infrastructure withdrew
its claim to one of the patents included in the first suit, and ZTE withdrew its invalidity counterclaim. Another patent included
in the first suit was heard in a trial that commenced on October 28, 2014.
On November 28, 2014, the Court found the
patent valid as amended and infringed by ZTE. Following the Court’s ruling, ZTE applied to introduce new prior art and re-argue
the validity of the patent; the application was rejected on January 30, 2015. There was no appeal by ZTE of the substantive decision
and therefore the decision is final. Trial on the remedies phase is currently scheduled to occur in the first half of 2016 and
will focus on the appropriate royalty rate to be awarded.
On February 17, 2015, Vringo
withdrew its infringement claims against ZTE on three of the four remaining European Patents in suit in the second litigation in
the UK. ZTE subsequently withdrew its invalidity counterclaims in respect of these three patents.
On April 10, 2015, Vringo and ZTE reached an
agreement in relation to the remaining European Patent in issue (EP (UK) 1 330 933) in the second patent case in the UK as a result
of which the parties withdrew their respective claims and counterclaims.
The remedy for ZTE’s
infringement of the patent, which was adjudged valid and infringed by the Court on November 28, 2014, will be decided in a hearing
during the first quarter of 2016. The remaining legal fees in the litigation between the parties in the UK will be decided by the
Court after that hearing.
Germany
On November 15, 2012, Vringo Germany filed
a suit in the Mannheim Regional Court in Germany, alleging infringement of a European patent. The litigation was expanded to include
a second European patent on February 21, 2013. On November 4, 2013, Vringo Germany filed a further brief with respect to the proceedings
of the first European patent suit, asserting infringement by ZTE eNode B infrastructure equipment used in 4G networks. Vringo Germany
re-filed the first European patent case in the Regional Court of Düsseldorf on December 5, 2014.
On December 17, 2013, the Court
issued its judgment in the second European patent case, finding that ZTE infringed that patent and ordering an accounting and
an injunction upon payment of the appropriate bonds. On February 19, 2014, Vringo Germany filed suit in the Mannheim Regional
Court seeking enforcement of the accounting ordered and a further order that non-compliance be subject to civil and criminal
penalties. On May 5, 2014, we paid a bond of €1,000,000 (approximately $1,109,000 as of June 30, 2015) to the Court in
order to enforce the injunction against ZTE and on May 20, 2015, we paid an additional bond of €50,000 (approximately
$57,000 as of June 30, 2015) to enforce review of accounting records. On December 27, 2013, ZTE filed a notice of appeal of
the Mannheim Regional Court’s judgment in the second European patent case, and on January 24, 2014, ZTE filed an
emergency motion with the Court of Appeals seeking a stay of the judge’s order pending appeal. On February 24,
2014, ZTE’s motion was denied. A hearing in the appeal is scheduled for the third quarter of 2015.
On September 13, 2013 and January 28, 2014,
Vringo Germany filed two suits in the Regional Court of Düsseldorf, alleging infringement of two additional European patents.
Those cases were heard by the Court on November 27, 2014. On January 22, 2015, the Court issued its judgment, finding that ZTE
does not infringe either patent. On February 17, 2015, Vringo filed notices of appeal for each patent. The appeal process is anticipated
to take at least one year.
ZTE filed nullity suits with respect to
the first and second European patents in the Federal Patents Court in Munich, Germany, during the second and fourth quarters, respectively,
of 2013. On July 3, 2015, the Court decided that certain claims that read on handover between radio network controllers, a key
part of 3G infrastructure technology of the first European patent are valid as amended. Trial in the nullity suit with respect
to the second European patent has been scheduled for the fourth quarter of 2015.
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. 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. Trials in the nullity suits are expected to occur in the first half of 2016.
In May 2015, ZTE filed nullity suits in
the Federal Patents Court in Munich, Germany, with respect to three European patents not currently being asserted against ZTE. No
schedule has currently been set in these cases.
China
ZTE has filed 33 reexamination requests
of Vringo’s Chinese patents with the Patent Re-Examination Board (“PRB”) of the State Intellectual Property Office
of the People’s Republic of China. To date, the PRB has upheld the validity of 17 of Vringo’s patents, partially upheld
the validity of two of Vringo’s patents, and has held that 12 of Vringo’s patents are invalid. Vringo has filed appeals
on the PRB’s decision on the patents that have been held invalid. The appeal process is expected to take at least one year.
The remaining reexamination requests remain pending, with decisions expected to be rendered on a rolling basis.
On February 21, 2014,
ZTE filed a civil complaint against Vringo and Vringo Infrastructure in the Shenzhen Intermediate Court alleging that Vringo
violated China’s antimonopoly laws. Vringo received notice of the action on June 26, 2014. Vringo intends to vigorously
contest all aspects of this action in the appropriate manner. On July 28, 2014, Vringo filed a motion to have this complaint
dismissed due to lack of jurisdiction. On August 6, 2014, the Court dismissed this motion. Vringo filed an appeal of the
dismissal, which was denied by the Court. The Court conducted a hearing on May 29, 2015 for the parties to submit any
evidence on which they intended to rely. During this hearing, ZTE amended its complaint to increase its damages demand. As a
result, Vringo filed a motion contesting the jurisdiction of the Court, which was denied. Vringo’s appeal of the
jurisdictional question is pending. Trial on the merits, which had been scheduled to begin on June 9, 2015 has been postponed
pending Vringo’s appeal. The appellate process is expected to take several months. We have not made a determination of
what the potential liability may be should we lose the case in China.
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 liability and injunctive relief for these patents was held on April 13, 2015 before the 3rd
division of the 3rd chamber of the Tribunal de Grande Instance de Paris (specializing
in IP matters). We anticipate that the Court will render a decision in the third quarter of 2015.
Australia
On June 11, 2013, Vringo Infrastructure
filed a patent infringement lawsuit in the Federal Court of Australia in the New South Wales registry, alleging infringement by
ZTE of two Australian patents. In March 2015, the Court granted Vringo’s request to join ZTE Corporation as a party
to the action. We currently anticipate that the Court will set a trial date in 2015.
Spain
On September 6, 2013, Vringo Infrastructure
filed a preliminary inquiry order against ZTE in the Commercial Court of Madrid, Spain, requiring ZTE to provide discovery relating
to alleged infringement of a patent which is the Spanish counter-part of the second European patent filed in Germany. In light
of ZTE’s non-responsiveness to the order, on March 24, 2014 the Court granted our request to seek discovery of four of ZTE’s
Spanish customers. We have received responses from all four customers. On July 31, 2014, ZTE filed a nullity suit in the Commercial
Court of Madrid seeking to invalidate two of the Spanish counter-parts of Vringo’s European patents, including the patent
found valid as amended and infringed in the UK.
India
On November 7, 2013, we and our subsidiary,
Vringo Infrastructure, filed a patent infringement lawsuit in the High Court of Delhi at New Delhi, India, alleging infringement
of an Indian patent related to CDMA. On November 8, 2013, the Court granted an ex-parte preliminary injunction and appointed commissioners
to inspect ZTE’s facilities and collect evidence. ZTE appealed the preliminary injunction and, on December 12, 2013, the
Court instituted an interim arrangement. On February 3, 2014, we filed a motion for contempt for ZTE’s failure to comply
with the Court’s order, and requested that the Court order ZTE to pay an increased bond. A ruling on this motion is pending.
On January 31, 2014, we and our subsidiary,
Vringo Infrastructure, filed a patent infringement lawsuit in the High Court of Delhi at New Delhi, alleging infringement of a
second Indian patent related to GSM Infrastructure. The Court granted an ex-parte preliminary injunction and appointed commissioners
to inspect ZTE’s facilities and collect evidence. ZTE appealed the preliminary injunction and, on August 13, 2014, the Court
instituted an interim arrangement. On August 30, 2014, we filed a motion for contempt for ZTE’s failure to comply with the
Court’s order, and requested that the Court order ZTE to pay an increased bond. A ruling on this motion is pending.
Brazil
On April 14, 2014, Vringo Infrastructure
filed a patent infringement lawsuit assigned to the 5th Trial Court of Rio de Janeiro State Court in Brazil, alleging infringement
of a Brazilian patent related to 3G/4G/LTE infrastructure. This is the Brazilian counterpart to the patent found to be valid as
amended and infringed in the UK. 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. The Company posted
a bond of approximately R$2,020,000 (approximately $640,000 as of June 30, 2015) with the court on April 17, 2014 as a surety
against the truth of the allegations contained in the complaint. ZTE has filed numerous appeals against the injunction since, all
of which have been rejected.
On July 17, 2014, ZTE filed a nullity suit
in the Federal district court in Rio de Janiero, Brazil, against both Vringo and the Brazilian patent office, seeking to invalidate
Vringo’s Brazilian patent. The Brazilian patent office answered the complaint, supporting the validity of the patent and
requesting the dismissal of the complaint. A schedule for the remainder of this matter has not yet been set.
In April 2015, ZTE filed a second suit
in the Federal district court in Rio de Janeiro, against Vringo and the Brazilian patent office, seeking to prevent Vringo from
enforcing the injunction issued in the state court. A schedule for this matter has not yet been set.
Malaysia
On June 23, 2014, Vringo Infrastructure
filed a patent infringement lawsuit against ZTE in the High Court of Malaya at Kuala Lumpur. The Court is expected to hear the
case in the fourth quarter of 2015.
Romania
On June 23, 2014, Vringo Infrastructure
filed a patent infringement lawsuit against ZTE in the Bucharest Tribunal Civil Section. On July 1, 2014, the court granted an
ex-parte preliminary injunction, ordering ZTE to cease any importation, exportation, introduction on the market, offer for sale,
storage, sale, trade, distribution, promotion, or any other business activity regarding the infringing product. ZTE appealed the
injunction and, on October 10, 2014, the Bucharest Court of Appeal suspended enforcement of the injunction in light of ZTE’s
allegations that it was immediately subject to approximately €31,500,000 in contract losses, pending the outcome of the appeal.
On January 8, 2015, the Court rejected ZTE’s appeal, and reinstated the injunction with immediate effect. The Court ordered
Vringo to pay a bond of approximately €243,000 in order to continue to enforce the injunction. On February 4, 2015, the Court
rejected ZTE’s request for the Court to order Vringo to pay an increased bond of €40,000,000, in a final decision that
may not be appealed. Vringo paid the €243,000 bond on February 11, 2015 (approximately $270,000 as of June 30, 2015). ZTE
has filed numerous appeals against the injunction since, all of which have been rejected.
Netherlands
On May 28, 2014, Vringo Infrastructure
commenced legal proceedings, pursuant to European Anti-Piracy Regulations, Number 1383/2003, Article 11 against ZTE in the District
Court of The Hague. ZTE has filed an invalidity lawsuit for the patent-in-suit. On August 19, 2014, Vringo Infrastructure filed
another suit at the District Court of The Hague, which subsumed the May 18, 2014 lawsuit. A schedule has not yet been set in this
matter.
On June 4, 2014, ZTE filed suit in the
District Court of Rotterdam against Vringo and Vringo Infrastructure for the alleged wrongful detention of goods under the relevant
anti-piracy regulations. A schedule has not yet been set in this matter.
On July 24, 2014, ZTE filed a request with
the District Court of The Hague to seek the release of ZTE UMTS products being held by Dutch customs officials and to order Vringo
to ask the Dutch customs authorities to stop their actions against ZTE’s products based on the Anti-Piracy Regulations of
the European Union. On October 24, 2014, the President of the Court denied ZTE’s requests, and upheld the detention of ZTE’s
goods, finding, prima facie, that ZTE has infringed one of Vringo’s European patents, upholding the validity of that patent,
and rejecting ZTE’s argument that Vringo has violated European competition law by enforcing that patent. ZTE was also ordered
to pay Vringo’s legal costs of approximately $250,000. ZTE retains the right to appeal this decision.
On October 23, 2014, ZTE filed suit in
the District Court of The Hague seeking the invalidity of Vringo’s European Patent that is the subject of the other proceedings
taking place in the same Court. A hearing in this matter is expected to take place in the third quarter of 2015.
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 a non-disclosure agreement (“NDA”)
between the parties, including but not limited to ZTE’s use of such materials in its antitrust lawsuit in China against Vringo
and Vringo Infrastructure. On July 7, 2014, the court granted a temporary restraining order against ZTE’s use of such material.
On July 23, 2014, ZTE filed a counterclaim against Vringo. On July 24, 2014, the Court held a hearing on Vringo’s motion
for a preliminary injunction against ZTE. On October 2, 2014, Vringo filed a motion for judgment on the pleadings, similar to a
motion for summary judgment, asking the court to render a judgment on Vringo’s cause of action based solely on the pleadings
of the parties. On April 6, 2015, the Court granted Vringo’s motion in part, holding that ZTE breached the NDA. On June 3,
2015, the Court granted, in part, Vringo’s request for a preliminary injunction, effectively converting the previously-granted
temporary restraining order into a preliminary injunction.
On February 5, 2015, ZTE filed suit in
the United States District Court for the District of Delaware alleging that Vringo breached its contractual obligations to ETSI,
which it assumed from Nokia when it purchased its infrastructure patent portfolio. On February 6, 2015, the Court granted a temporary
restraining order and preliminary injunction against Vringo. On February 10, 2015, the Court dissolved
the temporary restraining order and preliminary injunction and granted Vringo’s request to transfer the case to the United
States District Court for the Southern District of New York.
On February 5, 2015,
ZTE filed inter partes review (“IPR”) requests for five of Vringo’s United States Patents. The
requests, filed with the Patent Trial and Appeal Board (“PTAB”) of the United States Patent and Trademark Office
(“USPTO”) will remain pending until the PTAB makes a decision on whether to grant the requests and, thus, review
the patents. While these patents have counterparts being litigated by Vringo in other parts of the world, none of these
United States Patents are currently in litigation. On June 5, 2015, ZTE withdrew their requests for IPR for procedural
reasons.
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.
European Patent Office
On May 14, 2015, ZTE filed an opposition
to one of Vringo’s newly issued patents at the European Patent Office. Vringo believes that ZTE’s request has no merit
and plans to vigorously defend the validity of its patent. A schedule has not yet been set.
National Development and Reform Commission
(China)
On January 13, 2015, Vringo Infrastructure
received a Request for Assistance in Investigation from the National Development and Reform Commission of the People’s Republic
of China (NDRC). This request was based on a complaint filed by ZTE against Vringo. The NDRC has demanded that Vringo consent to
mediation with ZTE overseen by the NDRC. Vringo is actively responding to the NDRC’s concerns and working to convince NDRC
that ZTE’s claims have no merit. Vringo is additionally working to ensure that the NDRC respects the various relevant treaties
to which the United States and China are signatories.
ASUS
Germany
On October 4, 2013 and January 29, 2014,
Vringo Germany filed two patent infringement lawsuits against ASUS in the Düsseldorf Regional Court, alleging infringement
of two European patents. Those cases were heard by the Court on November 27, 2014. On January 22, 2015, the Court issued its judgment,
finding that ASUS does not infringe either patent. On February 17, 2015, Vringo filed notices of appeal for each patent. The appeal
process is anticipated to take at least one year.
ASUS filed nullity suits with respect to
the first and second European patents in the Federal Patents Court in Munich, Germany, during the second quarter of 2014. Trials
in the nullity suits are expected to occur in the first half of 2016.
Spain
On February 7, 2014, Vringo Infrastructure
filed suit in the Commercial Court of Barcelona alleging infringement of a patent which is the Spanish counter-part of the first
European patent filed in Germany. The oral hearing for this case was heard before the Commercial Court of Barcelona on November
25, 2014. Judgment is pending. On December 19, 2014, ASUS filed a nullity suit with respect to the same patent. A schedule for
the case has not yet been set.
India
On April 15, 2014, Vringo Infrastructure
filed suit in the High Court of Delhi, New Delhi alleging infringement of a patent related to use of dictionaries in search engines
preloaded on certain ASUS devices. Google has successfully petitioned to intervene as an interested party and, by right, has filed
responsive pleadings. A schedule for the remainder of case has not yet been set.
Search Patents
On September 15, 2011, our wholly-owned
subsidiary, I/P Engine, Inc. (“I/P Engine”) initiated litigation in the United States District Court, for the Eastern
District of Virginia, against AOL Inc., Google, Inc., IAC Search & Media, Inc., Gannett Company, Inc., and Target Corporation
(collectively, the “Defendants”) for infringement of claims of U.S. Patent Nos. 6,314,420 and 6,775,664, which I/P
Engine acquired from Lycos, Inc.
Trial commenced on October 16, 2012, and
the case was submitted to the jury on November 1, 2012. On November 6, 2012, the jury ruled in favor of I/P Engine and against
the Defendants. After upholding the validity of the patents-in-suit, and determining that the asserted claims of the patents were
infringed by the defendants, the jury found that reasonable royalty damages should be based on a “running royalty,”
and that the running royalty rate should be 3.5%. The jury also awarded I/P Engine a total of approximately $30,500,000. On November
20, 2012, the clerk entered the District Court's final judgment.
On January 3, 2014, the District Court
ordered that I/P Engine recover an additional sum of $17,320,000 from Defendants for supplemental damages and prejudgment interest.
On January 21, 2014, the District Court ruled that Defendants' alleged design-around is “nothing more than a colorable variation
of the system adjudged to infringe," and accordingly I/P Engine "is entitled to ongoing royalties as long as Defendants
continue to use the modified system.” On January 28, 2014, the District Court ruled that the appropriate ongoing royalty
rate for Defendants' continued infringement of the patents-in-suit that “would reasonably compensate [I/P Engine] for giving
up [its] right to exclude yet allow an ongoing willful infringer to make a reasonable profit” is a rate of 6.5% of the 20.9%
royalty base previously set by the District Court. The Defendants also filed a separate appeal related to these matters.
On August 15, 2014, the Court of Appeals
for the Federal Circuit (“Federal Circuit”) held that the claims of the patents-in-suit asserted by the Company against
the Defendants are invalid for obviousness. On August 20, 2014, Vringo announced that I/P Engine would seek en banc review of the
Federal Circuit's decision.
On October 15, 2014, I/P Engine filed a
petition for rehearing en banc, in which it argues that the majority's opinion in this case presents important questions of law
and is at odds with a series of Supreme Court and Federal Circuit decisions which do not allow appellate judges to disregard a
jury's detailed findings under these circumstances. I/P Engine argued that review is particularly appropriate here, where the panel
majority not only failed to adopt the proper legal standard, but explicitly rejected it.
On
December 15, 2014, the Federal Circuit denied I/P Engine's petition for rehearing of the case en banc and
consequently, we announced that I/P Engine will seek review by the Supreme Court of the United
States (“Supreme Court”) of the Federal Circuit's decision. On May 14, 2015, I/P Engine filed a petition for a
writ of certiorari with the Supreme Court. The petition asks the Court to review and overturn a divided opinion of the U.S.
Court of Appeals for the Federal Circuit, issued on August 15, 2014, which reversed a jury verdict entered in favor of I/P
Engine against Google and certain of Google's customers in the United States District Court for the Eastern District of
Virginia. Subsequent to the filing of I/P Engine’s petition, Google requested and was granted two extensions to the
deadline for filing a response. Google filed their response on July 29, 2015.
The court dockets for the foregoing cases
are publicly available on the Public Access to Court Electronic Records website, www.pacer.gov, which is operated by the Administrative
Office of the U.S. Courts and the website for the Supreme Court, www.supremecourt.gov.
Financial Condition
Since January 2012, we have raised
approximately $123,355,000, including the May 2015 financing transaction discussed above, which has been used to finance our
operations. As of now, we have not yet generated any significant revenues. As of June 30, 2015, we had a cash balance of
$20,227,000. Our average monthly cash spent in operations for the six month period ended June 30, 2015 was approximately
$1,285,000. This is not necessarily indicative of the future use of our working capital. In addition, we paid approximately
$2,691,000 in deposits with courts beginning in the second quarter of 2014 to date, related to proceedings in Germany,
Brazil, Romania, and Malaysia, which are included in Deposits with courts in the consolidated balance sheets as of June 30,
2015 and December 31, 2014. Deposits with courts paid in local currency are remeasured on the balance sheet date based on the
related foreign exchange rate on that date. As of June 30, 2015, deposits with courts totaled $2,117,000.
As of June 30, 2015 and December 31, 2014,
our total stockholders' equity was $20,396,000 and $31,180,000, respectively. The decrease in stockholders’ equity since
December 31, 2014 is mainly due to the operating loss during the six month period ended June 30, 2015.
Our operating plans
include increasing revenue through the licensing of our intellectual property, strategic partnerships, and litigation, when
required, which may be resolved through a settlement or collection. Disputes regarding the assertion of patents and other
intellectual property rights are highly complex and technical. The majority of our expenditures consist of costs related to
our litigation campaigns. In our cases against ZTE and ASUS, we incurred costs during the first half of 2015 related to the
preparation and filing of briefs and other court documents, as well as case preparation and management. A large percentage of
these costs were incurred in the UK and the U.S. In civil law jurisdictions, such as Germany, France, Spain, and others, the
majority of costs are incurred in the early stages of litigation. With respect to our litigation in these countries, the
respective campaigns are currently in the later stages and therefore we have already incurred the large majority of the
related anticipated costs. As such, based on our plans, costs in these jurisdictions are projected to be lower in the
remainder of 2015 and other future periods.
Despite our plans, our legal proceedings
may continue for several years and may require significant expenditures for legal fees and other expenses. Further, should we be
deemed the losing party in certain of our litigations, we may be liable for some or all of our opponents’ legal fees. In
addition, in connection with litigation, we have made several affirmative financial guarantees to courts around the world, and
might face the need to make additional guarantees in the future.
In addition, our plans to continue to expand
our planned operations through acquisitions and monetization of additional patents, other intellectual property or operating businesses
may be time consuming, complex and costly to consummate. We may utilize many different transaction structures in our acquisitions
and the terms of such acquisition agreements tend to be heavily negotiated. Our future ability to raise capital, if necessary,
may be limited. Even if we are able to acquire particular patents or other intellectual property assets, there is no guarantee
that we will generate sufficient revenue related to those assets to offset the acquisition costs. Therefore, no assurance can be
given at this time as to whether we will be able to achieve our objectives or whether we will have the sources of liquidity for
follow through with our operating plans.
In addition, until we generate sufficient
revenue, we may need to raise additional funds, which may be achieved through the issuance of additional equity or debt, or through
loans from financial institutions. There can be no assurance, however, that any such opportunities will materialize. We may
also be able to raise additional funds through the exercise of our outstanding warrants and options, however, substantially all
of such outstanding equity instruments are currently “out of the money” due to the decline in our common stock price
which began in the third quarter of 2014.
We anticipate that we will continue to
seek additional sources of liquidity, when needed, until we generate positive cash flows to support our operations. We cannot give
any assurance that the necessary capital will be raised or that, if funds are raised, it will be on favorable terms. If we are
unable to obtain additional funding on a timely basis, we may be required to curtail or terminate some of our business plans. Any
future sales of securities to finance our operations may require stockholder approval and will dilute existing stockholders' ownership.
We cannot guarantee when or if we will ever generate positive cash flows.
As a result of the events and circumstances
described above, including the cash proceeds received in connection with the May 2015 financing transaction and our operating plans,
which include paying the principal and interest related to the Notes in shares of our common stock, we believe that we currently
have sufficient cash to continue our current operations for at least the next twelve months.
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 related 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.
General and administrative expenses
General and administrative expenses include
costs related to management and administrative personnel, development 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 the Notes, deposits, bank charges, as well as fair
value adjustments related to our derivative warrant liabilities and Conversion feature. The value of such derivative liabilities
is highly influenced by assumptions used in its valuation, as well as by our stock price at the period end (revaluation date).
Income taxes
As of June 30, 2015, deferred tax assets
generated from 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.
Three month period ended June 30,
2015 compared to the three month period ended June 30, 2014
Revenue
| |
Three months ended June 30, | |
| |
2015 | | |
2014 | | |
Change | |
Revenue | |
$ | — | | |
$ | 800,000 | | |
$ | (800,000 | ) |
During the three month period ended June
30, 2014, we recorded total revenue of $800,000, which was due to a one-time payment in connection with a licensing agreement for
certain of our owned intellectual property. We did not record revenue for the three month period ended June 30, 2015.
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 worldwide through acquisitions
and monetization of additional patents, other intellectual property or operating businesses.
Acquisitions of patents or other intellectual
property assets are often time consuming, complex and costly to consummate. We may utilize many different transaction structures
in our acquisitions and the terms of such acquisition agreements tend to be heavily negotiated. Our ability to raise capital may
be limited. Even if we are able to acquire particular patents or other intellectual property assets, there is no guarantee that
we will generate sufficient revenue related to those assets to offset the acquisition costs. We anticipate that our legal proceedings
may continue for several years and may require significant expenditures for legal fees and other expenses. Disputes regarding the
assertion of patents and other intellectual property rights are highly complex and technical.
Operating legal costs
| |
Three months ended June 30, | |
| |
2015 | | |
2014 | | |
Change | |
Operating legal costs | |
$ | 5,464,000 | | |
$ | 5,982,000 | | |
$ | (518,000 | ) |
During the three month period ended June
30, 2015, our operating legal costs were $5,464,000, which represents a decrease of $518,000 (or 8.7%) from operating legal costs
recorded for the three months ended June 30, 2014. This decrease was partially due to the timing and nature of consulting and patent
litigation costs related to legal proceedings against ZTE and Google. With respect to our legal proceedings against ZTE, costs
during the three month period ended June 30, 2015 were associated with our continued worldwide litigation efforts in the UK, U.S.,
and other countries. We did not incur significant expenses in connection with our legal proceedings against Google during the three
month period ended June 30, 2015.
We expect our operating legal costs to
decrease during the remainder of 2015 as compared to 2014 since most of our litigation campaigns are in the later stages of development.
Our goal is to decrease our overall operating legal expenses by performing more work in-house, which we believe will cost less
than outsourcing to external firms. There is no guarantee, however, that an in-house team will be less expensive or more efficient
than outsourcing this work. Moreover, as we expand the scope of our monetization efforts, the amount of legal work will increase
leading to a concomitant increase in our operating legal costs, regardless of if such work is performed in-house or outsourced.
Amortization of intangibles
| |
Three months ended June 30, | |
| |
2015 | | |
2014 | | |
Change | |
Amortization and impairment of intangibles | |
$ | 813,000 | | |
$ | 968,000 | | |
$ | (155,000 | ) |
Our intangible assets consist of our patent
portfolios, which are amortized over their remaining useful lives (i.e., through the expiration date of the patent). During the
three month period ended June 30, 2015, amortization expense related to our intangible assets totaled $813,000, which represents
a decrease of $155,000 (or 16.0%) from amortization of intangibles recorded for the three month period ended June 30, 2014. This
decrease is attributable to the fact that the patents-in-suit in I/P Engine's litigation against AOL Inc., Google Inc. et al were
fully impaired during the third quarter of 2014. As such, there was less amortization expense during the three months ended June
30, 2015 as compared to the three months ended June 30, 2014.
General and administrative
| |
Three months ended June 30, | |
| |
2015 | | |
2014 | | |
Change | |
General and administrative | |
$ | 2,298,000 | | |
$ | 4,203,000 | | |
$ | (1,905,000 | ) |
During the three month period ended
June 30, 2015, general and administrative expenses decreased by $1,905,000 (or 45.3%), to $2,298,000, compared to $4,203,000
that was recorded during the three month period ended June 30, 2014. The overall decrease was primarily due to a decrease in
stock-based compensation expense of approximately $1,563,000, as certain awards granted in July 2012 fully vested during
2015. In addition, there were also forfeitures of certain equity awards held by our former Chief Operating Officer and
certain employees during the fourth quarter of 2014 and the first half of 2015. There were no equity award
grants during the three month period ended June 30, 2015. Also, the awards associated with the current period expense were
valued lower than the awards associated with the prior period expense, mostly due to the decrease in our stock price, which
also contributed to the decrease in stock-based compensation expense. In addition, there was a decrease in payroll
expense and office administration costs as compared to the prior period.
Non-operating income (expense), net
| |
Three months ended June 30, | |
| |
2015 | | |
2014 | | |
Change | |
Non-operating income (expense), net | |
$ | 66,000 | | |
$ | 304,000 | | |
$ | (238,000 | ) |
During the three month period ended June
30, 2015, we recorded non-operating income, net, of $66,000 compared to non-operating income, net, of $304,000 during the three
month period ended June 30, 2014. The non-operating income recognized in the three month period ended June 30, 2015 was mainly
driven by a gain on the revaluation of derivative liability warrants and the conversion feature related to the securities purchase
agreement that we entered into on May 4, 2015 (the “Closing Date”). On the Closing Date, the net proceeds received
were allocated amongst the Senior Secured Convertible Note (the “Note”), its conversion feature, and the warrants issued
to the holders of the Note. The warrants and Conversion feature were then revalued and marked to market as of the balance sheet
date, which resulted in a gain of $695,000. An additional gain was also recorded for the quarter and was attributed to foreign
exchange gains in connection with our deposits with courts.
The gains reported during the three
month period ended June 30, 2015 were offset by the interest expense of $465,000, which is calculated using the effective
interest rate method. In addition, for the quarter, we elected to repay the installments in registered shares, which are
issued at a discount of 15% to market prices. This resulted in $210,000 recorded as a loss on the extinguishment of debt.
During the three month period ended June
30, 2014, we recorded approximately $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 warrants in June 2014. On January
1, 2015, the down-round protection clauses associated with our remaining outstanding derivative warrants expired and, as a result,
these warrants no longer meet the criteria for liability classification. As such, the related liabilities were revalued as of January
1, 2015 and the balance was reclassified to equity. There was no change in value of the derivative warrant liabilities between
December 31, 2014 and January 1, 2015, and therefore no gain or loss was recorded during the three month period ended June 30,
2015
Six month period ended June 30, 2015
compared to the six month period ended June 30, 2015
Revenue
| |
Six months ended June 30, | |
| |
2015 | | |
2014 | | |
Change | |
Revenue | |
$ | 150,000 | | |
$ | 1,050,000 | | |
$ | (900,000 | ) |
During the six month period ended June
30, 2015, we recorded total revenue of $150,000, which represents a decrease of $900,000 (or 85.7%) as compared to the six month
period ended June 30, 2014. 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 six month period ended June 30, 2014 of $1,050,000
was due to certain one-time payments in connection with license and settlement agreements for certain of our owned intellectual
property.
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, | |
| |
2015 | | |
2014 | | |
Change | |
Operating legal costs | |
$ | 8,565,000 | | |
$ | 10,857,000 | | |
$ | (2,292,000 | ) |
During the six month period ended June
30, 2015, our operating legal costs were $8,565,000, which represents a decrease of $2,292,000 (or 21.1%) from operating legal
costs recorded for the six months ended June 30, 2014. This decrease 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.
With respect to our legal proceedings against
ZTE, costs during the six month period ended June 30, 2015 were associated with our continued worldwide litigation efforts in the
UK, U.S., and other countries. We did not incur significant expenses in connection with our legal proceedings against Google during
the three month period ended June 30, 2015.
It is uncertain whether our operating legal
costs will increase over time. Though we aim to diversify our portfolio of products and increase our intellectual property monetization
efforts, we have also increased the size of our in-house legal department staff as mentioned above. The goal is to decrease our
overall legal expenses by 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, | |
| |
2015 | | |
2014 | | |
Change | |
Amortization of intangibles | |
$ | 1,617,000 | | |
$ | 1,925,000 | | |
$ | (308,000 | ) |
Our intangible assets consist of our patent
portfolios, which are amortized over their remaining useful lives (i.e., through the expiration date of the patent). During the
six month period ended June 30, 2015, amortization expense related to our intangible assets totaled $1,617,000, which represents
a decrease of $308,000 (or 16.0%) from amortization of intangibles recorded for the six month period ended June 30, 2014. This
decrease is attributable to the fact that the patents-in-suit in I/P Engine's litigation against AOL Inc., Google Inc. et al were
fully impaired during the third quarter of 2014. As such, there was less amortization expense during the six months ended June
30, 2015 as compared to the three months ended June 30, 2014.
General and administrative
| |
Six months ended June 30, | |
| |
2015 | | |
2014 | | |
Change | |
General and administrative | |
$ | 5,296,000 | | |
$ | 8,446,000 | | |
$ | (3,150,000 | ) |
During the six month period ended
June 30, 2015, general and administrative expenses decreased by $3,150,000 (or 37.3%), to $5,296,000, compared to $8,446,000
that was recorded during the six month period ended June 30, 2014. The overall decrease in general and administrative
expenses was primarily due to a decrease in the stock-based compensation expense for the first six months of 2015 as compared
to the same period during 2014. The reason for the decrease was attributable to several factors. Stock-based
compensation awards granted during July 2012 fully vested in 2015. There were forfeitures of certain equity awards held by
our former Chief Operating Officer and certain employees during the fourth quarter of 2014 and the first quarter of 2015.
Also, the awards associated with the current period expense were valued lower than the awards associated with the prior
period expense, mostly due to the decrease in our stock price, which also contributed to the decrease in stock-based
compensation expense.
Lastly, the company completed consolidation
of corporate functions in New York in 2014 and implemented cost savings strategies in 2015 that resulted in a decrease in payroll
expense and office administration costs as compared to the prior period.
Non-operating income (expense), net
| |
Six months ended June 30, | |
| |
2015 | | |
2014 | | |
Change | |
Non-operating income (expense), net | |
$ | (157,000 | ) | |
$ | (771,000 | ) | |
$ | 614,000 | |
During the six month period ended
June 30, 2015, we recorded non-operating expense, net, in the amount of $157,000 compared to non-operating expense, net, in
the amount of $771,000 recorded during the six month period ended June 30, 2014. The non-operating expense recognized in the
six month period ended June 30, 2015 was driven by various factors. Installment payments made to holders of the
Senior Secured Convertible Note (the “Note”) from the securities purchase agreement that we entered into on May
4, 2015 (the “Closing Date”) resulted in an increase in interest expense of $465,000 for the six month period
ended June 30, 2015. The interest expense is calculated using the effective interest method. In addition, we elected to
repay the installments in registered shares, which are issued at a discount of 15% to market prices. This resulted in
$210,000 recorded as a loss on the extinguishment of debt.
The current period expense also relates
to foreign exchanges losses in connection with our deposits with courts.
The expenses reported during the six
month period ended June 30, 2015 were offset by a gain on the revaluation of derivative liability warrants and the conversion feature
related to the securities purchase agreement. On the Closing Date, the net proceeds received were allocated amongst the Note, its
Conversion feature, and the warrants issued to the holders of the Note. The warrants and Conversion feature were then revalued and
marked to market as of the balance sheet date, which resulted in a gain of $695,000.
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 warrants in June 2014.
We expect that our non-operating income (expense) will remain
highly volatile, and we may choose to fund our operations through additional financing. In particular, non-operating income (expense)
will be affected by the adjustments to the fair value of our derivative instruments. Fair value of these derivative instruments
depends on a 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.
Loss from discontinued mobile social application operations
| |
Six months ended June 30, | |
| |
2015 | | |
2014 | | |
Change | |
Revenue | |
$ | — | | |
$ | 37,000 | | |
$ | (37,000 | ) |
Operating expenses | |
| — | | |
| (266,000 | ) | |
| 266,000 | |
Operating loss | |
| — | | |
| (229,000 | ) | |
| 229,000 | |
Non-operating income (expense) | |
| — | | |
| 20,000 | | |
| (20,000 | ) |
Loss before taxes on income | |
| — | | |
| (209,000 | ) | |
| 209,000 | |
Income tax expense | |
| — | | |
| — | | |
| — | |
Loss from discontinued operations | |
$ | — | | |
$ | (209,000 | ) | |
$ | 209,000 | |
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 in InfoMedia. Additionally, our Chief Executive Officer was appointed as a full voting member
on InfoMedia’s board of directors and we received a number of customary protective rights. The InfoMedia Class B shares are
accounted for as a cost-method investment.
During the six month period ended June
30, 2015, there were no results from discontinued operations since all related activities ceased when the sale was executed.
Liquidity and Capital Resources
As of June 30, 2015, we had a cash
balance of $20,227,000. This represents an increase of $4,204,000 from our cash balance on December 31, 2014, which is mainly
due to the net cash that was raised as part of the securities purchase agreement we entered into on May 4, 2015, offset by
net cash used in operations of approximately $7,713,000 during the six-month period ended June 30, 2015. Our average monthly
cash spent in operations for the six month periods ended June 30, 2015 and 2014 was approximately $1,285,000 and $2,159,000,
respectively. The majority of these expenditures during the six months ended June 30, 2015 consisted of costs related to our
litigation campaigns. In our cases against ZTE and ASUS, we incurred costs during the first two quarters of 2015 related to
the preparation and filing of briefs and other court documents, as well as case preparation and management. A large
percentage of these costs were incurred in the UK and the U.S. In civil law jurisdictions, such as Germany, France, Spain,
and others, the majority of costs are incurred in the early stages of litigation and we anticipate that the costs in these
jurisdictions will be lower in future periods. In addition, we paid approximately $2,691,000 in deposits with courts
beginning in the second quarter of 2014 to date, related to our proceedings in Germany, Brazil, Romania and Malaysia.
Deposits with courts paid in local currency are re-measured on the balance sheet date based on the related foreign exchange
rate on that date. As of June 30, 2015, deposits with courts totaled $2,117,000.
On May 4, 2015, we entered into a
securities purchase agreement with certain institutional investors in a registered direct offering of $12,500,000 of Notes
and certain warrants to purchase shares of our common stock. On the Closing Date, we issued the Notes, which are convertible
into shares of our common stock at $1.00 per share, bear 8% interest and mature in 21 months from the date of issuance,
unless earlier converted. In addition, we issued approximately 5,375,000 warrants to purchase shares of our common
stock, which are exercisable at $1.00 per share and are exercisable for a period of five years beginning on the six month and
one day anniversary of their date of issuance. In connection with the issuance of the Notes and warrants, we received net
cash proceeds of $12,425,000 on May 5, 2015. Our obligations under the outstanding Notes are secured by a first priority
perfected security interest in substantially all of our U.S. assets. In addition, stock of certain of our subsidiaries has
been pledged. The outstanding Notes contain customary events of default, as well as covenants, which include restrictions on
the assumption of new debt by Vringo.
The principal amount of the
outstanding Notes will be repaid monthly, and we may make such payments and related interest payments in cash or, subject to
certain conditions, in registered shares of our common stock, at our election. If we choose to repay the Notes in shares of
our common stock, the shares will be issued at a 15% discount, based on the then-current market price data of our common
stock. We may also repay the Notes in advance of the maturity schedule subject to early repayment penalties.
Our operating plans include increasing
revenue through the licensing of our intellectual property, strategic partnerships, and litigation, when required, which may be
resolved through a settlement or collection. Disputes regarding the assertion of patents and other intellectual property rights
are highly complex and technical. The majority of our expenditures consist of costs related to our four litigation campaigns. A
large percentage of these costs were incurred in the UK, Australia, Germany, Brazil, the Netherlands, and France. In civil law
jurisdictions, such as Germany, France, Spain, and others, the majority of costs are incurred in the early stages of litigation.
With respect to our litigation in such countries, the respective litigation campaigns are currently in the later stages and therefore
we have already incurred the large majority of the related anticipated costs. As such, based on our plans, costs in these jurisdictions
are projected to be lower in remainder of 2015 and other future periods.
Despite our plans, our legal proceedings
may continue for several years and may require significant expenditures for legal fees and other expenses. Further, should we be
deemed the losing party in certain of our litigations, we may be liable for some or all of our opponents’ legal fees. In
addition, in connection with litigation, we have made several affirmative financial guarantees to courts around the world, and
might face the need to make additional guarantees in the future.
In addition, our plans to continue to expand
our planned operations through acquisitions and monetization of additional patents, other intellectual property or operating businesses
may be time consuming, complex and costly to consummate. We may utilize many different transaction structures in our acquisitions
and the terms of such acquisition agreements tend to be heavily negotiated. Our future ability to raise capital, if necessary,
may be limited. Even if we are able to acquire particular patents or other intellectual property assets, there is no guarantee
that we will generate sufficient revenue related to those assets to offset the acquisition costs. Therefore, no assurance can be
given at this time as to whether we will be able to achieve our objectives or whether we will have the sources of liquidity for
follow through with our operating plans.
We anticipate that we will continue to
seek additional sources of liquidity, when needed, until we generate positive cash flows to support our operations. We cannot give
any assurance that the necessary capital will be raised or that, if funds are raised, it will be on favorable terms. If we are
unable to obtain additional funding on a timely basis, we may be required to curtail or terminate some of our business plans. Any
future sales of securities to finance our operations may require stockholder approval and will dilute existing stockholders' ownership.
We cannot guarantee when or if we will ever generate positive cash flows.
As a result of the events and circumstances
described above, including the cash proceeds received in connection with the May 2015 financing transaction and our operating plans,
which include paying the principal and interest related to the Notes in shares of our common stock, we believe that we currently
have sufficient cash to continue our current operations for at least the next twelve months.
Cash flows
| |
Six months ended June 30, | |
| |
2015 | | |
2014 | | |
Change | |
Net cash used in operating activities | |
$ | (7,713,000 | ) | |
$ | (12,955,000 | ) | |
$ | 5,242,000 | |
Net cash used in investing activities | |
$ | (287,000 | ) | |
$ | (2,449,000 | ) | |
$ | 2,162,000 | |
Cash provided by financing activities | |
$ | 12,207,000 | | |
$ | 13,452,000 | | |
$ | (1,245,000 | ) |
Operating activities
During the six month period ended June
30, 2015, net cash used in operating activities totaled $7,713,000 compared to net cash used in operating activities of $12,955,000
during the six month period ended June 30, 2014. The decrease of $5,242,000 was mainly due to the timing and nature of litigation
costs described above.
Our net cash used in operating activities
could increase if we engage in future business development activities. As we expect to move towards greater revenue generation
in the future, we expect that these amounts will be offset over time by the collection of revenues. There is no guarantee that
we will generate sufficient revenue to offset future operating expenses and our ability to raise additional capital may be limited.
Investing activities
During the six month period
ended June 30, 2015, net cash used in investing activities totaled $287,000, which mainly represents the deposit we made to a
Romanian court to enforce an injunction against ZTE in Romania and the deposit we made in Germany to enforce review of
accounting records. 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. There was also an increase in fixed asset purchases during
the six month period ended June 30, 2014.
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 six month period ended
June 30, 2015, we received net proceeds of $12,425,000 from a securities purchase in a registered direct offering of
$12,500,000 of Notes and warrants to purchase up to 5,375,000 shares of our common stock. This amount was offset by the
amount of debt issuance costs that were paid in relation to the agreement. During the six month period ended June 30, 2014,
cash provided by financing activities totaled $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.
A significant portion of our issued and
outstanding warrants, for which the underlying shares of common stock held by non-affiliates are freely tradable, are currently
“out of the money.” Therefore, the potential of additional incoming funds from exercises by our warrant holders is
currently very limited. To the extent that this portion of our issued and outstanding warrants were “in the money,”
it could be used as a source of additional funding if the warrant holders choose to exercise.
We may also choose to raise additional
funds in connection with any acquisitions of patent portfolios or other intellectual property assets that we may pursue. There
can be no assurance, however, that any such opportunity will materialize. Moreover, any such financing would likely be dilutive
to our current stockholders.
Off-Balance Sheet Arrangements
From October 2012 through the filing date
of this Quarterly Report on Form 10-Q, our subsidiaries filed patent infringement lawsuits against the subsidiaries of ZTE
Corporation in the UK, France, Germany, Australia, India, Brazil, Malaysia, Romania, and the Netherlands. 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, as part
of standard legal procedures in the UK, we placed two written commitments to ensure the payment of a potential liability
by Vringo Infrastructure resulting for the two cases filed in the fourth quarter of 2012 and second quarter of 2013, which the
defendants estimated to be approximately $2,900,000 each. With respect to these written commitments, we believe that Vringo’s
commitments will be shortly discharged since all claims in the UK cases, other than the remedies for the patent found infringed
and valid as amended, have been dismissed. As such, any remaining costs where Vringo was not the “commercial victor”
as defined under UK procedural law can be assessed. We believe that the amounts of the written commitments well exceed any costs,
to the extent that they are assessed, and anticipate that such costs will not exceed the amount of the estimated liability recorded
in our consolidated balance sheet as of June 30, 2015.
In addition, we may be required to grant
additional written commitments, as necessary, in connection with our commenced proceedings against ZTE Corporation in Europe, Brazil,
India and Australia. It should be noted, however, that if we were successful on any court applications or the entirety of any litigation,
ZTE Corporation would 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, 2015:
| |
Payments Due by Period | |
| |
Total | | |
Less than 1 Year | | |
1-3 Years | | |
3-5 Years | | |
More than 5 Years | |
Operating leases | |
$ | 1,774,000 | | |
$ | 403,000 | | |
$ | 816,000 | | |
$ | 555,000 | | |
$ | — | |
Total | |
$ | 1,774,000 | | |
$ | 403,000 | | |
$ | 816,000 | | |
$ | 555,000 | | |
$ | — | |
In July 2012, we signed a rental agreement
for our corporate executive office in New York for an annual rental fee of approximately $137,000 (subject to certain adjustments)
which was to expire in September 2015. However, in January 2014, we entered into an amended lease agreement with the landlord for
a different office space within the same building. The initial annual rental fee for this new office is approximately $403,000
(subject to certain future escalations and adjustments) beginning on August 1, 2014, which was the date when the new office space
was available. This lease will expire in October 2019.
Critical Accounting Estimates
These consolidated financial statements
should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K filed
with the SEC on March 16, 2015, which includes a description of our critical accounting policies that involve subjective and complex
judgments that could potentially affect reported results. While there have been no material changes to our critical accounting
policies as to the methodologies or assumptions we apply under them, we continue to monitor such methodologies and assumptions.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
Financial instruments which potentially
subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We maintain our cash
and cash equivalents with various major financial institutions. These major financial institutions are located in the United States
and our policy is designed to limit exposure to any one institution.
The primary objective of our investment
activities is to preserve principal while concurrently maximizing the income we receive from our investments without significantly
increasing risk. To minimize risks in the future, we intend to maintain our portfolio of cash equivalents and short-term investments
in securities such as commercial paper and money market funds. As of June 30, 2015 and December 31, 2014, our cash was mostly held
in money market funds in the amounts of $8,090,000 and $13,085,000, respectively. In general, money market funds are not subject
to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. Accordingly, a 100 basis point
increase in interest rates or a 10% decline in the value of the United States equity markets would not be expected to have a material
impact on the value of such money market funds.
A portion of our expenses are denominated
in foreign currencies. If the value of the U.S. dollar weakens against the value of these currencies, there will be a negative
impact on our operating costs. In addition, we are subject to the risk of exchange rate fluctuations to the extent we hold monetary
assets and liabilities in these currencies.
Item 4.
Controls and Procedures.
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 (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 June 30, 2015, 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 Control Over Financial Reporting
There were no changes in
our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Part II- OTHER INFORMATION
Item 1. Legal Proceedings.
Infrastructure Patents
As one of the means of realizing the
value of the patents on telecom infrastructure, Vringo, Inc. and our wholly-owned subsidiaries, Vringo Infrastructure, Inc.
(“Vringo Infrastructure”) and Vringo Germany GmbH (“Vringo Germany”) have filed a
number of suits against ZTE Corporation (“ZTE”), and ASUSTeK Computer Inc. (“ASUS”) and certain of
their subsidiaries, affiliates and other companies in the United States, European jurisdictions, India, Australia, Brazil,
and Malaysia alleging infringement of certain U.S., European, Indian, Australian, Brazilian, and Malaysian patents.
ZTE
United Kingdom
On October 5, 2012, Vringo Infrastructure
filed a suit in the UK High Court of Justice, Chancery Division, Patents Court, alleging infringement of three European patents.
Subsequently, ZTE responded to the complaint with a counterclaim for invalidity of the patents-in-suit. Vringo Infrastructure filed
a second UK suit on December 3, 2012, alleging infringement of three additional European patents.
In March 2014, Vringo Infrastructure withdrew
its claim to one of the patents included in the first suit, and ZTE withdrew its invalidity counterclaim. Another patent included
in the first suit was heard in a trial that commenced on October 28, 2014.
On November 28, 2014, the Court found the
patent valid as amended and infringed by ZTE. Following the Court’s ruling, ZTE applied to introduce new prior art and re-argue
the validity of the patent; the application was rejected on January 30, 2015. There was no appeal by ZTE of the substantive decision
and therefore the decision is final. Trial on the remedies phase is currently scheduled to occur in the first half of 2016 and
will focus on the appropriate royalty rate to be awarded.
On February 17, 2015, Vringo
withdrew its infringement claims against ZTE on three of the four remaining European Patents in suit in the second litigation in
the UK. ZTE subsequently withdrew its invalidity counterclaims in respect of these three patents.
On April 10, 2015, Vringo and ZTE reached an
agreement in relation to the remaining European Patent in issue (EP (UK) 1 330 933) in the second patent case in the UK as a result
of which the parties withdrew their respective claims and counterclaims.
The remedy for ZTE’s
infringement of the patent, which was adjudged valid and infringed by the Court on November 28, 2014, will be decided in a hearing
during the first quarter of 2016. The remaining legal fees in the litigation between the parties in the UK will be decided by the
Court during after that hearing.
Germany
On November 15, 2012, Vringo Germany filed
a suit in the Mannheim Regional Court in Germany, alleging infringement of a European patent. The litigation was expanded to include
a second European patent on February 21, 2013. On November 4, 2013, Vringo Germany filed a further brief with respect to the proceedings
of the first European patent suit, asserting infringement by ZTE eNode B infrastructure equipment used in 4G networks. Vringo Germany
re-filed the first European patent case in the Regional Court of Düsseldorf on December 5, 2014.
On December 17, 2013, the
Court issued its judgment in the second European patent case, finding that ZTE infringed that patent and ordering an
accounting and an injunction upon payment of the appropriate bonds. On February 19, 2014, Vringo Germany filed suit in the
Mannheim Regional Court seeking enforcement of the accounting ordered and a further order that non-compliance be subject to
civil and criminal penalties. On May 5, 2014, we paid a bond of €1,000,000 (approximately $1,109,000 as of June 30,
2015) to the Court in order to enforce the injunction against ZTE, and on May 20, 2015, we paid an additional bond of
€50,000 (approximately $57,000 as of June 30, 2015) to enforce review of accounting records. On December 27, 2013, ZTE
filed a notice of appeal of the Mannheim Regional Court’s judgment in the second European patent case, and on January
24, 2014, ZTE filed an emergency motion with the Court of Appeals seeking a stay of the judge’s order pending appeal.
On February 24, 2014, ZTE’s motion was denied. A hearing in the appeal is scheduled for the third quarter of
2015.
On September 13, 2013 and January 28, 2014,
Vringo Germany filed two suits in the Regional Court of Düsseldorf, alleging infringement of two additional European patents.
Those cases were heard by the Court on November 27, 2014. On January 22, 2015, the Court issued its judgment, finding that ZTE
does not infringe either patent. On February 17, 2015, Vringo filed notices of appeal for each patent. The appeal process is anticipated
to take at least one year.
ZTE filed nullity suits with respect to
the first and second European patents in the Federal Patents Court in Munich, Germany during the second and fourth quarters, respectively,
of 2013. On July 3, 2015, the Court decided that certain claims that read on handover between radio network controllers, a key
part of 3G infrastructure technology of the first European patent are valid as amended. Trial in the nullity suit with respect
to the second European patent has been scheduled for the fourth quarter of 2015.
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. 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. Trials in the nullity suits are expected to occur in the first half of 2016.
In May 2015, ZTE filed nullity suits in
the Federal Patents Court in Munich, Germany, with respect to three European patents not currently being asserted against ZTE. No
schedule has currently been set in these cases.
China
ZTE has filed 33 reexamination requests
of Vringo’s Chinese patents with the Patent Re-Examination Board (“PRB”) of the State Intellectual Property Office
of the People’s Republic of China. To date, the PRB has upheld the validity of 17 of Vringo’s patents, partially upheld
the validity of two of Vringo’s patents, and has held that 12 of Vringo’s patents are invalid. Vringo has filed appeals
on the PRB’s decision on the patents that have been held invalid. The appeal process is expected to take at least one year.
The remaining reexamination requests remain pending, with decisions expected to be rendered on a rolling basis.
On February 21, 2014,
ZTE filed a civil complaint against Vringo and Vringo Infrastructure in the Shenzhen Intermediate Court alleging that Vringo
violated China’s antimonopoly laws. Vringo received notice of the action on June 26, 2014. Vringo intends to vigorously
contest all aspects of this action in the appropriate manner. On July 28, 2014, Vringo filed a motion to have this complaint
dismissed due to lack of jurisdiction. On August 6, 2014, the Court dismissed this motion. Vringo filed an appeal of the
dismissal, which was denied by the Court. The Court conducted a hearing on May 29, 2015 for the parties to submit any
evidence on which they intended to rely. During this hearing, ZTE amended its complaint to increase its damages demand. As a
result, Vringo filed a motion contesting the jurisdiction of the Court, which was denied. Vringo’s appeal of the
jurisdictional question is pending. Trial on the merits, which had been scheduled to begin on June 9, 2015 has been postponed
pending Vringo’s appeal. The appellate process is expected to take several months. We have not made a determination of
what the potential liability may be should we lose the case in China.
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 liability and injunctive relief for these patents was held on April 13, 2015 before the 3rd
division of the 3rd chamber of the Tribunal de Grande Instance de Paris (specializing
in IP matters). We anticipate that the Court will render a decision in the third quarter of 2015.
Australia
On June 11, 2013, Vringo Infrastructure
filed a patent infringement lawsuit in the Federal Court of Australia in the New South Wales registry, alleging infringement by
ZTE of two Australian patents. In March 2015, the Court granted Vringo’s request to join ZTE Corporation as a party
to the action. We currently anticipate that the Court will set a trial date in 2015.
Spain
On September 6, 2013, Vringo Infrastructure
filed a preliminary inquiry order against ZTE in the Commercial Court of Madrid, Spain, requiring ZTE to provide discovery relating
to alleged infringement of a patent which is the Spanish counter-part of the second European patent filed in Germany. In light
of ZTE’s non-responsiveness to the order, on March 24, 2014 the Court granted our request to seek discovery of four of ZTE’s
Spanish customers. We have received responses from all four customers. On July 31, 2014, ZTE filed a nullity suit in the Commercial
Court of Madrid seeking to invalidate two of the Spanish counter-parts of Vringo’s European patents, including the patent
found valid as amended and infringed in the UK.
India
On November 7, 2013, we and our subsidiary,
Vringo Infrastructure, filed a patent infringement lawsuit in the High Court of Delhi at New Delhi, India, alleging infringement
of an Indian patent related to CDMA. On November 8, 2013, the Court granted an ex-parte preliminary injunction and appointed commissioners
to inspect ZTE’s facilities and collect evidence. ZTE appealed the preliminary injunction and, on December 12, 2013, the
Court instituted an interim arrangement. On February 3, 2014, we filed a motion for contempt for ZTE’s failure to comply
with the Court’s order, and requested that the Court order ZTE to pay an increased bond. A ruling on this motion is pending.
On January 31, 2014, we and our subsidiary,
Vringo Infrastructure, filed a patent infringement lawsuit in the High Court of Delhi at New Delhi, alleging infringement of a
second Indian patent related to GSM Infrastructure. The Court granted an ex-parte preliminary injunction and appointed commissioners
to inspect ZTE’s facilities and collect evidence. ZTE appealed the preliminary injunction and, on August 13, 2014, the Court
instituted an interim arrangement. On August 30, 2014, we filed a motion for contempt for ZTE’s failure to comply with the
Court’s order, and requested that the Court order ZTE to pay an increased bond. A ruling on this motion is pending.
Brazil
On April 14, 2014, Vringo Infrastructure
filed a patent infringement lawsuit assigned to the 5th Trial Court of Rio de Janeiro State Court in Brazil, alleging infringement
of a Brazilian patent related to 3G/4G/LTE infrastructure. This is the Brazilian counterpart to the patent found to be valid as
amended and infringed in the UK. 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. The Company posted
a bond of approximately R$2,020,000 (approximately $640,000 as of June 30, 2015) with the court on April 17, 2014 as a surety
against the truth of the allegations contained in the complaint. ZTE has filed numerous appeals against the injunction since, all
of which have been rejected.
On July 17, 2014, ZTE filed a nullity suit
in the Federal district court in Rio de Janiero, Brazil, against both Vringo and the Brazilian patent office, seeking to invalidate
Vringo’s Brazilian patent. The Brazilian patent office answered the complaint, supporting the validity of the patent and
requesting the dismissal of the complaint. A schedule for the remainder of this matter has not yet been set.
In April 2015, ZTE filed a second suit
in the Federal district court in Rio de Janeiro, against Vringo and the Brazilian patent office, seeking to prevent Vringo from
enforcing the injunction issued in the state court. A schedule for this matter has not yet been set.
Malaysia
On June 23, 2014, Vringo Infrastructure
filed a patent infringement lawsuit against ZTE in the High Court of Malaya at Kuala Lumpur. The Court is expected to hear the
case in the fourth quarter of 2015.
Romania
On
June 23, 2014, Vringo Infrastructure filed a patent infringement lawsuit against ZTE in the Bucharest Tribunal Civil Section.
On July 1, 2014, the court granted an ex-parte preliminary injunction, ordering ZTE to cease any importation, exportation, introduction
on the market, offer for sale, storage, sale, trade, distribution, promotion, or any other business activity regarding the infringing
product. ZTE appealed the injunction and, on October 10, 2014, the Bucharest Court of Appeal suspended enforcement of the injunction
in light of ZTE’s allegations that it was immediately subject to approximately €31,500,000 in contract losses, pending
the outcome of the appeal. On January 8, 2015, the Court rejected ZTE’s appeal, and reinstated the injunction with immediate
effect. The Court ordered Vringo to pay a bond of approximately €243,000 in order to continue to enforce the injunction.
On February 4, 2015, the Court rejected ZTE’s request for the Court to order Vringo to pay an increased bond of €40,000,000,
in a final decision that may not be appealed. Vringo paid the €243,000 bond on February 11, 2015 (approximately $270,000
as of June 30, 2015). ZTE has filed numerous appeals against the injunction since, all of which have been rejected.
Netherlands
On May 28, 2014, Vringo Infrastructure
commenced legal proceedings, pursuant to European Anti-Piracy Regulations, Number 1383/2003, Article 11 against ZTE in the District
Court of The Hague. ZTE has filed an invalidity lawsuit for the patent-in-suit. On August 19, 2014, Vringo Infrastructure filed
another suit at the District Court of The Hague, which subsumed the May 18, 2014 lawsuit. A schedule has not yet been set in this
matter.
On June 4, 2014, ZTE filed suit in the
District Court of Rotterdam against Vringo and Vringo Infrastructure for the alleged wrongful detention of goods under the relevant
anti-piracy regulations. A schedule has not yet been set in this matter.
On July 24, 2014, ZTE filed a request with
the District Court of The Hague to seek the release of ZTE UMTS products being held by Dutch customs officials and to order Vringo
to ask the Dutch customs authorities to stop their actions against ZTE’s products based on the Anti-Piracy Regulations of
the European Union. On October 24, 2014, the President of the Court denied ZTE’s requests, and upheld the detention of ZTE’s
goods, finding, prima facie, that ZTE has infringed one of Vringo’s European patents, upholding the validity of that patent,
and rejecting ZTE’s argument that Vringo has violated European competition law by enforcing that patent. ZTE was also ordered
to pay Vringo’s legal costs of approximately $250,000. ZTE retains the right to appeal this decision.
On October 23, 2014, ZTE filed suit in
the District Court of The Hague seeking the invalidity of Vringo’s European Patent that is the subject of the other proceedings
taking place in the same Court. A hearing in this matter is expected to take place in the third quarter of 2015.
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 a non-disclosure agreement (“NDA”)
between the parties, including but not limited to ZTE’s use of such materials in its antitrust lawsuit in China against Vringo
and Vringo Infrastructure. On July 7, 2014, the court granted a temporary restraining order against ZTE’s use of such material.
On July 23, 2014, ZTE filed a counterclaim against Vringo. On July 24, 2014, the Court held a hearing on Vringo’s motion
for a preliminary injunction against ZTE. On October 2, 2014, Vringo filed a motion for judgment on the pleadings, similar to a
motion for summary judgment, asking the court to render a judgment on Vringo’s cause of action based solely on the pleadings
of the parties. On April 6, 2015, the Court granted Vringo’s motion in part, holding that ZTE breached the NDA. On June 3,
2015, the Court granted, in part, Vringo’s request for a preliminary injunction, effectively converting the previously-granted
temporary restraining order into a preliminary injunction.
On February 5, 2015, ZTE filed suit in
the United States District Court for the District of Delaware alleging that Vringo breached its contractual obligations to ETSI,
which it assumed from Nokia when it purchased its infrastructure patent portfolio. On February 6, 2015, the Court granted a temporary
restraining order and preliminary injunction against Vringo. On February 10, 2015, the Court dissolved
the temporary restraining order and preliminary injunction and granted Vringo’s request to transfer the case to the United
States District Court for the Southern District of New York.
On February 5, 2015,
ZTE filed inter partes review (“IPR”) requests for five of Vringo’s United States Patents. The
requests, filed with the Patent Trial and Appeal Board (“PTAB”) of the United States Patent and Trademark Office
(“USPTO”) will remain pending until the PTAB makes a decision on whether to grant the requests and, thus, review
the patents. While these patents have counterparts being litigated by Vringo in other parts of the world, none of these
United States Patents are currently in litigation. On June 5, 2015, ZTE withdrew their requests for IPR for procedural
reasons.
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.
European Patent Office
On May 14, 2015, ZTE filed an opposition
to one of Vringo’s newly issued patents at the European Patent Office. Vringo believes that ZTE’s request has no merit
and plans to vigorously defend the validity of its patent. A schedule has not yet been set.
National Development and Reform Commission
(China)
On January 13, 2015, Vringo Infrastructure
received a Request for Assistance in Investigation from the National Development and Reform Commission of the People’s Republic
of China (NDRC). This request was based on a complaint filed by ZTE against Vringo. The NDRC has demanded that Vringo consent to
mediation with ZTE overseen by the NDRC. Vringo is actively responding to the NDRC’s concerns and working to convince NDRC
that ZTE’s claims have no merit. Vringo is additionally working to ensure that the NDRC respects the various relevant treaties
to which the United States and China are signatories.
ASUS
Germany
On October 4, 2013 and January 29, 2014,
Vringo Germany filed two patent infringement lawsuits against ASUS in the Düsseldorf Regional Court, alleging infringement
of two European patents. Those cases were heard by the Court on November 27, 2014. On January 22, 2015, the Court issued its judgment,
finding that ASUS does not infringe either patent. On February 17, 2015, Vringo filed notices of appeal for each patent. The appeal
process is anticipated to take at least one year.
ASUS filed nullity suits with respect to
the first and second European patents in the Federal Patents Court in Munich, Germany, during the second quarter of 2014. Trials
in the nullity suits are expected to occur in the first half of 2016.
Spain
On February 7, 2014, Vringo Infrastructure
filed suit in the Commercial Court of Barcelona alleging infringement of a patent which is the Spanish counter-part of the first
European patent filed in Germany. The oral hearing for this case was heard before the Commercial Court of Barcelona on November
25, 2014. Judgment is pending. On December 19, 2014, ASUS filed a nullity suit with respect to the same patent. A schedule for
the case has not yet been set.
India
On April 15, 2014, Vringo Infrastructure
filed suit in the High Court of Delhi, New Delhi alleging infringement of a patent related to use of dictionaries in search engines
preloaded on certain ASUS devices. Google has successfully petitioned to intervene as an interested party and, by right, has filed
responsive pleadings. A schedule for the remainder of case has not yet been set.
Search Patents
On September 15, 2011, our wholly-owned
subsidiary, I/P Engine, Inc. (“I/P Engine”) initiated litigation in the United States District Court, for the Eastern
District of Virginia, against AOL Inc., Google, Inc., IAC Search & Media, Inc., Gannett Company, Inc., and Target Corporation
(collectively, the “Defendants”) for infringement of claims of U.S. Patent Nos. 6,314,420 and 6,775,664, which I/P
Engine acquired from Lycos, Inc.
Trial commenced on October 16, 2012, and
the case was submitted to the jury on November 1, 2012. On November 6, 2012, the jury ruled in favor of I/P Engine and against
the Defendants. After upholding the validity of the patents-in-suit, and determining that the asserted claims of the patents were
infringed by the defendants, the jury found that reasonable royalty damages should be based on a “running royalty,”
and that the running royalty rate should be 3.5%. The jury also awarded I/P Engine a total of approximately $30,500,000. On November
20, 2012, the clerk entered the District Court's final judgment.
On January 3, 2014, the District Court
ordered that I/P Engine recover an additional sum of $17,320,000 from Defendants for supplemental damages and prejudgment interest.
On January 21, 2014, the District Court ruled that Defendants' alleged design-around is “nothing more than a colorable variation
of the system adjudged to infringe," and accordingly I/P Engine "is entitled to ongoing royalties as long as Defendants
continue to use the modified system.” On January 28, 2014, the District Court ruled that the appropriate ongoing royalty
rate for Defendants' continued infringement of the patents-in-suit that “would reasonably compensate [I/P Engine] for giving
up [its] right to exclude yet allow an ongoing willful infringer to make a reasonable profit” is a rate of 6.5% of the 20.9%
royalty base previously set by the District Court. The Defendants also filed a separate appeal related to these matters.
On August 15, 2014, the Court of Appeals
for the Federal Circuit (“Federal Circuit”) held that the claims of the patents-in-suit asserted by the Company against
the Defendants are invalid for obviousness. On August 20, 2014, Vringo announced that I/P Engine would seek en banc review of the
Federal Circuit's decision.
On October 15, 2014, I/P Engine filed a
petition for rehearing en banc, in which it argues that the majority's opinion in this case presents important questions of law
and is at odds with a series of Supreme Court and Federal Circuit decisions which do not allow appellate judges to disregard a
jury's detailed findings under these circumstances. I/P Engine argued that review is particularly appropriate here, where the panel
majority not only failed to adopt the proper legal standard, but explicitly rejected it.
On
December 15, 2014, the Federal Circuit denied I/P Engine's petition for rehearing of the case en banc and
consequently, we announced that I/P Engine will seek review by the Supreme Court of the United
States (“Supreme Court”) of the Federal Circuit's decision. On May 14, 2015, I/P Engine filed a petition for a
writ of certiorari with the Supreme Court. The petition asks the Court to review and overturn a divided opinion of the U.S.
Court of Appeals for the Federal Circuit, issued on August 15, 2014, which reversed a jury verdict entered in favor of I/P
Engine against Google and certain of Google's customers in the United States District Court for the Eastern District of
Virginia. Subsequent to the filing of I/P Engine’s petition, Google requested and was granted two extensions to the
deadline for filing a response. Google filed their response on July 29, 2015.
The court dockets for the foregoing cases
are publicly available on the Public Access to Court Electronic Records website, www.pacer.gov, which is operated by the Administrative
Office of the U.S. Courts and the website for the Supreme Court, www.supremecourt.gov.
Item 1A. Risk Factors.
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,
2014. In addition to the risk factors below and the risk factors included in our Annual Report on Form 10-K, 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.
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.
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 could be through debt (if such financing is available), which could have a material adverse
effect on our consolidated balance sheet and overall financial condition.
As of August 3, 2015 we had 9,566,795 warrants
outstanding which can be exercised for 9,566,795 shares of common stock and incentive equity instruments outstanding to purchase
8,801,303 shares of our common stock granted to our management, employees, directors and consultants. Substantially all of these
aforementioned outstanding equity instruments are currently “out of the money” and therefore our ability to raise capital
through the exercise of these outstanding instruments are significantly limited.
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
August 3, 2015 be exercised, there would be an additional 9,566,795 shares of common stock eligible for trading in the public
market. The incentive equity instruments currently outstanding to purchase 8,801,303 shares of our common stock granted to
our management, employees, directors and consultants are subject to acceleration of vesting of 75% and 100% (according to the
agreement signed with each grantee), upon a subsequent change of control. Such securities, if exercised, will increase the
number of issued and outstanding shares of our common stock. Therefore, the sale, or even the possibility of sale, of the
shares of common stock underlying the warrants and options could have an adverse effect on the market price for our
securities and/or on our ability to obtain future financing.
The indebtedness created by the sale
of the Notes and any future indebtedness we incur exposes us to risks that could adversely affect our business, financial condition
and results of operations.
We incurred $12,500,000 aggregate principal
amount of senior secured indebtedness represented by the Notes in May 2015. Our indebtedness could have significant negative consequences
for our business, results of operation and financial condition, including:
| ● | increasing our vulnerability to adverse economic and industry conditions; |
| ● | limiting our ability to obtain additional financing; |
| ● | requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing
the amount of our cash flow available for other purposes; |
| ● | limiting our flexibility in planning for, or reacting to, changes in our business; and |
| ● | placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access
to capital resources. |
We cannot provide assurance that we
will continue to maintain sufficient cash reserves or that our business will generate cash flow from operations at levels
sufficient to permit us to pay principal, premium, if any, and interest on our indebtedness, or that our cash needs will not
increase. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or
if we fail to comply with the various requirements of our existing indebtedness, the Notes or any indebtedness which we may
incur in the future, we would be in default, which would permit the holders of the Notes and such other indebtedness to
accelerate the maturity of the Notes and such other indebtedness and could cause defaults under the Notes and such other
indebtedness. Any default under the Notes or such other indebtedness could have a material adverse effect on our business,
results of operations and financial condition.
We may not have the ability to pay interest
on the Notes or to redeem the Notes.
The Notes bear interest at a rate of
8.0% per year, and payments with respect to the principal amount of the Notes is payable monthly; the interest is payable
quarterly starting July 1, 2015. If we are unable to satisfy certain equity conditions, we will be required to pay all
amounts due on any payment date in cash. If a change of control occurs, holders of the Notes may require us to repurchase,
for cash, all or a portion of their Notes. Our ability to make payments of principal and interest on the Notes, to redeem the
Notes and to fund working capital needs and planned capital expenditures depends on our ability to generate cash flow in the
future. To some extent, this is subject to general economic, financial, competitive, legislative and regulatory factors and
other factors that are beyond our control. We cannot provide assurance that we will continue to maintain sufficient cash
reserves or that our business will continue to generate cash flow from operations at levels sufficient to permit us to pay
the interest on the Notes or to repurchase or redeem the Notes, or that our cash needs will not increase.
Our failure to make required payments under
the Notes would permit holders of the Notes to accelerate our obligations under the Notes. If the repayment of the related indebtedness
were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay such indebtedness.
If we are unable to generate
sufficient cash flow from operations in the future to service our indebtedness and meet our other needs, we may have to
refinance all or a portion of our indebtedness, obtain additional financing, or reduce expenditures. We cannot provide
assurance that any of these measures would be possible or that any additional financing could be obtained on favorable terms,
or at all. The inability to obtain additional financing on commercially reasonable terms could have a material adverse effect
on our financial condition and on our ability to meet our obligations under the Notes.
There is substantial doubt concerning
our ability to continue as a going concern.
Our consolidated financial
statements have been prepared assuming that we will continue as a going concern which contemplates the realization of assets
and satisfaction of liabilities in the normal course of business. We expect to incur further losses in the operations of
our business and have been dependent on funding our operations through the issuance and sale of equity and debt securities.
These circumstances raise substantial doubt about our ability to continue as a going concern. As a result of this uncertainty
and the substantial doubt about our ability to continue as a going concern as of December 31, 2014, KPMG LLP,
our independent registered public accounting firm, issued a report dated March 16, 2015, stating its opinion that
our recurring losses from operations, negative cash flows from operating activities, and potential insufficiency of cash
or available sources of liquidity to support our current operating requirements raise substantial doubt as to our ability
to continue as a going concern. Investors in our securities should review carefully the report of KPMG LLP, which is included
in our Annual Report on Form 10-K for the year ended December 31, 2014. Management’s plans include increasing
revenue through the licensing of our intellectual property, strategic partnerships, and litigation, when required, which may
be resolved through a settlement or collection. We also intend to continue to expand our planned operations through
acquisitions and monetization of additional patents, other intellectual property or operating businesses. However, no
assurance can be given at this time as to whether we will be able to achieve these objectives or whether we will have the
sources of liquidity for follow through with these plans.
Our limited operating history makes it difficult to evaluate
our current business and future prospects.
To date, our business is focused on the
assertion of our patent portfolio of which the earliest patent was acquired by us in June 2011. Therefore, we not only have a limited
operating history, but also a limited track record in executing our business model which includes, among other things, creating,
prosecuting, licensing, litigating or otherwise monetizing our patent assets. Our limited operating history makes it difficult
to evaluate our current business model and future prospects.
In light of the costs, uncertainties, delays
and difficulties frequently encountered by companies in the early stages of development with no operating history, there is a significant
risk that we will not be able to:
| · | implement or execute our current business plan, or demonstrate that our business plan is sound;
and/or |
| · | raise sufficient funds in the capital markets to effectuate our long-term business plan. |
If we are unable to execute any one of
the foregoing or similar matters relating to our operations, our business may fail.
We commenced legal proceedings against security and communications
companies, and we expect such proceedings to be time-consuming and costly, which may adversely affect our financial condition and
our ability to operate our business.
To license or otherwise monetize the patent
assets that we own, we commenced legal proceedings against a number of large, multi-national companies, pursuant to which we allege
that such companies infringe on one or more of our patents. Our viability is highly dependent on the outcome of these litigations,
and there is a risk that we may be unable to achieve the results we desire from such litigation, failure from which would harm
our business to a great degree. In addition, the defendants in these litigations have substantially more resources than we do,
which could make our litigation efforts more difficult.
We anticipate that legal proceedings may
continue for several years and may require significant expenditures for legal fees and other expenses. Disputes regarding the assertion
of patents and other intellectual property rights are highly complex and technical. Once initiated, we may be forced to litigate
against other parties in addition to the originally named defendants. Our adversaries may allege defenses and/or file counterclaims
for, among other things, revocation of our patents or file collateral litigations or initiate investigations in the United States,
Europe, India, and China or elsewhere in an effort to avoid or limit liability and damages for patent infringement. If such actions
are successful, they may preclude our ability to derive licensing revenue from the patents currently being asserted.
Additionally, we anticipate that our legal
fees and other expenses will be material and will negatively impact our financial condition and results of operations and may result
in our inability to continue our business. We estimate that our legal fees over the next twelve months will be significant for
these enforcement actions. Expenses thereafter are dependent on the outcome of the status of the litigation. Our failure to monetize
our patent assets would significantly harm our business.
Further, should we be deemed the losing
party in certain of our litigations, we may be liable for some or all of our opponents’ legal fees. In addition, in
connection with litigation, we have made several affirmative financial guarantees to courts around the world, and might face the
need to make additional guarantees in the future.
In addition, we may be required to grant
additional written commitments, as necessary, in connection with our commenced proceedings against ZTE Corporation and its subsidiaries
in various countries. As of today, we cannot estimate our potential future liability. However, should we be successful on any court
applications, for example, in the UK, Australia, France, or Germany or the entire litigation and/or litigations, our adversary
may be responsible for a substantial percentage of our legal fees.
Further, if any of the patents in suit
are found not infringed or invalid, it is highly unlikely that the relevant patents would be viewed as essential and therefore
infringed by all unlicensed market participants.
There is a risk that a court will find
our patents invalid, not infringed or unenforceable and/or that the USPTO or other relevant patent offices in various countries
will either invalidate the patents or materially narrow the scope of their claims during the course of a reexamination, opposition
or other such proceeding. In addition, even with a positive trial court verdict, the patents may be invalidated, found not infringed
or rendered unenforceable on appeal. This risk may occur either presently or from time to time in connection with future litigations
we may bring. If this were to occur, it would have a material adverse effect on the viability of our company and our operations.
We believe that certain companies infringe
certain of our patents, but recognize that obtaining and collecting a judgment against such companies may be difficult or impossible.
Patent litigation is inherently risky and the outcome is uncertain. Some of the parties that we believe infringe on our patents
are large and well-financed companies with substantially greater resources than ours. We believe that these parties would devote
a substantial amount of resources in an attempt to avoid or limit a finding that they are liable for infringing on our patents
or, in the event liability is found, to avoid or limit the amount of associated damages. In addition, there is a risk that these
parties may file reexaminations or other proceedings with the USPTO or other government agencies in the United States or abroad
in an attempt to invalidate, narrow the scope or render unenforceable the patents we own.
In addition, as part of our ongoing legal
proceedings, the validity and/or enforceability of our patents-in-suit is often challenged in a court or an administrative proceeding. On
August 15, 2014, the Federal Circuit reversed a judgment of the United States District Court for the Eastern District of Virginia
by holding that the asserted claims of the patents-in-suit in I/P Engine's litigation against AOL Inc., Google Inc. et al. are
invalid for obviousness. During the second half of 2014, we experienced a decline in our common stock price.
Moreover, in connection with any of our
present or future patent enforcement actions, it is possible that a defendant may request and/or a court may rule that we violated
relevant statues, regulations, rules or standards relating to the substantive or procedural aspects of such enforcement actions
in the United States or abroad. In such event, a court or other regulatory agency may issue monetary sanctions against us or our
operating subsidiaries or award attorneys’ fees and/or expenses to one or more defendants, which could be material, and if
we or our subsidiaries are required to pay such monetary sanctions, attorneys’ fees and/or expenses, such payment could materially
harm our operating results and financial position.
In addition, it is difficult in general to predict the outcome
of patent enforcement litigation at the trial or appellate level. In the United States, there is a higher rate of appeals in patent
enforcement litigation than in standard business litigation. The defendant to any case we bring, may file as many appeals as allowed
by right, including to the first, second and/or final courts of appeal (in the United States those courts would be the Federal
Circuit and Supreme Court, respectively). Such appeals are expensive and time-consuming, and the outcomes of such appeals are sometimes
unpredictable, resulting in increased costs and reduced or delayed revenue.
We may not be able to successfully monetize the patents we
acquired from Nokia, nor any of the other patent acquisitions, thus we may fail to realize all of the anticipated benefits of such
acquisition.
There is no assurance that we will be able
to successfully monetize the patent portfolio that we acquired from Nokia, nor any other patent acquisitions. The patents we acquired
from Nokia could fail to produce anticipated benefits, or could have other adverse effects that we currently do not foresee. Failure
to successfully monetize these patent assets may have a material adverse effect on our business, financial condition and results
of operations.
In addition, the acquisition of a patent
portfolio is subject to a number of risks, including, but not limited to the following:
| · | There is a significant time lag between acquiring a patent portfolio and recognizing revenue from those patent assets, if at
all. During that time lag, material costs are likely to be incurred that would have a negative effect on our results of operations,
cash flows and financial position. |
| · | The integration of a patent portfolio is a time consuming and expensive process that may disrupt our operations. If our integration
efforts are not successful, our results of operations could be harmed. In addition, we may not achieve anticipated synergies or
other benefits from such acquisition. |
Therefore, there is no assurance that we
will be able to monetize an acquired patent portfolio and recoup our investment.
We may seek to internally develop new
inventions and intellectual property, which would take time and would be costly. Moreover, the failure to obtain or maintain intellectual
property rights for such inventions would lead to the loss of our investments in such activities.
Members of our management team have experience
as inventors. As such, part of our business may include the internal development of new inventions or intellectual property that
we will seek to monetize. However, this aspect of our business would likely require significant capital and would take time to
achieve. Such activities could also distract our management team from its present business initiatives, which could have a material
and adverse effect on our business. There is also the risk that our initiatives in this regard would not yield any viable new inventions
or technology, which would lead to a loss of our investments in time and resources in such activities.
In addition, even if we are able to internally
develop new inventions, in order for those inventions to be viable and to compete effectively, we would need to develop and maintain
them, and they would heavily rely on, a proprietary position with respect to such inventions and intellectual property. However,
there are significant risks associated with any such intellectual property we may develop principally, including the following:
| · | patent applications we may file may not result in issued patents or may take longer than we expect
to result in issued patents; |
| · | we may be subject to opposition proceedings in the U.S. or foreign countries; |
| · | any patents that are issued to us may not provide meaningful protection; |
| · | we may not be able to develop additional proprietary technologies that are patentable; |
| · | other companies may challenge patents issued to us; |
| · | other companies may have independently developed and/or patented (or may in the future independently
develop and patent) similar or alternative technologies, or duplicate our technologies; |
| · | other companies may design around patents we have developed; and |
| · | enforcement of our patents could be complex, uncertain and very expensive. |
We cannot be certain that patents will
be issued as a result of any future applications, or that any of our patents, once issued, will provide us with adequate protection
from competing products. For example, issued patents may be circumvented or challenged, declared invalid or unenforceable, or narrowed
in scope. In addition, since publication of discoveries in scientific or patent literature often lags behind actual discoveries,
we cannot be certain that we will be the first to make our additional new inventions or to file patent applications covering those
inventions. It is also possible that others may have obtained or may obtain issued patents that could prevent us from commercializing
our products or require us to obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct
our business. As to those patents that we may license or otherwise monetize, our rights will depend on maintaining our obligations
to the licensor under the applicable license agreement, and we may be unable to do so. Our failure to obtain or maintain intellectual
property rights for our inventions would lead to the loss of our investments in such activities, which would have a material and
adverse effect on our company.
Moreover, patent application delays could
cause delays in recognizing revenue from our internally generated patents and could cause us to miss opportunities to license patents
before other competing technologies are developed or introduced into the market.
New legislation, regulations or court
rulings related to enforcing patents could harm our business and operating results.
Intellectual property is the subject of
intense scrutiny by the courts, legislatures and executive branches of governments around the world. Various patent offices, governments
or intergovernmental bodies (like the European Commission) may implement new legislation, regulations or rulings that impact the
patent enforcement process or the rights of patent holders and such changes could negatively affect our business model. For example,
limitations on the ability to bring patent enforcement claims, limitations on potential liability for patent infringement, lower
evidentiary standards for invalidating patents, increases in the cost to resolve patent disputes and other similar developments
could negatively affect our ability to assert our patent or other intellectual property rights.
In September 2013, the Federal Trade Commission
announced that it is planning to gather information from approximately 25 companies that are in the business of buying and asserting
patents in order to develop a better understanding of how those companies do business and impact innovation and competition. Both
the Federal Trade Commission and European Commission are actively considering what the appropriate restrictions are on the ability
of owners of patents declared to technical standards to receive both injunctions and royalties.
Furthermore, United States patent laws
have been amended by the Leahy-Smith America Invents Act (“America Invents Act”). The America Invents Act includes
a number of significant changes to U.S. patent law. In general, the legislation attempts to address issues surrounding the enforceability
of patents and the increase in patent litigation by, among other things, establishing new procedures for patent litigation. For
example, the America Invents Act changes the way that parties may be joined in patent infringement actions, increasing the likelihood
that such actions will need to be brought against individual parties allegedly infringing by their respective individual actions
or activities. At this time, it is not clear what, if any, impact the America Invents Act will have on the operation of our enforcement
business. However, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the enforcement
of our patented technologies, which could have a material adverse effect on our business and financial condition.
In addition, the U.S. Department of Justice
(“DOJ”) has conducted reviews of the patent system to evaluate the impact of patent assertion entities on industries
in which those patents relate. It is possible that the findings and recommendations of the DOJ could impact the ability to effectively
license and enforce standards-essential patents and could increase the uncertainties and costs surrounding the enforcement of any
such patented technologies.
Furthermore, in various pending litigation
and appeals in the United States Federal courts, various arguments and legal theories are being advanced to potentially limit the
scope of damages that a patent licensing company such as us might be entitled to. Any one of these pending cases could result in
new legal doctrines that could make our existing or future patent portfolios less valuable or more costly to enforce.
Further, and in general, it is impossible
to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals
will become enacted as laws. Compliance with any new or existing laws or regulations could be difficult and expensive, affect the
manner in which we conduct our business and negatively impact our business, prospects, financial condition and results of operations.
That said, to date, we do not believe that any existing or proposed statutory or regulatory change has materially affected our
business.
Further, the leadership changes in the
European Commission (“EC”) make it challenging to predict whether and how the EC will shift its focus from its prior
stances regarding the enforcement of intellectual property rights and the relationship between such rights and European competition
law.
Additionally, there are numerous initiatives
being pursued in multiple countries including India and Brazil, regarding when and how intellectual property rights should be enforced
as well as the relationship between enforcement and other laws, including relevant anti-trust or competition law. It is too early
to state with any degree of certainty the impact that such initiatives may have on our business.
Additionally, the political and legal climate
in China appears to have changed and is causing significant challenges for foreign companies that attempt to enforce their intellectual
property rights against Chinese business whether such rights are enforced in China or elsewhere in the world. At this time, it
is unclear what if any impact this change in climate will have on our business.
If we fail to comply with the continued
listing requirements of the NASDAQ Capital Market, our common stock may be delisted and the price of our common stock and our ability
to access the capital markets could be negatively impacted.
Our common stock is listed for trading
on the NASDAQ Capital Market (“NASDAQ”). We must satisfy NASDAQ’s continued listing requirements, including,
among other things, a minimum closing bid price requirement of $1.00 per share for 30 consecutive business days. If a company trades
for 30 consecutive business days below the $1.00 minimum closing bid price requirement, NASDAQ will send a deficiency notice to
the company, advising that it has been afforded a “compliance period” of 180 calendar days to regain compliance with
the applicable requirements. Thereafter, if such a company does not regain compliance with the bid price requirement, a second
180-day compliance period may be available.
A delisting of our common stock from NASDAQ
could materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of our
common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable
to us, or at all, and may result in the potential loss of confidence by investors, employees and fewer business development opportunities.
On December 18, 2014, we received a notification
letter from NASDAQ informing us that for the last 30 consecutive business days, the bid price of our securities had closed below
$1.00 per share. This notice has no immediate effect on our NASDAQ listing and we had 180 calendar days, or until June 16, 2015,
to regain compliance. We did not regain compliance during such period since the closing bid price of our securities was not at
least $1.00 per share for a minimum of ten consecutive business days. On June 17, 2015, we received a letter from NASDAQ notifying
us that we had been granted an additional 180-day period, or until December 14, 2015, to regain compliance with the minimum $1.00
bid price per share requirement for continued listing on the NASDAQ Capital Market, as set forth in NASDAQ Listing Rule 5810(c)(3)(A)(ii).
We intend to cure the deficiency during this extended period by implementing a reverse stock split of our common stock. If
we are unable to implement a reverse stock split and regain compliance with the minimum bid price requirement, we could be delisted.
Acquisitions of additional patent assets
may be time consuming, complex and costly, which could adversely affect our operating results.
Acquisitions of patents or other intellectual
property assets, which are and will be critical to our business plan, are often time consuming, complex and costly to consummate.
We may utilize many different transaction structures in our acquisitions and the terms of such acquisition agreements tend to be
heavily negotiated. As a result, we expect to incur significant operating expenses and will likely be required to raise capital
during the negotiations.
Even if we are able to acquire particular
patents or other intellectual property assets, there is no guarantee that we will generate sufficient revenue related to those
assets to offset the acquisition costs. While we will seek to conduct confirmatory due diligence on the patents or other intellectual
property assets we are considering for acquisition, we may acquire such assets from a seller who does not have proper title to
those assets. In those cases, we may be required to spend significant resources to defend our interest in such assets and, if we
are not successful, our acquisition may be invalid, in which case we could lose part or all of our investment in those assets.
We may also identify patents or other intellectual
property assets that cost more than we are prepared to spend with our own capital resources. We may incur significant costs to
organize and negotiate a structured acquisition that does not ultimately result in an acquisition of any patents or other intellectual
property assets or, if consummated, proves to be unprofitable for us. These higher costs could adversely affect our operating results,
and if we incur losses, the value of our securities will decline.
In addition, we may acquire patents and
technologies that are in the early stages of adoption in the commercial, industrial and consumer markets. Demand for some of these
technologies will likely be untested and may be subject to fluctuation based upon the rate at which our licensees will adopt our
patents and technologies in their products and services. As a result, there can be no assurance as to whether technologies we acquire
or develop will have value that we can monetize.
In certain acquisitions of patent assets,
we may seek to defer payment or finance a portion of the acquisition price. This approach may put us at a competitive disadvantage
and could result in harm to our business.
We have limited capital and may seek to
negotiate acquisitions of patent or other intellectual property assets where we can defer payments or finance a portion of the
acquisition price. These types of debt financing or deferred payment arrangements may not be as attractive to sellers of patent
assets as receiving the full purchase price for those assets in cash at the closing of the acquisition. As a result, we might not
compete effectively against other companies in the market for acquiring patent assets, some of whom have greater cash resources
than we have.
Our confidential information may be
disclosed by other parties.
We routinely enter into non-disclosure
agreements with other parties, including but not limited to vendors, law firms, parties with whom we are engaged in negotiations,
and employees. However, there exists a risk that those other parties will not honor their contractual obligations to not disclose
our confidential information. This may include parties who breach such obligations in the context of confidential settlement offers
and/or negotiations. In addition, there exists a risk that, upon such breach and subsequent dissemination of our confidential information,
third parties and potential licensees may seek to use such confidential information to their advantage and/or to our disadvantage including
in legal proceedings in which we are involved. Our ability to act against such third parties may be limited, as we may not be in
privity of contract with such third parties.
Competition is intense in the industries
in which our subsidiaries do business and as a result, we may not be able to grow or maintain our market share for our technologies
and patents.
We expect to encounter competition in the
area of patent acquisition and enforcement as the number of companies entering this market is increasing. This includes competitors
seeking to acquire the same or similar patents and technologies that we may seek to acquire. As new technological advances occur,
many of our patented technologies may become obsolete before they are completely monetized. If we are unable to replace obsolete
technologies with more technologically advanced patented technologies, then this obsolescence could have a negative effect on our
ability to generate future revenues.
Our licensing business also competes with
venture capital firms and various industry leaders for technology licensing opportunities. Many of these competitors may have more
financial and human resources than we do. As we become more successful, we may find more companies entering the market for similar
technology opportunities, which may reduce our market share in one or more technology industries that we currently rely upon to
generate future revenue.
Weak global economic conditions may
cause infringing parties to delay entering into licensing agreements, which could prolong our litigation and adversely affect our
financial condition and operating results.
Our business plan depends significantly
on worldwide economic conditions, and the United States and world economies have recently experienced weak economic conditions.
Uncertainty about global economic conditions poses a risk as businesses may postpone spending in response to tighter credit, negative
financial news and declines in income or asset values. This response could have a material negative effect on the willingness of
parties infringing on our assets to enter into licensing or other revenue generating agreements voluntarily. Entering into such
agreements is critical to our business plan, and our failure to do so could cause material harm to our business.
Future sales of our shares of common
stock by our stockholders could cause the market price of our common stock to drop significantly, even if our business is otherwise
performing well.
As of August 3, 2015, we had 99,377,749
shares of common stock issued and outstanding, excluding shares of common stock issuable upon exercise of warrants, options or
restricted stock units. As shares saleable under Rule 144 are sold or as restrictions on resale lapse, the market price of our
common stock could drop significantly, if the holders of restricted shares sell them, or are perceived by the market as intending
to sell them. This decline in our stock price could occur even if our business is otherwise performing well.
Technology company stock prices are
especially volatile, and this volatility may depress the price of our common stock.
The stock market has experienced significant
price and volume fluctuations, and the market prices of technology companies have been highly volatile. We believe that various
factors may cause the market price of our common stock to fluctuate, perhaps substantially, including, among others, the following:
| · | developments or disputes concerning our patents; |
| · | announcements of developments in our patent enforcement actions; |
| · | additions to or departures of our key personnel; |
| · | announcements of technological innovations by us or our competitors; |
| · | announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships,
capital commitments, new technologies, or patents; |
| · | new regulatory pronouncements and changes in regulatory guidelines; |
| · | changes in financial estimates or recommendations by securities analysts; and |
| · | general and industry-specific economic conditions. |
The market prices of the securities of
technology companies have been highly volatile and are likely to remain highly volatile in the future. The stock market as a whole
also has experienced extreme price and volume fluctuations that have affected the market price of many technology companies in
ways that may have been unrelated to these companies' operating performance. Furthermore, we believe that fluctuations in our stock
price can also be impacted by court rulings and/or other developments in our patent licensing and enforcement actions and stock
price may reflect certain future growth and profitability expectations. If we fail to meet these expectations then our stock price
may significantly decline which could have an adverse impact on investor confidence.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit
No. |
|
Description |
10.1 |
|
Securities Purchase Agreement, dated May 4, 2015, between Vringo, Inc. and the Investors named therein (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on May 4, 2015) |
|
|
|
10.2 |
|
Form of Notes (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on May 4, 2015) |
|
|
|
10.3 |
|
Form of Warrants (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed with the SEC on May 4, 2015) |
|
|
|
10.4 |
|
Form of Base Indenture between Vringo, Inc. and Computershare Trust Company, N.A (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed with the SEC on May 4, 2015) |
|
|
|
10.5 |
|
Form of First Supplemental Indenture (incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K filed with the SEC on May 4, 2015) |
|
|
|
10.6 |
|
Form of Security Agreement in favor of Iroquois Master Fund Ltd. as collateral agent (incorporated by reference to Exhibit 10.6 to our Current Report on Form 8-K filed with the SEC on May 4, 2015) |
|
|
|
10.7 |
|
Amendment No. 3 to Employment Agreement, dated as of June 22, 2015, by and between Vringo, Inc. and Andrew Kennedy
Lang (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on June 24, 2015) |
|
|
|
31.1* |
|
Certification of Principal Executive Officer pursuant to Exchange Act, Rules 13a - 14(a) and 15d - 14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2* |
|
Certification of Principal Financial and Accounting Officer pursuant to Exchange
Act Rules 13a - 14(a) and 15d - 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32** |
|
Certifications of Principal Executive Officer and Principal Financial and Accounting Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
101.INS* |
|
XBRL Instance Document |
|
|
|
101.SCH* |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL* |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF* |
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB* |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE* |
|
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 4th day of August 2015.
VRINGO, INC. |
|
By: |
/s/ ANASTASIA NYRKOVSKAYA |
|
Anastasia Nyrkovskaya |
|
Chief Financial Officer |
|
(Principal Financial and Accounting Officer) |
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE
OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Andrew D. Perlman, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q
of Vringo, Inc.;
2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying
officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls
and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control
over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of
the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change
in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying
officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and
material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Dated: August 4, 2015
/s/ ANDREW D. PERLMAN |
Chief Executive Officer |
(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL
OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Anastasia Nyrkovskaya, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q
of Vringo, Inc.;
2. Based on my knowledge, this report
does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying
officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls
and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control
over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of
the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change
in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying
officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and
material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Dated: August 4, 2015
/s/ ANASTASIA NYRKOVSKAYA |
Chief Financial Officer |
(Principal Financial and Accounting Officer) |
Exhibit 32
CERTIFICATIONS OF PRINCIPAL EXECUTIVE
OFFICER AND PRINCIPAL FINANCIAL OFFICER
PERSUANT SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections
(a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Vringo, Inc., a Delaware
corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:
The Quarterly Report for the quarter ended June 30, 2015
(the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: August 4, 2015
/s/ ANDREW D. PERLMAN |
Andrew D. Perlman |
Chief Executive Officer |
(Principal Executive Officer) |
Date: August 4, 2015
/s/ ANASTASIA NYRKOVSKAYA |
Anastasia Nyrkovskaya |
Chief Financial Officer |
(Principal Financial and Accounting Officer) |
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