Note 6. Stockholders’ Equity

Pre-Merger common stock share amounts and balance sheet disclosures were retrospectively restated to reflect Vringo’s equity instruments after the Merger.

(a) Common Stock

The following table summarizes information about the Company's issued and outstanding common stock from Inception through September 30, 2013:

	Shares of common stock
Balance as of June 8, 2011 (Inception)		—
Grant of shares at less than fair value to officers, directors and consultants		8,768,014
Issuance of shares of common stock		8,204,963
Balance as of December 31, 2011		16,972,977
Conversion of Series A Preferred Convertible Preferred stock, classified as mezzanine equity		890,192
Grant of shares to consultants		265,000
Legal Parent’s shares of common stock, recorded upon Merger		15,206,118
Exercise of 250,000 warrants, issued and exercised prior to the Merger		754,400
Post-Merger exercise of warrants		6,832,150
Exercise of stock options and vesting of RSUs		726,346
Conversion of Series A Preferred Convertible Preferred stock, classified as equity		20,136,445
Issuance of shares of common stock in connection with $31,148 received in a private financing round, net of issuance cost of $52		9,600,000
Issuance of shares of common stock in connection with $44,962 received in a private financing round, net of issuance cost of $39		10,344,998
Shares issued for acquisition of patents, see Note 3		160,600
Balance as of December 31, 2012		81,889,226
Exercise of warrants		421,493
Exercise of stock options and vesting of RSUs		1,810,005
Balance as of September 30, 2013		84,120,724

(b) Equity Incentive Plan

In August 2011, I/P adopted its 2011 Equity and Performance Incentive Plan (the “I/P 2011 Plan”). The I/P 2011 Plan provided for the issuance of stock options and restricted stock to the Company’s directors, employees and consultants. Cancelled, expired or forfeited grants may be reissued under the I/P 2011 Plan. The number of shares available under I/P 2011 Plan was subject to adjustments for certain changes. Following the Merger with the Legal Parent, the I/P 2011 Plan was assumed by the Company.

On July 19, 2012, following the Merger with the Legal Parent, the Company’s stockholders approved the 2012 Employee, Director and Consultant Equity Incentive Plan (“2012 Plan”), replacing the existing 2006 Stock Option Plan of the Legal Parent, and the remaining 9,100,000 authorized shares thereunder were cancelled. The Company’s 2012 Plan was approved in order to ensure full compliance with legal and tax requirements under U.S. law. The number of shares subject to the 2012 Plan is the sum of: (i) 15,600,000 shares of common stock, which constitutes 6,500,000 new shares and 9,100,000 previously authorized but unissued shares under the 2006 Stock Option Plan and (ii) any shares of common stock that are represented by awards granted under the Legal Parent’s 2006 Stock Option Plan that are forfeited, expired or are cancelled without delivery of shares of common stock or which result in the forfeiture of shares of common stock back to the Company, or the equivalent of such number of shares after the administrator, in its sole discretion, has interpreted the effect of any stock split, stock dividend, combination, recapitalization or similar transaction in accordance with the 2012 Plan; provided, however, that no more than 3,200,000 shares shall be added to the 2012 Plan. As of September 30, 2013, 4,802,211 shares were available for future grants under the 2012 Plan.

(c) Stock options and RSUs

The following table illustrates the common stock options granted for the nine month period ended September 30, 2013:

Title	Grant date		No. of options		Exercise price		Share price at grant date		Vesting terms		Assumptions used in Black-Scholes option pricing model
Management, Directors and Employees		January-September 2013		3,090,833		$2.85-$3.24		$2.85-$3.24		Over 0.67-3 years		Volatility	61.93%-70.51%
												Risk free interest rate	0.85%-2.06%
												Expected term, in years	5.71-10.00
												Dividend yield	0.00%
Consultants		January-June 2013		132,500		$2.90-$3.30		$2.90-$3.30		Over 0-2.5 years		Volatility	63.87%-65.96%
												Risk free interest rate	2.16%-2.62%
												Remaining expected term, in years	9.25-9.75
												Dividend yield	0.00%

The following table illustrates the RSUs granted for the nine month period ended September 30, 2013:

Title

Grant date

No. of RSUs

Exercise price

Share price at grant
date

Vesting terms

Management, directors and employees

February-May 2013

656,250

—

$2.95-$3.18

Over 0.67-3 years

Consultants

January 2013

33,000

—

$3.26

Over 0.75 years

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

The following table summarizes information about RSU and stock option activity for the nine month period ended September 30, 2013:

	RSUs				Options
	No. of RSUs		Weighted average grant date fair value		No. of options		Weighted average exercise price		Exercise price range		Weighted average grant date fair value
Outstanding at January 1, 2013		3,125,000	$	3.72		9,149,105	$	3.33		$0.01 – $5.50	$	2.57
Granted		689,250	$	3.17		3,223,333	$	3.14		$2.85 – $3.30	$	2.22
Vested/Exercised		(1,092,270)	$	3.62		(717,735)	$	1.36		$0.01 – $3.18	$	2.96
Forfeited		(310,209)	$	3.66		(417,821)	$	3.51		$0.01 – $5.50	$	2.44
Expired		—		—		(954,868)	$	5.04		$0.01 – $5.50	$	1.58
Outstanding at September 30, 2013		2,411,771	$	3.61		10,282,014	$	3.24		$0.01 – $5.50	$	2.53
Exercisable at September 30, 2013		—		—		5,099,098	$	3.04		$0.01 – $5.50

The Company cumulatively did not create tax benefits related to its stock-based compensation due to a full valuation allowance.

(d) Warrants

The following table summarizes information about warrant activity for the nine month period ended September 30, 2013:

	No. of warrants		Weighted average exercise price		Exercise price range
Outstanding at January 1, 2013		18,863,261	$	3.11		$0.94 – $5.06
Exercised		(421,493)	$	1.34		$0.94 – $1.76
Outstanding at September 30, 2013		18,441,768	$	3.15		$0.94 – $5.06

The Company’s outstanding warrants consisted of the following:

(1) Series 1 and Series 2 Warrants

As part of the Merger, on July 19, 2012, the Legal Parent issued to I/P’s stockholders 8,299,115 warrants at an exercise price of $1.76 per share and contractual term of 5 years (“Series 1 Warrant”). These warrants bear down-round protection clauses and as a result, they were initially classified as a long-term derivative liability and recorded at fair value. In addition, I/P’s stockholders received another 7,660,722 warrants at an exercise price of $1.76 per share and contractual term of 5 years (“Series 2 Warrant”). As the Series 2 Warrants do not have down-round protection clauses, they were classified as equity.

As part of the issuance of October 2012 Warrants, the down-round protection clause in 2,173,852 then outstanding Series 1 Warrants was removed. Because such warrants were no longer subject to down-round protection they were re-measured at fair value and classified as equity instruments. The overall impact of the removal of the down-round warrant protection, which was not material, was recorded during the nine month period ended September 30, 2013. As a result, during the nine month period ended September 30, 2013 the Company recorded an additional non-operating expense of $1,617, and re-classified $3,918 from derivative liabilities on account of warrants to stockholders’ equity.

During the nine month period ended September 30, 2013, 152,157 Series 1 Warrants and 45,190 Series 2 Warrants were exercised. From Inception and through September 30, 2013, 4,807,257 Series 1 Warrants and 1,326,060 Series 2 Warrants were exercised.

(2) Conversion Warrants, Special Bridge Warrants and Reload Warrants

On July 19, 2012, the date of the Merger, Legal Parent’s outstanding warrants included: (i) 148,390 derivative warrants, at an exercise price of $0.94 per share, with a remaining contractual term of 2.44 years (the “Special Bridge Warrants”); (ii) 101,445 derivative warrants, at an exercise price of $0.94 per share, with a remaining contractual term of 2.44 years (the “Conversion Warrants”); (iii) 887,330 derivative warrants, at an exercise price of $1.76 per share, with a remaining contractual term of 4.55 years (the “Preferential Reload Warrants”); and (iv) 814,408 warrants, classified as equity, at an exercise price of $1.76 per share, with a remaining contractual term of 4.55 years (the “non-Preferential Reload Warrants”). During both the nine month period ended September 30, 2013, and from Inception through September 30, 2013, 127,192 Special Bridge Warrants and 86,954 Conversion Warrants were exercised. During the nine month period ended September 30, 2013, 10,000 non-Preferential Reload Warrants were exercised. From Inception and through September 30, 2013, 179,520 non-Preferential Reload Warrants and 726,721 Preferential Reload Warrants were exercised.

(3) Initial Public Offering Warrants

Upon completion of its initial public offering, in June 2010, the Legal Parent issued 4,784,000 warrants at an exercise price of $5.06 per share. These warrants are publicly traded and are exercisable until June 21, 2015, at an exercise price of $5.06 per share. As of September 30, 2013, all of these warrants were outstanding and classified as equity instruments.

(4) October 2012 Warrants

On October 12, 2012, the Company entered into an agreement with certain of its warrant holders, pursuant to which, on October 23 and 24, 2012, the holders exercised in cash 3,721,062 of their outstanding warrants, with an exercise price of $1.76 per share. In exchange, the Company granted such warrant holders unregistered warrants of the Company to purchase an aggregate of 3,000,000 shares of the Company’s common stock, par value $0.01 per share, at an exercise price of $5.06 per share (the “October 2012 Warrants”). The contractual life of these warrants is 2.66 years and because such warrants do not bear any down-round protection clauses they were classified as equity instruments. October 2012 Warrants were valued using the following assumptions: volatility: 68.1%, share price: $3.50-$3.77, risk free interest rate: 0.724% and dividend yield: 0%. The fair value of warrants issued in exchange for the exercise of the Company’s derivative warrants was accounted for as an inducement, therefore an amount of $2,883, was recorded as a non-operating expense. As of September 30, 2013, all October 2012 warrants were outstanding.