44 W. 28th Street New York, New York New York, New York Current assets Cash and cash equivalents Prepaid expenses and other current assets Accounts receivable Short-term deposit (restricted) Total current assets Long-term deposit Property and equipment, at cost, net of $402 and $393 accumulated depreciation and amortization as of March 31, 2011 and December 31, 2010, respectively Deferred tax assets—long-term Total assets Current liabilities Deferred short-term tax liabilities, net Accounts payable and accrued expenses* Accrued employee compensation Accrued short-term severance pay Current maturities of venture loan Total current liabilities Long-term liabilities Accrued severance pay Venture loan Derivative liabilities on account of warrants Total long-term liabilities Commitments and contingencies Deficit in stockholders’ equity Preferred stock, $0.01 par value per share; 5,000,000 authorized; none issued and outstanding as of March 31, 2011 and December 31, 2010 Common stock, $0.01 par value per share 28,000,000 authorized; 5,673,253 and 5,405,080 issued and outstanding as of March 31, 2011 and December 31, 2010 respectively Additional paid-in capital Deficit accumulated during the development stage Total deficit in stockholders’ equity Total liabilities and deficit in stockholders’ equity Revenue Costs and Expenses* Cost of revenue Research and development Sales and marketing General and administrative Total operating expenses Operating loss Non-operating income Interest and amortization of debt discount expense Non-operating expenses Loss on extinguishment of debt Loss before taxes on income Income tax expense Net loss for the period Basic and diluted net loss per common share Weighted average number of shares used in computing basic and dilutive net loss per common share Balance as of January 9, 2006 (inception) Issuance of common stock Issuance of series A convertible preferred stock, net of issuance costs of $33 Stock dividend Grants of stock options, net of forfeitures—employees Grants of stock options, net of forfeitures—non employees Net loss for the period Balance as of December 31, 2006 Issuance of common stock as part of conversion of convertible loan Discounts to temporary equity Amortization of discounts to temporary equity Grants of stock options, net of forfeitures—employees Grants of stock options, net of forfeitures—non employees Net loss for the year Balance as of December 31, 2007 Issuance of warrants Amortization of discounts to temporary equity Grants of stock options, net of forfeitures—employees Grants of stock options, net of forfeitures—non employees Net loss for the year Balance as of December 31, 2008 Issuance of warrants Loan modification Amortization of discounts to temporary equity Grants of stock options, net of forfeitures—employees Grants of stock options, net of forfeiture—non employees Net loss for the year Balance as of December 31, 2009 Issuance of common stock, net of issuance costs of $1,768 Exchange of series A convertible preferred stock for common stock Conversion of Bridge notes Amortization of discounts to temporary equity Grants of stock options, net of forfeitures—employees Grants of stock options, net of forfeitures—non employees Exercise of warrants to charity Grants of warrants to lead investors Grants of warrants to charity Exercise of stock options Exercise of warrants Stock dividend Reverse stock split Exchange of series B convertible preferred stock for common stock Cashless exercise of warrants to charity Net loss for the year Balance as of December 31, 2010 Grants of stock options, net of forfeitures—employees Grants of stock options, net of forfeitures—non employees Exercise of warrants Issuance of shares to a consultant Grants of warrants to charity Net loss for the period Balance as of March 31, 2011 Cash flows from operating activities Net loss Adjustments to reconcile net cash flows used in operating activities: Items not affecting cash flows Depreciation and amortization Change in deferred tax assets and liabilities Increase (decrease) in accrued severance pay Share-based payment expenses Accrued interest expense Increase (decrease) in fair value of warrants Loss on extinguishment of debt Exchange rate (gains) losses Changes in current assets and liabilities Decrease (increase) in receivables, prepaid expenses and other current assets Increase (decrease) in payables and accruals Net cash used in operating activities Cash flows from investing activities Acquisition of property and equipment Decrease in lease deposits Proceeds from sale of fixed assets Investment in short-term deposits (restricted) Net cash provided by (used in) investing activities Cash flows from financing activities Receipt of a venture loan Repayment on account of venture loan Issuance of common stock and warrants, net Issuance of warrants Receipt of convertible loans Issuance of convertible preferred stock Change in deferred issuance cost Exercise of warrants Exercise of common stock options Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental disclosure of cash flows information Interest paid Non-cash investing and financing transactions Conversion of convertible loan into convertible preferred stock Extinguishment of debt Discount to the series B convertible preferred stock Allocation of fair value of loan warrants Allocation of fair value of conversion warrants Exchange of series B convertible preferred stock for common stock Exchange of series A convertible preferred stock for common stock Conversion of bridge notes into common stock Amortization of discounts to temporary equity respectively (three and six months ended June 30, 2010— U.S. $1 = NIS 3.783 and US $1 = NIS 3.759, respectively). (cont'd) directors. not yet adopted new requirements. Numerator: Net loss attributable to common stock shares (basic and diluted) Denominator: Weighted average number of common stock shares issued and outstanding (basic and diluted) Weighted average number of exercisable penny stock options and warrants (basic and diluted) Basic and diluted, outstanding, common stock shares Basic and diluted net losses per common stock share Description Assets Cash equivalents Total assets Liabilities Derivative liabilities on account of warrants Total liabilities Description Assets Cash equivalents Total assets Liabilities Derivative liability on account of warrants Total liabilities (cont'd) Original allocated amount Allocated amount – June 21, 2010 Fair value adjustment included in non-operating income Balance at December 31, 2010 Fair value adjustment included in non-operating expenses Balance at March 31, 2011 (cont'd) Venture loan (see also Note 4): exercised, respectively. In April 2011, the Company issued 19,862 shares of common stock upon exercise of 20 thousand charitable warrants with an exercise price of $0.01 per share. (cont'd) years (according to the applicable schedule of each optionee). future grants. January 31, 2011 January 31, 2011 Year ending December 31, 2011 (nine months ending December 31, 2011) 2012 2013 To develop these new platforms, we have leveraged our existing technology, intellectual property and our extensive experience with mobile video. We believe that these new platforms will represent a major component of our business on a going forward basis. Our Facetones™ product is or will be offered in a variety of business models including monthly subscription services together with operators, as a premium app available for purchase in app stores, and in a free direct to consumer version where we are monetizing by displaying ads at the end of the phone call. such time. We recognize revenue from monthly subscription from carriers, development projects and content sales when all the conditions for revenue recognition are met: (i) persuasive evidence of an arrangement exists, (ii) collection of the fee is probable, (iii) the sales price is fixed and determinable and (iv) delivery has occurred or services have been rendered. Our subscription service arrangements are evidenced by a written document signed by both parties. Our revenues from monthly subscription fees and content purchases are recognized when we have received confirmation from the carrier that the amount is due to us, which provides proof that the services have been rendered, and making collection probable. In addition, cost of revenue includes certain set-up and other direct costs incurred in connection with adjustments made to our products for each individual client. law. Three month period ended March 31, Revenue which includes $375 thousand from revenue share subscription services, $100 thousand from one-time setup fees, $50 thousand from Facetones™, 45 thousand from Fan Loyalty application formats, $30 thousand from Video ReMix platform and $5 thousand from applications sold. was not renewed. Three month period ended March 31, Cost of revenue product. The increase in cost of revenue recorded during three and six month period ended June 30, 2011, compared with three and six month period ended June 30, 2010, is mainly related to costs incurred in connection with the Fan Loyalty platform integration with Rotana and Video ReMix Platform modifications for Corso. This increase was offset by a decrease in content purchases and related expenses. Three month period ended March 31, Research and development cost saving plan implemented by us. Three month period ended March 31, Marketing The increase second quarter of 2010) and due to increase in labor cost mainly due to exchange rate differences (an increase of $26 thousand compared to the first half of 2010). Three month period ended March 31, General and administrative Three month period ended March 31, Non-operating expense (income), net Three Months Ended June 30, 2010 The increase in these expenses was partially offset by the recording of non-operating income of approximately $0.2 million from the adjustment of the fair value of the Special Bridge Warrants as of June 30, 2010 and a further $0.2 million adjustment of the fair value of the Conversion Warrants. instruments. Three month period ended March 31, Income tax expense (benefit) Three month period ended March 31, Net cash used in operating activities Net cash provided by (used in) investing activities Net cash provided by financing activities user-generated content. independent operations. Real estate leases (1) Auto leases (2) Venture loan (3) Total $1.22. $1.22. expected volatility, risk-free interest rate of 1.68%, estimated life of 4 years and no dividend yield. The fair value of the common stock was estimated at $2.79. The total non-operating expense recorded was approximately $1.3 million. All of these warrants were exercised during the fourth quarter of 2010 and the first quarter of 2011. statements upon adoption. controls. Description Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 March 31,June 30, 2011¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Delaware 20-4988129 10001 (Address of Principal Executive Offices) (Zip Code) 18 East 16th Street, 7th Floor, 10003 ( Address of Principal Executive Offices)(Zip Code)Former name or former address, if changed since last report)(646) 525-4319(Registrant’s Telephone Number, Including Area Code)¨odefinitiondefinitions of “large"large accelerated filer,” “accelerated filer”" "accelerated filer" and “smaller"smaller reporting company”company" in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer Smaller reporting company x ¨xMay 16,August 15, 2011, 5,673,2536,136,613 shares of the registrant’sregistrant's common stock were outstanding.Page PART I. FINANCIAL INFORMATION 3 PagePART I. FINANCIAL INFORMATION3Item 1. Financial Statements 3 Item 2. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 3034Item 4T. Controls and Procedures 34 30PART II. OTHER INFORMATION 35 31Item 1. Legal Proceedings 3135Item 1A. Risk Factors 3135Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 3135Item 3. Defaults Upon Senior Securities 3135Item 5. Other Information 3135Item 6. Exhibits Exhibits3135Item 1.Financial Statements. March 31,
2011 December 31,
2010 U.S.$ U.S.$ 3,567 5,407 106 168 136 80 — 20 3,809 5,675 9 9 175 178 27 27 4,020 5,889 Note U.S.$ U.S.$ Current assets Cash and cash equivalents 407 5,407 Restricted cash equivalents 4 1,051 — Short-term deposit (restricted) — 20 Accounts receivable 243 80 Prepaid expenses and other current assets 151 168 Total current assets 1,852 5,675 Long-term deposit 9 9 169 178 Deferred tax assets—long-term 28 27 Total assets 2,058 5,889 March 31,
2011 December 31,
2010 Note U.S.$ U.S.$ 50 50 390 421 374 358 — 178 1,317 1,262 2,131 2,269 181 178 1,560 1,911 3 1,062 1,770 2,803 3,859 5 4 — — 57 54 30,205 29,774 (31,176 ) (30,067 ) (914 ) (239 ) 4,020 5,889 Note U.S.$ U.S.$ Current liabilities Deferred short-term tax liabilities, net 68 50 Accounts payable and accrued expenses* 437 421 Accrued employee compensation 345 358 Accrued short-term severance pay — 178 Current maturities of venture loan 4 1,051 1,262 Total current liabilities 1,901 2,269 Long-term liabilities Accrued severance pay 185 178 Venture loan 4 — 1,911 Derivative liabilities on account of warrants 3 1,725 1,770 Total long-term liabilities 1,910 3,859 Commitments and contingencies 6 Deficit in stockholders' equity 5 Preferred stock, $0.01 par value per share; 5,000,000 authorized; none issued and outstanding as of June 30, 2011 and December 31, 2010 — — Common stock, $0.01 par value per share 28,000,000 authorized; 5,963,614 and 5,405,080 issued and outstanding as of June 30, 2011 and December 31, 2010 respectively 60 54 Additional paid-in capital 30,867 29,774 Deficit accumulated during the development stage ) (30,067 ) Total deficit in stockholders' equity ) (239 ) Total liabilities and deficit in stockholders' equity 5,889 * Amounts recorded as of March 31,June 30, 2011 and December 31, 2010 include $0$21 and $20 to a related party, respectively. Three months ended March 31, Cumulative
from inception
to March 31, 2011 2010 2011 U.S.$ U.S.$ U.S.$ 147 30 378 25 34 236 519 587 11,260 621 481 9,240 665 194 7,169 1,830 1,296 27,905 (1,683 ) (1,266 ) (27,527 ) 712 — 2,130 (110 ) (654 ) (5,242 ) (10 ) (57 ) (169 ) — — (321 ) (1,091 ) (1,977 ) (31,129 ) (18 ) (20 ) (47 ) (1,109 ) (1,997 ) (31,176 ) (0.19 ) (5.44 ) (27.07 ) 5,724,253 366,782 1,151,706 Three months ended June 30, Six months ended June 30, 2011 2010 2011 2010 2011 U.S.$ U.S.$ U.S.$ U.S.$ U.S.$ Revenue 227 44 374 74 605 Costs and Expenses* Cost of revenue 45 34 70 67 281 Research and development 460 603 979 1,180 12,305 Marketing 685 632 1,306 1,107 10,605 General and administrative 690 504 1,355 714 6,594 Total operating expenses 1,880 1,773 3,710 3,068 29,785 Operating loss (1,653 ) (1,729 ) (3,336 ) (2,994 ) (29,180 ) Non-operating income — 10 4 — 470 Non-operating expenses (7 ) — (18 ) (16 ) (177 ) Interest and amortization of debt discount expense (118 ) (3,355 ) (227 ) (4,009 ) (5,359 ) Decrease (increase) in the fair value of warrants (663 ) 480 45 448 997 Gain on restructuring of venture loan 963 — 963 — 963 Loss on extinguishment of debt — — — — (321 ) Loss before taxes on income (1,478 ) (4,594 ) (2,569 ) (6,571 ) (32,607 ) Income tax expense (26 ) (18 ) (44 ) (38 ) (73 ) Net loss (1,504 ) (4,612 ) (2,613 ) (6,609 ) (32,680 ) Basic and diluted net loss per common share (0.26 ) (5.20 ) (0.45 ) (10.54 ) (23.90 ) Weighted average number of shares used in computing basic and dilutive net loss per common share 5,845,738 887,567 5,784,337 627,174 1,367,246 * The amount recorded for the three month period ended March 31,and six months ending June 30, 2011 and 2010 and the cumulative period from inception include $131, $77$31, $162, $31, $89 and $1,182,$1,213, respectively, to related parties.STOCKHOLDERS’STOCKHOLDERS' EQUITY (DEFICIT) Common stock Series A
convertible
preferred
stock Additional
paid-in capital Deficit
accumulated
during the
development
stage Total U.S.$ U.S.$ U.S.$ U.S.$ U.S.$ — — — — — *— — — — *— — *— 2,321 — 2,321 20 24 (44 ) — — — — 7 — 7 — — 4 — 4 — — — (1,481 ) (1,481 ) 20 24 2,288 (1,481 ) 851 2 — 138 — 140 — — 43 — 43 — — (4 ) — (4 ) — — 98 — 98 — — 15 — 15 — — — (5,163 ) (5,163 ) 22 24 2,578 (6,644 ) (4,020 ) — — 360 — 360 — — (7 ) — (7 ) — — 18 — 18 — — 11 — 11 — — — (7,332 ) (7,332 ) Common stock Total U.S.$ U.S.$ U.S.$ U.S.$ U.S.$ Balance as of January 9, 2006 (inception) — — — — — Issuance of common stock *— — — — *— Issuance of series A convertible preferred stock, net of issuance costs of $33 — *— 2,321 — 2,321 Stock dividend 20 24 (44 ) — — Grants of stock options, net of forfeitures—employees — — 7 — 7 Grants of stock options, net of forfeitures—non employees — — 4 — 4 Net loss for the period — — — (1,481 ) (1,481 ) Balance as of December 31, 2006 20 24 2,288 (1,481 ) 851 Issuance of common stock as part of conversion of convertible loan 2 — 138 — 140 Discounts to temporary equity — — 43 — 43 Amortization of discounts to temporary equity — — (4 ) — (4 ) Grants of stock options, net of forfeitures—employees — — 98 — 98 Grants of stock options, net of forfeitures—non employees — — 15 — 15 Net loss for the year — — — (5,163 ) (5,163 ) Balance as of December 31, 2007 22 24 2,578 (6,644 ) (4,020 ) Issuance of warrants — — 360 — 360 Amortization of discounts to temporary equity — — (7 ) — (7 ) Grants of stock options, net of forfeitures—employees — — 18 — 18 Grants of stock options, net of forfeitures—non employees — — �� 11 — 11 Net loss for the year — — — (7,332 ) (7,332 ) STOCKHOLDERS’STOCKHOLDERS' EQUITY (DEFICIT) Common stock Series A
convertible
preferred
stock Additional
paid-in capital Deficit
accumulated
during the
development
stage Total U.S.$ U.S.$ U.S.$ U.S.$ U.S.$ 22 24 2,960 (13,976 ) (10,970 ) — — 60 — 60 — — 500 — 500 — — (7 ) — (7 ) — — 178 — 178 — — 10 — 10 — — — (6,149 ) (6,149 ) 22 24 3,701 (20,125 ) (16,378 ) 24 — 9,239 — 9,263 24 (24 ) — — — 9 — 2,536 — 2,545 — — (3 ) — (3 ) — — 883 — 883 — — 29 — 29 *— — 11 — 11 — — 1,342 — 1,342 — — 37 — 37 1 — — — 1 2 — — — 2 19 — (19 ) — — (93 ) — 93 — — 46 — 11,925 — 11,971 *— — *— *— — — — (9,942 ) (9,942 ) 54 — 29,774 (30,067 ) (239 ) — — 317 — 317 — — 25 — 25 3 — — — 3 *— — 46 — 46 — — 43 — 43 — — — (1,109 ) (1,109 ) 57 — 30,205 (31,176 ) (914 ) *Consideration for less than $1. Common stock Total U.S.$ U.S.$ U.S.$ U.S.$ U.S.$ Balance as of December 31, 2008 22 24 2,960 (13,976 ) (10,970 ) Issuance of warrants — — 60 — 60 Loan modification — — 500 — 500 Amortization of discounts to temporary equity — — (7 ) — (7 ) Grants of stock options, net of forfeitures—employees — — 178 — 178 Grants of stock options, net of forfeiture—non employees — — 10 — 10 Net loss for the year — — — (6,149 ) (6,149 ) Balance as of December 31, 2009 22 24 3,701 (20,125 ) (16,378 ) Issuance of common stock, net of issuance costs of $1,768 24 — 9,239 — 9,263 Exchange of series A convertible preferred stock for common stock 24 (24 ) — — — Conversion of Bridge notes 9 — 2,536 — 2,545 Amortization of discounts to temporary equity — — (3 ) — (3 ) Grants of stock options, net of forfeitures—employees — — 883 — 883 Grants of stock options, net of forfeitures—non employees — — 29 — 29 Exercise of warrants to charity *— — 11 — 11 Grants of warrants to lead investors — — 1,342 — 1,342 Grants of warrants to charity — — 37 — 37 Exercise of stock options 1 — — — 1 Exercise of warrants 2 — — — 2 Stock dividend 19 — (19 ) — — Reverse stock split (93 ) — 93 — — Exchange of series B convertible preferred stock for common stock 46 — 11,925 — 11,971 Cashless exercise of warrants to charity *— — *— *— Net loss for the year — — — (9,942 ) (9,942 ) Balance as of December 31, 2010 54 — 29,774 (30,067 ) (239 ) Grants of stock options, net of forfeitures—employees — — 764 — 764 Grants of stock options, net of forfeitures—non employees — — 30 — 30 Exercise of warrants 3 — — — 3 Issuance of shares to a consultant *— — 46 — 46 Issuance of shares in connection with restructuring of venture loan 3 — 210 — 213 Grants of warrants to charity — — 43 — 43 Net loss for the period — — — ) ) Balance as of June 30, 2011 60 — 30,867 ) ) Three months ended March 31, Cumulative
from inception
to March 31, 2011 2010 2011 U.S.$ U.S.$ U.S.$ (1,109 ) (1,997 ) (31,176 ) 9 24 402 (1 ) (4 ) 27 (176 ) — 151 431 66 3,124 52 556 2,809 (708 ) 32 (1,660 ) — — 321 (15 ) 19 37 7 (44 ) (242 ) (7 ) (375 ) 767 (1,517 ) (1,723 ) (25,440 ) (7 ) (23 ) (578 ) — — (9 ) 1 — 1 20 2,582 — 14 2,559 (586 ) Cumulative from inception Six months ended June 30, to June 30, 2011 2010 2011 U.S.$ U.S.$ U.S.$ Cash flows from operating activities Net loss (2,613 ) (6,609 ) (32,680 ) Adjustments to reconcile net cash flows used in operating activities: Items not affecting cash flows Depreciation and amortization 38 45 431 Change in deferred tax assets and liabilities 16 (8 ) 44 Increase (decrease) in accrued severance pay (179 ) — 148 Share-based payment expenses 883 1,817 3,576 Accrued interest expense 98 2,398 2,855 Decrease (increase) in fair value of warrants (45 ) (448 ) (997 ) Gain on restructuring of venture loan (963 ) — (963 ) Loss on extinguishment of debt — — 321 Exchange rate (gains) losses (24 ) (18 ) 28 Changes in current assets and liabilities Decrease (increase) in receivables, prepaid expenses and other current assets (145 ) 45 (394 ) Increase (decrease) in payables and accruals 18 (9 ) 792 Net cash used in operating activities (2,916 ) (2,787 ) (26,839 ) Cash flows from investing activities Acquisition of property and equipment (28 ) (34 ) (599 ) Decrease in lease deposits — — (9 ) (1,031 ) 2,582 (1,051 ) Net cash provided by (used in) investing activities (1,059 ) 2,548 (1,659 ) Three months ended March 31, Cumulative
from inception
to March 31, 2011 2010 2011 U.S.$ U.S.$ U.S.$ — — 5,000 (348 ) (88 ) (1,904 ) — — 9,263 — — 1,070 — — 3,976 — — 12,195 — (57 ) — 3 — 16 — — 1 (345 ) (145 ) 29,617 �� 8 (13 ) (24 ) (1,840 ) 678 3,567 5,407 744 — 3,567 1,422 3,567 79 102 1,065 — — 1,964 — — 321 — — 43 — — 334 — 2 1,564 — — 11,971 — — 24 — — 2,545 — — 21 Cumulative from inception Six months ended June 30, to June 30, 2011 2010 2011 U.S.$ U.S.$ U.S.$ Cash flows from financing activities Receipt of a venture loan — — 5,000 Repayment on account of venture loan (1,034 ) (88 ) (2,590 ) Issuance of common stock and warrants, net — 9,263 9,263 Issuance of warrants — — 1,070 Receipt of convertible loans — — 3,976 Issuance of convertible preferred stock — — 12,195 11 Net cash provided by (used in) financing activities (1,031 ) 9,186 28,931 Effect of exchange rate changes on cash and cash equivalents 6 1 (26 ) Increase (decrease) in cash and cash equivalents (5,000 ) 8,948 407 Cash and cash equivalents at beginning of period 5,407 744 — Cash and cash equivalents at end of period 407 9,692 407 Supplemental disclosure of cash flows information Interest paid 151 199 1,137 Non-cash investing and financing transactions Conversion of convertible loan into convertible preferred stock — — 1,964 Extinguishment of debt — 321 Discount to the series B convertible preferred stock — — 43 Allocation of fair value of loan warrants — — 334 Allocation of fair value of conversion warrants — 1,564 1,564 Exchange of series B convertible preferred stock for common stock — 11,971 11,971 Exchange of series A convertible preferred stock for common stock — 24 24 Conversion of bridge notes into common stock — 2,545 2,545 Amortization of discounts to temporary equity — 3 21 213 — 213 “Parent”"Parent") was incorporated in Delaware on January 9, 2006 and commenced operations during the first quarter of 2006. The Parent formed a wholly-owned subsidiary, Vringo (Israel) Ltd. (the “Subsidiary”"Subsidiary") in March 2006, primarily for the purpose of providing research and development services, as detailed in the intercompany service agreement. The Parent and the Subsidiary are collectively referred to herein as the “Company”"Company".allowingthat allows users to create, download and share video ringtones. The Company’sCompany's proprietary ringtone platform includes social networking capability and integration with web systems.“IPO”"IPO") of 2,392,000 units, each containing one share of common stock and two warrants, at an issue price of $4.60 per unit. Each warrant in the IPO unit is exercisable for five years after the IPO at an exercise price of $5.06. Gross proceeds of the IPO totaled approximately $11 million, of which the Company received approximately $9.3 million in net proceeds after deducting underwriting discounts and other offering costs. Immediately prior to the closing of the offering, the Company’sCompany's outstanding shares of preferred stock were exchanged for shares of common stock and the Company effected a 1 for 6 reverse stock split of its common stock. The Company issued a stock dividend to holders of the preferred stock prior to the split and exchange. All share and per-share information in these consolidated financial statements have been adjusted to give effect to the reverse stock split. On July 27, 2010, the units were separated into their components and the shares and warrants began to trade separately. Upon separation of the units into shares and warrants, the units ceased trading.The Companyinsignificant doubt as to the development stage. Therefore, there is no certainty regarding the Company’s ability to complete the product’s development and ensure the success of its marketing. The continuation of the stages of development and the realization of assets relatedCompany to the planned activities depend on future events, including future financings and achieving operational profitability.continue operating as a "going concern". The Company has incurred significant losses since its inception and expects that it will continue to operate at a net loss in the foreseeable future. For the three and six month periods ended March 31,June 30, 2011 2010 and for the cumulative period from inception until March 31,June 30, 2011, the Company incurred net losses of $1.1$1.5 million, $2.0$2.6 million and $31.2$32.7 million, respectively. The Company’sCompany's deficit in stockholders’stockholders' equity as of March 31,June 30, 2011 was $0.9$1.8 million.still significant doubt as tono assurance that the ability ofsubsequent financing will be consummated. Should it not be consummated by January 1, 2012, the convertible notes will be repayable in full, unless earlier converted (see Note 8 c). Based on the above, the Company has sufficient cash to continuemeet planned operating as a “going concern”. In 2011, in order to conserve funds, the Company underwent resource reductions. Other activities were initiated, including possible business combinations and/or the raising of additional funding. The Company believes that its current cash levels will be sufficient to support its activity onlyneeds into the thirdfirst quarter of 2011. 2012.Company’sCompany's future success depends upon several factors including the technological quality, price and performance of its product relative to those of its competitors.On March 8, 2011, the Company announced that it had signed a non-binding Letter of Intent to acquire substantially all the assets of m-Wise, Inc. The consummation of the transaction is subject to the signing of a definitive agreement, completion of due diligence and receipt of regulatory and stockholder approval.March 31,June 30, 2011, approximately $157$180 thousand of the Company’sCompany's net liabilities were located outside of the United States.(“("U.S. GAAP”GAAP"). All significant intercompany balances and transactions have been eliminated in consolidation.Nevertheless, theseThese financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2010. The results of operations for the three and six month period ended March 31,June 30, 2011 are not necessarily indicative of the results that may be expected for the entire fiscal year or for any other interim period.Company’sCompany's principal activities to date have been the research and development of its products and the Company has not generated significant revenues from its planned, principal operations. Accordingly, the Company’sCompany's financial statements are presented as those of a development stage enterprise.(“dollar”("dollar"). Therefore, the dollar has been determined to be the Company’sCompany's functional currency.“NIS”"NIS") are recorded at the exchange rate as of the transaction date. All exchange gains and losses from re-measurement of monetary balance sheet items denominated in non-dollar currencies are reflected as finance expense in the statement of operations, as they arise.March 31,June 30, 2011, the exchange rate was U.S. $1 = NIS 3.4813.415 (December 31, 2010—U.S. $1 = NIS 3.549). The average exchange rate for the three and six months period ended March 31,June 30, 2011 and the year ended December 31, 2010, was U.S. $1 = 3.441 NIS 3.601 and U.S. $1 = 3.521 NIS, 3.733, respectively.(cont’d)directors that are not plain vanilla.recently adoptednew accounting standardsFinancial Accounting Standards Board recently issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” which amends Topic 820 and demands more robust disclosures of (1)new guidance limits the different classes ofhighest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value (2) the valuation of techniques and inputs used, (3) the activityto changes in Level 3 fair value measurements, and (4) the transfers between Levelsunobservable inputs. The new guidance will be effective beginning January 1, 2 and 3. The disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted.2012. The Company does not expect the adoption of ASU 2010-06 to haveanticipate a material impact on its financial statements upon adoption of the Company’s consolidated financial position, results of operations or cash flows. Three months ended March 31, Cumulative
from inception
to March 31, 2011 2010 2011 (1,109 ) (1,997 ) (31,176 ) 5,554,385 366,782 1,105,464 169,868 — 46,242 5,724,253 366,782 1,151,706 (0.19 ) (5.44 ) (27.07 ) Cumulative from inception Three months ended June 30, Six months ended June 30, to June 30, 2011 2010 2011 2010 2011 Numerator: (in thousands, except share and per share data) Net loss attributable to common stock shares (basic and diluted) (1,504 ) (4,612 ) (2,613 ) (6,609 ) (32,680 ) Denominator: Weighted average number of common stock shares outstanding during the period (basic and diluted) 5,756,345 839,332 5,654,929 603,057 1,319,021 Weighted average number of penny stock options and warrants (basic and diluted) 89,393 48,235 129,408 24,117 48,225 Basic and diluted common stock share outstanding 5,845,738 887,567 5,784,337 627,174 1,367,246 Basic and diluted net losses per common stock share (0.26 ) (5.20 ) (0.45 ) (10.54 ) (23.90 ) “"Fair Value Measurements and Disclosures”" (formerly SFAS 157, “Fair Value Measurements”). ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received to sell 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, ASC 820-10 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:Company’sCompany's assets and liabilities measured at fair value on a recurring basis as of March 31,June 30, 2011 and December 31, 2010, aggregated by the level in the fair-value hierarchy within which those measurements fall: Fair value measurement at reporting date using March 31,
2011 Quoted prices in
active markets
for identical
assets (Level 1) Significant other
observable
inputs (Level 2) Significant
unobservable
inputs (Level 3) U.S.$ thousands 2,713 2,713 — — 2,713 2,713 — — 1,062 — — 1,062 1,062 — — 1,062 Fair value measurement at reporting date using U.S.$ thousands Assets Cash equivalents 51 51 — — Cash equivalents (restricted) 1,051 1,051 Total assets — — Liabilities Derivative liabilities on account of warrants 1,725 — — 1,725 Total liabilities 1,725 — — 1,725 (cont’d) Fair value measurement at reporting date using December 31,
2010 Quoted prices in
active markets
for identical
assets (Level 1) Significant other
observable
inputs (Level 2) Significant
unobservable
inputs (Level 3) U.S.$ thousands 4,542 4,542 — — 4,542 4,542 — — 1,770 — — 1,770 1,770 — — 1,770 Fair value measurement at reporting date using U.S.$ thousands Assets Cash equivalents 4,542 4,542 — — Total assets 4,542 4,542 — — Liabilities Derivative liability on account of warrants 1,770 — — 1,770 Total liabilities 1,770 — — 1,770 Company’sCompany's financial instruments at March 31,June 30, 2011 and December 31, 2010, consisted of cash, accounts receivable, long-term deposits, accrued expenses accrued compensation, related liabilities, and the venture loan. The carrying amounts of all the aforementioned financial instruments, approximate fair value, except the venture loan (see below).Company’sCompany's liabilities measured at fair value using significant unobservable inputs (Level 3) during the threesix months ended March 31,June 30, 2011: Level 3 Special Bridge
Warrants Conversion
Warrants Total U.S.$ thousands 1,070 — 1,070 88 1,564 1,652 (382 ) (570 ) (952 ) 776 994 1,770 (379 ) (329 ) (708 ) 397 665 1,062 Level 3 Total U.S.$ thousands Original allocated amount 1,070 — 1,070 Additional allocated amount (upon IPO) 88 1,564 1,652 (382 ) (570 ) (952 ) Balance at December 31, 2010 776 994 1,770 ) (45 ) Balance at June 30, 2011 1,725 (cont’d) March 31, 2011 December 31, 2010 Carrying
Amount Fair Value Carrying
Amount Fair Value U.S.$ thousands U.S.$ thousands 2,877 2,433 3,173 3,317 June 30, 2011 December 31, 2010 Fair Value Fair Value U.S.$ thousands U.S.$ thousands Venture loan 1,051 1,051 3,173 3,317 Stockholders’Venture Loan480,500480 thousand options to purchase shares of common stock to its employees, management and consultants (see below). During the three and six month period ended March 31,June 30, 2011, 114,000120 thousand and 234 thousand stock options were forfeited and no20 thousand and 20 thousand stock options were exercised.March 31,June 30, 2011, the Company issued 27,0000 and 27 thousand shares of common stock to one of its consultants.consultants, respectively. As a result, a compensation expense in the total amount of approximately $45 thousand was recorded.40,000 warrants to purchase 40 thousand shares of common stock as a charitable donation. 20,00020 thousand of these warrants were granted at an exercise price of $5.50 per share and the remaining 20,00020 thousand at an exercise price of $0.01 per share. The total fair value of approximately $43 thousand was calculated using the Black-Scholes-Merton model, using the following assumptions: stock price of $1.68, expected life of 6 years, risk-free interest rate of 2.38%, expected volatility of 56.41% and no dividend yield. The total fair value of the grant was recorded as an additional share-based payment expense in in the threesix month period ended March 31,June 30, 2011.March 31,June 30, 2011, there was approximately $2.7$2.5 million of total unrecognized share-based payment costcosts related to non-vested share-based compensation arrangements granted under the Company’s incentive plans. That cost is expected to be recognized over an estimated 3.53.25 years period.4—Stockholders’5—Stockholders' Equity—(cont’d)Company’sCompany's Board of Directors (the “Board”"Board") approved the granting of 216 thousand options to management, employees and consultants. The Board approved the granting of 216,000 optionsconsultants at an exercise price of $0.01 per share. These options will vest yearly over three and four year periods (according to the applicable schedule of theeach optionee). The Board also approved the granting of 264,500264 thousand options at an exercise price of $5.50 to its management, employees and consultants. These options will vest over three and four years.March 31,June 30, 2011, there were approximately 10.911.1 million shares of common stock available for grant under the Stock Option Plan. No. of options to
Employees No. of options to
Non Employees Exercise
price Fair value of
common stock U.S.$ U.S.$ 194,000 22,000 0.01 1.68 252,500 12,000 5.50 1.68 U.S.$ U.S.$ January 31, 2011 194,000 22,000 0.01 1.67 January 31, 2011 252,500 12,000 5.50 0.42 2.75-62.5-5.75 years, stock price of $1.70,$1.22, a risk free interest rate of 1.15%-2.38%0.57%-2.01% and an expected volatility of 46.31%-56.41%45.71%-54.41% and no dividend yield.5—6—Commitments and ContingenciesMarch 31,June 30, 2011, are as follows: U.S.$
thousands 65 53 8 126 U.S.$ thousands Year ending December 31, 2011 (six months ending December 31, 2011) 48 2012 55 2013 8 111 month periodmonths ended March 31,June 30, 2011 and 2010 was $33$22 thousand, and $26$39 thousand, respectively.6—7—Risks and Uncertainties (a) The Company’sCompany's primary business is to provide video ringtones globally by partnering with international telecommunication carriers. Principal markets targeted are the U.S., Europe and the Far East. The Company’sCompany's business depends on the technological infrastructures, wireless networks and information systems of its international carrier partners. (b) The wireless industry in which the Company conducts its business is characterized by rapid technological changes, frequent new product innovations, changes in customer requirements and expectations and evolving industry standards. (c) The Company’sCompany's data is hosted at a remote location. Although the Company has full alternative site data backed up, they do not have data hosting redundancy and are thus exposed to the business risk of significant service interruptions. (d) A significant portion of the Company’sCompany's expenses are denominated in NIS. The Company expects this level of NIS expenses to continue for the foreseeable future. If the value of the U.S. dollar weakens against the value of NIS, there will be a negative impact on the Company’sCompany's operating costs. In addition, to the extent the Company holds monetary assets and liabilities that are denominated in currencies other than the U.S. dollar, the Company will be subject to the risk of exchange rate fluctuations. (e) In order to continue operating as a going concern the Company needs to raise capital through further debt or equity transactions. The Company is thus exposed to a market risk that it will not be able to raise this capital, as disclosed in Note 1. (a) (f)AccelerationIn July 2011, the Company repaid the outstanding $1,051 thousand balance of its venture loan, using the funds set aside in the eventrestricted account (see Note 4).(b) In July 2011, the Company announced that it executed a Letter of default,Intent ("LOI") to acquire substantially all of the assets, and assume substantially all of the liabilities, including a long-term loan of up to $3 million, of Zlango Ltd., a mobile messaging company ("Zlango"). Under the terms of the LOI, the Company will issue 3 million shares of its common stock and provide Zlango's management with a retention package comprised of options to purchase 250 thousand shares of common stock. Further, as defineda condition of closing, Zlango’s long-term loan is to be renegotiated to provide a minimum eighteen month principal holiday and a reduced interest rate during the initial eighteen month period, with repayments to begin over the subsequent 48 month period.(c) loan agreement, is possible, among others, shouldcapital firms: Benchmark Capital and DAG Ventures. These venture capital firms may participate in a subsequent financing, following the Companyintended acquisition of Zlango (see Note 8 b). Should the subsequent financing occur, the convertible notes will automatically convert into the same securities as the subsequent financing, except that the conversion price for the convertible notes will be unableequal to pay its debts or should the fair salable valuelower of: (i) the closing price of the Company’s assets drops belowCompany's common stock on the fair valueday the private placement was announced; or (ii) the closing price of its liabilities.the Company's common stock on the closing date; or (iii) a 10% discount to the securities issued in the subsequent financing. Should the subsequent financing not occur by January 1, 2012, then the principal and all accrued but unpaid interest thereon shall be repayable in full to convertible note holders.Note 7—Subsequent EventsIn April 2011, the Company issued 19,862 shares of common stock upon exercise of 20,000 charitable warrants with an exercise price of $0.01 per share.Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations.“Exchange Act”"Exchange Act"). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,”"anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend," "may," "will," "plan," "project," "seek," "should," "target," "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”"Risk Factors" included in our Annual Report on Form 10-K filed on March 31, 2011. 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.videocontent and mobile social applications market. We anticipate that the ringtonemobile content and service market will begin to migrate from standard audio ringtones and content to high-quality video ringtones,services, with social networking capability and integration with web systems. We also believe that social network information and updates will begin to be shared regularly when friends regularly communicate by voice and by text. Our video ringtone solution,solutions and other mobile social and video applications, which encompasses a suite of mobile and PC-based tools, enables users to create, download and share video ringtonesand other social content with ease as part of the normal communication process, and provides our business partners with a consumer-friendly and easy-to-integrate monetization platform.slide showslideshow from social network pictures which provides relevant and social visual enhancement to the Ringtone and the Ringback tone, and our Fan Loyalty platform that allows users to obtain video and video ringtones, view information on reality television stars and vote for contestants.videocontent and mobile social services market is fragmented and that there are opportunities to acquire additional assets. We have been focusing on commercializing our core video ringtone service primarily through agreements with mobile carriers and other distribution partners in related areas such as handset manufactures and retailers such as the CarPhone Warehouse. We have live commercial launches oflaunched our Video Ringtone service commercially with sixfive mobile carriers operating in Turkey, Malaysia, Armenia, United Arab Emirates, Singapore, and the United Kingdom. In addition, we launched a Video ringtone service with RTL, a major television network in Belgium, and with Hungama Digital Media Entertainment ("Hungama"), a content and mobile services aggregator in India. OurThe service with Hungama is being offered to customers of 15 different mobile carriers in India. As of the end of the second quarter, we no longer offer our service commercially in Armenia. As of August 15, 2011, our partners have an aggregate of approximately 700 million subscribers, of which 235,000294,000 are paid subscribers to our service, and another 42,00025,000 subscribers have enrolled on a free-trial basis.quarterhalf of 2011, we launched our products and services with Everything Everywhere Limited, a United Kingdom communication company which operates the T–Mobile UK and Orange UK mobile services. With this launch, our video ringtone service is available to over 16 million Orange subscribers in the United Kingdom. We anticipate further integration with T-Mobile for a future release which would make our service directly available to another 14-plus million mobile subscribers in the UK.recently launched our Video ringtone products and services with StarHub, a mobile carrier in Singapore. Through this new carrier, our video ringtone service will be co-branded by StarHub and made available to its over 2 million customers. Following the termination of our agreement with Avea in Turkey, we signed a deal with Retromedya, a third party service provider there, whereby we will have access to offer our service to the customers of all carriers in Turkey. Subsequent to quarter end, inIn April 2011, we launched our ringtone service in India with Hungama, Digital Media Entertainment “Hungama”. Our service with Hungamawhich is available to a potential 500 million plus subscribers. We are negotiating with additional mobile carriers in a number of different countries and we expect to continue to scale our carriervideo ringtone business with carriers during the remainder of 2011.In the2011,our Video ReMix platform, we partneredcontinued in the second quarter to partner with Corso Communications and its client Heineken, to deliver a sponsored version of this platform.Video ReMix platform.global software developer platform of Telefonica, the largest mobile operator in the Spanish speaking world, and fourth largest globally. Facetones™ will be initially available on Telefonica's Application Store (Mstore) in several global markets. Subsequent to quarter end, Facetones™ was launched in Japan for Android users through the docomo market, a mobile internet portal operated by NTT DOCOMO, INC., the largest mobile phone operator in Japan, with 50+ million customers. Revenue from the Facetones TM platform was earned for development services from Nokia (NYSE: NOK).a songStar Academy 8 the largest music competition reality TV show.in the Middle East and Nokia, the world’s largest handset maker. This platform enables users to obtain video content from the show as well as from behind the scenes, retrieve information regarding the show and vote for their favorite contestants.Content sales The free app was launched in partnership with Rotana, a diversified media company and the world's largest producer of music and music television in the Middle East, and sponsored by Nokia. The application features exclusive content and fully integrated live voting capabilities for the blockbuster "Star Academy" reality music show, which reaches over 300 million viewers and is available in over 10 countries in the region.made throughmonetized not only via carrier relationships, as well asbut also through various application stores (“App stores”). We commenced paid content distribution of our apps through both Nokia’s Ovi store, in the United Kingdom and, subsequent to year end, and Verizon V Cast App Store, in the United States. We have launched free trial downloads with Vodafone Shop, in eight countries: Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain andTelefonica owned portals as well as the United Kingdom.NTT Docomo Market. Our content partnerships include major artists, celebrities and content providers, including EMI, Warner Music, T–Pain, Muhammad Ali Enterprises, Tiesto, Turner, Marvel, Hungama Mobile, RTL and Ingrooves.song competition reality TVStar Academy service, we have engaged primarily in developing free experiences for consumers in exchange for one-time fees from sponsors.servicevarious services together with mobile carriers and other partners in Latin America, parts of Europe including the United Kingdom and Spain, Japan, India, Singapore, Turkey, Malaysia, Armenia and the United Arab Emirates. Our mobile carrier partners co-brand our service and help market it to their subscribers. The pricing for subscriptions and content in various countries will vary substantially based on local economic conditions. In general, we aim to sell the monthly subscriptions ranging from $1 to $5 and we expect to generally receive at least 40% of the monthly subscription revenue. We currently monetize our video ringtone service across our existing launches on a blended rate basis of $0.13 per subscriber per month and we intend to increase this rate going forward as we move to more lucrative markets in Europe and North America. We expect that premium content will generally be sold for $1 to $5 per item although this price and the monthly subscription rate may vary substantially by country. Operators usually do not charge us or our users for any data charges associated with using our service or for using the operator’soperator's text messaging infrastructure to communicate with our subscribers.WeAs of June 30, 2011, we had approximately $3.6$0.4 million ofin cash and cash equivalents at March 31, 2011.equivalents. Our average monthly burn rate from operations for the threesix month period ended March 31,June 30, 2011, and the year ended December 31, 2010, was approximately $0.5 million. We believe that current cash levels will be sufficient to support our activity only into the third quarter of 2011. In addition, in order to conserve funds, we underwent resource reductions in the first quarterhalf of 2011. Other activities were initiated, including possible business combinations, and/or the raising of additional funding. Under the terms of our venture loan agreement, ifare deemed insolvent, we would beissued convertible notes in default. If the loan is accelerated as a result of such default, we would not have sufficient funds to continue our operations. Insolvency is definedprivate placement, in the aggregate amount of $2.5 million, primarily to two venture loan agreementcapital firms: Benchmark Capital and DAG Ventures. These venture capital firms may participate in a subsequent financing, following the intended acquisition of Zlango. Should the subsequent financing round occur, the convertible notes will automatically convert into the same securities as our inabilitythe ones issued in the subsequent financing. Should the subsequent financing not occur by January 1, 2012, the principal and all accrued but unpaid interest thereon shall be repayable in full to pay debts when they become due, or when the fair salable valueholders of our assets drops below the fair value of our liabilities (excluding derivative liabilities on account of warrants).Weconvertible note, unless the notes are a development stage company. From inception, we have raised approximately $28.5 million. These amounts have been usedconverted prior to finance our operations, as until now, we have not yet generated any significant revenues. From inception and until March 31, 2011, we recorded losses of $31.2 million and net cash outflow from operations of $25.4 million.RevenueRevenues from minimum monthly revenue guarantees from carriers are recognized at the end of each billing period for the service provided as we have an agreement with the carrier, the fee has been agreed upon contractually and the collection of this fee is probable.Costs and Expensesandamortization of prepaid content licenses, the direct costs of billing services and text messaging providers. for our legal and accounting fees, insurance, telephone and other office expenses including depreciation and amortization. Following the consummation of our IPO, general and administrative expenses increased significantly as we incurred additional costs of being a public company. These costs include increased legal and accounting costs, additional insurance costs, director compensation and increased share based compensation expenses.differences.differences, interest on deposits, bank charges and interest and discount amortization expenses on venture loan. In addition, non-operating expense (income) include expenses recorded as a resultincludes gain on restructuring of venture loan in light of the extinguishment of debt, interest expense incurred as a result of the conversion of the Bridge Loan into equity, amortization of the Bridge Loan and expenses recorded on account of the Lead Investor Warrants.settlement agreement signed June 8, 2011. Fair value adjustments of derivative liabilities on account of the Special Bridge Warrants and the Conversion Warrants, which are highly influenced by our stock price at the period end (measurement date), are recorded in non-operating expense (income). We expect that our non-operating expenses (income) will be directly impacted by changes in fair value of these warrants.March 31,June 30, 2011, our deferred tax assets generated from our U.S. activities were entirely 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 realized. The deferred tax assets and liabilities generated from our subsidiary’ssubsidiary's operations are not offset by an allowance, as in our estimation, it is more likely than not to be realized.which it providesprovided to us, plus a profit margin on such costs, which is currently 8%. However, the subsidiary is a “Beneficiary Enterprise”"Beneficiary Enterprise" as defined in amendment No. 60 to the Israeli Law for the Encouragement of Capital Investment, 1959, which means that income arising from its approved research and development activities is subject to zero percent tax for a period of two years and a reduced tax rate for the subsequent five years. The subsidiary elected to receive the zero percent tax benefits for the fiscal years of 2007 and 2008. In January 2011, new legislation amending the Investment Law was enacted. According to the amendment, the uniform tax rate applicable to the zone where the production facilities of the subsidiary are located would be 15% in 2011 and 2012, 12.5% in 2013 and 2014, and 12% in 2015 and thereafter. Under the transitory provisions of the new legislation, the subsidiary may opt whether to irrevocably implementimplemented the new law while waiving benefits provided under the current law or keep implementing the current law during the next years. Changing from the current law to the new law is permissible at any stage.subsidiary’ssubsidiary's Israeli tax returns for the 2007 through 2009 tax years. To date, the subsidiary has not yet received any findings from the audit by the Israeli tax authorities.March 31,June 30, 2011 and 2010 and the development stage period (cumulative from inception through March 31,June 30, 2011)The following analysis compares the results of our operations for the three month period ended March 31, Three months Ended June 30, Six months Ended June 30, 2011 2010 Change 2011 2010 Change 2011 ($ - in thousands) ($ - in thousands) ($ - in thousands) Revenue 227 44 183 374 74 300 605 the results of operations for the three month period ended March 31,Three Months Ended June 30, 2010 and the results of our operations from inception through March 31, 2011.Revenue Cumulative
from inception
to March 31,
2011 2011 2010 Change ($ - in thousands) ($ - in thousands) 147 30 378 378 March 31,June 30, 2011, we recorded revenues of $147$227 thousand, which represents an increase of $117$183 thousand (or 390%416%) from revenues recorded for the three month period ended March 31,June 30, 2010. The recognizedincrease was mainly due to revenue in the first quarter of 2011 was mainly from our revenue-sharing agreements in Malaysia ($77 thousand recorded, an increase of $67 thousand compared to the first quarter of 2010), Turkey ($7 thousand recorded, compared to $0 in the first quarter of 2010), and the United Arab Emirates ($19 thousand recorded, an increase of $9 thousand compared to the first quarter of 2010). In addition, we recognized revenue for one time set up fees in Singapore ($978 thousand in the firstsecond quarter of 2011, compared to $0the $15 thousand recorded in the firstsecond quarter of 2010), completion of Facetones™ ($50 thousand recognized in the second quarter of 2011) and Armeniacompletion of development of Fan Loyalty application ($945 thousand recognized in the second quarter of 2011).quarterhalf of 2011). The revenue2011, compared to the $25 thousand in the first quarterhalf of 2010 was mainly comprised2010), completion of our then new revenue-sharing agreementsFacetones™ ($50 thousand recognized in Malaysia, the United Arab Emirates and Armenia, whereby wefirst half of 2011), completion of development of Fan Loyalty application ($45 thousand recognized approximately $10 thousand for each onein the first half of these customers.Revenue for our2011), delivery of Video ReMix platform commenced this quarter,($30 thousand recognized in the first half of 2011), revenue recorded in connection with set-up fees for the recognitionnew agreement in Singapore ($18 thousand recognized in the first half of $232011).in March 2011.comingremainder of the year from: (i) Video Remix, Facetones™ and Fan Loyalty application platforms, (ii) revenue-sharing agreements in Malaysia, (iii) services provided in the United Arab Emirates, (iv) agreements with Everything Everywhere Limited and Bango in the UK, (v) newlyrecently launched services in India, and (vi) agreementpartnership with StarHub in Singapore. Our agreement with Vivacell in Armenia expiresexpired on June 30, 2011.From inception through March 31, 2011 we have recorded revenues of $378 thousand, which includes $174 thousand from our services in Malaysia, $73 thousand from our services in the United Arab Emirates, $62 thousand from our services in Armenia, $23 thousand Video ReMix platform development services, $22 thousand from our services in Turkey, $19 from initial one-time setup fee in Singapore, and $5 thousand from applications sold. Cumulative
from inception
to March 31,
2011 2011 2010 Change ($ - in thousands) ($ - in thousands) 25 34 (9 ) 236 During the three month period ended March 31, 2011 and 2010, our Three months Ended June 30, Six months Ended June 30, 2011 2010 Change 2011 2010 Change 2011 ($ - in thousands) ($ - in thousands) ($ - in thousands) Cost of revenue 45 34 11 70 67 (15 ) 281 was $25 thousand and $34 thousand, respectively, which represents a decreaseis mainly comprised of $9 thousand (or 26%) compared to cost of revenue for the three month period ended March 31, 2010. Cost of revenue is comprised of services related to the provision of content to end-users and cost of hosted servers needed to support theour service in markets where we have launched our services.over time as we provide more services and content and other services to the users of our service.users. As some of these costs are fixed irrespective of our revenues, we expect our gross margin to increase, significantly over time.as our revenues increase. We believe that we currently have enough server capacity to service up to two million global users before we need to expand our server capacity. From inception through March 31,June 30, 2011, our total cost of revenue was $236$281 thousand. Cumulative
from inception
to March 31,
2011 2011 2010 Change ($ - in thousands) ($ - in thousands) 519 587 (68 ) 11,260 ($ - in thousands) ($ - in thousands) ($ - in thousands) Research and development 460 603 (143 ) 979 1,180 (201 ) 12,305 $587$603 thousand to $519$460 thousand (12%(-22%) during the three month period ended March 31,June 30, 2011, compared to the three month period ended March 31,June 30, 2010. The decrease was mainly due to lower salary and compensation expenses (a decrease of $50 thousand compared to the second quarter of 2010), and a decrease in development services provided by subcontractors (a decrease of $32 thousand compared to the second quarter of 2010), as part of the cost saving plan implemented by us.mainly due to lower salary and compensation expenses (a decrease of $170 thousand compared to the first half of 2010) mainly in connection with a separation agreement we entered intosigned with one of our former chief technology officer. This was offset by an increase in share based compensation expense in connection with 2011 and 2010 grants. As our business matures and our revenues increase, we expect that our research and development expenses will grow at a slower rate than our corresponding revenues and marketing expenses. We also expect that our share based compensation costs will increase due to the recordingofficers, as part of the expense related to the options granted to management and employees.March 31,June 30, 2011, research and development expenses amounted to approximately $11.3$12.3 million. Of this amount, approximately $7.9$8.3 million was attributed to salaries and related expenses, $1.8 million was attributed to sub-contracting and consulting services, $0.8 million was attributed to operating expenses, $0.6 was attributed to overhead and $0.8 million was attributed to patent expenses. Cumulative
from inception
to March 31,
2011 2011 2010 Change ($ - in thousands) ($ - in thousands) 621 481 140 9,240 During ($ - in thousands) ($ - in thousands) ($ - in thousands) Marketing 685 632 53 1,306 1,107 199 10,605 March 31,June 30, 2011, marketing expenses increased $140 thousand (or 29%),compared to $621 thousand, from $481 thousand in the three month period ended March 31,June 30, 2010.in our marketing expenses for the three month period ended March 31, 2011, was in partmainly due to thehigher salary and compensation expenses partially because of higher share-based compensation expenses in 2011 and partially because of hiring in April 2010, of our President in the US, whose efforts are focused on marketing and business development. In addition,increase relatessix month period ended June 30, 2011, compared to the 2011 and 2010 options grants for marketing employees, thereby increasingsix month period ended June 30, 2010. The increase is mainly due to share-based compensation expense (an increase of $139 thousand compared to the respective compensation expense. Furthermore, we hadfirst half of 2010), an increase in salary paid in the US which included hiring, of our President in the US (an increase of $18 thousand compared to the first half of 2010) and increase in labor cost due to exchange rate differences (an increase of $48 thousand compared to the first half of 2010).advertising costs in connection with new commercial launches in 2011. customer acquisition expenses and $0.7 was attributed to overhead expenses.conductedconduct direct-to-consumer marketing activities in the countries where we have launched our services to build on the efforts of our partners. While we do not expect to invest heavily in direct-to-consumer marketing activities in the future, we do expect an increase in marketing expenses as we continue launching our service in different global markets. In certain markets, our marketing efforts may include hiring local personnel to introduce us to the market and purchasing rights to certain local content. As our market reach grows, we expect our marketing expenses to continue to increase our visibility to potential partners. We also expect that our share based compensation costs will ($ - in thousands) ($ - in thousands) ($ - in thousands) General and administrative 690 504 186 1,355 714 641 6,594 significantlywas mainly due to the recordinghigher professional fees connected to being a public company (an increase of the expense related$130 thousand compared to the management options.March 31,June 30, 2011, marketinggeneral and administrative expenses amounted tototaled approximately $9.2$6.6 million. Of this amount, approximately $5.1$3.1 million was attributed to salaries and related expenses, $1.4$1.1 was attributed to various office expenses, $1.8 million was attributed to sub-contractingprofessional fees and consulting services, $0.8$0.6 million was attributed to public relations servicesdepreciation and customer acquisition expenses, and $1.9 million was attributed to travel and tradeshows.General and Administrative Cumulative
from inception
to March 31,
2011 2011 2010 Change ($ - in thousands) ($ - in thousands) 665 194 471 7,169 During the three month period ended March 31, 2011, general and administrative expenses increased $471 thousand (or 242%), to $665 thousand, from $194 thousand in the three month period ended March 31, 2010.General and administrative expenses for the three month period ended March 31, 2011, increased from the general and administrative expenses recorded for the three month period ended March 31, 2010, mostly due to the increase in various professional fees in connection with becoming a public company. In addition, there was an increase due to additional insurance costs for our directors’ and officers’ liability insurance and an increase in share based compensation expenses due to new option grants in 2011 and 2010. amortization.increase due toremain stable as they reflect the costs of being a public company. These costs will beare reflected in increased accounting, legal and insurance costs as well as increased costs related to meeting our obligations under the Sarbanes-Oxley Act. We also expect thatIn addition, our compensation costs will increase significantly due to the recording of expense related to management options.From inception through March 31, 2011, general and administrative expenses totaled approximately $7.2 million. Of this amount, approximately $2.8 million was attributedreflect costs related to salariesmerger and related expenses, $0.5 million was attributedacquisition activity. Three months Ended June 30, Six months Ended June 30, 2011 2010 Change 2011 2010 Change 2011 ($ - in thousands) ($ - in thousands) ($ - in thousands) Non-operating income (expense), net 175 (2,865 ) 3,040 767 (3,577 ) 4,344 (3,427 ) rent, $1.8 million was attributed to various office management expenses, $1.6 million was attributed to professional fees and $0.5 million was attributed to depreciation and amortization.Non-operating Expense (Income), Net Cumulative
from inception
to March 31,
2011 2011 2010 Change ($ - in thousands) ($ - in thousands) (592 ) 711 (1,303 ) 3,602 March 31, 2011, non-operating expense changed $1.3 million (or -183%), to an income of $0.6 million, from an expense of $0.7 million in the three month period ended March 31, 2010. In the three month period ended March 31,June 30, 2011, we recorded non-operating income in the amount of $0.6$0.2 million, which was mainly comprisedcompared to non-operating expense in the amount of an income of $0.7$ 2.9 million recorded due to decrease in the fair valuethree month period ended June 30, 2010.and anin the amount of $0.7 million. In addition, we recorded a non-operating expense onin the total amount of approximately $0.1 million in connection with interest and discount amortization on venture loan.first quartertotal amount of 2010 was mainly comprised of $0.5$ 3.6 million, recorded in the six month period ended June 30, 2010.andpursuant to which we recorded additional interest costs for the Bridge Notes of $1.1 million. In addition, as a result of the conversion of the Bridge Notes we recorded an additional interest expense of approximately $1.1 million on account of the beneficial conversion feature from the loan and an additional $0.1 million relatingon account of the additional Special Bridge Warrants that were issued to investors in the Bridge Financing, in addition to the original 795,200 such warrants issued upon the closing of the Bridge Financing. Additional interest expense on account of the loan amortization of $0.1 million in addition to the interest expense recorded for the venture loan was also recorded in this period. In connection with the granting of the lead investor warrants we recorded additional interest expense of $1.3 million. We also recorded approximately $0.1 million of interest expense for the Bridge Notes and approximately $0.2 million of interest expense for the venture loan.March 31,June 30, 2011, non-operating expenses totaled approximately $3.6$3.4 million. Of this amount, we recorded income from interest on deposits of $0.4$0.2 million and interest expense on the venture loan of $1.5$1.6 million. In addition, we recorded $0.1 million of debt extinguishment expense related to the Series B Convertible Preferred Stock, $0.2 million of debt extinguishment expenses as a result of the loan modification agreement with SVB/Gold Hill, $1.0 million of additional interest expense as a result of the conversion of the convertible loan, $0.3 million of warrant amortization and $1.1 million of additional interest expense from the Bridge Notes. We also recorded an expense of $1.3 million as additional interest expense for the warrants granted to the lead investors of the Bridge Financing, $1.0 million income in connection with the settlement of the venture loan, and recorded non-operating income of $1.5$1.0 million for the adjustment of the fair value of the Special Bridge Warrants and the Conversion Warrants.instruments and additional interest payments in respect of the venture loan. Cumulative
from inception
to March 31,
2011 2011 2010 Change ($ - in thousands) ($ - in thousands) 18 20 (2 ) 47 Three months Ended June 30, Six months Ended June 30, 2011 2010 Change 2011 2010 Change 2011 ($ - in thousands) ($ - in thousands) ($ - in thousands) Taxes on income 26 18 8 44 38 6 73 March 31,June 30, 2011, we recorded an income tax expense in the total amount of $18$26 thousand, which reflects a decreasean increase of $2$8 thousand compared to tax expense of $20$18 thousand recorded in the three month period ended March 31,June 30, 2010. Taxes on income are mainly due to taxable profits generated by our subsidiary as a result of the intercompany cost plus agreement between us and the subsidiary, whereby the subsidiary performs development services for us and is reimbursed for its expenses plus 8%. For financial statements purposes, these profits are eliminated upon consolidation. The profits ofIn addition, during the subsidiary benefitted from a tax holiday in the 2007-2008 tax yearsthree and a taxable loss in 2009, for which a tax provision had been originally recorded.From inception through March 31,six month period ended June 30, 2011, we recorded income tax expense totaled $47 thousand. of $8 thousand and $12 thousand, respectively, in connection with tax withheld at source by our partner in Malaysia.we may enjoy additional tax benefit, due to new legislation enacted amending the Investment Law. Underunder the new legislation, a uniform rate of corporate tax would apply to all qualified income of certain industrial companies, as opposed to the current law’slaw's incentives that are limited to income from a “Benefited Enterprise”"Benefited Enterprise" during their benefits period. According to the amendment, the uniform tax rate applicable to the zone where the production facilities of the subsidiary are located would be 15% in 2011 and 2012, 12.5% in 2013 and 2014, and 12% in 2015 and thereafter.March 31,June 30, 2011, we had a cash positionbalance of $3.6$0.4 million (excluding restricted cash equivalents of $1.1 million) and $0 million net working capital of $1.7 million. We believe that our current cash levels will be sufficient to support our activity only into the third quarter of 2011.capital. The decrease of $1.8$5.0 million in our cash for the three month period ended Marchbalance from December 31, 2011,2010, was mainly due to cash used by us in our business operations ($ 1.52.9 million), venture loan repayment ($1 million) and the transfer of cash to a restricted account ($1.1 million). As of March 31,June 30, 2011, our total deficit in stockholders’stockholders' equity was $0.9$1.8 million mainly due to continued operating deficits from inception to date, and in partpartially due to the classification of the Special Bridge Warrants and the Conversion Warrants as derivative liabilities rather than equity securities.have historically funded our operations primarily throughimmediately repaid $331 thousand to the saleLenders, and placed additional $1,051 thousand as collateral into a restricted account. As part of the Agreement, we issued the Lenders 250,000 shares of our securities, including sales of common stock, in exchange for 250,000 Senior Lender Warrants, which were cancelled. Subsequent to the balance sheet date, the remaining loan balance in the restricted account was paid off in full using the funds set aside in the restricted account. As of June 30, 2011, a net gain on restructuring of debt, in the total amount of $963 thousand, was recorded in the statements of operations.preferred stock and warrants. In May 2006, we raised $2.35 million through the issuance of 588 shares of Series A Convertible Preferred Stock. We issued 2,353,299 additional shares of Series A Convertible Preferred Stock as a stock dividend in August 2006, resulting in a totalprivate placement, in the aggregate amount of 2,353,887 shares$2.5 million, primarily to two venture capital firms: Benchmark Capital and DAG Ventures. Following the intended acquisition with Zlango, these venture capital firms may participate in a subsequent financing round. Should the subsequent financing occur the convertible notes will automatically convert into the same securities as the ones issued in the subsequent financing, except that the conversion price for the convertible notes will be equal to the lower of: (i) the closing price of Series A Convertible Preferred Stock outstanding. In February 2007,our common stock on the day the private placement was announced; or (ii) the closing price of our common stock on the date the funds were received; or (iii) a 10% discount to the securities issued in the subsequent financing. Should the subsequent financing not occur by January 1, 2012, then the principal and all accrued but unpaid interest thereon shall be repayable in full to the holders of the convertible note, unless the notes are converted prior to such time.completed a financingbelieve we have sufficient cash to meet our planned operating needs into the first quarter of $2.12012, based on our current operating expense levels. Should the above mentioned $2.5 million of convertible notes which was later exchangedbe converted, and included as part of the Series B Financing in July 2007. In July 2007,a subsequent financing occur, we raised $12.1 million (including the $2.1 million above)believe we would have sufficient cash for operations through the issuanceend of 4,592,794 shares of Series B Convertible Preferred Stock2012. Should the subsequent financing not occur, then the principal and all accrued but unpaid interest thereon relating to the issuance of 200,694 shares of common stock.recent private placement will be repayable in full to convertible note holders by January 1, 2012, and we would need additional financing, in order to meet our cash flow needs. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. In addition, in September 2008,estimating our expected cash flow, we closed a $5.0 million loan from SVB/Gold Hill Capital. In December 2009, we completedhave considered the Bridge Financing of $3.0 million of convertible notes. In June 2010, we completedcurrent economic climate and our IPO raising gross proceeds of approximately $11 million through the sale of 2,392,000 units consisting of one share of common stock and two warrants. revenue estimations as discussed above. As an alternative source of liquidity, we are exploring acquisition opportunities. In addition, we may pursue a financing. We cannot give any assurance that the necessary capital will be raised or that, if funds are raised, it will be on favorable terms. Any future sales of securities to finance our company will dilute existing stockholders’stockholders' ownership. We cannot guarantee when or if we will ever generate positive cash flow.As of March 31, 2011, we had 28 full time employees and 5 part-time employees.threesix months ended March 31,June 30, 2011 and 2010 Cumulative
from inception
to March 31,
2011 2011 2010 Change ($ - in thousands) (1,517 ) (1,723 ) 206 (25,440 ) 14 2,559 (2,545 ) (586 ) (345 ) (145 ) (200 ) 29,617 Six month period ended June 30, 2011 2010 Change 2011 ($ - in thousands) Net cash used in operating activities (2,916 ) (2,787 ) (129 ) (26,839 ) Net cash provided by (used in) investing activities (1,059 ) 2,548 (3,607 ) (1,659 ) Net cash provided by (used in) financing activities (1,031 ) 9,186 (10,217 ) 28,931 threesix month period ended March 31,June 30, 2011, net cash used in operating activities totaled $1.5$2.9 million. During the quartersix month period ended March 31,June 30, 2010, net cash used in operating activities totaled $1.7$2.8 million. The decreaseincrease of $0.2$0.1 million used in operating activities was mainly due to higher professional fees connected to being a public company, offset by a reduction in workforce related costs in connection with the cost reduction plan implemented in the first quarter of 2011.increaseremain steady due to costs related to being a public company. As we move towards greater revenue generation, we expect some of these amounts will be offset by revenue. Since we receive most of our revenues directly from carriers whose payment schedules are generally net 90 days or longer, and our suppliers’suppliers' payment schedules are generally net 30 days, we do not expect the increase in revenue will initially increase our net cash from operating activities.threesix month period ended March 31,June 30, 2011, net cash used in investing activities totaled $1.1 million. During the six month period ended June 30, 2010, net cash provided by investing activities totaled $14 thousand. During the three month period ended March 31, 2010, net cash used in investing activities totaled $2.6$2.5 million.$2.5$3.6 million provided by investing activities is primarily due to the release of proceeds in the total amount of $2.6 million from the Bridge Financing from escrow which was slightly offset by the purchase of fixed assets. Fixed asset purchases in the threesix month period ended March 31, 2011, amounted to $7 thousand compared to $23 thousand for the year ended March 31, 2010. The decreaseJune 20, 2010 and an investment in fixed asset purchases was due to the need to replace certain fixed assets that had fully depreciated and to improve the serversrestricted short term account in the research and development facilitytotal amount of our Israeli subsidiary in 2010. $1.1 million.threesix month period ended March 31,June 30, 2011, net cash used by financing activities totaled $0.3$1.0 million, which relates to the repayment and settlement of the venture loan (refer to Liquidity and Capital Resources section above). During the six months ended June 30, 2010, net cash provided by financing activities totaled $9.2 million, which relates to the net proceeds received as a result of our Initial Public Offering, partially offset by the one-time payment of principal on the venture loan. We expectVenture Loan (prior to continuethe moratorium on principal payments).Subsequent to see a net cash outflow from financing activities as a result ofquarter end, the repaymentremaining portion of the venture loan and, dependent on our share price and other market conditions, possible inflows from the exercise of warrants and other instruments.As a result of our IPO in June 2010, we believe we have sufficient cash to meet our planned operating needs only into the third quarter of 2011, based on our current cash levels, including the cash raised from the offering. Following that date, we believe that we will need additional financing, in order to meet our longer-term cash flow needs. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. In estimating our expected cash flow, we have considered the current economic climate and our revenue estimations as discussed above.In MarchAs mentioned above, in July 2011, we signed a Letter of Intentan LOI to acquire and merge operations with Zlango. We intend to enter into an asset purchase agreement whereby we will acquire substantially all of the assets of m-Wise. Under the termsand assume practically all of the Letterliabilities of Intent, we will issue m-Wise 1.9Zlango (including assumption of a $3 million sharesloan). Please refer to Note 8 (b) in our financial statements for the period ended June 30, 2011.our common stock, provide m-Wise’s management withmobile social and video applications to create a retention package comprised of options to purchase 500,000 shares of common stock, assume and pay over a two year period certain of m-Wise’s expenses and related costsnew leader in the amount of $615,000mobile social arena. Zlango's technology can effortlessly add icons, themes and assume certain other liabilities of m-Wise. We will also issue a five-year promissory note for $320,000 convertible into 200,000 shares of common stock for certain services providers, in connection with the transaction.m-Wiseimages to standard text messages. Zlango provides a set of technology platforms through a managed services environment for enabling rich media messages over the existing mobile text infrastructure. It also offers a platform used by leadingfor premium and syndicated content, owners and service providers to manage, deliver and monetize mobile entertainment, content and applications. The m-Wise mobile software as a service (SaaS) platform powers over three million daily mobile service transactions world-wide, and m-Wise has performed over one billion mobile transactions in the aggregate since it was founded in March 2000.m-Wise’s platform has been utilized in over 300 applications across more than 50 mobile networks by more than 50 international content and media providers. m-Wise’s current customers include leading companies suchwell as Jesta Digital (formerly Fox Mobile), and Sendmemobile (formerly Thumbplay), Universal Music Group, Digicel and Snackable Media. These m-Wise-enabled applications for content and media partners include content delivery services, ringtones, music, video, games, information services, alerts and advertising and promotions, all of which were developed and delivered from the cloud on a hosted basis.According to the unaudited financial statements filed in m-Wise’s Form 10-Q for the three month period ended March 31, 2011, m-Wise recorded revenues of $0.8 million, gross profit of $0.5 million and a net loss (including non-cash, stock-based expenses and options accounting) of $0.2 million. We anticipate cost savings and operational synergies from combining m-Wise’s business with our core business. As a result, we believe that the m-Wise acquisition will have a positive effect on our cash flow with the potential to reduce our overall burn rate in the first full year of combined operations.m-Wise.Zlango. The parties intend to complete the transaction as soon as practicable after receiving all necessary approvals.We believe that there are a number of acquisition opportunities. We will require additional financing if we decide to make acquisitions. Additional financing may not be available on satisfactory terms when required.Venture loanIn September 2008, we drew down on a loan facility for $5.0 million. The loan facility bears interest at a rate of 9.5% per annum and an effective interest rate of 18%. The contractual repayment schedule required a 36-month repayment schedule beginning on March 31, 2009 following a nine-month interest only period. In conjunction with the Bridge Financing,loan modification agreementStrategic Cooperation Agreement with our lenders whereby principal paymentsm-Wise, Inc., a technology expert in mobile content management and delivery. This Strategic Cooperation Agreement supersedes prior arrangements and proposed transactions including the non-binding Letter of Intent we entered into with m-Wise on March 8, 2011. Under the facility were deferred until consummationterms of the IPO. Following the recommencement of principal payments,Strategic Cooperation Agreement, we agree to cooperate together on July 1, 2010, the remaining portion of the loan will be repaid through March 1, 2013. Future loan payments on the facility, including principalprojects while retaining our respective intellectual property and interest will amount to approximately $142 thousand per month. Please see Note 9 of our consolidated financial statements for the year ended December 31, 2010.March 31,June 30, 2011, for each of the next five years and thereafter: Payments due by period (in thousands of dollars) Total Less than 1
year 1-3 years 3-5 years More than 5
years Contractual obligations 66 42 24 — — 61 23 38 — — 3,095 1,473 1,622 — — 3,222 1,538 1,684 — — Payments due by period (in thousands of dollars) Total 1-3 years 3-5 years Contractual obligations Real estate leases (1) 56 56 — — — Auto leases (2) 54 31 23 — — Venture loan (3) 1,051 1,051 — — — Total 1,161 1,138 23 — — (1) We have a non-cancellable operating lease for our subsidiary’ssubsidiary's offices in Israel for which we pay approximately $5$6 thousand monthly. This commitment is for the period ending May 31, 2012. We have a non-cancellable operating lease for our offices in New York for which we pay approximately $3 thousand monthly. This commitment is for the period ending August 31, 2011.(2) The subsidiary leases fivethree motor vehicles for certain employees with variable commencement and expiration dates. All leases are for a total of 36 months whereby the final three months of the contract have been prepaid. Total monthly expenses for these leases amount to approximately $4$3 thousand. Expiration dates for the leases are on various dates from February 2011November 2013 through December 2013.(3) Represents total future principal repayments due,repayment which was settled in July 2011, after the balance sheet date, as per the venture loan settlement agreement. The above stated loan balance, is presented in ourSee Note 1 to these financial statements net of discount, in the total amount of $218 thousand. Please see Note 9 of our consolidated financial statements for the year ended December 31, 2010.statements.yearsyear ended December 31, 2010, we believe the following accounting policies to be the most critical in understanding the judgments and estimates we use in preparing our consolidated financial statements.“Compensation—"Compensation—Stock Compensation”Compensation" (formerly SFAS 123R, “Share-Based Payment”"Share-Based Payment"), which requires measurement of compensation cost for stock-based awards at fair value on the date of grant and the recognition of compensation over the service period in which the awards are expected to vest. In addition, for options granted to consultants, FASB ASC 505-50, “"Equity-Based Payments to Non Employees”" is applied. Under this pronouncement, the measurement date of the option occurs on the earlier of counterparty performance or performance commitment. The grant is revalued at every reporting date until the measurement date. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider various factors when estimating expected forfeitures, including historical experience. Actual results may differ substantially from these estimates.the Companywe consummated a Bridge Financing pursuant to which itwe issued 5% subordinated convertible promissory notes, (“("Bridge Notes”Notes"), in the aggregate amount of $2.98 million in a private placement, as well as warrants to purchase 795,200 shares of common stock (the “Special"Special Bridge Warrants”Warrants") (the “Bridge Financing”"Bridge Financing"). Proceeds from the Bridge Financing were first allocated to the Special Bridge Warrants, which were classified as a derivative liability and recorded at fair value, with the residual amount allocated to the Bridge Notes. The Special Bridge Warrants have down-round protection clauses which are not expected to have a material impact, and their fair value is calculated using the Black-Scholes-Merton model at every reporting period. The assumptions used in the initial calculation were 53% expected volatility, a risk-free interest rate of 1.6%, estimated life of 4.5 years and no dividend yield. The fair value of the common stock was estimated at $2.57. Upon the consummation of the IPO, we issued a further 69,132 Special Bridge Warrants to the holders of the Bridge Notes to reflect the final offering price of the IPO units. These warrants were valued on the date of the IPO by using the Black-Scholes-Merton model. The assumptions used in this calculation were 53% expected volatility, a risk-free interest rate of 1.9%, estimated life of 4.5 years and no dividend yield. The fair value of the common stock was estimated at $2.79. The additional warrants are then adjusted according to the fair value above at the end of each reporting period.March 31,June 30, 2011, the Special Bridge Warrants were valued using the Black-Scholes-Merton and the Monte-Carlo models. As the terms of these warrants include a special down-round protection clause, i.e. in a new issuance of common stock at a lower price than the current exercise price, the current exercise price will be adjustedlowered to the new issuance price.price and the number of warrants granted will increase so that the total exercise amount remains as under the original terms (approximately 2.4 million). We estimate a 40%85% probability of such protection being activated in the thirdfourth quarter of 2011. We have estimated the value of the down-round protection using a Monte-Carlo simulation. The following assumptions were used: 46.16%47.47% expected volatility, a risk-free interest rate of 1.75%1.00%, estimated life of 3.753.5 years and no dividend yield. The fair value of the common stock was $1.7.“Conversion Warrants”"Conversion Warrants"). The Conversion Warrants granted to the Bridge Note holders were classified as a derivative long-term liability. The Conversion Warrants have down-round protection clauses, which are not expected to have a material impact, and their fair value is calculated using the Black-Scholes-Merton model at every reporting period. The assumptions used in this calculation for the date of the IPO were 54% expected volatility, a risk-free interest rate of 2.1%, estimated life of 5 years and no dividend yield. The fair value of the common stock was estimated at $2.79.March 31,June 30, 2011, the Conversion Warrants were valued using the Black-Scholes-Merton and the Monte-Carlo models. As the terms of these warrants include a down-round protection clause, i.e. in a new issuance of common shares at a lower price than the current exercise price, the current exercise price will be adjusted to the new issuance price. We estimate a 40%85% probability of such protection being activated in the third quarter of 2011. We have estimated the value of the down-round protection using a Monte-Carlo simulation. The following assumptions were used: 48.38%47% expected volatility, a risk-free interest rate of 1.76%1.28%, estimated life of 4.233.98 years and no dividend yield. The fair value of the common stock was $1.7.March 31,June 30, 2011, we have fully offset our U.S. net deferred tax asset with a valuation allowance. Our lack of earnings history and the uncertainty surrounding our ability to generate U.S. taxable income prior to the expiration of such deferred tax assets were the primary factors considered by management in establishing the valuation allowance. Also, refer to Note 15 of our consolidated financial statements for the year ended December 31, 2010.“"Income Taxes”" (formerly FASB Interpretation No. 48, “"Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109”"), prescribes how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. Additionally, for tax positions to qualify for deferred tax benefit recognition under ASC 740, the position must have at least a “more"more likely than not”not" chance of being sustained upon challenge by the respective taxing authorities, which criteria is a matter of significant judgment.April 2010,May 2011, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Updates (“ASU”) 2010-17, which amends ASC 605, “Revenue Recognition”. ASU 2010-17guidance to amend the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on applying the milestone methodapplicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to milestone paymentschanges in unobservable inputs. The new guidance will be effective for achieving specified performance measure when those payments are related to uncertain future events limited to transactions involving research and development. Entities can make an accounting policy election to recognize arrangement consideration received for achieving specified performance measure during the period in which the milestones are achieved, provided certain criteria are met. Weus beginning January 1, 2012. Other than requiring additional disclosures, we do not expect the adoption of ASU 2010-17 to have aanticipate material impactimpacts on its consolidatedour financial statements.March 31,June 30, 2011. The term “disclosure"disclosure controls and procedures,”" as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’sSEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’scompany's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.March 31,June 30, 2011, our Principal Executive Officer and Principal Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective for the reasons set forth below.theour internal controls of the Company.March 31,June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 10.1 Settlement Agreement, by and between the Company, Silicon Valley Bank, SVB Financial Group and Gold Hill Venture Lending 03, L.P. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 14, 2011). 10.2 Pledge and Security Agreement, between the Company and Silicon Valley Bank. (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on June 14, 2011). 31.1 Certification of Principal Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. SIGNATURES16th15th day of May,August, 2011.VRINGO, INC.By: /S/ ELLEN COHL VRINGO, INC. By: /s/ Ellen Cohl Ellen Cohl Chief Financial Officer (Principal Financial Officer)
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