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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year Ended: December 31, 2013
OR
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-33304
FINJAN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
122 East 42nd Street, New York, New York
(Address of principal executive offices)
20-4075963
(I.R.S. Employer
Identification No.)
10168
(Zip Code)
Registrant’s telephone number, including area code: (646) 755-3320
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934
during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of the “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in
company. See the definitions of the “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Accelerated filer
x
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of June 30, 2013, there were 22,368,453 shares of the registrant’s common stock, par value $0.0001 per share, issued and outstanding. Of
these, 12,073,583 shares were held by non-affiliates of the registrant. The market value of securities held by non-affiliates was $144,882,996
as of June 30, 2013, based on the closing price of $12.00 for the registrant’s common stock on June 30, 2013.
As of March 11, 2014, there were 22,368,453 shares of the registrant’s common stock, par value $0.0001 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None.
Table of Contents
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
TABLE OF CONTENTS
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A
ITEM 9B.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
PART III
ITEM 10.
ITEM 11.
ITEM 12.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
ITEM 13.
ITEM 14.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
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2
2
12
24
24
24
25
26
26
27
27
39
39
39
39
43
44
44
47
54
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This filing includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements regarding our expectations, intentions,
beliefs and projections about our future results, performance, prospects and opportunities. These statements can be identified by the fact that
they do not relate strictly to historical or current facts or by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,”
“intend,” “may,” “plan,” “project,” “potential,” “should,” “will,” “will be,” “would,” the negative of these terms and similar expressions, but
this is not an exclusive way of identifying such statements. Readers are cautioned that forward-looking statements are not guarantees of future
performance. Our actual results, performance and achievements may differ materially from those expressed in, or implied by, the forward-
looking statements contained in this filing as a result of various risks, uncertainties and other factors. Important factors that could cause our
actual results to differ materially from our expectations include, without limitation, our ability to execute our business plan, the outcome of
pending or future enforcement actions, our ability to expand our technology portfolio, the enforceability of our patents, the continued use of
our technology in the market, the development of a liquid trading market for our securities and other factors described below under Item 1A,
“Risk Factors” and elsewhere in this filing.
Forward-looking statements speak only as of the date of this filing. Except as expressly required under federal securities laws and the
rules and regulations of the Securities and Exchange Commission, we do not undertake any obligation to update any forward-looking
statements to reflect events or circumstances arising after the date of this filing, whether as a result of new information or future events or
otherwise. You should not place undue reliance on the forward-looking statements included in this filing or that may be made elsewhere from
time to time by us, or on our behalf. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
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ITEM 1. BUSINESS.
Overview
PART I
We operate two businesses, each of which constitutes a separate reportable segment. Our two reportable segments include: our web and
network security technology segment, which we operate through Finjan, Inc. (“Finjan”) a wholly-owned subsidiary, and our organic fertilizer
segment, which we operate through Converted Organics of California (“Converted Organics”) also, a wholly-owned subsidiary. Effective as
of June 3, 2013, we consummated a reverse acquisition of Finjan (the “Reverse Merger”) and changed our name from “Converted Organics,
Inc.” to “Finjan Holdings, Inc.” Under generally accepted accounting principles in the United States, (“U.S. GAAP”) because Finjan’s former
stockholders received the greater portion of the voting rights in the combined entity and Finjan’s senior management represents all of the
senior management of the combined entity, the Reverse Merger was accounted for as a reverse acquisition under the acquisition method of
accounting for business combinations, with Finjan treated as the acquiring company in the Reverse Merger for accounting purposes.
Consequently, the assets and liabilities and the historical operations that are reflected in our historical financial statements are those of
Finjan. The results of operations of our organic fertilizer segment have been included in our assets and liabilities and our historical operations
since June 3, 2013, the date we completed the Reverse Merger.
During the year ended December 31, 2013, we generated revenue of approximately $0.7 million, all of which was generated by
Converted Organics. We did not generate revenue for the years ended December 31, 2012 and 2011.
We recognized other income of approximately $1.2 million, $80.6 million and $29.3 million for the years ended December 31, 2013,
2012 and 2011, respectively, primarily derived from licensing activities, interest and gains on settlement.
During the years ended December 31, 2013, 2012 and 2011, our net (loss) income was approximately $(6.3) million, $51.0 million and
$24.1 million, respectively.
Our Web and Network Security Technology Business
Overview
Through Finjan, we own a portfolio of patents, related to software that proactively detects malicious code and thereby protects end users
from identity and data theft, spyware, malware, phishing, trojans and other online threats. Finjan’s mission is to invest in innovation and
encourage the development of core intellectual property. Founded in 1997, Finjan developed and patented technology that is capable of
detecting previously unknown and emerging threats on a real-time, behavior-based, basis, in contrast to signature-based methods of
intercepting only known threats to computers, which were standard in the online security industry during the 1990s. As the network, web and
endpoint security industries have transitioned to behavior-based detection of malicious code, we believe that our patented technology is widely
used by third parties.
Development of Finjan’s Business
Finjan was founded in 1997 as a wholly-owned subsidiary of Finjan Software Ltd, an Israeli corporation, which we refer to as “Finjan’s
initial parent,” to cultivate proprietary technology that focused on proactively detecting threats to online security by identifying patterns and
behavior of online viruses and other malicious code, rather than relying on lists of threats known within the online security industry. This
technology allows users to proactively scan and repel the latest, and often unknown, threats to network, web, and endpoint security on a real-
time basis. Following the development of its patented technology, Finjan’s initial parent, together with its subsidiaries, provided secure web
solutions, including security software and hardware, to the enterprise and endpoint markets.
In 2002, Finjan’s initial parent engaged in a reorganization in which Finjan Software, Inc., a Delaware corporation, or “FSI,” was
formed to acquire and hold all of the capital stock of Finjan. Between 2002 and 2009, FSI focused its efforts on research and development and
sales and marketing activities in an effort to bolster its position in the industry and enhance its portfolio of content inspection
technologies. During that time period, FSI’s activities were funded primarily by venture capital firms with experience providing capital and
management expertise to software security firms, some with investment and operational experience within Israel’s cybersecurity and
technology sectors. Finjan also received financial backing from multi-national software and technology companies.
Between approximately 2002 and 2006, competitors in the online security industry began moving towards real-time, behavior-based,
proactive threat detection, at times in violation of Finjan’s patent rights and, beginning in 2005, Finjan commenced patent infringement
litigation against third parties it believed were infringing its patents.
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In October 2009, FSI transferred its portfolio of intellectual property to Finjan (its wholly owned subsidiary at the time). Thereafter, in
November, 2009, FSI sold certain assets, including certain of its operating subsidiaries (other than Finjan) and its sales and marketing assets,
and Finjan granted a non-exclusive patent license to M86 for 7,075,629 shares of M86 common stock of which 1,548,148 were issued to
Finjan and the balance of which were issued to FSI. In connection with that transaction, and subsequent to November 2009, FSI and its
remaining subsidiaries (including Finjan) ceased the development, marketing and sale of its products, but Finjan retained all of its patents and
related rights. In January 2012, Finjan purchased 1,837,595 shares of M86 Series C Preferred Stock and warrants to purchase 459,399 shares
of M86 Series C Preferred Stock for an aggregate purchase price of $1,601,097. In March, 2012, M86 entered into a business combination
with Trustwave Holdings, Inc., which we refer to as “Trustwave.” In connection with the transaction between Trustwave and M86, Finjan
exchanged its interest in M86 for 409,747 shares of Trustwave Class A common stock. In conjunction with that transaction, Finjan modified
the non-exclusive perpetual license to use certain of Finjan’s technology previously granted to M86, which license is fully paid unless certain
conditions are satisfied, in which case Finjan may be entitled to receive additional payments from Trustwave. We are not entitled to future
payments, if any, under such license, which are payable to FSI. In exchange for modifying such license, Finjan received 224,000 additional
shares of Trustwave Class A common stock.
Following the M86 transactions, Finjan raised additional funds from its existing stockholders to finance its activities, which have
consisted primarily of licensing and enforcing its intellectual property rights in network, web and endpoint security fields. See -Licensing and
Enforcement Business below.
In August 2011, Finjan sold certain fully amortized patents for $1.6 million and incurred $0.3 million of fees associated with the
transactions. Such patents were related to the protection of online images against unauthorized copying, which Finjan previously acquired
from an unaffiliated third party in 2005.
In April 2013, Finjan distributed securities of two unaffiliated entities which it previously held to FSI, and made a payment of cash in an
amount sufficient to repay and satisfy in full an intercompany loan from FSI to Finjan. Following that distribution, the board of directors and
stockholders of FSI approved the dissolution of, and a plan of liquidation for, FSI that resulted, among other things, in the distribution of
Finjan common stock to certain of FSI’s stockholders, each of whom received shares of our common stock in the Reverse Merger described
below.
In June 2013, Finjan engaged in the Reverse Merger described below and became one of our wholly-owned subsidiaries. As described
below, following the Reverse Merger, we have commenced discussions with various parties regarding potential licensing arrangements and
commenced four litigations against parties we believe are using our patented technology without a license.
Licensing and Enforcement Business
Through Finjan, we generate revenues and related cash flows by granting intellectual property licenses for the use of patented
technologies that we own. We actively license and enforce our patent rights against unauthorized use of our technologies (i.e. non-compliant
licensees). Most of our license agreements, whether entered into via traditional licensing or enforcement litigation or otherwise, are structured
on a paid-up basis (meaning we receive a one-time lump sum payment instead of future payments or royalties in exchange for a license to use
our technology in accordance with the applicable license agreement), while some of our license agreements provide for future royalty
payments in the event the licensee achieves milestones specified in the applicable license agreement. Upon entering into a new patent license
agreement, the licensee typically agrees to pay consideration for sales made prior to the effective date of the license, in an amount related to the
royalties we would have received had a license been in effect at the time of such sales.
Under U.S. law, a patent owner has the right to exclude others from making, selling or using the owner’s patented technology without a
license to do so. In many cases, unauthorized users of our technology are unwilling, at least initially, to negotiate or pay reasonable royalties
for their infringement of our patents and often fight any allegations of patent infringement. As a result of the common reluctance of patent
infringers to negotiate and ultimately take a patent license without at least the threat of legal action, patent licensing and enforcement often
begins with the filing of patent enforcement litigation. Accordingly, if we believe a party is required to license our patents in order to sell
certain products and such party refuses to do so, we may institute legal action against them. In a patent infringement lawsuit, we would
typically seek damages for past infringement and an injunction against future infringement. We evaluate, on a case by case basis, whether to
commence litigation, pursue litigation until a judgment is obtained or settle litigation based on a number of factors, including the strength of
our patent claims, validity, the evidence that the patent is being infringed and the terms of any proposed settlement or license agreement.
In June 2006, Finjan’s then parent filed a patent infringement lawsuit against Secure Computing Corp. and its subsidiaries, which we
refer to collectively as “Secure Computing,” in the United States District Court for the district of Delaware, which we refer to as the “Secure
Computing Litigation.” Finjan, which succeeded FSI as the plaintiff in the litigation, asserted that Secure
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Computing had willfully infringed three of Finjan’s U.S. patents and sought an injunction and damages for such infringement. In the Secure
Computing Litigation, Secure Computing filed counterclaims for patent infringement, asserting that Finjan was infringing two U.S. patents. At
trial, a jury determined that Secure Computing willfully infringed Finjan’s three patents and found that Finjan did not infringe Secure
Computing’s patents. The jury awarded Finjan approximately $9.0 million for past infringement in August 2009. In July 2011, the award was
subsequently increased to approximately $37.3 million, including interest. Post judgment interest continued to accumulate until the date of the
payment. The court also issued a permanent injunction prohibiting Secure Computing from making, using, selling or offering to sell any
infringing products. In September 2011, Finjan received proceeds of approximately $28.0 million, net of $9.3 million contingency legal fees,
from Secure Computing, including $3.1 million of interest, in satisfaction of the judgment.
In 2010, Finjan filed a patent infringement lawsuit against five additional software and technology companies, which we refer to as the
“2010 Litigation.” Finjan negotiated out-of-court settlements with two of the defendants while three defendants continued to trial. Following a
three-week jury trial held in December 2012, the jury rendered an adverse verdict in the 2010 Litigation. The jury concluded that the
defendants that proceeded to trial were not liable for infringement and also concluded that certain claims in two of Finjan’s patents were
invalid. Finjan filed a post-trial motion to set aside the jury’s verdict, but the motion was denied. The jury’s verdict rendering the subject
claims of the two patents invalid is currently being appealed. There can be no assurance, however, that such appeal will be successful. If
unsuccessful, the subject claims of the two patents will continue to be invalid in future licensing and enforcement actions.
In April 2012, Finjan entered into a binding memorandum of understanding, or “MOU,” with one of the parties in the 2010 Litigation.
As part of the MOU, Finjan agreed to withdraw its claims against such party in the 2010 Litigation and grant such party a license to use
Finjan’s patents. The license is fully paid up unless the holder of the license has aggregate annual net sales to third party distributors or re-
sellers in excess of $10 million (which has not been achieved to date). The MOU provided for the issuance to Finjan of 3.765% of the party’s
common stock, which had a fair value at the time of settlement of approximately $8.4 million, and cash payments in the aggregate amount of
$3.0 million, payable in three equal payments of $1.0 million, within eighteen months after the effective date of the final settlement and license
agreement. Finjan has received all of the above-mentioned shares and the three installment payments. The payments accrued interest at the rate
of 4% per annum until paid and were recognized when such payments were received. Prior to the Reverse Merger, Finjan distributed all of the
shares of common stock it received in the Settlement to its then-parent company and accordingly we do not own or have an interest in this
company.
In November 2012, Finjan signed a Confidential Settlement, Release and License Agreement with one of the parties to the 2010
Litigation, a large, multinational software and technology company. Pursuant to the agreement, the counter-party paid a one-time fully paid up
license fee to Finjan in the gross amount of $85 million in exchange for a perpetual, non-exclusive worldwide license to all of Finjan’s and its
affiliates’ patents, including patent rights owned or controlled by Finjan or its affiliates as of the date of such agreement and patents with a first
effective priority date occurring at any time prior to November 2022 that Finjan or its affiliates may own or control after the date of such
agreement. Following the signing of the agreement, Finjan dismissed all claims against the counter-party (including its affiliates).
Since completing the Reverse Merger in June 2013, Finjan has filed four patent infringement lawsuits, which we refer to as the “Pending
Litigation”). In each case, the patents subject to litigation relate to Finjan’s endpoint, web, and network security technologies. For additional
information regarding the Pending Litigation, see “Item 3. Legal Proceedings.”
As discussed below, since completing the Reverse Merger, we have also commenced preliminary discussions with potential licensees
during 2013 and, during the first quarter of 2014, we hired additional personnel (including our Vice President, Intellectual Property (IP)
Licensing and our Vice President, Legal Operations) to pursue our licensing strategy.
Growth Strategy
Our mission is to invest in innovation and encourage the development of core intellectual property. We believe our patented technology
that is capable of detecting previously unknown and emerging threats on a real-time, behavior-based, basis, in contrast to signature-based
methods of intercepting only known threats to computers, is significant and we intend to further monetize our technology through
licensing. This may include the pursuit of new patents relating to technology we currently own through the continued prosecution of pending
patent applications relating to our existing technology, the identification of new uses for our existing technology that may be patentable (and
obtaining patent protection for such new uses) and prosecuting patent applications in additional (non-U.S.) jurisdictions. We also intend to
expand our technology and intellectual property portfolio through strategic partnerships and acquisitions, as discussed below. Future licensing
efforts may involve negotiated transactions or, if necessary, enforcement of our patent rights through litigation or other means.
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We are also actively developing a licensing campaign, pursuant to which we intend to negotiate license agreements with third parties
without resorting to litigation. We have entered into preliminary discussions with several potential licensees. As discussed below, we are not
currently engaged in research and development or the internal development of new technology.
In addition to expanding our intellectual property portfolio by seeking additional patent protections relating to technology we currently
own (as described above), we intend to acquire and develop new technology and invest in intellectual property through acquisitions and
strategic partnerships. We intend to broaden our technology and patent holdings by working with inventors, acquiring technology companies,
investing in research laboratories, start-ups, universities, and by creating strategic partnerships with large companies seeking to effectively and
efficiently monetize their technology and patent assets. Currently, however, we do not have the resources to engage in internal research and
development or internal development of new technology through our current operating platform, and we expect that any new technology that
we acquire in the foreseeable future will be developed by strategic partners or businesses that we acquire or in which we invest. We will
depend upon acquisitions and strategic partnerships to acquire new technology, and we may acquire operating subsidiaries or enter into
strategic partnerships with businesses that develop technology on an ongoing basis. While we anticipate that we will initially focus on
acquisitions and strategic partnership involving technology relating to network, web and endpoint security, we may seek to diversify to a
broader software definition in the future. Our experience with monetizing both technology and patents may be considered useful by potential
acquisition candidates and strategic partners who may lack resources (in terms of capital, personnel and time) to effectively and efficiently
generate a return for those investments. We anticipate each opportunity may require a unique deal structure and have contemplated a number of
potential constructs; we may acquire outright applicable technology and patents for an upfront fee, pay royalties based on future licensing
revenue with respect to the acquired technology and patents, or commit shares of our common stock to the extent permitted under applicable
securities laws and the rules of any securities exchange on which our securities are listed or a combination of the above. Since completing the
Reverse Merger, we have increased our staffing with a view towards a licensing campaign and otherwise pursuing our growth strategy.
Among other things, our management has entertained discussions with potential sources of new technology regarding strategic opportunities,
including strategic partnerships and acquisitions. On November 21, 2013, we made an investment in an Israel –based limited partnership
venture capital fund seeking to invest in early-stage cyber technology companies.
As part of our acquisition and strategic partnership strategy, we will seek to identify technology and patents that have been or are
anticipated to be widely adopted by third parties in connection with the manufacture or sale of products and services. To date, other than a
small patent portfolio that we acquired in 2005 and substantially sold thereafter, we have not acquired any material technology or intellectual
property from third parties and no assurance can be given that we will be able to execute our acquisition and strategic partnership strategy on
terms acceptable to us, if at all. However, we intend to leverage the contacts and expertise of our directors and executive officers who, through
their backgrounds in the venture capital, technology and intellectual property monetization industries have experience identifying potentially
valuable opportunities for future investment.
Prior to the Reverse Merger, Finjan’s intellectual property enforcement was handled primarily by outside consultants (including outside
legal counsel and technology experts) and prior to April 2013, Finjan had no full time employees or consultants. However, in April 2013,
Finjan engaged Philip Hartstein to serve as Finjan’s President and Shimon Steinmetz to serve as Finjan’s Chief Financial Officer, in each case
on a consulting basis. Upon the closing of the Reverse Merger, Messrs. Hartstein and Steinmetz were appointed as our President and Chief
Financial Officer, respectively. In June 2013, we entered into employment agreements with each of Messrs. Hartstein and Steinmetz. During
February 2014, we also hired a Vice President, Intellectual Property (IP) Licensing and a Vice President, Legal Operations as part of our
efforts to pursue our licensing and enforcement business. We intend to hire or engage additional employees and/or consultants with skills and
experience relevant to our online security technology business in the near term and to develop processes and procedures for identifying and
evaluating the strength of a patent portfolio before the decision is made to acquire additional intellectual property or to commence enforcement
actions. Among other sources, we intend to utilize our connections in venture capital, cybersecurity and technology industries to identify and
retain talented personnel. There can be no assurances, however, that we will be successful in those endeavors.
Patented Technology
Through Finjan, we currently have twenty-one U.S. patents. Finjan’s current U.S. issued patents expire at various times from 2016
through 2032 and it currently has four U.S. patent applications pending. Finjan also has 11 international patents and four international patent
applications pending as of the date of the report. Although we may from time to time focus on monetizing certain of these patents, we consider
all of our patents to be “core” patents for our business.
The following table sets forth a brief description of Finjan’s issued U.S. patents, including their respective publication numbers,
application filing date, issue date, expiration date and title.
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Title
Expiration
Date*
File Date Issue Date
5/3/2004 8/26/2008 4/27/2019 Method and system for caching at secure gateways
7/1/2023 Policy-based caching
1/7/2023 Malicious mobile code runtime monitoring system and methods
Publication
Number
6092194 11/6/1997 7/18/2000 11/6/2017 System and method for protecting a computer and a network from hostile downloadables
6154844 12/22/1997 11/28/2000 12/22/2017 System and method for attaching a downloadable security profile to a downloadable
6167520 1/29/1997 12/26/2000 1/29/2017 System and method for protecting a client during runtime from hostile downloadables
6480962 4/18/2000 11/12/2002 1/29/2017 System and method for protecting a client during runtime from hostile downloadables
6804780 3/30/2000 10/12/2004 11/6/2017 System and method for protecting a computer and a network from hostile downloadables
6965968 2/27/2003 11/15/2005
7058822 5/17/2001
6/6/2006
7418731
7613918 2/16/2006 11/3/2009 12/22/2017 System and method for enforcing a security context on a downloadable
7613926
7647633 6/22/2005 1/12/2010
7756996 1/30/2004 7/13/2010
7757289 12/12/2005 7/13/2010 5/12/2029 System and method for inspecting dynamically generated executable code
7930299 11/29/2006 4/19/2011 5/18/2027 System and method for appending security information to search engine results
7975305 12/9/2004
8015182 11/29/2006
8079086 5/26/2009 12/13/2011 1/29/2017 Malicious mobile code runtime monitoring system and methods
8087079
8141154 6/14/2010 3/20/2012 12/12/2025 System and method for inspecting dynamically generated executable code
8225408 8/30/2004 7/17/2012 5/27/2021 Method and system for adaptive rule-based content scanners
8566580
3/7/2006 11/3/2009 11/6/2017 Method and system for protecting a computer and a network from hostile downloadables
1/7/2023 Malicious mobile code runtime monitoring system and methods
5/4/2029 Embedding management data within HTTP messages
7/5/2011 8/18/2020 Method and system for adaptive rule-based content scanners for desktop computers
9/6/2011 5/18/2027 System and method for appending security information to search engine results
5/4/2007 12/27/2011 10/26/2030 Byte-distribution analysis of file security
10/22/2013
7/23/2008
7/9/2032
System for splitting an SSL connection between two security computers, designed specifically
to address network security concerns
*
Patent expiration dates are routinely subject to dispute in patent infringement actions. No assurance can be given that third parties
infringing our patents will not dispute the expiration dates of our patents or that we will be successful in defending against such disputes.
See “Risk Factors—Risks Related to Our Web and Network Security Technology Business”
We continue to seek additional patent protection relating to the technology we currently own, most recently obtaining patent protection
(U.S. Patent No. 8,566,580) relating to a proprietary system for splitting an SSL connection between two secure computers, designed
specifically to address network security concerns. Splitting an SSL (secure socket layer) connection or ‘split tunneling’ allows a VPN (virtual
private network) user to access a public network (e.g., the Internet) and a local network simultaneously, utilizing the same physical network
connection. However, split tunneling can also enable users to bypass a company’s gateway level security, which represents a significant
network security risk. The technique covered by the ‘580 patent is intended to address this and other critical cybersecurity issues.
As a core element of our continued patent licensing and enforcement business, our management team, having expertise with technology
and IP monetization, alongside early company executives including Shlomo Touboul (Finjan’s founder) who consults with us, we monitor a
number of markets and assess and observe the adoption of our patented technology in these markets. Our management team, in conjunction
with outside legal, technical, and financial experts conclude on a case-by-case basis whether or not they believe that Finjan’s patented
technology is being used. Based on these observations, we continue to believe our patented technologies are relevant in specific technology
areas including endpoint/cloud software, web gateway/internet infrastructure, and networking equipment markets. From that basis, the
Company pursues unlicensed entities through licensing, assertion of claims or both.
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Competition
We expect to encounter significant competition in the area of patent acquisitions and enforcement. This includes a growing number of
competitors seeking to acquire the same or similar patents and technologies that we may seek to acquire. Entities including Acacia Research
Corporation, Interdigital, Inc., RPX Corporation, Rambus Inc., Tessera Technologies Inc., Wi-LAN Inc. and Pendrell Corp. compete in
acquiring rights to patents, and we expect more entities to enter the market.
Other companies may develop competing technologies that offer better or less expensive alternatives to our patented technologies that we
may acquire and/or out-license. Technological advances or entirely different approaches developed by one or more of our competitors could
render certain of the technologies owned or controlled by our operating subsidiaries obsolete and/or materially reduce their value.
We also compete with venture capital firms, strategic corporate buyers and various industry leaders for technology acquisitions and
licensing opportunities. Many of these competitors may have more financial and human resources than us as well as more experience
operating in our industry. If we are successful, we may find more companies entering the market for similar technology opportunities, which
may reduce our market share in the online security industry, which we currently rely upon to generate future income.
Our Organic Fertilizer Business
Overview
Through our Converted Organics subsidiary, we operate a processing facility in Gonzales, California (CA) that uses food and
agricultural waste as raw materials to manufacture all-natural fertilizer and soil amendment products combining nutritional and disease
suppression characteristics for sale to the agribusiness market. We anticipate that any future revenue from our fertilizer business will be based
upon our continued operation of our Gonzales, CA facility and possibly licensing the use of our organic fertilizer manufacturing technology to
others.
We are evaluating whether to continue our organic fertilizer business. There can be no assurance that we will continue to operate our
organic fertilizer business as previously operated or at all, or that such business will become profitable.
Production and Sale of Organic Fertilizer
Our organic fertilizer is produced exclusively at our Gonzales, CA plant. The plant currently produces predominantly liquid products;
with additional capital it could be modified to enable production of additional dry products as well. Revenue from our fertilizer manufacturing
operations is predominately generated from the sale of liquid product to the agribusiness market in California, though we do generate a small
amount of revenue from “tip fees” (which are fees charged to waste haulers who pay us a fee for accepting food waste generated by food
distributors, food providers and hospitality venues) associated with the receipt of food waste at the facility and sales of a limited amount of dry
products.
Through Converted Organics, we sell and distribute the fertilizer manufactured at the Gonzales, CA plant through a small group of sales
professionals who seek out large purchasers of fertilizer for distribution in our target geographic and product markets. Key activities of the
sales organization include the introduction of our products to target clients and the development of our relationships with them. Due to
Converted Organics’ small size, we believe that the most efficient means of distributing our fertilizer products is on a whole-sale basis to
regional distributors, and this method currently accounts for the majority of our sales. Distributors typically sell our fertilizer to farms,
vineyards, and other end users. We do not receive proceeds from the resale of our fertilizer products by distributors to end users. To the extent
that we make sales directly to customers, we generally require our customers to handle delivery of the product.
To generate product for sale, we use a high temperature liquid composting, or “HTLC,” process to convert food waste and other
feedstock into fertilizer. In simplified terms, the process operates by encouraging naturally-occurring microbes to consume prepared feedstock.
The action of the microbes on the feedstock is exothermic (heat-releasing), and causes the temperature of the feedstock to rise to very high,
pathogen-destroying levels. Subsequently, thermophilic (heat-loving) bacteria naturally occurring in the food waste utilize oxygen to convert
the waste into a rich blend of nutrients and single-cell proteins (aerobic digestion). Feedstock preparation, digestion temperature, rate of
oxygen addition, acidity, and inoculation of the microbial regime are carefully controlled to produce products that are highly consistent from
batch to batch. The HTLC method can be used in any future operating plants, whether owned by us or licensed. The HTLC technology that we
use is not patented and, although we believe our know how and right to use this technology may provide a competitive advantage, we do not
possess the right to exclude others from using the same or similar technology.
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Our Gonzales, CA facility is our sole producer of our fertilizer product. Converted Organics, Inc., the former parent of Converted
Organics of California, is considered the acquiree for accounting purposes in the Reverse Merger. The results of operations of Converted
Organics have been included in our assets and liabilities and our historical operations since June 3, 2013, the date we completed the Reverse
Merger. Accordingly, the following historical results of operations of Converted Organics are included in the pro forma financial information
in the footnotes to the consolidated financial statements included elsewhere in this filing. During 2013, 2012 and 2011, Converted Organics
generated approximately $1.6 million (of which approximately $0.7 million was generated after the Reverse Merger and is included in our
results of operations), $1.5 million and $2.8 million of revenue, respectively, from the sale of fertilizer from this facility. During the year ended
December 31, 2013, approximately 68% of the revenues generated by the Gonzales, CA facility were from a total of three customers, each of
which distributes our fertilizer. During 2012, approximately 58% of the revenues generated by the Gonzales, CA facility were from a total of
three customers, each of which distributes our fertilizer. During 2011, approximately 53% of the revenues generated by the Gonzales, CA
facility were from a total of four customers, each of which distributes our fertilizer.
Since completing the Reverse Merger, we have placed our fertilizer business under new management and have worked to enhance the
operations of its fertilizer business, principally by reducing costs. Under new management, our organic fertilizer business is poised to
manufacture its first new product line in approximately three years. Our new product offerings are undergoing registration with the California
Department of Food and Agriculture. Once registered, our new product offerings will include a liquid soil amendment complete with
beneficial soil micro-organisms and probiotics and a vegan, powder based fertilizer.
Benefits of Our Fertilizer Products and Technology
The efficacy of our fertilizer products has been demonstrated both in university laboratories and multi-year growth trials. These field
trials have been conducted on more than a dozen crops including potatoes, tomatoes, squash, blueberries, grapes, cotton, and turf grass. While
these studies have not been published, peer-reviewed, or otherwise subject to third-party scrutiny, we believe that the trials and other data
show our products to have several valuable attributes:
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Plant Nutrition. Historically, growers have focused on the nitrogen (N), phosphorous (P) and potassium (K) content of fertilizers.
As agronomists have gained a better understanding of the importance of soil culture, they have turned their attention to humic and
fulvic acids, phytohormones, and other micronutrients and growth regulators not present in petrochemical-based fertilizers. We
believe that the presence of such ingredients in our fertilizer may cause its use to have significant beneficial effects on soil and plant
health.
Disease Suppression. Based on field trials of product produced using our technology, we believe our products possess disease
suppression characteristics that may eliminate or significantly reduce the need for fungicides and other crop protection products. The
products’ disease suppression properties have been observed under controlled laboratory conditions and in documented field trials.
We also have field reports that have shown the liquid concentrate to be effective in reducing the severity of powdery mildew on
grapes, the verticillium pressure on tomatoes, and the scab in potatoes
Soil amendment. As a result of its slow-release nature, our dry fertilizer product increases the organic content of soil, which
improves granularity and water retention and thus reduces NPK leaching and run-off.
Pathogen-free. Due to high processing temperatures, our products are virtually pathogen-free and have an extended shelf life. We
generally recommend that customers not store our fertilizer for more than 12 months.
In addition to these agricultural benefits, we have also achieved Organic Materials Review Institute (OMRI) and/or Washington State
Department of Agriculture (WSDA) certification for many of our products, allowing growers to use them in certified organic farming.
Competition
We operate our organic fertilizer business in a very competitive environment. The organic fertilizer business requires us to compete in
three separate areas — organic waste stream feedstock, technology, and end products — each of which is quickly evolving. We believe our
organic fertilizer business will be able to compete effectively, with adequate financial resources, because of the abundance of the supply of
food waste in our geographic markets, the pricing of our tip fees, and the quality of our products and technology.
Competition for the organic waste stream feedstock includes landfills, incinerators, animal feed, land application, and traditional
composting operations.
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There are a variety of methods used to treat organic wastes, including composting, digestion, hydrolysis, and thermal processing.
Companies using these technologies may compete with us for organic material. These methods are defined as follows:
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Composting. Composting is a natural process of decomposition that can be accelerated through the mounding of waste into
windrows to retain the heat given off by bacteria involved in the decomposition process. Given the difficulties in controlling this
process, the resulting compost is often inconsistent and generally commands a lower market price than our product. Further,
large-scale composting facilities require significant amounts of land for operations, which, particularly in major metropolitan areas,
may either not be readily available or may be too costly.
Digestion. Digestion may be either aerobic (requiring oxygen) like the HTLC process, or anaerobic (occurring without oxygen).
Anaerobic digestion generally takes longer and produces significantly more odor as a result of the production of ammonia and
methane, the latter of which is also a greenhouse gas. The methane gas produced has some value as a source of energy, but it is not
readily transported and is thus generally limited to on-site use.
Hydrolysis. Hydrolysis is a chemical process by which water reacts with another substance, and it is usually catalyzed through the
introduction of an acid. This reaction is used to convert cellulose present in the organic waste into sugars, which in turn may be
converted into ethanol.
Thermal. Thermal technologies work by either completely or partially combusting organic materials for the purpose of generating
electricity. Partial combustion methods may also lead to the production of useful and saleable byproducts, such as a variety of gases
(e.g. hydrogen, carbon monoxide, and carbon dioxide) and organic liquids.
The organic fertilizer business is highly fragmented, under-capitalized, and growing rapidly. We are unaware of any dominant producers
or products currently in the market. There are a number of single-input, protein-based products, such as fish, bone, and cottonseed meal,
which can be used alone or mixed with chemical additives to create highly formulated fertilizer blends that target specific soil and crop needs.
In this sense, they are similar to our products and provide additional competition in the organic fertilizer market. In the future, large producers
of non-organic fertilizer may also increase their presence in the organic fertilizer market, and these companies are generally better-capitalized
and have greater financial and marketing resources than we do.
Most of the fertilizer consumed annually in North America is mined or derived from natural gas or petroleum. These petroleum-based
products generally have higher nutrient content (NPK) and cost less than organic fertilizers. Traditional petrochemical fertilizers are highly
soluble and readily leach from the soil, and slow-release products, which must be coated or specially processed, command a premium. The
economic value offered by petrochemicals, especially for field crops including corn, wheat, hay, and soybeans, will not be supplanted in the
foreseeable future. We compete with large producers of non-organic fertilizers, many of which are significantly larger and better-capitalized
than we are. In addition, we compete with numerous smaller producers of fertilizer.
Despite a large number of new products in the end market, we believe that our products have a unique set of characteristics. We believe
positioning and branding the combination of nutrition and disease suppression characteristics will differentiate our products from other organic
fertilizers to develop market demand, while maintaining or increasing pricing.
Target Markets
In the U.S., the majority of fertilizer is consumed by agribusiness, with the professional turf and retail segments consuming the
remainder. The concern of farmers, gardeners, and landscapers about nutrient runoffs, soil health, and other long-term effects of conventional
chemical fertilizers has increased demand for organic fertilizer. We have identified three target markets:
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Agribusiness. Conventional farms, organic farms, horticulture, hydroponics, and aquaculture.
Turf Management. Professional lawn care and landscaping, golf courses, and sod farms, as well as commercial, government, and
institutional facilities.
Retail Sales. Home improvement outlets, garden supply stores, nurseries, Internet sales, and shopping networks.
Due to cash and production limitations we are presently only marketing product into the agribusiness market.
We believe there are two primary business drivers influencing commercial agriculture. First, commercial farmers are focused on
improving the economic yield of their land — i.e., maximizing the value derived from crop output (quantity and quality). Second, commercial
farmers have begun to recognize the importance of reducing the use of chemical products while also meeting the demand for cost-effective,
environmentally responsible alternatives. We believe this change in focus is the result of:
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Consumer demand for safer, higher quality food;
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The limitation on the use of certain synthetic products by government authorities, including nutrients such as nitrogen and chemicals
such as methyl bromide;
Environmental concerns and the demand for sustainable technologies; and
Demand for more food for the growing world population.
We believe farmers are facing pressures to change from conventional production practices to more environmentally friendly practices.
U.S. agricultural producers are turning to certified organic farming methods as a potential way to lower production costs, decrease reliance on
nonrenewable resources such as chemical fertilizers, increase market share with an “organically grown” label and capture premium prices,
thereby boosting farm income.
Governmental Regulation
Our end products are regulated by federal, state, county, and local governments, as well as various agencies thereof, including the United
States Department of Agriculture.
In addition to the regulations governing the sale of our end products, our current facility and any future facilities are subject to extensive
regulation. Specific permit and approval requirements are set by the state and state agencies, as well as local jurisdictions including but not
limited to cities, towns, and counties. Any changes to our plant or procedures would likely require permit modifications.
Environmental regulations will also govern the operation of our current facility and any future facilities. Regulatory agencies may require
us to remediate environmental conditions at our locations. During the year ended December 31, 2013, expenses incurred to comply with
environmental regulation applicable to our fertilizer business were immaterial.
Future Development
We need additional capital to build additional plants to grow our organic fertilizer business or we need to license others to use our
technology. Our Converted Organics subsidiary does not have funds to build additional facilities and we have no plans to raise such funds or
allocate funds generated from our online security technology business for that purpose. We are evaluating whether to continue our organic
fertilizer business as currently conducted. There can be no assurance that we will continue to operate our organic fertilizer business as
previously operated or at all. We do not intend to use significant amounts of cash on hand generated by Finjan to fund our organic fertilizer
business.
Employees
As of December 31, 2013, we had twelve full-time employees, four part-time employees and four part-time consultants working for us,
on a consolidated basis. We have dedicated nine full-time employees to our web and network security technology business, including our
president, chief financial officer, and investor relations personnel, as well as three part-time consultant. In February 2014, we hired two
additional full-time employees, who serve as our Vice President, Intellectual Property (IP) Licensing and Vice President, Legal Operations. In
March 2014, the Company hired a Vice President, Corporate Counsel. Our management team and additional personnel that we may hire in the
future will be primarily responsible for establishing and pursuing our licensing and enforcement strategy, including analyzing licensing and
enforcement opportunities, making tactical decisions related to our strategy, identifying new applications for our existing technology and
pursuing opportunities to invest in new technologies through strategic partnerships and acquisitions. Although our management controls our
overall litigation strategy and our strategy for each case we litigate (or settle), we nonetheless utilize outside legal counsel to execute aspects of
our licensing and enforcement strategy (such as counsel we retain to prosecute enforcement actions, under the supervision of management)
and technology and utilize consultants, including Shlomo Touboul, Finjan’s founder and former chief technology officer, to assess
opportunities related to our technology and additional technologies we may pursue in the future. We intend to hire additional full-time
employees (or additional consultants or independent contractors) in the near future to expand our online security technology business,
although no assurance can be given that we will be able to attract or retain qualified employees on terms acceptable to us or at all. Three of our
full-time employees work in connection with our organic fertilizer segment (one in office management, one in operations and one in sales). We
also have four part-time employees and three part-time consultant in our organic fertilizer business. Neither we nor any of our subsidiaries is a
party to any collective bargaining agreement. We consider our employee relations to be good.
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Corporate Information and History
Corporate Information
Our principal executive offices are located at 122 East 42nd Street, New York, New York 10168. Our telephone number is (646) 755-
3320 and our web address is www.finjan.com. Financial and other information can be accessed on the “Investors” section of our website. We
make available through our website, free of charge, copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Also posted on our website are certain
corporate governance documents, including our Code of Business Conduct and Ethics. The reference to our website is textual in reference
only, and the information included or referred to on, or accessible through, our website does not constitute part of, and is not incorporated by
reference into, this report or any other filing.
We also file periodic reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). Such
reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, or by calling the
SEC at (800) SEC-0330. In addition, the SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information
statements and other information.
Corporate History
Finjan Holdings, Inc. (formerly, Converted Organics Inc.) was incorporated in Delaware in January of 2006 for the purpose of
establishing a waste-to-fertilizer business.
In February 2007, we successfully completed both a $9.9 million initial public offering of stock and a $17.5 million bond offering with
the New Jersey Economic Development Authority. The net proceeds of these offerings were used to develop and construct a fertilizer
manufacturing facility in Woodbridge, New Jersey. In January of 2008, we acquired the assets of Waste Recovery Industries, LLC and United
Organic Products, LLC, including our processing facility in Gonzales, California and related technology rights. Also in 2008, operations
commenced at the Woodbridge, New Jersey plant, with the production of dry fertilizer product beginning in 2009. We subsequently began
distribution of the dry product in the professional turf and retail markets. In 2009, we also raised $27 million of additional capital and the
Gonzales, California facility became cash flow positive. In 2010, we closed the Woodbridge, New Jersey plant, making the Gonzales,
California plant our sole fertilizer manufacturing facility.
In March 2010, we began to operate an Industrial Wastewater Resources, or “IWR,” division to leverage our exclusive license of the
LM-HT Concentrator technology for the treatment of industrial wastewater. On March 23, 2010, we entered into a loan and license agreement
with Heartland Technology Partners, LLC, or “HTP.” On September 17, 2012, we completed a transaction with HTP whereby we terminated
all rights under the license agreement in exchange for $650,000 and we no longer have any rights under that agreement. In light of the
termination of our agreement with HTP, we will not generate future revenue from, or own any assets in, the IWR segment of our business.
On May 20, 2010, we formed TerraSphere Inc., a Delaware C corporation and a wholly owned subsidiary of the Company, for the
purpose of acquiring the membership interests of TerraSphere Systems, LLC, or “TerraSphere Systems.” On July 6, 2010, we, TerraSphere
Inc., Terrasphere Systems and the members of TerraSphere Systems entered into a membership interest purchase agreement, pursuant to
which we agreed to acquire the membership interests of TerraSphere Systems. The agreement was approved by our stockholders on
September 16, 2010 and we acquired 95% of the membership interests of TerraSphere Systems on November 12, 2010. TerraSphere Systems
is in the business of designing, building, and operating highly efficient and scalable systems, featuring a patented, proprietary technology that
utilizes vertically-stacked modules to house rows of plants, which are then placed perpendicular to an interior light source to grow pesticide
and chemical-free organic fruits and vegetables. On December 7, 2012, we entered into an agreement, whereby we transferred our entire
ownership of TerraSphere Inc. and its subsidiaries to a third party. The purchaser received all of the assets of TerraSphere Inc. and its
subsidiaries, assumed all of the liabilities of TerraSphere Inc. and its subsidiaries and paid us nominal cash consideration. In light of the sale of
TerraSphere Inc. and its subsidiaries, we will not generate future revenue from the vertical farming segment of our business.
On June 3, 2013, we entered into an Agreement and Plan of Merger, which we refer to as the “Merger Agreement,” with Finjan and
COIN Merger Sub, Inc., or “Merger Sub,” pursuant to which Merger Sub merged with and into Finjan, with Finjan being the surviving
corporation. Upon filing of the Certificate of Ownership and Merger reflecting the merger of Merger Sub with and into Finjan with the
Delaware Secretary of State on June 3, 2013, we changed our corporate name from Converted Organics, Inc. to Finjan Holdings, Inc., without
obtaining shareholder approval, through a short-form merger in accordance with Section 253 of the General Corporation Law of the State of
Delaware. In connection with our name change, the symbol for our common stock was changed to “FNJN,” effective July 2, 2013.
Throughout this filing, we refer to the transactions contemplated by the Merger Agreement as the “Reverse Merger.” The Reverse Merger was
consummated on June 3, 2013. As a result of the Reverse Merger, Finjan became our wholly-owned subsidiary and former holders of
Finjan’s capital stock received an aggregate of 20,467,058 shares (on an adjusted basis, after giving effect to the 1-for-12 reverse stock split
that we effected on August 22, 2013) of our common stock, or 91.5% of our outstanding common stock at the effective time of the Reverse
Merger (on a fully-diluted basis, but excluding any shares underlying the options to purchase up to an aggregate of 1,585,476 shares (on an
adjusted basis, after giving effect to the 1-for-12 reverse stock split) of our common stock issued pursuant to the Merger Agreement).
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On June 3, 2013, as a condition to the closing of the Reverse Merger, we entered into an Exchange Agreement, which we refer to as the
“Exchange Agreement,” with Hudson Bay Master Fund Ltd., a Cayman Islands company, which we refer to as “Hudson Bay,” and Iroquois
Master Fund Ltd., a Cayman Islands company, which we refer to “Iroquois.” Pursuant to the Exchange Agreement, immediately following the
effectiveness of the Reverse Merger, each of Hudson Bay and Iroquois exchanged an aggregate of $1,192,500 principal amount of our
convertible notes, 13,281 shares of our Series A Preferred Stock and warrants to purchase an aggregate of 105,554 shares (on an adjusted
basis after giving effect to the 1-for-500 and 1-for-12 reverse stock splits effected on June 3, 2013 and August 22, 2013, respectively) of our
common stock for an aggregate of 1,789,469 shares (on an adjusted basis, after giving effect to the 1-for-12 reverse stock split that we
effected on August 22, 2013) of our common stock, or 8% of our outstanding common stock immediately following the Reverse Merger (on a
fully-diluted basis, but excluding any shares underlying the options to purchase up to an aggregate of 1,585,476 shares (on an adjusted basis,
after giving effect to the 1-for-12 reverse stock split) of our common stock issued pursuant to the Merger Agreement). Each of Hudson Bay
and Iroquois also released us, our affiliates, subsidiaries and related companies from any and all debts, liabilities and other claims with respect
to such convertible notes, Series A Preferred Stock and warrants.
For additional information regarding Finjan’s corporate history, please see “Business—Online Security Technology—Development of
Finjan’s Business” above.
ITEM 1A. RISK FACTORS.
Investing in our common stock involves a high degree of risk. You should consider carefully the risks, uncertainties and other factors
described below, in addition to the other information set forth in this filing, before deciding whether to invest in shares of our common stock.
Any of these risks, uncertainties and other factors could materially and adversely affect our business, financial condition, results of
operations, cash flows or prospects. In that case, the market price of our common stock could decline, and you may lose all or part of your
investment in our common stock. See also “Cautionary Note Regarding Forward-Looking Statements.”
Risks Related to Our Web and Network Security Technology Business
Finjan’s limited operating history following its 2009 asset sale makes it difficult to evaluate its current business and future
prospects.
Following the sale of Finjan’s sales, marketing and certain other assets in 2009, Finjan’s business has consisted primarily of prosecution
of the Secure Computing Litigation, the 2010 Litigation and, more recently, the Pending Litigation. Since 2009, Finjan has generated
significant, but sporadic cash flows and net income through its licensing and enforcement activities. Finjan has a very limited track record, as a
stand-alone entity, in executing its business plan which includes, among other things, acquiring, prosecuting, licensing, litigating or otherwise
monetizing patent assets. Finjan’s limited operating history, as a stand-alone entity, in its current line of business makes it difficult to evaluate
our current business model and future prospects. There is a significant risk that we will not be able to implement or execute our current
business plan, or demonstrate that its business plan is sound.
We are presently reliant exclusively on a limited number of patented technologies that we own through Finjan.
Finjan derives substantially all of its income from a relatively small number of key technologies. Since the sale of Finjan’s operating
assets in 2009, its assets have consisted primarily of twenty-one U.S. and eleven international patents that we intend to monetize. Finjan’s
current U.S. issued patents expire at various times from 2016 through 2032 and it currently has four U.S. patent applications and four
international patent applications pending as of the date of the filling. As new technological advances occur, many of the patented technologies
we own through Finjan may become obsolete before they are completely monetized. If we are unable to monetize our current patent assets for
any reason, including obsolescence of our technology, the expiration of our patents or any other reason, we may be unable to acquire
additional assets. If this occurs, our business and prospects would be materially harmed.
Any failure to protect or enforce our patent or other intellectual property rights could significantly impair our business.
Our ability to successfully operate our business depends largely on the validity and enforceability of our patent rights and the relevance
of our patent rights to commercially viable products or services. Third parties have challenged, and we expect will continue to challenge, the
infringement, validity and enforceability of certain of our patents. In some instances, our patent claims could be substantially narrowed or
declared invalid, unenforceable, not essential or not infringed. We cannot assure you that the validity and enforceability of our patents will be
maintained or that our patent claims will be applicable to any particular product or service. In addition, the U.S. Patent and Trademark Office,
or the “USPTO,” could invalidate or render unenforceable our current or future
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patents (if any) or materially narrow the scope of their claims during the course of a re-examination. Any significant adverse finding as to the
validity, enforceability or scope of certain of our patents and/or any successful design around certain of our patents could materially and
adversely affect our ability to secure future settlements or licenses on beneficial terms, if at all, and otherwise harm our business.
Adverse verdicts, including the adverse verdict rendered in the 2010 Litigation, may adversely affect our business.
In connection with the 2010 Litigation, a trial jury concluded that the defendants that proceeded to trial were not liable for infringement
and also concluded that certain claims in two of Finjan’s patents are invalid. Finjan filed a post-trial motion to set aside the jury verdict, but the
motion was denied. We are appealing the jury verdict rendering the subject claims in the two patents invalid. There can be no assurance,
however, that such appeal will be successful. If our appeal is not successful, the subject claims of the two patents will continue to be invalid in
future licensing and enforcement actions.
The value of our patent assets may decline.
We will likely be required to spend significant time and resources to maintain the effectiveness of our issued patents by paying
maintenance fees and making filings with the USPTO as well as prosecuting our patent applications. In the future, we may acquire patent
assets, including patent applications, which require us to spend resources to prosecute the applications with the USPTO.
Despite efforts to protect our intellectual property rights, any of the following or similar occurrences may reduce the value of our
intellectual property:
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our applications for patents may not be granted and, if granted, may be challenged or invalidated;
issued patents may not provide us with any competitive advantages versus potentially infringing parties;
our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology; or
our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or
superior to those we acquire and/or prosecute.
Moreover, we may not be able to effectively protect our intellectual property rights in certain foreign countries where we may do
business in the future or where competitors may operate. If we fail to maintain, defend or prosecute our patent assets properly, the value of
those assets would be reduced or eliminated, and our business would be harmed.
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We expect to be involved in costly, time-consuming and uncertain litigation and administrative actions to enforce our patents, which
may adversely affect our financial condition and our ability to operate our business.
If we believe a third party is required to obtain a license to use our technology, we may commence legal or administrative action if the
third party refuses to enter into a license agreement with us. Patent litigation is inherently risky and the outcome is uncertain and we cannot
predict the outcome of any future litigation or administrative action. Many of the other parties we believe infringe our patents, are large and
well-financed companies with substantially greater resources than us and may devote substantial resources toward avoiding or limiting liability
and the amount of associated damages for infringing our patents. We could also face counterclaims that challenge the essential nature, validity,
enforceability or infringement of our patents. Regardless of whether legal action is successful, legal and expert fees and other costs associated
with enforcement action have been, and may continue to be, significant.
Our cash flows are unpredictable, and this may harm our financial condition or the market price for our common stock.
The amount and timing of cash flows from our licensing and enforcement activities are subject to uncertainties stemming primarily from
uncertainties regarding the rates of adoption of our patented technologies, the growth rates of our licensees, the outcome of enforcement
actions and certain other factors. As such, our income and cash flows may vary significantly from period to period, which could make our
business difficult to manage, adversely affect our business and operating results, cause our annual or quarterly results to fall below market
expectations and adversely affect the market price of our common stock.
Our cash flows and income have been derived from a limited number of sources.
Our net income in recent years has been derived from a limited number of settlements and license agreements, and we expect that, in the
near term, any income that we generate will be derived from a limited number of sources. In 2011, we derived approximately $24.9 million of
income from a single settlement. In 2012, we derived approximately $77.4 million of income from two settlements. In 2013, we did not
generate any income from our web and endpoint security technology segment other than a $1.0 million installment on a license entered into in
connection with a settlement agreement entered into in 2012. If we are unable to identify other third parties who use our technology, our future
income and cash flow could be adversely affected.
If we are unable to identify sources of new technology, our growth strategy may fail.
We do not invent new technologies or products and our growth strategy will depend, in part, on our ability to identify technology, patent
portfolios, and other acquisition candidates. To date, other than our Reverse Merger of Finjan, neither we nor Finjan has engaged in any
material acquisitions of technology or intellectual property assets from unaffiliated third parties. If we are unable to establish and maintain
relationships within our industry, we may not be able to identify new technology-based opportunities for sustainable revenues and
growth. Even if we are successful in establishing relationships with sources of technology, those relationships may not provide the volume or
quality of technology and/or intellectual property assets necessary to sustain our licensing and enforcement business. If we are unable to
identify and establish meaningful relationships with sources of technology and intellectual property our growth strategy may fail.
We may be unable to achieve the financial or other goals intended at the time of any potential acquisition.
Acquisitions of technology patent portfolios or companies holding such assets are subject to numerous risks, including the following:
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our inability to enter into a definitive agreement with respect to any potential acquisition, or if we are able to enter into such
agreement, our inability to consummate the potential acquisition;
our inability to achieve the anticipated financial and other benefits of a specific acquisition;
our inability to retain key personnel from an acquired company, if necessary;
difficulty in maintaining controls, procedures and policies during the transition and integration process;
diversion of our management’s attention from other business concerns; and
failure of our due diligence process to identify significant issues, including issues with respect to patented technologies and patent
portfolios, and other legal and financial contingencies.
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If we are unable to manage these risks effectively as part of any acquisition, our business and prospects could be adversely
affected. Depending upon the nature and structure of future acquisitions, our stockholders may not have the ability to vote on, or consent to,
the consummation of any such acquisition.
The technology we acquire in the future, if any, may not be commercially successful.
We may acquire patents and technologies that are in the early stages of adoption in the commercial and consumer markets. Demand for
some of these technologies may be untested and subject to fluctuation based upon the rate at which our patents and technologies are adopted in
products and services. These technologies may require long development cycles and a substantial investment before we can determine their
commercial viability. As a result, there can be no assurance as to whether technologies we acquire will have value that can be monetized.
Failures in our due diligence and/or inaccuracies of representations and warranties made by third parties may expose us to
material liabilities, write-downs or write-offs in the future.
We expect to conduct due diligence investigations of the technology and patent assets we seek to acquire in the future. Due diligence is
time consuming and expensive and, at times, we may also rely on opinions or representations or warranties of third parties to supplement or
replace our own independent due diligence. Even if we conduct extensive due diligence on particular technology or patent assets, this diligence
may not reveal all material issues that affect the acquisition. If our diligence fails to identify issues related to the applicable technology or patent
assets or industry to which they relate, or opinions, representations or warranties prove to be inaccurate, we may be forced to later write-down
or write-off assets, or incur impairment or other charges that could result in our reporting losses. Even though these charges may be non-cash
items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market
perceptions about us or our common stock. In addition, we may acquire technology and patent assets from a seller who does not have proper
title to those assets. In those cases, we could lose part or all of our investment in the assets.
Our acquisitions of technology and patent assets may be time consuming, complex and costly, which could adversely affect our
operating results.
Acquisitions of patent, technology or other intellectual property assets may be time consuming, complex and costly to consummate. As a
result, we expect to incur significant operating expenses and may be required to raise capital during the negotiations even if the acquisition is
ultimately not consummated. We may incur significant costs to organize and negotiate a structured acquisition that does not ultimately result in
an acquisition of any technology or patent assets or, if consummated, proves to be unprofitable for us. These costs could adversely affect our
operating results, and if we incur losses, the value of our securities could decline.
It may be difficult for us to verify royalty amounts that we are owed under licensing agreements, and this may cause us to lose
revenues.
We anticipate that the terms of license agreements may require licensees to document their use of our technology and report related data
to us on a periodic basis. Although license terms may give us the right to audit books and records of licensees to verify this information, audits
can be expensive and time consuming, and may not be cost-effective based on our understanding of a licensee’s business. Furthermore, any
license compliance program that we establish to audit certain licensees in order to review the accuracy of the information contained in their
royalty reports may not be effective to ensure we receive royalties to which we are entitled.
The success of our online security technology business depends in part upon our ability to retain the best legal counsel to represent
us in patent enforcement litigation.
The success of our licensing and enforcement business depends upon our ability to retain the best legal counsel to advise us and manage
our enforcement and litigation activities. As our licensing and enforcement actions increase, it may become more difficult to find the best legal
counsel to handle our active litigation cases as conflicts prevent them from representing us.
In connection with patent enforcement actions, a court may rule that we have violated certain statutory, regulatory, federal, local or
governing rules or standards, which may expose us to certain material liabilities.
In connection with licensing and enforcement actions, it is possible that a defendant may claim and/or a court may rule that we have
violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or
procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or our subsidiaries or award
attorney’s fees and/or expenses to a defendant(s), which could be material, and if we or our subsidiaries are required to pay such monetary
sanctions, attorneys’ fees and/or expenses, such payment could materially harm our operating results and our financial position.
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New legislation, regulations, executive orders or rules related to obtaining patents or enforcing patents could significantly increase
our operating costs and decrease our income.
If new legislation, regulations or rules are implemented either by Congress, the USPTO or the courts or if the President of the United
States issues executive orders that impact the patent application process, the patent enforcement process or the rights of patent holders, these
changes could negatively affect our expenses and income. For example, new rules regarding the burden of proof in patent enforcement actions
could significantly increase the cost of our enforcement actions, and new standards or limitations on liability for patent infringement could
negatively impact our income derived from such enforcement actions.
Federal courts are becoming more crowded, and as a result, patent enforcement litigation is taking longer.
Our patent enforcement actions are almost exclusively prosecuted in federal court. We believe there is a trend in increasing numbers of
civil lawsuits and criminal proceedings before federal judges, and as a result, we believe that the risk of delays in our patent enforcement
actions will have a greater effect on our business in the future unless this trend changes.
Any reductions in the funding of the USPTO could have an adverse impact on the cost of processing pending patent applications
and the value of those pending patent applications.
Our business plan includes the possible acquisition of patent applications pending before the USPTO. The value of any patent
application we acquire will be dependent upon the issuance of patents in a timely manner, and any reductions in the funding of the USPTO
could materially delay the process by which the USPTO issues patents and consequently any income that may be derived for the technology
claimed in the patent application. Further, reductions in funding from Congress could result in higher patent application filing and maintenance
fees charged by the USPTO, causing an unexpected increase in our expenses.
Competition for patent rights and patent portfolios is intense.
We expect to encounter competition in the area of patent acquisition and enforcement as the number of companies entering this market is
increasing. This includes competitors seeking to acquire the same or similar patents and technologies that we may seek to acquire. Entities
including Acacia Research Corporation, InterDigital, Inc., RPX Corp, Rambus Inc., Tessera Technologies Inc., Wi-LAN Inc. and Pendrell
Corp compete in acquiring rights to patents, and we expect more entities to enter the market.
We anticipate that our future licensing and enforcement business will compete with venture capital firms and various industry leaders for
technology licensing opportunities. Many of these competitors may have more financial and human resources than we do. If we or our
competitors are successful, we may find more companies entering the market for similar technology opportunities, which may reduce our
market share in one or more technology industries that we plan on pursuing to generate future income.
The markets served by our online security technology are subject to rapid technological change, and if we is unable to acquire new
technologies and patents, our ability to generate income could be substantially impaired.
The markets served by our online security technology and our licensees frequently undergo transitions in which products rapidly
incorporate new features and performance standards on an industry-wide basis. Online security products are based on continually evolving
industry standards. This will require continued efforts and success in acquiring new patent portfolios with licensing and enforcement
opportunities. If we are unable to acquire new patented technologies and patent portfolios, or to identify and ensure compliance with evolving
industry standards, our ability to generate income could be substantially impaired and our business and financial condition could be materially
harmed.
We may require additional capital to support our present business plan and our anticipated business growth, and such capital may
not be available on acceptable terms, or at all, which would adversely affect our ability to operate.
Based on our current operating plans, our current resources are expected to be sufficient to fund our planned operations at least for the
coming twelve months. We may nonetheless seek to raise additional financing if our board of directors determines that it is advisable to do
so. We may also need to raise additional funds in connection with any acquisitions of technology or intellectual property assets that we pursue
or to fund licensing and enforcement actions.
While we may need to seek additional funding, we may not be able to obtain financing on acceptable terms, or at all. If we are unable to
obtain additional funding on a timely basis, we may be required to curtail or terminate some or all of our business plans.
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In certain acquisitions of patent assets, we may seek to defer payment or finance a portion of the acquisition price. This approach
may put us at a competitive disadvantage and could result in harm to our business.
We have limited capital and may seek to negotiate acquisitions of technology and intellectual property assets where we can defer
payments or finance a portion of the acquisition price. These types of debt financing or deferred payment arrangements may not be as attractive
to sellers of patent assets as receiving the full purchase price for those assets in cash at the closing of the acquisition. As a result, we might not
compete effectively against other companies in the market for acquiring these assets, many of whom have greater cash resources than we have.
Our public company disclosure obligations may have unintended adverse consequences on our licensing and patent enforcement
strategy.
We are subject to the disclosure and reporting requirements of applicable US securities laws and, if our securities are listed on a stock
exchange, will be subject to the applicable stock exchange’s disclosure rules. In order to comply with such laws and rules, we may be required
to disclose certain information that may be detrimental to our current or future litigation strategies. In addition, our disclosure obligations may
adversely affect our ability to enter into license or settlement agreements with third parties who are reluctant to have the terms of such
agreements publicly disclosed. To the extent permitted by applicable law and rules, we may incur additional costs and expenses seeking
confidential treatment of certain information reflected in our license or settlement agreements.
Risks Related to Our Organic Fertilizer Business
Our organic fertilizer business could fail.
Prior to the Reverse Merger, we suffered recurring losses and negative cash flows from operations, and Converted Organic’s working
capital was severely limited. Prior to the Reverse Merger, our independent registered public accounting firm added an explanatory paragraph to
its report for the year ended December 31, 2012 with respect to our ability to continue as a going concern. Our consolidated financial
statements as of and for the years ended December 31, 2012 and 2011, which reflected only our organic fertilizer business, were prepared on
the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
While we are significantly better capitalized since the Reverse Merger, if our organic fertilizer business continues to lose money, we may
liquidate the assets of our Converted Organics subsidiary and we might receive significantly less than the values at which they are carried on
our consolidated financial statements. We are evaluating whether to continue our organic fertilizer business. There can be no assurance that we
will continue to operate our organic fertilizer business as previously operated or at all, or that such business will become profitable.
If the National Organic Program changes its standards with respect to the use of any ingredient in organic fertilizer production,
we may no longer be allowed to sell certain of our products into the organic markets, which would materially lower sales at our
Gonzales, CA facility.
Our organic fertilizer business is subject to regulation by the National Organic Standards Board (NOSB) with regard to ingredients
included in the production of organic fertilizers. Currently, all of the ingredients used in our organic fertilizer production are classified as
organic; however, the NOSB does meet to reconsider items on a periodic basis. In 2011 they reviewed Corn Steep Liquor, one of our major
components of production and the organic classification was not changed for that ingredient.
If our organic fertilizer business continue to incur significant losses, we may never operate our organic fertilizer segment
profitably.
From inception through December 31, 2013, our organic fertilizer business has incurred a substantial accumulated net loss. The revenues
that our Gonzales, CA facility began to generate in February 2008 have not yet resulted in the organic fertilizer segment earning a profit. Our
organic fertilizer business may continue to incur losses for at least the near future. There is no assurance that our cost cutting and marketing
initiatives, or any initiative we may undertake in the future in our organic fertilizer segment will make our organic fertilizer business profitable.
We may be unable to establish marketing and sales capabilities necessary to commercialize and gain market acceptance for our
organic fertilizer products.
We currently have limited resources with which to expand our organic fertilizer sales and marketing capabilities. Co-promotion or other
marketing arrangements to commercialize our planned organic fertilizer products could significantly limit the revenues we derive from our
organic fertilizer segment, and the parties with whom we would enter into such agreements may fail to commercialize our products
successfully. Our organic fertilizer products address different markets and can be offered through multiple sales channels. Addressing each
market effectively will require sales and marketing resources tailored to the particular market and to the sales channels that we choose to
employ, and we may not choose to develop such specialized marketing resources.
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Energy and fuel cost variations could adversely affect operating results and expenses.
Energy costs, particularly electricity and natural gas, constitute a substantial portion of our operating expenses within our organic
fertilizer segment. The price and supply of energy and natural gas are unpredictable and fluctuate based on events outside our control,
including demand for oil and gas, weather, actions by Organization of Petroleum Exporting Countries, or “OPEC”, and other oil and gas
producers, and conflict in oil-producing countries. Price escalations in the cost of electricity or reductions in the supply of natural gas could
increase operating expenses and negatively affect our results of operations. We may not be able to pass through all or part of the increased
energy and fuel costs to our customers.
Successful infringement claims by third parties could result in substantial damages, lost product sales and the loss of important
proprietary rights.
We may have to defend ourselves against patent and other infringement claims asserted by third parties regarding the technology we own
or have licensed in connection with our organic fertilizer business, resulting in diversion of management focus and additional expenses for the
defense of claims. In addition, if a patent infringement suit was brought, we might be forced to stop or delay the development, manufacture or
sales of potential products that were claimed to infringe a patent covering a third party’s intellectual property unless that party granted us rights
to use its intellectual property. We may be unable to obtain these rights on terms acceptable to us, if at all. If we cannot obtain all necessary
licenses or other such rights on commercially reasonable terms, we may be unable to continue selling such products. Even if we are able to
obtain certain rights to a third party’s patented intellectual property, these rights may be non-exclusive, and therefore our competitors may
obtain access to the same intellectual property. Ultimately, we may be unable to commercialize our potential products or may have to cease
some or all of our business operations as a result of patent infringement claims, which could severely harm our business.
Defects in our products or failures in quality control could impair our ability to sell our products or could result in product liability
claims, litigation and other significant events with substantial additional costs.
Detection of any significant defects in our organic fertilizer products or failure in our quality control procedures may result in, among
other things, delay in time-to-market, loss of sales and market acceptance of our products, diversion of development resources, and injury to
our reputation. The costs we may incur in correcting any product defects may be substantial. Additionally, errors, defects or other performance
problems could result in financial or other damages to our customers, which could result in litigation. Product liability litigation, even if we
prevail, would be time consuming and costly to defend, and if we do not prevail, could result in the imposition of a damages award. We
presently maintain product liability insurance; however, it may not be adequate to cover any claims.
Changes in environmental regulations or violations of such regulations could result in increased expense and could have a
material negative effect on our financial performance.
Our organic fertilizer business is subject to extensive air, water and other environmental regulations and we need to maintain our
environmental permits, and need to obtain a number of environmental permits to construct and operate our organic fertilizer segment. If for any
reason any of these permits are not maintained or granted, construction costs for our facilities may increase, or the facilities may not be
constructed at all. Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to
invest or spend considerable resources in order to comply with future environmental regulations. In 2010, we were fined for alleged
environmental violations in connection with the operation of our Woodbridge, NJ facility, which we closed in 2010 making our Gonzales, CA
facility our only fertilizer manufacturing facility. Our failure to comply with environmental regulations could cause us to lose our required
permits, which could cause the interruption or cessation of our operations. Furthermore, the expense of compliance could be significant
enough to adversely affect our operation and have a material negative effect on our financial performance.
Our facilities will require certain permits to operate, which we may not be able to obtain at all or obtain on a timely basis.
For our Gonzales, CA facility, we have obtained the permits and approvals required to operate the facilities. We may not be able to
secure all the necessary permits for future facilities on a timely basis or at all, which may prevent us or potential licensees from operating such
facilities according to our business plan.
For future facilities, if any, we may need certain permits to operate solid waste or recycling facilities, as well as permits for our sewage
connection, water supply, land use, air emission, and wastewater discharge. The specific permit and approval requirements are set by the state
and the various local jurisdictions, including but not limited to city, town, county, township, and state agencies having control over the specific
properties. Permits once given may be withdrawn. Inability to obtain or maintain permits to construct, operate or maintain our facilities will
severely and adversely affect our business.
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The fertilizer industry is highly competitive, which may adversely affect our ability to generate and grow sales.
Chemical fertilizers are manufactured by many companies, are plentiful, and are relatively inexpensive. In addition, there are over 1,700
“crop products” registered as “organic” with the Organic Materials Review Institute, a number that has more than doubled since 2002. If we
fail to keep up with changes affecting the markets that we intend to serve, our organic fertilizer business will become less competitive, thereby
adversely affecting our financial performance.
Pressure by our customers to reduce prices and agree to long-term supply arrangements may adversely affect our net sales and
profit margins.
Our organic fertilizer business’s current and potential customers, especially large agricultural companies, are often under budgetary
pressure and are very price sensitive. Our customers may negotiate supply arrangements with us well in advance of delivery dates, thereby
requiring us to commit to product prices before we can accurately determine our final costs. If this happens, we may have to reduce our
conversion costs and obtain higher volume orders to offset lower average sales prices. If we are unable to offset lower sales prices by
reducing our costs, our gross profit margins will decline, which could have a material negative effect on our financial performance.
Our use of HTLC technology imposes obligations on us related to infringement actions that may become burdensome.
If our use of HTLC technology is alleged to infringe the intellectual property of a third party, we may become obligated to defend such
infringement action. In such an event, we may become obligated to find alternative technology or to pay a royalty to a third party in order to
continue to operate.
We do not hold a patent for the HTLC technology that we use, and our intellectual property rights in the HTLC process are limited to our
know-how. Our possession of rights to use the know-how related to our HTLC technology will not be sufficient to prevent others from
employing similar technology that we believe is infringing. Accordingly, we may not possess the right to exclude third parties from using the
same or similar technology in competition with us.
Our Gonzales, CA and discontinued Woodbridge, NJ facilities, as well as future facility sites, may have unknown environmental
problems that could be expensive and time-consuming to correct.
There can be no assurance that we will not encounter hazardous environmental conditions at the Gonzales, CA facility site or at any
additional future facility sites that may delay the construction of our food waste conversion facilities or require us to incur significant clean-up
or correction costs. Upon encountering a hazardous environmental condition, our contractor may suspend work in the affected area. If we
receive notice of a hazardous environmental condition, we may be required to correct the condition prior to continuing construction. The
presence of a hazardous environmental condition will likely delay construction of the particular facility and may require significant
expenditures to correct the environmental condition. If we encounter any hazardous environmental conditions during construction that require
time or money to correct, such event could delay our ability to generate revenue.
Inclement weather and natural disasters may adversely affect our organic fertilizer business.
Our Gonzales, CA facility is susceptible to floods, earthquakes and other adverse weather conditions and natural disasters. Weather
conditions and natural disasters could disrupt our operations at our fertilizer production facility, interrupt the delivery of products to our
customers, substantially increase the cost of production, including the cost of supplies and materials and substantially increase the cost of
energy needed to operate our facility or deliver products to or from our facility. Severe weather conditions and natural disasters could also
cause material damage to, or the destruction of, our facility and equipment, mechanical failures, the loss of raw materials, or the release of
hazardous materials from our facility or storage tanks located on our property. We do not currently maintain insurance against all of these
risks. Accordingly, adverse weather and natural disasters could materially and adversely affect our financial condition, results of operations, or
cash flows.
We have little or no experience in the fertilizer industry, which increases the risk of our inability to build or license our facilities
and operate our business.
We are currently, and are likely for some time to continue to be, dependent upon our present (i.e., post-Reverse Merger) management
team to operate our organic fertilizer business. Most of these individuals are experienced both in business generally and in the governance and
operation of public companies. However, our present (post-Reverse Merger) management team does not have experience in organizing the
construction, equipping, and start-up of a food waste conversion facility. As a result, we may not develop our organic fertilizer business
successfully or at all.
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The communities where our facilities may be located may be averse to hosting waste handling and manufacturing facilities.
Local residents and authorities in communities where our facilities may be located may be concerned about odor, vermin, noise,
increased truck traffic, air pollution, decreased property values, and public health risks associated with operating a manufacturing facility in
their area. These constituencies may oppose our permitting applications or raise other issues regarding our proposed facilities or bring legal
challenges to prevent us from constructing or operating facilities.
During the start-up phase at the former Woodbridge, NJ facility, we experienced odor-related issues. As a result of these issues, we
were assessed fines from the Health Department of Middlesex County, New Jersey and had been named as a party in a lawsuit by a
neighboring business. With respect to the fines assessed by the Health Department, we have negotiated a settlement agreement for the full
amount of fines assessed. With respect to the litigation, the plaintiff has alleged various causes of action connected to the odors emanating
from the facility and in addition to monetary damages, sought enjoinment of any and all operations which in any way cause or contribute to the
alleged pollution. This litigation was eventually dismissed without any finding of wrong doing on our part; however, any new litigation may
be subject us to judgments or fines, or our operations may be interrupted or terminated. Even though we have discontinued the operations at
our Woodbridge, NJ facility these issues could occur at future owned or licensed facilities.
Our organic fertilizer business is dependent on a small number of major customers for its revenues and the loss of any of these
major customers would adversely affect our organic fertilizer business.
Our Gonzales, CA facility relies on a few major customers for a majority of its revenues. During 2013 and 2012, approximately 68%
and 58% of the revenues, respectively generated by the Gonzales, CA facility were from a total of three customers: Crop Production Services,
NH3 Service Company, Inc. and JR Simplot Company, each of which distributes our fertilizer. We do not have any long-term agreements
with any of our customers. The loss of any of our major customers could adversely affect our organic fertilizer business.
Risks Related to Our Common Stock
We will incur increased costs and demands upon management and accounting and finance resources as a result of complying with
the laws and regulations affecting public companies.
We incur legal, accounting and other expenses as a result of being a public company. Prior to the Reverse Merger, Finjan was a private
company and not subject to these expenses. While we were a public company subject to these costs prior to completing the Reverse Merger,
the costs associated with being a public company are not reflected in our historical financial statements because Finjan was the accounting
acquirer in the Reverse Merger, and, as such, our historical financial statements are those of Finjan. Moreover, we may need to enhance and
supplement Finjan’s internal accounting resources with additional accounting and finance personnel with the requisite public company
experience and expertise, as well as refine our quarterly and annual financial statement closing process, to enable us to satisfy our reporting
obligations. We will need to devote time and financial resources to compliance programs, investor relations activities, financial reporting
obligations and other activities relevant to being a public company. The costs associated with these activities, as well as any diversion of
management’s time and attention, may have a material adverse effect on our future business. In light of these costs and the changes in our
management, business and growth strategy that resulted from the Reverse Merger, the public company costs that we incurred prior to the
Reverse Merger may not be indicative of the costs we will incur in the future.
We have identified material weaknesses in our internal control over financial reporting as of December 31, 2013. If we fail to
maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide
reliable reports or prevent fraud, our operating results could be harmed.
We have identified material weaknesses in our internal control over financial reporting pertaining to insufficient controls over (i) the
calculation and recording of cost of goods sold in our organic fertilizer segment, (ii) the recording of sales transactions in our organic fertilizer
segment and (iii) the documentation of support for assessing the fair value of component elements of our litigation settlements and judgment
award during the years ended December 31, 2012 and 2011. See “Item 9A—Controls and Procedures—Management’s Report on Internal
Control Over Financial Reporting.”
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely
basis. In addition, due to the identified material weaknesses, management has concluded that as of December 31, 2013, our disclosure controls
and procedures were ineffective. The existence of material weaknesses could adversely affect our ability to report our financial condition and
results of operations accurately and on a timely basis and, as a result, we may be unable to timely meet our reporting obligations with the
SEC. The existence of material weaknesses also could adversely affect the market price of our common stock and subject us to sanctions or
investigations by the SEC and other regulatory authorities.
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As of the date of filing this annual report on Form 10-K, we have implemented remedial measures related to the identified material
weakness. We did not, however, have sufficient time to test the effectiveness of the controls we put in place as of December 31, 2013. Despite
our ongoing remediation efforts intended to ensure compliance with the Section 404 requirements, any control system regardless of how well
designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met. Therefore, we cannot be
certain that in the future additional material weaknesses or significant deficiencies will not exist or otherwise be discovered. If our efforts to
remediate the weaknesses identified are not successful or if other deficiencies occur, these weaknesses or deficiencies could result in
misstatements of our results of operations, additional restatements of our consolidated financial statements, a decline in our stock price and
investor confidence, or other material effects on our business, reputation, results of operations, financial condition or liquidity.
Concentration of ownership among our existing executive officers, directors and their affiliates, and others who beneficially own at
least 10% of our outstanding common stock, may prevent new investors from influencing significant corporate decisions.
Our executive officers, directors and their affiliates, together with others who own at least 10% of our outstanding common stock,
beneficially own or control approximately 66% of our common stock. Accordingly, these persons, acting individually or as a group, will have
substantial influence over the outcome of a corporate action requiring stockholder approval, including the election of directors, any merger,
consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. These stockholders may also exert
influence in delaying or preventing a change in control of our company, even if such change in control would benefit our other stockholders.
In addition, the significant concentration of stock ownership may adversely affect the market value of our common stock due to investors’
perception that conflicts of interest may exist or arise.
A significant number of shares of common stock will be eligible for sale and depress the market price for our common stock.
Future sales by us or our existing shareholders could similarly depress the market price of our common stock.
We have filed a registration statement with the Securities and Exchange Commission which seeks to register the resale of a significant
number of our shares of common stock. If such registration statement is declared effective, such shares will become eligible for sale in the
public market, which could cause the market price for our common stock to decline significantly. If our existing stockholders sell a large
number of shares of our common stock, or if we sell additional common stock or securities that are convertible into common stock, in the
future, the market price of our common stock similarly could decline. Further, even the perception in the public market that we or our existing
shareholders might sell shares of common stock could depress the market price of our common stock.
An active, liquid and orderly trading market for our common stock may not develop, and the price of our stock may be volatile and
may decline in value.
There currently is only limited trading in our common stock. An active trading market may not develop or, if developed, may not be
sustained. The lack of an active market may impair your ability to sell your shares of common stock at the time you wish to sell them or at a
price that you consider reasonable. An inactive market may also impair our ability to raise capital by selling shares of common stock and may
impair our ability to acquire other companies or assets by using shares of our common stock as consideration.
The stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of companies with securities traded in those markets. Broad market and industry factors may seriously affect the
market price of companies’ stock, including ours, regardless of actual operating performance. In addition, in the past, following periods of
volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been
instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s
attention and resources.
Market prices for technology companies have been particularly volatile. We believe that various factors may cause the market price of
our common stock to fluctuate, perhaps substantially, including, among others, the following:
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developments in relationships with licensees;
our or our competitors’ technological innovations;
announcements of developments in our patent enforcement actions;
developments or disputes concerning our patents;
variations in our quarterly and annual operating results;
our failure to meet or exceed securities analysts’ expectations of our financial results;
a change in financial estimates or securities analysts’ recommendations;
changes in management’s or securities analysts’ estimates of our financial performance;
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changes in market valuations of similar companies;
the current sovereign debt crises affecting several countries in the European Union and concerns about sovereign debt of the United
States.
Our common stock may not be eligible for listing on a national securities exchange.
Our common stock is currently quoted on the OTCQB tier of OTC Markets, an over-the-counter quotation service. Securities quoted in
over-the-counter venues often lack liquidity and analyst coverage, which may result in lower prices for our common stock than might be
obtained in a larger, more established stock exchanges and may also result in a larger spread between the bid and asked price for our common
stock. We cannot assure you that we will be able to meet the initial listing standards of any national securities exchange, or, if we do meet such
initial qualitative listing standards, that we will be able to maintain any such listing.
Our common stock may be considered a “penny stock.”
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00
per share, subject to specific exemptions. The market price of our common stock may be less than $5.00 per share and therefore may be a
“penny stock.” Broker and dealers effecting transactions in “penny stock” must disclose certain information concerning the transaction, obtain
a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may
restrict the ability of brokers or dealers to sell our common stock and may affect your ability to sell shares of our common stock in the future.
Our shareholders may experience significant dilution if future equity offerings are used to fund operations or acquire
complementary businesses.
Our authorized capital stock consists of one billion (1,000,000,000) shares of common stock and 10,000,000 shares of blank check
preferred stock. If we engage in capital raising activities in the future, including issuances of common stock or securities that are convertible
into, or exercisable for, our common stock, to fund the growth of our business, our shareholders could experience significant dilution. In
addition, securities issued in connection with future financing activities or potential acquisitions may have rights and preferences senior to the
rights and preferences of our common stock. We have adopted an equity incentive plan pursuant to which equity awards may be granted to
eligible employees (including our executive officers), directors and consultants, if our board of directors determines that it is in the best interest
of the Company and our shareholders to do so. The issuance of shares of our common stock upon the exercise of any such equity awards may
result in dilution to our shareholders and adversely affect our earnings.
If securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our market, or
if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by whether industry or securities analysts publish research and reports
about us, our business, our market or our competitors and, if any analysts do publish such reports, what they publish in those reports. We may
not obtain analyst coverage in the future. Any analysts that do cover us may make adverse recommendations regarding our stock, adversely
change their recommendations from time to time, and/or provide more favorable relative recommendations about our competitors. If any
analyst who may cover us in the future were to cease coverage of our company or fail to regularly publish reports on us, or if analysts fail to
cover us or publish reports about us at all, we could lose, or never gain, visibility in the financial markets, which in turn could cause our stock
price or trading volume to decline.
The price of our common stock following the Reverse Merger may be affected by factors different from those previously affecting
the shares of Converted Organics.
Our business differs materially from the business of the Company prior to the Reverse Merger and, accordingly, our results of
operations and the trading price of our common stock following the completion of the Reverse Merger may be significantly affected by factors
different from those previously affecting the independent results of our operations because the combined company will be conducting activities
not undertaken by us prior to the completion of the Reverse Merger.
We do not anticipate paying any dividends in the foreseeable future.
We currently intend to retain our future earnings to support operations and to finance expansion and, therefore, we do not anticipate
paying any cash dividends to holders of our common stock in the foreseeable future.
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Our future results may differ materially from the unaudited pro forma financial statements presented in connection with the
Reverse Merger.
Our future results may be materially different from those shown in the unaudited pro forma combined financial statements prepared in
connection with the Reverse Merger, which show only a combination of the historical results of Finjan and the Company presented by Finjan
and the Company in connection with the Reverse Merger. We incurred $790,000 in costs associated with the completion of the Reverse
Merger. Furthermore, these costs decreased the capital that we are able to use for continued development of our business and may cause us to
seek to raise new capital sooner than expected.
Anti-takeover provisions in our charter and bylaws may prevent or frustrate attempts by stockholders to change the board of
directors or current management and could make a third-party acquisition of our company difficult.
Our certificate of incorporation and bylaws contain provisions that may discourage, delay or prevent a merger, acquisition or other
change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium
for their shares. For example, our board of directors is authorized by our certificate of incorporation to establish classes or series of preferred
stock and fix the designation, powers, preferences and rights of the shares of each such class or series without any further vote or action by
our stockholders. Any shares of preferred stock so issued could have priority over our common stock with respect to dividend or liquidation
rights. The issuance of shares of preferred stock, or the issuance of rights to purchase such shares, could be used to discourage an unsolicited
acquisition proposal. In addition, the issuance of a series of preferred stock could impede a business combination by including class voting
rights that would enable a holder to block such a transaction, or by adversely affecting the voting power of holders of our common stock.
Such provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.
If we issue shares of preferred stock, investments in common stock could be diluted or subordinated to the rights of the holders of
preferred stock.
Our board of directors is authorized by our certificate of incorporation to establish classes or series of preferred stock and fix the
designation, powers, preferences and rights of the shares of each such class or series without any further vote or action by our stockholders.
Any shares of preferred stock so issued could have priority over our common stock with respect to dividend or liquidation rights. The
issuance of shares of preferred stock, or the issuance of rights to purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of preferred stock might impede a business combination by including class voting rights that
would enable a holder to block such a transaction. In addition, under certain circumstances, the issuance of preferred stock could adversely
affect the voting power of holders of our common stock. Although our board of directors is required to make any determination to issue
preferred stock based on its judgment as to the best interests of our stockholders, our board of directors could act in a manner that would
discourage an acquisition attempt or other transaction that some, or a majority, of our stockholders might believe to be in their best interests or
in which such stockholders might receive a premium for their stock over the then-market price of such stock. Presently, our board of directors
does not intend to seek stockholder approval prior to the issuance of currently authorized preferred stock, unless otherwise required by law or
applicable stock exchange rules. Although we have no plans to issue any additional shares of preferred stock or to adopt any new series,
preferences or other classification of preferred stock, any such action by our board of directors or issuance of preferred stock by us could
dilute your investment in our common stock and warrants or subordinate your holdings to such shares of preferred stock.
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ITEM 1B. UNRESOLVED STAFF COMMENTS.
None
ITEM 2. PROPERTIES.
Our principal executive office is located at 122 East 42nd Street, New York, NY 10168, which we use in connection with our web and
network security technology segment and for general corporate purposes.
We occupy the space for our principal executive office pursuant to a lease agreement, dated September 9, 2013, with 122 East 42nd
Street, LLC. Under the lease, for a period of five years from October 1, 2013, the commencement date of the lease, we owe an initial annual
rent of $138,952, payable in monthly installments of $11,579, unless earlier terminated in accordance with the lease. The annual rental rate,
beginning after the first year, is subject to an increase, on a cumulative basis, at a rate of 2.5% per annum compounded annually. Our office
space at 122 East 42nd Street replaced our office at 261 Madison Avenue, New York, NY 10016.
We have a lease for land in Gonzales, CA, where our Gonzales, CA facility is located. The land is leased from Valley Land Holdings
(“VLH”), a California LLC whose sole member is a former officer and a former director of our company. The lease provides for a monthly
rent of $10,433. The lease is renewable for three 5-year terms after the expiration of the initial 10-year term. In addition, to leasing the land on
which the Gonzales, CA facility is located, we own the operating equipment used in the facility. Our Gonzalez, CA facility is used in our
organic fertilizer segment. Effective April 15, 2013, we assigned our rights and obligations under our Gonzales, CA lease to our Converted
Organics subsidiary, which assumed our obligations thereunder.
ITEM 3. LEGAL PROCEEDINGS.
Matter 1: Finjan filed a patent infringement lawsuit against FireEye, Inc. in the United States District Court for the Northern District of
California on July 8, 2013, asserting that FireEye, Inc. is infringing U.S. Patent Nos. 6,804,780, 8,079,086, 7,975,305, 8,225,408, 7,058,822,
7,647,633 and 6,154,844 patents. There can be no assurance that the Company will be successful in litigating these claims.
Matter 2: Finjan filed a patent infringement lawsuit against Blue Coat Systems, Inc. in the United States District Court for the Northern
District of California on August 28, 2013, asserting that Blue Coat Systems, Inc. is infringing U.S. Patent Nos. 6,154,844, 6,804,780,
6,965,968, 7,058,822, 7,418,731, 7,647,633. There can be no assurance that the Company will be successful in settling or litigating these
claims.
Matter 3: Finjan filed a patent infringement lawsuit against Websense, Inc., in the United States District Court for the Northern District
of California on September 23, 2013 asserting that Websense, Inc. is infringing U.S. Patent Nos. 7,058,822, 7,647,633, 8,141,154 and
8,225,408. There can be no assurance that the Company will successful in settling or litigating these claims.
Matter 4: Finjan appealed a District Court Decision in a prior patent case with defendants Sophos, Inc., Websense, Inc., and Symantec
Corp. where there was a finding of no liability for U.S. Patent Nos. 6,092,194 and 6,480,962. The Appeal Brief was filed on December 10,
2013 at the Court of Appeals for the Federal Circuit and the case is pending. There is no assurance that the appeal will be granted.
Matter 5: Finjan filed a patent infringement lawsuit against Proofpoint, Inc., et.al. in the United States District Court for the Northern
District of California on December 16, 2013, asserting that Proofpoint, Inc. et.al. is infringing U.S. Patent Nos. 6,154,844, 7,058,822,
7,613,918, 7,647,633, 7,975,305, 8,079,086, 8,141,154, 8,225,408.
Finjan is seeking monetary damages for past and future use of accused infringing products, injunctive relief, and or other remedies
deemed appropriate through the Court. There can be no assurance that the Company will be successful in settling or litigating these claims.
From time to time we are involved in legal proceedings arising in the ordinary course of business. We believe there is no other litigation
pending that could have, individually or in the aggregate, a material adverse effect on our results of operations or financial condition.
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ITEM 4. MINE SAFETY DISCLOSURES.
None
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is quoted on OTC Markets—OTCQB Tier under the symbol “FNJN.” We effected a 1-for-12 reverse stock split of
our common stock, and our common stock commenced trading on a post-split basis, on August 22, 2013. In connection with the Reverse
Merger, we changed our name to “Finjan Holdings, Inc.” and, effective as of July 2, 2013, the symbol for our common stock changed from
“COIND” to “FNJN”.
All OTC Markets quotations included herein reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions. The trading market for our common stock has been extremely limited and sporadic. We have applied
to list our common stock for trading on a national securities exchange as soon as reasonably practicable after we meet the initial quantitative
listing standards of any such exchange. However, we cannot be certain that we will meet such initial listing standards or receive approval to
list our common stock on any national securities exchange. There can be no assurance that a market will ever develop for our common stock in
the future. The following table sets forth the high and low bid prices per share of our common stock as quoted on OTC Markets. The prices
below have been adjusted to give retroactive effect to the 1-for-12 reverse stock split we effected on August 22, 2013, the 1-for-500 reverse
stock split that we effected on June 3, 2013 and the 1-for-500 reverse stock split that we effected on March 5, 2012.
Year Ending December 31, 2013
First Quarter (2)
Second Quarter (2)(3)
Third Quarter (4)
Fourth Quarter
Year Ended December 31, 2012
First Quarter (1)
Second Quarter (2)
Third Quarter (2)
Fourth Quarter (2)
High
Low
$
$
$
$
31.10
24.24
13.20
11.75
$18,375.00
143.25
$
39.00
$
19.10
$
$ 6.00
$ 9.00
$ 2.25
$ 2.65
$66.00
$27.75
$ 5.25
$ 4.85
(1) Bid prices for the first quarter of 2012 have been adjusted to reflect the 1-for-500, 1-for-500 and 1-for-12 reverse stock splits effected on
March 5, 2012, June 3, 2013 and August 22, 2013, respectively.
(2) Bid prices for the second, third and fourth quarters of 2012 and the first and second quarters of 2013 have been adjusted to reflect the 1-
for-500 and 1-for-12 reverse stock splits effected on June 3, 2013 and August 22, 2013, respectively.
(3) The Reverse Merger was effective, and publicly announced, following the close of trading on June 3, 2013.
(4) Bid prices for the third quarter of 2013 have been adjusted to give retroactive effect to the 1-for-12 reverse stock split effected on
August 22, 2013.
Holders
As of March 10, 2014, there were approximately 56 holders of record of our common stock.
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Dividend Policy
We have not paid any cash dividends on our common stock to date. The payment of dividends in the future will be contingent upon our
revenues and earnings, if any, capital requirements and general financial condition, and will be within the discretion of our then-existing board
of directors. We currently intend to retain our future earnings to support operations and to finance expansion and, therefore, our board of
directors does not anticipate paying any cash dividends to holders of our common stock in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
As of December 31, 2013, securities issued and securities available for future issuance under the Converted Organics 2010 Omnibus
Stock Compensation Plan, (the “2010 Plan”) and the Finjan Holdings, Inc. 2013 Global Share Option Plan (the “2013 Plan”) were as follows:
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
the first column)
Equity compensation plans approved by
security holders
Equity compensation plans not approved by
security holders
Total
1,625,476 $
—
1,625,476 $
1.76
—
1.76
629,254(1)
—
629,254
(1) The amount of securities available for future issuance under equity compensation plans includes 611,360 shares available under the 2013
plan and 17,894 shares available under the 2010 Plan, in each case as of December 31, 2013. The 2010 Plan, which was adopted and
approved by stockholders prior to the Reverse Merger, contains an “evergreen” provision that provides for automatic increases in the
number of shares authorized for issuance thereunder to an amount equal to 20% of the shares of common stock outstanding on the last
day of the prior fiscal year. Accordingly, on January 1, 2014, the number of shares available for issuance pursuant to the 2010 Plan was
increased to 4,473,691. No awards under the 2010 Plan are currently outstanding and we do not intend to issue any awards under the
2010 Plan in the future.
Recent Sales of Unregistered Securities
Not applicable.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion includes forward-looking statements about our business, financial condition and results of operations,
including discussions about management’s expectations for our business. These statements represent projections, beliefs and expectations
based on current circumstances and conditions and in light of recent events and trends, and you should not construe these statements either
as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause
our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. A
description of material factors known to us that may cause our results to vary, or may cause management to deviate from its current plans
and expectations, is set forth under “Risk Factors.” See “Cautionary Note Regarding Forward-Looking Statements.” The following
discussion should also be read in conjunction with our audited consolidated financial statements including the notes thereto appearing
elsewhere in this filing.
Overview
Effective as of June 3, 2013, the date we consummated the Reverse Merger and changed our name from “Converted Organics, Inc.” to
“Finjan Holdings, Inc.,” we operate two businesses, each of which constitutes a separate reportable segment. Our two reportable segments
include: our web and network security technology segment, which we operate through Finjan, and our organic fertilizer segment, which we
operate through Converted Organics. Finjan is considered the acquirer for accounting purposes in the Reverse Merger and we account for the
transaction as a reverse business combination. Consequently, the assets and liabilities and the historical operations that are reflected in our
historical financial statements are those of Finjan. The results of operations of our organic fertilizer segment have been included in our assets
and liabilities and our historical operations since June 3, 2013, the date we completed the Reverse Merger.
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We intend to carry on our web and network security technology business as our principal line of business. We are evaluating whether to
continue our organic fertilizer business as currently conducted. There can be no assurance that we will continue to operate our organic fertilizer
business as previously operated or at all.
Web and Network Security Technology Segment
We operate our web and network security business through Finjan. Through Finjan, we own a portfolio of patents, related to software
that proactively detects malicious code and thereby protects end users from identity and data theft, spyware, malware, phishing, trojans and
other online threats. Founded in 1997, Finjan developed and patented technology that is capable of detecting previously unknown and
emerging threats on a real-time, behavior-based, basis, in contrast to signature-based methods of intercepting only known threats to computers,
which were standard in the online security industry during the 1990s. As the network, web and endpoint security industries have transitioned
to behavior-based detection of malicious code, we believe that our technology is widely used by third parties. We intend to maximize the
economic benefits of our technology through further licensing and to broaden our technology and patent holdings through acquisitions and
strategic partnerships.
As a core element of our continued patent licensing and enforcement business, our management team, having expertise with technology
and IP monetization, alongside early company executives including Shlomo Touboul (Finjan’s founder) who consults with us, we monitor a
number of markets and assess and observe the adoption of our patented technology in these markets. Our management team, in conjunction
with outside legal, technical, and financial experts conclude on a case-by-case basis whether or not they believe that Finjan’s patented
technology is being used. Based on these observations, we continue to believe our patented technologies are relevant in specific technology
areas including endpoint/cloud software, web gateway/internet infrastructure, and networking equipment markets. From that basis, the
Company pursues unlicensed entities through licensing, assertion of claims or both.
Since the sale of its hardware and software operations in 2009, Finjan’s primary source of income and related cash flows has been the
enforcement of its patent rights against unauthorized use and, to a lesser extent, income derived from intellectual property licenses granted to
third parties for the use of patented technologies that are owned by Finjan. Although the Company is actively pursuing negotiated licenses
apart from litigation settlements, the Company has not entered into a license agreement outside of a settlement since its 2012 negotiated license
agreement with Trustwave (see “Business— Our Web and Network Security Technology Business –Development of Finjan’s Business” for
additional information regarding such license).
Finjan’s operating expenses consist primarily of general and administrative expenses. Finjan did not have any full-time employees from
2009 until 2013. Instead, Finjan relied on outside legal counsel, technology consultants and other professionals to conduct operations during
that period, some of whom are former investors and executives of Finjan. Accordingly, Finjan’s general and administrative expenses consist
primarily of legal fees and other expenses paid to third party consultants. In April 2013, Finjan engaged Philip Hartstein and Shimon
Steinmetz to serve as its President and Chief Financial Officer, respectively, pursuant to consulting agreements, which were terminated upon
the execution of employment agreements between the Company and Messrs. Hartstein and Steinmetz. Prior to April 2013, Finjan’s sole
executive officer was Daniel Chinn, serving as Chief Executive Officer, who did not receive compensation for his services as an officer of
Finjan. Messrs. Hartstein and Steinmetz were appointed as our President and Chief Financial Officer, respectively, upon the closing of the
Reverse Merger. Since the Reverse Merger we have hired an additional six employees, including our Vice President, Intellectual Property (IP)
Licensing and Vice President, Legal Operations. We intend to hire or engage additional full-time employees and/or consultants to pursue our
growth strategy, although there can be no assurance that we will be able to attract or retain qualified personnel on terms acceptable to us, if at
all. Our management team and additional personnel that we may hire in the future will be primarily responsible for establishing and pursuing
our licensing and enforcement strategy, including analyzing licensing and enforcement opportunities, making tactical decisions related to our
strategy, identifying new applications for our existing technology and pursuing opportunities to invest in new technologies through strategic
partnerships and acquisitions. We nonetheless expect to continue to utilize outside legal counsel and other professionals to execute aspects of
our strategy for the foreseeable future, such as counsel we will retain to prosecute enforcement actions, although our management will control
our overall litigation strategy and our strategy for each case we litigate.
Organic Fertilizer Segment
We operate a processing facility in Gonzales, CA that uses food and agricultural waste as raw materials to manufacture organic fertilizer
and soil amendment products combining nutritional and disease suppression characteristics for sale to our agribusiness market. The Gonzales,
CA facility is our production facility that services the West Coast agribusiness customer base through established distribution channels. This
facility uses proprietary technology and process known as High Temperature Liquid Composting, or HTLC, which processes various
biodegradable waste products into liquid and food waste-based fertilizer and a limited amount of solids that could be further processed into a
useable form for use in agriculture, retail, and professional turf markets.
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We are evaluating whether to continue our organic fertilizer business. There can be no assurance that we will continue to operate our
organic fertilizer business as previously operated or at all.
Restatement
On July 17, 2013, the Company filed a registration statement on Form S-1 which included consolidated statements of operations for the
years ended December 31, 2012 and 2011 with patent infringement settlements and licensing income classified as other income. Subsequently,
the Company filed a series of amendments on Forms S-1/A wherein the patent infringement settlements and licensing income in the
consolidated statements of operations were reclassified as revenue due to a change in the Company’s business model.
The portion of consideration received from the settlement of litigation, net of any contingent legal fees, representing the value of any legal
release, which had previously been classified as revenues is now reported as gain on settlements within other income on the consolidated
statements of operations. The portion of settlement proceeds representing the license granted, which had previously been included in revenues,
is now recorded as settlement proceeds for modification of licensing agreement within other income on the consolidated statements of
operations. Other legal costs incurred in connection with patent infringement litigation and previously classified as costs of revenues, are now
included in selling, general and administrative expenses on the consolidated statements of operations.
The Company has since determined that the patent infringement settlements and licensing income are subject to multiple element
accounting. However, the fair value models used to arrive at the litigation settlements are sealed by the court and are not readily available to
support the Company’s classification of such amounts as revenue. Consequently, the Company is unable to readily determine or support the
fair value of the multiple elements of the settlement.
Accordingly, the Company has restated the condensed consolidated statements of operations for the three and six months ended June 30,
2013 and 2012 and the three and nine months ended September 30, 2013 and 2012 included in the Company’s Quarterly Reports on Form 10-
Q and the condensed consolidated statements of operations for the years ended December 31, 2012 and 2011 included in the Company’s
Form S-1/A filed on January 21, 2014, in order to correct the classification of the consideration received upon the settlement of patent
infringement litigation in the years ended December 31, 2012 and 2011. Such restatements did not have an impact on previously reported net
income (loss) or net income (loss) per share, total equity and total assets.
Significant Developments During 2013
Strategic Investment
On November 21, 2013, we made a strategic investment in an Israel-based limited partnership venture capital fund seeking to invest in
early-stage cyber technology companies on the leading edge of cybersecurity innovation. If and when we fund the entire amount of the
investment, the investment will be less than a 10% limited partnership interest in which we will not be able to exercise control over the fund.
1-for-12 Reverse Stock Split
Effective as of 12:01 a.m. on August 22, 2013, we effected a 1-for-12 reverse stock split of our issued and outstanding shares of
common stock, immediately following the effectiveness of which every 12 issued and outstanding shares of our common stock automatically
converted into one share of our common stock. Any of our stockholders that would otherwise have been entitled to a fraction of a share of
common stock (after aggregating all fractional shares of our common stock to be received by such stockholder) as a result of the 1-for-12
reverse stock split, received an additional share of our common stock (i.e., the aggregate number of shares of common stock of a stockholder
resulting from the 1-for-12 reverse stock split were rounded up to the nearest whole number). The 1-for-12 reverse stock split did not affect
the number of shares of capital stock that we are authorized to issue or the par value of our common stock. The 1-for-12 reverse stock split
was approved by our board of directors and the holders of a majority of our common stock, by written consent in lieu of a meeting, on July 5,
2013.
All share, share equivalents, and per share information within this 10-K is presented on an “as adjusted” basis, giving effect to the 1-for-
12 reverse stock split, unless otherwise indicated or the context otherwise requires.
Employment Agreements
On July 8, 2013, we entered into an employment agreement (the “Hartstein Employment Agreement”) with Philip Hartstein, pursuant to
which Mr. Hartstein serves as our president. The Hartstein Employment Agreement provides for a base salary and a discretionary bonus at the
end of every four month period of his employment term, based on Mr. Hartstein’s performance and our overall progress. The Hartstein
Employment Agreement was effective as of July 1, 2013. Either we or Mr. Hartstein may terminate the Hartstein Employment Agreement at
any time upon 90 days prior written notice. The Hartstein Employment Agreement superseded a consulting agreement between Finjan, Inc.,
our wholly-owned subsidiary, and Mr. Hartstein that provided for substantially the same compensation as described above. The consulting
agreement between Finjan, Inc. and Mr. Hartstein ceased to be effective upon the entry into the Hartstein Employment Agreement.
On July 8, 2013, we entered into an agreement (the “Steinmetz Employment Agreement”) with Shimon Steinmetz, pursuant to which
Mr. Steinmetz serves as our chief financial officer. The Steinmetz Employment Agreement provides for a base salary and a discretionary
bonus at the end of each calendar year during his employment term, based on Mr. Steinmetz’s performance and the our overall progress. The
Steinmetz Employment Agreement was effective as of July 1, 2013. Either we or Mr. Steinmetz may terminate the Steinmetz Employment
Agreement at any time upon 90 days prior written notice. The Steinmetz Employment Agreement superseded a consulting agreement between
Finjan, Inc., our wholly-owned subsidiary, and Mr. Steinmetz that provided for substantially the same compensation as described above. The
consulting agreement between Finjan, Inc. and Mr. Steinmetz ceased to be effective upon the entry into the Steinmetz Employment Agreement.
Patent Litigation
On July 8, 2013, Finjan filed a patent infringement lawsuit against FireEye, Inc. in the United States District Court for the Northern
District of California. Finjan is asserting that FireEye, Inc. is infringing upon several of Finjan’s patents.
On August 8, 2013, Finjan filed a patent infringement lawsuit against Blue Coat Systems, Inc., for infringement of Finjan patents
relating to endpoint, web, and network security technologies
On September 24, 2013, Finjan filed a patent infringement lawsuit against Websense, Inc., for infringement of Finjan patents relating to
endpoint, web, and network security technologies.
On December 17, 2013, Finjan filed a lawsuit against Proofpoint, Inc., and its subsidiary Armorize Technologies, Inc., alleging
infringement of eight of Finjan’s patents.
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Reverse Merger
On June 3, 2013 we entered into the Merger Agreement with Merger Sub and Finjan and consummated the Reverse Merger. Upon the
closing of the Reverse Merger, we issued 20,467,058 shares of our common stock (excluding any shares underlying the options to purchase
up to an aggregate of 1,585,476 shares of our common stock issued pursuant to the Merger Agreement), or 91.5% of our issued and
outstanding common stock on a fully-diluted basis after giving effect to the Reverse Merger, to the stockholders of Finjan immediately prior to
the Reverse Merger (whom we sometimes refer to as the “former Finjan stockholders”).
In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) section 805,
“Business Combinations”, Finjan is considered the accounting acquirer in the Reverse Merger. Finjan is considered the acquirer for
accounting purposes, and will account for the transaction as a reverse business combination, because Finjan’s former stockholders received
the greater portion of the voting rights in the combined entity and Finjan’s senior management represents all of the senior management of the
combined entity. Consequently, the assets and liabilities and the historical operations that will be reflected in our consolidated financial
statements will be those of Finjan and will be recorded at the historical cost basis of Finjan.
Exchange Agreement
On June 3, 2013, as a condition to the closing of the Reverse Merger, we entered into an Exchange Agreement with each of Hudson Bay
and Iroquois. Pursuant to the Exchange Agreement, immediately following the effectiveness of the Reverse Merger, each of Hudson Bay and
Iroquois exchanged an aggregate of $1,192,500 principal amount of our convertible notes, 13,281 shares of our Series A Preferred Stock and
warrants to purchase an aggregate of 105,554 shares of our common stock for an aggregate of 1,789,469 shares of our common stock, or 8%
of our outstanding common stock immediately following the Reverse Merger. Each of Hudson Bay and Iroquois also released us, our
affiliates, subsidiaries and related companies from any and all debts, liabilities and other claims with respect to such convertible notes, Series A
Preferred Stock and warrants.
Following the effectiveness of the Exchange Agreement, there are no outstanding securities convertible into our common stock other
than (i) options granted under the Amended and Restated Converted Organics 2006 Stock Option Plan, which we refer to as the “2006 Option
Plan,” the Converted Organics 2010 Omnibus Stock Compensation Plan, which we refer to as the “2010 Stock Compensation Plan,” and the
options issued pursuant to the Merger Agreement under our 2013 Option Plan, which are exercisable for an aggregate of 1,585,479 shares of
our common stock, and (ii) our Class C, Class D and Class H warrants, which are exercisable for 1, 1 and 1 shares of our common stock,
respectively, subject to further adjustment in accordance with the terms of the applicable warrant. The 2013 Option Plan was approved by the
Company’s board of directors in connection with the Reverse Merger and by the written consent in lieu of a meeting of the holders of a
majority of our outstanding common stock.
Closing Agreement
On June 3, 2013, in connection with the Reverse Merger, we entered into a Closing Agreement, which we refer to as the “Closing
Agreement,” with Hudson Bay, Iroquois and Michael Eisenberg, in his capacity as the stockholder representative of the former Finjan
stockholders, who we refer to as the Stockholder Representative. Pursuant to the Closing Agreement, Hudson Bay and Iroquois severally but
not jointly agreed to pay to the Company, or to third parties for the account of the Company, within five days following the effective time of
the Reverse Merger an amount equal to certain known liabilities and obligations of the Company existing as of the effective time of the
Reverse Merger. Such known liabilities, which were in the aggregate amount of $927,385, consisted of accounts payable due to various
vendors of the Company, accrued but unpaid compensation expenses of the Company, liabilities related to the Company’s discontinued
Woodbridge, NJ operations and expenses incurred by the Company related to the Reverse Merger. In connection with such obligations,
Hudson Bay and Iroquois paid $847,523 to, or for the account of, the Company in accordance with the Closing Agreement. In addition,
Hudson Bay and Iroquois severally but not jointly agreed to pay the Stockholder Representative, for the benefit of the former Finjan
stockholders, an amount equal to any and all payments made by the Company in respect of liabilities of the Company (on an unconsolidated
basis) that were not known to Hudson Bay or Iroquois as of the effective time of the Reverse Merger, prior to the one-year anniversary of the
effective time of the Reverse Merger in an amount not to exceed $1,000,000 in the aggregate. Hudson Bay and Iroquois’ obligations in respect
of unknown liabilities are subject to the satisfaction of certain conditions related to the market price and trading volume of our common stock
as well as the eligibility of Hudson Bay and Iroquois to sell their shares of Common Stock without any volume restrictions under Federal
securities laws. Hudson Bay and Iroquois will not be required to make such payments in respect of unknown liabilities until reimbursable
payments by us equal or exceed $100,000. The estimated fair value of the indemnification was deemed de minimus to the financial statements,
pro-forma financial statements and related disclosures.
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Comparability to Future Results
We have set forth below selected factors that we believe have had, or can be expected to have, a significant effect on the comparability of
our recent or future results. In addition to the factors described below, please see “Risk Factors” for additional factors that may affect our
operating results.
Fluctuation of income, expenses and cash flows related to licensing and enforcement
Our settlements and judgments are non-recurring, and are not necessarily indicative of the income or cash flows that we expect to
generate in the future from our existing technology portfolio or otherwise. We expect income, expenses and cash flows related to patent
enforcement to be unpredictable and to fluctuate significantly from period to period. A number of factors, many of which are beyond our
control, may affect the timing and amount of our income and cash flows related to patent licensing and enforcement actions, including, but not
limited to, trial dates, the strength of our claims and likelihood of achieving an acceptable license on settlement, the timing and nature of any
appeals and our ability to collect on any favorable judgments. Significant fluctuations in our income and cash flows may make our business
difficult to manage and adversely affect our business and operating results. We do not recognize income from our licensing and enforcement
actions until we actually receive the proceeds of licensing activities or litigation (whether resolved at trial or in a settlement).
Our expenses, principally with respect to litigation costs, may also vary significantly from period to period depending upon a number of
factors, including, but not limited to, whether fees of outside legal counsel are paid on an hourly, contingent or other basis, the timing of
depositions, discovery and other elements of litigation, costs of expert witnesses and other consultants and other costs incurred in support of
enforcement actions.
As a result of the factors described above and other known and unknown risks affecting our business (including those described above
under the caption “Risk Factors”), our historical operating performance may not be indicative of our future results.
Public company expenses
As a result of the Reverse Merger, Finjan became a subsidiary of a public company, and we have applied to list our common stock on
the Nasdaq Capital Market, although no assurance can be granted that such application will be approved or that we will continue to satisfy the
relevant quantitative listing criteria. Finjan’s operating results as a private company do not reflect certain expenses that we incur, and will
continue to incur, as a public company. We expect that our general and administrative expenses will increase as we pay legal counsel and
accountants to assist us in, among other things, establishing and maintaining more comprehensive compliance and governance functions,
establishing and maintaining internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, and preparing
and distributing periodic public reports under the federal securities laws with respect to the business we operate through Finjan. We also
expect to incur additional costs associated with compensation of non-employee directors and costs associated with the retention of full-time
employees and consultants to operate our web and network security technology business and to comply with our obligations as a public
company. In addition, we expect that as part of a public company the cost of director and officer liability insurance will increase compared to
costs incurred by Finjan prior to the Reverse Merger. In light of these costs and the changes in our management, business and growth strategy
that resulted from the Reverse Merger, the public company costs that we incurred prior to the Reverse Merger may not be indicative of the
costs we will incur in the future.
Stock-based and other executive compensation
During the years ended December 31 2012 and 2011, Finjan did not grant any options, restricted stock or other equity-based
compensation. Prior to the Reverse Merger, Finjan had outstanding options to purchase an aggregate of 77 shares of Finjan common stock, all
of which were awarded in May 2013. Following the Reverse Merger, our board of directors adopted the 2013 Option Plan, and the 2010 Plan
also remains in effect. In addition, although the 2010 Stock Compensation Plan replaced the 2006 Option Plan and no additional options will
be issued under the 2006 Option Plan, the Company reserved the right to issue new options pursuant to the 2006 Option Plan to the extent
that, and in the amount of, any outstanding options that are forfeited under that plan. We do not intend to issue additional options under either
the 2010 Stock Compensation Plan or the 2006 Option Plan, and expect that future equity-based awards will be made under our 2013 Option
Plan or other equity, incentive compensation or similar plans that the Company may adopt in the future, to our directors, officers and other
employees and consultants. As a result, to the extent relevant, we may incur non-cash, stock-based compensation expenses in future periods.
During the year ended December 31, 2013, Finjan granted to employees and consultants ten-year options to purchase an aggregate of
1,625,476 shares of common stock at exercise prices ranging from $1.66 to $5.90 per share. During the year ended December 31, 2013,
Finjan granted an aggregate of 22,368 shares of restricted stock in connection with the termination of certain severance agreements in
connection with the closing of the Reverse Merger.
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In addition, Finjan had no full-time employees or full-time consultants during the years ended December 31, 2012 and 2011 and its sole
executive officer served in such capacity without compensation during such years. In April 2013, Finjan engaged Philip Hartstein and Shimon
Steinmetz as its President and Chief Financial Officer, respectively, pursuant to consulting agreements. Messrs. Hartstein and Steinmetz were
appointed President and Chief Financial Officer of the Company on July 8, 2013. During the first quarter of 2014, we also hired a Vice
President, Intellectual Property (IP) Licensing, a Vice President, Legal Operations and a Vice President, Corporate Counsel and we intend to
hire additional employees and/or consultants in the future to expand our business. Since the Reverse Merger, we have hired a total of five
employees. Accordingly, we will incur compensation expenses in future periods that Finjan did not incur during the period presented in its
financial statements. For additional information regarding the Consulting Agreements between Finjan and each of its President and Chief
Financial Officer please see “Executive Compensation—Employment Agreements” below.
Finjan Reorganization
Until May 2, 2013, Finjan was a wholly-owned subsidiary of Finjan Software, Inc., a Delaware corporation, which we refer to as
“FSI.” In April 2013, Finjan distributed securities of two unaffiliated entities which it previously held to FSI, and made a payment of cash in
an amount sufficient to repay and satisfy in full an intercompany loan from FSI to Finjan. Following that distribution, the board of directors
and stockholders of FSI approved the dissolution of, and a plan of liquidation for, FSI that resulted in, among other things, the distribution of
Finjan common stock to certain of FSI’s stockholders, each of whom received shares of our common stock in the Reverse Merger.
Recent Financing Activities Prior to the Reverse Merger
Prior to the Reverse Merger, Converted Organics, Inc.’s operations were financed primarily by the issuance of debt, equity and equity-
linked securities. In connection with the Reverse Merger, we redeemed, cancelled or otherwise retired all of the notes and derivative securities
previously issued by Converted Organics, Inc., other than warrants that are exercisable for a de minimis number of shares of our common
stock. See “Significant Developments During 2013 – Exchange Agreement” above. Although we may require financing in the future, we
expect that our cash on hand will be sufficient to satisfy our cash needs for at least the next twelve months, although we may seek additional
financing in connection with our growth strategy. During the year ended December 31, 2012, the Company issued 89,438 shares of its
common stock to reduce principal of $3,975,978 on its convertible debt. During the three month period ended March 31, 2013, the company
issued short term notes in the aggregate amount of $374,000, which were extinguished pursuant to the Exchange Agreement.
Results of Operations
Year ended December 31, 2013 compared with the year ended December 31, 2012
Our revenue and cost of revenues for the year ended December 31, 2013 was $0.74 and $0.76 million, respectively, which was
attributable to our organic fertilizer business.
Our operating expenses consist primarily of legal fees, general and administrative expenses, including stock-based compensation,
consulting and other professional fees, and transaction costs associated with the Reverse Merger. During the year ended December 31, 2013,
total operating expenses increased by approximately $4.7 million, or 171%, to $7.5 million as compared to the year ended December 31, 2012.
The increased costs were primarily due to $2.6 million incurred in relation to current litigation, approximately $0.8 million related to the one
time merger transaction costs, $0.8 million corporate legal expenses, $0.2 million accounting and consulting fees and $0.1 million in stock
registration fees and various other costs related to being a public company. The Company also hired new employees including the President
and CFO and others in 2013 resulting in increased salaries and benefits of approximately $0.6 million.
Our gain on settlements, net of legal costs decreased by approximately $76.4 million, or 99%, to $1.0 million for the year ended
December 31, 2013 compared to the year ended December 31, 2012. The decrease was primarily due to our entry into settlements with two of
the parties in the 2010 Litigation, pursuant to which we received net proceeds of approximately $76.5 million (gross proceeds of $85.0 million
less contingent legal fees of $8.5 million) from one of the defendants during 2012 and $1.0 million in cash proceeds (representing the first of
three equal installment payments payable over 18 months from the date of settlement) and securities with a fair value as of the settlement date
of approximately $8.4 million from the second defendant during 2012, partially offset by the receipt of the second installment with respect to a
litigation settlement payment of $1.0 million during 2013 associated with a licensing agreement. The remaining amounts due under the
litigation settlement will be recognized when payment is received, as collectability is not reasonably assured.
Our other income decreased by approximately $3.1 million, or 100%, to less than $0.1 million for the year ended December 31, 2013
compared to the year ended December 31, 2012. The decrease was due to securities received in exchange for modifying a perpetual license
agreement originally entered into on November 2, 2009 with a fair value of approximately $3.1 million during 2012.
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Our interest income decreased by less than $0.1 million, or 7%, to approximately $0.2 million for the year ended December 31, 2013
compared to the year ended December 31, 2012. Interest income decreased due to the lower average cash balance on hand during the 2013
periods compared to the same periods of 2012.
The significant fluctuation in our income for the year ended December 31, 2013 as compared to our income for the 2012 fiscal year
reflects the fact that our settlements are non-recurring and, as a result, income for these periods is not necessarily indicative of the income we
will achieve in the future.
Our income taxes for the year ended December 31, 2013 decreased $27.1 million, or 103%, to a tax benefit of $0.3 million as compared
to the year ended December 31, 2012, due to limited cumulative taxable operations of the Company in certain local jurisdictions compared to
the same period in 2012.
Year ended December 31, 2012 compared with the year ended December 31, 2011
Our general and administrative expenses consist mainly of legal, consulting and other professional fees. Our general and administrative
expenses increased approximately $0.9 million, or 52%, to $2.8 million for the year ended December 31, 2012 compared to the year ended
December 31, 2011. The increase in general and administrative expenses is primarily due to a an approximate $0.2 million increase in legal
fees and other expenses related to litigation (other than contingency fees paid in connection with settlements), as well as a $0.7 million increase
in consulting and other fees and expenses consisting primarily of fees and expenses related to our evaluation of strategic alternatives that
culminated in the Reverse Merger.
Our gain on settlements, net of legal costs increased by approximately $52.4 million, or 211%, to approximately $77.4 million for the
year ended December 31, 2012 compared to the year ended December 31, 2011. The increase was primarily due to settlement agreements with
two of the parties in the 2010 Litigation, pursuant to which we received net proceeds of approximately $76.5 million (gross proceeds of $85.0
million less contingent legal fees of $8.5 million) from one of the defendants and $1.0 million in cash proceeds (representing the first of three
equal installment payments payable over 18 months from the date of settlement) and securities with a fair value as of the settlement date of
approximately $8.4 million from the second defendant during the year ended December 31, 2012. Our gain on settlements, net of legal costs
for the year ended December 31, 2011 was attributable to receipt of approximately $24.9 million in net proceeds (proceeds of $37.3 million
(including interest income of $3.1 million) less contingent legal fees of $9.3 million) from the judgment we obtained in the Secure Computing
Litigation.
During the year ended December 31, 2011 we sold certain patent assets to a third party for net proceeds of approximately $1.3
million. The net proceeds was accounted for as a gain on sale of patents, net of legal costs. We did not sell any patents in fiscal 2012 and do
not presently intend to sell the patents in our current portfolio.
Other income increased by $3.1 million during the year ended December 31, 2012 due to securities received in exchange for modifying a
perpetual license agreement originally entered into on November 2, 2009 with a fair value of approximately $3.1 million.
Our interest income decreased approximately $3.0 million, or 95%, to $0.16 million during the year ended December 31, 2012 compared
to the year ended December 31, 2011, primarily resulting from the approximate $3.1 million of interest income we received as component
from the judgment we obtained in the Secure Computing Litigation.
The significant fluctuation in our income before taxes for the year ended December 31, 2012 as compared to our income for the 2011
fiscal year reflects the fact that our settlements and judgments are non-recurring and, as a result, income for these periods is not necessarily
indicative of the income we will achieve in the future.
Our income taxes for the year ended December 31, 2012 increased $23.5 million, or 692%, to $26.9 million as compared to the year
ended December 31, 2011. Such increase was primarily due to an increase in gain on settlement, partially offset by the increase in our general
and administrative expenses described above.
Liquidity and Capital Resources
Overview
Our cash requirements are, and will continue to be, dependent upon a variety of factors. We expect to continue to devote significant
capital resources to our licensing and enforcement program and resulting litigation we pursue. We also expect to require significant capital
resources to maintain our issued patents, prosecute our patent applications, acquire new technologies as part of our growth strategy and to
attract and retain qualified personnel on a full time basis. Our primary sources of liquidity are cash flows from operations, principally proceeds
from settlements and judgments in connection with our patent enforcement activities. Based on our
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current forecasts and assumptions, we believe that our cash and cash equivalents, will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months. We may, however, encounter unforeseen difficulties that may deplete
our capital resources more rapidly than anticipated, including those set forth under “Risk Factors,” above. Even without such difficulties, we
may seek to raise additional capital to grow our business. Any efforts to seek additional funding could be made through issuances of equity or
debt, or other external financing. However, additional funding may not be available on favorable terms, or at all. The capital and credit markets
have experienced extreme volatility and disruption since late 2007, and the volatility and impact of the disruption has continued into 2014. At
times during this period, the volatility and disruption has reached unprecedented levels. In several cases, the markets have exerted downward
pressure on stock prices and credit capacity for certain issuers, and there can be no assurance that we will have access to short-term financing.
If we fail to obtain additional funding when needed, we may not be able to execute our business plans and our business may suffer.
We had approximately $24.6 million and $91.5 million of cash and cash equivalents and $23.9 million and $29.6 million of working
capital as of December 31, 2013 and 2012, respectively. As of December 31, 2012, our current liabilities included approximately $33.9 million
due to FSI, Finjan’s then-parent company, which was repaid in full in February 2013 in anticipation of Finjan’s reorganization.
Cash flows for the year ended December 31, 2013
Operating Activities: Finjan’s net cash provided by operating activities decreased by $100.3 million, or 149%, to $32.8 million of cash
used in operating activities during the year ended December 31, 2013 as compared to the year ended December 31, 2012. Such decrease is
primarily attributable to Finjan’s receipt of approximately $77.5 million of cash proceeds as a result of a settlement net of contingency fees and
an installment payment related to the settlement agreement entered into by the Company entered into during 2012 partially offset by $2.8
million of legal costs and general and administrative expenses respectively. During the year ended December 31, 2013, we used cash of
approximately $25.3 million related to the payment of income taxes. The significant fluctuation in our cash flows from operating activities for
the year ended December 31, 2013 as compared to our cash flows from operating activities for the 2012 fiscal year reflects the fact that our
settlements are non-recurring and, as a result, cash flows from operating activities for these periods are not necessarily indicative of the income
we will achieve in the future.
Investing activities: During the year ended December 31, 2013, our investing activities used approximately $0.03 million, as compared to
$1.3 million of cash used by investing activities during the year ended December 31, 2012. Cash provided by investing activities during the
year ended December 31, 2013 primarily related to the $0.52 million of proceeds from notes receivable acquired through the Reverse Merger,
which was offset by an investment of $0.5 million in an Israeli limited liability partnership. Cash used in investing activities during the year
ended December 31, 2012 related to our purchase of M86 securities. (which were distributed to FSI during 2013, prior to the Reverse
Merger)
Financing activities: During the year ended December 31, 2013, we used approximately $34.1 million in financing activities, as
compared to $2.5 million used in financing activities during the year ended December 31, 2012. The increase in cash used in financing
activities is primarily attributable to the repayment of $33.9 million of intercompany indebtedness due to FSI during the year ended
December 31, 2013.
Cash flows for the year ended December 31, 2012
Operating Activities: Our net cash provided by operating activities increased by $40.9 million, or 154%, to $67.5 million during the year
ended December 31, 2012 as compared to the year ended December 31, 2011. Such increase is primarily attributable to our receipt of
approximately $77.5 million of cash proceeds as a result of a settlement and a part installment of the settlement agreement entered into by the
Company in 2012, partially offset by $2.8 million of legal costs and general and administrative expenses respectively. We used a portion of the
net proceeds received to finance post-trial proceedings and continue to use a portion of such proceeds in connection with our pending appeals
with respect to the 2010 Litigation. We also expect to use such proceeds to finance any future licensing and enforcement activities and any
future acquisitions, as well as for working capital and general corporate purposes. The significant fluctuation in our cash flows from operating
activities for the year ended December 31, 2012 as compared to our cash flows from operating activities for the 2011 fiscal year reflects the
fact that our settlements are non-recurring and, as a result, cash flows from operating activities for these periods are not necessarily indicative
of the income we will achieve in the future.
Investing activities: During the year ended December 31, 2012, Finjan used approximately $1.3 million in investing activities, as
compared to $1.3 million in cash proceeds provided by the sale of patent, net of commissions, during the year ended December 31,
2011. Cash used in investing activities during the year ended December 31, 2012 related primarily to our purchase of M86 securities.
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Financing activities: During the year ended December 31, 2012, Finjan used approximately $2.5 million in financing activities, as
compared to $0.2 million in cash used in financing activities during the year ended December 31, 2011. The increase in cash used in financing
activities is attributable to the repayment of $2.5 million of intercompany indebtedness due to FSI during the year ended December 31, 2012.
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Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States, or “GAAP.” The preparation of
these financial statements in accordance with GAAP requires us to make estimates, assumptions and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, assumptions and judgments, including those related to revenue recognition, bad debts, inventories, warranties and
income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and our revenue
recognition. Actual results may differ from these estimates under different assumptions or conditions and the impact of such differences may
be material to our consolidated financial statements.
Critical accounting policies are those policies that, in management’s view, are most important in the portrayal of our financial condition
and results of operations. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on
the results that we report in our financial statements. These critical accounting policies require us to make difficult and subjective judgments,
often as a result of the need to make estimates regarding matters that are inherently uncertain. Those critical accounting policies and estimates
that require the most significant judgment are discussed further below. We consider our most critical accounting policies and estimates to be:
revenue recognition, gain on settlements, valuation of long lived assets, stock based compensation, accounting for business combinations-
acquisition method accounting.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery of the product or service has occurred and all
obligations have been performed pursuant to the terms of the agreement, the sales price is fixed or determinable, and collectability is
reasonably assured.
Depending on the complexity of the underlying revenue arrangement and related terms and conditions, significant judgments,
assumptions and estimates may be required to determine when substantial delivery of contract elements has occurred, whether any significant
ongoing obligations exist subsequent to contract execution, whether amounts due are collectible and the appropriate period or periods in
which, or during which, the completion of the earnings process occurs. Depending on the magnitude of specific revenue arrangements, if
different judgments, assumptions and estimates are made regarding contracts executed in any specific period, our periodic financial results may
be materially affected.
Income from our Web and Network Security segment results from the monetization of patented technologies by licensing through a
negotiated agreement and/or enforcement of such patented technologies by a court of law. Licenses achieved by ordinary business negotiations
where a fair value of the license is determined by the Company is recognized as revenue. Due to our unique business, it is often necessary to
file patent infringement litigation against users of our patented technologies as part of the licensing and enforcement activities. We may enter
into certain settlements of patent infringement disputes once litigation commences. The amount of consideration received upon any settlement
or judgment is allocated to each element of the settlement based on the fair value of each element using the residual method. Elements with fair
values related to licensing agreement, royalty revenues, net of contingent legal fees, are recognized as revenue. When the Company is unable to
determine the fair value of a license agreement or a settlement, the value of the license agreement or settlement is recognized as contra expense
or gain on settlements in other income.
Revenue from our Organic Fertilizer segment results from two sources, product sales and tip fees. Product sales revenue comes from the
sale of fertilizer products and is recognized upon delivery. Tip fee revenue is derived from waste haulers who pay us “tip” fees for accepting
food waste generated by food distributors such as grocery stores, produce docks and fish markets, food processors and hospitality venues
such as hotels, restaurants, convention centers and airports. Tip fee revenue is recognized straight line over the period the fees are earned.
Gain on Settlements
Elements that are not related to license agreements and royalty revenue in nature will be reflected as a separate line item within the other
income section of the consolidated statements of operations as gain on settlement. Elements provided in either settlement agreements or
judgment include: the value of a license, legal release, and interest. When settlements or judgment are achieved at discounts to the fair value of
a license, the Company allocates the full settlement or judgment, excluding specifically named element as mentioned above, to the value of the
license under the residual accounting method. Legal release as part of a settlement agreement is recognized as a separate line item in the
consolidated statement of operations when value can be allocated to legal release. Ordinarily, when the Company reaches a settlement with a
defendant, no value is allocated to legal release since the existence of a settlement removes legal standing to bring a claim of infringement and
without legal a legal claim, legal release has no economic value. The element that is applicable to interest income is recorded as a separate line
item in other income.
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We make estimates and judgments when determining whether the collectability of fees receivable from licensees is reasonably assured.
We assess the collectability of fees receivable based on a number of factors, including past transaction history and the credit-worthiness of
licensees. If it is determined that collection is not reasonably assured, the fee is recognized when collectability becomes reasonably assured,
assuming all other income recognition criteria have been met, which is generally upon receipt of cash for transactions where collectability may
have been an issue. Management’s estimates regarding collectability impact the actual income recognized each period and the timing of the
recognition of income. Our assumptions and judgments regarding future collectability could differ from actual events and thus materially
impact our financial position and results of operations.
In general, our income arrangements provide for the payment of contractually determined fees in consideration for the grant of certain
intellectual property rights for patented technologies owned or controlled by us. These rights typically include some combination of the
following: (i) the grant of a non-exclusive, retroactive and future license to manufacture and/or sell products covered by patented technologies
owned or controlled by our operating subsidiaries, (ii) a covenant-not-to-sue, (iii) the release of the licensee from certain claims, and (iv) the
dismissal of any pending litigation. The intellectual property rights granted may be perpetual in nature, extending until the expiration of the
related patents, or can be granted for a defined, relatively short period of time, with the licensee possessing the right to renew the agreement at
the end of each contractual term for an additional minimum upfront payment.
Pursuant to the terms of these agreements, we have no further obligation with respect to the grant of the non-exclusive retroactive and
future licenses, covenants-not-to-sue, releases, and other deliverables, including no express or implied obligation on our part to maintain or
upgrade the technology, or provide future support or services. As such, the earnings process is complete and income is recognized upon the
execution of the agreement, when collectability is reasonably assured and when all other income recognition criteria have been met.
Income from licenses issued through negotiated agreement with the licensee is recognized when the arrangement with the licensee has
been signed and the license has been delivered and made effective, provided license fees are fixed or determinable and collectability is
reasonably assured. Income from settlements reached on legal enforcement of our patent rights and the release of the licensee from certain legal
claims, is recognized on receipt of the settlement amounts.
Stock-based Compensation Expense
Stock-based compensation payments to employees, non-employee consultants and directors are recognized as expense in the statements
of income. The compensation cost for all stock-based awards is measured at the grant date, based on the fair value of the award (determined
using a Black-Scholes option pricing model for stock options and intrinsic value on the date of grant for non-vested restricted stock), and is
recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). Determining the fair
value of stock-based awards at the grant date requires significant estimates and judgments, including estimating the market price volatility of
our common stock, future employee stock option exercise behavior and requisite service periods.
Stock-based compensation expense is recorded only for those awards expected to vest using an estimated pre-vesting forfeiture rate. As
such, we are required to estimate pre-vesting option forfeitures at the time of grant and reflect the impact of estimated pre-vesting option
forfeitures on compensation expense recognized. Estimates of pre-vesting forfeitures must be periodically revised in subsequent periods if
actual forfeitures differ from those estimates. We consider several factors in connection with our estimate of pre-vesting forfeitures, including
types of awards, employee class, and historical pre-vesting forfeiture data. The estimation of stock awards that will ultimately vest requires
judgment, and to the extent that actual results differ from our estimates, such amounts will be recorded as cumulative adjustments in the period
the estimates are revised. The Company granted options to a small number of employees and consultants. Given the executive level of the
grantees, the Company does not expect any of the awards granted to have forfeiture due to employee termination. Therefore, there is no
forfeiture rate used in calculating stock-compensation expense. The Company will continue to monitor its expectations on an ongoing basis
and revise this assumption as future circumstances dictate.
If actual results differ significantly from these assumption, stock-based compensation expense and our results of operations could be
materially impacted.
Valuation of Long-lived and Intangible Assets
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Factors we consider important, which could trigger an impairment review, include the following:
•
significant underperformance relative to expected historical or projected future operating results;
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•
•
•
•
significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
significant negative industry or economic trends;
significant adverse changes in legal factors or in the business climate, including adverse regulatory actions or assessments; and
significant decline in our stock price for a sustained period.
If a potential impairment exists, a calculation is performed to determine the fair value of the long-lived asset. This calculation is based on
a valuation model, which considers the estimated future undiscounted cash flows resulting from the use of the asset, and a discount rate
commensurate with the risks involved. Third party appraised values may also be used in determining whether impairment potentially exists.
The estimated fair value is compared to the long-lived asset’s carrying value to determine whether impairment exists.
As described above, in assessing the recoverability of intangible assets, significant judgment is required in connection with estimates of
market values, estimates of the amount and timing of future cash flows, and estimates of other factors that are used to determine the fair value
of the respective assets. If these estimates or related projections change in future periods, future intangible asset impairment tests may result in
charges to earnings.
Accounting for Business Combinations - Acquisition Method of Accounting
Acquisitions are accounted for in accordance with the acquisition method of accounting under Financial Accounting Standards Board,
“FASB”, ASC Topic 805, “Business Combinations,” “Topic 805”. Topic 805 requires, among other things, that identifiable assets acquired
and liabilities assumed be recognized at their fair values as of the acquisition date. Under the acquisition method of accounting, the purchase
consideration is allocated to the assets acquired, including tangible assets, patents and other identifiable intangible assets and liabilities
assumed, based on their estimated fair market values on the date of acquisition. Any excess purchase price after the initial allocation to
identifiable net tangible and identifiable intangible assets is assigned to goodwill. Amounts attributable to patents are amortized using the
straight-line method over the estimated economic useful life of the underlying patents. The carrying value of our patents was $0 as of
December 31, 2013 and 2012. Nonetheless, we believe our technology remains current and we continue to seek licensing opportunities and
are actively engaged in enforcement actions to further monetize our patent portfolio. Acquisition accounting includes the establishment of a net
deferred tax asset or liability resulting from book tax basis differences related to assets acquired and liabilities assumed on the date of
acquisition.
We assess fair value for financial statement purposes using a variety of methods, including the use of present value models and may also
reference independent analyses. Amounts recorded as intangible assets, including patents and patent rights, are based on assumptions and
estimates, as of the date of acquisition, regarding the amount and timing of projected income and costs associated with the licensing and
enforcement of patents and patent rights acquired, appropriate risk-adjusted discount rates, rates of technology adoption, market penetration,
technological obsolescence, product launch timing, the impact of competition or lack of competition in the market place, tax implications and
other factors. Also, upon acquisition, based on several of the estimates and assumptions previously described, we determine the estimated
economic useful lives of the acquired intangible assets for amortization purposes.
Management is responsible for determining the fair value of the tangible and identifiable intangible assets acquired and liabilities
assumed as of the acquisition date, solely for purposes of allocating the purchase price to the assets acquired and liabilities assumed. Fair value
measurements can be highly subjective, and it is possible that other professionals for other purposes, applying reasonable judgment and
criteria to the same facts and circumstances, could develop and support a range of alternative estimated amounts. Actual results may vary from
projected results.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward
Exists (“ASU 2013-11”). ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits
when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is
effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. ASU 2013-11 is not
applicable to the Company since we do not have an uncertain tax positions for the current and prior years.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market risk for changes in interest rates relates primarily to its holdings of cash and cash equivalents. Our cash and cash
equivalents as of December 31, 2013 totaled $24.6 million and consisted primarily of cash and money market funds with original maturities of
three months or less from the date of purchase. Our primary exposure to market risk is interest income sensitivity, which is affected by
changes in the general level of the interest rates in the United States. However, because of the short-term nature of the instruments in our
portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial condition or results of
operations. We do not have any foreign currency or other derivative financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data of the Company required by this Item are described in Item 15 of this
Annual Report on Form 10-K and are presented beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial
Officer, we conducted an evaluation of the effectiveness, as of December 31, 2013 of our disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The purpose of this evaluation
was to determine whether, as of the evaluation date, our disclosure controls and procedures were effective to provide reasonable assurance that
the information we are required to disclose in our filings with the Securities and Exchange Commission, or SEC, under the Exchange Act (i) is
recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Based on that evaluation, management has concluded that, as of December 31, 2013 our disclosure controls and procedures were not
effective due to the material weaknesses in our internal control over financial reporting described below in Management’s Report on Internal
Control Over Financial Reporting.
Inherent Limitations Over Internal Controls
The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
The Company’s internal control over financial reporting includes those policies and procedures that:
(i)
(ii)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
Company’s assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the
Company’s management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the financial statements.
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal
controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations, in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of
fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those
internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
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Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of
the effectiveness of internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934, as amended. In connection with the preparation of the Company’s annual financial statement. Management of the Company, including
our chief executive officer and chief financial officer, has undertaken an assessment of the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2013 based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (1992 framework). A material weakness is a deficiency, or
combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement
of the annual or interim financial statements will not be prevented or detected on a timely basis.
In performing the assessment, our management identified the following deficiencies in our internal control over financial reporting that
constitute a material weakness under standards established by the Public Company Accounting Oversight Board, or PCAOB, as of December
31, 2013:
•
•
•
Insufficient controls at the Company’s Converted Organics entity, acquired on June 3rd , 2013, related to a lack of adequately
designed controls to ensure that Cost of Goods Sold was accurately calculated and recorded at the transaction level.
Insufficient controls over the Revenue process at the Company’s Converted Organics entity, acquired on June 3rd, 2013 primarily
related to a lack of control activities to ensure that all sales transactions were recorded.
Insufficient controls over the Revenue process at the Finjan entity, primarily due to a lack of readily available documentation to
support the computations utilized in the Company’s fair value assessment of the component elements of its litigation settlements and
judgment award entered into its favor during the year ended December 31, 2013.
As a result of these material weaknesses, management concluded that we did not maintain effective internal control over financial
reporting as of December 31, 2013, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (1992 framework) and consequently we did not maintain effective internal control
over reporting.
Changes in Internal Control over Financial Reporting and Remediation
As a result of the material weaknesses described above, management has already implemented, or is in the process of implementing, the
following remediation steps to enhance internal control over financial reporting.
Finjan Revenue
•
Management has restated its historical financial statements. This restatement was necessitated by a lack of adequate
documentation to support fair value computations, resulting in a need for the Company to account for proceeds from legal
settlements and judgments received by the Company as gain on settlements net of contingency fees and/or as contra expense
in other income.
•
•
During 2013, Management has hired individuals with the necessary technical accounting expertise to ensure that complex
revenue transactions are recorded in accordance with Generally Accepted Accounting Principles in the United States.
Management has implemented a process in which all relevant data required to support the fair value components of the
litigation settlements and judgements is properly reviewed, approved and maintained.
Converted Organics Cost of Goods Sold
•
•
Management developed and implemented a process during Q1 2014 whereby Cost of Goods Sold is calculated based on
standard costs and applied to each sale made during the period at the time of sale.
Management has enhanced inventory reporting to include detailed inventory reports that are reviewed and approved by senior
management.
Converted Organics Revenue
•
Management has implemented the use of a sales order log which is reconciled to sales recorded at the end of each period to
ensure that all revenue earned during the period has been recorded. Although the Company implemented this new control
activity in December 2013, this control activity had not been in operations for a sufficient period of time to enable
management to obtain sufficient evidence about its operating effectiveness.
Except as described above, there have been no changes in our control over financial reporting during the year ended December 31, 2013
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders of
Finjan Holdings, Inc.
We have audited Finjan Holdings, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2013, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (1992). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management Annual Report on
Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that degree of compliance with the policies or procedures may deteriorate.
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A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is
a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected
on a timely basis. The following material weaknesses have been identified and included in Management’s Annual Report on Internal Control
Over Financial Reporting:
Material weakness related to revenue in the Company’s Organic Fertilizer segment: Insufficient controls over the Revenue process at
the Company’s Converted Organics entity, acquired on June 3, 2013, primarily related to a lack of control activities to ensure that all sales
transactions were recorded.
Material weakness related to cost of goods sold in the Company’s Organic Fertilizer segment: Insufficient controls at the Company’s
Converted Organics entity, acquired on June 3, 2013, related to a lack of adequately designed controls to ensure that cost of goods sold
was accurately calculated and recorded at the transaction level.
Material weakness related to revenue in the Company’s Web and Network Security Technology segment: Insufficient controls over
the Revenue process primarily due to a lack of readily available documentation to support the computations utilized in the Company’s fair
value assessment of the component elements of its litigation settlements and judgment award entered into in its favor during the year ended
December 31, 2013.
These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the fiscal
December 31, 2013 consolidated financial statements, and this report does not affect our report dated March 13, 2014.
In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control
criteria, Finjan Holdings, Inc. has not maintained effective internal control over financial reporting as of December 31, 2013, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(1992).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets as of December 31, 2013 and 2012 and the related consolidated statements of income, stockholders’ (deficiency)
equity, and cash flows for the years ended December 31, 2013, 2012 and 2011 of the Company and our report dated March 13, 2014
expressed an unqualified opinion on those financial statements.
/s/ Marcum LLP
Marcum LLP
New York, NY
March 13, 2014
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ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Executive Officers and Directors
Below are the names and certain information regarding our current executive officers and directors:
Effective as of June 3, 2013, in connection with the closing of the Reverse Merger and pursuant to the Merger Agreement, Edward J.
Gildea resigned as our president and chief executive officer, David R. Allen resigned as our chief financial officer and executive vice president
of administration, William Gildea resigned as our secretary and Edward J. Stoltenberg resigned as a director of the Company. Edward J.
Gildea also resigned as the chairman of the board of directors but remains a director of the Company.
Effective as of June 3, 2013, Philip Hartstein was appointed as our president, Shimon Steinmetz was appointed as our chief financial
officer and Daniel Chinn was appointed as a director to fill the vacancy created by Edward Stoltenberg’s resignation. Mr. Chinn also serves as
chief executive officer of our Finjan subsidiary. Effective as of June 23, 2013, Michael Eisenberg, Eric Benhamou and Alex Rogers were
appointed as additional members of our board of directors to fill vacancies on our board.
The following table sets certain information concerning our executive officers and directors, including their names, ages, positions with
us and, with respect to directors, the year in which their current term as directors expires. Our executive officers are chosen by our board of
directors and hold their respective offices until their resignation or earlier removal by the board of directors.
Name
Daniel Chinn
Edward Gildea
Michael Eisenberg
Eric Benhamou
Alex Rogers
Philip Hartstein
Shimon Steinmetz
Position
Director
Director (1)
Director (2)
Director (2)
Director (2)
President
Chief Financial Officer
Age Class Executive Since Director Since Term Expires
2010
N/A
N/A
N/A
N/A
2013
2013
1
2
3
1
2
N/A
N/A
2013
2006
2013
2013
2013
N/A
N/A
47
61
41
57
38
37
35
2013(3)
2014
2015
2013(3)
2014
N/A
N/A
(1) Mr. Gildea resigned as our president, chief executive officer and chairman of the board of directors, effective June 3, 2013. He continues
to serve as one of our directors. Effective as of June 23, 2013, he resigned as a director and was immediately reappointed as a class 2
director with a term expiring in 2014.
(2) Messrs. Eisenberg, Benhamou and Rogers have been appointed to serve as members of our board of directors, to fill the vacancies created
by the increase in the size of our board of directors from two members to five members. Such appointments became effective as of
June 23, 2013, 10 days after mailing of an information statement with respect to a change in the majority of our board of directors
pursuant to the Merger Agreement.
(3) No annual meeting of stockholders was held during 2013. Class 1 board members will be up for election at the next meeting of
stockholders.
Executive Officers/Directors
The following information pertains to our executive officers who also serve as directors, their principal occupations and other public
company directorships for at least the last five years and information regarding their specific experiences, qualifications, attributes and skills.
Daniel Chinn. Mr. Chinn was appointed as a director of the Company in connection with the closing of the Reverse Merger. Mr. Chinn
has served, and continues to serve, as the chief executive officer of our Finjan subsidiary since 2010. He also served as a director of FSI (from
2006) and the chief executive officer (from 2010) of FSI until its dissolution in 2013. Since 2011, Mr. Chinn has also been a Partner at
Tulchinsky Stern Marciano Cohen Levitski & Co., an Israeli law firm, where he specializes in
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corporate and transactional matters. Prior to joining Tulchinsky Stern Marciano Cohen Levitski & Co., from 2009 to 2010, Mr. Chinn was the
chief executive officer of Seambiotic Ltd., which develops and produces marine microalgae for the food additives sector and as an energy
alternative source, and from 2006 to 2010, he was a Partner at Israel Seed IV, L.P., an investment company focusing on Israeli information
technology and life sciences companies. The Company believes that Mr. Chinn brings to our board of directors his deep knowledge and
understanding of Finjan’s business, gained over 7 years of service in board and management capacities of Finjan and FSI, and his experience
in leading and advising other small market companies as investor, director, executive officer and legal counsel.
Non-Employee Directors
The following information pertains to our non-employee directors, their principal occupations and other public company directorships
for at least the last five years and information regarding their specific experiences, qualifications, attributes and skills.
Michael Eisenberg. Mr. Eisenberg was appointed as a director of the Company effective as of June 23, 2013. Mr. Eisenberg has served
as a director of Finjan since 2003. Since 2005, Mr. Eisenberg has been a general partner at Benchmark Capital Partners, an early stage venture
capital firm focusing on social, mobile, local and cloud companies that disrupt various industries. Mr. Eisenberg has served, and continues to
serve, on the board of directors of many of Benchmark’s portfolio companies in the technology industry. Mr. Eisenberg earned a B.A. from
Yeshiva University. In July 2013, Mr. Eisenberg co-founded, and currently serves as a manager of, Aleph, a venture capital firm focused on
serving Israeli entrepreneurs. The Company believes that Mr. Eisenberg will bring to our board of directors his deep knowledge and
understanding of Finjan’s business, gained over ten years of service as a director of Finjan, and his extensive board leadership with other
companies in the technology industry.
Eric Benhamou. Mr. Benhamou was appointed as a director of the Company effective as of June 23, 2013. He has served as a director
of Finjan since 2006. Mr. Benhamou is also chairman and chief executive officer of Benhamou Global Ventures, LLC, which he founded in
2003. Benhamou Global Ventures, LLC invests and plays an active role in innovative high tech firms throughout the world. Mr. Benhamou
sits or has sat on the boards of directors of numerous public and private companies in the technology industry. Among U.S. public companies,
he serves as a director of Cypress Semiconductor Corporation, a semiconductor company (chairman, since 1993) and SVB Financial Group, a
diversified financial services company, bank holding company and financial holding company (since 2005), and has previously served as a
director of RealNetworks, Inc., creator of digital media services and software (2003-2012), 3Com Corporation, a public networking solutions
provider (chairman, 1990-2010), Voltaire Ltd., a public grid computing network solutions company (2007-2011), Dasient, a security company
that provides malware detection and prevention solutions (2010-2011) and Palm, Inc., a public mobile products provider (chairman, 1999-
2007). Mr. Benhamou also has served in management capacities at various public and private technology companies, including Palm, Inc.
(interim chief executive officer, 2001-2003) and 3Com Corporation (chief executive officer, 1990-2000), and previously founded Bridge
Communications, an early networking pioneer, and served as vice president of engineering (1981-1987) until its merger with 3Com in
1987. He serves as a member of the board of the Stanford University School of Engineering, as a vice chairman of the board of governors of
Ben Gurion University of the Negev, and serves other educational and philanthropic organizations. Mr. Benhamou holds a Master of Science
degree from Stanford University’s School of Engineering, a Diplôme d’Ingénieur and a doctorate from Ecole Nationale Supérieure d’Arts et
Métiers, Paris, and several honorary degrees. We believe that Mr. Benhamou’s extensive experience managing public companies in the
technology sector, his expertise in venture and other financial transactions, and his engineering expertise makes him well-qualified to serve on
our board of directors.
Alex Rogers. Alex Rogers was appointed as a director of the Company effective as of June 23, 2013. He has served as a director of
Finjan since 2005. Mr. Rogers also serves as a managing director HarbourVest Partners (Asia) Limited and HarbourVest Partners LLC,
which he joined in 1998. At HarbourVest, he focuses on direct co-investments in growth equity, buyout, and mezzanine transactions in Asia,
Europe and emerging markets regions, and has been instrumental in expanding and managing HarbourVest’s direct investment team in
London, including its direct European senior debt investing activities. He has also been actively involved in HarbourVest’s business
development activities, including the listings of HarbourVest Global Private Equity Limited (“HVPE”) and HarbourVest Senior Loan Europe
Limited (“HSLE”). Mr. Rogers transferred to HarbourVest’s Hong Kong subsidiary in 2012. He serves or has recently served as a board
member or board observer at M86, MobileAccess Networks (acquired by Corning), MYOB (acquired by Bain Capital), Nero AG,
Transmode Systems (TRMO:SS), TynTec, and World-Check (acquired by Thomson Reuters). His previous experience includes two years
with McKinsey & Company. Mr. Rogers received a BA (summa cum laude) in Economics from Duke University in 1996 and an MBA from
Harvard Business School in 2002, where he graduated with high distinction and was named a Baker Scholar.
Edward J. Gildea. Mr. Gildea has been a director of the Company since January 2006. From January 2006 until the closing of the
Reverse Merger, Mr. Gildea also served as our chairman, president and chief executive officer. From 2001 to 2005, he held several executive
positions including chief operating officer, executive vice president, Strategy and Business Development, and General Counsel of Quality
Metric Incorporated, a private health status measurement business. During that period, Mr. Gildea was also engaged in the private practice of
law representing business clients and held management positions in our predecessor companies.
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He holds an A.B. degree from the College of the Holy Cross and a J.D. degree from Suffolk University Law School. The Company believes
that Mr. Gildea’s financial and business expertise, including a diversified background of counseling and managing both public and private
companies, gives him the qualifications and skills to serve on our board of directors.
Executive Officers
The following information pertains to our non-director executive officers.
Philip Hartstein. Mr. Hartstein was appointed as the president of the Company in connection with the closing of the Reverse Merger. He
has served as president of Finjan since April 2013. Previously, Mr. Hartstein was a vice president and portfolio manager with IP Navigation
Group a full-service patent monetization firm, from 2012 to 2013. He served as Managing Director—Business Development with Rembrandt
IP Solutions, a firm that specializes in investing in and monetizing infringed intellectual property, from 2009 to 2012. In prior roles,
Mr. Hartstein was a director with IPotential in the patent brokerage group, a director and early member of Ocean Tomo’s management team
overseeing both the patent analytics and IP acquisitions groups, working as an in-house IP manager for a medical device start-up, and as a
patent engineer for boutique IP law firm.
Shimon Steinmetz. Mr. Steinmetz was appointed as the chief financial officer of the Company in connection with the Reverse
Merger. He has served as chief financial officer of Finjan since April 2013. Prior to joining Finjan, Mr. Steinmetz worked in the technology
investment banking practice at Cantor Fitzgerald. Earlier in his career he worked as restructuring consultant at Grant Thornton and as a Senior
Associate at TH Lee Putnam Ventures. He began his career on Wall Street as an investment banker at Goldman Sachs and Salomon Smith
Barney. Shimon holds a MBA from the University of Chicago Booth School of Business and a BA from Yeshiva University.
Family Relationships
There are no family relationships among the members of our board of directors or our executive officers.
Composition of the Board and Director Independence
Our board of directors currently consists of five members. Our board of directors determines director independence based on the
definition of “independent directors” under NASDAQ Marketplace Rule 5605(a)(2). Consistent with that standard, after review of all relevant
transactions and relationships, including between each director, any of his family members, and us, our executive officers and our independent
registered public accounting firm, our board of directors has affirmatively determined that as of the date hereof, Messrs. Eisenberg, Benhamou
and Rogers are independent under the NASDAQ standard for independence. Prior to the Reverse Merger, our board of directors consisted of
two members, one of whom (Edward Stoltenberg) qualified as an independent director.
In accordance with our certificate of incorporation, our board of directors is divided into three classes of directors, with the classes as
nearly equal in number as possible, each serving staggered three-year terms. As a result, approximately one third of our board of directors will
be elected each year.
The terms of office of our board of directors will be:
•
•
•
Class 1 directors, whose initial term was scheduled to expire at the annual meeting of stockholders to be held in 2013, but since no
2013 stockholders meeting was held, their term will expire when their successors are duly elected and qualify;
Class 2 directors, whose initial term will expire at the annual meeting of stockholders to be held in 2014 and when their successors
are duly elected and qualify; and
Class 3 directors, whose initial term will expire at the annual meeting of stockholders to be held in 2015 and when their successors
are duly elected and qualify.
Daniel Chinn and Eric Benhamou are class 1 directors, Edward Gildea and Alex Rogers are class 2 directors and Michael Eisenberg is a
class 3 director.
The classification of directors will have the effect of making it more difficult for stockholders to change the composition of our
board. Our bylaws provide that the number of directors shall consist of not less than two and not more than eight members, with the exact
number to be fixed at the discretion of the board.
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Board Committees
As our common stock is not presently listed for trading or quotation on a national securities exchange, we are not presently required to
have board committees, such as an audit committee, compensation committee or nominating committee. In view of the fact that our board of
directors had only two members until June 23, 2013, the customary functions of an audit committee, compensation committee and nominating
committee had been performed by the full board of directors. On October 7, 2013, we adopted a new written charter for, and reconstituted, the
compensation committee of our board of directors. Michael Eisenberg and Alex Rogers serve as members of the compensation committee. In
addition, on October 7, 2013, we adopted a new written charter for, and reconstituted, the nominating and corporate governance committee of
our board of directors Daniel Chinn and Michael Eisenberg serve as members of the nominating and corporate governance committee. The
function of our audit committee continues to be performed by our full board of directors. We currently have one board member, Eric
Benhamou, who qualifies as an “audit committee financial expert,” as defined by the rules of the Securities and Exchange Commission.
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 2013, none of our executive officers served as a director of or member of a compensation
committee of any entity that has one or more executive officers serving on our board of directors.
Code of Business Conduct and Ethics
Our Board has adopted a code of business conduct and ethics that establishes the standards of ethical conduct applicable to all directors,
officers and employees of the Company. The code of business conduct and ethics addresses, among other things, conflicts of interest,
compliance with disclosure controls and procedures, and internal control over financial reporting, corporate opportunities and confidentiality
requirements. The Audit Committee is responsible for applying and interpreting our code of business conduct and ethics in situations where
questions are presented to it. We intend to satisfy the disclosure requirements under the Securities Exchange Act of 1934, as amended,
regarding amendments to, or a waiver from, our Code of Business Conduct and Ethics by posting such information on our website
(www.finjan.com). There were no amendments or waivers to our code of business conduct and ethics in fiscal year 2013. Our code of
business conduct and ethics is available for review on our website at www.finjan.com. To request a copy of the code of business conduct and
ethics, please make written request to our Chief Financial Officer c/o Finjan Holdings, Inc., 122 East 42nd Street, Suite 1512, New York, NY
10168.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires our executive officers and directors,
and persons who beneficially own more than 10% of our equity securities, to file reports of ownership and changes in ownership with the
SEC. Based solely on our review of copies of such reports and representations from our executive officers and directors, we believe that our
executive officers and directors complied with all Section 16(a) filing requirements during the year ended December 31, 2013, except that Eric
Benhamou failed to file a Form 3 to report his appointment as a director of the Company.
ITEM 11. EXECUTIVE COMPENSATION.
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Summary Compensation Table
The following table provides the compensation earned for the fiscal years indicated for services rendered to us in all capacities, by our
named executive officers.
Name and
Principal Position
Philip Hartstein
President (3)
Shimon Steinmetz
Chief Financial Officer (4)
Daniel Chinn
Chief Executive Officer, Finjan, Inc. (5)
Edward Gildea
President and Chief
Executive Officer (6)
David Allen
Chief Financial Officer (7)
Year
2013 $150,000 $ 50,000 $ — $ 276,942 $
Salary Bonus (1)
Awards (2)
Awards (2)
Compensation
Total
75,000 $551,942
Stock
Option
All Other
2013 $100,000 $ 50,000 $ — $ 118,689 $
59,999 $328,688
2013 $ — $ — $ — $ 451,143 $
— $451,143
2013 $ 49,215 $ — $ 29,411 $ — $
2012 $229,005 $ — $ — $ — $
2011 $198,900 $ — $ 144,498 $ 117,740 $
2013 $ 81,442 $ — $
3,219 $ — $
2012 $187,676 $ — $ — $ — $
2011 $156,081 $ — $ 41,887 $ 34,130 $
300,000 $378,626
— $229,005
— $461,138
175,000 $259,661
— $187,676
— $232,098
(1) The Company provided discretionary cash bonuses to its president and chief financial officer based upon the Company’s progress
following the completion of the Reverse Merger. The bonuses were not based on specific performance criteria.
(3)
(2) Represents the full grant date fair value of the stock award or option grant, as applicable, calculated in accordance with FASB ASC Topic
718. Our policy and assumptions made in the valuation of share-based payments are contained in Note 11 to our December 31, 2013
financial statements. The value of stock awards presented in the Summary Compensation Table reflects the grant date fair value of the
awards and does not correspond to the actual value that will be recognized by the named executive officers.
In April 2013, Finjan engaged Philip Hartstein to serve as its president pursuant to a consulting agreement, which was terminated upon
the execution of an employment agreement between the Company and Mr. Hartstein effective as of July 1, 2013. Prior to the effectiveness
of such employment agreement, the Company paid Mr. Hartstein $75,000 of consulting fees, which are reflected as “other compensation”
in the table above. During 2013, Finjan granted Mr. Hartstein a ten-year option which, as a result of the Reverse Merger, was converted
into a ten-year option to purchase 432,403 shares of common stock at an exercise price of $1.66 per share.
In April 2013, Finjan engaged Shimon Steinmetz to serve as its chief financial officer pursuant to a consulting agreement, which was
terminated upon the execution of an employment agreement between the Company and Mr. Steinmetz effective as of July 1, 2013. Prior to
the effectiveness of such employment agreement, the Company paid Mr. Steinmetz $59,999 of consulting fees, which are reflected as
“other compensation” in the table above. During 2013, Finjan granted Mr. Steinmetz a ten-year option which, as a result of the Reverse
Merger, was converted into a ten-year option to purchase 185,315 shares of common stock at an exercise price of $1.66 per share.
(5) During 2013, Finjan granted Mr. Chinn a ten-year option which, as a result of the Reverse Merger, was converted into a ten-year option
to purchase 535,355 shares of common stock at an exercise price of $1.66 per share. The option was awarded to Mr. Chinn directly.
(4)
(6) Edward Gildea was the president and chief executive officer of Converted Organics, Inc. prior to the Reverse Merger. Mr. Gildea
resigned his positions as an officer of the Company effective as of June 3, 2013. He continues to serve as a director of the Company.
Mr. Gildea did not receive compensation in his capacity as a director during the year ended December 31, 2013. The Company awarded
241,938 shares of restricted stock to Mr. Gildea in connection with the closing of the Reverse Merger, all of which vested on December 3,
2013. Mr. Gildea also received $300,000, in cash, in connection with the termination of his severance agreement upon the consummation
of the Reverse Merger. Mr. Gildea’s compensation is not included in the financial statements included within this Annual Report because
this is pre-Reverse Merger compensation.
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Table of Contents
(7) David Allen was the chief financial officer of Converted Organics, Inc. prior to the Reverse Merger. Mr. Allen resigned his position as an
officer of the Company effective as of June 3, 2013. The Company awarded 26,482 shares of stock to Mr. Allen in connection with the
closing of the Reverse Merger, all of which vested immediately upon grant. Mr. Allen also received $175,000, in cash, in connection with
the termination of his severance agreement upon consummation of the Reverse Merger. Mr. Allen’s compensation is not included in the
financial statements included within this Annual Report because this is
pre-Reverse Merger compensation.
Grants of Plan-Based Awards
The following table sets forth certain information with respect to grants of plan-based awards during the year ended December 31, 2013:
All Other All Other
Option
Stock
Awards: Awards:
Exercise Grant Date
Number of Number of or Base Fair Value
Shares of Securities Price of of Stock and
Name
Philip Hartstein
Shimon Steinmetz
Daniel Chinn
Edward Gildea
David Allen
Grant
Date
5/7/2013
5/7/2013
5/7/2013
6/3/2013
6/3/2013
Stock or Underlying Option
Options Awards
Units
Option
Awards
—
—
—
20,161
2,207
432,403 $ 1.66 $ 276,942
185,315 $ 1.66 $ 118,689
535,355 $ 1.66 $ 451,143
29,411
3,219
n/a $
n/a $
—
—
Outstanding Equity Awards at Fiscal Year End
The following table sets forth certain information with respect to the value of all equity awards that were outstanding at December 31,
2013:
Option Awards
Stock Awards
Name
Philip Hartstein (1)
Shimon Steinmetz (2)
Daniel Chinn
Edward Gildea (3)
David Allen (3)
Number of
Securities
Underlying
Unexercised
Options
Number of
Securities
Underlying
Unexercised
Options
Option
Exercise
Exercisable
—
—
422,107
—
—
Unexercisable
Price
432,403 $ 1.66
185,315 $ 1.66
113,248 $ 1.66
— $ —
— $ —
Option
Expiration
Date
5/7/2023
5/7/2023
5/7/2023
—
—
Number of
Shares
or Units
of Stock
That Have
Not Vested
Market
Value of
Shares
or Units
of Stock
That Have
Not Vested
— $ —
— $ —
— $ —
— $ —
— $ —
49
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
— $
— $
— $
— $
— $
Equity
Incentive Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
—
—
—
—
—
Table of Contents
(1) Twenty-five percent (25%) of the options awarded to Mr. Hartstein vest and become exercisable on March 31, 2014 and thereafter, 6.25%
of the options vest and become exercisable every three calendar months
(2) Twenty-five percent (25%) of the options awarded to Mr. Steinmetz vest and become exercisable on March 31, 2014 and thereafter,
6.25% of the options vest and become exercisable every three calendar months.
(3) Options to purchase common stock previously held by Edward Gildea and David Allen were exercisable for less than one share following
the reverse stock splits described above, and, accordingly, such options were not outstanding as of December 31, 2013.
Option Exercises and Stock Vested
The following table summarizes, with respect to our named executive officers, all options that were exercised or stock that vested during
fiscal 2013:
Name
Edward Gildea
David Allen
Employment Agreements
Philip Hartstein
Option Awards
Restricted Stock
Number of Shares
Acquired on Exercise
—
—
Value Realized
on Exercise
—
—
$
$
Number of
Shares Vested
20,162
2,207
Value Realized
on Vesting
154,232
3,219
$
$
On July 8, 2013, we and Philip Hartstein entered into an employment agreement, which we refer to as the “Hartstein Employment
Agreement”, pursuant to which Mr. Hartstein serves as our President. The Hartstein Employment Agreement provides for a base salary of
$300,000 per year. In addition, pursuant to the Hartstein Employment Agreement, Mr. Hartstein is eligible to receive a discretionary bonus at
the end of every four month period of his employment term, based on Mr. Hartstein’s performance and the overall progress of the Company,
in an aggregate amount of up to $75,000 per year. The Hartstein Employment Agreement was effective as of July 1, 2013. Either we or
Mr. Hartstein may terminate the Hartstein Employment Agreement at any time upon 90 days prior written notice. Prior to the completion of the
Reverse Merger, on March 29, 2013, Finjan entered into a consulting agreement with Mr. Hartstein that provided for substantially the same
compensation as described above. In addition, pursuant to the consulting agreement between Mr. Hartstein and Finjan, Finjan granted
Mr. Hartstein options to purchase 21 shares of Finjan common stock at an exercise price of $34,096.87 per share, which options were
converted as a result of the Reverse Merger into options to purchase 432,403 shares of our common stock at an adjusted exercise price of
$1.6559 per share. Such options have a four-year vesting term, which vesting shall cease upon a termination of the Hartstein Employment
Agreement for any reason, subject to accelerated vesting if Mr. Hartstein is terminated within one year following a change of control of the
Company (see “—Potential Payments Upon Termination or Change-in-Control—Messrs. Hartstein and Steinmetz” below). The consulting
agreement between Finjan and Mr. Hartstein ceased to be effective upon our entry into the Hartstein Employment Agreement.
Shimon Steinmetz
On July 8, 2013, we and Shimon Steinmetz entered into an employment agreement, which we refer to as the “Steinmetz Employment
Agreement”, pursuant to which Mr. Steinmetz serves as our Chief Financial Officer. The Steinmetz Employment Agreement provides for a
base salary of $200,000 per year. In addition, pursuant to the Steinmetz Employment Agreement, Mr. Steinmetz is eligible to receive a
discretionary bonus at the end of each calendar year during his employment term, based on Mr. Steinmetz’s performance and the overall
progress of the Company, in an aggregate amount of up to $50,000 per year. The Steinmetz Employment Agreement was effective as of
July 1, 2013. Either we or Mr. Steinmetz may terminate the Steinmetz Employment Agreement at any time upon 90 days prior written
notice. Prior to the completion of the Reverse Merger, on March 28, 2013, Finjan entered into a consulting agreement with Mr. Steinmetz that
provided for substantially the same compensation as described above. In addition, pursuant to the consulting agreement between
Mr. Steinmetz and Finjan, Finjan granted Mr. Steinmetz options to purchase 9 shares of Finjan common stock at an exercise price of
$34,096.87 per share, which options were converted as a result of the Reverse Merger into options to purchase 185,315 shares of our
common stock at an adjusted exercise price of $1.6559 per share. Such options have a four-year vesting term, which vesting shall cease upon
a termination of the Steinmetz Employment Agreement for any reason, subject to accelerated vesting if Mr. Steinmetz is terminated within one
year following a change of control of the Company (see “—Potential Payments Upon Termination or Change-in-Control—Messrs. Hartstein
and Steinmetz” below). The consulting agreement between Finjan and Mr. Steinmetz ceased to be effective upon our entry into the Steinmetz
Employment Agreement.
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Other than Messrs. Hartstein and Steinmetz, all of our named executive officers are at-will employees. We have severance agreements
with Edward J. Gildea and David Allen described below under “—Potential Payments Upon Termination or Change-in-Control—Messrs.
Gildea and Allen”, both of which have been terminated in connection with the Reverse Merger.
Potential Payments Upon Termination or Change-in-Control
Messrs. Hartstein and Steinmetz
Pursuant to the Hartstein Employment Agreement, the unvested portion of any options granted to Mr. Hartstein pursuant to the
consulting agreement between Finjan and Mr. Hartstein (and converted into options to purchase our common stock as a result of the Reverse
Merger) shall accelerate upon the occurrence of a change of control of the Company and termination of the Hartstein Employment Agreement
within one year thereafter.
Pursuant to the Steinmetz Employment Agreement, the unvested portion of any options granted to Mr. Steinmetz pursuant to the
consulting agreement between Finjan and Mr. Steinmetz (and converted into options to purchase our common stock as a result of the Reverse
Merger) shall accelerate upon the occurrence of a change of control of the Company and termination of the Steinmetz Employment Agreement
within one year thereafter.
Messrs. Gildea and Allen
Effective as of April 20, 2011, the Company entered into severance agreements with Mr. Gildea and Mr. Allen, which provided that,
upon a change in control of the Company, Messrs. Gildea and Allen were be entitled to a continuation of payment of their base salary for a
term of thirty-six months, payable in bi-weekly installments in accordance with the Company’s regular payroll practices. Such severance
agreements defined “Change of Control” to mean the consummation of any of the following events: (i) a sale, lease or disposition of all or
substantially all of the assets of the Company, or (ii) a merger or consolidation (in a single transaction or a series of related transactions) of the
Company with or into any other corporation or corporations or other entity, or any other corporate reorganization, where the stockholders of
the Company immediately prior to such event do not retain (in substantially the same percentages) beneficial ownership, directly or indirectly,
of more than fifty percent (50%) of the voting power of and interest in the successor entity or the entity that controls the successor entity;
provided, however, that a “Change in Control” did not include a sale, lease, transfer or other disposition of all or substantially all of the capital
stock, assets, properties or business of the Company (by way of merger, consolidation, reorganization, recapitalization, sale of assets, stock
purchase, contribution or other similar transaction) that involved the Company, on the one hand, and the Company or any of its subsidiaries.
The severance agreements also provided that, in the event a Change of Control occurred, and the employment of either Mr. Gildea or
Mr. Allen was terminated (i) by the Company for a reason other than for “Cause” (as defined in the applicable severance agreement) or (ii) by
the Executive for “Good Reason” (as defined in the applicable severance agreement), then the Executive would be eligible for severance pay as
described above.
Mr. Gildea and Mr. Allen agreed to terminate the severance agreements in connection with the closing of the Reverse Merger. In
exchange for such termination, the Company paid $300,000 and $175,000 and awarded 20,162 and 2,207 shares of our common stock to
Messrs. Gildea and Allen, respectively (on an adjusted basis, after giving effect to the 1-for-12 Reverse Stock Split). The shares of common
stock awarded to Mr. Gildea will lapse and be forfeited in the event Mr. Gildea elects to no longer serve as a director of the Company or an
affiliate of the Company prior to the six month anniversary of the grant date.
Director and Officer Indemnification Agreements
We have entered into indemnification agreements with certain members of our board of directors (Eric Benhamou, Daniel Chinn,
Michael Eisenberg and Alex Rogers) and Phil Hartstein and Shimon Steinmetz. These agreements require us to indemnify these individuals to
the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to us, and to advance expenses
incurred as a result of any proceeding against them as to which they could be indemnified. We also expect to maintain directors and officers
liability insurance and may enter into similar indemnification agreements with future directors and executive officers. Insofar as
indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
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Employee Benefit Plans
Finjan Holdings, Inc. 2013 Global Share Option Plan and Israeli Sub-Plan
On June 3, 2013, immediately following the closing of the Reverse Merger, our board of directors approved the 2013 Option Plan and
determined to submit the 2013 Option Plan to the stockholders of the Company with the recommendation of the board for approval. The 2013
Option Plan was approved by the holders of a majority of our common stock approved by written consent in lieu of a special meeting as of
July 5, 2013. Prior to the closing of the Reverse Merger, Finjan had outstanding options to purchase an aggregate of 77 shares of its common
stock, at an exercise price of $34,096.87 per share. Pursuant to the Merger Agreement, such options were converted as a result of the Reverse
Merger into options to purchase an aggregate of 1,585,476 shares of our common stock, at an adjusted exercise price of $1.6559 per share,
which options have been granted under our 2013 Option Plan.
A general description of the basic features of the 2013 Option Plan is set forth below.
The 2013 Option Plan is intended to provide an incentive to retain, in the employ of the company and its affiliates, persons of training,
experience, and ability; to attract new employees, directors, consultants and service providers; to encourage the sense of proprietorship of such
persons; and to stimulate the active interest of such persons in our development and financial success by providing them with opportunities to
purchase our common stock in accordance with the 2013 Option Plan. Any person who is employed by us or any of our affiliates, as well as
any of our directors, consultants, advisers, service providers or controlling stockholders (within the meaning of Israeli Income Tax Ordinance
[New Version] 1961, as amended, or the “Ordinance”) is eligible to participate in the 2013 Option Plan.
The 2013 Option Plan is intended to meet the performance-based compensation exemption under Section 162(m) of the Internal Revenue
Code of 1986. In addition, the 2013 Option Plan is intended to enable the company to grant options and issue shares under various tax
regimes, including, the United States, Israel and other jurisdictions.
The 2013 Option Plan was effective as of June 3, 2013, the date it was adopted by our board of directors and will terminate at the end of
ten years from such date of adoption; provided, however, that the 2013 Option Plan will remain in effect until the latest expiration date of any
outstanding option. Subject to applicable law, no option subject to the 2013 Option Plan was able to be exercised until the plan was approved
by our shareholders.
We have reserved 2,236,836 authorized but unissued shares of common stock for purposes of the 2013 Option Plan, subject to
adjustment in the event of certain transactions, including certain mergers, sales of substantially all of the company’s assets, reverse mergers,
and certain changes in control of the company, as well as to reflect stock splits, recapitalizations, share exchanges and similar transactions.
The administration, interpretation and operation of the 2013 Option Plan will be vested in our board of directors, or a compensation or
other committee thereof as determined by our board of directors. Effective as of October 7, 2013, our compensation committee serves as the
administrator of the 2013 Option Plan. Our board of directors, or committee thereof tasked with administering the 2013 Option Plan is
sometimes referred to as the “Administrator.”
The Administrator will have the full power and discretionary authority, subject to applicable law and subject to our certificate of
incorporation, to: (i) designate optionees; (ii) determine the terms and provisions of the respective option agreements awarded under the 2013
Option Plan (which may, but need not, be identical), including, but not limited to, the number of options to be granted to each optionee, the
number of shares to be covered by each option, provisions concerning the time or times when and the extent to which the options may be
exercised and the nature and duration of restrictions as to the transferability or restrictions constituting substantial risk of forfeiture;
(iii) accelerate the right of an optionee to exercise, in whole or in part, any previously granted option; (iv) interpret the provisions and
supervise the administration of the 2013 Option Plan; (v) replace, cancel or suspend awards, as necessary; (vi) determine the fair market value
of the shares covered by each option in accordance with the 2013 Option Plan; (v) designate the type of options to be granted to an optionee;
(vi) alter any restrictions and conditions of any options or shares subject to any options; (ix) determine the purchase price of the option;
(x) prescribe, amend and rescind rules and regulations relating to the 2013 Option Plan; and (vii) determine any other matter which is
necessary or desirable for, or incidental to the administration of the 2013 Option Plan.
The purchase price of each share subject to an option awarded under the 2013 Option Plan will be determined by the Administrator in its
sole and absolute discretion in accordance with applicable law, subject to any guidelines as may be determined by our board of directors (in the
event the board of directors is not then the Administrator) from time to time. However, in the case of a grant to any eligible person subject to
U.S. taxation, the 2013 Option Plan provides that the purchase price shall not be less than 100% of the fair market value (as determined in
accordance with the 2013 Option Plan) of the underlying shares as determined on the date of grant.
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The 2013 Option Plan provides that, in the event of certain transactions, including certain mergers, sales of substantially all of the
company’s assets, reverse mergers, and certain changes in control of the Company, the unexercised options then outstanding under the plan
will be assumed or substituted for an appropriate number of shares of the securities of the successor company, unless the successor company
does not agree to do so. However, any options that are exercisable into shares that have a fair market value that is equal to or less than such
option’s purchase price may be cancelled by the Administrator rather than assumed or substituted by the successor company. The number of
shares issuable upon exercise of options may also be adjusted to reflect stock splits, recapitalizations, stock dividends, share exchanges and
similar transactions.
Options granted under the 2013 Option Plan may be exercised by the optionee in whole or in part from time to time, to the extent that the
options become vested and exercisable, prior to the applicable expiration date, and provided that, subject to certain exceptions, the optionee is
employed by, serves as a director, or provides services to us or any of our affiliates, at all times during the period beginning with the date of
grant and ending upon the date of exercise.
Options granted under the 2013 Option Plan, to the extent not previously exercised, will terminate upon the earlier of: (i) the date set
forth in the option agreement; (ii) the lapse of ten years from the date of grant; (ii) in the event of certain transaction and other events specified
in the plan, and (iii) the expiration of any extended period applicable under the plan following the termination of the optionee’s service to the
company or its affiliates.
In the event of termination of optionee’s employment, directorship or service-provider relationship, with us and all of our affiliates, all
options granted to such optionee under the 2013 Option Plan will immediately expire, subject to limited exceptions. However, the 2013 Option
Plan provides that an option may be exercised after the date of termination of an optionee’s employment or service with us or any of our
affiliates during an additional period of time beyond the date of such termination, but only with respect to the number of vested options at the
time of such termination, if (i) the termination is without cause, in which event any vested option still in force may be exercised within a period
of ninety days after the date of such termination or the expiration date of the option, if earlier; or (ii) termination is the result of death or
disability of the optionee, in which event any vested option still in force may be exercised within a period of twelve months after the date of
such termination or the expiration date of the option, if earlier; or (iii) prior to the date of such termination, the Administrator shall authorize an
extension of the terms of all or part of the vested options beyond the date of such termination for a period not to exceed the period during
which the options by their terms would otherwise have been exercisable.
Any form of option agreement authorized by the 2013 Option Plan may contain such other provisions as the Administrator may, from
time to time, deem advisable.
Without derogating from any other rights granted to the Administrator, the board of directors may at any time, but when applicable, after
consultation with any trustee appointed in accordance with the Israeli sub-plan under the 2013 Option Plan, amend, alter, suspend or terminate
the plan and/or any sub-plan thereunder. No amendment, alteration, suspension or termination of the 2013 Option Plan will impair the rights
of any optionee, unless mutually agreed otherwise between us and the optionee. Termination of the 2013 Option Plan will not affect the
Administrator’s ability to exercise the powers granted to it hereunder with respect to options granted under the 2013 Option Plan prior to the
date of such termination.
Option awards under the 2013 Option Plan to participants who are residents of the State of Israel or those who are deemed to be
residents of the State of Israel for tax purposes, whom we refer to as “Israeli Optionees,” are subject to the provisions of an Israeli sub-plan,
which we refer to as the “Israeli Sub-Plan.” The Israeli Sub-Plan provides that eligible employees who are Israeli Optionees may only be
granted options granted pursuant to Section 102 of the Ordinance and eligible non-employee Israeli Optionees may only be granted options
granted pursuant to Section 3(i) of the Ordinance.
Converted Organics 2010 Omnibus Stock Compensation Plan
At the Annual Meeting of Shareholders on June 30, 2010, our stockholders approved the Converted Organics 2010 Omnibus Stock
Compensation Plan, or the “2010 Stock Compensation Plan.” Commencing January 1, 2011 and on the first day of each fiscal year thereafter,
the number of shares authorized for issuance under the 2010 Stock Compensation Plan is automatically recalculated to be equal to 20% of the
shares of the Company’s common stock outstanding on the last day of the prior fiscal year, less any issuances made under both the 2006
Option Plan and the 2010 Stock Compensation Plan. Accordingly, as of January 1, 2013 and 2014, 17,894 and 4,473,191 shares of our
common stock respectively, were available for issuance pursuant to the 2010 Stock Compensation Plan. The 2010 Stock Compensation Plan
replaced the 2006 Option Plan.
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Under the 2010 Stock Compensation Plan, the Compensation Committee may grant awards in the form of incentive stock options, as
defined in Section 422 of the Code, as well as options which do not so qualify, stock units, stock awards, stock appreciation rights and other
stock-based awards. The 2010 Stock Compensation Plan also permits awards to be granted that are based on or measured by common stock to
employees, consultants and non-employee directors, on such terms and conditions as our compensation committee deems appropriate. Other
stock-based awards may be granted subject to achievement of performance goals or other conditions and may be payable in common stock or
cash, or in a combination of the two.
Although, in connection with the adoption of the 2010 Stock Compensation Plan, we reserved the right to issue new options pursuant to
the 2006 Option Plan, to the extent that any currently outstanding options are forfeited under that 2006 Option Plan, we do not intend to issue
additional options under either the 2010 Stock Compensation Plan or the 2006 Option Plan. Instead, we expect that future equity-based
awards will be made under our 2013 Option Plan or other equity, incentive compensation or similar plans that the Company may adopt in the
future, to our directors, officers and other employees and consultants.
Director Compensation
Effective immediately following the Reverse Merger, we ceased to pay fees or other compensation to our non-executive directors, such
that our board of directors did not receive any compensation for their service during 2013. Our board of directors may determine to pay non-
executive directors fees in the future.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The following table shows information regarding the beneficial ownership of our common stock as of March 10, 2014 by:
•
•
•
•
each person who is known by us to own beneficially more than 5% of our common stock;
each of our directors;
each of our named executive officers; and
all of our directors and executive officers as a group.
The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the
determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if
that person has shares or “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,”
which includes the power to dispose of or direct the disposition of such security. Under those regulations, the number of shares of common
stock and percentages set forth opposite the name of each person and entity in the following table includes common stock underlying options
held by that person or entity, that are exercisable within 60 days after March 10, 2014, but excludes common stock underlying options held by
any other person or entity. Except as noted below, the address for each person listed in the following table is c/o Finjan Holdings, Inc., 122
East 42nd Street, New York, New York 10168. Subject to applicable community property laws, we believe that all persons listed have sole
voting and investment power with respect to their shares unless otherwise indicated.
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Table of Contents
Name of Beneficial Owner
Daniel Chinn, Director
Philip Hartstein, President
Shimon Steinmetz, Chief Financial Officer
Michael Eisenberg, Director
Eric Benhamou, Director
Alex Rogers, Director
Edward Gildea, Director
All directors and executive officers as a group
BCPI I, L.P.
2480 Sand Hill Road
Menlo Park, CA 94025
Israel Seed IV, L.P.
309 Queensgate House
South Church Street
Georgetown,
Grand Cayman, Cayman Islands
Harbourvest International Private Equity Partners IV Direct Fund L.P.
c/o HarbourVest Partners, LLC
One Financial Center
44th Floor
Boston, MA 02111
Cisco Systems, Inc.
170 W. Tasman Drive
San Jose, CA 95134
Star Bird Holdings Limited
c/o BWCI Group,
Albert House,
South Esplanade,
St Peter Port
Guernsey GY1 3BY
D and A Income Limited
c/o HSBC Trustee (C.I.) Limited
HSBC House
Esplanade
St Helier
Jersey JE1 1GT, Channel Islands
Shares Beneficially Owned
%(1)
Number
401,517(2)
108,101(3)
46,329(4)
5,353,555(5)
617,718(6)
0(7)
20,162(8)
6,547,382(9)
1.8%
*
*
23.9%
2.8%
—
*
28.6%
5,353,555(10)
23.9%
4,365,207(11)
19.5%
4,303,435(12)
19.2%
1,688,429
7.5%
1,461,933(13)
6.5%
1,461,933(14)
6.5%
(1) Percentages are based on 22,368,453 shares of common stock issued and outstanding as of March 10, 2014.
(2)
Includes options to purchase up to 401,517 shares of common stock, which are currently exercisable or will become exercisable within
sixty days for $1.6559 per share. Does not include options to purchase up to 133,839 shares of common stock which are not currently
exercisable and will not become exercisable within the next 60 days.
Includes options to purchase up to 108,101 shares of common stock, which are currently exercisable or will become exercisable within
sixty days, for $1.6599 per share. Does not include options to purchase up to 324,302 shares of common stock which are not currently
exercisable and will not become exercisable within the next 60 days.
Includes options to purchase up to 46,329 shares of common stock, which are currently exercisable or will become exercisable within
sixty days, for $1.6599 per share. Does not include options to purchase up to 138,987 shares of common stock which are not currently
exercisable and will not become exercisable within the next 60 days.
(3)
(4)
(5) Represents the 5,353,555 shares of common stock held by BCPI I, L.P. See footnote (10).
(6)
Includes shares of common stock held by Benhamou Global Ventures LLC, with respect to which Eric Benhamou has sole voting and
dispositive power.
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(7) Excludes the 4,303,435 shares held by HarbourVest International Private Equity Partners IV-Direct Fund L.P. Alex Rogers is an
employee of HarbourVest Partners (Asia) Limited, a subsidiary of HarbourVest Partners, LLC, the Managing Member of HIPEP IV
Direct Associates LLC, which is the General Partner of HarbourVest International Private Equity Partners IV-Direct Fund
L.P. Mr. Rogers does not have voting power or dispositive power with respect to shares held by HarbourVest International Private Equity
Partners IV-Direct Fund L.P. and disclaims beneficial ownership of the shares held by HarbourVest International Private Equity Partners
IV-Direct Fund.
Includes 20,162 shares issued to Mr. Gildea in connection with the termination of his severance agreement on June 3, 2013. The business
address for Mr. Gildea is 7A Commercial Wharf West, Boston, MA 02110.
Includes options to purchase up to 555,947 shares of common stock held by Daniel Chinn, Philip Hartstein and Shimon Steinmetz which
are currently exercisable or will become exercisable within 60 days for $1.6559 per share.
(8)
(9)
(10) Represents 5,353,555 shares of common stock held by BCPI I, L.P. (“BCPI I”) for itself and as nominee for BCPI Founders’ Fund I,
L.P. (“BCPI FF”) and for other individuals and entities. BCPI Partners I, L.P. (“BCPI GP”), the general partner of both BCPI I and BCPI
FF, may be deemed to have sole power to vote and dispose of these shares, BCPI Corporation (“BCPI Corp.”), the general partner of
BCPI GP, may be deemed to have sole power to vote and dispose of these shares, and Michael Eisenberg (“Eisenberg”) and Arad Naveh
(“Naveh”), the directors of BCPI Corp., may be deemed to have shared power to vote and dispose of these shares. The foregoing
information is based solely upon information contained in the Schedule 13D filed by BCPI I, BCPI GP, BCPI Corp., Eisenberg and
Naveh on June 13, 2013.
(11) Represents 4,365,207 shares of common stock held by Israel Seed IV, L.P., the general partner of which is Israel Venture Partners 2000
Limited (“Israel Venture”). Neil Cohen (“Cohen”), Jonathan Medved and Michael Eisenberg are the current members of Israel
Venture. However, Neil Cohen is the managing member of Israel Venture and, in his capacity as such, has voting and dispositive power
with respect to securities beneficially owned by Israel Venture. Both Israel Venture and Cohen have disclaimed beneficial ownership of
the reported securities except to the extent of their pecuniary interest therein. The foregoing information is based solely upon information
contained in the Schedule 13D filed by Israel Seed and Israel Venture on June 13, 2013.
(12) Voting and investment power over the securities owned directly by HarbourVest International Private Equity Partners IV-Direct Fund
L.P. (“HarbourVest Direct”) is exercised by the Investment Committee of HarbourVest Partners, LLC, (“HarbourVest Partners”) which
is the Managing Member of HIPEP IV Direct Associates LLC (“HarbourVest Associates”), which is the General Partner of HarbourVest
Direct Based solely upon the Schedule 13G filed by HarbourVest Direct, HarbourVest Associates and HarbourVest Partners, each of
HarbourVest Direct, HarbourVest Associates and HarbourVest Partners shares voting and dispositive power with respect to the shares of
common stock held by HarbourVest Direct.
(13) BWCI Pension Trustees Limited (“PTL”) and BWCI Trust Company Limited (“CTL”), as the corporate directors of Star Bird Holdings
Limited (“STAR”), manage various investments of STAR, including STAR’s investments in the Company. Each of PTL and CTL has,
except in limited circumstances, the power to vote or to direct the vote and to dispose or to direct the disposition of the shares of common
stock that STAR may be deemed to beneficially own. As a result, STAR, PTL and CTL may be deemed to constitute a “group” within the
meaning of the provisions of Rule 13d-3 of the Securities Exchange Act of 1934, as amended, with respect to STAR’s investment in the
Company. PTL and CTL own directly no Shares. Each of PTL and CTL have disclaimed beneficial ownership of any securities owned by
STAR. The foregoing information is based solely upon information contained in the Schedule 13G filed by STAR, PTL and CT2 on
June 18, 2013.
(14) D & A Income Limited (“D&A”) is wholly-owned by HSBC International Trustee Limited, Jersey Branch (“HSBC International Trustee
Limited”), as the sole trustee of certain trusts. Accordingly, HSBC International Trustee Limited may be deemed to beneficially own the
shares of our common stock held directly by D&A. HSBC PB Corporate Services 1 Limited is the sole director of D&A and may also be
deemed to beneficially own the shares of our common stock held by D&A. The foregoing is based on information provided by the
stockholder.
Securities Authorized for Issuance Under Equity Compensation Plans
See Part II, Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
56
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Finjan has obtained, and we expect to continue to obtain, legal services from a law firm in which Daniel Chinn, a member of our board
of directors and the chief executive officer of Finjan, is a partner. During the years ended December 31, 2013 and 2012, Finjan incurred legal
fees due to such law firm in the amount of approximately $290,000 and $245,000, respectively.
Prior to the separation from the Former Parent, Finjan periodically received non interest bearing advances from the Former Parent to
support its operations. During the year ended December 31, 2012 the Company had net transfers to the Former Parent amounting to
approximately $2,470,000. As of December 31, 2012, the Company had a net amounts due to the Former Parent aggregating approximately
$33,943,000. In February 2013, the Company repaid the outstanding balance due to the Former Parent in full and there are no amounts due to
the Former Parent as of December 31, 2013.
The disclosures set forth under the headings “Business—Corporate Information and History” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Recent Developments—Exchange Agreement”, “Management”, “Executive
Compensation—Employment Agreements”, “Executive Compensation—Potential Payments Upon Termination or Change-in-Control”,
“Executive Compensation—Director Compensation” and “Security Ownership of Certain Beneficial Owners and Management”, are
incorporated herein by reference.
As payment for compensation accrued and not paid since April 1, 2006 and expenses incurred but not reimbursed since April 1, 2006,
we have previously disclosed an intent to pay in the future, out of available cash, a total of $150,000 to the following current and former
executive officers, directors and consultants, each of whom will receive $50,000: Edward J. Gildea, John A. Walsdorf and William A.
Gildea. However, in connection with the closing of the Reverse Merger, Edward J. Gildea and William A. Gildea each waived their respective
rights to receive such payment.
Marshall S. Sterman, a former director, is also currently chairman of the board of Urban Ag Corp, which licenses technology held by a
former subsidiary of the Company.
The above transactions were ratified by a majority of the members of our Board of Directors who were independent directors. Future
transactions with our officers, directors or greater than five percent stockholders will be on terms no less favorable to us than could be
obtained from unaffiliated third parties, and all such transactions will be reviewed and subject to approval by our audit committee, if any, or
directors serving in similar capacities, which will have access, at our expense, to our or independent legal counsel.
Other than the transactions contemplated by the Merger Agreement, employment agreements, lock-up Agreements with each of the
former Finjan stockholders who received shares of our common stock in the Reverse Merger, or as otherwise described in this filing, there
has not been and there is no currently proposed transaction or series of transactions in which the we were or are to be a participant and the
amount involved exceeds $120,000, and in which any none of the following persons had or will have any direct or indirect material interest:
(i) any of our or Finjan’s directors or officers; (ii) any person known to beneficially own, directly or indirectly, more than 5% of our common
stock; or (iii) any immediate family member of any of the foregoing persons.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table sets forth the fees that the Company billed or expected to be billed by Marcum LLP, our independent registered
public accountants, for fiscal years 2013 and 2012.
Audit Fees (1)
Audit-Related Fees (2)
Tax Fees (3)
All Other Fees
Total
57
For The Years Ended
December
2013
$128,750
73,800
—
2012
$141,459
—
$202,550
$141,459
Table of Contents
(1) Audit fees relate to professional services rendered in connection with the audit of the Company’s annual financial statements and internal
control over financial reporting, quarterly review of financial statements included in the Company’s Quarterly Reports on Form 10-Q, and
audit services provided in connection with other statutory and regulatory filings.
(2) Audit-related fees relate to professional services rendered in connection with assurance and related services that are reasonably related to
the performance of the audit or review of the Company’s financial statements, including due diligence.
(3) Tax fees relate to professional services rendered for tax compliance, tax advice and tax planning for the Company.
Although, we do not have pre-approval policies and procedures described in paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X, the
fees above were approved in advance.
58
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
PART IV
Exhibit
Number
2.1
2.2
2.3
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
Exhibit Description
Agreement and Plan of Merger, dated as of June 3, 2013, by and among Converted Organics, Inc. (now known as Finjan
Holdings, Inc.) (the “Company”), COIN Merger Sub, Inc., and Finjan, Inc. (incorporated by reference to Exhibit 2.1 to our
current report on Form 8-K filed June 3, 2013)
Asset Purchase Agreement between the Company and United Organic Products, LLC, dated January 21, 2008 (incorporated by
reference to our current report Exhibit 2.02 on Form 8-K filed January 29, 2008)
Asset Purchase Agreement between the Company and Waste Recovery Industries, LLC, dated January 21, 2008 (incorporated by
reference to Exhibit 2.03 to our current report on Form 8-K filed January 29, 2008)
Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to our registration statement on Form SB-2
filed June 21, 2006)
Certificate of Amendment to Certificate of Incorporation of the Company, filed with the Secretary of State of the State of
Delaware on June 9, 2008 (incorporated by reference to the form of Certificate of Amendment on Annex B to our definitive
proxy statement on Schedule 14A filed March 5, 2008)
Certificate of Amendment to Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware
on August 10, 2009 (incorporated by reference to Exhibit 3.2 to our prospects on Form S-1 filed September 15, 2009)
Certificate of Amendment to Certificate of Incorporation of the Company, filed with the Secretary of State of the State of
Delaware on June 30, 2010 (incorporated by reference to Exhibit 3.1 to our current report on Form 8-K filed June 30, 2010)
Certificate of Amendment to Certificate of Incorporation of the Company, filed with the Secretary of State of the State of
Delaware on June 14, 2011 (incorporated by reference to the form of Certificate of Amendment on Annex A to our definitive
proxy statement on Schedule 14A filed May 2, 2011)
Certificate of Amendment to Certificate of Incorporation of the Company, filed with the Secretary of State of the State of
Delaware on October 21, 2011 and effective November 8, 2011 (incorporated by reference to the form of Certificate of
Amendment on Annex B to our definitive proxy statement on Schedule 14A filed May 2, 2011)
Certificate of Amendment to Certificate of Incorporation of the Company, filed with the Secretary of State of the State of
Delaware on March 2, 2012 and effective March 5, 2012 (incorporated by reference to the form of Certificate of Amendment on
Annex A to our definitive proxy statement on Schedule 14A filed January 17, 2012)
Certificate of Amendment to Certificate of Incorporation of the Company, filed with the Secretary of State of the State of
Delaware on June 11, 2012 (incorporated by reference to the form of Certificate of Amendment on Annex A to our definitive
proxy statement on Schedule 14A filed April 30, 2012)
Certificate of Amendment to Certificate of Incorporation of the Company, filed with the Secretary of State of the State of
Delaware on May 31, 2013 and effective June 3, 2013 (incorporated by reference to Exhibit 3.1 to our current report on Form 8-
K filed June 3, 2013)
Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock, dated October 18,
2010 (incorporated by reference to Exhibit 3.1 to our current report on Form 8-K filed on October 18, 2010)
Amended and Restated Bylaws, adopted June 6, 2008 (incorporated by reference to Exhibit 3.2 to our current report on Form 8-K
filed June 6, 2008
59
Table of Contents
Exhibit
Number
3.12
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
16.1
21.1
24
Exhibit Description
Amendment to the Bylaws, adopted September 10, 2010 (incorporated by reference to Exhibit 3.2 to our current report on Form 8-
K filed September 13, 2010)
Exchange Agreement, dated as of June 3, 2013, by and among the Company, Hudson Bay Master Fund Ltd. and Iroquois Master
Fund Ltd. (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed June 3, 2013)
Closing Agreement, dated as of June 3, 2013, by and among the Company, Hudson Bay Master Fund Ltd., Iroquois Master Fund
Ltd., the former stockholders of Finjan, Inc., and Michael Eisenberg, as the stockholder representative of the former stockholders
of Finjan, Inc. (incorporated by reference to Exhibit 10.2 to our current report on Amendment No. 1 to Form S-1 filed September
20, 2013)
Form of Registration Rights Agreement, dated as of June 3, 2013, by and between the Company and certain stockholders of the
Company (incorporated by reference to Exhibit 10.3 to our current report on Form 8-K filed June 3, 2013)
Form of Lock-Up Agreement, dated as of June 3, 2013, by and between the Company and certain stockholders of the Company
(incorporated by reference to Exhibit 10.4 to our current report on Form 8-K filed June 3, 2013)
Employment Agreement, dated as of July 5, 2013, by and between the Company and Philip Hartstein (incorporated by reference to
Exhibit 10.1 to our current report on Form 8-K filed July 12, 2013)#
Employment Agreement, dated as of July 5, 2013, by and between the Company and Shimon Steinmetz (incorporated by reference
to Exhibit 10.2 to our current report on Form 8-K filed July 12, 2013)#
Finjan Holdings, Inc. 2013 Global Share Option Plan (incorporated by reference to Exhibit 10.7 to our current report on Form 8-K
filed June 3, 2013)#
Form of Option Award under the Finjan Holdings, Inc. 2013 Global Share Option Plan*#
Consulting Agreement, dated as of March 29, 2013, by and between Finjan, Inc. and Philip Hartstein (incorporated by reference to
Exhibit 10.5 to our current report on Form 8-K filed June 3, 2013)#
Consulting Agreement, dated as of March 28, 2013, by and between Finjan, Inc. and Shimon Steinmetz (incorporated by reference
to Exhibit 10.5 to our current report on Form 8-K filed June 3, 2013)#
Termination Agreement, dated as of June 3, 2013, between the Company and Edward Gildea (incorporated by reference to Exhibit
10.10 to our quarterly report on Form 10-Q for the quarterly period ended June 30, 2013)#
Termination Agreement, dated as of June 3, 2013, between the Company and David Allen (incorporated by reference to Exhibit
10.11 to our quarterly report on Form 10-Q for the quarterly period ended June 30, 2013)#
Letter From Moody, Famiglietti & Andronico, LLP to the Securities and Exchange Commission (incorporated by reference to
Exhibit 16.1 to our current report on Form 8-K filed June 3, 2013)
Subsidiaries of Finjan Holdings, Inc.
Power of Attorney (contained on signature page).
60
Table of Contents
Exhibit
Number
31.1
31.2
32.1
32.2
Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
Exhibit Description
Certifications of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002**
Certifications of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002**
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
*
**
Filed herewith.
This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or
otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities
Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
# Management contract or compensatory plan or arrangement
61
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 13, 2014
Date: March 13, 2014
FINJAN HOLDINGS, INC.
By:
By:
/s/ Philip Hartstein
Philip Hartstein
President
(Principal Executive Officer)
/s/ Shimon Steinmetz
Shimon Steinmetz
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
*
Eric Benhamou
*
Daniel Chinn
*
Michael Eisenberg
*
Edward Gildea
*
Alex Rogers
/s/ Philip Hartstein
Philip Hartstein
/s/ Shimon Steinmetz
Shimon Steinmetz
* By: /s/ Philip Hartstein
Philip Hartstein
Attorney-in-fact
Title
Director
Director
Director
Director
Director
Date
March 13, 2014
March 13, 2014
March 13, 2014
March 13, 2014
March 13, 2014
President (Principal Executive Officer)
March 13, 2014
Chief Financial Officer (Principal Financial and Accounting
Officer)
March 13, 2014
62
Table of Contents
FINJAN HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Stockholders’ Equity (Deficiency) for the Years Ended December 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-8
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Finjan Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Finjan Holdings, Inc. (the “Company”) as of December 31, 2013 and 2012,
and the related consolidated statements of operations, stockholders’ (deficiency) equity and cash flows for the years ended December 31,
2013, 2012 and 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Finjan Holdings, Inc. as of December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for the years
ended December 31, 2013, 2012 and 2011 in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Finjan Holdings,
Inc., internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992) and our report dated, March 13,
2014, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of existence of
certain material weaknesses.
/s/ Marcum LLP
Marcum LLP
New York, NY
March 13, 2014
F-2
Table of Contents
FINJAN HOLDINGS, INC.
Consolidated Balance Sheets
(In thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Investments
Other non-current assets
Total Assets
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable
Accounts payable - related parties
Accrued expenses
Accrued income taxes
Due to former parent
Other current liabilities
Total current liabilities
Deferred tax liabilities
Total Liabilities
Commitments and contingencies
Stockholders’ Equity
December 31,
2013
2012
$24,598 $ 91,545
—
—
3
91,548
—
—
—
12,784
—
$27,947 $104,332
50
34
150
24,832
953
1,333
306
500
23
$
495 $
15
336
4
—
35
885
39
2,562
17
68
25,325
33,943
—
61,915
—
924 $ 61,915
$
Preferred stock - $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding at
December 31, 2013 and 2012
Common stock - $0.0001 par value; 1,000,000,000 shares authorized; 22,368,453 and 20,590,596 shares issued
and outstanding at December 31, 2013 and 2012
Additional paid-in capital
Retained earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
—
—
2
21,546
5,475
27,023
2
17,821
24,594
42,417
$27,947 $104,332
See Notes to these Consolidated Financial Statements
F-3
Table of Contents
FINJAN HOLDINGS, INC.
Consolidated Statements of Operations
(In thousands, except share and per share data)
Revenues
Cost of revenues
Gross loss
Operating Expenses:
Selling, general and administrative
Transaction costs
Total operating expenses
Loss from operations
Other Income
Gain on settlements, net of legal costs
Gain on sale of patents, net of legal costs
Settlement proceeds for modification of licensing agreement
Other income
Interest income
Total other income
(Loss) income before provision for income taxes
Income tax (benefit) provision
Net (Loss) Income
Net (Loss) Income Per Share:
Basic and Diluted
Weighted Average Number of
Common Shares Outstanding:
Basic and Diluted
2013
For the Years Ended December 31,
2012
(restated)
2011
(restated)
$
744
762
(18)
$
—
—
—
6,689
790
7,479
(7,497)
1,000
—
—
9
153
1,162
(6,335)
(263)
(6,072)
(0.28)
2,759
—
2,759
(2,759)
77,353
—
3,116
—
164
80,633
77,874
26,889
50,985
2.48
$
$
$
$
—
—
—
1,818
—
1,818
(1,818)
24,908
1,280
—
—
3,124
29,312
27,494
3,396
24,098
1.17
$
$
$
21,601,974
20,590,596
20,590,596
See Notes to these Consolidated Financial Statements
F-4
Table of Contents
FINJAN HOLDINGS, INC.
Consolidated Statement of Stockholders’ (Deficiency) Equity
For the Years Ended December 31, 2013, 2012 and 2011
(In thousands, except share and per share data)
Balance - January 1, 2011
Tax provision contributed by former parent
Net income
Balance - December 31, 2011
Tax provision contributed by former parent
Net income
Balance - December 31, 2012
Repurchase and retirement of common stock
Outstanding common stock of Converted Organics at time of
exchange
Common stock issued in exchange for convertible notes, preferred
stock and warrants
Amortization of stock option costs
Restricted stock awards granted
Dividend issued to former parent
Tax benefit contributed to former parent
Impact of share rounding as result of reverse stock split
Net loss
Balance - December 31, 2013
Common Stock
Amount
Additional
Paid-In
Capital
(Accumulated
Deficit)
Retained
Earnings
Shares
20,590,596
—
—
20,590,596
—
—
20,590,596
(123,544)
$
2 $ 13,553
2,704
—
16,257
1,564
—
17,821
(205)
—
—
2
—
—
2
—
(50,489)
—
24,098
(26,391)
—
50,985
24,594
—
Total
$(36,934)
2,704
24,098
(10,132)
1,564
50,985
42,417
(205)
89,473
—
131
—
131
1,789,469
22,368
—
—
91
—
22,368,453
—
—
—
—
—
—
—
2,610
1,156
33
—
—
—
—
2 $ 21,546
$
—
—
—
(12,784)
(263)
—
(6,072)
5,475
2,610
1,156
33
(12,784)
(263)
—
(6,072)
$ 27,023
See Notes to these Consolidated Financial Statements
F-5
Table of Contents
FINJAN HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In thousands)
Cash Flows From Operating Activities
Net (loss) income
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
$ (6,072) $ 50,985 $ 24,098
For the Years Ended December 31,
2011
2012
2013
Depreciation and amortization
Stock-based compensation expense
Shares received in settlement of litigation
Shares received in exchange for modification of license agreement
Gain on sale of patents
Tax provision contributed by Former Parent
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Other assets
Accrued expenses
Accounts payable
Accounts payable - related parties
Accrued income taxes
Deferred tax liability
Total Adjustments
Net Cash (Used in) Provided By Operating Activities
Cash Flows From Investing Activities
Purchases of shares in investee
Proceeds from sale of shares in investee
Cash acquired through merger with Converted Organics
Proceeds from notes receivable acquired through merger with Converted Organics
Purchases of property and equipment
Proceeds from sale of patents, net of legal costs
Net Cash (Used in) Provided by Investing Activities
Cash Flows From Financing Activities
Repayment of loan from Former Parent
Repurchase and retirement of common stock
Net Cash Used in Financing Activities
Net (Decrease) Increase in Cash and Cash Equivalents
Cash and Cash Equivalents - Beginning
Cash and Cash Equivalents - Ending
241
1,189
—
—
—
(263)
—
—
(8,353)
(3,116)
—
1,564
—
—
—
—
(1,280)
2,704
152
94
(82)
(23)
(346)
(2,331)
(2)
(25,321)
(4)
(26,696)
—
—
(3)
—
68
1,740
2
24,633
—
16,535
—
—
—
—
—
389
691
—
2,504
(32,768)
67,520
26,602
(500)
—
63
517
(111)
—
(31)
(1,601)
286
—
—
—
—
(1,315)
—
—
—
—
—
1,280
1,280
(33,943)
(205)
(34,148)
(2,470)
—
(2,470)
(157)
—
(157)
(66,947)
91,545
63,735
27,810
27,725
85
$ 24,598 $ 91,545 $ 27,810
See Notes to these Consolidated Financial Statements
F-6
Table of Contents
FINJAN HOLDINGS, INC.
Consolidated Statements of Cash Flows – Continued
(In thousands)
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for income taxes
Non-cash investing and financing activities:
Distribution of investments as dividend
Leasehold improvements financed
Acquisition of Converted Organics
Assets acquired and liabilities assumed:
Cash and cash equivalents
Accounts receivable
Inventory
Notes receivable
Other current assets
Property and equipment
Intangible assets - customer relationships
Goodwill
Accounts payable and accrued liabilities
Deferred tax liability
Total fair value of net assets acquired
Common stock issued to acquire Converted Organics net assets
See Notes to these Consolidated Financial Statements
F-7
For the Years Ended December 31,
2013
2012
2011
$
$
$
$
$
$
25,331
$ —
$ —
12,784
35
$ —
$ —
$ —
$ —
63
202
128
517
65
928
1,453
306
(878)
(43)
2,741
2,741
$ —
—
—
—
—
—
—
—
—
—
$ —
$ —
$ —
—
—
—
—
—
—
—
—
—
$ —
$ —
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND OPERATIONS
ORGANIZATION
Finjan Holdings, Inc. (the “Company” or “Finjan Holdings”), a Delaware corporation (formerly Converted Organics, Inc.), has two reportable
business segments: a web and network security technology segment focused on licensing and enforcing its technology patent portfolio,
operated by its wholly-owned subsidiary Finjan, Inc. (“Finjan”), and an organic fertilizer segment operated by another wholly-owned
subsidiary, Converted Organics of California, LLC (“Converted Organics”).
Finjan was founded in 1997 as a wholly owned subsidiary of Finjan Software Ltd. (“FSL”). FSL, together with its subsidiaries, sold
enterprise web security solutions, including real-time and behavior-based malware prevention. In October 2003, FSL transferred all of its
shares in Finjan to Finjan Software, Inc. (“FSI”). As a result of this transfer, Finjan became a wholly-owned subsidiary of FSI (the “Former
Parent”). On December 8, 2010, Finjan, Inc. changed its name to FI Delaware, Inc. On October 22, 2012, FI Delaware, Inc. changed its name
back to Finjan, Inc.
In October 2009, the Former Parent sold its portfolio of intellectual property to Finjan. In November 2009, the Former Parent sold certain
assets, (including assets belonging to Finjan), and Finjan granted a patent license to M86 Security Inc. (“M86”) for 7,075,629 shares of M86
common stock, of which 1,548,148 were issued to Finjan and the balance of which were issued to the Former Parent. In connection with that
transaction, and subsequent to November 2009, the Former Parent and its remaining subsidiaries ceased the development, marketing and sale
of its products, but retained all patents and related rights. In March 2012, M86 entered into a business combination with Trustwave Holdings,
Inc. (“Trustwave”) and Finjan exchanged its interest in M86 for shares of the common stock of Trustwave. In conjunction with that
transaction, in March 2012, Finjan granted Trustwave a non-exclusive license to use certain of Finjan’s technology, which license is fully paid
unless certain conditions are satisfied, in which case Finjan may be entitled to receive additional payments from Trustwave. In exchange
for modifying the license received from M86, Finjan received 224,000 additional shares of Trustwave Class A common stock (see Note 8).
In February 2013, Finjan distributed its interests in securities issued by two unaffiliated entities which it previously held to the Former Parent
(see Note 8), and made a payment of cash in an amount sufficient to repay and satisfy in full an intercompany loan from the Former Parent to
Finjan. Following that distribution, the Board of Directors and stockholders of the Former Parent approved the dissolution of, and plan of
liquidation for FSI that resulted in, among other things, the distribution of all outstanding Finjan common stock to certain of the Former Parent
’s stockholders, whereby Finjan ceased to be a subsidiary of the Former Parent.
REVERSE MERGER
On June 3, 2013, Converted Organics, Inc. entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Finjan. Effective
June 3, 2013 and pursuant to the Merger Agreement, a wholly owned subsidiary merged with and into Finjan and Finjan became a wholly-
owned subsidiary of Converted Organics, Inc. (the “Merger”). Concurrent with the Merger, Converted Organics, Inc.’s name was changed to
Finjan Holdings, Inc.
At the effective time of the Merger, each issued and outstanding shares of common stock of Finjan immediately prior to the Merger was
converted into 247,087.147 shares (the “Exchange Ratio”) of Finjan Holdings common stock. In addition, each option to purchase shares of
Finjan common stock that was outstanding immediately prior to the Merger was converted into an option to purchase the number of shares of
Finjan Holdings common stock determined by multiplying the number of shares of Finjan common stock subject to the Finjan option by the
Exchange Ratio on the same terms and conditions as were applicable to such Finjan option. The exercise price per share of each Finjan
Holdings option was determined by dividing the exercise price of each Finjan option by the Exchange Ratio.
On June 3, 2013, as a condition to the closing of the Merger, the Company entered into an Exchange Agreement (the “Exchange Agreement”)
with each of Hudson Bay Master Fund Ltd. (“Hudson Bay”) and Iroquois Master Fund Ltd. (“Iroquois”). Pursuant to the Exchange
Agreement, immediately following the effectiveness of the Merger, Hudson Bay and Iroquois exchanged an aggregate of $1,192,500 principal
amount of Converted Organics convertible notes, 13,281 shares of its 1% Series A Convertible Preferred Stock and warrants to purchase an
aggregate of 105,554 shares of its common stock for an aggregate of 1,789,469 shares of Finjan Holdings common stock, or 8.0% of
outstanding common stock immediately following the Merger on a fully-diluted basis.
F-8
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND OPERATIONS, CONTINUED
REVERSE MERGER, CONTINUED
Upon completion of the Merger, the former stockholders of Finjan held approximately 91.5% of the outstanding shares of capital stock of
Finjan Holdings on a fully-diluted basis, after giving effect to the Merger, the Exchange Agreement and assuming the exercise or conversion
of all outstanding class C, D and H warrants and options (but excluding shares underlying options to purchase Finjan common stock which
were converted into options to purchase Company common stock pursuant to the Merger Agreement). Accordingly, the Merger represents a
change in control of the Company. Upon completion of the Merger, the stockholders and former debt holders of the Company prior to the
Merger owned approximately 8.5% of the outstanding shares of capital stock of Finjan Holdings on a fully-diluted basis, without giving effect
to the Finjan stock options that were converted into Company options upon the closing of the Merger.
Under generally accepted accounting principles in the United States, (“U.S. GAAP”) because Finjan’s former stockholders received the
greater portion of the voting rights in the combined entity and Finjan’s senior management represents all of the senior management of the
combined entity, the Merger was accounted for as a reverse acquisition under the acquisition method of accounting for business combinations,
with Finjan treated as the acquiring company in the Merger for accounting purposes. Accordingly, the assets and liabilities and the historical
operations that are reflected in Finjan Holdings consolidated financial statements are those of Finjan and are recorded at the historical cost
basis of Finjan. The results of operations of the acquired Converted Organics business have been included in the consolidated statement of
operations since the date of Merger. For additional information regarding the Merger, see Note 4.
Unless otherwise indicated or the context otherwise requires, references to “Finjan Holdings,” or “the Company” refer to Finjan Holdings,
Inc., and its consolidated subsidiaries. Disclosures relating to the pre-merger business of Finjan Holdings, Inc., unless noted as being the
business of Converted Organics prior to the Merger, pertain to the business of Finjan prior to the Merger.
REVERSE STOCK SPLITS
Effective on June 3, 2013, prior to the consummation of the Merger, the Company effected a 1-for-500 reverse stock split of its issued and
outstanding shares of common stock. On July 5, 2013, the Company’s stockholders approved an amendment to the Company’s certificate of
incorporation that provides for a 1-for-12 reverse stock split that became effective August 22, 2013.
All references in these consolidated financial statements to the number of shares, options and other common stock equivalents, price per share
and weighted average number of shares outstanding of common stock have been adjusted to retroactively reflect the effect of the 1-for-500 and
the 1-for-12 reverse stock splits.
OPERATIONS
The Company intends to carry on Finjan’s business as its principal line of business, although the Company continues to operate its organic
fertilizer business through Converted Organics.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation. The results of operations of the acquired Converted Organics business and the estimated
fair market values of the assets acquired and liabilities assumed have been included in the consolidated financial statements of the Company
since the date of Merger.
BUSINESS ACQUISITION
Acquired businesses are accounted for using the acquisition method of accounting. The acquisition method of accounting for acquired
businesses requires, among other things, that most assets acquired and liabilities assumed be recognized at their estimated fair values as of the
acquisition date. The excess of the purchase price over the assigned values of the net assets acquired, if any, is recorded as goodwill.
Transaction costs are expensed as incurred.
F-9
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
RECLASSIFICATIONS
Certain prior period amounts have been reclassified for comparative purposes to conform to the fiscal 2013 presentation. These
reclassifications have no impact on the previously reported net income (loss).
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including
those related to stock-based compensation expense, impairment of long-lived assets, the determination of the economic useful life of property
and equipment and intangible assets, income taxes and valuation allowances against net deferred tax assets, and the application of the
acquisition method of accounting for business combinations. Management bases its estimates on historical experience or on various other
assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly liquid instruments with original maturities of three months or
less when purchased to be cash equivalents. Included in cash and cash equivalents are demand deposits and money market accounts.
CONCENTRATIONS OF CREDIT RISK
The Company maintains its cash and cash equivalents in financial institutions located in the United States. At times, the Company’s cash and
cash equivalent balances may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance
limits. The Company has not experienced any losses in such accounts. As of December 31, 2013 and 2012, substantially all of the company’s
cash and cash equivalents are uninsured.
As of December 31, 2013, two customers of the organic fertilizer segment accounted for 37% and 16% of the Company’s accounts receivable
balance.
During 2013, approximately 14%, 19% and 35% of the revenues generated by the company were from three customers.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company does not
currently require any collateral for accounts receivable. The Company regularly reviews the allowance by considering factors such as historical
experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to
pay. Bad debt expense for the year ended December 31, 2013 was not material. The allowance for doubtful accounts as of December 31, 2013
was not material. The Company did not have any accounts receivable prior to the Merger.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories. The Company’s
policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and
inventory in excess of expected requirements. There were no material write-downs as of December 31, 2013
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated on the straight-line method over the estimated useful lives of the related
assets which range from 3 to 10 years. Leasehold improvements are amortized on the straight-line method over the shorter of the remaining
lease term or the estimated useful economic lives of the related assets using the straight line method. The costs of additions and betterments are
capitalized and expenditures for repairs and maintenance are expensed in the period incurred. When items of property and equipment are sold
or retired, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is included in income.
F-10
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PATENTS
The Company owns or possesses licenses to use its patents. The Company’s patent costs were fully amortized prior to January 1, 2012. The
costs of maintaining patents are expensed as incurred. Patents as of December 31, 2013 and 2012 are as follows:
Patents
Less: accumulated amortization
Total
INTANGIBLE ASSETS
As of December 31,
(In thousands)
2013
$ 18,052
(18,052)
$ —
2012
$ 18,052
(18,052)
$ —
Intangible assets acquired individually, with a group of other assets, or in a business combination, are recorded at fair value. The Company’s
identifiable intangible assets consist of customer relationships acquired as part of the Merger. The fair value of intangible assets acquired was
determined based on a discounted cash flow analysis. Identifiable intangible assets are being amortized over the period of estimated benefit
using the straight-line method, which approximates the customer attrition rate, reflecting the pattern of economic benefits associated with these
assets, and have estimated useful lives of six years.
GOODWILL
The Company records goodwill when the purchase price of an acquisition exceeds the fair value of the net tangible and intangible assets as of
the date of acquisition. The Company performs an annual review of goodwill for indicators of impairment. When it is determined that goodwill
may be impaired, the Company performs an impairment assessment of the acquired reporting unit and impairment tests using a fair value
approach. As of December 31, 2013, the company has not identified any such impairments.
INVESTMENTS
Investments in common and preferred stock in which the Company has significant influence, but less than a controlling voting interest, are
accounted for using the equity method and are classified as non-current assets. Significant influence is presumed to exist when the Company
holds more than 20% of the investee’s voting instruments. Other investments that are not controlled, and over which the Company does not
have the ability to exercise significant influence are accounted for under the cost method. All of the Company’s investments as of
December 31, 2013 and 2012 are accounted for under the cost method.
IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER ACQUIRED INTANGIBLE ASSETS
Long-lived assets, such as property and equipment and intangible assets, are evaluated for impairment whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable. The carrying amount of a long lived asset is not recoverable if it
exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposition of the asset. The amount of
impairment loss, if any, is measured as the difference between the carrying value of the asset and its estimated fair value. Fair value is
estimated based on the best information available and by making necessary estimates, judgments and projections. For purposes of these tests,
long-lived assets must be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent
of the cash flows of other assets and liabilities. As of December 31, 2013, the Company has not identified any such impairments.
F-11
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities, approximate their fair value due to their short maturities.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. These fair value measurements apply to all financial instruments that are measured and reported on a fair value basis.
Where available, fair value is based on observable market prices or is derived from such prices. The Company uses the market approach
valuation technique to value its investments. The market approach uses prices and other pertinent information generated from market
transactions involving identical or comparable assets or liabilities. The types of factors that the Company may take into account in fair value
pricing the investments include available current market data, including relevant and applicable market quotes.
Based on the observability of the inputs used in the valuation techniques, financial instruments are categorized according to the fair value
hierarchy, which ranks the quality and reliability of the information used to determine fair values.
Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1 - Observable inputs such as quoted prices in active markets.
Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level 3 - Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the assignment of
an asset or liability within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The
Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.
REVENUE RECOGNITION
Revenue is recognized when persuasive evidence of an arrangement exists, delivery of the product or service has occurred, all obligations have
been performed pursuant to the terms of the agreement, the sales price is fixed or determinable, and collectability is reasonably assured.
Revenue from the Company’s web and network security technology business results from grants of licenses to its patents and settlements
reached from legal enforcement of the Company’s patent rights. Revenue is recognized when the arrangement with the licensee has been
signed and the license has been delivered and made effective, provided license fees are fixed or determinable and collectability is reasonably
assured. The fair value of licenses achieved by ordinary business negotiations is recognized as revenue.
The amount of consideration received upon any settlement or judgment is allocated to each element of the settlement based on the fair value of
each element. Elements related to licensing agreements, royalty revenues, net of contingent legal fees, are recognized as revenue in the
consolidated statement of operations. Elements that are not related to license agreements and royalty revenue in nature will be reflected as a
separate line item within the other income section of the consolidated statements of operations. Elements provided in either settlement
agreements or judgments include: the value of a license, legal release, and interest. When settlements or judgments are achieved at discounts to
the fair value of a license, the Company allocates the full settlement or judgment, excluding specifically named elements as mentioned above, to
the value of the license agreement or royalty revenue under the residual method. Legal release as part of a settlement agreement is recognized
as a separate line item in the consolidated statements of operations when value can be allocated to the legal release. When the Company reaches
a settlement with a defendant, no value is allocated to the legal release since the existence of a settlement removes legal standing to bring a
claim of infringement and without a legal claim, the legal release has no economic value. The element that is applicable to interest income will
be recorded as a separate line item in other income. The Company does not assume future performance obligations in its license arrangements.
F-12
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
REVENUE RECOGNITION, CONTINUED
The Company’s organic fertilizer operation generates revenues from two sources, namely, product sales and tip fees. Product sales revenue
comes from the sale of fertilizer products and is recognized upon delivery. Tip fee revenue is derived from waste haulers who pay the
Company “tip” fees for accepting food waste generated by food distributors such as grocery stores, produce docks and fish markets, food
processors and hospitality venues such as hotels, restaurants, convention centers and airports. Tip fee revenue is recognized straight-line over
the period the fees are earned.
STOCK-BASED COMPENSATION
The Company measures compensation cost for all employee stock-based awards at their fair values on the date of grant. Stock-based awards
issued to non-employees are measured at their fair values on the date of grant, and are re-measured at each reporting period through their
vesting dates. When a non-employee becomes an employee and continues to vest in the award, the fair value of the individual’s award is re-
measured on the date that he becomes an employee, and then is not subsequently re-measured at future reporting dates. The fair value of stock
based awards is recognized as expense over the service period, net of estimated forfeitures, using the straight-line method for stock options
and restricted stock. The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock-based awards.
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is based upon the weighted-average number of common shares outstanding. Diluted net income
(loss) per common share is based on the weighted-average number of common shares outstanding and potentially dilutive common shares
outstanding. Basic and diluted net income (loss) per common share were computed as follows:
For the Years Ended
December 31,
2012
(In thousands, except share and per share data)
2013
2011
Numerator:
Net (loss) income
Denominator:
Weighted-average common shares:
Basic and diluted
Net (loss) income per common share:
Basic and diluted
$
(6,072)
$
50,985
$
24,098
21,601,974
20,590,596
20,590,596
$
(0.28)
$
2.48
$
1.17
F-13
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
NET INCOME (LOSS) PER COMMON SHARE, CONTINUED
Potentially dilutive common shares from employee equity plans and warrants are determined by applying the treasury stock method to the
assumed exercise of warrants and share options and are excluded from the computation of diluted net loss per share if their inclusion would be
anti-dilutive and consist of the following:
Options
Warrants*
Total
December 31,
2013
1,625,476
—
1,625,476
* Warrants are currently exercisable for less than one share of common stock, and are therefore anti-dilutive, as a result of the 1-for-10
reverse stock split that we effected on November 8, 2011, the 1-for-500 reverse stock split that we effected on March 5, 2012, the 1-for-
500 reverse stock split that we effected on June 3, 2013 and the 1-for-12 reverse stock split we effected on August 22, 2013. The
warrants are subject to further adjustments in the future, which may have the effect of increasing or decreasing the exercise price and the
number of shares issuable upon exercise of the warrants.
The company did not have potentially dilutive common shares from employees equity plans and warrants as of December 31, 2012 and 2011
INCOME TAXES
The Former Parent files its consolidated income tax returns in the U.S. federal jurisdiction and has filed consolidated income tax returns in the
state of California through 2010. The Former Parent’s federal income tax returns for tax years after 2008 remain subject to examination by the
federal tax authorities. The Former Parent did not file separate income returns for its wholly-owned subsidiary. The former Parent’s State
income tax revenues for tax years after 2008 remain subject to examination by the state tax authorities.
The Company utilizes the separate return method in accounting for income taxes. The Company accounts for income taxes pursuant to the
asset and liability method which requires deferred income tax assets and liabilities to be computed annually for temporary differences between
the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be realized. The income tax provision or benefit is the tax payable or
refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
The benefit of tax positions taken or expected to be taken in income tax returns are recognized in the financial statements if such positions are
more likely than not of being sustained. As of December 31, 2013 and 2012, no liability for unrecognized tax benefits was required to be
reported. The Company does not expect its unrecognized tax benefit position to change during the next twelve months.
The Company’s policy is to classify assessments, if any, for tax-related interest as interest expense and penalties as general and administrative
expenses. There were no amounts accrued for penalties or interest as of, or during the years ended December 31, 2013, 2012 and 2011.
F-14
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, Presentation of
an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU
2013-11”). ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net
operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective for
annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. ASU 2013-11 is not applicable to the
Company since the Company did not have uncertain tax positions for the years ended December 31, 2013, 2012 and 2011.
Other recent accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require
adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
SUBSEQUENT EVENTS
Management has evaluated subsequent events or transactions occurring through the date the financial statements were issued. Management
concluded that no additional subsequent events required disclosure in these financial statements other than those disclosed in these notes to
these financial statements.
NOTE 3 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
On July 17, 2013, the Company filed a registration statement on Form S-1 which included consolidated statements of operations for the years
ended December 31, 2012 and 2011 with patent infringement settlements and licensing income classified as other income. Subsequently, the
Company filed a series of amendments on Forms S-1/A wherein the patent infringement settlements and licensing income in the consolidated
statements of operations were reclassified as revenue due to a change in the Company’s business model.
The portion of consideration received from the settlement of litigation, net of any contingent legal fees, representing the value of any legal
release, which had previously been classified as revenues is now reported as gain on settlements within other income on the consolidated
statements of operations. The portion of settlement proceeds representing the license granted, which had previously been included in revenues,
is now recorded as settlement proceeds for modification of licensing agreement within other income on the consolidated statements of
operations. Other legal costs incurred in connection with patent infringement litigation and previously classified as costs of revenues, are now
included in selling, general and administrative expenses on the consolidated statements of operations.
The Company has since determined that the patent infringement settlements and licensing income are subject to multiple element accounting.
However, the information needed to develop the models used to arrive at the fair value of the various elements included in litigation settlements
are sealed by the court and are not readily available to support company’s classification of such amounts as revenues. Consequently, the
Company is readily unable to determine or support the fair value of the multiple elements of the settlement, and has included amounts received
in such settlements as other income.
Accordingly, the Company has restated the condensed consolidated statements of operations for the three and six months ended June 30, 2013
and 2012 and the three and nine months ended September 30, 2013 and 2012 included in the Company’s Quarterly Reports on Form 10-Q
and the condensed consolidated statements of operations for the years ended December 31, 2012 and 2011 included in the Company’s Form
S-1/A filed on January 21, 2014, in order to correct the classification of the consideration received upon the settlement of patent infringement
litigation in the years ended December 31, 2012 and 2011. Such restatements did not have an impact on previously reported net income (loss)
or net income (loss) per share, total equity and total assets.
F-15
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS, CONTINUED
The following is a summary of the effects of the restatement for December 31, 2012 and 2011 (dollars in thousands):
For the Years Ended December 31,
2012
2011
Revenues
Cost of revenues
Gross Profit
Operating Expenses
Selling, general and administrative
Transaction costs
Total operating expenses
Operating Income (Loss)
Other Income
Gain on settlements
Gain on sale of patents, net of legal
costs
Settlement proceeds for modification of
licensing agreement
Interest income
Total Other Income
Previously
reported on
Form S-1/A Adjustment As restated Form S-1/A Adjustment As restated
$ 88,969 $ (88,969) $ — $ 24,908 $ (24,908) $ —
—
—
Previously
reported on
(1,465)
(23,443)
(9,151)
(79,818)
9,151
79,818
1,465
23,443
—
—
2,108
—
2,108
77,710
651
—
651
(80,469)
2,759
—
2,759
(2,759)
353
—
353
23,090
1.465
—
1,465
(24,908)
1,818
—
1,818
(1,818)
—
77,353
77,353
—
24,908
24,908
—
—
164
164
—
—
1,280
—
1,280
3,116
—
80,469
3,116
164
80,633
—
3,124
4,404
—
—
24,908
—
3,124
29,312
Income before provision for
income taxes
Provision for income taxes
77,874
26,889
$ 50,985 $
Net Income
77,874
26,889
—
—
— $ 50,985 $ 24,098 $
27,494
3,396
27,494
—
—
3,396
— $ 24,098
Net Income per share, basic and diluted $
2.48
$
2.48 $
1.17
$
1.17
NOTE 4 - MERGER WITH CONVERTED ORGANICS, INC.
As described in Note 1, the Company completed the Merger on June 3, 2013. At the effective time of the Merger shares of Finjan stock were
converted into a total of 20,467,052 shares of Finjan Holdings common stock. The stockholders of the Company prior to the effective time of
the Merger continued to hold 89,473 shares of Company common stock. In addition, certain Company indebtedness was exchanged for an
aggregate of 1,789,469 shares of Company common stock in connection with the Merger. Finally, an aggregate of 22,368 shares of Company
common stock were issued to the former chief executive officer and former chief financial officer of Converted Organics, Inc. in connection
with the termination of their severance agreements. During the year ended December, 2013, the Company incurred $790,000 in transaction
costs related to the Merger, which primarily consisted of legal and accounting expenses. These expenses were recorded as transaction costs in
the accompanying consolidated statements of operations.
F-16
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – MERGER WITH CONVERTED ORGANICS, INC., CONTINUED
Assets acquired and liabilities assumed in the Merger had the following estimated fair values (in thousands):
Cash and cash equivalents
Accounts receivable
Inventory
Note receivable
Other current assets
Property and equipment
Intangible asset – customer relationships
Goodwill
Accounts payable and accrued liabilities
Deferred tax liability
Fair value of shares issued as acquisition consideration
$
63
202
128
517
65
928
1,453
306
(878)
(43)
$2,741
The intangible asset related to customer relationships reflects the estimated net present value of the future cash flows associated with the stable
and recurring customer base acquired in the Merger. The fair value was determined using an income approach, which recognizes that the fair
value of an asset is premised upon the expected receipt of future economic benefits such as earnings and cash inflows based on current sales
projections and estimated direct costs for each product line. Indications of value are developed by discounting these benefits to their present
worth at a discount rate that reflects the current return requirements of the market. Acquired customer relationships are finite-lived intangible
assets and are amortized over their estimated life of six years using the straight-line method, which approximates the customer attrition rate,
reflecting the pattern of economic benefits associated with these assets.
The excess of purchase price over the fair value amounts assigned to the identifiable assets acquired and liabilities assumed represents
goodwill from the acquisition. The Company believes the factors that contributed to goodwill include the acquisition of a talented workforce
and administrative synergies. The Company does not expect any portion of this goodwill to be deductible for tax purposes. See Note 7 –
Intangible Assets and Goodwill.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information presents the combined results of operations for the years ended December 31, 2013
and 2012 as if the reverse merger had been completed at the beginning of the respective periods. The pro forma financial information includes
adjustments to eliminate one time charges and to include amortization of fair value adjustments in the appropriate pro forma periods as though
the companies were combined at the beginning of the respective periods, and is not indicative of, nor does it purport to project the future
financial position or operating results of the company. These adjustments include:
•
An increase (decrease) in amortization and depreciation expense of $122,000 and $(46,000) for the years ended December 31, 2013 and
2012, respectively, related to the fair value of acquired identifiable assets and property and equipment.
•
The exclusion of transaction-related expenses of $790,000 for the year ended December 31, 2013.
•
An adjustment for the estimated portion of the interest expense and change in fair value of derivative liabilities attributable to the
convertible notes being exchanged for common stock as a part of the transactions contemplated by the Merger Agreement.
F-17
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – MERGER WITH CONVERTED ORGANICS, INC., CONTINUED
PRO FORMA FINANCIAL INFORMATION, CONTINUED
The unaudited pro forma results do not reflect operating efficiencies or potential cost savings which may be implemented after the Merger.
Revenue
Net (loss) income
Net (loss) income per common share:
Basic and diluted
Weighted average shares outstanding:
Basic and diluted
For the Years Ended December 31,
2013
2012
(In thousands, except per share data)
1,411
(7,048)
$
(0.31)
$
$
$
1,521
54,066
2.41
22,469,562
22,389,609
NOTE 5 – INVENTORY
The components of inventory were as follows as of December 31, 2013 (in thousands):
Raw materials
Finished goods
Inventory
The Company did not hold inventory as of December 31, 2012.
NOTE 6 – PROPERTY AND EQUIPMENT
The components of property and equipment at December 31, 2013 were as follows (in thousands):
Buildings & improvements
Machinery and equipment
Office equipment and furniture
Less accumulated depreciation
Property and equipment, net
$13
21
$34
$ 613
410
51
$1,074
(121)
$ 953
Depreciation expense for the year ended December 31, 2013 was approximately $121,000. The Company did not have fixed assets or
depreciation expense for the years ended December 31, 2012 or 2011.
F-18
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – INTANGIBLE ASSETS AND GOODWILL
INTANGIBLE ASSETS
The Company’s intangible assets as of December 31, 2013 consist of customer relationships acquired in the Merger, which are amortized over
their estimated life of six years, using the straight-line method, as follows (in thousands):
Customer relationships
Accumulated amortization
Total
$1,453
(120)
$1,333
Amortization expense was approximately $120,000 for the year ended December 31, 2013. The Company did not have intangible assets or
amortization expense for the years ended December 31, 2012 or 2011.
The estimated future amortization of amortizable intangible assets over the remaining weighted average useful life of 5.5 years is as follows (in
thousands):
Years ended December 31,
2014
2015
2016
2017
2018
Thereafter
$ 242
242
242
242
242
123
$1,333
GOODWILL
Goodwill at December 31, 2013 represents the excess of purchase price over the fair value amounts assigned to the identifiable assets acquired
and liabilities assumed from the acquisition of Converted Organics.
During the fourth quarter of 2013, during the Company’s final purchase price allocation, the Company recorded two goodwill adjustments,
including a credit of $49,000, related to a reduction of Converted Organics accrued liabilities, partially offset by a debit adjustment related to
the identification of a Converted Organics deferred tax liability of approximately $43,000. These adjustments resulted in a retrospective
decrease to goodwill of approximately $6,000.
NOTE 8 – INVESTMENTS
During the year ending December 31, 2012, the Company purchased 1,837,595 shares of M86 Series C preferred stock and warrants to
purchase 459,399 shares of M86 Series C preferred stock for a consideration of $1,601,097. As discussed in Note 1, in March 2012, M86
was acquired by Trustwave and the Company was granted 409,747 shares of Trustwave Class A common stock in exchange for its shares in
M86.
During the year ending December 31, 2012, the Company was granted an additional 224,000 shares of Trustwave Class A common stock in
exchange for modifying an original perpetual license agreement dated November 2, 2009. Such shares had a fair value on the date of the
agreement of $3,115,840 and have been recorded as settlement proceeds for licensing agreement within other income in the accompanying
statement of operations. In July 2012, the Company sold back 20,577 of these shares to Trustwave for $286,227 and accounted for this
transaction under the cost recovery method. As of December 31, 2012, the Company owned approximately 1% of the common stock
outstanding of Trustwave on a fully diluted basis.
During the year ended December 31, 2012 the Company was also granted 2,951,876 shares of the common stock of a software technology
company with a fair value of $8,353,554 in connection with the settlement of a patent infringement lawsuit (the “Settlement Investment”) (see
Note 12.) The Trustwave Shares and the Settlement Investment were accounted for under the cost method since the Finjan did not have the
ability to exercise significant influence over these entities. On March 5, 2013, Finjan issued a dividend to its Former Parent consisting of its
entire ownership interest in the Trustwave Shares and the Settlement Investment. As of December 31, 2013, the Company no longer held
either of these investments.
F-19
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INVESTMENTS, CONTINUED
On November 21, 2013, the Company made a $5 million commitment to invest in an Israel –based limited partnership venture capital fund
seeking to invest in early-stage cyber technology companies. If and when the Company funds the entire amount of the investment,
the investment will be less than a 10% limited partnership interest in which the Company will not be able to exercise control over the fund.
Accordingly, the Company has accounted for this investment under the cost method of accounting.*
There were no identified events or changes in circumstances that are believed to have had a significant adverse effect on the fair value of the
investments as of December 31, 2013 and 2012.
The following is a summary of the Company’s investments:
Balance – January 1, 2012
Investment made during 2012
Fair value of shares granted to the Company
Sale of shares
Balance - December 31, 2012
Dividend issued to Former Parent
Investment made during 2013
Balance - December 31, 2013
NOTE 9 – COMMITMENTS AND CONTINGENCIES
LEASES
Trustwave
Shares
Settlement
Investment
Venture
Capital
Fund
(in thousands)
$ —
1,601
3,116
(286)
4,431
(4,431)
—
$ —
$ —
—
8,353
—
8,353
(8,353)
—
$ —
$ —
—
—
—
—
—
500
$ 500
Total
Investments
$
$
—
1,601
11,469
(286)
12,784
(12,784)
500
500
The Company leases a production facility in California. Under the terms of the lease, the Company owes a minimum annual rent of $125,202,
payable in monthly installments of $10,433, unless earlier terminated in accordance with the lease. The lease is renewable for three 5-year
terms after the expiration of the initial 10-year term. The annual rental rate is subject to increase on each annual anniversary of the
commencement of the immediately preceding rental year by 3% of the rent paid during the immediately preceding year. This lease expires in
January 2018.
On September 9, 2013, the Company entered into a lease for its new corporate headquarters for a period of five years beginning October 1,
2013. Under the terms of the lease, the Company owes an initial annual rent of $138,952, payable in monthly installments of $11,579, unless
earlier terminated in accordance with the lease. The annual rental rate, beginning after the first year, is subject to an increase, on a cumulative
basis, at a rate of 2.5% per annum compounded annually. Rent is recorded on a straight-line basis. Deferred rent as of December 31, 2013 was
not material.
The following table sets forth the Company’s aggregate future minimum payments under its operating lease commitments as of December 31,
2013 (in thousands):
Years ending December 31,
2014
2015
2016
2017
2018
$ 280
275
283
291
127
$1,256
Rent expense for the year ended December 31, 2013 was approximately $149,000. The Company did not have any rent expense for the years
ended December 31, 2012 or 2011.
* As of December 31, 2013, the Company had a $4.5 million outstanding Capital Commitment to the venture capital fund. The Company did
not have Capital Commitment as of December 31, 2012.
F-20
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – COMMITMENTS AND CONTINGENCIES, CONTINUED
EMPLOYMENT AGREEMENTS
On July 8, 2013, the Company and Philip Hartstein, president of the Company, entered into an employment agreement (the “Hartstein
Employment Agreement”), pursuant to which Mr. Hartstein serves as the Company’s President. The Hartstein Employment Agreement
provides for a base salary and a discretionary bonus at the end of every four month period of his employment term, based on Mr. Hartstein’s
performance and the overall progress of the Company. The Hartstein Employment Agreement was effective as of July 1, 2013. Either the
Company or Mr. Hartstein may terminate the Hartstein Employment Agreement at any time upon 90 days prior written notice. The Hartstein
Employment Agreement superseded a consulting agreement between Finjan, Inc., a wholly-owned subsidiary of the Company, and
Mr. Hartstein that provided for substantially the same compensation as described above. The consulting agreement between Finjan, Inc. and
Mr. Hartstein ceased to be effective upon the entry into the Hartstein Employment Agreement.
On July 8, 2013, the Company and Shimon Steinmetz, Chief Financial Officer of the Company, entered into an employment agreement (the
“Steinmetz Employment Agreement”), pursuant to which Mr. Steinmetz serves as the Company’s chief financial officer. The Steinmetz
Employment Agreement provides for a base salary and a discretionary bonus at the end of each calendar year during his employment term,
based on Mr. Steinmetz’s performance and the overall progress of the Company. The Steinmetz Employment Agreement was effective as of
July 1, 2013. Either the Company or Mr. Steinmetz may terminate the Steinmetz Employment Agreement at any time upon 90 days prior
written notice. The Steinmetz Employment Agreement superseded a consulting agreement between Finjan, Inc., a wholly-owned subsidiary of
the Company, and Mr. Steinmetz that provided for substantially the same compensation as described above. The consulting agreement
between Finjan, Inc. and Mr. Steinmetz ceased to be effective upon the entry into the Steinmetz Employment Agreement.
LITIGATION, CLAIMS AND ASSESSMENTS
Finjan currently has 4 pending litigations with accusations of patent infringement with FireEye, Inc., Blue Coat Systems, Inc., Websense, Inc.,
and Proofpoint, Inc. et. al., each case assigned to different Judges.
Finjan filed a patent infringement lawsuit against FireEye, Inc. in the United States District Court for the Northern District of California on
July 8, 2013, asserting that FireEye, Inc. is infringing U.S. Patent Nos. 6,804,780, 8,079,086, 7,975,305, 8,225,408, 7,058,822, 7,647,633
and 6,154,844 patents. There can be no assurance that the Company will be successful in settling or litigating these claims.
Finjan filed a patent infringement lawsuit against Blue Coat System, Inc., in the United States District Court for the Northern District of
California on August 28, 2013, asserting that Blue Coat Systems, Inc. is infringing U.S. Patent Nos. 6,154,844, 6,804,780, 6,965,968,
7,058,822, 7,418,731, 7,647,633. Finjan filed a patent infringement lawsuit against Websense, Inc. in the United States District Court for the
Northern District of California on September 23, 2013, asserting that Websense, Inc. is infringing U.S. Patent Nos. 7,058,822, 7,647,633,
8,141,154, and 8,225,408. There can be no assurance that the Company will be successful in settling or litigating these claims.
Finjan filed a patent infringement lawsuit against Proofpoint, Inc. et.al. in the United States District Court for the Northern District of
California on December 16, 2013, asserting that Proofpoint, Inc. et.al. is infringing U.S. Patent Nos. 6,154,844, 7,058,822, 7,613,918,
7,647,633, 7,975,305, 8,079,086, 8,141,154, 8,225,408. Finjan is seeking monetary damages for past and future use of accused infringing
products, injunctive relief, and or other remedies deemed appropriate through the Court. There can be no assurance that the Company will be
successful in settling or litigating these claims.
Finjan has also appealed a District Court Decision in a prior patent case with defendants Sophos, Inc., Websense, Inc., and Symantec Corp.
where there was a finding of no liability for U.S. Patent Nos. 6,092,194 and 6,480,962. The Appeal Brief was filed on December 10, 2013 at
the Court of Appeals for the Federal Circuit and the case is pending. There is no assurance that the appeal will be granted. [NOTE: HAVE
THESE NAMES BEEN DISCLOSED PREVIOUSLY?]
The Company is not currently aware of threatened litigations, inbound cases filed against the Company, or counterclaims.
F-21
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – STOCKHOLDERS’ EQUITY
AUTHORIZED CAPITALIZATION
Following the Merger, the Company’s capital structure is comprised of preferred stock and common stock. The number of preferred and
common shares of the Company in the prior comparative period has been retroactively adjusted to reflect the conversion ratio applied in the
Merger. The Company’s authorized capitalization consists of (i) 1,000,000,000 shares of common stock, par value $0.0001 per share, and
(ii) 10,000,000 shares of Preferred Stock, $0.0001 par value per share.
The Company’s certificate of incorporation authorizes the Board of Directors to establish one or more classes or series of preferred stock.
Unless required by law or by any stock exchange on which our common stock is listed in the future, the authorized shares of preferred stock
will be available for issuance at the discretion of our Board of Directors without further action by our stockholders. The Board of Directors is
able to determine, with respect to any class or series of preferred stock, the terms and rights of that series.
COMMON STOCK
Holders of the Company’s common stock are entitled to one vote on each matter submitted to a vote at a meeting of stockholders. The
Company’s common stock does not have cumulative voting rights, which means that the holders of a majority of voting shares voting for the
election of directors can elect all of the members of the Board of Directors. The Company’s common stock has no preemptive rights and no
redemption or conversion privileges. The holders of the outstanding shares of the Company’s common stock are entitled to receive dividends
out of assets legally available at such times and in such amounts as the Board of Directors may, from time to time, determine, and upon
liquidation and dissolution are entitled to receive all assets available for distribution to the stockholders. A majority vote of shares represented
at a meeting at which a quorum is present is sufficient for all actions that require the vote of stockholders.
On May 6, 2013, Finjan repurchased from the Former Parent six shares of its common stock for $205,000. These repurchased shares were
immediately retired.
As of December 31, 2013, 22,368,453 shares of the common stock were outstanding including 22,368 shares of restricted stock awards
(“RSAs”) awarded to the former Chief Executive Officer and former Chief Financial Officer of Converted Organics, Inc. in connection with
the termination of their severance agreements (See Note 11).
PREFERRED STOCK
On October 18, 2010, the Company designated and issued 17,500 shares of preferred stock as 1% Series A Convertible Preferred Stock, or
“Series A Preferred,” by filing with the Delaware Secretary of State, a Certificate of Designation of Preferences, Rights and Limitations of
Series A Preferred Stock, or the “Certificate of Designation,” with respect to the Series A Preferred. On June 3, 2013, all of the outstanding
shares of Series A Preferred Stock were exchanged for shares of the Company’s common stock pursuant to the Exchange Agreement and, as
a result, no shares of the Company’s Series A Preferred Stock are outstanding. In accordance with the Certificate of Designations, all shares
of Series A Preferred have resumed the status of authorized but unissued shares of preferred stock, and will no longer be designated as Series
A Preferred.
COMMON STOCK WARRANTS
The Company has certain Class C, D and H warrants outstanding to purchase approximately 1 share of common stock as of December 31,
2013. The warrants have an average exercise price of $2.7 million per share. The Class C and D warrants will expire in May 2014 and the
Class H warrants will expire in October 2014, if not exercised earlier. These warrants are classified as liabilities in the accompanying
consolidated balance sheet as of December 31, 2013, due anti-dilution adjustment provisions that may result in the reduction of their exercise
prices and an increase in the number of shares issuable upon exercise. The fair value of these warrants was de minimis both at the date of the
Merger and at December 31, 2013.
F-22
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – STOCKHOLDERS’ EQUITY, CONTINUED
CLASS C WARRANTS AND CLASS D WARRANTS
In connection with the Company’s financing completed in May 2009, the Company issued Class C warrants to purchase an aggregate of
885,000 shares of common stock and Class D warrants to purchase an aggregate of 415,000 shares of common stock. The Class C warrants
and Class D warrants both expire in May 2014. The initial exercise prices of the Class C warrants and Class D warrants were $1.00 per share
and $1.50 per share, respectively. The warrants are subject to anti-dilution rights, which provide that the exercise price of the warrants shall be
reduced, with certain exceptions, if we make new issuances of our securities below the warrants exercise prices, to the price of such lower
priced issuances. The Class C warrants and Class D warrants are non-redeemable. The warrant holders are entitled to a “cashless exercise”
option if, at any time of exercise, there is no effective registration statement registering, or no current prospectus available for, the resale of the
shares of common stock underlying the warrants. This option entitles the warrant holders to elect to receive fewer shares of common stock
without paying the cash exercise price. The number of shares to be issued would be determined by a formula based on the total number of
shares with respect to which the warrant is being exercised, the volume weighted average price per share of our common stock on the trading
date immediately prior to the date of exercise and the applicable exercise price of the warrants.
If, at any time while the warrants are outstanding, the Company (1) effects any reverse merger or consolidation, (2) effects any sale of all or
substantially all of its assets, (3) is subject to, or completes a tender offer or exchange offer, (4) effects any reclassification of the Company’s
common stock or any compulsory share exchange pursuant to which the Company’s common stock is converted into or exchanged for other
securities, cash or property, or (5) engages in one or more transactions with another party that results in that party acquiring more than 50% of
the Company’s outstanding shares of common stock, each a “Fundamental Transaction,” then the holder shall have the right thereafter to
receive, upon exercise of the warrant, the same amount and kind of securities, cash or property as it would have been entitled to receive upon
the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of the number
of shares then issuable upon exercise of the warrant, and any additional consideration payable as part of the Fundamental Transaction. Any
successor to the Company or surviving entity shall assume the obligations under the warrant.
CLASS H WARRANTS
In connection with the Company’s public offering completed in October 2009, the Company issued Class H warrants to purchase an
aggregate of 17,250,000 shares of common stock at an initial exercise price of $1.30 per share, subject to adjustment. After giving effect to
reverse stock splits completed the 1-for-10 reverse stock split that we effected on November 8, 2011, the 1-for-500 reverse stock split that we
effected on March 5, 2012, the 1-for-500 reverse stock split that we effected on June 3, 2013 and the 1-for-12 reverse stock split we effected
on August 22, 2013, the adjusted exercise price of the Class H warrants is $39.0 million per share and the outstanding Class H warrants are
exercisable for less than one share. The Class H warrants are subject to further adjustments in the future, which may have the effect of
increasing or decreasing the exercise price and the number of shares issue upon exercise of the Class H warrants. The Class H warrants will
expire on October 14, 2014. The Class H warrants are not redeemable. The exercise price and number of shares of common stock issuable on
exercise of the Class H warrants may be adjusted in certain circumstances including in the event of a stock dividend, or the Company’s
recapitalization, reorganization, Reverse Merger or consolidation. However, the Class H warrants will not be adjusted for issuances of
common stock, preferred stock or other securities at a price below their respective exercise prices.
No Class H warrants will be exercisable unless at the time of exercise a prospectus relating to common stock issuable upon exercise of the
Class H warrants is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the
state of residence of the holder of the Class H warrants. The Company has agreed to use reasonable efforts to maintain a current prospectus
relating to common stock issuable upon exercise of the Class H warrants until the expiration of the Class H warrants. The Class H warrants
may be deprived of any value and the market for the Class H warrants may be limited if the prospectus relating to the common stock issuable
upon the exercise of the Class H warrants is not current or if the common stock is not qualified or exempt from qualification in the
jurisdictions in which the holders of the Class H warrants reside.
No fractional shares will be issued upon exercise of the Class H warrants. Whenever any fraction of a share of common stock would
otherwise be required to be issued or distributed upon exercise of the Class H warrants, the actual issuance or distribution made shall reflect a
rounding of such fraction to the nearest whole share (up or down), with fractions of half of a share or less being rounded down and fractions
in excess of half of a share being rounded up.
F-23
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – STOCK-BASED COMPENSATION
On June 30, 2010, the Company’s stockholders approved the adoption of the Omnibus Stock Compensation Plan. As of December 31, 2013,
17,894 shares of the common stock are reserved for issuance pursuant to the Company’s Omnibus Stock Compensation Plan.
On May 7, 2013, Finjan adopted the 2013 Finjan, Inc. Global Share Option Plan. The option plan provides for the award of stock options,
RSAs and other equity interests in the Company to directors, officers, employees, consultants and advisors. The terms of each award and the
exercise price are determined by the Board of Directors.
On May 7, 2013, the Company granted six consultants options to purchase an aggregate of 1,585,476 of common stock with an exercise price
of $1.66. The options have a grant date value of $1,184,934 and vest 25% on or prior to the one year anniversary of the grant date, and the
remaining 75% vest in equal installments over the next 7 quarters. The options terminate upon the earlier of (i) the date set forth in the
respective option agreement or (ii) after the ten years anniversary of the grant date.
On June 3, 2013, immediately following the closing of the Merger, the Company’s Board of Directors approved the Finjan Holdings, Inc.
2013 Global Share Option Plan (the “2013 Global Share Option Plan”). The 2013 Global Share Option Plan was approved by the holders of a
majority of our common stock by written consent in lieu of a special meeting as of July 5, 2013. The Company reserved shares for issuance
under the 2013 Global Share Option Plan equal to ten percent of the common stock outstanding.
All options granted by Finjan under the Finjan, Inc. 2013 Global Share Option Plan prior to the Merger were assumed by Finjan Holdings
upon the closing of the Merger with substantially the same terms and conditions, except that the number of options and exercise price of the
options were adjusted at the same exchange ratio as was applied in the Merger to convert Finjan shares into Finjan Holdings shares. The
Company recognized incremental compensation expense from this modification of Finjan options of $133,000, during the year end
December 31, 2013.
On October 7, 2013, the Company granted an option to purchase of 40,000 shares of the Company’s common stock at an exercise price of
$5.90 per share with a grant date value of $135,854 to an employee of the Company. The option grant has a contractual term of ten years and
vests over a four year period, with 25 percent of the stock options vesting on July 15, 2014 and the remaining 75 percent vesting thereafter in
equal quarterly installments over the remaining three years.
As of December 31, 2013, the remaining number of shares available for issuance under the 2013 Global Share Option Plan is 589,001.
Total Stock-based compensation stock options and restricted stock awards, expense of $1.2 million was recorded in selling, general and
administrative expenses in the accompanying consolidated statements of operations for the year ended December 31, 2013. This stock-based
compensation expense was for options and restricted stock awards granted to certain employees, consultants, and members of the Board of
Directors after the merger. No stock based compensation expense was recorded for the years ended December 31, 2012 or 2011.
STOCK OPTIONS
The following is a summary of stock option activity during the year ended December 31, 2013. There were no options outstanding during
2012.
Outstanding – December 31, 2012
Options granted
Options exercised
Options forfeited
Options expired
Outstanding – December 31, 2013
Exercisable – December 31, 2013
Number of
Options
Outstanding
—
1,625,476
—
—
—
1,625,476
591,812
F-24
Weighted
Average
$
Exercise Price
—
1.76
—
—
—
1.76
1.66
$
$
Average
Remaining
Contractual
Life (in years)
Aggregate
Instrinsic
Value
(thousands)
9.36
9.35
$
$
7,590
2,825
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – STOCK-BASED COMPENSATION, CONTINUED
STOCK OPTIONS, CONTINUED
The Company estimates the fair values of stock options using the Black-Scholes option-pricing model on the date of grant. For the year ended
December 31, 2013, the assumptions used in the Black-Scholes option pricing model, which was used to estimate the grant date fair value per
option, were as follows,
Weighted-average Black-Scholes option pricing model assumptions:
Volatility
Expected term (in years)
Risk-free rate
Expected dividend yield
Weighted average grant date fair value per share
Employee
Grants
Non-Employee
Grants
50.7%
6
1.0%
0.0%
0.78
$
$
50.6%
10
2.9%
0.0%
0.84
The risk-free interest rate is the United States Treasury rate for the day of the grant having a term equal to the life of the equity instrument. The
volatility is a measure of the amount by which the Company’s share price has fluctuated or is expected to fluctuate. Since the Company’s
common stock was not publicly traded, or was not publicly traded for an extended duration at the time of the grant, an average of the historic
volatilities of comparative companies was used. The dividend yield is zero percent as the Company has not made any dividend payment and
has no plans to pay dividends in the foreseeable future. Due to the lack of historical information, the Company determines the expected term of
its stock option awards by using the simplified method, which assumes each vesting tranche of the award has a term equal to average of the
contractual term and the vesting period*.
As of December 31, 2013, total compensation cost not yet recognized related to unvested stock options was approximately $1.8 million, which
is expected to be recognized over a weighted-average period of 2.3 years.
RESTRICTED STOCK AWARDS
On June 3, 2013, the Company granted an aggregate of 22,368 shares of restricted stock in connection with the termination of certain
severance agreements, in connection with the Merger. The shares had a grant date value of $32,630. Of the total shares granted, 2,206 shares
vested immediately on the grant date; the remaining 20,162 shares vested six months from the date of grant.
The following is a summary of non-vested restricted stock award activity for the year ended December 31, 2013:
Non-vested – December 31, 2012
Shares granted
Shares vested
Shares forfeited
Non-vested – December 31, 2013
Number of
Shares
—
22,368
(22,368)
—
—
Weighted Average
Grant Date
Fair Value
$
$
—
1.46
1.46
—
—
The Company estimates the fair value of RSAs on the date of grant as the fair value of the granted shares using the Black-Scholes method and
assumptions describe above. For the year ended December 31, 2013, the Company recognized $32,630 stock based compensation expense
related to restricted stock awards.
* Forfeitures are estimated at the timely valuation and reduce expense ratably over the vesting period. The estimate will be adjusted periodically
based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate, when it is material. The Company
estimate forfeitures related to option grants at an annual rate of 0% per year for options granted during the year ended December 31, 2013.
F-25
Table of Contents
NOTE 12 – OTHER INCOME
GAIN ON SETTLEMENTS
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2006, the Former Parent filed a patent infringement lawsuit against Secure Computing Corporation and its subsidiaries (the
“defendants”) in U.S. District Court of Delaware. The Company asserted that defendants had willfully infringed on three of the Company’s
U.S. patents and sought an injunction and damages for such infringement. In this action, the defendants filed counterclaims for patent
infringement, asserting that the Company was infringing on two of its U.S. patents. At trial, the jury determined that the defendants willfully
infringed the Company’s three patents and found that the Company did not infringe on the defendants’ patents. The jury awarded the
Company approximately $9.0 million for damages in August 2009 and the award was subsequently increased to approximately $37.3 million,
including interest, in July 2011. The Company recognized other income of $34.2 million and interest income of $3.1 million when the
proceeds were received by the Company in September 2011. net of legal costs of approximately $9.3 million as compensation for the patents
infringement.
In July 2010, the Company filed a patent infringement lawsuit against five additional software technology companies (the “2010
Litigation”) The Company asserted that defendants had willfully infringed on the Company’s U.S. patents and sought an injunction and
damages for such infringement. In April 2012, a Memorandum of Understanding was signed between the Company and one of the parties in
the 2010 Litigation granting such party a worldwide, perpetual, non-exclusive, non-sublicenseable license to the patents-in-suit and all other
patents owned by, or exclusively licensed to, FI Delaware or its direct or indirect wholly-owned subsidiaries. The license is fully paid up
unless the holder of the license has aggregate annual net sales to third party distributors or re-sellers in excess of $10.0 million (which has not
been achieved to date). In exchange for such license, the third party issued 2,951,786 shares of its common stock (representing 3.765% of
such party’s outstanding shares of common stock) (the “Settlement Investment”) with a fair value of $8.3 million on the date of the agreement
and agreed to pay Finjan $3.0 million in cash, which is payable over an 18 month period in the form of three payments in the amount of $1.0
million each. The Company has received all the three installment payments, and recognized such amount as gain on settlements (the last
installment payment of $1.0 million was received in January 2014). The Settlement Investment has been reflected as an Investment on the
accompanying consolidated balance sheet as of December 31, 2012 (see Note 8.) On March 5, 2013, the Company issued a dividend to the
Former Parent, which included its entire ownership of the Settlement Investment.
In November 2012, Finjan signed a Confidential Settlement, Release and License Agreement with one of the other parties to the 2010
Litigation, a large, multinational software and technology company. Pursuant to the agreement, the counter-party paid a one-time fully paid up
license fee to Finjan in the amount of $85 million, which was recognized as gain on settlements, net of legal costs of $8.5 million. Such fee
was paid in exchange for a release and perpetual, non-exclusive worldwide license to all of the Company’s and its affiliates’ patents, including
patent rights owned or controlled by the Company or its affiliates as of the date of such agreement and patents with a first effective priority
date occurring at any time prior to November 2022 that the Company or its affiliates may own or control after the date of such
agreement. Following the signing of the agreement, Finjan dismissed all claims against the counter-party (including its affiliates).
SALE OF PATENTS
During 2011, the Company sold certain of its fully amortized patents for $1,600,000 and incurred $320,000 of fees associated with the
transactions. The sale was recorded as other income, net of legal fees.
NOTE 13 – RELATED PARTY TRANSACTIONS
In the course of business, the Company obtains legal services from a firm in which an executive of Finjan and member of the Company’s
board is a member. The Company incurred approximately $290,000, $245,000 and $138,000 in legal fees to the firm during the years ended
December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013 and 2012 the Company had balances due to this firm amounting
to approximately $15,000 and $17,000, respectively.
Prior to the separation from the Former Parent, Finjan periodically received non-interest bearing advances from the Former Parent to support
its operations. During the year ended December 31, 2012 the Company had net transfers to the Former Parent amounting to approximately
$2,470,000. As of December 31, 2012, the Company had a net amounts due to the Former Parent aggregating approximately $33,943,000. In
February 2013, the Company repaid the outstanding balance due to the Former Parent in full and there are no amounts due to the Former
Parent as of December 31, 2013.
F-26
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – SEGMENT REPORTING
Operating segments are the components for which separate and discrete financial information is available and used by management in making
decisions on allocation resources and assessing performance. Subsequent to the Merger on June 3, 2013 as described in Note 1, the Company
has two operating segments, namely, a web and network security technology segment and an organic fertilizer segment. The Company’s
operating segments are each reportable segments because their activities are not economically similar. The following table summarizes financial
information about the Company’s business segments for the years ended December 31, 2013, 2012 and 2011:
For the Years Ended December 31,
2012
2011
2013
Revenue:
Web and network security technology
Organic fertilizer
Total revenue
Net (loss) income:
Web and network security technology
Organic fertilizer
Total net (loss) income
Interest income:
Web and network security technology
Organic fertilizer
Total interest income
Total assets:
Web and network security technology
Organic fertilizer
Total assets
Depreciation and amortization:
Web and network security technology
Organic fertilizer
Total depreciation and amortization
Capital expenditures:
Web and network security technology
Organic fertilizer
Total capital expenditures
Goodwill:
Web and network security technology
Organic fertilizer
Total goodwill
(in thousands)
(restated)
(restated)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
—
—
—
$ —
—
$ —
50,985
—
50,985
$24,098
—
$24,098
164
—
164
$ 3,124
—
$ 3,124
104,332
—
104,332
$27,810
—
$27,810
—
—
—
—
—
—
—
—
—
$ —
—
$ —
$ —
—
$ —
$ —
—
$ —
$ —
744
744
$
$ (5,590)
(482)
$ (6,072)
$
153
—
153
$
$27,011
936
$27,947
$
$
$
$
123
118
241
65
81
146
$ —
306
306
$
During the year ended December 31, 2013, the three largest customers of the Company’s organic fertilizer segment accounted for
approximately 14%, 19% and 35% of the Company’s revenues respectively. As of December 31, 2013, two customers of the organic fertilizer
segment accounted for 16% and 37% of the Company’s accounts receivable balance, respectively.
F-27
Table of Contents
NOTE 15 – INCOME TAX
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provisions for income tax for the years ended December 31, 2013, 2012 and 2011 consist of the following:
Federal:
Current
Deferred
State:
Current
Deferred
Change in valuation allowance
Income tax provision
For the Years Ended December 31,
2012
2013
(in thousands)
2011
$ (263)
(1,389)
$26,889
422
$ 3,396
6,226
4
(845)
(2,493)
2,230
$ (263)
—
—
27,311
(422)
$26,889
—
—
9,622
(6,226)
$ 3,396
The expected tax expense (benefit) based on the statutory rate is reconciled with actual tax expense (benefit) as follows:
U.S. Federal statutory rate
Permanent differences:
Benefit of NOL carryback
Other
Change in valuation allowance
Income tax provision
For the Years Ended December 31,
2012
35.0%
2013
34.0%
2011
35.0%
(5.0)%
2.8%
(27.7)%
4.1%
0.0%
0.0%
(0.5)%
34.5%
0.0%
0.0%
(22.6)%
12.4%
Under ASC 805, “Business Combinations”, an acquirer should recognize and measure deferred taxes arising from assets acquired and
liabilities assumed in a business combination in accordance with ASC 740. The financial statement loss includes losses that will not result in
future deferred tax assets and therefore these losses are excluded.
The approximate tax effects of temporary differences, which give rise to the deferred tax assets and liabilities, are as follows:
Deferred tax assets:
Net operating losses
Stock-based compensation
Intangible assets
Total deferred tax assets
Valuation allowance
Deferred tax asset, net of valuation allowance
Deferred tax liabilities
Acquired intangible assets
Net deferred tax liability
As of December 31,
2013
2012
$ 2,037
307
4,874
7,218
(7,218)
—
(39)
(39)
$
$ —
—
4,988
4,988
(4,988)
—
—
$ —
During the year ended December 31, 2011, Finjan, Inc. utilized the benefit of certain prior net operating loss carryforwards (“NOLs”). As of
December 31, 2013 and 2012, the Company had NOL carryforwards of approximately $5.3 million and zero, respectively.
F-28
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – INCOME TAX, CONTINUED
Utilization of the Company’s net operating loss may be subject to substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net
operating loss before utilization. During the years ended December 31, 2012 and 2011, the Company recorded a tax benefit of $1,563,807 and
$2,704,437, respectively, related to the utilization of NOLs contributed by the Former Parent. Such benefits were recorded as a contribution to
capital during the respective periods. For the year ended December 31, 2013 the Company recorded a tax benefit of $263,377 related to
utilization of NOLs contributed by Finjan to the Former Parent. Such benefit was recorded as a dividend distribution to the former parent
during the year.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary difference become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and taxing strategies in making this
assessment. Based on this assessment, management has established a full valuation allowance against all of the deferred tax assets in excess of
the deferred tax liabilities for each period, since it is more likely than not that the deferred tax assets will not be realized. The change in
valuation allowance for the years ended December 31, 2013, 2012 and 2011 is $2.2 million, $(0.4) million and $(6.2) million, respectively.
NOTE 16 – QUARTERLY DATA (UNAUDITED)
RESTATED QUARTERLY INFORMATION (UNAUDITED)
As a result of the restatement of previously issued financial statements as described in Note 3, the quarterly information included in the
condensed consolidated statements of operations for the quarterly periods ended June 30, 2013 and 2012 and September 30, 2013 and 2012
included in the Company’s Quarterly Reports on Form 10-Q is restated as follows:
Three Months Ended June 30,
2013
2012
Three Months Ended September 30,
2013
2012
Amounts
previously
reported As restated
Amounts
previously
reported As restated
Amounts
previously
reported As restated
198 $
148
50
3,116 $
2,929
187
— $
—
—
394 $
576
(182)
Amounts
previously
reported As restated
—
—
—
9,354 $
3,165
6,189
394 $
324
70
Revenues
Cost of revenues
Gross profit
Operating Expenses
Selling, general and administrative
Transaction costs
Total operating expense
(Loss) income from operations
Other Income, net
Gain on settlements, net of legal costs
Interest income
Other income
Total other income, net
(Loss) income before provision for income
taxes
Provision for income taxes
Net (Loss) Income
Show EPS & wtd. avg.
$
1,198 $
187
1,011
1,719
525
2,244
(1,233)
—
31
17
48
1,493
790
2,283
(2,233)
1,000
31
17
1,048
(1,185)
7
(1,192) $
(1,185)
7
(1,192) $
(0.06) $
(0.06)
$
$
101
—
101
86
—
56
—
56
142
—
142 $
0.00
3,030
—
3,030
(3,030)
—
56
3,116
3,172
142
—
142 $
0.00 $
1,197
—
1,197
(1,379)
1,449
—
1,449
(1,379)
—
7
(4)
3
—
7
(4)
3
(1,376)
(1,376)
(1,376) $
(1,376) $
(0.06) $
(0.06) $
197
—
197
5,992
—
16
—
16
6,008
89
5,919 $
0.29 $
3,361
—
3,361
(3,361)
9,353
16
—
9,369
6,008
89
5,919
0.29
21,093,384 21,093,384 20,590,596 20,590,596 22,348,201 22,348,201 20,590,596 20,590,596
F-29
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 – QUARTERLY DATA, (UNAUDITED) CONTINUED
RESTATED QUARTERLY INFORMATION, (UNAUDITED) CONTINUED
Six Months Ended June 30,
2013
2012
Nine Months Ended September 30,
2012
2013
Amounts
previously
reported As restated
Amounts
previously
reported As restated
Amounts
previously
reported As restated
198 $
148
50
3,116 $
2,929
187
— $
—
—
1,593 $
1,129
464
Amounts
previously
reported As restated
—
—
—
12,469 $
6,094
6,375
592 $
472
120
Revenues
Cost of revenues
Gross profit
Operating Expenses
Selling, general and administrative
Transaction costs
Total operating expense
(Loss) income from operations
Other Income, net
Gain on settlements, net of legal costs
Interest income
Other income
Total other income, net
(Loss) income before provision for income
taxes
Provision for income taxes
Net (Loss) Income
Show EPS & wtd. avg.
$
1,198 $
553
645
1,934
790
2,724
(2,079)
—
111
17
128
2,339
790
3,129
(3,079)
1,000
111
17
1,128
(1,951)
7
(1,951)
7
271
—
271
(84)
—
117
—
117
33
—
3,200
—
3,200
(3,200)
3,132
790
3,922
(3,458)
117
3,116
3,233
—
118
13
131
3,788
790
4,578
(4,458)
1,000
118
13
1,131
467
—
467
5,908
—
133
—
133
6,561
—
6,561
(6,561)
9,353
133
3,116
12,602
33
—
(3,327)
7
(3,327)
7
6,041
89
6,041
89
(1,958) $
(0.09) $
5,952
33 $
$
$
0.29
0 $
20,843,379 20,843,379 20,590,596 20,590,596 21,350,498 21,350,498 20,590,596 20,590,596
(3,334) $
(0.16) $
(3,334) $
(0.16)
(1,958) $
(0.09)
5,952 $
0.29
33 $
0
F-30
Table of Contents
FINJAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 – QUARTERLY DATA, (UNAUDITED) CONTINUED
SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes quarterly information for the years ended December 31, 2013 and 2012 (in thousands except for per share
data):
Revenues
Gross profit
Loss from operations
Other Income
Net Loss
Net Loss Per Share - Basic and Diluted
Revenues
Gross profit
Loss from operations
Other Income(4)
Net (Loss) Income
Net (Loss) Income Per Share - Basic and Diluted
(In thousands, except per share amounts)
Three Months Ended
June 30,
2013 (1)
(Restated)
198
$
50
(2,233)
1,048
(1,192)
$ (0.01)
September 30,
2013
(Restated)
$
$
394
70
(1,379)
3
(1,376)
(0.06)
(In thousands, except per share amounts)
Three Months Ended
June 30,
2012(2)
(Restated)
$ —
—
(3,030)
3,172
142
0.00
$
September 30,
2012(3)
(Restated)
$
$
—
—
(3,361)
9,369
5,919
0.29
December 31,
2013
$
$
152
(138)
(3,040)
31
(2,738)
(0.12)
December 31,
2012(4)
$
$
—
—
3,802
68,031
45,033
2.19
March 31,
2013
$ —
—
(846)
80
(766)
(0.04)
$
March 31,
2012
$ —
—
(170)
61
(109)
(0.01)
$
(1) Loss from operations for this period includes $790,000 of transaction costs related to the Reverse Merger. Other income for this period
includes the second installment payment of $1.0 million associated with a licensing agreement.
(2) Other income during this period includes approximately $3.1 million related to the receipt of shares in an unaffiliated entity’s common
stock in exchange for modifying an original perpetual license agreement
(3) Other income for this period includes $9 million settlement received related to patent enforcement litigation
(4) Other income for this period includes $76.5 million license fee paid to the Company, net of legal costs, in connection with the settlement
of litigation.
F-31
Table of Contents
Exhibit
Number
2.1
2.2
2.3
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
INDEX TO EXHIBITS
Exhibit Description
Agreement and Plan of Merger, dated as of June 3, 2013, by and among Converted Organics, Inc. (now known as Finjan
Holdings, Inc.) (the “Company”), COIN Merger Sub, Inc., and Finjan, Inc. (incorporated by reference to Exhibit 2.1 to our
current report on Form 8-K filed June 3, 2013)
Asset Purchase Agreement between the Company and United Organic Products, LLC, dated January 21, 2008 (incorporated by
reference to our current report Exhibit 2.02 on Form 8-K filed January 29, 2008)
Asset Purchase Agreement between the Company and Waste Recovery Industries, LLC, dated January 21, 2008 (incorporated by
reference to Exhibit 2.03 to our current report on Form 8-K filed January 29, 2008)
Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to our registration statement on Form SB-2
filed June 21, 2006)
Certificate of Amendment to Certificate of Incorporation of the Company, filed with the Secretary of State of the State of
Delaware on June 9, 2008 (incorporated by reference to the form of Certificate of Amendment on Annex B to our definitive
proxy statement on Schedule 14A filed March 5, 2008)
Certificate of Amendment to Certificate of Incorporation of the Company filed with the Secretary of State of the State of Delaware
on August 10, 2009 (incorporated by reference to Exhibit 3.2 to our prospects on Form S-1 filed September 15, 2009)
Certificate of Amendment to Certificate of Incorporation of the Company, filed with the Secretary of State of the State of
Delaware on June 30, 2010 (incorporated by reference to Exhibit 3.1 to our current report on Form 8-K filed June 30, 2010)
Certificate of Amendment to Certificate of Incorporation of the Company, filed with the Secretary of State of the State of
Delaware on June 14, 2011 (incorporated by reference to the form of Certificate of Amendment on Annex A to our definitive
proxy statement on Schedule 14A filed May 2, 2011)
Certificate of Amendment to Certificate of Incorporation of the Company, filed with the Secretary of State of the State of
Delaware on October 21, 2011 and effective November 8, 2011 (incorporated by reference to the form of Certificate of
Amendment on Annex B to our definitive proxy statement on Schedule 14A filed May 2, 2011)
Certificate of Amendment to Certificate of Incorporation of the Company, filed with the Secretary of State of the State of
Delaware on March 2, 2012 and effective March 5, 2012 (incorporated by reference to the form of Certificate of Amendment on
Annex A to our definitive proxy statement on Schedule 14A filed January 17, 2012)
Certificate of Amendment to Certificate of Incorporation of the Company, filed with the Secretary of State of the State of
Delaware on June 11, 2012 (incorporated by reference to the form of Certificate of Amendment on Annex A to our definitive
proxy statement on Schedule 14A filed April 30, 2012)
Certificate of Amendment to Certificate of Incorporation of the Company, filed with the Secretary of State of the State of
Delaware on May 31, 2013 and effective June 3, 2013 (incorporated by reference to Exhibit 3.1 to our current report on Form 8-
K filed June 3, 2013)
Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock, dated October 18,
2010 (incorporated by reference to Exhibit 3.1 to our current report on Form 8-K filed on October 18, 2010)
Amended and Restated Bylaws, adopted June 6, 2008 (incorporated by reference to Exhibit 3.2 to our current report on Form 8-K
filed June 6, 2008
1
Table of Contents
Exhibit
Number
3.12
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
16.1
21.1
24
31.1
31.2
32.1
32.2
Exhibit Description
Amendment to the Bylaws, adopted September 10, 2010 (incorporated by reference to Exhibit 3.2 to our current report on Form
8-K filed September 13, 2010)
Exchange Agreement, dated as of June 3, 2013, by and among the Company, Hudson Bay Master Fund Ltd. and Iroquois
Master Fund Ltd. (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed June 3, 2013)
Closing Agreement, dated as of June 3, 2013, by and among the Company, Hudson Bay Master Fund Ltd., Iroquois Master
Fund Ltd., the former stockholders of Finjan, Inc., and Michael Eisenberg, as the stockholder representative of the former
stockholders of Finjan, Inc. (incorporated by reference to Exhibit 10.2 to our current report on Amendment No. 1 to Form S-1
filed September 20, 2013)
Form of Registration Rights Agreement, dated as of June 3, 2013, by and between the Company and certain stockholders of the
Company (incorporated by reference to Exhibit 10.3 to our current report on Form 8-K filed June 3, 2013)
Form of Lock-Up Agreement, dated as of June 3, 2013, by and between the Company and certain stockholders of the Company
(incorporated by reference to Exhibit 10.4 to our current report on Form 8-K filed June 3, 2013)
Employment Agreement, dated as of July 5, 2013, by and between the Company and Philip Hartstein (incorporated by reference
to Exhibit 10.1 to our current report on Form 8-K filed July 12, 2013)#
Employment Agreement, dated as of July 5, 2013, by and between the Company and Shimon Steinmetz (incorporated by
reference to Exhibit 10.2 to our current report on Form 8-K filed July 12, 2013)#
Finjan Holdings, Inc. 2013 Global Share Option Plan (incorporated by reference to Exhibit 10.7 to our current report on Form 8-
K filed June 3, 2013)#
Form of Option Award under the Finjan Holdings, Inc. 2013 Global Share Option Plan*#
Consulting Agreement, dated as of March 29, 2013, by and between Finjan, Inc. and Philip Hartstein (incorporated by reference
to Exhibit 10.5 to our current report on Form 8-K filed June 3, 2013)#
Consulting Agreement, dated as of March 28, 2013, by and between Finjan, Inc. and Shimon Steinmetz (incorporated by
reference to Exhibit 10.5 to our current report on Form 8-K filed June 3, 2013)#
Termination Agreement, dated as of June 3, 2013, between the Company and Edward Gildea (incorporated by reference to
Exhibit 10.10 to our quarterly report on Form 10-Q for the quarterly period ended June 30, 2013)#
Termination Agreement, dated as of June 3, 2013, between the Company and David Allen (incorporated by reference to Exhibit
10.11 to our quarterly report on Form 10-Q for the quarterly period ended June 30, 2013)#
Letter From Moody, Famiglietti & Andronico, LLP to the Securities and Exchange Commission (incorporated by reference to
Exhibit 16.1 to our current report on Form 8-K filed June 3, 2013)
Subsidiaries of Finjan Holdings, Inc.
Power of Attorney (contained on signature page).
Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
Certifications of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002**
Certifications of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002**
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
*
**
Filed herewith.
This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or
otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities
Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
# Management contract or compensatory plan or arrangement
2
FINJAN HOLDINGS, INC.
OPTION AGREEMENT
Made as of the day of , 201
Exhibit 10.8
BETWEEN:
Finjan Holdings, Inc.
A company incorporated under the laws of the State of Delaware, USA
(hereinafter the “Company”)
on the one part
AND:
Name:
I.D. No:
Address:
(hereinafter the “Optionee”)
on the other part
1.
Preamble and Definitions
1.1. The preamble to this agreement constitutes an integral part hereof.
1.2. Unless otherwise defined herein, capitalized terms used herein shall have the meaning ascribed to them in the Finjan Holdings, Inc.
2013 Global Share Option Plan (the “GSOP”).
2. Grant of Options
2.1. The Company hereby grants to the Optionee the number of Options as set forth in Exhibit A attached hereto, each Option shall be
exercisable into one Share (subject to the adjustments set forth in the GSOP), upon payment of the Purchase Price as set forth in
Exhibit A, subject to the terms and the conditions as set forth in the GSOP and as provided herein.
2.2. This Option is intended to be a Nonstatutory Stock Option, as specified in Exhibit A.
2.3. Notwithstanding anything to the foregoing, the Purchase Price shall not be less than 100% of the Fair Market Value of the
underlying Shares on the date of grant or such other amount as may be required pursuant to the Code.
2.4. The Optionee is aware that the Company intends in the future to issue additional shares and to grant additional options to various
entities and individuals, as the Company in its sole discretion shall determine.
3.
Period of Option and Conditions of Exercise
3.1. The terms of this Option Agreement shall commence on the Date of Grant and terminate at the Expiration Date, or at the time at
which the Option expires or otherwise terminates pursuant to the terms of the GSOP or pursuant to this Option Agreement.
3.2. Options may be exercised only to purchase whole Shares, and in no case may a fraction of a Share be purchased. If any fractional
Share would be deliverable upon exercise, such fraction shall be rounded up one-half or less, or otherwise rounded down, to the
nearest whole number.
4.
5.
Reserved
Vesting; Period of Exercise
5.1. Subject to the provisions of the GSOP, Options shall vest and become exercisable according to the Vesting Dates set forth
in Exhibit A attached hereto, provided that the Optionee is an Employee of or providing services to the Company and/or its
Affiliates on the applicable Vesting Date, and subject to the provisions of Section 2.12.2 of the GSOP.
5.2. All unexercised Options granted to the Optionee shall terminate and shall no longer be exercisable on the Expiration Date, as
described in Section 10.2 of the GSOP.
6.
Exercise of Options
6.1. Options may be exercised in accordance with the provisions of Section 10.1 of the GSOP.
6.2.
In order for the Company to issue Shares upon the exercise of any of the Options, the Optionee hereby agrees to sign any and all
documents required by any applicable law and/or by the Company’s Certificate of Incorporation. The Optionee further agrees that in
the event that the Company and its counsel deem it necessary or advisable, in their sole discretion, the issuance of Shares may be
conditioned upon certain representations, warranties, and acknowledgments by the Optionee.
6.3. The Company shall not be obligated to issue any Shares upon the exercise of an Option if such issuance, in the opinion of the
Company, might constitute a violation by the Company of any provision of law.
6.4. Optionee’s Representations. In the event that the underlying Shares have not been registered under the Securities Act of 1933, as
amended, at the time this Option is exercised, the Optionee shall, if required by the Company, concurrently with the exercise of all or
any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as
Exhibit B.
7.
Restrictions on Transfer of Options and Shares and Additional Provisions
7.1. The transfer of Options and the transfer of Shares to be issued upon exercise of the Options shall be subject to the limitations set
forth in the GSOP, this Agreement, and in the Company’s Certificate of Incorporation (including without limitation, any rights of
first refusal as may be specified therein), or in any applicable law including securities law of any jurisdiction.
7.2. The Optionee acknowledges that in the event Company’s shares shall be registered for trading in any public market, the Optionee’s
right to sell Shares may be subject to limitations (including a lock-up period), as will be required by the Company or its
underwriters, and the Optionee unconditionally agrees and accepts any such limitations. The Optionee acknowledges that in order to
enforce the above restriction, the Company may impose stop-transfer instructions with respect to the exercised Shares.
7.3. The Optionee shall not dispose of any Shares in transactions which violate, in the opinion of the Company, any applicable laws,
rules and regulations.
7.4. The Optionee agrees that the Company shall have the authority to endorse upon the certificate or certificates representing the Shares
such legends referring to the foregoing restrictions, and any other applicable restrictions as it may deem appropriate (which do not
violate the Optionee’s rights according to this Option Agreement).
8.
Taxes; Indemnification
8.1. The Optionee agrees that the Company does not have a duty to design or administer the GSOP or its other compensation programs
in a manner that minimizes the Optionee’s tax liabilities. Any tax consequences arising from the grant or exercise of any Option,
from the payment for Shares covered thereby or from any other event or act (of the Company and/or its Affiliates, the Trustee or the
Optionee), hereunder, shall be borne solely by the Optionee. The Company and/or its Affiliates and/or the Trustee shall withhold
taxes according to the requirements under the applicable laws, rules, and regulations, including withholding taxes at source. In the
event that the Company and/or its Affiliates determine that it is required to withhold any tax as a result of the exercise of this Option,
the Optionee, as a condition to the exercise of this Option, shall make arrangements satisfactory to the Company and/or its Affiliates
to enable it to satisfy all withholding requirements. The Optionee shall also make arrangements satisfactory to the Company and/or
its Affiliates to enable it to satisfy any withholding requirements that may arise in connection with the disposition of Shares
purchased by exercising this Option. Furthermore, the Optionee hereby agrees to indemnify the Company and/or its Affiliates and/or
the Trustee and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including
without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the
Optionee.
8.2. The Optionee will not be entitled to receive from the Company and/or the Trustee any Shares allocated or issued upon the exercise of
Options prior to the full payments of the Optionee’s tax liabilities arising from Options which were granted to him and/or Shares
issued upon the exercise of Options. For the avoidance of doubt, neither the Company nor the Trustee shall be required to release
any share certificate to the Optionee until all payments required to be made by the Optionee have been fully satisfied.
8.3. The receipt of the Options and the acquisition of the Shares to be issued upon the exercise of the Options may result in tax
consequences. THE OPTIONEE IS ADVISED TO CONSULT A TAX ADVISER WITH RESPECT TO THE TAX
CONSEQUENCES OF RECEIVING OR EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
9. Miscellaneous
9.1. No Obligation to Exercise Options. The grant and acceptance of these Options imposes no obligation on the Optionee to exercise it.
9.2. Confidentiality. The Optionee shall regard the information in this Option Agreement and its exhibits attached hereto, as well as any
related documents and materials provided to Optionee in connection therewith, as confidential information and the Optionee shall not
reveal its contents to anyone except when required by law or for the purpose of gaining legal or tax advice.
9.3. Data Privacy Notice and Consent. In accepting the Options herein, the Optionee expressly consents to the collection, use and
transfer, in electronic or other form, of his personal Data, as described below, by and among Company and its Affiliates and/or
Trustee and/or other custodian and/or the applicable tax authorities for the exclusive purpose of implementing, administering and
managing Optionee’s participation in the GSOP. In addition, the Optionee acknowledges that Company and/or Affiliates may hold
certain personal information concerning the Optionee, including, but not limited to, the Optionee’s name, home address and
telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of
stock or directorships held in Company and/or Affiliates, details of all Options or any other entitlement to shares awarded, canceled,
vested, unvested or outstanding in the Participant’s favor (“Data”), for the purpose of implementing, administering and managing
the GSOP; (ii) Data may be transferred to any third parties assisting in the implementation, administration and management of the
GSOP, including to third parties outside of the jurisdiction in which the Optionee resides and further transfers thereafter, or
elsewhere, and that the third parties’ countries may have different data privacy laws and protections than the Optionee’s country; and
(iii) Participant may request a list with the names and addresses of such third parties by contacting the Company. The Optionee
further acknowledges that he may refuse or withdraw his consent to the above at no cost by contacting in writing the Company and
that such refusal or withdrawal of consent may affect the Optionee’s ability to participate in the GSOP.
9.4. Continuation of Employment or Service. Neither the GSOP nor this Option Agreement shall impose any obligation on the Company
and/or an Affiliate to continue the Optionee’s employment or service and nothing in the GSOP or in this Option Agreement shall
confer upon the Optionee any right to continue in the employ or service of the Company and/or an Affiliate or restrict the right of the
Company and/or an Affiliate to terminate such employment or service at any time.
9.5. No other Rights. The Optionee hereby acknowledges that participation in the GSOP is voluntary. The value of the Options is an
extraordinary item of compensation outside the scope of the Optionee’s normal employment and compensation rights, if any. As
such, the Options are not part of normal or expected compensation for purposes of calculating any payments due to severance,
resignation, redundancy, end of service, bonuses, long-service awards, pensions or retirement benefits or similar payments unless
specifically and otherwise provided in the plans or agreements governing such compensation. The GSOP is discretionary in nature
and may be amended, cancelled, or terminated by the Company, in its sole discretion, at any time. The grant of Options under the
GSOP is a one-time benefit and does not create any contractual or other right to receive any other grant of Options or other awards
under the GSOP in the future. Future grants, if any, will be at the sole discretion of the Company, including, but not limited to, the
timing of the grant, the form of award, number of shares subject to an award, vesting, and exercise or settlement provisions, as
relevant.
9.6. Entire Agreement. Subject to the provisions of the GSOP as may be amended or supplemented from time to time by the Company,
to which this Option Agreement is subject, this Option Agreement, together with the exhibits hereto, constitute the entire agreement
between the Optionee and the Company with respect to Options granted hereunder, and supersedes all prior agreements,
understandings and arrangements, oral or written, between the Optionee and the Company with respect to the subject matter hereof.
9.7. No Waiver; Severability. The failure of any party to enforce at any time any provisions of this Option Agreement or the GSOP
shall in no way be construed to be a waiver of such provision or of any other provision hereof. If one or more of the provisions of
this Option Agreement shall be held unenforceable, the enforceability of the remaining provisions shall
not be affected; to the extent permissible by law, any provisions which could be deemed null and void shall first be revised
retroactively to permit the provisions herein to be interpreted to carry out their intent and the intent of this Option Agreement and the
GSOP.
9.8. Provisions of the GSOP. The Options provided for herein are granted pursuant to the GSOP and said Options and this Option
Agreement are in all respects governed by the GSOP and subject to all of the terms and provisions of the GSOP. In the event of a
conflict between the provisions of the GSOP and this Option Agreement, the terms and conditions of the GSOP shall prevail.
However, this Option Agreement sets out specific terms for the Options, and those terms shall prevail over more general terms in
the GSOP on the same issue, if any, or in the event of a conflict between such terms.
9.9. Binding Effect. The GSOP and this Option Agreement shall be binding upon the heirs, executors, administrators and successors of
the parties hereof.
9.10. Notices. All notices or other communications given or made hereunder shall be in writing and shall be delivered or mailed by
registered mail or delivered by email or facsimile with written confirmation of receipt to the Optionee and/or to the Company at the
addresses shown on the letterhead above, or at such other place as the Company may designate by written notice to the Optionee.
The Optionee is responsible for notifying the Company in writing of any change in the Optionee’s address, and the Company shall
be deemed to have complied with any obligation to provide the Optionee with notice by sending such notice to the address indicated
on the letterhead above. Notwithstanding the foregoing, to the extent permitted by law, Company may deliver any documents related
to the GSOP, this Option Agreement and/or to the Options by electronic means. The Optionee hereby consents to receive such
documents by electronic delivery and agrees to participate in the GSOP through an on-line or electronic system established and
maintained by Company or another third party designated by Company.
9.11. Language. If the Optionee has received the terms of this Option Agreement or any other GSOP related documents translated into a
language other than English and if the translated version is different than the English version, the English version will control.
9.12. Counterparts. This Option Agreement may be executed in two or more counterparts, each of which shall he deemed an original and
all of which together shall constitute one instrument.
IN WITNESS WHEREOF, the undersigned have executed this Option Agreement as of the date first written above.
FINJAN HOLDINGS, INC.
By:
Name:
Title:
I, the undersigned, hereby acknowledge receipt of a copy of the GSOP and accept the Options subject to all of the terms and provisions
thereof. I have reviewed the GSOP and this Option Agreement in its entirety, have had an opportunity to obtain the advice of counsel prior to
executing this Option Agreement, and fully understand all provisions of this Option Agreement. I hereby agree to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any questions relating to the GSOP and this Option Agreement. I
further agree to notify the Company upon any change in the residence address indicated above.
Optionee’s Signature
Attachments:
Exhibit A:
Terms of the Option
Exhibit B:
Investment Representation Statement
EXHIBIT B
TERMS OF THE OPTION
Nonstatutory Stock Option
Name of the Optionee:
Date of Grant:
Designation:
1. Number of Options granted:
2. Purchase Price:
3. Vesting Dates:
Optionee
Company
EXHIBIT C
Investment Representation Statement
OPTIONEE:
COMPANY: Finjan Holdings, Inc.
SECURITY:
AMOUNT:
DATE:
In connection with the purchase of the above-listed Securities, the undersigned Optionee represents to the Company the following:
(i) Optionee is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Securities. Optionee is acquiring these Securities for investment for Optionee’s
own account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act
of 1933, as amended (the “Securities Act”).
(ii) Optionee acknowledges and understands that the Securities constitute “restricted securities” under the Securities Act and have not
been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things,
the bona fide nature of Optionee’s investment intent as expressed herein. In this connection, Optionee understands that, in the view of the
Securities and Exchange Commission, the statutory basis for such exemption may be unavailable if Optionee’s representation was predicated
solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale,
for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future.
Optionee further understands that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act or
an exemption from such registration is available. Optionee further acknowledges and understands that the Company is under no obligation to
register the Securities. Optionee understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the
transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company,
and any other legend required under applicable state securities laws.
(iii) Optionee is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance,
permit limited public resale of “restricted securities” acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to
the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to the
Optionee, the exercise will be exempt from registration under the Securities Act. In the event the Company becomes subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer period as any market
stand-off agreement may require) the Securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions
specified by Rule 144, including: (1) the resale being made through a broker in an unsolicited “broker’s transaction” or in transactions directly
with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of
certain public information about the Company, (3) the amount of Securities being sold during any three month period not exceeding the
limitations specified in Rule 144(e), and (4) the timely filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the time of grant of the Option, then the Securities may be resold in
certain limited circumstances subject to the provisions of Rule 144, which requires the resale to occur not less than one year after the later of
the date the Securities were sold by the Company or the date the Securities were sold by an affiliate of the Company, within the meaning of
Rule 144; and, in the case of acquisition of the Securities by an affiliate, or by a non-affiliate who subsequently holds the Securities less than
two years, the satisfaction of the conditions set forth in sections (1), (2), (3) and (4) of the paragraph immediately above.
(iv) Optionee further understands that in the event all of the applicable requirements of Rule 701 or 144 are not satisfied, registration
under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the
fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons
proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 or 701 will have a
substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and
their respective brokers who participate in such transactions do so at their own risk. Optionee understands that no assurances can be given that
any such other registration exemption will be available in such event.
Signature of Optionee:
Date:
FINJAN HOLDINGS, INC.
LIST OF SUBSIDIARIES AS OF DECEMBER 31, 2013
Name of Entity
I. Finjan Holdings, Inc.
A. Finjan, Inc.
B. Converted Organics of California, LLC
C. Converted Organics of Woodbridge, LLC
D. Converted Organics of Mississippi LLC
EXHIBIT 21.1
State of Incorporation
Delaware
Delaware
California
New Jersey
Mississippi
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Philip Hartstein, certify that:
EXHIBIT 31.1
(1)
I have reviewed this annual report on Form 10-K of Finjan Holdings, Inc. for the year ended December 31, 2013;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
(4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
Disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 13, 2014
By:
/s/ Philip Hartstein
Philip Hartstein
President
(Principal Executive Officer)
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Shimon Steinmetz, certify that:
EXHIBIT 31.2
(1)
I have reviewed this annual report on Form 10-K of Finjan Holdings, Inc. for the year ended December 31, 2013;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
(4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
Disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 13, 2014
By:
/s/ Shimon Steinmetz
Shimon Steinmetz
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S. C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of Finjan Holdings, Inc., (the ‘‘Company’’) on Form 10-K for the period ended
December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), I, Philip Hartstein, President of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my
knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Date: March 13, 2014
By:
/s/ Philip Hartstein
Philip Hartstein
President
(Principal Executive Officer)
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report of Finjan Holdings, Inc., (the ‘‘Company’’) on Form 10-K for the period ended
December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), I, Shimon Steinmetz, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Date: March 13, 2014
By:
/s/ Shimon Steinmetz
Shimon Steinmetz
Chief Financial Officer
(Principal Financial and
Accounting Officer)