☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2023
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 |
Delaware | 77-0390628 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification |
308 Dorla Court, Suite 206 Zephyr Cove, Nevada | 89448 | |
(Address of principal executive offices) | (Zip Code) |
Former name, former address and former fiscal year, if changed since last report: N/A
Securities registered pursuant to Section 12(b) of the Act:ClassTrading Symbol(s) Name of Exchangeeach exchange on Which Registeredwhich registeredVHC NYSE American LLC
☐ ☐Sectionsection 12(g) of the Act:
NoneRegistrantregistrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o☐ No ☒Registrantregistrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o☐ No ☒oand 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 ☒ No oIndicate 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. o (Check one):o☐☒☐Smaller reporting company oo (Do not check if a smaller reporting company)☒o☐Smaller reporting company ☒
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60,821,163
8, 2024.
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PART III | ||||||
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PART IV | ||||||
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1
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
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PART I
Our product GABRIEL Secure Communication Platform™, unlike other collaboration and communication products and services on the market today, does not requirefor real time access to user’s confidential data and reduces the threat of hacking and data mining. It enables individuals and organizations to maintain complete ownership and control overof their personal and confidential data, secured within their own private network, while enabling authorized secure encrypted access from anywhere at any time. users.
We are actively recruiting best-of-breed partners in various vertical markets including, healthcare, finance, government, etc, to help us rapidly expand our enterprise customer base. A numberVirnetX Matrix™ product at City of Bridgeport, International Association of Certified ISAOISAOs (IACI) including, ISAO'sand SkinWalker Ranch. Although there can be no assurance in this regard, the Company believes that there are opportunities for Maritime & Ports, ISAO Credit Union ISAO, CityCompany products’ sales directly to, resale arrangements with and/or adoption as vendor standards by, one or more of Chicago, ISAO Human Trafficking ISAO have chosenthese third parties.
We have executedpredictive analytics-based solutions provider with a number of patentprimary focus on selling into the space and technology licenses and intend to seek further licensees for our technology, including our GABRIEL Connection Technology™ to original equipment manufacturers, or OEMs, of chips, servers, smart phones, tablets, e-Readers, laptops, net books and other devices, withindefense sectors. Under the IP-telephony, mobility, fixed-mobile convergence and unified communications markets including 4G/LTE Advanced.
We have submitted a declaration with the 3rd Generation Partnership Project, or 3GPP, identifying a groupterms of our patentsagreement, OmniTeq will deploy and patent applicationsintegrate our VirnetX One™ family of products at SkinWalker Ranch to secure their data and protect against cyber hackers. Our second investment was with OP Media, Inc, a dynamic software platform provider, addressing a critical market requirement for transforming static infrastructure processes and knowledgebases into digital processes that we believe arecan be continuously optimized using AI, ML, and blockchain technologies for making informed decisions and creating streamlined workflows in real-time, without requiring coding or may become essential to certain developing specifications inprogramming skills. Further, under the 3GPP LTE, Systems Architecture Evolution, or SAE project. Weterms of our respective agreements, both OmniTeq and OP Media have agreed to make available a non-exclusive patent license under fair, reasonableintegrate our VirnetX One™ family of products and non-discriminatory termsservices into their solutions and conditions, with compensation, or FRAND,
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to 3GPP members desiring to implement the technical specifications identified by us. We believe that we are positioned to license our essential security patents to 3GPP members as they move into deploying 4G/LTE Advanced devices and solutions.
We have an ongoing GABRIEL Licensing Programlicensing program under which we offer licenses to a portionour technology, software, and some of our patent portfolio, technology and software,patented inventions, including our secure domain name registry service, to domain infrastructure providers, communication service providers as well as to system integrators. Our GABRIEL Connection Technology™ License is offered to OEM customers who want to adopt the GABRIEL Connection Technology™ as their solution for establishing secure connections using secure domain names within their products. We have developed GABRIEL Connection Technology™ Software Development Kit (SDK) to assist with rapid integration of these techniques into existing software implementations with minimal code changesimplementations.
We have signed Patent License Agreements with Avaya Inc., Aastra USA, Inc., Microsoft Corporation, Mitel Networks Corporation, NEC Corporation and NEC Corporation of America, Siemens Enterprise Communications GmbH & Co. KG, and Siemens Enterprise Communications Inc. to license certain of our patents, for a one-time payment and/or an ongoing royalty for all future sales through the expiration of the licensed patents with respect to certain current and future IP-encrypted products. We have engaged IPVALUE Management Inc. to assist us in commercializing our portfolio of patentsis primarily focused on securing real-time communications over the Internet. UnderInternet, and related services, and is used in all our technology and products, some of which were acquired by our principal operating subsidiary; VirnetX, Inc., from Leidos, Inc., or Leidos, (f/k/a Science Applications International Corporation, or SAIC) in 2006.
the same level of network security and ZTNA solutions enterprises are already deploying for their remote workforce. We believe that the market opportunity for our software and technology solutions is large and expanding as secure domain names are now an integral part of securing the next generation 5G and 4G/LTE Advanced wireless networks and M2M communications in areas including Smart City, Connected Car and Connected Home. We also believe that all 4G/LTE Advanced mobile devices will require unique secure domain names and become part of a secure domain name registry.
We intend to continue to license our patent portfolio, technology and software, including our secure domain name registry service, to domain infrastructure providers, communication service providers as well as to system integrators. We intend to seek further license of our technology, including our GABRIEL Connection Technology™ to enterprise customers, developers and original equipment manufacturers, or OEMs, of chips, servers, smart phones, tablets, e-Readers, laptops, net books and other devices, within the IP-telephony, mobility, fixed-mobile convergence and unified communications markets including 4G/LTE.
Our employees include the core development team behind our patent portfolio, technology and software. This team has worked together for over ten years and is the same team that invented and developed this technology while working at Leidos, Inc. (“Leidos”). Leidos is a FORTUNE 500® scientific, engineering and technology applications company that uses its deep domain knowledge to solve problems of vital importance to the nation and the world, in national security, energy and the environment, critical infrastructure and health. The team has continued its research and development work started at Leidos, and expanded the set of patents we acquired in 2006 from Leidos, into a larger portfolio of approximately 185 U.S. and Foreign patents, patent validations and pending applications. This portfolio now serves as the foundation of our licensing business and planned service offerings and is expected to generate the majority of our future revenue in license fees and royalties. We intend to continue our research and development efforts to further strengthen and expand our patent portfolio.
Please see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Operations – Research and Development Expenses for a description of our research and development expenses for the past three fiscal years.
We intend to continue using an outsourced and leveraged model to maintain efficiency and manage costs as we grow our licensing business by, for example, offering incentives to early licensing targets or asserting our rights for use of our patents. We also intend to expand our design pilot in participation with leading 4G/LTE companies (domain infrastructure providers, chipset manufacturers, service providers and others) and build our secure domain name registry.
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Industry Overview
We believe that the rapid growth of mobile devices (smartphones/tablets/ultra-mobile PCs), with always-on network access, and need to socially interact with friends and family while maintaining a constant online presence has transformed the “Internet of Web 2.0” in to the “The Internet of the People”. It has become an evolving, rich and complex medium used by individuals and businesses to conduct commerce, share information and engage in real-time communications including email, text messaging, IM, and voice and video calls. We believe the user demand for high speed broadband access along with the quality of experience wherever they are and whatever BYOD (bring your own device) they may be using; Mobility, IP video delivery, and the move to cloud have dramatically changed the way service providers deliver services. While wireline networks remain the primary mechanism for delivering premium and high bandwidth services, its growth has held steady compared to the growth of the mobileIoT communications. The cost barrier to obtaining a mobile device with data access has disappeared allowing billions of people to have online access on fixed and mobile networks, and those users accessing social networking websites, using peer-to-peer, or P2P applications, and uploading live content over the internet, which in turn is downloaded by millions, has led to significant growth in packet traffic. Not only is traffic growing and changing in nature, its location of origin and timing has become completely unpredictable. There is a significant impact on the mobile signaling network, brought on by smartphone penetration and consumer use of “chatty” applications that conduct frequent network queries.
We believe that as the users become more comfortable with using their smartphones/tablets and other connected devices, they will increasingly treat their mobile and fixed/WiFi networks as a single network and demand seamless transition from one network type to another without any disruption of service. The 4G/LTE standard was developed with the goal of creating a single IP network that is efficient, flexible, open up new business models and services revenues and eventually lead to true “virtual networks” or software-defined networks (SDN). The service providers were forced to perform complete overhaul of their telecom network infrastructure in order to move from TDM paradigm to next generation IP networks based on 4G/LTE for dealing with this rapidly growing demand. Before these network overhauls could be completed, some service providers decided to label their hybrid 3.5G/HSPA+/partial LTE implementations as 4G networks in order to mitigate the risk of losing revenue. We believe this has led to significant confusion and misunderstanding among users.
Adding to the demand for mobile and fixed broadband services is the fast adoption of connected machines or devices, or embedded systems capable of M2M communication. These M2M communications are made possible by a device (non-phone/tablet/pc such as a sensor) that is attached to a machine to capture an event that is relayed over a network via 3G/4G routers or fixed broadband lines, delivering data or events (such as temperature, location, consumption, heart rate, stress levels, light, movement, altitude and speed) to applications creating an “Internet of Things” or IoT. As the service providers start deploying true 4G (Long Term Evolution-Advanced, or LTE-Advanced) and this pace picks up, we believe that almost every device will get its own unique identity and a high-speed connection to the internet over a high-speed IP (Internet Protocol) based telecommunication network making it an “Internet of Everything”.
We believe that growing security concerns and vulnerabilities in a large number of use-case scenarios due to the inherent “open” nature of this architecture can throttle the successful adoption of these technologies. Security can no longer exist as a point solution, and enterprises are currently upgrading core IT infrastructure (systems, networks, and management) to integrate security into everything. Because of the complexity of today’s networks and the requirement to connect users from any location at any time on any device, enterprise buyers looking to improve security posture have to evaluate everything from software solutions for smartphones to routers and switches with integrated security, massive security appliances for data centers, cloud-based security services, and security solutions for virtualized environments and public and private clouds.
We believe that telecommunication markets are rapidly changing and presenting new challenges to the equipment and service providers, including but not limited to increasing user demand for mobile, always-on connections with multiple devices. We also believe that traffic growth, video acceleration, cloud services and a rapidly growing number of subscriber’s challenge currently available network architectures and that, because of this, service providers and carriers will eventually use a single network for fixed and mobile communications, private/premium communications and Internet access, in spite of the difficulties involved challenging their business models and forcing the consideration of new network architectures. We believe that LTE technology will deliver users the benefits of faster data speeds and new services by creating a new radio access technology that’s optimized for IP-based traffic and offers operators a simple upgrade path from 3G networks.
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Smartphones are multi-functional devices that handle a wide variety of business-critical applications and support increasingly complex functions including enhanced data processing, Internet access, e-mail access, calendars and scheduling, contact management and the ability to view electronic documents. Users have continual access to these applications while on the move making them an increasingly essential business tool for the mobile worker. These devices enable mobile workers to have similar functionality inside or outside the office thereby increasing employee efficiency. However, it is critical that this mobile environment have the same level of security as an enterprise’s internal network.
Embedded mobile broadband computing devices include PCs, netbooks, tablets, and mobile Internet devices (MIDs) with embedded mobile broadband modems to enable Internet access via a mobile broadband network. A growing number of these devices are now shipping enabled with LTE/4G. Mobile Internet devices (MIDs) include handheld mobile Internet devices; e.g. eReader, gaming console, digital picture frame, digital camera, with embedded mobile broadband modems. Mobile broadband routers have mobile broadband modems or antenna as the broadband connection; have multiple Ethernet ports and integrated wireless access points for local area connectivity and bandwidth sharing; can have integrated hub or switch; may have an integrated stateful firewall or IPSec VPN and are also known as mobile hotspot routers.
Machine-to-Machine, or M2M, connected devices, or embedded systems; connected machines are fast becoming the eyes and ears of the enterprise. By adding sensors and networking technologies to the products they sell and the equipment they employ, companies are finding new ways to gather powerful insights and use new forms of data, thus creating a vast “internet of things”. This communication is made possible by a device (such as an intelligent sensor) that is attached to a machine to capture an event, such as such as temperature, location, consumption, heart rate, stress levels, light, movement, altitude and speed, that is relayed over a network delivering data to applications. The potential applications for this technology are numerous and as such include smart meters in energy and utilities (the “smart grid”), connected vehicles in automotive and logistics, heart monitors in healthcare, RFID tagged inventory in retail and manufacturing, and digital signage in media and communications to name a few. Another fast-growing application is in the wearable technology products namely, fitness and wellness, infotainment (information-based media content), healthcare and medical, and industrial and military. The fitness and wellness segment comprises products like smart clothing and smart sensors, activity monitors, sleep sensors and others, whereas the Infotainment sector consists of products like smart watches, heads-up displays, smart glasses and others. The products like continuous glucose monitor, drug delivery, monitors, wearable patches and others have been covered under healthcare and medical segment and products like hand worn terminals, augmented reality headsets and others have been mentioned under industrial and military segment. We believe that the large revenue potential for M2M services that has attracted the attention of carriers globally risks being thwarted by the growing security concerns in M2M applications. Porous security is exposing vulnerabilities in a large number of use-case scenarios, including Automobiles, energy management systems, telemedicine, and telemetry. While built-in security is a high priority in all other information and communication technologies, it is yet to be considered, even at a basic level, in most M2M applications. The rapid and successful adoption of M2M in automobiles, healthcare, industrial installations, and consumer homes may be jeopardized if communication security is not designed in to all M2M devices and applications. All these new devices will require a unique identity addressable by a secure domain name and all their communications, with application servers and other devices, completely secured automatically and on-demand. IP mobility services require an environment where wired and wireless phones work together with Internet Protocol to deliver services (voice, video, data and combinations thereof) uniformly across multiple access networks, including, among others, LTE, WiMAX, WiFi cellular and fixed.
Voice over LTE (“VoLTE”) technology is the foundation for communication services on any device over LTE, Wi-Fi and 5G. VoLTE is delivered via the IP Multimedia Subsystem (IMS) and enables operators to offer high-quality, simultaneous voice and LTE data services on smartphones and other devices. There are currently more than 1,000 VoLTE-enabled device models, supporting different regions and frequencies. Wi-Fi calling is built on the same core network systems as VoLTE, and enables operators to extend their voice service to places with limited cellular coverage. Over 50 Wi-Fi calling networks have been launched in more than 30 countries (Source: GSMA March 2017).
Based on our estimates, using severalpublicly available market data, sources, we believe that Worldwide LTE based subscriptions are expected to grow from 2.7 billion in 2017 to 5.5 billion by 2023. VoLTEthe size of the global Industrial IoT security market size is now available in more than 125 networks spanning across approximately 60 countries. Based on recent measurements in operator networks, the number of VoLTE subscriptions is now projected to grow from 575 million$4.76 billion in 2022 to 4.6approximately $23.17 billion by 2028 at a CAGR of 30.2% during the end of 2022, making up more than 90 percent of all LTE subscriptions globally. Mobile Data Traffic per device, including smartphone, tablets, is
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expected to increase from 7.5 Gigabyte per month in 2017 to over 29 Gigabyte per month in 2023. We believe in order to realize the full functionality of IP mobility, several challenges including security must be overcome. When users are mobile, connections and data need to cross multiple network boundaries, each of which poses a security threat. Wireless networks may be threatened or compromised by rogue users who enter through insecure wireless access points. We believe that providing authenticated accessVirnetX One™ software products are positioned to help enterprises adapt to the M2M networksrapidly evolving threat landscape in work environments and enterprise applications are important requirements and representthe growing need to secure communications regardless of a significant market opportunity for our patented technology and secure domain names to provide usersuser’s location, network, or machines fully authenticated secure access on a “zero-click” or “single-click” basis.
Our Solutions
Our software and technology solutions, including our secure domain name registry, our patents anddevice using our GABRIEL Connection Technology™ are designed.
Our Products
Our GABRIEL Secure Communication Platform™, unlike other collaboration and communication products and services, on the market today, does not require access to users’ confidential data and reduces the threateasily deploy our technology through our VirnetX One™ family of hacking and data mining. It enables individuals and organizations to maintain complete ownership and control overproducts for endpoint security or securing their personal and confidential data, secured within their own private network, while enabling authorized secure encrypted access from anywhere at any time. Our GABRIEL Collaboration Suite™ is a set of applications that run on top of our GABRIEL Secure Communication Platform™. It enables seamless and secure cross-platform communications between users’ devices. The following applications are included in the current release and can be easily accessed through the GABRIEL interface:
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Our GABRIEL Collaboration Suite™ is available for download and free trial, for Android, iOS, Windows, Linux and Mac OS X platforms, at http://www.gabrielsecure.com/. We continue to enhance our products and add new functionality to our products. We will provide updates to new and existing customers as they are released publicly. Over 80 small and medium businesses have installed our GABRIEL Secure Communication Platform™ and GABRIEL Collaboration Suite™ products in their corporate networks. We intend to continue to expand our customer base with targeted promotions and direct sales initiatives.
Competitive Strengths
We believe the following competitive strengths will enable our success in the marketplace:
Our Strategy
Our strategy is to become the market leader in securing real-time communications over the Internet and to establish our VirnetX One™ and GABRIEL CommunicationsConnection Technology™ as the industry standard security platform.platforms. Key elements of our strategy are to:
• | Promote War RoomTM video conferencing product in the general market for sale to end-user enterprises, directly and with partners, with targeted promotions and other marketing programs to assist remote workers and offer an industry leading secure meeting solution. |
• | Unique patented technology. We are focused on developing innovative technology for securing real-time communications over the Internet and establishing the exclusive secure domain name registry in the United States and other key markets around the world. Our unique solutions combine industry standard encryption methods and communication protocols with our patented techniques for automated DNS lookup mechanisms. Our technology and patented approach enable users to create a secure communication link by generating secure domain names. We currently own approximately 205 total patents and pending applications, including 72 U.S. patents/patent applications and 133 foreign patents/validations/pending applications. Our portfolio includes patents and pending patent applications in the United States and other key markets that support our secure domain name registry service for the Internet. |
• | Scalable licensing business model. We are actively engaged in pursuing additional licensing agreements with industry participants OEMs, service providers and system integrators within the IP-telephony, mobility, mobile-to-mobile communications, fixed-mobile convergence, and unified communications end-markets. |
• | Highly experienced research and development team. Our research and development team is comprised of nationally recognized network security and encryption technology scientists and experts that have worked together as a team for over ten years. During their careers, this team has developed several cutting-edge technologies for U.S. national defense, intelligence, and civilian agencies, many of which remain critical to our national security today. Prior to joining VirnetX, our team worked for Leidos, during which time they invented the core technology that is the foundation of our current technology and software. Based on the collective knowledge and experience of our development team, we believe that we have one of the most experienced and sophisticated groups of security experts researching vulnerability and threats to real-time communication over the Internet and developing solutions to mitigate these problems. |
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technical specifications identified by us. We have also submitted a number of updates to our original declaration, identifying additional technical specifications that would also require a license to our US and Foreign patents.
License and Service Offerings
Our research and development team is the team responsible for inventing the claimed subject matter of the patents that form the foundation of our technology. This team has worked together for over ten years. We intend to leverage
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this experience and continue investing in research and development and, over time, expect to strengthen and expand our patent portfolio, technology, and software. While we are currently focused on securing real-time communications overand collaboration applications for the Internetenterprise remote workforce. We are exploring creating a marketplace of applications secured by our VirnetX One platform. This approach will allow us to offer a portfolio of certified applications that can be deployed by the enterprise customers in their business networks with confidence in keeping their confidential data and establishingcommunications secure. This marketplace strategy will allow us to offer more flexible licensing options to solve specific customer use-cases, align with partner product offerings and create upsell opportunities for our products.
We have undertaken activities to commercialize our products and intellectual property in and outside the firstUnited States including VirnetX OneTM, War RoomTM, VirnetX MatrixTM, GABRIEL Connection TechnologyTM and only secure domain name registry, weour Secured Domain Name Registry and Technology. We believe our existingproduct portfolio to secure devices and future intellectual property portfolio will extend to additionalsystems are stable in areas including, among others, network securitysuch as City, County and operating systems for fixedState Governments, Healthcare, Finance, Legal, Oil and mobile devices.
Customers
Our GABRIEL Collaboration Suite™ is available for downloadGas, Medical, Law Enforcement, National Defense and free trial, for Android, iOS, Windows, Linux and Mac OS X platforms, at http://www.gabrielsecure.com/.related support industries. We continue to enhanceactively pursue new sales opportunities in and one of United States.
During 2023, we actively engaged in discussions with certain third-parties to pitch the capabilities of VimetX OneTM. As a result of our productsefforts, we made a series of announcements with Solution Synergy, WeSecure, Samsung, Every Data Corporation, and addObject Security We also announced new functionalitydeployments of our VimetX MatrixTM product at City of Bridgeport, International Association of Certified ISAOs (IACI) and SkinWalker Ranch. Although there can be no assurance in this regard, the Company believes that there are opportunities for Company products' sales directly to, our products. We will provide updates to new and existing customersresale arrangements with and/or adoption as they are released publicly. Over 80 small and medium businesses have installed our GABRIEL Secure Communication Platform™ and GABRIEL Collaboration Suite™ products in their corporate networks. We continue to rapidly expand our customer base with targeted promotions and direct sales initiatives.vendor standards by, one or more of these third parties.
In 2018, weWe plan to continue working ondirectly market our software products, domain name registry services to large enterprises and government organizations along with our service provider and system integrator customers.
We plan to directly market our Gabriel Secure Communication Platform™ and Gabriel Collaboration Suite™ products, domain name registry services to our service provider and system integrator customers. We market our Gabriel line of products directly to small and medium businesses using online marketing programs and tools. A number of International Association of Certified ISAO (IACI) including, ISAO’s for Maritime & Ports, ISAO Credit Union ISAO, City of Chicago, ISAO Human Trafficking ISAO have chosen to deploy our software as private and secure e-technology to protect their communications. Several other ISAOs are completing their evaluations before deploying our products within their networks.
globally. We expect to leverage our relationship with Leidos,OmniTeq and Op Media to extend our offering to departments and agencies within the federal government. Leidos is
In 2017, we began to pursue opportunities to market our GABRIEL™ Collaboration Suite and other productslicensing efforts in Japan. In 2017, we entered into an AmendedWe have signed a non-exclusive Distribution and Restated Revenue SharingService Agreement (the “Revenue Sharing Agreement”)with IP Dream, a Japanese based strategic technology developer and
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an Amended and Restated Gabriel License Agreement (the “Gabriel License Agreement,” together with the Revenue Sharing Agreement, the “PITA Agreements”) with Public Intelligence Technology Associates (“PITA”) service provider, to sell our software products as well as a related engagement letterVirnetX’s Secure Domain Name technology to its clients in Japan and greater Asia. Jointly with Withlin, a Dentons Innovation Group Partnership, to facilitate our marketing effortsIP Dream, we are currently pursuing several OEM opportunities with some of the largest services providers in Japan. However, since the execution of these agreements, these arrangements have not produced any meaningful results. The engagement letter terminated automatically on July 28, 2017. On March 16, 2018,Along with our efforts with IP Dream, we delivered a letter to PITA acknowledging the termination of the PITA Agreements but also notifying PITA that, though we consider the PITA Agreements effectively terminated, the letter also constituted a notice of termination pursuant to the relevant termination provisions of each PITA Agreement. More recently, we have beguncontinue to explore alternative strategies to pursue opportunities to work with other third parties in Japan, and elsewhere, using an approach that will seek to capitalize on these opportunities in part by placing more emphasis on the use of our own employees.
Competition
Intellectual Property and Patent Rights
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Notwithstanding anything to the contrary set forth in any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 that might incorporate future filings, the information set forth on the United States Patent and Trademark Office or the USPTO Website,(the “USPTO”) website, shall not be deemed to be a part of or incorporated by reference into any such filings. The Company doesWe do not warrant the accuracy, or completeness or adequacy of the USPTO Website,website, and expressly disclaimsdisclaim liability for errors or omissions on such website.
Patent Assignment
• | Patent Assignment. Leidos, unconditionally and irrevocably conveyed, transferred, assigned, and quitclaimed all its right, title, and interest in and to the patents and patent applications, as specifically set forth in the assignment document recorded with the U.S. Patent Office, including, without limitation, the right to sue for past infringement. |
• | License to Leidos, Outside the Field of Use. Effective March 12, 2008, we granted to Leidos, a non-exclusive, royalty free, fully paid, perpetual, worldwide, irrevocable, sub licensable and transferable right and license permitting Leidos, and its assignees to make, have made, import, use, offer for sale, and sell products and services covered by, and to make improvements to, the patents and patent applications we acquired from Leidos, solely outside our field of use. |
• | Compensation Obligations.
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Government Regulation
The laws governing online secure communications remain largely unsettled in various respects, even in areas where there has been legislative action. It may take years to determine whetherUncertainty regarding the interpretation and how existingenforcement of laws governing matters such as intellectual property, privacy, data protection and libel apply toin the context of online communications and media. Suchmedia is likely to remain. New and existing legislation, or changes in its interpretation and enforcement, may interfere with the growth in use of online secure communications and decrease the acceptance of online secure communications as a viable solution, which could adversely affect our business.
adopted and put in force. New and evolving laws and regulations, and changes in their enforcement and interpretation, may have material impacts upon our development and commercialization plans or business practices, and may significantly increase our compliance costs and otherwise adversely affect our business, financial condition, and results of operations.
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Employees
As of December 31, 2017,2023, we had 2127 full and part-time employees.
Corporate Overviewpart time employees, most of whom work remotely from our corporate offices. We have had a work-from-home workforce since our inception. The emphasis of our employees is on our technology research and History
product development with 14 employees focused on this effort. Our team has been working on enhancing our products and adding new functionality along with successfully filing several new patent applications in 2022. We are a holding companyalso continue building our sales and conductmarketing teams to expand our product-lines and customer base. In 2024, the Chief Operating Officer to our team in Japan was promoted to Chief Operating Officer of the Company, who will be focused on growing our operations, throughexpanding the Company's line of security products into Japan as well as the broader Pacific Rim, and transacting with military-affiliated partners within the United States to facilitate the collaborative development of next-generation cybersecurity and protective artificial intelligence solutions.
equity incentive plan.
In addition to the materials that are posted on our website, you may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Item 1A. | Risk Factors |
Annual Form on Form 10-K,Report, including the section titled “Management’sin “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making any investment in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. If any of these risk factors occur, you could lose substantial value or your entire investment in our shares.Risks Related to Businessbusiness has been, and Our Financial ReportingWe are involved and willmay continue to be, involved in litigation defending our patent portfolio, which can be time-consumingnegatively affected by shareholders intent upon alternate business strategies.costly and we cannot anticipate the results.We spend a significant amount of our financial and management resources to pursue our current litigation. We believeimport controls that this litigation and others that we may pursue in the future could continue for years and consume significant financial and management resources. The counterpart to our litigation includes large, well-financed companies with substantially greater resources than us. Patent litigation is risky and the outcome is uncertain, and we cannot assure you that any of our current or future litigation matters will result in a favorable outcome for us. In addition, even if we obtain favorable interim rulings or verdicts, they may be inconsistent with the ultimate resolution of the dispute. Also, we cannot assure you that we will not be exposed to claims or sanctions against us which may be costly or impossible forsubject us to defend. Unfavorableliability or adverse outcomes may result in losses, exhaustion of financial resources or other adverse effects, which could encumber our ability to develop and commercialize our products.13
We may need to raise additional capital to support our business growth, and this capital will be dilutive, may cause our stock price to drop or may not be available on acceptable terms, if at all.
We may need to raise additional capital, which may not be available to us when needed or may not be available on terms acceptable to us, to support our business growth or to respond to business opportunities, challenges or unforeseen circumstances, including sales under our ATM or our universal shelf registration statement. Our ability to obtain additional capital, if and when required, will depend on our business plans, investor demand, our operating performance, the condition of the capital markets, the terms of our current contractual obligations and other factors. If we raise additional funds through the issuance of equity, equity-linked or debt securities, including those under our ATM or our Universal Shelf Registration Statement, those securities may have rights, preferences, or privileges senior to the rights of our common stock, and our existing stockholders may experience dilution. Additionally, we are unable to predict the future success of our current ATM offering. Sales of a substantial number of shares of our common stock in the public market, the perception that these sales or other financings might occur, could depress the market price of our common stock and could also impair our ability to raise capital through the sale of additional equity securities. If we issue debt securities or incur indebtedness, the incurrence of indebtedness would resultcompete in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to obtain additional capital, or are unable to obtain additional capital on satisfactory terms, our ability to continue to support our business growth or to respond to business opportunities, challenges, or other circumstances could be adversely affected, and our business may be harmed.
We have terminated our revenue sharing and licensing arrangement with PITA and we cannot be sure any of our potential alternative strategies in Japan, or elsewhere, will be successful.
The PITA Agreements terminated in March 2018 as described elsewhere in this Annual Report on Form 10-K. PITA may dispute the effectiveness of that termination and litigation, which may be expensive and distracting to management, may ensue. Although we intend to pursue alternative strategies in our expansion efforts in Japan and other countries, including potential partnerships, joint ventures and other arrangements with third parties, we cannot be sure these efforts will be successful or be favorable to us.
We may not be able to capitalize on market opportunities related to our licensing strategy or our patent portfolio.
Our business strategy includes licensing our patents and technology to other companies in order to reach a larger end-user base than we could reach through direct sales and marketing efforts; as such, our business strategy and revenues will depend on intellectual property licensing fees and royalties for the majority of our revenues. We currently derive minimal revenue from licensing activities and we cannot assure you that we will successfully capitalize on our market opportunities or that our current business strategy will succeed. Factors that may affect our ability to execute our current business strategy include, but are not limited to, the following:
If we are not able to adequately protect our patent rights and trade secrets, our business would be negatively impacted.
We believe our patents are valid, enforceable
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become involved in, divert resources away from our other activities, limit or cease our revenues related to such patents, or otherwise materially and adversely affect our business. Similar challenges could also prevent us from obtaining additional patents in the future. Additionally, several of our patents are currently, and other patents may in the future be, subject to United States Patent and Trademark Office (“USPTO”) post-grant inter partes review proceedings (“IPR”) which may result in all or part of these patents being invalidated or the claims of our patents being limited. Unfavorable or adverse outcomes in our litigation or IPRs may result in losses, exhaustion of financial resources, reduction in our ability to enforce our intellectual property rights, or other adverse effects, which could encumber our ability to develop and commercialize our products. Even if we are successful in enforcing our intellectual property rights, our patentsOur operating results may not ultimately provide us with any competitive advantagesbe consistent and may be less valuable than we currently expect. These risks may be heightened in countries other than the United States where laws regarding patent protection are less developed,difficult to predict and may be negatively affected by the fact that legal standards in the United States and elsewhere for protection of intellectual property rights in Internet-related businesses are uncertain and still evolving. In addition, there are a significant number of United States and foreign patents and patent applications in our areas of interest, and we expect that significant litigation in these areas will continue, and will add uncertainty to the value of certain patents and other intellectual property rights in our areas of interest. If we are unable to protect our intellectual property rights or otherwise realize value from them, our business would be negatively affected.
We can provide no assurances that the licensing of our essential security patents under FRAND will be successful.
At the request of the European Telecommunications Standards Institute (“ETSI”), and the Alliance for Telecommunications Industry Solutions (“ATIS”), we agreed to update our licensing declaration to ETSI and ATIS under their respective Intellectual Property Rights policies. This was in response to our Statement of Patent Holder identifying a group of our patents and patent applications that we believe are or may become essential to certain developing specifications in the 3rd Generation Partnership Project (3GPP) Long Term Evolution (“LTE”), Systems Architecture Evolution (“SAE”) project. We will make available a non-exclusive patent license under FRAND (fair, reasonable and non-discriminatory terms and conditions, with compensation) for the patents identified by us that are or become essential, to applicants desiring to implement the Technical Specifications identified by us, as set forth in the updated licensing declaration under the ATIS and ETSI Intellectual Property Rights policies. Our licensing declarations under the ATIS and ETSI Intellectual Property Rights policies may limit our flexibility in determining royalties and license terms for certain of our patents. Consequently, we cannot assure you that the licensing of the essential security patents will be successful or that third parties will be willing to enter into licenses with us on reasonable terms or at all, which could have an adverse effect on our business and harm our competitive position.
Because our business is conducted or expected to be conducted in an environment that is subject to rapid change, we may be subject to various developments in regulation, law and consumer preferences to which we may not be able to adapt successfully.
The current regulatory environment for our products and services remains unclear.achieve or sustain profitability in the future.
• | Customer adoption of our VirnetX OneTM platform and software products and services; |
• | Adoption of VirnetX OneTM platform by third party application providers of secure communications; |
Our business depends on the growth of instant messaging, VoIP, mobile services, streaming video, file transfer and remote desktop and other next-generation Internet-based applications. A decline in the use of these applications due to complexity or cost of these applications relative to alternate traditional or newly developed communications channels, or development of alternative technologies, could cause a material decline in the number of users in these areas.
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More aggressive domestic or international regulation of the Internet in general, and Internet telephony providers and services specifically may materially andmanage, adversely affect our business financial condition,and operating results, and future prospects.
Our exposure to outside influences beyond our control, including new legislation, court rulings or actions by the United States Patent and Trademark Office, could adversely affect our licensing and enforcement activities and results of operations.
Our licensing and enforcement activities are subject to numerous risks from outside influences, including the following:
New legislation, regulations or court rulings relatedresults to enforcing patents could harm our businessfall below investor’s expectations and operating results.
Intellectual property is the subject of intense scrutiny by the courts, legislatures and executive branches of governments around the world. Various patent offices, governments or intergovernmental bodies may implement new legislation, regulations or rulings that impact the patent enforcement process or the rights of patent holders and such changes could negatively affect licensing efforts and/or litigations. For example, limitations on the ability to bring patent enforcement claims, limitations on potential liability for patent infringement, lower evidentiary standards for invalidating patents, increases in the cost to resolve patent disputes and other similar developments could negatively affect our ability to assert our patent or other intellectual property rights.
It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become enacted as laws. Compliance with any new or existing laws or regulations could be difficult and expensive, affect the manner in which we conduct our business and negatively impact our business, prospects, financial condition and results of operations.
If we experience security breaches, we could be exposed to liability and our reputation and business could suffer.
We expect to retain certain confidential and proprietary customer information in our secure data centers and secure domain name registry, as well as personal data and other confidential and proprietary information relating to our business. It will be critical to our business strategy that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Our secure domain name registry operations will also depend on our ability to maintain our computer and telecommunications equipment in effective working order and to reasonably protect our systems against interruption, and potentially depend on protection by other registrars in the shared registration system. The secure domain name servers that we will operate will be critical hardware to our registry services operations. Therefore, we expect to have to expend significant time and money to maintain or increase the security of our products, facilities and infrastructure. Security technologies are constantly being tested by computer professionals, academics and “hackers.” Advances in computer capabilities and the techniques for attacking security solutions, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security measures and could make some or all our products obsolete or unmarketable. Likewise, if any of our products are found to have significant security vulnerabilities, then we may need to dedicate engineering and other resources to eliminate the vulnerabilities and to repair or replace products already sold or licensed to our
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customers. Despite the security measures that we and our service providers utilize, our infrastructure and that of our service providers may be vulnerable to physical break-ins, computer viruses, attacks by hackers, phishing attacks, social engineering, or similar disruptive problems. It is possible that we may have to expend additional financial and other resources to address such problems. As a provider of Internet security software and technology, we may be the target of dedicated efforts by hackers and other third parties to overcome or defeat our security measures. Any physical or electronic break-in or other security breach or compromise of the information stored at our secure data centers and domain name registration systems, including any compromise due to human error or employee or contractor malfeasance, may jeopardize the security of information stored on our premises or in the computer systems and networks of our customers. In such an event, we could face significant liability and current or potential customers could be reluctant to use our services. Additionally, any such data security incident, or the perception that one has occurred could also result in adverse publicity and therefore adversely affect the market’s perception of the security of electronic commerce and communications over IP networks as well as the security or reliabilitymarket price of our services.
A security breach or other security incident could require a substantial level of financial resourcescommon stock. If we fail to rectify and could resultincrease our revenue to offset any increases in a claim and investigation that cause us to incur substantial fines, penalties, or other liability and related legal and other costs. Any actual or perceived security breach or other security incident may also harm our reputation and make it more difficult or impossible for us to successfully market to others. Any of the foregoing matters could harm our operating results and financial condition.
Privacy and data security concerns, and data collection and transfer restrictions and related domesticexpenses, we may not achieve or foreign regulations may limit the use and adoption of our solutions and adversely affect our business.
Personal privacy, information security, and data protection are significant issuessustain profitability in the United States, Europe and many other jurisdictions where we have operations or offer our products. The regulatory framework governing the collection, processing, storage and use of confidential and proprietary business information and personal data is rapidly evolving. The United States. federal and various state and foreign governments have adopted or proposed requirements regarding the collection, distribution, use, security and storage of personally identifiable information and other data relating to individuals, and federal and state consumer protection laws are being applied to enforce regulations related to the online collection, use and dissemination of data.
Further, many foreign countries and governmental bodies, including the European Union (EU”), where we conduct business, have laws and regulations concerning the collection and use of personal data obtained from their residents or by businesses operating within their jurisdiction. These laws and regulations often are more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of data that identifies or may be used to identify or locate an individual, such as names, email addresses and, in some jurisdictions, IP addresses.
We also expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the EU, and other jurisdictions. For example, the European Commission has adopted a General Data Protection Regulation, which will be fully effective on May 25, 2018, that will supersede current EU data protection legislation, impose more stringent EU data protection requirements, and provide for greater penalties for noncompliance. We cannot yet determine the impact such future laws, regulations and standards may have on our business. Privacy, data protection and information security laws and regulations are often subject to differing interpretations, may be inconsistent among jurisdictions, and may be alleged to be inconsistent with our current or future practices. Additionally, we may be bound by contractual requirements applicable to our collection, use, processing, and disclosure of various types of data, including personal data, and may be bound by, or voluntarily comply with, self-regulatory or other industry standards relating to these matters. These and other requirements could reduce demand for our products, increase our costs, impair our ability to grow our business, or restrict our ability to store and process data or, in some cases, impact our ability to offer our service in some locations and may subject us to liability. Any failure or perceived failure to comply with applicable laws, regulations, industry standards, and contractual obligations may adversely affect our business. Further, in view of new or modified federal, state or foreign laws and regulations, industry standards, contractual obligations and other legal obligations, or any changes in their interpretation, we may find it necessary or desirable to fundamentally change our business activities and practices or to expend significant resources to modify our product and otherwise adapt to these changes. We may be unable to make such changes and modifications in a commercially reasonable manner or at all, and our ability to develop new products and features could be limited.
The costs of compliance with and other burdens imposed by laws, regulations and standards may limit the use and adoption of our service and reduce overall demand for it, or lead to significant fines, penalties or liabilities for any
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noncompliance. Privacy, information security, and data protection concerns, whether valid or not valid, may inhibit market adoption of our platform, particularly in certain industries and foreign countries.
We expect that we will experience long and unpredictable sales cycles, which may impact our operating results.
If we are unable to expand our revenue sources or establish, sustain, grow or replace relationships with a diversified customer base, our revenues may be limited.
We currently generate revenue from a limited number of customers that have entered Settlement and License Agreements. Although our GABRIEL Collaboration Suite™ is not currently generating revenue, it will take time for us to grow our installed user base and generate new customers. Additionally, there is no guarantee that we will be able to derive revenue from new customers, sustain or increase revenue from existing customers or replace customers from whom we currently generate revenue. As a result, our revenue may be limited or static.
VirnetX One™ platform and software products.
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Any significant problem with our systems or operations couldcustomers, and result in lost revenue, customer dissatisfaction, or lawsuits against us. A failure
Our ability to sell our solutions will be dependent on the qualitysecurity or reliability of our technical support, and our failure to deliver high-quality technical support services, which could have a material adverse effectimpact on our salesbusiness, financial condition, and results of operations.
operation.
Telephone carriers have petitioned governmental agencies to enforce regulatory tariffs, which, if granted, would increase the cost of online communication, and such increase in cost may impede the growth of online communication and adversely affect our business.
Use of the Internet has over-burdened existing telecommunications infrastructures, and many high traffic areas have begun to experience interruptions in service. As a result, certain local telephone carriers have petitioned governmental agencies to enforce regulatory tariffs on IP telephony traffic that crosses over their traditional telephone networks. If the relief sought in these petitions is granted, the costs of communicating via online could increase substantially, potentially adversely affecting the growth in the use of online secure communications. Any of these developments could have an adverse effect on our business.
materially harm our business.
business
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Our international expansion will subject us to additional costs and risks,War, terrorism, other acts of violence, or natural or manmade disasters as well as macroeconomic conditions may affect the markets in which we operate, our clients and our plansservice delivery.
We expect to expandadversely affected by instability, disruption, or destruction in a geographic region in which we operate, regardless of cause, including war, terrorism, riot, civil insurrection, or social unrest, and natural or manmade disasters, including famine, flood, fire, earthquake, storm, or pandemic events and spread of disease, such as the COVID-19 pandemic. Our business may also be adversely affected by further downturn in macroeconomic conditions, including inflation and rising interest rates, global political and economic uncertainty and tensions, such as the ongoing Russia-Ukraine and Israel-Hamas conflicts as well as any related political or economic response, counter responses or otherwise, financial services sector instability, a reduction in business confidence and activity, financial market volatility, and other factors. Such events can adversely affect our presence internationally through, for example, international partnerships with third parties andoperations or the possibility of establishing international subsidiaries and offices. Our international expansion may present challenges and risks, including those inherent in international operations, to useconomy as a whole and may requirecause our customers to delay their decisions on spending for the services we provide and perpetuate significant attention from management. Wechanges in regional and global economic conditions and cycles. These events may not be successful inalso pose risks to our international partnerships, expansion efforts,personnel and we may incur significant operating expenses
We may identify future material weakness which may result in late filings, increased costs or declines in our share price.
Although we believe that we currently maintain effective control over our disclosuresto physical facilities and procedures and internal control over financial reporting, we may in the future identify deficiencies regarding the design and effectiveness of our system of internal control over financial reporting. If we experience any material weaknesses in our internal control over financial reporting the future or are unable to provide unqualified management or attestation reports about our internal controls, we may be unable to meet financial and other reporting deadlines and may incur costs associated with remediation, and any ofoperations, which could causeadversely affect our share price to decline.
Risks Related to Our Common Stock
financial results.
The market For more information regarding trading in our common stock and listing on the NYSE, see additional risk factors included elsewhere in this Annual Report on Form 10-K.
The trading price of our common stock has been volatile since our initial public offering, and is likely to continue to be volatile. Factorsresult in financial losses that could cause fluctuations in the market price of our common stock include, but are not limited to the following:
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Further, in recent years the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. In addition, the stock prices of many technology companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, government shutdowns, interest rate changes the stability of the EU and the exit of the United Kingdom or international currency fluctuations, may cause the market price of our common stock to decline. decline and delay the development of our products.
We1940 (the “1940 Act”). If we do not currently pay dividends onmanage our common stockinvestments and thus stockholders must look to appreciation of our common stock to realize a gain on their investments.
Our dividend policy is within the discretion of our Board of Directors and will depend upon various factors, including our business financial condition, results of operations, capital requirements, and investment opportunities. We therefore cannot make assurances that our Board of Directors will determine to pay regular or special dividends in the future. Accordingly, unless our Board of Directors determines to pay dividends, stockholders will be required to look to appreciation of our common stock to realize a gain on their investment. This appreciation may not occur.
The exercise of our outstanding stock options, RSU’s and issuance of new shares would result in a dilution of our current stockholders’ voting power and an increase in the number of shares eligible for future resale in the public market which may negatively impact the market price of our stock.
The exercise of our outstanding vested stock options would dilute the ownership interests of our existing stockholders. As of December 31, 2017, we had outstanding options to purchase an aggregate of 5,138,066 shares of common stock representing approximately 9% of our total shares outstanding of which 3,129,233 were vested and therefore exercisable. To the extent outstanding stock options are exercised, additional shares of common stock will be issued, existing stockholders’ percentage voting interests will decline and the number of shares eligible for resale in the public market will increase. Such increase may have a negative effect on the value or market trading price of our common stock.
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The market price of our common stock may decline because our operating results may not be consistent and may be difficult to predict.
Our reported net income has fluctuated in the past due to several factors. We expect that our future operating results may also fluctuate due to the same or similar factors. We had a net loss of $29.2 million for the year ended December 31, 2015, a net loss of $28.6 million for the year ended December 31, 2016, and a net loss of $17.3 million for the year ended December 31, 2017, with an accumulated deficit of $176 million. The following include some of the factors that may cause our operating results to fluctuate:
These fluctuations may make our business particularly difficult to manage, adversely affect our business and operating results, make our operating results difficult for investors to predict and, further, cause our results to fall below investor’s expectations and adversely affect the market price of our common stock.
Because ownership of our common stock is concentrated, investors may have limited influence on stockholder decisions.
As of December 31, 2017, our executive officers and directors beneficially owned approximately 12% of our outstanding common stock. In addition, a group of stockholders that, as of December 31, 2007, held 4,766,666 shares, or approximately 8% of our outstanding common stock, have entered into a voting agreement with us that requires them to vote all of their shares of our voting stock in favor of the director nominees approved by our Board of Directors at each director election going forward, and in a manner that is proportionalmeets the requirements for an exemption under the 1940 Act, we may be deemed to be an investment company under the votes cast by1940 Act and subject to additional limitations on operating our business including limitations on the issuance of securities, which may make it difficult for us to raise capital.
Item 1B. | Unresolved Staff Comments |
Item 1C. | Cybersecurity |
Our protective provisions in our amended and restated certificate of incorporation and bylaws could make it difficult for a third party to successfully acquire us even if you would like to sell your stock to them.
cybersecurity threats. We have devoted significant resources to implement and maintain security measures to meet regulatory requirements and customer expectations, and we intend to continue to make significant investments to maintain the security of our data and cybersecurity infrastructure.
Notwithstanding the extensive approach we take to cybersecurity, we may not be successful in preventing or mitigating a23
In addition, the provisions of Section 203 of the Delaware General Corporate Law govern us. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time.
These and other provisions in our amended and restated certificate of incorporation, our bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.
None
Item 2. | Properties |
Item 3. | Legal Proceedings |
We have eleven intellectual property infringement lawsuits pending
VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED)
On March 30, 2015, the United States Court for the Eastern District of Texas, Tyler Division, issued an order finding substantial overlap between the remanded portions of the Civil Action Case 6:10-CV-00417-LED (VirnetX vs. Cisco et. al.), and the ongoing Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case. The jury trial in this case was held on January 25, 2016. On February 4, 2016, a jury in the United States Court for the Eastern District of Texas, Tyler Division, awarded us $625.6 million in a verdict against Apple Inc. for infringing four of our US patents, marking it the second time a federal jury has found Apple liable for infringing VirnetX’s patented technology. The verdict includes royalties awarded to us based on an earlier patent infringement finding (Case 6:10-CV-00417-LED) against Apple. The jury found that Apple’s modified VPN On-Demand, iMessage and FaceTime services infringed VirnetX’s patents and that Apple’s infringement was willful. In addition to determining the royalty owed by Apple for its prior infringement, this verdict also includes an award based on the
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jury’s finding that Apple’s modified VPN On Demand, iMessage and FaceTime services have continued to infringe VirnetX’s patents. The post-trial hearing was held on May 25, 2016 in the United States Court for the Eastern District of Texas, Texarkana Division. On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases (Case No. 6:10-cv-417, Docket No. 878 (“Apple I case”); Case No. 6:12-cv-855, Docket No. 220 (“Apple II case”)), ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II case will be retried after Apple I case. Events and developments subsequent to the order from the court are described to support Apple I and Apple II matters.
VirnetX Inc. v. Cisco Systems, Inc. et al. (Case 6:10-CV-00417-LED) (“Apple I”)
On August 11, 2010, we initiated a lawsuit by filing a complaint against Aastra USA. Inc. (“Aastra”), Apple, Cisco Systems, Inc. (“Cisco”), and NEC Corporation (“NEC”) in the United States District Court for the Eastern District of Texas, Tyler Division, pursuant to which we alleged that these parties infringe on certain of our patents. We sought damages and injunctive relief. Aastra and NEC agreed to sign license agreements with us and we agreed to drop all the accusations of infringement against them. At the pre-trial hearing, the judge decided to conduct separate jury trial for each defendant, and try only the case against Apple on the scheduled trial date. The jury trial of our case against Cisco was held on March 4, 2013. The jury in our case against Cisco came back with a verdict of non-infringement also determined that all our patents-in-suit patents are not invalid. Our motions for a new trial and Cisco’s infringement of certain VirnetX patents were denied and the case against Cisco was closed.
The jury trial of our case against Apple was held on October 31, 2012. On November 6, 2012, a jury in the United States Court for the Eastern District of Texas, Tyler Division, awarded us over $368 million in a verdict against Apple for infringing four of our patents. On February 26, 2013, the court issued its Memorandum Opinion and Order regarding post-trial motions resulting from the prior jury verdict denying Apple’s motion to reduce the damages awarded by the jury for past infringement. The Court further denied Apple’s request for a new trial on the liability and damages portions of the verdict and granted our motions for pre-judgment interest, post-judgment interest, and post-verdict damages to date. The Court ordered that Apple pay $34 thousand in daily interest up to final judgment and $330 thousand in daily damages for infringement up to final judgment for certain Apple devices included in the verdict. The Court denied our request for a permanent injunction and severed the future infringement portion into its own separate proceedings under Case 6:13-CV-00211-LED.
On July 3, 2013, Apple filed an appeal of the judgment dated February 27, 2013 and order dated June 4, 2013 denying Apple’s motion to alter or amend the judgment to the USCAFC. On September 16, 2014, USCAFC issued their opinion, affirming the jury’s finding that all 4 of our patents are valid, confirming the jury’s finding of infringement of VPN on Demand under many of the asserted claims of our ‘135 and ‘151 patents, and confirming the district’s court’s decision to allow evidence concerning our licenses and royalty rates in connection with the determination of damages. In its opinion, the USCAFC also vacated the jury’s damages award and the district court’s claim construction with respect to parts of our ‘504 and ‘211 patents and remanded the damages award and determination of infringement with respect to FaceTime –for further proceedings consistent with its opinion. On October 16, 2014, we filed a petition with the USCAFC, requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decision concerning VirnetX’s litigation against Apple Inc. On December 16, 2014, USCAFC denied our petition requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decision and remanded the case back to the Eastern District of Texas, Tyler Division, for further proceedings consistent with its opinion. On February 25, 2015, USCAFC granted Apple’s motions to lift stay of proceedings and vacate Case 6:13-CV-00211-LED. On March 30, 2015, the court issued an order finding substantial overlap between the remanded portions of this case and the ongoing Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case.
On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases Apple I case and Apple II case, ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II will be retried after Apple I case. The jury trial in this case was held on September 26, 2016. On September 30, 2016, a Jury in the United States Court for the Eastern District of Texas, Tyler Division, in the case VirnetX Inc., et al. v. Apple Inc., No. Apple I, has awarded VirnetX $302.4 million in a verdict against Apple for infringing four VirnetX patents, marking the third time a federal jury has found Apple liable for infringing VirnetX’s patented technology.
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The verdict includes royalties awarded to VirnetX, for unresolved issues in the Apple I case, remanded back from the USCAFC, related to (1) damages owed to VirnetX for infringement by Apple’s original VPN-on-Demand (VOD) and (2) the alleged infringement by Apple’s original FaceTime product, under the new claim construction of “secure communication link” pertaining to the ’504 and ’211 patents by the USCAFC, and the damages associated with that infringement. The hearing on all the post-trial motions was held on November 22, 2016.
On September 29, 2017, the United States District Court for the Eastern District of Texas, Tyler Division, entered Final Judgement and issued its Memorandum Opinion and Order regarding post-trial motions resulting from the prior $302.4 million jury verdict for VirnetX in the Apple I case.
In the Order, the Court denied all of Apple’s post-trial motions including motion for judgment as a matter of law of non-infringement, motion for judgment as a matter of law on damages, motion for a new trial on infringement, and motion for a new trial on damages. The Court granted all VirnetX’s post-trial motions including motion for willful infringement and enhanced the royalty rate during the willfulness period by 50 percent, from $1.20 to $1.80 per device, awarding VirnetX, enhanced damages in the amount of $41.3 million against Apple thereby, granting VirnetX a total sum of $343.7 million in pre-interest damages. The Court also awarded costs, certain attorneys’ fees, and prejudgment interest to VirnetX, and directed the parties to meet and confer regarding these amounts. On October 13, 2017, having met and conferred and having reached agreements on all amounts, parties jointly filed a motion asking the Court to grant VirnetX an additional sum in the amount of $96 million in agreed Bill of Costs, Attorneys’ Fees, and Prejudgment Interest. The Final Judgement is only subject to appeal stemming from new issues unresolved in the Apple I case, remanded back from the United States Court of Appeals for the Federal Circuit. The total Final Judgement amount including Jury Verdict, Willful Infringement, Interest, Costs and Attorney Fees is $439.7 million.
On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on September 29, 2017 to the United States Court of Appeals for the Federal Circuit. This case has now been closed and events and developments subsequent to the notice of appeal are described below under VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case).
VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”)
On November 6, 2012, we filed a complaint against Apple in the United States District Court for the Eastern District of Texas, Tyler Division for willfully infringing four of our patents, U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151, and seeking both an unspecified amount of damages and injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and the latest Macintosh computers. Due to their release dates, these products were not included in the previous lawsuit that concluded with a Jury verdict on November 6, 2012 that was subsequently upheld by the United States District Court for the Eastern District of Texas, Tyler Division, on February 26, 2013. On July 1, 2013, we filed a consolidated and amended complaint to include U.S. Patent No. 8,051,181 and consolidate Civil Action No. 6:11-cv-00563-LED. On August 27, 2013, we filed an amended complaint including allegations of willful infringement related to U.S. Patent No. 8,504,697 seeking both damages and injunctive relief. The Markman hearing in this case was held on May 20, 2014 and on August 8, 2014, issued its Markman Order, denying Apple’s motion for summary judgment of indefiniteness, in which Apple alleged that some of the disputed claims terms in the patents asserted by us were invalid for indefiniteness. In a separate order, the court granted in part and denied in part our motion for partial summary judgment on Apple’s invalidity counterclaims, precluding Apple from asserting invalidity as a defense against infringement of the claims that were tried before a jury in our prior litigation against Apple (VirnetX vs. Cisco et. al., Case 6:10-CV-00417-LED). The jury trial in this case was scheduled for October 13, 2015. On March 30, 2015, the court issued an order finding substantial overlap between this case and the remanded portions of Case 6:10-CV-00417-LED (VirnetX vs. Cisco et. al.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case. On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases Apple I case and Apple II case, ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II will be retried after Apple I case.
On September 29, 2017, the Court issued an order denying Apple’s Motion to Stay. The Court ordered the parties to meet and confer and file a joint motion with a proposed trial date by October 13, 2017. The parties have met, conferred and filed a joint motion on the proposed trial dates. On November 9, 2017, the court issued its order setting this case for jury selection on April 2, 2018 in Tyler, Texas.
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On January 5, 2018, Apple filed a Petition for Writ of Mandamus with the USCAFC requesting the court to stay the upcoming limited retrial of the Apple II pending the USCAFC’s decision in related consolidated appeal VirnetX Inc. v. Apple Inc., Cases 2017-1591. On February 22, 2018, the USCAFC issued its order denying Apple’s Petition for Writ of Mandamus. The Apple II case is proceeding on schedule for jury selection on April 2, 2018 per the district court’s order.
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case)
On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on September 29, 2017 to the United States Court of Appeals for the Federal Circuit.
On January 5, 2018, Apple filed a motion requesting a stay of the briefing schedule in this appeal pending this court’s decision in related consolidated appeal VirnetX Inc. v. Apple Inc., Cases 2017-1591. On January 24, 2018, USCAFC denied Apple’s motion requesting a stay of the briefing schedule and ordered Apple to file its opening brief no later than March 19, 2018.
VirnetX Inc. v. Apple, Inc. (Case 15-1934)
On July 10, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the United States Patent and Trademark Office, Patent Trial and Appeal Board (“PTAB”) in IPR2014-00237 and IPR2014-00238, related to U.S. Patent No. 8,504,697. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on the grounds discussed in IPR2014-00238. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 16-1211)
On September 28, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2014-00403 and IPR2014-00404 and on October 22, 2015 for IPR2014-00481 and IPR2014-00482 involving our U.S. Patent Nos. 7,188,180, and 7,987,274. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on the grounds discussed in IPR2014-00403 and IPR2014-00481. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 16-1480)
On November 30, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,949 related to U.S. Patent No. 8,051,181. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on certain grounds. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 16-119)
On March 4, 2016, we filed a petition for writ of mandamus with the USCAFC, requesting the USCAFC’s intervention to revoke the PTAB’s decision joining Apple to IPR2015-01046 and IPR2015-01047, related to U.S. Patent Nos. 6,502,135 and 7,490,151. On March 18, 2016, the USCAFC denied the petition without prejudice to us raising the arguments on appeal after the PTAB’s final decisions. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 17-1131)
On October 31, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2015-00810 and IPR2015-00812, on November 9, 2016 for IPR2015-00811, and on November 28, 2016 for IPR2015-00866, IPR2015-00868, IPR2015-00870 and IPR2015-00871 involving our U.S. Patent Nos.8,868,705, 8,850,009, 8,458,341, 8,516,131, and 8,560,705. These appeals have been consolidated. The briefing in these appeals has been concluded; the oral argument were held on March 5, 2018. We are awaiting the courts ruling in this matter.
VirnetX Inc. v. The Mangrove Partners (Case 17-1368)
On December 16, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2015-01046, and on December 20, 2016 for IPR2015-1047, involving our U.S. Patent Nos. 6,502,135, and 7,490,151. These appeals also involve Apple, Inc. and one of them involves Black Swamp IP, LLC. On April 27, 2017, the USCAFC stayed these appeals pending the USCAFC’s en banc decision in Wi-Fi One, LLC v. Broadcom Corporation, No. 2015-1944. The stay was lifted on January 31, 2018, and briefing is now ongoing.
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VirnetX Inc. v. Apple Inc., Cisco Systems, Inc. (Case 17-1591)
On February 7, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-partes reexamination nos. 95/001,788, 95/001,789, and 95/001,856 relatednotes to our U.S. Patent Nos. 7,921,211 and 7,418,504. These appeals have been consolidated. The briefing in these appeals has been concluded; the oral arguments have not yet been scheduled.
VirnetX Inc. v. Apple Inc. (Case 17-2490)
On August 23, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2016-00331 and IPR2016-00332 involving our U.S. Patent No. 8,504,696. These appeals have been consolidated. The briefing in these appeals has been concluded; the oral arguments have not yet been scheduled.
In re VirnetX Inc. (Case 17-2593)
On September 22, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2016-00693 and IPR2016-00957 involving our U.S. Patent Nos. 7,418,504 and 7,921,211. These appeals have been consolidated. The briefing in these appeals is ongoing. The entity that initiated the IPRs, Black Swamp IP, LLC, indicated on October 18, 2017, that it would not participate in the appeals. On November 27, 2017, the United States Patent and Trademark Office indicated that it would intervene in the appeals. On January 19, 2018, the USCAFC stayed these appeals pending the USCAFC’s decision in Case 17-1591.
One or more potential intellectual property infringement claims may also be available to us against certain other companies who have the resources to defend against any such claims. Although we believe these potential claims are worth pursuing, commencing a lawsuit can be expensive and time-consuming, and there is no assurance that we will prevail on such potential claims. In addition, bringing a lawsuit may lead to potential counterclaims which may preclude our ability to commercialize our initial products, which are currently in development.
Currently, we are not a party to any other pending legal proceedings, and are not aware of any proceeding threatened or contemplated against us by any governmental authority or other party.
Item 4. | Mine Safety |
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PART II
Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity |
The following table shows the price range of our common stock, as reported on the NYSE American LLC, for each quarter ended during the last two fiscal years.
VirnetX Holding Corp | HIGH | LOW | ||||
Year ended, December 31, 2017: | ||||||
First quarter | $ | 2.75 | $ | 1.70 | ||
Second quarter | $ | 5.40 | $ | 2.02 | ||
Third quarter | $ | 4.85 | $ | 3.00 | ||
Fourth quarter | $ | 8.75 | $ | 3.55 | ||
Year ended, December 31, 2016: | ||||||
First quarter | $ | 9.64 | $ | 1.95 | ||
Second quarter | $ | 6.50 | $ | 3.83 | ||
Third quarter | $ | 4.64 | $ | 2.14 | ||
Fourth quarter | $ | 5.13 | $ | 2.10 |
The closing price of our common stock on the NYSE American LLC on March 14, 2018 was $4.05 per share.
Dividends
We do not currently intend to begin paying a regular dividend
VirnetX’s history as a public company VirnetX has distributed over $165.9 million in cash to shareholders.
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Stock Performance Graph
The stock price performance reflected on this graph is not necessarily indicative of future stock price performance. See the disclosure in part I, Item 1A. “Risk Factors”
12/12 | 12/13 | 12/14 | 12/15 | 12/16 | 12/17 | |||||||||||||
VirnetX Holding Corp | $ | 100.00 | $ | 66.29 | $ | 18.75 | $ | 8.78 | $ | 7.51 | $ | 12.64 | ||||||
S&P 500 | $ | 100.00 | $ | 132.39 | $ | 150.51 | $ | 152.59 | $ | 170.84 | $ | 208.14 | ||||||
RDG Technology Composite | $ | 100.00 | $ | 132.51 | $ | 155.05 | $ | 161.00 | $ | 181.12 | $ | 247.79 |
*$100 invested on 12/31/18 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. | ||
Copyright© 2024 Standard & Poor’s, a division of S&P Global. All rights reserved. |
12/18 | 12/19 | 12/20 | 12/21 | 12/22 | 12/23 | |||||||||||||||||||
VirnetX Holding Corp | 100.00 | 158.33 | 246.02 | 126.92 | 63.46 | 44.33 | ||||||||||||||||||
S&P 500 | 100.00 | 131.49 | 155.68 | 200.37 | 164.08 | 207.21 | ||||||||||||||||||
RDG Technology Composite | 100.00 | 142.93 | 222.56 | 266.61 | 181.18 | 261.37 |
During the year ended December 31, 2017, we had no sales of unregistered securities and no repurchases of stock.
Item 6. |
The consolidated statement of operations data for the years ended December 31, 2017, 2016 and 2015 and the balance sheet data at December 31, 2017 and 2016, are derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations data for the years ended December 31, 2014 and 2013 and the balance sheet data at December 31, 2015, 2014 and 2013 are derived from our audited financial statements not included in this annual report on Form 10-K.
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The selected consolidated financial data below is not necessarily indicative of future performance and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included in Item 8 of this Annual Report on Form 10-K.
For the year ended December 31, | |||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||
Consolidated Statement of Operations Data: | |||||||||||||||
Revenue | $ | 1,547 | $ | 1,550 | $ | 1,555 | $ | 1,249 | $ | 2,197 | |||||
Gain on settlement(a) | $ | — | $ | — | $ | — | $ | 23,000 | $ | — | |||||
Total operating expenses | $ | (18,868 | ) | $ | (30,055 | ) | $ | (30,732 | ) | $ | (36,414 | ) | $ | (30,784 | ) |
Income tax expense | $ | (3 | ) | $ | (133 | ) | $ | (8 | ) | $ | (15 | ) | $ | (751 | ) |
Net loss | $ | (17,278 | ) | $ | (28,569 | ) | $ | (29,234 | ) | $ | (9,902 | ) | $ | (27,608 | ) |
Loss per share | $ | (0.30 | ) | $ | (0.51 | ) | $ | (0.56 | ) | $ | (0.19 | ) | $ | (0.54 | ) |
Consolidated Balance Sheet Data: | |||||||||||||||
Cash and cash equivalents | $ | 3,135 | $ | 6,627 | $ | 8,726 | $ | 18,658 | $ | 19,173 | |||||
Investments available for sale | $ | 1,453 | $ | 9,249 | $ | 9,954 | $ | 22,571 | $ | 19,815 | |||||
Total assets | $ | 7,175 | $ | 18,871 | $ | 22,172 | $ | 45,090 | $ | 39,398 | |||||
Stockholders’ equity | $ | 1,553 | $ | 11,147 | $ | 15,095 | $ | 32,627 | $ | 34,024 |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of |
We are a holding company and conduct our operations through our wholly-owned subsidiary, VirnetX, Inc. VirnetX, Inc., was incorporated in the State of Delaware in August 2005. In November 2006, VirnetX, Inc. acquired certain patents from SAIC, now Leidos. In July 2007, we effected a merger by and among VirnetX, Inc., VirnetX Holding Corporation and a wholly-owned subsidiary of VirnetX Holding Corporation, whereby VirnetX, Inc. merged with, and became, a wholly-owned subsidiary of VirnetX Holding Corporation and VirnetX Holding Corporation issued shares of its common stock to the stockholders of VirnetX, Inc. as consideration for the merger. As a result of this merger, the former security holders of VirnetX, Inc. came to own a majority of our outstanding common stock. On October 29, 2007, we changed our name from PASW, Inc. to VirnetX Holding Corporation.
Our portfolio of intellectual property is the foundation of our business model. We currently own approximately 185 U.S. and foreign patents, patent validations and pending applications. Our patent portfolio is primarily focused on securing real-time communications over the Internet, as well as related services such as the establishment and maintenance of a secure domain name registry. Our patented methods also have additional applications in the key areas of device operating systems and network security for Cloud services, M2M communications in areas of Smart City, Connected Car and Connected Home.
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We have submitted a declaration with the 3rd Generation Partnership Project, or 3GPP, identifying a group of our patents and patent applications that we believe are or may become essential to certain developing specifications in the 3GPP LTE, SAE project. We have agreed to make available a non-exclusive patent license under fair, reasonable and non-discriminatory terms and conditions, with compensation, or FRAND, to 3GPP members desiring to implement the technical specifications identified by us. We believe that we are positioned to license our essential security patents to 3GPP members as they move into 4G.
We believe that the market opportunity for our software and technology solutions is large and expanding as secure domain names are now an integral part of securing the next generation 4G/LTE Advanced wireless networks and M2M communications in areas including Smart City, Connected Car and Connected Home. We also believe that all 4G/LTE Advanced mobile devices will require unique secure domain names and become part of a secure domain name registry.
We intend to license our patent portfolio, technology and software, including our secure domain name registry service, to domain infrastructure providers, communication service providers as well as to system integrators. We intend to seek further license of our technology, including our GABRIEL Connection Technology™ to enterprise customers, developers and original equipment manufacturers, or OEMs, of chips, servers, smart phones, tablets, e-Readers, laptops, net books and other devices, within the IP-telephony, mobility, fixed-mobile convergence and unified communications markets including 4G/LTE. We have published our royalty rates and guidelines on our website. All forward moving licenses have adhered to these guidelines and have met or exceeded these rates and we will use these rates and guidelines in all future license negotiations.
OurVirnetX’s software and technology solutions, including ourits Secure Domain Name Registry and Technology, VirnetX One™, War Room™, VirnetX Matrix™, and GABRIEL Connection Technology™, are designed to facilitatebe device and location-independent, and enable a secure communicationsreal-time communication environment for all types of enterprise applications, services, and provide the security platform required by next-generation Internet-based applications such as instant messaging, or IM, voice over Internet protocol, or VoIP, mobile services, streaming video, file transfer, remote desktop and, or M2M communications.critical infrastructures. Our technology generates secure connections on a “zero-click” or “single-click” basis, significantly simplifying the deployment of secure real-time communication solutions by eliminating the need for end-users to enter any encryption information.
We Many small and medium businesses have signed Patent License Agreements with Avaya Inc., Aastra USA, Inc., Microsoft Corporation, Mitel Networks Corporation, NEC Corporation and NEC Corporation of America, Siemens Enterprise Communications GmbH & Co. KG, and Siemens Enterprise Communications Inc. to license certain ofinstalled our patents, for a one-time payment and/or an ongoing royalty for all future sales through the expiration of the licensed patents with respect to certain current and future IP-encrypted products. We have engaged IPVALUE Management Inc. to assist ussoftware products in commercializing our portfolio of patents on securing real-time communications over the Internet. Under the multi-year agreement, IPVALUE will originate and assist us with negotiating transactions related to patent licensing worldwide with respect to certain third parties.
Our employees include the core development team behind our patent portfolio, technology and software. This team has worked together for over ten years and is the same team that invented and developed this technology while working at Leidos, is a FORTUNE 500® scientific, engineering and technology applications company that uses its deep domain knowledge to solve problems of vital importance to the nation and the world, in national security, energy and the environment, critical infrastructure and health. The team has continued its research and development work started at Leidos, and expanded the set of patents we acquired in 2006 from Leidos, into a larger portfolio with approximately 185 U.S. and Foreign patents, patent validations and pending applications. This portfolio now serves as the foundation of our licensing business and planned service offerings and is expected to generate the majority of
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our future revenue in license fees and royalties.their corporate networks. We intend to continue our research and development efforts to further strengthen and expand our patent portfolio. See – Operations – Research and Development Expenses for a description of our research and development expenses for the past three fiscal years discussed below.
We continue using an outsourced and leveraged model to maintain efficiency and manage costs as we grow our licensing business by, for example, offering incentives to early licensing targets or asserting our rights for use of our patents. We also intend to expand our design pilot in participationcustomer base with leading 4G/LTE companies (domain infrastructure providers, chipset manufacturers, service providers,targeted promotions and others)direct sales initiatives to large enterprise and build our secure domain name registry.
Developments ingovernmental organizations.
Litigation
outcomes of which are inherently uncertain. We have eleven intellectual property infringement lawsuits pending in the United States District Court for the Eastern District of Texas, Tyler Division, and United States Court of Appeals for the Federal Circuit (“USCAFC”).
VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED)
On March 30, 2015, the United States Court for the Eastern District of Texas, Tyler Division, issued an order finding substantial overlap between the remanded portions of the Civil Action Case 6:10-CV-00417-LED (VirnetX vs. Cisco et. al.),record any potential gains related to legal proceedings only after cash is collected. We record a liability when it is probable that a loss has been incurred and the ongoing Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case. The jury trial in this case was held on January 25, 2016. On February 4, 2016, a jury in the United States Court for the Eastern District of Texas, Tyler Division, awarded us $625.6 million in a verdict against Apple Inc. for infringing four of our US patents, marking it the second time a federal jury has found Apple liable for infringing VirnetX’s patented technology. The verdict includes royalties awarded to us based on an earlier patent infringement finding (Case 6:10-CV-00417-LED) against Apple. The jury found that Apple’s modified VPN On-Demand, iMessage and FaceTime services infringed VirnetX’s patents and that Apple’s infringement was willful. In addition to determining the royalty owed by Apple for its prior infringement, this verdict also includes an award based on the jury’s finding that Apple’s modified VPN On Demand, iMessage and FaceTime services have continued to infringe VirnetX’s patents. The post-trial hearing was held on May 25, 2016 in the United States Court for the Eastern District of Texas, Texarkana Division. On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases (Case No. 6:10-cv-417, Docket No. 878 (“Apple I case”); Case No. 6:12-cv-855, Docket No. 220 (“Apple II case”)), ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both casesamount is bifurcated and that the Apple II case will be retried after Apple I case. Events and developments subsequent to the order from the court are described to support Apple I and Apple II matters.
VirnetX Inc. v. Cisco Systems, Inc. et al. (Case 6:10-CV-00417-LED) (“Apple I”)
On August 11, 2010, we initiated a lawsuit by filing a complaint against Aastra USA. Inc. (“Aastra”), Apple, Cisco Systems, Inc. (“Cisco”), and NEC Corporation (“NEC”) in the United States District Court for the Eastern District of Texas, Tyler Division, pursuant to which we alleged that these parties infringe on certain of our patents. We sought damages and injunctive relief. Aastra and NEC agreed to sign license agreements with us and we agreed to drop all the accusations of infringement against them. At the pre-trial hearing, the judge decided to conduct separate jury trial for each defendant, and try only the case against Apple on the scheduled trial date. The jury trial of our case against Cisco was held on March 4, 2013. The jury in our case against Cisco came back with a verdict of non-infringement also determined that all our patents-in-suit patents are not invalid. Our motions for a new trial and Cisco’s infringement of certain VirnetX patents were denied and the case against Cisco was closed.
The jury trial of our case against Apple was held on October 31, 2012. On November 6, 2012, a jury in the United States Court for the Eastern District of Texas, Tyler Division, awarded us over $368 million in a verdict against Apple for infringing four of our patents. On February 26, 2013, the court issued its Memorandum Opinion and Order regarding post-trial motions resulting from the prior jury verdict denying Apple’s motion to reduce the damages awarded by the jury for past infringement. The Court further denied Apple’s request for a new trial on the liability and damages portions of the verdict and granted our motions for pre-judgment interest, post-judgment interest, and post-verdict damages to date. The Court ordered that Apple pay $34 thousand in daily interest up to final judgment
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and $330 thousand in daily damages for infringement up to final judgment for certain Apple devices included in the verdict. The Court denied our request for a permanent injunction and severed the future infringement portion into its own separate proceedings under Case 6:13-CV-00211-LED.
On July 3, 2013, Apple filed an appeal of the judgment dated February 27, 2013 and order dated June 4, 2013 denying Apple’s motion to alter or amend the judgment to the USCAFC. On September 16, 2014, USCAFC issued their opinion, affirming the jury’s finding that all 4 of our patents are valid, confirming the jury’s finding of infringement of VPN on Demand under many of the asserted claims of our ‘135 and ‘151 patents, and confirming the district’s court’s decision to allow evidence concerning our licenses and royalty rates in connection withreasonably estimable, the determination of damages. In its opinion, the USCAFC also vacated the jury’s damages awardwhich requires significant judgment. Resolution of legal matters in a manner inconsistent with management’s expectations could have a material impact on our financial condition and the district court’s claim construction with respect to parts of our ‘504 and ‘211 patents and remanded the damages award and determination of infringement with respect to FaceTime –for further proceedings consistent with its opinion. On October 16, 2014, we filed a petition with the USCAFC, requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decision concerning VirnetX’s litigation against Apple Inc. On December 16, 2014, USCAFC denied our petition requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decision and remanded the case back to the Eastern District of Texas, Tyler Division, for further proceedings consistent with its opinion. On February 25, 2015, USCAFC granted Apple’s motions to lift stay of proceedings and vacate Case 6:13-CV-00211-LED. On March 30, 2015, the court issued an order finding substantial overlap between the remanded portions of this case and the ongoing Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case.
On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases Apple I case and Apple II case, ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II will be retried after Apple I case. The jury trial in this case was held on September 26, 2016. On September 30, 2016, a Juryoperating results. See Note 12 in the United States Court for the Eastern District of Texas, Tyler Division, in the case VirnetX Inc., et al. v. Apple Inc., No. Apple I, has awarded VirnetX $302.4 million in a verdict against Apple for infringing four VirnetX patents, marking the third time a federal jury has found Apple liable for infringing VirnetX’s patented technology.
The verdict includes royalties awarded to VirnetX, for unresolved issues in the Apple I case, remanded back from the USCAFC, related to (1) damages owed to VirnetX for infringement by Apple’s original VPN-on-Demand (VOD) and (2) the alleged infringement by Apple’s original FaceTime product, under the new claim construction of “secure communication link” pertaining to the ’504 and ’211 patents by the USCAFC, and the damages associated with that infringement. The hearing on all the post-trial motions was held on November 22, 2016.
On September 29, 2017, the United States District Court for the Eastern District of Texas, Tyler Division, entered Final Judgement and issued its Memorandum Opinion and Order regarding post-trial motions resulting from the prior $302.4 million jury verdict for VirnetX in the Apple I case.
In the Order, the Court denied all of Apple’s post-trial motions including motion for judgment as a matter of law of non-infringement, motion for judgment as a matter of law on damages, motion for a new trial on infringement, and motion for a new trial on damages. The Court granted all VirnetX’s post-trial motions including motion for willful infringement and enhanced the royalty rate during the willfulness period by 50 percent, from $1.20 to $1.80 per device, awarding VirnetX, enhanced damages in the amount of $41.3 million against Apple thereby, granting VirnetX a total sum of $343.7 million in pre-interest damages. The Court also awarded costs, certain attorneys’ fees, and prejudgment interest to VirnetX, and directed the parties to meet and confer regarding these amounts. On October 13, 2017, having met and conferred and having reached agreements on all amounts, parties jointly filed a motion asking the Court to grant VirnetX an additional sum in the amount of $96 million in agreed Bill of Costs, Attorneys’ Fees, and Prejudgment Interest. The Final Judgement is only subject to appeal stemming from new issues unresolved in the Apple I case, remanded back from the United States Court of Appeals for the Federal Circuit. The total Final Judgement amount including Jury Verdict, Willful Infringement, Interest, Costs and Attorney Fees is $439.7 million.
On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on September 29, 2017 to the United States Court of Appeals for the Federal Circuit. This case has now been closed and events and developments subsequent to the notice of appeal are described below under VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case).
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VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”)
On November 6, 2012, we filed a complaint against Apple in the United States District Court for the Eastern District of Texas, Tyler Division for willfully infringing four of our patents, U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151, and seeking both an unspecified amount of damages and injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and the latest Macintosh computers. Due to their release dates, these products were not included in the previous lawsuit that concluded with a Jury verdict on November 6, 2012 that was subsequently upheld by the United States District Court for the Eastern District of Texas, Tyler Division, on February 26, 2013. On July 1, 2013, we filed a consolidated and amended complaint to include U.S. Patent No. 8,051,181 and consolidate Civil Action No. 6:11-cv-00563-LED. On August 27, 2013, we filed an amended complaint including allegations of willful infringement related to U.S. Patent No. 8,504,697 seeking both damages and injunctive relief. The Markman hearing in this case was held on May 20, 2014 and on August 8, 2014, issued its Markman Order, denying Apple’s motion for summary judgment of indefiniteness, in which Apple alleged that some of the disputed claims terms in the patents asserted by us were invalid for indefiniteness. In a separate order, the court granted in part and denied in part our motion for partial summary judgment on Apple’s invalidity counterclaims, precluding Apple from asserting invalidity as a defense against infringement of the claims that were tried before a jury in our prior litigation against Apple (VirnetX vs. Cisco et. al., Case 6:10-CV-00417-LED). The jury trial in this case was scheduled for October 13, 2015. On March 30, 2015, the court issued an order finding substantial overlap between this case and the remanded portions of Case 6:10-CV-00417-LED (VirnetX vs. Cisco et. al.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case. On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases Apple I case and Apple II case, ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II will be retried after Apple I case.
On September 29, 2017, the Court issued an order denying Apple’s Motion to Stay. The Court ordered the parties to meet and confer and file a joint motion with a proposed trial date by October 13, 2017. The parties have met, conferred and filed a joint motion on the proposed trial dates. On November 9, 2017, the court issued its order setting this case for jury selection on April 2, 2018 in Tyler, Texas.
On January 5, 2018, Apple filed a Petition for Writ of Mandamus with the USCAFC requesting the court to stay the upcoming limited retrial of the Apple II pending the USCAFC’s decision in related consolidated appeal VirnetX Inc. v. Apple Inc., Cases 2017-1591. On February 22, 2018, the USCAFC issued its order denying Apple’s Petition for Writ of Mandamus. The Apple II case is proceeding on schedule for jury selection on April 2, 2018 per the district court’s order.
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case)
On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on September 29, 2017 to the United States Court of Appeals for the Federal Circuit.
On January 5, 2018, Apple filed a motion requesting a stay of the briefing schedule in this appeal pending this court’s decision in related consolidated appeal VirnetX Inc. v. Apple Inc., Cases 2017-1591. On January 24, 2018, USCAFC denied Apple’s motion requesting a stay of the briefing schedule and ordered Apple to file its opening brief no later than March 19, 2018.
VirnetX Inc. v. Apple, Inc. (Case 15-1934)
On July 10, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the United States Patent and Trademark Office, Patent Trial and Appeal Board (“PTAB”) in IPR2014-00237 and IPR2014-00238, related to U.S. Patent No. 8,504,697. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on the grounds discussed in IPR2014-00238. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 16-1211)
On September 28, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2014-00403 and IPR2014-00404 and on October 22, 2015 for IPR2014-00481 and IPR2014-00482 involving our U.S. Patent Nos. 7,188,180, and 7,987,274. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on the grounds discussed in IPR2014-00403 and IPR2014-00481. We are currently evaluating our options in this case.
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VirnetX Inc. v. Apple, Inc. (Case 16-1480)
On November 30, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,949 related to U.S. Patent No. 8,051,181. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on certain grounds. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 16-119)
On March 4, 2016, we filed a petition for writ of mandamus with the USCAFC, requesting the USCAFC’s intervention to revoke the PTAB’s decision joining Apple to IPR2015-01046 and IPR2015-01047, related to U.S. Patent Nos. 6,502,135 and 7,490,151. On March 18, 2016, the USCAFC denied the petition without prejudice to us raising the arguments on appeal after the PTAB’s final decisions. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 17-1131)
On October 31, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2015-00810 and IPR2015-00812, on November 9, 2016 for IPR2015-00811, and on November 28, 2016 for IPR2015-00866, IPR2015-00868, IPR2015-00870 and IPR2015-00871 involving our U.S. Patent Nos.8,868,705, 8,850,009, 8,458,341, 8,516,131, and 8,560,705. These appeals have been consolidated. The briefing in these appeals has been concluded; the oral argument were held on March 5, 2018. We are awaiting the courts ruling in this matter.
VirnetX Inc. v. The Mangrove Partners (Case 17-1368)
On December 16, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2015-01046, and on December 20, 2016 for IPR2015-1047, involving our U.S. Patent Nos. 6,502,135, and 7,490,151. These appeals also involve Apple, Inc. and one of them involves Black Swamp IP, LLC. On April 27, 2017, the USCAFC stayed these appeals pending the USCAFC’s en banc decision in Wi-Fi One, LLC v. Broadcom Corporation, No. 2015-1944. The stay was lifted on January 31, 2018, and briefing is now ongoing.
VirnetX Inc. v. Apple Inc., Cisco Systems, Inc. (Case 17-1591)
On February 7, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-partes reexamination nos. 95/001,788, 95/001,789, and 95/001,856 relatednotes to our U.S. Patent Nos. 7,921,211 and 7,418,504. These appeals have been consolidated. The briefing in these appeals has been concluded; the oral arguments have not yet been scheduled.
VirnetX Inc. v. Apple Inc. (Case 17-2490)
On August 23, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2016-00331 and IPR2016-00332 involving our U.S. Patent No. 8,504,696. These appeals have been consolidated. The briefing in these appeals has been concluded; the oral arguments have not yet been scheduled.
In re VirnetX Inc. (Case 17-2593)
On September 22, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2016-00693 and IPR2016-00957 involving our U.S. Patent Nos. 7,418,504 and 7,921,211. These appeals have been consolidated. The briefing in these appeals is ongoing. The entity that initiated the IPRs, Black Swamp IP, LLC, indicated on October 18, 2017, that it would not participate in the appeals. On November 27, 2017, the United States Patent and Trademark Office indicated that it would intervene in the appeals. On January 19, 2018, the USCAFC stayed these appeals pending the USCAFC’s decision in Case 17-1591.
One orconsolidated financial statements for more potential intellectual property infringement claims may also be available to us against certain other companies who have the resources to defend against any such claims. Although we believe these potential claims are worth pursuing, commencing a lawsuit can be expensive and time-consuming, and there is no assurance that we will prevail on such potential claims. In addition, bringing a lawsuit may lead to potential counterclaims which may preclude our ability to commercialize our initial products, which are currently in development. Currently, we are not a party to any other pending legal proceedings, and are not aware of any proceeding threatened or contemplated against us by any governmental authority or other party.
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Commitments and Related Party Transactions
increasing annually for a total commitment of approximately $7,500.
and Estimates
Basis of Consolidation
The consolidated financial statements include the accounts of VirnetX Holding Corporation and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
The preparation of
Investments
Investments classified as available-for-sale are recorded at fair market value. Unrealized gains and losses are reported as other comprehensive income. Realized gains and losses are recorded in income in the basis for making judgments aboutperiod they are realized using specific identification of each security's cost basis. We invest our excess cash primarily in highly liquid debt instruments including corporate, government and federal agency securities, with contractual maturities less than two years. By policy, we limit the carrying values of assets and liabilities.
Revenue Recognition (see New Accounting Pronouncements - ASU No. 2014-09, Revenue from Contracts with Customers)
We derive our revenue from patent licensing. The timing and amount of revenue recognized from each licensee depends upon a variety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations. Such agreements may be complex and include multiple elements. These agreements may include, without limitation, elements relatedcredit exposure to the settlement of past patent infringement liabilities, up-front and non-refundable license fees for the use of patents, patent licensing royalties on covered products sold by licensees, and the compensation structure and ownership of intellectual property rights associated with contractual technology development arrangements. Licensing agreements are accounted for under the Financial Accounting Standards Board (“FASB”) revenue recognition guidance, “Revenue Arrangements with Multiple Deliverables.” This guidance requires consideration to be allocated to each element of an agreement that has stand-alone value using the relative fair value method. In other circumstances, such as those agreements involving consideration for past and expected future patent royalty obligations, after consideration of the particular facts and circumstances, the appropriate recording of revenue between periods may require the use of judgment. In all cases, revenue is only recognized after all the following criteria are met: (1) written agreements have been executed; (2) delivery of technology or intellectual property rights has occurred or services have been rendered; (3) fees are fixed or determinable; and (4) collectability of fees is reasonably assured.any one issuer.
Patent License Agreements: Upon signing a patent license agreement, including licenses entered upon settlement of litigation, we provide the licensee permission to use our patented technology in specific applications. We account for
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patent license agreements in accordance with the guidance for revenue recognition for arrangements with multiple deliverables, with amounts allocated to each element based on their fair values. We have elected to utilize the leased-based modelinvestment measurement alternative for revenue recognition with revenue being recognized over the expected period of benefit to the licensee. Underother investments without readily determinable fair values. During 2023, we invested $2,000 in L2 Holdings LLC and $500 in OP Media Inc. These investments are carried at our patent license agreements,initial cost less any impairment, because we do not have the ability to exercise significant influence over operating and financial matters. For these investments, we adjust the carrying value for any purchases or expect to typically receive one or a combinationsales of our ownership interests. Periodically, we evaluate these investments for impairment. If we identify an impairment, we reduce the following forms of payment as consideration for permitting our licensees to use our patented inventions in specific applications and products:
Deferred revenue
In August 2013, we began receiving annual payments on a contract that required payment to us over 4 years of $10,000 (“August 2013 Contract Settlement”). From the inception of that license to December 31, 2017, we received cash totaling $10,000, all of which is non-refundable. We recognized $1,500, $1,500 and $1,500 of revenue related to the August 2013 Contract Settlement during the years ended December 31, 2017, 2016 and 2015, respectively.
Activity under the August 2013 Contract Settlement was as follows (in thousands):
2017 | 2016 | 2015 | |||||||
Deferred Revenue, beginning of year | $ | 4,000 | $ | 3,000 | $ | 2,000 | |||
Payment received | — | 2,500 | 2,500 | ||||||
Less: Amount amortized as revenue | 1,500 | 1,500 | 1,500 | ||||||
Deferred Revenue, end of year | $ | 2,500 | $ | 4,000 | $ | 3,000 |
Royalty Expense
Royalty expensecarrying value for the years ended December 31, 2017, 2016 and 2015 was $0, $884 and $5,265, respectively, and wasimpairment loss with a result of our royalty agreement with Leidos. The agreement provides for revenue sharing and legal
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reimbursements relatedcharge to attorney time and expenses incurred by Leidos during discovery and other aspects of litigation involving the defense of our patents which have been resolved.
Earnings Per Share
Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. During the years ended 2017, 2016 and 2015 we incurred losses. Therefore, the effects of any common stock equivalent were anti-dilutive during those periods.
Concentration of Credit Risk and Other Risks and Uncertainties
Our cash and cash equivalents are primarily maintained at two major financial institutions in the United States. A portion of those balances are insured by the Federal Deposit Insurance Corporation. During the year ended December 31, 2017, and 2016 we had, at times, funds which were uninsured. We do not believe that we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships with major financial institutions.earnings. We have not experiencedidentified any losses on our depositsimpairment as of cash and cash equivalents.
Derivative Instruments
Our Series I Warrants contained an anti-dilution provision which prevented them from being considered indexed to our stock. As a result, the warrants were required to be accounted for as derivative instruments during 2015. The remaining balance of Series 1 Warrants expired during the year ended December 31, 2015.2023.
We recognize derivative instruments as either assets or liabilities on the accompanying Consolidated Balance Sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives in the accompanying Consolidated Statements of Operations.
Impairment of Long-Lived Assets
We identify and record impairment losses on long-lived assets used in operations when events and changes in circumstances indicate that the carrying amount of an asset might not be recoverable, but not less than annually. Recoverability is measured by comparison of the anticipated future net undiscounted cash flows to the related assets’ carrying value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset.
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against our net deferred income tax assets, we consider all available evidence, both positive and negative. Consistent with our policy, and because of our history of operating losses, we do not currently recognize the benefit of all of our deferred tax assets, including tax loss carry forwards, that may be used to offset future taxable income. We continually assess our ability to generate sufficient taxable income during future periods in which our deferred tax assets may be realized. If and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance if any, as an income tax benefit in our statements of operations.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”). The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate federal tax rate from a maximum of 35% to a 21% rate. The rate reduction will be taking effect on January 1, 2018. Therefore, we applied the tax rate of 21% to the ending balance of federal deferred tax assets, but because we provided a full valuation allowance against our net deferred tax assets, no tax impact is recognized due to the tax rate change.
The Act changes the worldwide territorial tax system. Therefore, the deemed repatriation tax applies to undistributed earnings of certain non-U.S. subsidiaries. The company has no deemed repatriation tax liability because its foreign subsidiary’s accumulated earnings are negative. We also assess the tax impact of the Act for 2018 and future years and do not believe there is a need to change our valuation allowance position as of December 31, 2017.
Stock-based Compensation
We account for stock-based compensation using the fair value recognition method. We recognize these compensation costs net of the applicable forfeiture rate and recognize the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally based the option vesting term of 4 years. Beginning January 1, 2017, we discontinued estimating forfeitures for time-based awards upon adoption of ASU No. 2016-09 – “Compensation – Stock Compensation” discussed below in New Accounting Pronouncements.
In addition, we record stock and options granted to non-employees at fair value of the consideration received or the fair value of the equity investments issued as they vest over the performance period.
We apply fair value accounting to all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis.
Level 1 – Quotedunadjusted quoted prices in active markets for identical assets or liabilities.
liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Level 2 – Observablemeasurements utilize either directly or indirectly observable inputs in markets other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
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Our financial instruments are stated at amounts that equal, or are intended to approximate, fair value. When we approximateestimate fair value, we utilize market data or assumptions that we believe market participants would use in pricing the financial instrument, including assumptions about risk and inputs to the valuation technique. We use quoted valuation techniques, primarily the income and market approach, that maximizewhich maximizes the use of observable inputs and minimize the use of unobservable inputs for recurring fair value measurements.
New Accounting Pronouncements
In June 2016,
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”), which simplified certain aspectsrequisite service period of the accountingaward, which is generally a vesting term of 4 years. We recognize forfeitures, if any, when they occur. In addition, we record stock-based compensation expense for share-based payment transactions, including income taxes, classificationawards granted to non-employees at fair value of awards and classificationthe consideration received or the fair value of the equity instruments issued, as they vest, over the performance period. See Note 6 in the statement of cash flows. We adopted this ASU in 2017 with the following affects:
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We are evaluating the impact this guidance will have on our financial position and statement of operations.
In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) “ASU 2014-09”. ASU 2014-09 was subsequently amended by ASU No. 2016-10 and 2016-12. As amended, Topic 606 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments create a new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For a public entity, the amendments to ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We will adopt the new revenue standards in our first quarter of 2018 utilizing the modified retrospective transition method. We expect the adoption of the standard to result in an approximate $2,500 increase in accumulated deficit and a $2,500 decrease in deferred revenue in our consolidated balance sheet. The new revenue standards are not expected to have a material impact on the amount and timing of revenue recognized in our consolidated financial statements.
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Results of Operations (all amounts in this section are expressed in thousands)
2017 | 2016 | 2015 | |||||||
Revenue | $ | 1,547 | $ | 1,550 | $ | 1,555 |
2023 | 2022 | |||||||
Revenue | $ | 7 | $ | 48 |
In addition to the settlement discussed above, during 2017, 2016 and 2015 we recognized royalty revenue as part of license agreements entered into with customers during the patent infringement actions (see Note 14 “Litigation”). These revenues relate to payment for use of our patented technology prior to the signing of a license agreement, and royalty payments after the execution of the license agreements. No amounts were allocable to settlement fees, expense reimbursement, damages or any other amounts other than historical and future sales as no such amounts were requested or received.
Mitel.
2023 | 2022 | |||||||
Licensing costs | $ | — | $ | (4 | ) |
2017 | 2016 | 2015 | |||||||
Research and Development | $ | 2,674 | $ | 2,499 | $ | 2,277 |
2023 | 2022 | |||||||
Research and Development | $ | 9,713 | $ | 6,406 |
Our research and development expenses for the year ended December 31, 2017 was $2,674in 2023 were $9,713 compared to December 31, 2016 of $2,499 and $2,277 for the year ended December 31, 2015.$6,406 in 2022. The increasefluctuation in 20172023 compared to 20162022 was primarily due to the increasechanges in staff, wages andengineering compensation costs, including bonuses. The increase in 2016 compared to 2015 was primarily due to increase in wages and bonuses paid in 2016 compared to 2015.
2017 | 2016 | 2015 | |||||||
Selling, General and Administrative | $ | 16,194 | $ | 26,672 | $ | 23,190 |
2023 | 2022 | |||||||
Selling, General and Administrative | $ | 21,739 | $ | 15,722 |
Our selling, general and administrative expenses for the year ended December 31, 2017 was $16,194in 2023 were $21,739 compared to December 31, 2016 of $26,672 and $23,190 for the year ended December 31, 2015.$15,722 in 2022. The decrease in 2017 was primarily due to a decrease in legal fees, mostly related to cases involving the defense of our patents. The increases in 2016 were primarily due to the increase in legal fees. Legal fees represent approximately 23% of general and administrative expenses for 2017 as compared to 49% for 2016 and 42% for 2015.
Within selling, general and administrative expenses legal fees for the year ended December 31, 2017 were $3,657 comparedwas primarily due to the year ended December 31, 2016 of $13,002outside services and $9,638 for the year ended December 31, 2015.
Also included in selling, generaladditional compensation costs, including bonuses.
Loss on change in value of derivative liability
2017 | 2016 | 2015 | |||||||
Loss on change in value of derivative liability | $ | — | $ | — | $ | (117 | ) |
Our non-cash loss related to the periodic revaluation of our Series I Warrants liability for the year ended December 31, 2015 was $117. All outstanding Series 1 Warrants expired in March 2015.
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Other Income, and Expenses
2017 | 2016 | 2015 | |||||||
Interest and Other Income | $ | 46 | $ | 69 | $ | 68 |
2023 | 2022 | |||||||
Interest and Other Income | $ | 3,495 | $ | 1,848 |
$1,848 in 2022, due to higher interest rates.
Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||
United States federal statutory rate | 35.00 | % | 35.00 | % | 35.00 | % | |||
State taxes, net of federal benefit | (0.01 | )% | (0.31 | )% | (0.04 | )% | |||
Valuation allowance | (35.94 | )% | (35.43 | )% | (33.36 | )% | |||
Stock options | — | — | (1.62 | )% | |||||
Prior year adjustment | — | (0.06 | )% | 0.03 | % | ||||
R&D Credit | 1.43 | % | 0.66 | % | 0.38 | % | |||
Warrants | — | — | (0.14 | )% | |||||
Other | (0.50 | )% | (0.33 | )% | (0.29 | )% | |||
Effective income tax rate | (0.02 | )% | (0.47 | )% | (0.04 | )% |
In 2017, 2016 United States federal statutory rate 21.00 % 21.00 % State taxes, net of federal benefit (0.01 )% (0.55 )% Valuation allowance (20.31 )% (91.21 )% Stock based compensation (0.58 )% (9.44 )% R&D Credit 2.20 % 1.22 % Other (2.03 )% (0.29 )% Effective income tax rate 0.28 % (79.27 )%
expiring options.
For the year ended
2022. We expect that our cash and cash equivalents and short-term investments as of December 31, 2017, the $6,821 in proceeds subsequent to December 31, 2017, from sales of our common shares under the ATM, as well as the possibility of future sales of common shares under the ATM and the universal shelf registration statement, described below,2023, will be sufficient to fund our current level of selling, general and administration costs including legal expenses and provide related working capital for the foreseeable future. Over the longer term, we expect to derive the majority of our future revenue from license fees and royalties associated with our patent portfolio, technology, software and secure domain name registry in the United States and other markets around the world.
Universal Shelf Registration and ATM Offering
In August 2015, we filed a universal shelf registration statement with the SEC enabling us to offer and sell from time to time up to $100 million of equity, debt or other types of securities. We also entered into an at-the-market (“ATM”) equity offering sales agreement with Cowen & Company, LLC in August 2015, under which we may offer and sell shares of our common stock having an aggregate value of up to $35 million. We have and expect to use proceeds from this offering for GABRIEL product development and marketing, and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products, technologies or businesses. As of December 31, 2017, common stock with an aggregate value of up to $8,041 remains available for offer and sale under the ATM agreement.
We sold 730,444, 4,760,594 and 835,056 shares of common stock under the ATM program during the years ended December 31, 2017, 2016 and 2015, respectively. The average sales price per common share sold during the year ended December 31, 2017 was $5.19 and the aggregate proceeds from the sales totaled $3,790 during the period.
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Sales commissions, fees and other costs associated with the ATM transactions totaled $113 for 2017. The average sales price per common share sold during the year ended December 31, 2016 was $4.16 and the aggregate proceeds from the sales totaled $19,791 during the period. Sales commissions, fees and other costs associated with the ATM transactions totaled $594 for 2016. The average sales price per common share sold during the year ended December 31, 2015 was $4.04 and the aggregate proceeds from the sales totaled $3,378 during the period. Sales commissions, fees and other costs associated with the ATM totaled $101 for 2015. On March 8, 2018, we amended our August 20, 2015 equity offering sales agreement (“Amended Agreement”) with Cowen and Company, LLC (“Cowen”), whereby the maximum aggregate value of the Company’s common stock (“Shares”) we may offer and sell, from time to time, was increased from $35,000,000 to $50,000,000.
Contractual Commitments
Total | 2018 | 2019 | |||||||
Leases | $ | 102 | $ | 56 | $ | 46 | |||
Total | $ | 102 | $ | 56 | $ | 46 |
Off-Balance Sheet Arrangements
As of December 31, 2017, we had no off-balance sheet arrangements.
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
We invest our excess cash primarily in highly liquid debt instruments including corporate, government and federal agency securities. By policy,
Investments in fixed rate securities carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates. Due in part to these factors, our income from investments may decrease in the future.
We considered the historical volatility of short-term interest rates and determined that it was reasonably possible that an adverse change of 100 basis points could be experienced in the near term but would have an immaterial impact in the fair value of our marketable securities as they will be maturing in six months or less.
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33 35 36 37 38 39 40
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America.20172023 and 2016,2022, and the related consolidated statements of income,operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-yeartwo-year period ended December 31, 2017,2023, and the related notes (collectively referred to as the financial statements)“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 20172023 and 2016,2022, and the consolidated results of theirits operations and its cash flows for each of the years in the three-yeartwo-year period ended December 31, 2017,2023, in conformity with accounting principles generally accepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2018, expressed an unqualified opinion. consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
Description of the Matter | Other Investments As discussed in Note 2 to the financial statements, the Company purchased equity interests in two private entities. Given that the entities do not have a readily determinable fair market value, management must consider various factors, including the Company’s ability to apply significant influence to the overall operations of the entities, in determining the classification and the initial value of the Other Investments. In addition, management must also evaluate the investments as of each reporting period to determine if there are any factors that would impact the recognized value of Other Investments. Our determination that the classification and the valuation of Other Investments is a critical audit matter results from the significant judgment by management when assessing the recognition method of the initial purchase as well as the ongoing analysis of the valuation of the investments. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures relating to management’s assessment of the initial recognition and valuation of Other Investments. |
Audit Procedures | Our principal audit procedures related to the Company’s Other Investments included the following: - We evaluated management’s analysis regarding their ability to apply significant influence in the operations of the entities by obtaining information of the ownership percentage of the entities, composition of the respective boards, and any other relevant factors in determining their recognition method being recognized as cost in accordance with Accounting Standards Codification 321. - We also evaluated management’s assessment of impairment factors or any observable transactions from inception of the investments through year-end to determine whether an adjustment in the recognized value was necessary. This includes reviewing management’s internal analysis as well as any publicly available data regarding any factors or events that could impact the entities’ values. |
VIRNETX HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
As of December 31, 2017 | As of December 31, 2016 | |||||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 3,135 | $ | 6,627 | ||
Investments available for sale | 1,453 | 9,249 | ||||
Prepaid expenses and other current assets | 591 | 588 | ||||
Total current assets | 5,179 | 16,464 | ||||
Prepaid expenses, non-current | 1,989 | 2,374 | ||||
Property and equipment, net | 7 | 33 | ||||
Total assets | $ | 7,175 | $ | 18,871 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable and accrued liabilities | $ | 414 | $ | 1,806 | ||
Accrued payroll and related expenses | 2,175 | 1,522 | ||||
Income tax liability | 393 | 396 | ||||
Deferred revenue, current portion | 1,500 | 1,500 | ||||
Total current liabilities | 4,482 | 5,224 | ||||
Deferred revenue, non-current portion | 1,000 | 2,500 | ||||
Other liabilities | 140 | — | ||||
Commitments and contingencies (Note 4) | — | — | ||||
Total liabilities | 5,622 | 7,724 | ||||
Stockholders’ equity: | ||||||
Preferred stock, par value $0.0001 per share Authorized: 10,000,000 shares at December 31, 2017 and December 31, 2016, Issued and outstanding: 0 shares at December 31, 2017 and December 31, 2016 | — | — | ||||
Common stock, par value $0.0001 per share | ||||||
Authorized: 100,000,000 shares at December 31, 2017 and December 31, 2016, Issued and outstanding: 59,051,978 shares and 58,144,888 shares, at December 31, 2017 and December 31, 2016, respectively | 6 | 6 | ||||
Additional paid-in capital | 177,076 | 169,391 | ||||
Accumulated deficit | (175,516 | ) | (158,238 | ) | ||
Accumulated other comprehensive loss | (13 | ) | (12 | ) | ||
Total stockholders’ equity | 1,553 | 11,147 | ||||
Total liabilities and stockholders’ equity | $ | 7,175 | $ | 18,871 |
As of December 31, 2023 | As of December 31, 2022 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 26,289 | $ | 86,561 | ||||
Investments available for sale | 27,258 | 65,462 | ||||||
Accounts receivables | 2 | 14 | ||||||
Prepaid expenses and other current assets | 282 | 224 | ||||||
Total current assets | 53,831 | 152,261 | ||||||
Prepaid expenses and other assets | 4,014 | 703 | ||||||
Property and equipment, net | 67 | 11 | ||||||
Other investments | 2,500 | — | ||||||
Total assets | $ | 60,412 | $ | 152,975 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 440 | $ | 373 | ||||
Accrued payroll and related expenses | 316 | 311 | ||||||
Other liabilities, current | 498 | 47 | ||||||
Total current liabilities | 1,254 | 731 | ||||||
Other liabilities | 3,145 | — | ||||||
Total liabilities | 4,399 | 731 | ||||||
Commitments and contingencies (Note 4) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, par value $0.0001 per share Authorized: 10,000,000 shares at December 31, 2023 and December 31, 2022, Issued and outstanding: 0 shares at December 31, 2023 and December 31, 2022 | — | — | ||||||
Common stock, par value $0.0001 per share | ||||||||
Authorized: 100,000,000 shares at December 31, 2023 and December 31, 2022, Issued and outstanding: 3,618,431 and 3,571,232 shares, at December 31, 2023 and December 31, 2022, respectively | — | — | ||||||
Additional paid-in capital | 242,520 | 239,753 | ||||||
Accumulated deficit | (186,495 | ) | (87,195 | ) | ||||
Accumulated other comprehensive loss | (12 | ) | (314 | ) | ||||
Total stockholders’ equity | 56,013 | 152,244 | ||||||
Total liabilities and stockholders’ equity | $ | 60,412 | $ | 152,975 |
47
VIRNETX HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||
Revenue | $ | 1,547 | $ | 1,550 | $ | 1,555 | |||
Operating expense: | |||||||||
Royalty expense | — | 884 | 5,265 | ||||||
Research and development | 2,674 | 2,499 | 2,277 | ||||||
Selling, general and administrative expenses | 16,194 | 26,672 | 23,190 | ||||||
Total operating expense | 18,868 | 30,055 | 30,732 | ||||||
Loss from operations | (17,321 | ) | (28,505 | ) | (29,177 | ) | |||
Loss on change in value of derivative liability | — | — | (117 | ) | |||||
Interest and other income, net | 46 | 69 | 68 | ||||||
Loss before taxes | (17,275 | ) | (28,436 | ) | (29,226 | ) | |||
Income tax expense | (3 | ) | (133 | ) | (8 | ) | |||
Net loss | $ | (17,278 | ) | $ | (28,569 | ) | $ | (29,234 | ) |
Basic and diluted loss per share | $ | (0.30 | ) | $ | (0.51 | ) | $ | (0.56 | ) |
Weighted average shares outstanding basic and diluted | 58,354,397 | 55,984,825 | 52,384,494 |
VIRNETX HOLDING CORPORATIONCONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(in thousands)
Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||
Net loss | $ | (17,278 | ) | $ | (28,569 | ) | $ | (29,234 | ) |
Other comprehensive gain (loss), net of tax: | |||||||||
Change in equity adjustment from foreign currency translation, net of tax | — | 3 | (1 | ) | |||||
Change in unrealized gain (loss) on investments, net of tax | (1 | ) | 4 | (3 | ) | ||||
Total other comprehensive income (loss), net of tax | (1 | ) | 7 | (4 | ) | ||||
Comprehensive loss | $ | (17,279 | ) | $ | (28,562 | ) | $ | (29,238 | ) |
Year Ended December 31, 2023 | Year Ended December 31, 2022 | |||||||
Revenue | $ | 7 | $ | 48 | ||||
Operating expense: | ||||||||
Licensing costs | — | (4 | ) | |||||
Research and development | 9,713 | 6,406 | ||||||
Selling, general and administrative expenses | 21,739 | 15,722 | ||||||
Total operating expense | 31,452 | 22,124 | ||||||
(Loss) from operations | (31,445 | ) | (22,076 | ) | ||||
Interest and other income, net | 3,495 | 1,848 | ||||||
(Loss) before taxes | (27,950 | ) | (20,228 | ) | ||||
Income tax (provision) benefit | 79 | (16,032 | ) | |||||
Net (loss) | $ | (27,871 | ) | $ | (36,260 | ) | ||
Basic (loss) per share | $ | (7.79 | ) | $ | (10.17 | ) | ||
Diluted (loss) per share | $ | (7.79 | ) | $ | (10.17 | ) | ||
Weighted average shares outstanding basic | 3,579 | 3,565 | ||||||
Weighted average shares outstanding diluted | 3,579 | 3,565 |
48
VirnetX Holding Corporation
VIRNETX HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
COMPREHENSIVE (LOSS)
(in thousands, except share amounts)
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity (Deficit) | ||||||||||||||
Shares | Amount | |||||||||||||||||
Balance at December 31, 2014 | 51,996,701 | $ | 5 | $ | 133,072 | $ | (100,435 | ) | $ | (15 | ) | $ | 32,627 | |||||
Stock issued for cash exercise of warrants at $3.59 per share, net | 120,161 | 431 | 431 | |||||||||||||||
Stock issued for cash at $4.04 per share, net | 835,056 | 3,276 | 3,276 | |||||||||||||||
Advisor warrant issuance | 121 | 121 | ||||||||||||||||
Stock-based compensation | 7,275 | 7,275 | ||||||||||||||||
Exercise of options | 143,100 | 165 | 165 | |||||||||||||||
Stock issued for vested RSUs | 103,817 | |||||||||||||||||
Derivative liability | 438 | 438 | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||
Net Loss | (29,234 | ) | (29,234 | ) | ||||||||||||||
Other comprehensive loss, net of tax | (4 | ) | (4 | ) | ||||||||||||||
Comprehensive loss | (29,238 | ) | ||||||||||||||||
Balance at December 31, 2015 | 53,198,835 | $ | 5 | $ | 144,778 | $ | (129,669 | ) | $ | (19 | ) | $ | 15,095 | |||||
Stock issued for cash at 3.00-$5.05 per share, net | 4,760,594 | 1 | 19,195 | 19,196 | ||||||||||||||
Stock-based compensation | 5,398 | 5,398 | ||||||||||||||||
Exercise of options | 50,357 | 20 | 20 | |||||||||||||||
Stock issued for vested RSUs | 135,102 | |||||||||||||||||
Comprehensive income: | ||||||||||||||||||
Net Loss | (28,569 | ) | (28,569 | ) | ||||||||||||||
Other comprehensive income, net of tax | 7 | 7 | ||||||||||||||||
Comprehensive loss | (28,562 | ) | ||||||||||||||||
Balance at December 31, 2016 | 58,144,888 | $ | 6 | $ | 169,391 | $ | (158,238 | ) | $ | (12 | ) | $ | 11,147 | |||||
Stock issued for cash at $4.00 -$5.69 per share, net | 730,444 | 3,677 | 3,677 | |||||||||||||||
Stock-based compensation | 3,986 | 3,986 | ||||||||||||||||
Exercise of options | 12,500 | 22 | 22 | |||||||||||||||
Stock issued for vested RSUs | 164,146 | |||||||||||||||||
Comprehensive income: | ||||||||||||||||||
Net Loss | (17,278 | ) | (17,278 | ) | ||||||||||||||
Other comprehensive loss, net of tax | (1 | ) | (1 | ) | ||||||||||||||
Comprehensive loss | (17,279 | ) | ||||||||||||||||
Balance at December 31, 2017 | 59,051,978 | $ | 6 | $ | 177,076 | $ | (175,516 | ) | $ | (13 | ) | $ | 1,553 |
Year Ended December 31, 2023 | Year Ended December 31, 2022 | |||||||
Net (loss) | $ | (27,871 | ) | $ | (36,260 | ) | ||
Other comprehensive (loss) income, net of tax: | ||||||||
Change in unrealized (loss) gain on investments, net | 306 | (246 | ) | |||||
Change in foreign currency translation, net | (4 | ) | — | |||||
Total other comprehensive (loss) gain, net of tax | 302 | (246 | ) | |||||
Comprehensive (loss) | $ | (27,569 | ) | $ | (36,506 | ) |
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VIRNETX HOLDING CORPORATIONCONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
STOCKHOLDERS’ EQUITY
(in thousands)
Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||
Cash flows from operating activities: | |||||||||
Net loss | $ | (17,278 | ) | $ | (28,569 | ) | $ | (29,234 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||
Depreciation | 26 | 28 | 26 | ||||||
Amortization of warrant issuance costs | — | 30 | 91 | ||||||
Stock-based compensation | 3,986 | 5,398 | 7,275 | ||||||
Change in value of derivative liability | — | — | 117 | ||||||
Changes in assets and liabilities: | |||||||||
Prepaid expenses and other current assets | (3 | ) | 66 | (2 | ) | ||||
Prepaid expense – Non-current | 385 | 385 | 385 | ||||||
Accounts payable | (1,392 | ) | (477 | ) | (1,044 | ) | |||
Other liabilities | 140 | — | — | ||||||
Accrued payroll and related expenses | 695 | 232 | 1,207 | ||||||
Royalty payable | — | — | (6,100 | ) | |||||
Related-party payable | — | (11 | ) | (70 | ) | ||||
Income tax liability | (3 | ) | (4 | ) | (8 | ) | |||
Deferred revenue | (1,500 | ) | 1,000 | 1,000 | |||||
Net cash used in operating activities | (14,944 | ) | (21,922 | ) | (26,357 | ) | |||
Cash flows from investing activities: | |||||||||
Purchase of property and equipment | — | (13 | ) | (10 | ) | ||||
Purchase of investments | (946 | ) | (10,527 | ) | (10,673 | ) | |||
Proceeds from sale or maturity of investments | 8,741 | 11,240 | 23,287 | ||||||
Net cash provided by investing activities | 7,795 | 700 | 12,604 | ||||||
Cash flows from financing activities: Restate for rule | |||||||||
Proceeds from exercise of options | 22 | 20 | 165 | ||||||
Proceeds from exercise of warrants | — | — | 431 | ||||||
Proceeds from sale of common stock | 3,677 | 19,196 | 3,276 | ||||||
Payments of taxes on cashless exercise of restricted stock units | (42 | ) | (93 | ) | (51 | ) | |||
Net cash provided by financing activities | 3,657 | 19,123 | 3,821 | ||||||
Net decrease in cash and cash equivalents | (3,492 | ) | (2,099 | ) | (9,932 | ) | |||
Cash and cash equivalents, beginning of period | 6,627 | 8,726 | 18,658 | ||||||
Cash and cash equivalents, end of period | $ | 3,135 | $ | 6,627 | $ | 8,726 | |||
Cash paid for income taxes | $ | 5 | $ | 126 | $ | 6 | |||
Non-cash transactions | |||||||||
Fair value of warrants issued for services | $ | — | $ | — | $ | 121 |
Year Ended | ||||||||
December 31, | ||||||||
2023 | 2022 | |||||||
Total shareholders’ equity, beginning balances | $ | 152,244 | $ | 185,449 | ||||
Common stock and additional paid-in capital: | ||||||||
Beginning balances | 239,753 | 236,452 | ||||||
Common stock issued for options/RSUs/RS, net | (11 | ) | (29 | ) | ||||
Stock-based compensation | 2,778 | 3,330 | ||||||
Ending balances | 242,520 | 239,753 | ||||||
Accumulated deficit | ||||||||
Beginning balances | (87,195 | ) | (50,935 | ) | ||||
Net (loss) | (27,871 | ) | (36,260 | ) | ||||
Dividends | (71,429 | ) | — | |||||
Ending balances | (186,495 | ) | (87,195 | ) | ||||
Accumulated other comprehensive loss: | ||||||||
Beginning balances | (314 | ) | (68 | ) | ||||
Change in unrealized investment (loss) gain, net | 306 | (246 | ) | |||||
Change in foreign currency translation, net | (4 | ) | — | |||||
Ending balances | (12 | ) | (314 | ) | ||||
Total shareholders’ equity, ending balances | $ | 56,013 | $ | 152,244 | ||||
Dividends per share | $ | 20 | $ | — |
50
Year Ended December 31, 2023 | Year Ended December 31, 2022 | |||||||
Cash flows from operating activities: | ||||||||
Net (loss) | $ | (27,871 | ) | $ | (36,260 | ) | ||
Adjustments to reconcile net (loss) to net cash from operating activities: | ||||||||
Depreciation | 9 | 7 | ||||||
Stock-based compensation | 2,778 | 3,330 | ||||||
Bad debt | 15 | — | ||||||
Deferred income taxes | — | 16,032 | ||||||
Changes in assets and liabilities: | ||||||||
Prepaid expenses and other current assets | (3,369 | ) | 331 | |||||
Accounts payable and accrued liabilities | 67 | 35 | ||||||
Other liabilities | 3,596 | (54 | ) | |||||
Accrued payroll and related expenses | 5 | 41 | ||||||
Accrued licensing costs | — | (355 | ) | |||||
Accounts receivable | (3 | ) | 3 | |||||
Prepaid income taxes | — | (3 | ) | |||||
Net cash used in operating activities | (24,773 | ) | (16,893 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (65 | ) | — | |||||
Purchase of investments at cost | (2,500 | ) | — | |||||
Purchase of investments | (47,215 | ) | (67,070 | ) | ||||
Proceeds from sale or maturity of investments | 85,721 | 28,535 | ||||||
Net cash provided by (used in) investing activities | 35,941 | (38,535 | ) | |||||
Cash flows from financing activities: | ||||||||
Dividend | (71,429 | ) | — | |||||
Withholding taxes paid on cashless exercise of restricted stock and restricted stock units | (11 | ) | (29 | ) | ||||
Net cash used in financing activities | (71,440 | ) | (29 | ) | ||||
Net (decrease) in cash and cash equivalents | (60,272 | ) | (55,457 | ) | ||||
Cash and cash equivalents, beginning of period | 86,561 | 142,018 | ||||||
Cash and cash equivalents, end of period | $ | 26,289 | $ | 86,561 | ||||
Cash paid for income taxes | $ | — | $ | 2 |
amounts)
applications.
2034.
Directors.
Customers. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our revenue arrangements may consist of multiple-element arrangements, with revenue for each unit of accounting recognized as the product or service is delivered to the customer.
51
The Company actively monitors and obligations. Such agreementsenforces its intellectual property (“IP”) rights, including seeking appropriate compensation from third parties that utilize the Company’s IP without a license. As a result, the Company may, be complex and include multiple elements. These agreements may include, without limitation, elements relatedfrom time to thetime, receive payments as part of a settlement of pastor compensation for a patent infringement liabilities, up-front and non-refundable license fees for the use of patents, patent licensing royalties on covered products sold by licensees, and the compensation structure and ownership of intellectual property rights associated with contractual technology development arrangements. Licensing agreementsdispute. Proceeds received are accounted for under the Financial Accounting Standards Board (“FASB”) revenue recognition guidance, “Revenue Arrangements with Multiple Deliverables.” This guidance requires consideration to be allocated to each element of an agreement that has stand-alone value usingidentified in the relativesettlement or compensation, based on the fair value method. In other circumstances, such as those agreements involving consideration for pastof each element. Generally, settlements and expected future patent royalty obligations, after consideration of the particular facts and circumstances, the appropriate recording of revenue between periodscompensation may require the use of judgment. In all cases, revenue is only recognized after allinclude the following criteriaelements: the value of a license or royalty agreement, cost reimbursement, damages, and interest. Elements identified related to licensing and royalty are met: (1) written agreements have been executed; (2) deliveryrecognized as revenue. Elements identified as reimbursed costs are generally recorded as a reduction to the reported expenses. Elements identified as damages or interest are generally recorded in other income in the condensed consolidated statement of technology or intellectual property rights has occurred or services have been rendered; (3) feesoperations.
Patent License Agreements: Upon signinglicensing costs we incurred in conjunction with a patent license agreement, including licenses entered upon settlementinfringement case.
Deferred Revenue
In August 2013, we began receiving annual payments on a contract that required payment to us over 4 years totaling $10,000 (“August 2013 Contract Settlement”). As of December 31, 2017, we received cash totaling $10,000, all of
52
which is non-refundable. We recognized $1,500, $1,500 and $1,500 of revenue related to the August 2013 Contract Settlement during the years ended December 31, 2017, 2016 and 2015, respectively.
Activity under the August 2013 Contract Settlement was as follows:
2017 | 2016 | 2015 | |||||||
Deferred Revenue, beginning of year | $ | 4,000 | $ | 3,000 | $ | 2,000 | |||
Payment received | — | 2,500 | 2,500 | ||||||
Less: Amount amortized as revenue | 1,500 | 1,500 | 1,500 | ||||||
Deferred Revenue, end of year | $ | 2,500 | $ | 4,000 | $ | 3,000 |
Royalty Expense
Royalty expense for the years ended December 31, 2017, 2016 and 2015 was $0, $884 and $5,265, respectively and was a result of our royalty agreement with Leidos. The agreement provides for revenue sharing and legal reimbursements related to attorney time and expenses incurred by Leidos during discovery and other aspects of litigation matters that have been resolved.
Cash and Cash Equivalents
Prepaid Expenses and Other Current Assets
Prepaid Expense and Other Current Assets at December 31, 2017 includes the current portion of prepaid rent for a facility lease for corporate promotional and marketing purposes. Beginning March 2014, the prepayment totaling $4,000 is being amortized over the 10-year term of the lease. The unamortized non-current portion of the prepayment is included in Prepaid Expenses-Non-current on the consolidated balance sheet.
Property
Property and equipment$500 in OP Media Inc. These investments are statedcarried at historicalour initial cost less accumulated depreciationany impairment, because we do not have the ability to exercise significant influence over operating and amortization. Depreciation and amortization are computed usingfinancial matters. For these investments, we adjust the accelerated and straight-line methods overcarrying value for any purchases or sales of our ownership interests. Periodically, we evaluate these investments for impairment. If we identify an impairment, we reduce the estimated useful livescarrying value for the impairment loss with a charge to earnings. We have not identified any impairment as of the assets, which range from five to seven years. Repair and maintenance costs are charged to expense as incurred.
December 31, 2023.
53
Intangible Assets
54
probability are highly subjective management estimates. Actual results could differ materially from these estimates. We include interest and penalties, if any, in income tax expense. During the years ended December 31, 2017, 2016 and 2015, income tax expense included interest and penalties of $0, $48 and $0, respectively.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”). The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate federal tax rate from a maximum of 35% to a 21% rate. The rate reduction will be taking effect on January 1, 2018. Therefore, we applied the tax rate of 21% to the ending balance of federal deferred tax assets, but because we provided a full valuation allowance against our net deferred tax assets, no tax impact is recognized due to the tax rate change.
The Act changes the worldwide territorial tax system. Therefore, the deemed repatriation tax applies to undistributed earnings of certain non-U.S. subsidiaries. The company has no deemed repatriation tax liability because its foreign subsidiaries accumulated earnings is negative. We also assess the tax impact of the Act for 2018 and future years and do not believe there is a need to change our valuation allowance position as of December 31, 2017.
Derivative Instruments
Our Series I Warrants were accounted for as derivative instruments as a result of an anti-dilution provision which, in accordance with U.S. GAAP, prevented them from being considered indexed to our stock and qualified for an exception to derivative accounting. The balance of our Series I Warrants expired during the year ended December 31, 2015.
We recognize derivative instruments as either assets or liabilities on the accompanying Consolidated Balance Sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives in the accompanying Consolidated Statements of Operations.
any, when they occur. In addition, as required we record stock and optionsstock-based compensation expense for awards granted to non-employees at fair value of the consideration received or the fair value of the equity instruments issued, as they vest, over the performance period.
period (See Note 6 - Stock-Based Compensation).
Reclassifications
Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation.
55
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”), which simplified certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification in the statement of cash flows. We adopted this ASU in 2017 with the following affects:
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We are evaluating the impact this guidance will have on our financial position and statement of operations.
In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) “ASU 2014-09”. ASU 2014-09 was subsequently amended by ASU No. 2016-10 and 2016-12. As amended, Topic 606 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments create a new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For a public entity, the amendments to ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We will adopt the new revenue standards in our first quarter of 2018 utilizing the modified retrospective transition method. We expect the adoption of the standard to result in an approximate $2,500 decrease in accumulated deficit and a $2,500 decrease in deferred revenue in our consolidated balance sheet. The new revenue standards are not expected to have a material impact on the amount and timing of revenue recognized in our consolidated financial statements.
December 31 | ||||||
2017 | 2016 | |||||
Office furniture | $ | 79 | $ | 79 | ||
Computer equipment | 172 | 172 | ||||
Total | 251 | 251 | ||||
Less accumulated depreciation | (244 | ) | (218 | ) | ||
$ | 7 | $ | 33 |
December 31 2023 2022 Office furniture $ 143 $ 79 Computer equipment 92 92 Total 235 171 Less accumulated depreciation (168 ) (160 ) Total property and equipment, net $ 67 $ 11
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Note 4 − Commitments,, Contingencies Contingencies andRelated Party Transactions
During 2017, 2016 and 2015 we leased the use of an aircraft from K2 Investment Fund LLC (“LLC”) for business travel for employees of the Company.our employees. We incurred approximately $1,240, $772$1,097 and $593$1,123 in rental fees (including fees and other reimbursements)reimbursements to the LLC duringin 2023 and 2022, respectively. We pay for the year ended December 31, 2017, 2016Company’s business usage of the aircraft and 2015, respectively.have no right to purchase. Our Chief Executive Officer and Chief Administrative Officer are the managing partners of the LLC and control the equity interests of the LLC. On January 31, 2015, weWe entered into a 12-month non-exclusive leaseagreement with the LLC for use of the plane at a rate of $8 per flight hour, with no minimum usage requirement. The agreement contains other terms and conditions normal in such transactions and can be cancelled by either us or the LLC with 30 days’ notice. The leaseagreement renews on an annual basis unless terminated by the lessor or lessee.either party. Neither party has yet exercised their termination rights.
We have a stock incentive plan for employees
The 2013 Plan will expire in 2023. Options may be granted under the 2013 Plan with an exercise price determined by our Board of Directors, or a duly appointed committee thereof, provided, however, thatequal to the exercise price of an option granted to any employee shall be not less than 100% of the fair market value at the date of grant in the case of ISO or 85% of the fair market value at the date of grant in the case of an NSO. The exercise price of an ISO or NSO granted to one of our Named Executive Officers shall not be less than 100% fair market value of the shares at the date of grant and the exercise price of an ISO granted to a 10% shareholder shall not be less than 110% of the fair market value of the sharesour stock on the date of grant. Stock options granted under the 2013 Plan typically vest over four yearsRSUs and have a 10-year term. All RSUsrestricted stock are considered to be granted at the fair value of our stock on the date of grant because they have no exercise price. The fair value of options, RSUs typically vestand restricted stock are expensed over four years.the vesting periods. All options, RSUs and restricted stock are subject to forfeiture if service terminates prior to the shares vesting. At December 31, 2017,2023, there were 2,928,562225,778 shares available for grant under the 2013A&R Plan.
Options Outstanding | Options Vested and Exercisable | |||||||||||||||||
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | ||||||||||||
$ 0.24- 1.58 | 771,045 | 1.26 | $ | 1.16 | 771,045 | 1.26 | $ | 1.16 | ||||||||||
$ 1.74- 6.95 | 3,113,396 | 8.04 | 4.27 | 1,134,677 | 5.86 | 4.63 | ||||||||||||
$ 14.52- 35.25 | 1,253,625 | 4.71 | 23.16 | 1,223,510 | 4.67 | 23.35 | ||||||||||||
5,138,066 | 6.21 | $ | 8.41 | 3,129,233 | 4.26 | $ | 11.09 |
57
The following tables summarize activity under the Planplan for the indicated periods:
Options | ||||||||||||
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||
Outstanding at December 31, 2014 | 4,489,028 | $ | 9.33 | — | $ | — | ||||||
Options granted | 694,000 | 4.47 | — | — | ||||||||
Options exercised | (143,100 | ) | 1.15 | — | — | |||||||
Options cancelled | (40,000 | ) | 25.61 | — | — | |||||||
Outstanding at December 31, 2015 | 4,999,928 | $ | 8.76 | — | $ | — | ||||||
Options granted | 429,000 | 4.77 | — | — | ||||||||
Options exercised | (50,357 | ) | 0.40 | — | — | |||||||
Outstanding at December 31, 2016 | 5,378,571 | $ | 8.52 | — | $ | — | ||||||
Options granted | 1,613,500 | 4.06 | — | — | ||||||||
Options exercised | (12,500 | ) | 1.74 | — | — | |||||||
Options cancelled | (1,841,505 | ) | 4.71 | — | — | |||||||
Outstanding at December 31, 2017 | 5,138,066 | $ | 8.41 | 6.21 | $ | 2,529 | ||||||
Options exercisable at December 31, 2017 | 3,129,233 | $ | 11.09 | 4.26 | $ | 2,271 |
RSUs | |||||||||
Number of RSUs | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value | |||||||
Outstanding at December 31, 2014 | 310,394 | $ | 19.74 | $ | — | ||||
RSUs granted | 162,665 | 5.57 | — | ||||||
RSUs vested | (113,103 | ) | 20.11 | — | |||||
Outstanding at December 31, 2015 | 359,956 | $ | 13.22 | $ | — | ||||
RSUs granted | 219,331 | 4.75 | — | ||||||
RSUs vested | (155,852 | ) | 15.27 | — | |||||
Outstanding at December 31, 2016 | 423,435 | $ | 8.08 | $ | — | ||||
RSUs granted | 220,664 | 3.83 | — | ||||||
RSUs vested | (174,438 | ) | 10.47 | — | |||||
Outstanding at December 31, 2017 | 469,661 | $ | 5.19 | $ | — |
Options Outstanding | Options Vested and Exercisable | |||||||||||||||||||||||
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | ||||||||||||||||||
$ 10.00 - 31.60 | 41,925 | 8.45 | $ | 28.67 | 17,519 | 8.45 | $ | 28.16 | ||||||||||||||||
$ 34.80 - 139.00 | 275,217 | 4.66 | $ | 90.31 | 252,243 | 4.42 | $ | 90.00 | ||||||||||||||||
$ 290.40 - 308.00 | 12,875 | 0.49 | $ | 304.24 | 12,875 | 0.49 | $ | 304.24 | ||||||||||||||||
330,017 | 4.98 | $ | 90.63 | 282,637 | 4.49 | $ | 95.70 |
Options | ||||||||||||||||
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding, December 31, 2021 | 319,868 | $ | 139.80 | — | $ | — | ||||||||||
Options granted | 40,050 | 29.60 | — | — | ||||||||||||
Options exercised | — | — | — | — | ||||||||||||
Options cancelled | (19,120 | ) | 501.20 | — | — | |||||||||||
Outstanding, December 31, 2022 | 340,798 | $ | 106.60 | — | $ | — | ||||||||||
Options granted | 1,875 | 10.00 | — | — | ||||||||||||
Options exercised | — | — | — | — | ||||||||||||
Options cancelled | (12,656 | ) | 510.21 | — | — | |||||||||||
Outstanding, December 31, 2023 | 330,017 | $ | 90.63 | 4.98 | $ | — | ||||||||||
Options exercisable, December 31, 2023 | 282,637 | $ | 95.70 | 4.49 | $ | — |
RSUs | ||||||||||||
Number of RSUs | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value | ||||||||||
Outstanding, December 31, 2021 | 25,457 | $ | 107.80 | $ | — | |||||||
RSUs granted | 12,918 | 29.20 | — | |||||||||
RSUs vested | (10,770 | ) | 103.00 | — | ||||||||
RSUs cancelled | — | — | — | |||||||||
Outstanding, December 31, 2022 | 27,605 | $ | 73.00 | $ | — | |||||||
RSUs granted | 1,250 | 10.00 | — | |||||||||
RSUs vested | (11,405 | ) | 83.81 | — | ||||||||
RSUs cancelled | — | — | — | |||||||||
Outstanding, December 31, 2023 | 17,450 | $ | 60.81 | $ | — |
Restricted Stock | ||||||||||||
Number of Restricted Stock | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value | ||||||||||
Outstanding, December 31, 2022 | — | $ | — | $ | — | |||||||
Restricted stock granted | 36,927 | 9.12 | — | |||||||||
Restricted stock vested | (3,617 | ) | 9.19 | — | ||||||||
Restricted stock cancelled | (604 | ) | 9.60 | — | ||||||||
Outstanding, December 31, 2023 | 32,706 | $ | 9.11 | $ | — |
Stock-Based Compensation by Type of Award | Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | ||||||
Stock options | $ | 2,446 | $ | 3,436 | $ | 4,939 | |||
RSUs | 1,540 | 1,962 | 2,336 | ||||||
Total stock-based compensation expense | $ | 3,986 | $ | 5,398 | $ | 7,275 |
Stock-Based Compensation by Type of Award | Year Ended December 31, 2023 | Year Ended December 31, 2022 | ||||||
Stock options | $ | 1,960 | $ | 2,303 | ||||
RSUs | 778 | 1,027 | ||||||
Restricted stock | 40 | |||||||
Total stock-based compensation expense | $ | 2,778 | $ | 3,330 |
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As of December 31, 2017,2023, there was $6,086$3,006 of unrecognized stock-based compensation expense expected to be recognizedexpense; $2,025 related to unvested employee stock options, and $1,767 of unrecognized stock-based compensation expense to be recognized$683 related to unvested RSUs.RSUs, and $298 related to unvested restricted stock. These costs are expected to be recognized over a weighted-average period of 3.111.8 years for options, 1.74 years for RSUs, and 2.433.54 years respectively.
for restricted stock.
Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |
Expected stock price volatility | 84.91% | 79.6% | 82% |
Risk-free interest rate | 1.94% | 1.85% | 2.12% |
Expected life term (in years) | 6.08 years | 6.03 years | 6.07 years |
Expected dividends | 0% | 0% | 0% |
Expected stock price volatility 81.39 % 85.39 % Risk-free interest rate 3.9 % 3.09 % Expected life term 5.5 years 6.2 years Expected dividends 0 % 0 %
factors.
anti-dilutive.
Year Ended December 31, | |||||||||
2017 | 2016 | 2015 | |||||||
Net loss | $ | (17,278 | ) | $ | (28,569 | ) | $ | (29,234 | ) |
Basic and diluted weighted average number of shares outstanding | 58,354 | 55,985 | 52,384 | ||||||
Basic and diluted loss per share | $ | (0.30 | ) | $ | (0.51 | ) | $ | (0.56 | ) |
Year Ended December 31, 2023 2022 Net (loss) income $ (27,871 ) $ (36,260 ) Basic weighted average number of shares outstanding 3,579 3,565 Effect of dilutive securities — — Diluted weighted average number of shares outstanding 3,579 3,565 Basic (loss) earnings per share $ (7.79 ) $ (10.17 ) Diluted (loss) earnings per share $ (7.79 ) $ (10.17 )
In August 2015, we filed a universal shelf registration statement with the SEC enabling us to offer and sell from time to time up to $100 million of equity, debt or other types of securities. We also entered into an at-the-market (“ATM”) equity offering sales agreement with Cowen & Company, LLC in August 2015, under which we may offer and sell
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We sold 730,444, 4,760,594 and 835,056purchase of 1,250 shares of common stock under the ATM program during the years ended December 31, 2017, 2016 and 2015 respectively. The average salesat an exercise price per common share sold during the year ended December 31, 2017 was $5.19 and the aggregate proceeds from the sales totaled $3,790 during the period. Sales commissions, fees and other costs associated with the ATM transactions totaled $113 for 2017. The average sales price per common share sold during the year ended December 31, 2016 was $4.16 and the aggregate proceeds from the sales totaled $19,791 during the period. Sales commissions, fees and other costs associated with the ATM transactions totaled $594 for 2016. The average sales price per common share sold during the year ended December 31, 2015 was $4.04 and the aggregate proceeds from the sales totaled $3,378 during the period. Sales commissions, fees and other costs associated with the ATM totaled $101 for 2015 (see Note 15 - Subsequent Events).
Note 9 − Equity Warrants
During the year ended December 31, 2015 we issued warrants (“Advisor Warrants”) for the purchase of 25,000 shares of common stock for $7$115 per share, which expireexercisable on the date of grant, expiring in April 2020.2025. The Advisor Warrants were issued for advisory services provided by a third party. Our Advisor Warrants were recorded atweighted average fair value onat the issuancegrant date and included in Additional Paid in Capital on our Consolidated Balance Sheet. The Advisor Warrants are exercisable by the holder, in whole or in part, until expiration, and may also be net-share-settled. Terms of the warrant agreement include no registration requirements for the underlying common stock and there are no anti-dilution provisions.was $83.20 per warrant. The fair value at issuance of the warrantsgrant date was recorded in Prepaid Expenses and Other Current Assets, and is being amortized overestimated utilizing the twelve-month life of the service contract,Black-Scholes valuation model with the expense included in Selling, Generalfollowing weighted average assumptions (i) dividend yield on our common stock of 0 percent (ii) expected stock price volatility of 97 percent (iii) a risk-free interest rate of 0.27 percent and Administrative Expense in our Consolidated Statements(iv) and expected option term of Operations.
Information about the Advisor Warrants outstanding during the twelve months ended December 31, 2017 follows:
Original Number of Warrants Issued | Exercise Price per Common Share | Exercisable at December 31, 2016 | Became Exercisable | Exercised | Terminated / Cancelled / Expired | Exercisable at December 31, 2017 | Expiration Date |
25,000 | $7.00 | 25,000 | — | — | — | 25,000 | April 2020 |
Issued Exercised Expiration Date 1,250 $ 115 1,250 — — — 1,250 April 30, 2025
Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||
Current: | |||||||||
Federal | $ | — | $ | — | $ | 10 | |||
State | (3 | ) | (133 | ) | (18 | ) | |||
Foreign | — | — | — | ||||||
(3 | ) | (133 | ) | (8 | ) | ||||
Deferred: | |||||||||
Federal | — | — | — | ||||||
State | — | — | — | ||||||
Total income tax provision | $ | (3 | ) | $ | (133 | ) | $ | (8 | ) |
Year Ended December 31, 2023 | Year Ended December 31, 2022 | |||||||
Current: | ||||||||
Federal | $ | — | $ | — | ||||
State | 2 | 3 | ||||||
Foreign | — | — | ||||||
2 | 3 | |||||||
Deferred: | ||||||||
Federal | (79 | ) | 15,920 | |||||
State | (2 | ) | 109 | |||||
(81 | ) | 16,029 | ||||||
Total income tax (benefit) provision | $ | (79 | ) | $ | 16,032 |
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A reconciliation of the United States federal statutory income tax rate to our effective income tax rate is as follows:
Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||
United States federal statutory rate | 35.00 | % | 35.00 | % | 35.00 | % | |||
State taxes, net of federal benefit | (0.01 | )% | (0.31 | )% | (0.04 | )% | |||
Valuation allowance | (35.94 | )% | (35.43 | )% | (33.36 | )% | |||
Stock options | — | — | (1.62 | )% | |||||
Prior year true-up | — | (0.06 | )% | 0.03 | % | ||||
R&D Credit | 1.43 | % | 0.66 | % | 0.38 | % | |||
Warrants | — | — | (0.14 | )% | |||||
Other | (0.50 | )% | (0.33 | )% | (0.29 | )% | |||
Effective income tax rate | (0.02 | )% | (0.47 | )% | (0.04 | )% |
In 2017, 2016
December 31, 2023
December 31, 2022 United States federal statutory rate 21.00 % 21.00 % State taxes, net of federal benefit (0.01 )% (0.55 )% Valuation allowance (20.31 )% (91.21 )% Stock based compensation (0.58 )% (9.44 )% R&D Credit 2.20 % 1.22 % Other (2.03 )% (0.29 )% Effective income tax rate 0.28 % (79.27 )%
As of December 31, 2023 | As of December 31, 2022 | |||||||
Deferred tax assets: | ||||||||
Reserves and accruals | $ | 65 | $ | 147 | ||||
Research and development credits and other credits | 1,110 | 430 | ||||||
Net operating loss carry forward | 15,262 | 11,988 | ||||||
Stock based compensation | 4,360 | 5,018 | ||||||
Other | 2,382 | 970 | ||||||
Total deferred tax assets | $ | 23,179 | $ | 18,553 | ||||
Valuation allowance | (23,179 | ) | (18,553 | ) | ||||
Deferred tax assets after valuation allowance | — | — | ||||||
Total deferred tax liability – depreciation and amortization | — | — | ||||||
Net deferred tax assets | $ | — | $ | — |
Deferred tax assets (liabilities) consist of the following:
Year Ended December 31, 2017 | Year Ended December 31, 2016 | |||||
Deferred tax assets: | ||||||
Reserves and accruals | $ | 963 | $ | 1,063 | ||
State tax | — | 1 | ||||
Research and development credits and other credits | 1,300 | 1,092 | ||||
Net operating loss carry forward | 22,448 | 29,186 | ||||
Stock based compensation | 9,260 | 13,031 | ||||
Other | 54 | 88 | ||||
Total deferred tax assets | 34,025 | 44,461 | ||||
Valuation allowance | (34,025 | ) | (44,455 | ) | ||
Deferred tax assets after valuation allowance | — | 6 | ||||
Deferred tax liability: | ||||||
Depreciation and amortization | — | (6 | ) | |||
Total deferred tax liability | — | (6 | ) | |||
Net deferred tax assets | $ | — | $ | — |
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”). The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate federal tax rate from a maximum of 35% to a 21% rate. The rate reduction will be taking effect on January 1, 2018. Therefore, we applied the tax rate of 21% to the ending balance of federal deferred tax assets, but because we provided a full valuation allowance against our net deferred tax assets, no tax impact is recorded due to the tax rate change.
The Act changes the worldwide territorial tax system. Therefore, the deemed repatriation tax applies to undistributed earnings of certain non-U.S. subsidiaries. The company has no deemed repatriation tax liability because its foreign subsidiary’s accumulated earnings is negative. We also assess the tax impact of the Act for 2018 and future years and do not believe there is a need to change our valuation allowance position as of December 31, 2017.
61
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets at December 31, 2017 will not be fully realizable. Accordingly, management has maintained a full valuation allowance against its net deferred tax assets at December 31, 2017. The net change in the total valuation allowance for the 12 months ended December 31, 2017 was a decrease of $10,430. At December 31, 2017, we had federal and state net operating loss carry-forwards of approximately $87,429 and $98,425, respectively, expiring beginning in 2027 for federal and began expiring in 2016, for state. At December 31, 2017, we had federal research and development credit carry-forwards of approximately $1,300, expiring beginning in 2031.
Internal Revenue Code Section 382 places a limitation (the “Section 382 Limitation”) on the amount of taxable income that can be offset by net operating loss carry forwards after a change in control (generally greater than 50% change in ownership) of a loss corporation. California, the state in which our headquarters was once located, has similar rules. Our capitalization described herein may have resulted in such a change. Generally, after a control change, a loss corporation cannot deduct net operating loss carry forwards generated in years prior to the deemed change of control under IRC Section 382 in excess of the Section 382 Limitation.
We are required to recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. As a result,At December 31, 2023, we have provided contingent reserve under ASC 740-10 of $316 at December 31, 2017, and December 31, 2016. no uncertain tax positions.
which is October 2024.
A reconciliation of beginning and ending amounts of unrecognized tax benefits follows:
Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||
Balance at the beginning of the year | $ | 316 | $ | 316 | $ | 316 | |||
Additions based on tax positions related to the current year | — | — | — | ||||||
Additions for tax positions of prior years | — | — | — | ||||||
Settlements | — | — | — | ||||||
Lapse of applicable statute of limitations | — | — | — | ||||||
Balance at the end of the year | $ | 316 | $ | 316 | $ | 316 |
We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis.
Level 1 – Quotedunadjusted quoted prices in active markets for identical assets or liabilities.
liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Level 2 – Observablemeasurements utilize either directly or indirectly observable inputs in markets other than quoted prices in active markets for identical assets and liabilities, quoted prices for identicalmarkets.
Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that we believe market participants would use in pricing the asset or liability.
The carrying amounts for cashfinancial instrument, including assumptions about risk and cash equivalents, investments in certificates of deposit, accounts payable and accrued expenses approximate their fair values dueinputs to the short periodvaluation technique. We use valuation techniques, primarily the income and market approach, which maximizes the use of time until maturity.
observable inputs and minimize the use of unobservable inputs for recurring fair value measurements.
62
U.S. Agency securities:agency and treasury securities: Fair value measured at the closing price reported on the active market on which the individual securities are traded.
December 31, 2017 | ||||||||||||||||||
Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Investments Available for Sale | |||||||||||||
Cash | $ | 1,972 | $ | — | $ | — | $ | 1,972 | $ | 1,972 | $ | — | ||||||
Level 1: | ||||||||||||||||||
Mutual funds | 616 | — | — | 616 | 616 | |||||||||||||
U.S. agency securities | 2,001 | — | (1 | ) | 2,000 | 547 | 1,453 | |||||||||||
2,617 | — | (1 | ) | 2,616 | 1,163 | 1,453 | ||||||||||||
Total | $ | 4,589 | $ | — | $ | (1 | ) | $ | 4,588 | $ | 3,135 | $ | 1,453 |
December 31, 2023 | ||||||||||||||||||||||||
Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Investments Available for Sale | |||||||||||||||||||
Cash | $ | 1,452 | $ | — | $ | — | $ | 1,452 | $ | 1,452 | $ | — | ||||||||||||
Level 1: | ||||||||||||||||||||||||
Mutual funds | 20,040 | — | — | 20,040 | 20,040 | — | ||||||||||||||||||
U.S. agency and treasury securities | 32,046 | 27 | (18 | ) | 32,055 | 4,797 | 27,258 | |||||||||||||||||
52,086 | 27 | (18 | ) | 52,095 | 24,837 | 27,258 | ||||||||||||||||||
Total | $ | 53,538 | $ | 27 | $ | (18 | ) | $ | 53,547 | $ | 26,289 | $ | 27,258 |
December 31, 2022 | ||||||||||||||||||||||||
Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Investments Available for Sale | |||||||||||||||||||
Cash | $ | 16,949 | $ | — | $ | — | $ | 16,949 | $ | 16,949 | $ | — | ||||||||||||
Level 1: | ||||||||||||||||||||||||
Mutual funds | 66,493 | — | — | 66,493 | 66,493 | — | ||||||||||||||||||
U.S. agency and treasury securities | 68,958 | 9 | (386 | ) | 68,581 | 3,119 | 65,462 | |||||||||||||||||
135,451 | 9 | (386 | ) | 135,074 | 69,612 | 65,462 | ||||||||||||||||||
Total | $ | 152,400 | $ | 9 | $ | (386 | ) | $ | 152,023 | $ | 86,561 | $ | 65,462 |
December 31, 2016 | ||||||||||||||||||
Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Investments Available for Sale | |||||||||||||
Cash | $ | 3,432 | $ | — | $ | — | $ | 3,432 | $ | 3,432 | $ | — | ||||||
Level 1: | ||||||||||||||||||
Mutual funds | 3,195 | — | — | 3,195 | 3,195 | — | ||||||||||||
U.S. government securities | 1,254 | — | — | 1,254 | — | 1,254 | ||||||||||||
U.S. agency securities | 7,996 | 2 | (3 | ) | 7,995 | — | 7,995 | |||||||||||
12,445 | 2 | (3 | ) | 12,444 | 3,195 | 9,249 | ||||||||||||
Total | $ | 15,877 | $ | 2 | $ | (3 | ) | $ | 15,876 | $ | 6,627 | $ | 9,249 |
The maturities of our marketable securitiesinvestments generally range from within one to two years. Actual maturities could differ from contractual maturities due to call or prepayment provisions.
(all dollar amounts in this section are expressed in thousands except for rates per device)
VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED)
On March 30, 2015, the United States Court for the Eastern District of Texas, Tyler Division, issued an order finding substantial overlap between the remanded portions of the Civil Action Case 6:10-CV-00417-LED (VirnetX vs. Cisco et. al.), and the ongoing Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case. The jury trial in this case was held on January 25, 2016. On February 4, 2016, a jury in the United States Court for the Eastern District of Texas, Tyler Division, awarded us $625.6 million in a verdict against Apple Inc. for infringing four of our US patents, marking it the second time a federal jury has found Apple liable for infringing VirnetX’s patented technology. The verdict includes royalties awarded to us based on an earlier patent infringement finding (Case 6:10-CV-00417-LED) against Apple. The jury found that Apple’s modified VPN On-Demand, iMessage and FaceTime services infringed VirnetX’s patents and that Apple’s infringement was willful. In addition to determining the royalty owed by Apple for its prior infringement, this verdict also includes an award based on the jury’s finding that Apple’s modified VPN On Demand, iMessage and FaceTime services have continued to infringe VirnetX’s patents. The post-trial hearing was held on May 25, 2016 in the United States Court for the Eastern District of Texas, Texarkana Division. On July 29, 2016, the court issued a new order, vacating its previous orders
63
consolidating the cases (Case No. 6:10-cv-417, Docket No. 878 (“Apple I case”); Case No. 6:12-cv-855, Docket No. 220 (“Apple II case”)), ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II case will be retried after Apple I case. Events and developments subsequent to the order from the court are described to support Apple I and Apple II matters.
VirnetX Inc. v. Cisco Systems, Inc. et al. (Case 6:10-CV-00417-LED) (“Apple I”)
On August 11, 2010, we initiated a lawsuit by filing a complaint against Aastra USA. Inc. (“Aastra”), Apple, Cisco Systems, Inc. (“Cisco”), and NEC Corporation (“NEC”) in the United States District Court for the Eastern District of Texas, Tyler Division, pursuant to which we alleged that these parties infringe on certain of our patents. We sought damages and injunctive relief. Aastra and NEC agreed to sign license agreements with us and we agreed to drop all the accusations of infringement against them. At the pre-trial hearing, the judge decided to conduct separate jury trial for each defendant, and try only the case against Apple on the scheduled trial date. The jury trial of our case against Cisco was held on March 4, 2013. The jury in our case against Cisco came back with a verdict of non-infringement also determined that all our patents-in-suit patents are not invalid. Our motions for a new trial and Cisco’s infringement of certain VirnetX patents were denied and the case against Cisco was closed.
The jury trial of our case against Apple was held on October 31, 2012. On November 6, 2012, a jury in the United States Court for the Eastern District of Texas, Tyler Division, awarded us over $368 million in a verdict against Apple for infringing four of our patents. On February 26, 2013, the court issued its Memorandum Opinion and Order regarding post-trial motions resulting from the prior jury verdict denying Apple’s motion to reduce the damages awarded by the jury for past infringement. The Court further denied Apple’s request for a new trial on the liability and damages portions of the verdict and granted our motions for pre-judgment interest, post-judgment interest, and post-verdict damages to date. The Court ordered that Apple pay $34 thousand in daily interest up to final judgment and $330 thousand in daily damages for infringement up to final judgment for certain Apple devices included in the verdict. The Court denied our request for a permanent injunction and severed the future infringement portion into its own separate proceedings under Case 6:13-CV-00211-LED.
On July 3, 2013, Apple filed an appeal of the judgment dated February 27, 2013 and order dated June 4, 2013 denying Apple’s motion to alter or amend the judgment to the USCAFC. On September 16, 2014, USCAFC issued their opinion, affirming the jury’s finding that all 4 of our patents are valid, confirming the jury’s finding of infringement of VPN on Demand under many of the asserted claims of our ‘135 and ‘151 patents, and confirming the district’s court’s decision to allow evidence concerning our licenses and royalty rates in connection with the determination of damages. In its opinion, the USCAFC also vacated the jury’s damages award and the district court’s claim construction with respect to parts of our ‘504 and ‘211 patents and remanded the damages award and determination of infringement with respect to FaceTime –for further proceedings consistent with its opinion. On October 16, 2014, we filed a petition with the USCAFC, requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decision concerning VirnetX’s litigation against Apple Inc. On December 16, 2014, USCAFC denied our petition requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decision and remanded the case back to the Eastern District of Texas, Tyler Division, for further proceedings consistent with its opinion. On February 25, 2015, USCAFC granted Apple’s motions to lift stay of proceedings and vacate Case 6:13-CV-00211-LED. On March 30, 2015, the court issued an order finding substantial overlap between the remanded portions of this case and the ongoing Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case.
On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases Apple I case and Apple II case, ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II will be retried after Apple I case. The jury trial in this case was held on September 26, 2016. On September 30, 2016, a Jury in the United States Court for the Eastern District of Texas, Tyler Division, in the case VirnetX Inc., et al. v. Apple Inc., No. Apple I, has awarded VirnetX $302.4 million in a verdict against Apple for infringing four VirnetX patents, marking the third time a federal jury has found Apple liable for infringing VirnetX’s patented technology.
The verdict includes royalties awarded to VirnetX, for unresolved issues in the Apple I case, remanded back from the USCAFC, related to (1) damages owed to VirnetX for infringement by Apple’s original VPN-on-Demand (VOD) and
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(2) the alleged infringement by Apple’s original FaceTime product, under the new claim construction of “secure communication link” pertaining to the ’504 and ’211 patents by the USCAFC, and the damages associated with that infringement. The hearing on all the post-trial motions was held on November 22, 2016.
On September 29, 2017, the United States District Court for the Eastern District of Texas, Tyler Division, entered Final Judgement and issued its Memorandum Opinion and Order regarding post-trial motions resulting from the prior $302.4 million jury verdict for VirnetX in the Apple I case.
In the Order, the Court denied all of Apple’s post-trial motions including motion for judgment as a matter of law of non-infringement, motion for judgment as a matter of law on damages, motion for a new trial on infringement, and motion for a new trial on damages. The Court granted all VirnetX’s post-trial motions including motion for willful infringement and enhanced the royalty rate during the willfulness period by 50 percent, from $1.20 to $1.80 per device, awarding VirnetX, enhanced damages in the amount of $41.3 million against Apple thereby, granting VirnetX a total sum of $343.7 million in pre-interest damages. The Court also awarded costs, certain attorneys’ fees, and prejudgment interest to VirnetX, and directed the parties to meet and confer regarding these amounts. On October 13, 2017, having met and conferred and having reached agreements on all amounts, parties jointly filed a motion asking the Court to grant VirnetX an additional sum in the amount of $96 million in agreed Bill of Costs, Attorneys’ Fees, and Prejudgment Interest. The Final Judgement is only subject to appeal stemming from new issues unresolved in the Apple I case, remanded back from the United States Court of Appeals for the Federal Circuit. The total Final Judgement amount including Jury Verdict, Willful Infringement, Interest, Costs and Attorney Fees is $439.7 million.
On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on September 29, 2017 to the United States Court of Appeals for the Federal Circuit. This case has now been closed and events and developments subsequent to the notice of appeal are described below under VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case).
VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”)
On
On September 29, 2017, the Court issued an order denying Apple’s Motion to Stay. The Court ordered the parties to meet and confer and file a joint motion with a proposed trial date by October 13, 2017. The parties have met, conferred and filed a joint motion on the proposed trial dates. On November 9, 2017, the court issued its order setting this case for jury selection on April 2, 2018 in Tyler, Texas.
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On January 5, 2018,costs. Apple filed a Petition for Writ of Mandamus with the USCAFC requesting the court to stay the upcoming limited retrial of the Apple II pending the USCAFC’s decision in related consolidated appeal VirnetX Inc. v. Apple Inc., Cases 2017-1591. On February 22, 2018, the USCAFC issued its order denying Apple’s Petition for Writ of Mandamus. The Apple II case is proceeding on schedule for jury selection on April 2, 2018 per the district court’s order.
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case)
On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on September 29, 2017 towith the United States Court of Appeals for the Federal Circuit.
Circuit (“USCAFC”) in the Apple II case.
31, 2023, the USCAFC issued its decision vacating the USDC’s judgement in this matter and remanding it back to the USDC with instructions to dismiss the case as moot. On July 14, 2023 the District Court vacated its prior Final Judgment against Apple dated January 6, 2021 and dismissed the case as moot. On May 1, 2023, VirnetX filed a petition for panel rehearing. On June 27, 2023, the petition for panel rehearing was denied, and the mandate issued on June 30, 2023. VirnetX filed a petition for a writ of certiorari with the United States Supreme Court, on September 20, 2023. On February 20, 2024, the Supreme Court denied our petition. We are evaluating all our options in this matter.
(USCAFC Case 20-2271) and VirnetX Inc. v. Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp, LLC (USCAFC Case 20-2272)
VirnetX Inc. v. Apple, Inc. (Case 16-1211)
On September 28, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2014-00403 and IPR2014-00404 and on October 22, 2015 for IPR2014-00481 and IPR2014-00482IPR2016-00062 involving our U.S. Patent Nos. 7,188,180,No. 6,502,135, and 7,987,274. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on the grounds discussed in IPR2014-00403 and IPR2014-00481. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 16-1480)
On November 30, 2015, we filed appeals with the USCAFC, appealingan appeal of the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,949 related toreview proceedings IPR2015-1047, IPR2016-00063, and IPR2016-00167 involving our U.S. Patent No. 8,051,181. The oral arguments in this case were heard on November 7, 2016.7,490,151. On September 25, 2020, the USCAFC issued an order consolidating the two appeals. On December 9, 2016, the USCAFC affirmed the PTAB based on certain grounds. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 16-119)
On March 4, 2016,15, 2020, we filed a petition for writ of mandamus withmotion to vacate the USCAFC, requestingPTAB decisions below and to remand these appeals to the USCAFC’s intervention to revoke the PTAB’s decision joining Apple to IPR2015-01046 and IPR2015-01047, related to U.S. Patent Nos. 6,502,135 and 7,490,151.PTAB. On March 18, 2016,16, 2021, the USCAFC denied the petitionmotion without prejudice to us raising the argumentschallenges made in the motion in our opening brief. Our opening brief was filed on appeal afterJune 7, 2021.
matter.
Hirshfeld (USCAFC Case 17-2593, -2594)
VirnetX Inc. v. The Mangrove Partners (Case 17-1368)
On December 16, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2015-01046, and on December 20, 2016 for IPR2015-1047, involving our U.S. Patent Nos. 6,502,135, and 7,490,151. These appeals also involve Apple, Inc. and onean appeal of them involves Black Swamp IP, LLC. On April 27, 2017, the USCAFC stayed these appeals pending the USCAFC’s en banc decision in Wi-Fi One, LLC v. Broadcom Corporation, No. 2015-1944. The stay was lifted on January 31, 2018, and briefing is now ongoing.
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VirnetX Inc. v. Apple Inc., Cisco Systems, Inc. (Case 17-1591)
On February 7, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-partes reexamination nos. 95/001,788, 95/001,789, and 95/001,856 related toreview proceeding IPR2016-00693 involving our U.S. Patent Nos. 7,921,211No. 7,418,504, and 7,418,504. These appeals have been consolidated. The briefing in these appeals has been concluded; the oral arguments have not yet been scheduled.
VirnetX Inc. v. Apple Inc. (Case 17-2490)
On August 23, 2017, we filed appeals with the USCAFC, appealingan appeal of the invalidity findings by the PTAB in IPR2016-00331 and IPR2016-00332inter-partes review proceeding IPR2016-00957 involving our U.S. Patent No. 8,504,696. These appeals have been consolidated. The briefing in7,921,211. On September 16, 2021, USCAFC issued an order remanding these appeals has been concluded;for the oral arguments have not yet been scheduled.
limited purpose of allowing VirnetX the opportunity to request rehearing of the PTAB’s final written decisions by the Director of the USPTO. The USCAFC retained jurisdiction over the appeals in the meantime. On October 18, 2021, we filed our requests for Director rehearing with the USPTO. On January 7, 2022, our requests for Director rehearing were denied. On January 21, 2022, we informed the USCAFC about the denial of Director rehearing and requested that the court dismiss the appeal involving IPR2016-00957 as moot and vacate the PTAB’s underlying decision. On April 4, 2022, the USCAFC vacated the PTAB’s decision in IPR2016-00957 and remanded Appeal No. 17-2594 with instructions to dismiss. In re the April 4, 2022 order, the USCAFC further set a briefing schedule, in Appeal No. 17-2593. VirnetX filed its opening brief on September 12, 2022. The USPTO filed its response brief on December 20, 2022. VirnetX filed its reply brief on February 14, 2023. On April 18, 2023, VirnetX filed a motion to hold this appeal in abeyance pending the disposition of any petition for rehearing in the No. 20-2271, -2272 appeal, and pending the United States Supreme Court’s disposition of a pending petition for a writ of certiorari in Arthrex, Inc. v. Smith & Nephew, Inc., No. 22-639. That motion was denied on June 1, 2023. On October 20, 2023, the USCAFC issued a decision finding the appeal moot in view of its concurrent decision in USCAFC No. 22-2234. VirnetX sought rehearing, which was denied, and the mandate to close the case was issued on January 12, 2024.
v. Cisco Systems, Inc. (USCAFC Case 19-1671)
inter-partes re-examination proceeding 95/001,714 involving our U.S. Patent No. 7,490,151. The certified list is due to be filed by the USPTO by May 30, 2023, and our opening brief will be due 60 days thereafter. In addition, on April 21, 2023, Cisco filed a cross-appeal. On September 29, 2023, VirnetX filed a motion to remand. That motion was denied without prejudice to VirnetX raising the same arguments in its opening appeal brief in an order dated December 27, 2023, which also set the deadline for VirnetX to file an opening brief for February 5, 2024. VirnetX filed its opening brief on February 5, 2024, and Cisco’s opening/response brief’s is currently due March 18, 2024
Due in 2024 | $ | 494 | ||
Due in 2025 | $ | 946 | ||
Due in 2026 | $ | 927 | ||
Due in 2027 | $ | 954 | ||
Due in 2028 | $ | 983 | ||
Thereafter | $ | 336 | ||
Total undiscounted lease liability | $ | 4,640 | ||
Less: imputed interest | $ | (1,001 | ) | |
Total lease liability | $ | 3,639 |
annual payments each March, beginning in 2025 starting at $600 and increasing annually for a total commitment of approximately $7,500.
First | Second | Third | Fourth | |||||||||
(in thousands except per share) | ||||||||||||
2017 | ||||||||||||
Revenue | $ | 375 | $ | 396 | $ | 375 | $ | 401 | ||||
Loss from operations | $ | (3,906 | ) | $ | (3,811 | ) | $ | (3,562 | ) | $ | (6,042 | ) |
Net loss | $ | (3,894 | ) | $ | (3,798 | ) | $ | (3,552 | ) | $ | (6,034 | ) |
Basic earnings (loss) per common share | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.10 | ) |
Diluted earnings (loss) per common share | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.10 | ) |
First | Second | Third | Fourth | |||||||||
(in thousands except per share) | ||||||||||||
2016 | ||||||||||||
Revenue | $ | 375 | $ | 398 | $ | 375 | $ | 402 | ||||
Loss from operations | $ | (8,618 | ) | $ | (5,353 | ) | $ | (7,287 | ) | $ | (7,247 | ) |
Net loss | $ | (8,610 | ) | $ | (5,337 | ) | $ | (7,387 | ) | $ | (7,235 | ) |
Basic earnings (loss) per common share | $ | (0.16 | ) | $ | (0.10 | ) | $ | (0.13 | ) | $ | (0.12 | ) |
Diluted earnings (loss) per common share | $ | (0.16 | ) | $ | (0.10 | ) | $ | (0.13 | ) | $ | (0.12 | ) |
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Note 15 – Subsequent Event
On March 8, 2018, we amended our August 20, 2015 equity offering sales agreement (“Amended Agreement”) with Cowen and Company, LLC (“Cowen”), whereby the maximum aggregate value of the Company’s common stock (“Shares”) we may offer and sell, from time to time, was increased from $35,000,000 to $50,000,000. The Company intends to use the proceeds of this offering for Gabriel product development and marketing, and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products, technologies or businesses.
Under the Amended Agreement, Cowen may sell Shares in an “at-the-market” offering (“ATM”) as defined in Rule 415 promulgated under the Securities Act of 1933, including sales made directly on the NYSE American, LLC, on any other existing trading market for the Shares, or to or through a market maker. In addition, under the Amended Agreement, Cowen may sell the Shares by any other method permitted by law, including private offerings. Subject to the terms and conditions of the Amended Agreement, Cowen will act as sales agent and use commercially reasonable efforts to sell on our behalf all the shares of common stock requested to be sold by us, consistent with its normal trading and sales practices, on mutually agreed terms between Cowen and us.
Between January 1, 2018 and March 14, 2018, we sold 1,749,185 shares of common stock under the ATM program. The average sales price per common share sold was $4.02 and the aggregate proceeds from the sales totaled $7,032. Sales commissions, fees and other costs associated with the ATM transactions totaled $211.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors andStockholders of VirnetX Holding Corporation
Opinion on Internal Control over Financial Reporting
We have audited VirnetX Holding Corporation’s (the Company’s) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets and the related consolidated statements of income, comprehensive loss, stockholders’ equity, and cash flows of the Company, and our report dated March 16, 2018, expressed an unqualified opinion.
Basis for Opinion
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’s 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
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 its 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 the degree of compliance with the policies or procedures may deteriorate.
/s/ Farber Hass Hurley LLP
Chatsworth, CaliforniaMarch 16, 2018
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial |
Item 9A. | Controls and |
2023.
Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
On March 16, 2018, we sent a letter to PITA acknowledging the termination of the Amended and Restated Revenue Sharing Agreement and the Amended and Restated Gabriel License Agreement with PITA. Although we consider the PITA Agreements terminated as of March 16, 2018, our letter also constituted our (i) notice of termination of the Amended and Restated Revenue Sharing Agreement pursuant to Section 5.2(b) thereof and (ii) notice of termination of the Amended and Restated Gabriel License Agreement pursuant to Section 5.2(b) thereof to PITA.
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PART III
Item 10. | Directors, Executive Officers and Corporate |
Item 11. | Executive |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder |
We have a stock incentive plan for employees
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options and RSUs | Weighted-Average Exercise Price of Outstanding Options and RSUs | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | |||||||||
Equity compensation plans approved by security holders | 347,467 | $ | 89.32 | 225,778 | ||||||||
Equity compensation plans not approved by security holders | — | — | ||||||||||
Total | 347,467 | $ | 89.32 | 225,778 |
Plan Category | 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 | ||||||
Equity compensation plans approved by security holders | 5,632,727 | $ | 8.14 | 2,928,562 | |||||
Equity compensation plans not approved by security holders | — | — | |||||||
Total | 5,632,727 | $ | 8.14 | 2,928,562 |
On February 24, 2017, June 2, 2017 and September 14, 2017 the Compensation Committee granted 1,576,000 options and 195,665 RSU’s to the employees of VirnetX Inc. On June 1, 2017, the Compensation Committee granted 37,500 options and 24,9991,251 RSUs to members of theour Board of Directors of VirnetX, Inc.
Item 13. | Certain Relationships and Related Transactions, and Director |
Item 14. | Principal |
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PART IV
Item 15. | Exhibits and Financial Statement |
(a) | The following documents are filed as part of this Annual Report on Form 10-K |
(1) | Financial Statements: See the Index to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K. |
(2) | Financial Statement Schedule: Financial statement schedules are omitted because they are not applicable, or the required information is shown in the financial statements or notes thereto. All other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or the notes thereto. |
(3) | Exhibits: The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K). |
Exhibit Number | Incorporated by reference herein | ||||
Description | Form | Exhibit No. | Filing Date | File No. | |
Certificate of Incorporation of the Company. | 8-K | 3.1 | 11/01/2007 | 000-26895 | |
By-Laws of the Company. | 8-K | 3.2 | 11/01/2007 | 000-26895 | |
Form of Warrant Agency Agreement by and between the Company and Corporate Stock Transfer, Inc. as Warrant Agent. | S-1/A | 4.1 | 01/16/2009 | 333-153645 | |
Form of Series I Warrant. | 8-K | 4.1 | 09/03/2009 | 001-33852 | |
Specimen Common Stock Certificate. | S-3 | 4.1 | 08/21/2015 | 333-206497 | |
Form of Senior Indenture | S-3 | 4.2 | 08/21/2015 | 333-206497 | |
Form of Subordinated Indenture | S-3 | 4.4 | 08/21/2015 | 333-206497 | |
Form of Indemnification Agreement by and between the Company and each of Kendall Larsen, Robert D. Short III, Gary Feiner, Michael F. Angelo, Thomas M. O’Brien and Richard Nance. | 8-K | 10.3 | 07/12/2007 | 000-26895 | |
2007 Stock Plan, as amended on April 13, 2012. | 10-Q | 10.2 | 05/10/2012 | 001-33852 | |
Amended Form of Stock Option Agreement – 2007 Stock Plan. | 10-Q | 4.5 | 05/10/2011 | 001-33852 | |
Form of Restricted Stock Unit Award Agreement – 2007 Stock Plan. | 10-Q | 10.3 | 05/10/2012 | 001-33852 | |
2013 Equity Incentive Plan. | DEF 14A | Appendix A | 04/12/2013 | 001-33852 | |
Form of Stock Option Agreement – 2013 Equity Incentive Plan. | 10-K | 10.6 | 03/02/2015 | 001-33852 | |
Form of Restricted Stock Unit Agreement – 2013 Equity Incentive Plan. | 10-K | 10.7 | 03/02/2015 | 001-33852 | |
Voting Agreement among the Company and certain of its stockholders, dated as of December 12, 2007. | 10-K | 10.11 | 03/31/2008 | 001-33852 | |
Securities Purchase Agreement, dated as of September 2, 2009, by and between the Company and the Purchasers (as defined therein). | 8-K | 10.1 | 09/03/2009 | 001-33852 | |
Form of Registration Rights Agreement by and between the Company and the Purchasers (as defined therein). | 8-K | 10.2 | 09/03/2009 | 001-33852 |
Exhibit Number | Description | Incorporated by reference herein | ||||
Form | Exhibit No. | Filing Date | File No. | Filed Herewith | ||
3.1 | 8-K | 3.1 | 11/01/2007 | 000-26895 | ||
3.2 | 8-K | 3.1 | 10/25/2023 | 001-33852 | ||
3.3 | 8-K | 3.1 | 1/27/2023 | 001-33852 | ||
4.2 | S-3 | 4.1 | 07/30/2018 | 333-226413 | ||
4.3 | S-3 | 4.2 | 07/30/2018 | 333-226413 | ||
4.4 | S-3 | 4.4 | 07/30/2018 | 333-226413 | ||
4.5 | 10-K | 4.6 | 03/16/2020 | 001-33852 | ||
10.1 | 10-K | 10.1 | 03/18/2019 | 001-33852 | ||
10.2* | 10-Q | 10.2 | 05/10/2012 | 001-33852 | ||
10.3* | 10-Q | 4.5 | 05/10/2011 | 001-33852 | ||
10.4* | 10-Q | 10.3 | 05/10/2012 | 001-33852 | ||
10.5* | DEF 14A | Appendix A | 04/13/2021 | 001-33852 | ||
10.6* | S-8 | 10.1 | 06/15/2023 | 333-272677 | ||
10.7* | 10-K | 10.6 | 03/02/2015 | 001-33852 | ||
10.8* | 10-K | 10.7 | 03/02/2015 | 001-33852 | ||
10.9* | 10-Q | 10.2 | 08/11/2023 | 001-33852 | ||
10.10 | 8-K | 10.4 | 07/12/2007 | 000-26895 | ||
10.11** | 8-K | 10.6 | 07/12/2007 | 000-26895 | ||
10.12 | 8-K | 10.1 | 03/18/2008 | 001-33852 | ||
10.13 | 8-K | 10.5 | 07/12/2007 | 000-26895 | ||
10.14 | 8-K | 10.7 | 07/12/2007 | 000-26895 | ||
10.15 | 8-K | 10.8 | 07/12/2007 | 000-26895 | ||
10.16** | 10-Q/A | 10.1 | 01/31/2011 | 001-33852 | ||
10.17** | 10-K | 10.23 | 03/02/2015 | 001-33852 | ||
10.18* | 10-Q | 10.1 | 11/08/2021 | 001-33852 | ||
10.19* | Offer Letter by and between Darl C. McBride and the Company, dated as of December 22, 2023. | X | ||||
10.20 | 8-K | 10.1 | 03/30/2023 | 001-33852 |
10.21 | 10-Q | 10.2 | 05/15/2023 | 001-33852 | ||
10.22* | Outside Director Compensation Policy, as amended. | X | ||||
21.1 | 10-K | 21.1 | 03/16/2021 | 001-33852 | ||
Consent of Farber Hass Hurley LLP, Independent Registered Public Accounting Firm. | X | |||||
24.1 | Power of Attorney (contained on signature page hereto) | X | ||||
Chief Executive Officer Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act. | X | |||||
Chief Financial Officer Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act. | X | |||||
Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | |||||
Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | |||||
97.1* | Compensation Recovery Policy of the Company as adopted November 8, 2023. | X | ||||
101.INS | XBRL Instance Document | X | ||||
101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | ||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||||
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | X |
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Exhibit Number | Incorporated by reference herein | ||||
Description | Form | Exhibit No. | Filing Date | File No. | |
Form of Underwriting Agreement between VirnetX Holding Corporation and Gilford Securities Incorporated. | S-1/A | 1.1 | 01/16/2009 | 333-153645 | |
Patent License and Assignment Agreement by and between the Company and Leidos, Inc. (formerly Science Applications International Corporation) dated as of August 12, 2005. | 8-K | 10.4 | 07/12/2007 | 000-26895 | |
Amendment No. 1 to Patent License and Assignment Agreement by and between the Company and Leidos, Inc. dated as of November 2, 2006. | 8-K | 10.6 | 07/12/2007 | 000-26895 | |
Amendment No. 2 to Patent License and Assignment Agreement by and between VirnetX, Inc. and Leidos, Inc. dated as of March 12, 2008. | 8-K | 10.1 | 03/18/2008 | 001-33852 | |
Security Agreement by and between the Company and Leidos, Inc. dated as of August 12, 2005. | 8-K | 10.5 | 07/12/2007 | 000-26895 | |
Assignment Agreement between the Company and Leidos, Inc. dated as of December 21, 2006. | 8-K | 10.7 | 07/12/2007 | 000-26895 | |
Professional Services Agreement by and between the Company and Leidos, Inc. dated as of August 12, 2005. | 8-K | 10.8 | 07/12/2007 | 000-26895 | |
Engagement Letter dated June 8, 2009, by and between McKool Smith, a professional corporation, and VirnetX, Inc. | 10-Q | 10.1 | 08/10/2009 | 001-33852 | |
Engagement Letter dated April 15, 2010, by and between McKool Smith, a professional corporation, and VirnetX, Inc. | 10-Q | 10.1 | 05/07/2010 | 001-33852 | |
Settlement and License Agreement, by and between Microsoft Corporation and VirnetX, Inc., dated May 14, 2010. | 10-Q/A | 10.1 | 01/31/2011 | 001-33852 | |
Amended Settlement and License Agreement, by and between Microsoft Corporation and VirnetX, Inc., dated December 17, 2014. | 10-K | 10.23 | 03/02/2015 | 001-33852 | |
Employment Offer Letter from VirnetX, Inc. to Richard H. Nance. | 10-Q | 10.4 | 05/10/2012 | 001-33852 | |
Patent Licensing Representative Agreement, by and between IPValue Management, Inc. and VirnetX, Inc., dated May 8, 2015. | 10-Q | 10.1 | 05/11/2015 | 001-33852 | |
Amended and Restated Revenue Sharing Agreement by and between VirnetX Holding Corporation and Public Intelligence Technology Associates, dated October 18, 2017. | 10-Q | 10.1 | 11/9/2017 | 001-33852 |
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Exhibit Number | Incorporated by reference herein | ||||
Description | Form | Exhibit No. | Filing Date | File No. | |
Amended and Restated Gabriel License Agreement by and between VirnetX Holding Corporation and Public Intelligence Technology Associates, dated October 18, 2017. | 10-Q | 10.2 | 11/9/2017 | 001-33852 | |
Sales Agreement, dated August 20, 2015, by and between VirnetX Holding Corporation and Cowen and Company, LLC. | S-3 | 1.2 | 8/21/2015 | 333-206497 | |
Amendment No. 1 to Sales Agreement, dated March 8, 2018, by and between VirnetX Holding Corporation and Cowen and Company, LLC. | 8-K | 10.2 | 3/9/2018 | 001-33852 | |
Subsidiaries of VirnetX Holding Corporation. | |||||
Consent of Farber Hass Hurley LLP, Independent Registered Public Accounting Firm. | |||||
Power of Attorney (contained on signature page hereto) | |||||
Chief Executive Officer Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act. | |||||
Chief Financial Officer Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act. | |||||
Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||
Chief Financial Officer Certification 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 |
* | Indicates management contract or compensatory plan. |
** | Confidential treatment has been granted by the |
*** | Portions of this |
† | The certifications attached as Exhibit 32.1 and 32.2 that accompany this |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
VirnetX Holding Corporation | ||
By: | /s/ Kendall Larsen | |
Name: Kendall Larsen | ||
Title: Chief Executive Officer and President | ||
Dated: March 15, 2024 |
Dated: March 16, 2018
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POWER OF ATTORNEY
Name | Capacity | Date | ||
/s/Kendall Larsen | Director, Chief Executive Officer and President | March | ||
Kendall Larsen | (Principal Executive Officer) | |||
/s/ Katherine Allanson | Chief Financial Officer | March | ||
(Principal Financial Officer and Principal Accounting Officer) | ||||
/s/Robert D. Short III | Director | March | ||
Robert D. Short III | ||||
/s/Gary Feiner | Director | March | ||
Gary Feiner | ||||
/s/Michael F. Angelo | Director | March | ||
Michael F. Angelo | ||||
/s/Thomas M. O’Brien | Director | March | ||
Thomas M. O’Brien |
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