SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172023.
or
| ☐
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:File Number: 001-33852
VirnetX Holding Corporation
(Exact name of registrant as specified in its charter)
Delaware
| | 77-0390628
|
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number)No.) |
308 Dorla Court, Suite 206 Zephyr Cove, Nevada | | 89448
|
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (775) 548-1785
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:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.0001 per share | VHC | NYSE |
Indicate by check mark whether the Registrant:registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Yes ☒No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth companycompany” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
Emerging growth company ☐ | Non-accelerated filer ☐
| (Do not check if a smaller reporting company) | Smaller reporting company ☐ |
| | | |
| Emerging growth company ☐ ☒ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.Act). Yes ☐ No ☒
The number of71,639,905 shares outstanding of the Registrant’sregistrant’s Common Stock were outstanding as of November 2, 2017, was 58,836,073.August 10, 2023.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have included or incorporated by reference in this Quarterly Report on Form 10-Q (this “Report”), and from time to time we may make statements that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are based upon our current expectations, estimates, assumptions, and beliefs concerning future events and conditions and may discuss, among other things, anticipated future performance (including sales and earnings), products, expected growth, future business plans and costs, the impact of potential and ongoing litigation, the expectation of future stockholder distributions, statements regarding the Company’s efforts and ability to regain compliance with the New York Stock Exchange (“NYSE”) continued listing standard, our beliefs and statements regarding general industry and market conditions and growth rates, as well as general domestic and international economic conditions. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result in,” and similar expressions. Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties, and other factors, many of which are outside our control, which could cause actual results to differ materially from such statements and from our historical results and experience. These risks, uncertainties and other factors include, but are not limited to those described in Item 1A - Risk Factors of this Report and elsewhere in this Report and those described from time to time in our reports filed with the Securities and Exchange Commission (the “SEC”). Readers are cautioned that it is not possible to predict or identify all the risks, uncertainties and other factors that may affect future results and that the risks described herein should not be considered a complete list. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Among others, the forward-looking statements appearing in this Quarterly Report that may not occur include statements that:
In the VirnetX Inc. v. Apple, Inc. (Case Nos. 6:11-cv-00563-RWS, 6:12-cv-00855-RWS) (“Apple II”) litigation, the United States Court of Appeals for the Federal Circuit (the “Federal Circuit”) in November 2019, affirmed-in-part, and reversed-in-part the judgment issued by the United States District Court for the Eastern District of Texas (the “district court”) in the case awarding VirnetX damages of $595.9 million. On October 30, 2020, after a trial in the district court, a jury returned a verdict in favor of VirnetX, awarding VirnetX over $502 million in damages. On January 15, 2021, the district court denied Apple’s motion for judgment as a matter of law and affirmed the jury findings. Apple appealed to the Federal Circuit with regards to the judgement from the district court. On March 31, 2023, the Federal Circuit issued its decision vacating the district court’s judgement in this matter and remanding it back to the district court with instructions to dismiss the case as moot. We make statements in this quarterly report that we are evaluating all of our available options in this matter, including potentially seeking rehearing or certiorari review and this may imply that the March 31, 2023 circuit decision may be reversed; however, we might not pursue options that could lead to reversal, or if we do, we may not be successful. In addition, the patents in this case are being challenged in the United States Patent and Trademark Office. If those challenges are successful, the award in the case may be reduced, eliminated and/or delayed for a lengthy period. The continuation of this litigation is distracting to our management, expensive, and these distractions and expenses may continue.
We have undertaken activities to commercialize our products and patent portfolio in and outside the United States including VirnetX One™, War Room™, VirnetX Matrix™, GABRIEL Connection Technology™ and our Secured Domain Name Registry and Technology. These statements may imply that the worldwide market for our commercialized products is large and will result in significant future licensing or software revenue for us. However, commercialization of products such as ours is subject to significant obstacles and risks and may prevent significant future revenues for us.
EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
VIRNETX HOLDING CORPORATION
| | Page |
| | |
| 1 2 |
| | 1 2 |
| | |
| | 1 2 |
| | 2 3 |
| | 2 4 |
| | 5 |
| | 3 6 |
| | 4 7 |
| | 15 |
| | 16 |
| | 20 |
| | 18 |
| | 20 18 |
| | |
| 21 19 |
| | 21 |
| | 19 |
| | 24 19 |
| | 32 |
| | 34 33 |
| | |
| 35 |
| 36 34 |
PART I — FINANCIAL INFORMATION
ITEM 1-ITEM 1. - FINANCIAL STATEMENTS.
VIRNETX HOLDING CORPORATION
CONDENSED CONSOLIDATED
BALANCE SHEETS
(in thousands, except share amounts)
| | | As of June 30, 2023 | | | As of December 31, 2022 | |
| | As of September 30, 2017 | | | As of December 31, 2016 | | | (unaudited) | | | | |
ASSETS | | (unaudited) | | | | | | | | | | |
Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,647 | | | $ | 6,627 | | | $ | 25,970 | | | $ | 86,561 | |
Investments available for sale | | | 2,665 | | | | 9,249 | | | | 40,259 | | | | 65,462 | |
Accounts receivables | | | | 4 | | | | 14 | |
Prepaid expenses and other current assets | | | 692 | | | | 588 | | | | 480 | | | | 224 | |
Total current assets | | | 5,004 | | | | 16,464 | | | | 66,713 | | | | 152,261 | |
Prepaid expenses, non-current | | | 2,086 | | | | 2,374 | | |
Prepaid expenses and other assets | | | | 526 | | | | 703 | |
Property and equipment, net | | | 12 | | | | 33 | | | | 8 | | | | 11 | |
Total assets | | $ | 7,102 | | | $ | 18,871 | | | $ | 67,247 | | | $ | 152,975 | |
| | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 802 | | | $ | 1,806 | | | $ | 397 | | | $ | 373 | |
Accrued payroll and related expenses | | | 210 | | | | 1,522 | | | | 392 | | | | 311 | |
Income tax liability | | | 394 | | | | 396 | | |
Other current liabilities | | | 140 | | | | — | | |
Deferred revenue, current portion | | | 1,500 | | | | 1,500 | | |
Accrued dividends
| | | | — | | | | — | |
Other liabilities, current | | | | 24 | | | | 47 | |
Total current liabilities | | | 3,046 | | | | 5,224 | | | | 813 | | | | 731 | |
| | | | | | | | | | | | | | | | |
Deferred revenue, non-current portion | | | 1,375 | | | | 2,500 | | |
Other liabilities
| | | | — | | | | — | |
Total liabilities | | | 4,421 | | | | 7,724 | | | | 813 | | | | 731 | |
| | | | | | | | | |
Commitments and contingencies (Note 4) | | | — | | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Stockholders’ equity: | | | | | | | | | | | | | | | | |
Preferred stock, par value $0.0001 per share Authorized: 10,000,000 shares at September 30, 2017 and December 31, 2016, Issued and outstanding: 0 shares at September 30, 2017 and December 31, 2016 | | | — | | | | — | | |
Common stock, par value $0.0001 per share | | | | | | | | | |
Authorized: 100,000,000 shares at September 30, 2017 and December 31, 2016, Issued and outstanding: 58,309,034 shares and 58,144,888 shares, at September 30, 2017 and December 31, 2016, respectively | | | 6 | | | | 6 | | |
Preferred stock, par value $0.0001 per share Authorized: 10,000,000 shares at June 30, 2023 and December 31, 2022; Issued and outstanding: 0 shares at June 30, 2023 and December 31, 2022 | | | | — | | | | — | |
Common stock, par value $0.0001 per share Authorized: 100,000,000 shares at June 30, 2023 and December 31, 2022; Issued and outstanding: 71,639,905 shares at June 30, 2023 and 71,424,650 at December 31, 2022
| | | | 7 | | | | 7 | |
Additional paid-in capital | | | 172,171 | | | | 169,391 | | | | 241,105 | | | | 239,746 | |
Accumulated deficit | | | (169,482 | ) | | | (158,238 | ) | | | (174,470 | ) | | | (87,195 | ) |
Accumulated other comprehensive loss | | | (14 | ) | | | (12 | ) | | | (208 | ) | | | (314 | ) |
Total stockholders’ equity | | | 2,681 | | | | 11,147 | | | | 66,434 | | | | 152,244 | |
Total liabilities and stockholders’ equity | | $ | 7,102 | | | $ | 18,871 | | | $ | 67,247 | | | $ | 152,975 | |
See accompanying notes to condensed consolidated financial statements.
VIRNETX HOLDING CORPORATION
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share amounts)
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, 2017 | | | September 30, 2016 | | | September 30, 2017 | | | September 30, 2016 | |
Revenue | | $ | 375 | | | $ | 375 | | | $ | 1,146 | | | $ | 1,148 | |
Operating expense: | | | | | | | | | | | | | | | | |
Royalty expense | | | — | | | | 884 | | | | — | | | | 884 | |
Research and development | | | 481 | | | | 460 | | | | 1,473 | | | | 1,391 | |
Selling, general and administrative expenses | | | 3,456 | | | | 6,318 | | | | 10,953 | | | | 20,132 | |
Total operating expense | | | 3,937 | | | | 7,662 | | | | 12,426 | | | | 22,407 | |
Loss from operations | | | (3,562 | ) | | | (7,287 | ) | | | (11,280 | ) | | | (21,259 | ) |
Interest and other income, net | | | 9 | | | | 19 | | | | 40 | | | | 50 | |
Loss before taxes | | | (3,553 | ) | | | (7,268 | ) | | | (11,240 | ) | | | (21,209 | ) |
Income tax benefit (expense) | | | 1 | | | | (119 | ) | | | (4 | ) | | | (126 | ) |
Net loss | | $ | (3,552 | ) | | $ | (7,387 | ) | | $ | (11,244 | ) | | $ | (21,335 | ) |
Basic and diluted loss per share | | $ | (0.06 | ) | | $ | (0.13 | ) | | $ | (0.19 | ) | | $ | (0.38 | ) |
Weighted average shares outstanding basic and diluted | | | 58,306 | | | | 56,651 | | | | 58,216 | | | | 55,503 | |
| | Three Months Ended | | | Six Months Ended | |
| | June 30, 2023 | | | June 30, 2022 | | | June 30, 2023 | | | June 30, 2022 | |
Revenue | | $ | 2 | | | $ | 34 | | | $ | 4 | | | $ | 39 | |
Operating expense: | | | | | | | | | | | | | | | | |
Licensing costs | | | — | | | | — | | | | — | | | | (4 | ) |
Research and development | | | 4,755 | | | | 1,255 | | | | 6,123 | | | | 2,482 | |
Selling, general and administrative | | | 7,366 | | | | 3,046 | | | | 11,913 | | | | 6,231 | |
Total operating expense | | | 12,121 | | | | 4,301 | | | | 18,036 | | | | 8,709 | |
(Loss) from operations | | | (12,119 | ) | | | (4,267 | ) | | | (18,032 | ) | | | (8,670 | ) |
Interest and other income, net | | | 740 | | | | 203 | | | | 2,108 | | | | 229 | |
(Loss) before taxes | | | (11,379 | ) | | | (4,064 | ) | | | (15,924 | ) | | | (8,441 | ) |
Income tax (expense) benefit | | | — | | | | (373 | ) | | | 78 | | | | 684 | |
Net (loss) | | $ | (11,379 | ) | | $ | (4,437 | ) | | $ | (15,846 | ) | | $ | (7,757 | ) |
Basic (loss) per share | | $ | (0.16 | ) | | $ | (0.06 | ) | | $ | (0.22 | ) | | $ | (0.11 | ) |
Diluted (loss) per share | | $ | (0.16 | ) | | $ | (0.06 | ) | | $ | (0.22 | ) | | $ | (0.11 | ) |
Weighted average shares outstanding - basic | | | 71,466 | | | | 71,255 | | | | 71,445 | | | | 71,244 | |
Weighted average shares outstanding - diluted | | | 71,466 | | | | 71,255 | | | | 71,445 | | | | 71,244 | |
VIRNETX HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)(in thousands)
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, 2017 | | | September 30, 2016 | | | September 30, 2017 | | | September 30, 2016 | |
Net loss | | $ | (3,552 | ) | | $ | (7,387 | ) | | $ | (11,244 | ) | | $ | (21,335 | ) |
Other comprehensive gain (loss), net of tax: | | | | | | | | | | | | | | | | |
Change in equity adjustment from foreign currency translation, net of tax | | | — | | | | — | | | | — | | | | 4 | |
Change in unrealized gain (loss) on investments, net of tax | | | 3 | | | | (1 | ) | | | (2 | ) | | | 12 | |
| | | 3 | | | | (1 | ) | | | (2 | ) | | | 16 | |
Comprehensive loss | | $ | (3,549 | ) | | $ | (7,388 | ) | | $ | (11,246 | ) | | $ | (21,319 | ) |
See accompanying notes to condensed consolidated financial statements.
VIRNETX HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS COMPREHENSIVE INCOME (LOSS) (Unaudited)
(in thousands)
| | Nine Months Ended September 30, 2017 | | | Nine Months Ended September 30, 2016 | |
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (11,244 | ) | | $ | (21,335 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Depreciation | | | 21 | | | | 22 | |
Amortization of warrant issuance costs | | | — | | | | 30 | |
Stock-based compensation | | | 2,780 | | | | 3,979 | |
Changes in assets and liabilities: | | | | | | | | |
Prepaid expenses and other assets | | | 184 | | | | 238 | |
Accounts payable and accrued liabilities | | | (1,004 | ) | | | 549 | |
Accrued payroll and related expenses | | | (1,270 | ) | | | (1,290 | ) |
Other current liabilities | | | 140 | | | | — | |
Royalty payable | | | — | | | | 884 | |
Related-party payable | | | — | | | | 83 | |
Income tax liability | | | (2 | ) | | | — | |
Deferred revenue | | | (1,125 | ) | | | 1,375 | |
Net cash used in operating activities | | | (11,520 | ) | | | (15,465 | ) |
Cash flows from investing activities: | | | | | | | | |
Purchase of property and equipment | | | — | | | | (14 | ) |
Purchase of investments | | | (756 | ) | | | (7,888 | ) |
Proceeds from sale or maturity of investments | | | 7,338 | | | | 8,615 | |
Net cash provided by investing activities | | | 6,582 | | | | 713 | |
Cash flows from financing activities: | | | | | | | | |
Proceeds from exercise of options | | | — | | | | 20 | |
Proceeds from sale of common stock | | | — | | | | 14,626 | |
Payments of taxes on cashless exercise of restricted stock units | | | (42 | ) | | | (93 | ) |
Net cash (used in) provided by financing activities | | | (42 | ) | | | 14,553 | |
Net decrease in cash and cash equivalents | | | (4,980 | ) | | | (199 | ) |
Cash and cash equivalents, beginning of period | | | 6,627 | | | | 8,726 | |
Cash and cash equivalents, end of period | | $ | 1,647 | | | $ | 8,527 | |
Cash paid for income taxes | | $ | — | | | $ | 126 | |
| | Three Months Ended | | | Six Months Ended | |
| | June 30, 2023 | | | June 30, 2022 | | | June 30, 2023 | | | June 30, 2022 | |
Net (loss) | | $ | (11,379 | ) | | $ | (4,437 | ) | | $ | (15,846 | ) | | $ | (7,757 | ) |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | |
Change in unrealized gain (loss) on investments, net of tax | | | 3 | | | | (110 | ) | | | 110 | | | | (281 | ) |
Change in foreign currency translation, net of tax | | | (3 | ) | | | (3 | ) | | | (4 | ) | | | (6 | ) |
Total other comprehensive income (loss) | | | — | | | | (113 | ) | | | 106 | | | | (287 | ) |
Comprehensive (loss) | | $ | (11,379 | ) | | $ | (4,550 | ) | | $ | (15,740 | ) | | $ | (8,044 | ) |
See accompanying notes to condensed consolidated financial statements.
VIRNETX HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) (in thousands, except per share amounts)
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Total shareholders’ equity, beginning balances | | $ | 77,136 | | | $ | 182,733 | | | $ | 152,244 | | | $ | 185,449 | |
| | | | | | | | | | | | | | | | |
Common stock and additional paid-in capital: | | | | | | | | | | | | | | | | |
Beginning balances | | | 240,435 | | | | 237,230 | | | | 239,753 | | | | 236,452 | |
Common stock issued for options/RSUs, net
| | | (5 | ) | | | (29 | ) | | | (5 | ) | | | (29 | ) |
Stock-based compensation | | | 682 | | | | 812 | | | | 1,364 | | | | 1,590 | |
Ending balances | | | 241,112 | | | | 238,013 | | | | 241,112 | | | | 238,013 | |
| | | | | | | | | | | | | | | | |
Accumulated deficit:
| | | | | | | | | | | | | | | | |
Beginning balances | | | (163,091 | ) | | | (54,255 | ) | | | (87,195 | ) | | | (50,935 | ) |
Net (loss)
| | | (11,379 | ) | | | (4,437 | ) | | | (15,846 | ) | | | (7,757 | ) |
Dividends
| | | — | | | | — | | | | (71,429 | ) | | | — | |
Ending balances | | | (174,470 | ) | | | (58,692 | ) | | | (174,470 | ) | | | (58,692 | ) |
| | | | | | | | | | | | | | | | |
Accumulated other comprehensive loss: | | | | | | | | | | | | | | | | |
Beginning balances | | | (208 | ) | | | (242 | ) | | | (314 | ) | | | (68 | ) |
Change in unrealized investment gain/loss, net | | | 3 | | | | (110 | ) | | | 110 | | | | (281 | ) |
Change in foreign currency translation, net | | | (3 | ) | | | (3 | ) | | | (4 | ) | | | (6 | ) |
Ending balances | | | (208 | ) | | | (355 | ) | | | (208 | ) | | | (355 | ) |
| | | | | | | | | | | | | | | | |
Total shareholders’ equity, ending balances | | $ | 66,434 | | | $ | 178,966 | | | $ | 66,434 | | | $ | 178,966 | |
| | | | | | | | | | | | | | | | |
Dividends per share | | $ | — | | | $ | — | | | $ | 1.00 | | | $ | — | |
See accompanying notes to condensed consolidated financial statements.
VIRNETX HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
| | Six Months Ended June 30, | |
| | 2023 | | | 2022 | |
Cash flows from operating activities: | | | | | | |
Net (loss)
| | $ | (15,846 | ) | | $ | (7,757 | ) |
Adjustments to reconcile net loss to cash flows from operating activities: | | | | | | | | |
Depreciation | | | 3 | | | | 3 | |
Deferred tax assets | | | — | | | | (685 | ) |
Bad debt
| | | 11 | | | | — | |
Stock-based compensation | | | 1,364 | | | | 1,590 | |
Changes in assets and liabilities: | | | | | | | | |
Accounts receivables | | | (1 | ) | | | (2 | ) |
Prepaid expenses and other assets | | | (79 | ) | | | (134 | ) |
Accounts payable | | | 24 | | | | 12 | |
Accrued payroll and related expenses | | | 81 | | | | 63 | |
Accrued licensing costs
| | | — | | | | (355 | ) |
| | | (23 | ) | | | (31 | ) |
Net cash used in operating activities | | | (14,466 | ) | | | (7,296 | ) |
Cash flows from investing activities: | | | | | | | | |
Purchase of investments | | | (25,753 | ) | | | (13,203 | ) |
Proceeds from sale or maturity of investments | | | 51,062 | | | | 5,688 | |
Net cash provided by (used in) investing activities | | | 25,309 | | | | (7,515 | ) |
Cash flows from financing activities: | | | | | | | | |
Payment of dividends | | | (71,429 | ) | | | — | |
Payment of payroll taxes on vested restricted stock units | | | (5 | ) | | | (29 | ) |
Net cash used in financing activities | | | (71,434 | ) | | | (29 | ) |
Net change in cash and cash equivalents | | | (60,591 | ) | | | (14,840 | ) |
Cash and cash equivalents, beginning of period | | | 86,561 | | | | 142,018 | |
Cash and cash equivalents, end of period | | $ | 25,970 | | | $ | 127,178 | |
Cash paid for income taxes | | $ | — | | | $ | 2 | |
See accompanying notes to condensed consolidated financial statements.
VIRNETX HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
Note 1 — Business Description and Basis of Presentation
VirnetX Holding Corporation which we refer to as(the “Company,” “we,” “us,” “our,” “the Company” or “VirnetX”“our”) is engaged in the business of commercializing a portfolio of patents. We seek to license ouran Internet security software and technology company with patented technology for Zero Trust Network Access (“ZTNA”) based secure network communications. VirnetX’s software and technology solutions, including its Secure Domain Name Registry and Technology, VirnetX One™, War Room™, VirnetX Matrix™, and GABRIEL Connection Technology™, are designed to various original equipment manufacturers, or OEMs, that use our technologies inbe device- and location-independent, and enable a secure real-time communication environment for all types of enterprise applications, services, and critical infrastructures. Our technology generates secure connections on a “single-click” basis, significantly simplifying the development and manufacturingdeployment of their own products withinsecure real-time communication solutions by eliminating the IP-telephony, mobility, fixed-mobile convergence and unified communications markets. Priorneed for end-users to 2012, our revenue was limited to an insignificant amount of software royalties pursuant to the terms of a single license agreement. Since 2012 we had revenues from settlements of patent infringement disputes whereby we received consideration for past sales of licenses that utilized our technology, where there was no prior patent license agreement, as well as license agreement revenues from settlements providing licensing for the continued use of our technology (see “Revenue Recognition”)enter any encryption information.
Our portfolio of intellectual property is the foundation of our business model. We currently own approximately 49205 total patents and pending applications, including 72 U.S. and 69 foreign patents with approximately 50 pending patents/patent applications worldwide.and 133 foreign patents/validations/pending applications. Our patent portfolio is primarily focused on securing real-time communications over the Internet as well as and related services, such as the establishment and maintenance of a secure domain name registry. Our patented methods also have additional applicationsis used in the key areas of device operating systems and network security for Cloud services, Machine-to-Machine (“M2M”) communications in areas including “Smart City,” “Connected Car” and “Connected Home.” All our U.S. and foreign patents and pending patent applications relate generally to securing communications over the Internet and as such, cover all our technology and other products. Our issued U.S. and foreign patents expire at various times during the period from 2019 to 2024. Someproducts, some of our issued patents and pending patent applicationswhich were acquired by our principal operating subsidiary,subsidiary; VirnetX, Inc., from Leidos, Inc. (“Leidos”), or Leidos, (f/k/a Science Applications International Corporation, or SAIC) in 20062006.
Our product portfolio includes sophisticated technologies, products and weservices that are requiredavailable for sale worldwide. Our next-generation, VirnetX One™ platform builds upon our patented Secure Domain Name Registry and Technology and GABRIEL Connection Technology™ to make payments to Leidos, in certain casesfurther enhance the security and efficiency of our patented secure communication links. VirnetX One™ is a security-as-a-service platform that result in cash or certain other values generatedprotects enterprise applications, services, and infrastructure from those patents. The amount of such payments depends upon the type of value generated, and certain categories are subject to maximumscyber-attacks. Our platform allows businesses and other limitations.enterprises of all sizes to add a “security umbrella” as an added layer on top of their existing infrastructure to further reduce risk and bolster security against ever-growing cyberthreats to data, operating systems, other infrastructure products and gateway security controllers.
Note 2 — Basis of Presentation and Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The accompanying Condensed Consolidated Balance Sheet as of June 30, 2023, the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022, the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2023 and 2022, the Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2023 and 2022, and the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). In our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of June 30, 2023, our results of operations for the three and six months ended June 30, 2023 and 2022, and our cash flows for the six months ended June 30, 2023 and 2022. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.
These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 31, 2023.
Use of Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below. We have reviewed our critical accounting policies and estimates with the audit committee of our Board of Directors.
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.
Unaudited Interim Financial Information
Leases
The accompanyingCompany determines if an arrangement is a lease at inception in accordance with Accounting Standards Codification (“ASC”) Topic 842. Operating lease right-of-use (“ROU”) assets are included in Prepaid expenses, and other assets on the Condensed Consolidated Balance Sheet as of September 30, 2017,Sheets. ROU assets represent the Condensed Consolidated Statements of OperationsCompany’s right to use an underlying asset for the threelease term and nine months ended September 30, 2017lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and 2016,lease liabilities are recognized at the Condensed Consolidated Statementscommencement date based on the present value of Comprehensive Losslease payments over the lease term (see Note 8 – Leases).
Revenue Recognition
The Company derives revenue from licensing and royalty fees from contracts with customers which can span several years. We account for the three and nine months ended September 30, 2017 and 2016, and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 are unaudited. These unaudited interim condensed consolidated financial statements have been preparedthis revenue in accordance with generally accepted accounting principlesASC Topic 606, Revenue from Contracts with Customers. A performance obligation is a promise in the United States (“U.S. GAAP”). In our opinion, the unaudited interim condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of September 30, 2017, our results of operations for the three and nine months ended September 30, 2017 and 2016, and our cash flows for the nine months ended September 30, 2017 and 2016. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the resultscontract to be expected for the year ending December 31, 2017.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC on March 16, 2017.
Use of Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in our accounting estimates are reasonably likely to occur. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial conditiontransfer a distinct good or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, at the time they are made and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below.
Reclassifications
Certain prior period amounts were reclassified to conformservice to the current year’s presentation. None of these reclassifications had an impact on reported net income for any of the periods presented.
Revenue Recognition
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 related 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 becustomer. A contract’s transaction price is 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 pastdistinct performance obligation 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.
Patent License Agreements: Upon signing a patent license agreement, including licenses entered into upon settlement of litigation, we provide the licensee permission to use our patented technology in specific applications. We account for 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 model for revenue recognition with revenue being recognized over the expected period of benefit to the licensee. Under our patent license agreements, we do or expect to typically receive one or a combination of the following forms of payment as consideration for permitting our licensees to use our patented inventions in specific applications and products:
• Consideration for Past Sales: Consideration related to a licensee’s product sales from prior periods may result from a negotiated agreement with a licensee that utilized our patented technology prior to signing a patent license agreement with us or from the resolution of a litigation, disagreement or arbitration with a licensee over the specific terms of an existing license agreement. We may also receive royalty for past sales in connection with the settlement of patent litigation where there was no prior patent license agreement. These amounts are negotiated, typically based upon application of a royalty rate to historical sales prior to the execution of the license agreement. In each of these cases, because delivery has occurred, we record the consideration as revenue when, we have obtained a signed agreement, identified a fixed or determinable price, and determined that collectabilityas, the performance obligation is reasonably assured.
• Current Royalty Payments: Ongoing royalty payments cover a licensee’s obligations to us related to its salessatisfied. Our revenue arrangements may consist of covered products inmultiple-element arrangements, with revenue for each unit of accounting recognized as the current contractual reporting period. Licensees that owe these current royalty payments are obligated to provide us with quarterlyproduct or semi-annual royalty reports that summarize their sales of covered products and their related royalty obligations to us. We expect to receive these royalty reports subsequentservice is delivered to the periodcustomer.
With the licensing of our patents, performance obligations are generally satisfied at a point in whichtime as work is complete when our licensees’ underlying sales occurred. As a result, it is impractical for uspatent rights are transferred to recognize revenue in the period in which the underlying sales occur, and, in most cases, we will recognize revenue in the period in which the royalty report is received and other revenue recognition criteria are met due to the fact that without royalty reports from our licensees, our visibility into our licensees’ sales is limited.
• Non-Refundable Up-Front Fees and Minimum Fee Contracts: For licenses that provide for non-refundable up-front or fixed minimum fees over their term, for which wecustomers. We generally have no future obligations or performance requirements,further obligation to our customers regarding our technology.
Certain contracts may require our customers to enter into a hosting arrangement with us and for these arrangements, revenue is generally recognized over the license term. For licenses that provide for fees that are not fixed or determinable, including licenses that provide for extended payment terms and/or payment of a significant portion of the fee after expiration of the license or more than 12 months after delivery, the fees aretime, generally presumed not to be fixed or determinable, and revenue is deferred and recognized as earned, but generally not in advance of collection.
• Non-Royalty Elements: Elements that are not related to royalty revenue in nature, such as settlement fees, expense reimbursement, and damages, if any, are recorded as gain from settlement which is reflected as a separate line item within the operating expenses section in the consolidated statements of operations.
Deferred revenue
In August 2013, we began receiving annual payments on a contract requiring payment to us over 4 years totaling $10,000 (“August 2013 Contract Settlement”). In accordance with our revenue recognition policy we defer and recognize revenue over the life of the contract, butservicing contract.
The Company actively monitors and enforces its intellectual property rights, including seeking appropriate compensation from third parties that utilize the Company’s intellectual property without a license. As a result, the Company may, from time to time, receive payments as part of a settlement or compensation for a patent infringement dispute. Proceeds received are allocated to each element identified in the settlement or compensation, based on the fair value of each element. Generally, settlements and compensation may include the following elements: the value of a license or royalty agreement, cost reimbursement, damages, and interest. Elements identified related to licensing and royalty are recognized 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 operations.
Licensing Costs
Included in operating expenses in 2022 is a refund of licensing costs we incurred in conjunction with a favorable court decision relating to a patent infringement case.
Contingent Gains
ASC Topic 450-30-25, Contingent Gains, prohibits recognition of contingent gains until realized. Accordingly, we do not record contingent gains ahead of collection. such realization. Management generally considers any such gains as realized only upon the collection of cash.
Cash and Cash Equivalents
We collectedconsider all highly liquid investments purchased with maturities of three months or less at the final payment under the contract in 2016. During the nine months ended September 30, 2017 we recognized $1,125date of revenue relatedpurchase to be cash equivalents. Our cash and cash equivalents are not subject to significant interest rate risk due to the August 2013 Contract Settlement.short maturities of these investments.
Activity under
Investments are classified as available-for-sale and 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 August 2013 Contract Settlement was as follows:
Deferred Revenue, December 31, 2016 | | $ | 4,000 | |
Less: Amount amortized as revenue | | | 1,125 | |
Deferred Revenue, September 30, 2017 | | $ | 2,875 | |
period 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 amount of credit exposure to any one issuer.
Earnings Per Share
Basic earnings per share
Property and equipment are stated at historical cost, less accumulated depreciation and amortization. Depreciation and amortization are computed by dividing earnings availableusing the accelerated and straight-line methods over the estimated useful lives of the assets, which range from five to common stockholders by the weighted average number of outstanding common shares during the period. Diluted earnings per shareseven years. Repair and maintenance costs are computed by dividing net income by the weighted average number of shares outstanding during the period increasedcharged to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued.expense as incurred.
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. Deposits held with these financial institutions may exceed the amount of insurance provided on such deposits. A portion of those balances are insured by the Federal Deposit Insurance Corporation.Corporation, or FDIC. During the ninesix months ended SeptemberJune 30, 20172023, we had, at times, funds whichthat 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.relationships. We have not experienced any losses on our deposits of cash and cash equivalents.
Prepaid Expenses
The carrying amounts of our financial instruments, including cash equivalents, accounts payable, and accrued liabilities, approximate fair value because of their generally short maturities.
We record intangible assets at September 30, 2017 includecost, less accumulated amortization. Amortization of intangible assets is provided over their estimated useful lives, which can range from three to 15 years, on either a straight-line basis or as revenue is generated by the current portion of prepaid rent for a facility lease for corporate promotional and marketing purposes. From inception, 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.assets.
Impairment of Long-Lived Assets
On an annual basis, we
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.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.
Research and development costs include expenses paid to outside development consultants and compensation related expenses for our engineering staff. Research and development costs are expensed as incurred.
We account for income taxes using the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our assets and liabilities. We calculate current and deferred tax provisions based on estimates and assumptions that could differ from actual results reflected on the income tax returns filed during the following years. Adjustments based on filed returns are recorded when identified in the subsequent years. The effect on deferred taxes for a change in tax rates is recognized in income in the period that the tax rate change is enacted. In assessing our deferred tax assets, we consider whether it is more likely than not that all or some portion of the deferred tax assets will not be realized.
The 2017 U.S. Tax Cuts and Jobs Act changes IRC Section 174, regarding capitalization of book research and development (“R&D”) expenses for income tax purposes. Effective for tax years beginning in 2022, IRC Section 174 requires the capitalization of book R&D expenses which are capitalized and amortized over 5 years for domestic R&D expenses and over 15 years for foreign R&D expenses. To date there has been limited guidance from the IRS on how to quantify the amount of book R&D expenses subject to capitalization, including the indirect expenses supporting the R&D function. Due to the limited guidance, some assumptions were made in our estimates.
A valuation allowance is provided for deferred income tax assets when, in our judgment, based upon currently available information and other factors, it is more likely than not that all or a portion of such deferred income tax assets will not be realized. The determination of the need for a valuation allowance is based on an on-going evaluation of current information including, among other things, historical operating results, estimates of future earnings in different taxing jurisdictions and the expected timing of the reversals of temporary differences. We believe the determination to record a valuation allowance to reduce a deferred income tax asset is a significant accounting estimate because it is based, among other things, on an estimate of future taxable income in the United States and certain other jurisdictions, which is susceptible to change and may or may not occur, and because the impact of adjusting a valuation allowance may be material. In determining when to release the valuation allowance established against our net deferred income tax assets, we consider all available evidence, both positive and negative. 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 as an income tax benefit in our statements of operations.
We account for our uncertain tax positions in accordance with U.S. GAAP, which utilizes a two-step approach to evaluate tax positions. Step one, recognition, requires evaluation of the tax position to determine if based solely on technical merits it is more likely than not to be sustained upon examination. Step two, measurement, is addressed only if a position is more likely than not to be sustained. In step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement with tax authorities. If a position does not meet the more likely than not threshold for recognition in step one, no benefit is recorded until the first subsequent period in which the more likely than not standard is met, the issue is resolved with the taxing authority, or the statute of limitations expires. Positions previously recognized are reversed if and when we subsequently determine the position no longer is more likely than not to be sustained. Evaluation of tax positions, their technical merits, and measurements using cumulative probability are highly subjective management estimates. Actual results could differ materially from these estimates.
We account for stock-based compensation using the fair value recognition method in accordance with U.S. GAAP. We recognize these compensation costs on a straight-line basis over the requisite service period of the award, which is generally a vesting term of four years. We recognize forfeitures, if any, when they occur. In addition, we record stock-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 (See Note 5 - Stock-Based Compensation).
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 is 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.
Fair Value of Financial Instruments
Fair value is the price that would result from an orderly transaction between market participants at the measurement date. A fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Level 2 measurements utilize either directly or indirectly observable inputs in markets other than quoted prices in active markets.
Our financial instruments are stated at amounts that equal, or approximate, fair value. When we estimate 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 valuation techniques, primarily the income and market approach, which maximizes the use of observable inputs and minimize the use of unobservable inputs for recurring fair value measurements.
Mutual Funds:funds: Valued at the quoted net asset value of shares held.
U.S. Governmentagency and U.S. Agency Securitiestreasury securities: Fair value measured at the closing price reported on the active market on which the individual securities are traded.
The following tables show the adjusted cost, gross unrealized gains, gross unrealized losses, and fair value of our securities by significant investment category as of SeptemberJune 30, 2017,2023 and December 31, 2016.2022.
| | September 30, 2017 | |
| | Adjusted Cost | | | Unrealized Gains | | | Unrealized Losses | | | Fair Value | | | Cash and Cash Equivalents | | | Investments Available for Sale | |
Cash | | $ | 1,427 | | | $ | - | | | $ | - | | | $ | 1,427 | | | $ | 1,427 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Level 1: | | | | | | | | | | | | | | | | | | | | | | | | |
Mutual funds | | | 220 | | | | - | | | | - | | | | 220 | | | | 220 | | | | - | |
U.S. agency securities | | | 2,667 | | | | - | | | | (2 | ) | | | 2,665 | | | | - | | | | 2,665 | |
| | | 2,887 | | | | - | | | | (2 | ) | | | 2,885 | | | | 220 | | | | 2,665 | |
Total | | $ | 4,314 | | | $ | - | | | $ | (2 | ) | | $ | 4,312 | | | $ | 1,647 | | | $ | 2,665 | |
| | 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 | |
New Accounting Pronouncements
| | June 30, 2023 | |
| | Adjusted Cost | | | Unrealized Gains | | | Unrealized Losses | | | Fair Value | | | Cash and Cash Equivalents | | | Investments Available
for Sale | |
Cash | | $ | 1,693 | | | $ | — | | | $ | — | | | $ | 1,693 | | | $ | 1,693 | | | $ | — | |
Level 1: | | | | | | | | | | | | | | | | | | | | | | | | |
Mutual funds | | | 20,077 | | | | — | | | | — | | | | 20,077 | | | | 20,077 | | | | — | |
U.S. agency and treasury securities | | | 44,645 | | | | 3 | | | | (189 | ) | | | 44,459 | | | | 4,200 | | | | 40,259 | |
| | | 64,722 | | | | 3 | | | | (189 | ) | | | 64,536 | | | | 24,277 | | | | 40,259 | |
Total | | $ | 66,415 | | | $ | 3 | | | $ | (189 | ) | | $ | 66,229 | | | $ | 25,970 | | | $ | 40,259 | |
In June 2016,
| | 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 | |
Note 3 — Income Taxes
For the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326) “ASU 2016-13”. The purpose of ASU 2016-13 is to require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. We are evaluating the impact this guidance will have on our financial position and statement of operations.
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:
• ASU 2016-9 requires excess tax benefits to be recognized regardless of whether the benefit reduces taxes payable. We had zero excess tax benefits recognized for the ninethree months ended SeptemberJune 30, 2017.
• Certain prior period amounts were reclassified to conform to2023, we recognized no income tax on loss before taxes of $11,379, which is an effective tax rate of 0.0%. For the current year’s presentation. None of these reclassifications had an impact on reported net income for any of the periods presented. As a result of the implementation of ASU 2016-09, our condensed consolidated statements of cash flow for the ninesix months ended SeptemberJune 30, 2016 has been restated to reflect the reclassification of $93 for payments of taxes on cashless exercise of restricted stock units, previously reported in cash flows from operation activities to the current presentation in cash flows from financing activities.
• The Company has elected to not estimate forfeitures expected to occur to determine the amount of stock-based compensation cost to be2023, we recognized in each period. The guidance relating to forfeitures did not have an impact on our accumulated deficit as of January 1, 2017.
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 full retrospective transition method. 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.
Note 3 - Income Taxes
We had $1 income tax benefit forof $78 on loss of $15,924, which is an effective tax rate of 0.49%. The effective rate is lower than the statutory federal rate primarily due to the change in valuation allowance. For the three months ended SeptemberJune 30, 2017 and $4 of2022, we recognized an income tax expense forof $373 on loss before taxes of $4,064, an effective tax rate of 9.18%. For the ninesix months ended SeptemberJune 30, 2017. During2022, we recognized an income tax benefit of $684 on loss before taxes of $8,441, which is an effective tax rate of 8.10%. The effective rate is lower than the threestatutory federal rate primarily due to the effect of stock-based compensation and nine-month period ended September 30, 2017, we had net operating losses (“NOLs”) which generatedexpiring options, requiring us to reduce our deferred tax assets for NOL carryforwards. We haveasset. Management provided a full valuation allowancesallowance against the net deferred tax assets including the deferred tax assets for NOL carryforwards. Valuation allowances provided for our net deferred tax assets increased by $1,404 and $5,152 for the three and nine months ended September 30, 2017, respectively.
We had $119 income tax expense for the three months ended September 30, 2016 and $126 of income tax expense for the nine months ended September 30, 2016. During the three and nine-month periods ended September 30, 2016, we had NOLs which generated deferred tax assets for NOL carryforwards. We provided valuation allowances against the net deferred tax assets including the deferred tax assets for NOL carry-forwards. Valuation allowances provided for our net deferred tax assets increased by $2,707 and $7,942 for the three and nine months ended September 30, 2016, respectively.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all 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, including our history of operating losses and the uncertainty of generating future taxable income, management believes it is more likely than not that the net deferred tax assets at SeptemberJune 30, 2017 will not be fully realizable. Accordingly, management has maintained a valuation allowance against our net deferred tax assets at September 30, 2017. The valuation allowance provided against our net deferred tax assets was approximately $50,000 and $44,000 at September 30, 2017 and December 31, 2016, respectively.2023.
At September 30, 2017, we have federal and state NOL carry-forwards of approximately $85,000 and $69,000, respectively, with the federal NOL carry-forwards expiring beginning in 2027. The state NOL carry-forward began expiring in 2016.
We have adopted accounting guidance for income taxes, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return. We are required to recognize in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position.
Our tax years for 2005 and forward are subject to examination by the U.S. tax authority and various state tax authorities. These years are open due to net operating lossesauthorities because we utilized the NOLs and tax credits remaining unutilized from such years.generated in those years in 2020. The statute of limitation for those years shall expire three years after the date of filing 2020 income tax returns.
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. At December 31, 2022 and June 30, 2023, we have no uncertain tax positions. Our policy is to recognize interest and penalties accrued on any unrecognizeduncertain tax benefitspositions as a component of income tax expense. As of September 30, 2017, weWe had no accrued immaterial amounts of interest andor penalties related to uncertain tax positions.positions at June 30, 2023.
Note 4 — Commitments and Related Party Transactions
We lease our officesoffice under an operating lease with a third party expiring inwhich expires on October 2019. We recognize rent expense on a straight-line basis over the term of the lease.31, 2023 (see Note 8 - Leases).
We leaseentered into a service agreement for the use of an aircraft from K2 Investment Fund LLC (“LLC”) for business travel for employees of the Company. We incurred approximately $218$112 and $690$399 compared to $228$249 and $596$514 in rental fees and reimbursements to the LLC during the three and ninesix months ended SeptemberJune 30, 20172023 and 2016,2022, respectively. We pay for the Company’s usage of the aircraft and have no rights 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 exercised their termination rights.
Note 5 — Stock-BasedStock Based Compensation
We have a stock incentive plan for employees
Our stockholders approved the Amended and others called the VirnetX Holding Corporation 2013Restated Equity Incentive Plan (the “Plan”“A&R Plan”), at our annual shareholders’ meeting in June 2023, which has been approved by our stockholders. In May 2017,added 3,500,000 shares to the Board approved an amendment and restatement of the Plan to, among other things, increase the shares reservedplan. Our prior plan expired March 29, 2023; no further awards will be made under the prior plan, but the A&R Plan by 2,500,000will govern awards granted under the prior plan. At June 30, 2023, there were 5,253,971 shares (the “Plan Amendment”). Our stockholders approved of the Plan Amendment at the 2017 Annual Meeting of Stockholders held on June 1, 2017. The Plan provides for grants of 16,624,469 shares of our common stock, including stock options and restricted stock units (“RSUs”), and will expire in 2023. As of September 30, 2017, 2,244,631 shares remained available for grant under the A&R Plan.
Stock-based compensation expense included in general and administrative expense was $393 and $487, and in research and development expense was $289 and $325, for the three months ended June 30, 2023 and 2022, respectively. Stock-based compensation expense included in general and administrative expense was $764 and $953, and in research and development expense was $600 and $637, for the six months ended June 30, 2023 and 2022, respectively.
During the three months ended SeptemberJune 30, 2017,2023, we granted options for a total of 1,377,50037,500 shares with a weighted average grant date fair value of $3.01$0.35 per option. During the three months ended SeptemberJune 30, 2016, no options were granted.
During the nine months ended September 30, 2017,2022, we granted options for a total of 1,733,500 shares. The weighted average fair values at the grant dates for options issued during the nine months ended September 30, 2017 was $2.93 per option. The fair values of options at the grant date were estimated utilizing the Black-Scholes valuation model with the following weighted average assumptions for the nine months ended September 30, 2017 (i) dividend yield on our common stock of 0 percent (ii) expected stock price volatility of 85 percent (iii) a risk-free interest rate of 1.93 percent and (iv) and expected option term of 6 years.
During the nine months ended September 30, 2016, we granted options for a total of 429,000801,004 shares with a weighted average grant date fair value of $3.25. The fair values$1.09 per option.
During the six months ended June 30, 2023, we granted options for a total of options at the37,500 shares with a weighted average grant date werefair value of $0.35 per option. We estimated the fair value of the options on the date of grant utilizing the Black-Scholes valuation model with the following assumptions: (i) 0 percent dividend yield, (ii) 81 percent volatility, (iii) 4% risk free rate and (iv) 6 years expected term. During the six months ended June 30, 2022, we granted options for a total of 801,004 shares with a weighted average assumptions forgrant date fair value of $1.09 per option. We estimated the nine months ended September 30, 2016fair value of the options on the date of grant utilizing the Black-Scholes valuation model with the following assumptions: (i) 0 percent dividend yield, on our common stock of 0(ii) 86 percent (ii) expected stock price volatility, of 80(iii) 3 percent (iii) a risk-free interestrisk free rate of 1.84 percent and (iv) an6 years expected option term of 6 years.term.
During the three months ended SeptemberJune 30, 2017 2023 and 2016, 2022, we granted no RSUs.
During the nine months ended September 30, 201724,999 and 2016, we granted 220,664 and 219,331258,363 RSUs respectively. Therespectively, with weighted average fair values of at the date of grant dates for RSUs issued during the nine months ended September 30, 2017of $0.50 and 2016 were $3.83 and $4.75 per RSU,$1.46, respectively. RSUs, which are subject to forfeiture if service terminates prior to the shares vesting, are expensed ratably over the vesting period.
Stock-based compensation expense included in general and administrative expense was $1,064 and $2,780 for During the three and nine months ended SeptemberJune 30, 2017, respectively,2023 and $1,4232022, we paid $5 and $3,979 for$29 in withholding taxes on shares issued upon conversion of RSUs, respectively. The underlying shares were cancelled. The amounts are reflected as financing costs in the accompanying statement of cash flows. No RSUs were granted during the first three and nine months ended September 30, 2016, respectively.of 2023 or 2022.
As of SeptemberJune 30, 2017,2023, the unrecognized stock-based compensation expense related to non-vested stock options and RSUs was $7,180$3,009 and $2,241,$1,074, respectively, which will be amortized over an estimated weighted average period of approximately 3.342.25 and 2.682.24 years, respectively.
During the nine-month periodthree and six months ended SeptemberJune 30, 20172023 and 2022 no options were exercised.
During the three months ended June 30, 2023 and 2022, we issued 164,146 new215,255 and 191,795 shares as a result of common stockvesting RSUs, respectively. No shares were issued during the first three months of 2023 or 2022 as a result of vesting RSUs.
During the three ended June 30, 2023 and 2022, there were 213,125 and 255,000 options returned to the plan due to the 10-year expiration for unexercised options respectively. During six months ended June 30, 2023 and 2022, there were 253,125 and 255,000 options returned to the plan due to the 10-year expiration for unexercised options respectively.
Note 6 — Equity
Common Stock
On August 21, 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 an at-the-market (“ATM”) equity offering sales agreement with Cowen & Company, LLC on August 20, 2015, under which we may offer and sellissued no 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. From August 20, 2015 through December 30, 2016, we sold 5,595,650 shares under the ATM. The average sales price per common share was $4.14 and the aggregate proceeds from the sales totaled $23,169options exercised during the period. Sales commissions, feesthree and other costs associated with the ATM totaled $695. During the ninesix months ended SeptemberJune 30, 2017 no2023 or 2022, respectively. We issued 215,255 and 191,795 shares as a result of vesting RSUs during the three months ended June 30, 2023 and 2022, respectively. No shares were sold underissued during the ATM. At September 30, 2017 $65 million remains available for sale under the shelf offering, with $11.8 million remaining in the ATM. (see “Note 8 - Subsequent Events”) first three months of 2023 or 2022 as a result of vesting RSUs.
Warrants
In 2015,2020, we issued warrants (“Advisor Warrants”) for the purchase of 25,000 shares of common stock at an exercise price of $7$5.75 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 Condensed 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 $4.16 per warrant. The fair value at issuance of the warrants of $121grant date was recorded in Prepaid Expenses and Other Current Assets, and was 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 Condensed Consolidated Statements(iv) and expected option term of Operations.5 years.
Information about warrants outstanding during the nine months ended September 30, 2017 follows:
Warrants Issued | | | Exercise Price | | | Outstanding and Exercisable December 31, 2022 | | | Issued | | | Exercised | | | Terminated / Cancelled | | | Outstanding and Exercisable June 30, 2023
| | Expiration Date |
| 25,000 | | | $ | 5.75 | | | | 25,000 | | | | — | | | | — | | | | — | | | | 25,000 | | April 30, 2025 |
Original Number of Warrants Issued | | | Exercise Price per Common Share | | | Exercisable at December 31, 2016 | | | Became Exercisable | | | Exercised | | | Terminated / Cancelled / Expired | | | Exercisable at September 30, 2017 | | Expiration Date |
| 25,000 | | | $ | 7.00 | | | | 25,000 | | | | — | | | | — | | | | — | | | | 25,000 | | April 2020 |
| | | | | | | | | 25,000 | | | | — | | | | — | | | | — | | | | 25,000 | | |
Stock Purchase and Revenue Sharing Agreement
As previously disclosed in the Company’s public filings, on May 31, 2017, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Public Intelligence Technology Associates kk (“PITA”), (Japanese Corporation), pursuant to which the Company would issue and sell to PITA 5,494,505 shares of Common Stock (the “Shares”) as promptly as practicable following the satisfaction or waiver of certain closing conditions (the “Share Purchase”). The Share Purchase did not close and the Purchase Agreement was terminated effective as of October 18, 2017.
Concurrently with the termination of the Purchase Agreement, the Company and PITA amended and restated the Revenue Sharing Agreement (the “Amended and Restated Revenue Sharing Agreement”) to have it survive the termination of the Purchase Agreement.
Note 7 — Litigation (all dollar amounts in this section are expressed in thousands except for rates per device)
We have elevenseveral 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.), 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 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, 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 $41,271 against Apple thereby, granting VirnetX a total sum of $343,699 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 $96,028 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 $439,727. (see “Note 8 - Subsequent Events”).
VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”)
On
This case began on November 6, 2012, when we filed a complaint against Apple Inc. (“Apple”) in the United States District Court for the Eastern District of Texas, Tyler Division for willfully infringing four(“USDC”) in which we alleged that Apple infringed on certain of our patents, U.S.(U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151, and seeking both an unspecified amount of7,490,151). We sought 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, theseThe USDC entered a Final Judgment and issued its Memorandum Opinion and Order regarding post-trial motions, affirming the jury’s verdict of $502,600 and granting VirnetX motions for supplemental damages, a sunset royalty, and the royalty rate of $1.20 per infringing iPhone, iPad and Mac products, were not included in the previous lawsuit that concludedpre-judgment and post-judgment interest and costs. Apple filed a notice of appeal with a Jury verdict on November 6, 2012 that was subsequently upheld by the United States District Court of Appeals 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 hearingFederal Circuit (“USCAFC”) 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,October 9, 2018, USCAFC docketed 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. We are awaiting court order setting the date for a new jury trial in Apple II case.
appeal as Case No. 19-1050 - VirnetX Inc. v. Apple Inc. (Case 15-1934)On November 22, 2019, the USCAFC issued an opinion affirming the district court’s findings that Apple is precluded from making certain invalidity arguments and that Apple infringed the ‘135 and ‘151 patents; reversing the USDC’s finding that Apple infringed the ‘504 and ‘211 patents; and remanding the case for proceedings on damages. Apple sought panel and en banc rehearing, which the USCAFC denied on February 10, 2020.
On February 22, 2020, the USDC issued a scheduling order for the parties to brief the court about the need for a new trial for recalculating the damages. We filed our motion for entry of judgment on February 28, 2020. The arguments on this matter were heard on April 14, 2020. In its order, unsealed on May 1, 2020, the USDC denied VirnetX’s motion for entry of a new judgment based on the prior jury verdict and ordered a new jury trial on damages. On August 10, 2020, the USDC granted Apple’s motion for continuance and reset the date to October 26, 2020. On October 30, 2020, a jury returned a $502,800 verdict in favor of VirnetX based on Apple’s infringement of two network security patents: VirnetX US Patents No. 6,502,135 and No. 7,490,151. The jury verdict called for damages of $0.84 per accused device since the 2013 launch of Apple’s iOS 7 operating system and represents 598,629,580 infringing units from US sales only. On January 15, 2021, the USDC denied Apple’s motion for judgment as a matter of law, and on February 4, 2021, Apple filed a notice of appeal to the USCAFC.
On February 22, 2021, the USCAFC docketed the appeal as Case No. 19-1672. Apple’s opening brief was filed on June 2, 2021. VirnetX filed its responsive brief on July 10, 2015,26, 2021. Apple filed its reply brief on September 13, 2021. Oral arguments were held on September 8, 2022. On March 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. The current deadline to file any petition for a writ of certiorari from the USCAFC’s decision is September 25, 2023.
VirnetX Inc. v. Mangrove Partners Master Fund, Ltd., Apple Inc. (USCAFC Case 20-2271) and VirnetX Inc. v. Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp, LLC (USCAFC Case 20-2272)
On September 15, 2020, we filed appeals with the USCAFC appealingan appeal of the invalidity findings by the United States Patent and Trademark Office, Patent Trial and Appeal Board (“PTAB”) in IPR2014-00237inter-partes review proceedings IPR2015-01046 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 IPR2014-00482IPR2016-00062 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.
On June 23, 2021, the USCAFC entered an order directing us (and parties in other appeals that raised Appointments Clause challenges) to file a brief explaining how they believe their cases should proceed in light of the Supreme Court’s decision in United States v. Arthrex, Inc., 141 S. Ct. 1970 (2021). On July 7, 2021, we filed a brief in response to the court’s order. Other parties, including the U.S. Patent and Trademark Office (“USPTO”) filed their responses on July 21, 2021. On August 19, 2021, USCAFC issued an order remanding these appeals for the limited purpose of allowing VirnetX the opportunity to request rehearing of the PTAB’s final decisions.written decisions by the Director of the USPTO. The USCAFC retained jurisdiction over the appeals in the meantime. On September 20, 2021, we filed our requests for Director rehearing with the USPTO. On October 29, 2021, our requests for Director rehearing were denied. We are currently evaluating our optionssubsequently filed an amended opening brief to the USCAFC on December 10, 2021, the other parties filed response briefs on February 2, 2022, and we filed a reply brief on February 22, 2022. All the briefings have been completed. The oral arguments in this case.matter were held on September 8, 2022. On March 30, 2023, the USCAFC issued its decision affirming PTAB’s decisions finding certain claims of the ‘135 patent and the ‘151 patent to be unpatentable. On June 5, 2023, VirnetX filed a petition for panel rehearing. On June 22, 2023, the petition for panel rehearing was denied, and the mandate issued on June 29, 2023. The current deadline to file any petition for a writ of certiorari from the USCAFC’s decision is September 20, 2023.
VirnetX Inc. v. Apple, Inc. (Case 17-1131)Hirshfeld (USCAFC Case 17-2593, -2594)
On October 31, 2016, September 22, 2017, 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; oral arguments have not yet been scheduled.
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.
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 is ongoing.
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 is ongoing.for the 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 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 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, and we currently await scheduling of oral arguments.
In re VirnetX Inc. (Case 17-2593)v. Cisco Systems, Inc. (USCAFC Case 19-1671)
On September 22, 2017,March 18, 2019, we filed appeals with the USCAFC appealingan appeal of the invalidity findings by the PTAB in IPR2016-00693 and IPR2016-00957inter-partes re-examination proceeding 95/001,679 involving our U.S. Patent Nos. 7,418,504 and 7,921,211. These appeals have been consolidated. The briefing inNo. 6,502,135. On October 5, 2021, USCAFC issued an order remanding these appeals is ongoing.for the limited purpose of allowing VirnetX the opportunity to request rehearing of the PTAB’s final written decisions by the Director of the PTO. The entity that initiatedUSCAFC retained jurisdiction over the IPRs, Black Swamp IP, LLC, indicatedappeals in the meantime. Our request for Director rehearing with the PTO was filed on November 5, 2021. On January 10, 2022, our request for Director rehearing was denied. We informed the USCAFC about the denial of Director rehearing. VirnetX’s opening brief was filed on June 23, 2022. The USPTO’s response brief was filed on August 2, 2022, and Cisco’s response brief was filed on September 2, 2022. VirnetX filed its reply brief on October 7, 2022. On April 18, 2017, that it would not participate2023, VirnetX filed a motion to hold this appeal in abeyance pending the disposition of any petition for rehearing in the appeals.No. 20-2271, -2272 appeal, and pending the 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, and we currently await scheduling of oral arguments.
VirnetX Inc. v. Apple Inc. (USCAFC Case 22-1523) (“Apple Reexam I”)
On March 10, 2022, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes re-examination proceeding 95/001,682 involving our U.S. Patent No. 6,502,135. Our opening brief was filed on August 22, 2022. Apple and USPTO each filed a response brief on December 28, 2022. VirnetX filed its reply brief on February 8, 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 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, and we currently await scheduling of oral arguments.
VirnetX Inc. v. Apple Inc. (USCAFC Case 22-1997) (“Apple Reexam II”)
On July 6, 2022, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes re-examination proceeding 95/001,697 involving our U.S. Patent No. 7,490,151. On October 20, 2017,17, 2022, we filed a motion to remand the appeal in light of the PTAB’s refusal to permit Director rehearing. On January 23, 2023, the USCAFC ordereddenied that motion without prejudice to the United States Patent and Trademark Office to inform it within 30 days whether it wishes to participateparties raising their arguments in the appeals.merits briefs. VirnetX opening brief was filed on May 8, 2023, and Apple and the USPTO each filed a response brief on July 24, 2023. VirnetX reply brief is currently due on August 14, 2023.
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 22-2234)
On September 16, 2022, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes re-examination proceeding 95/001,851 involving our U.S. Patent No. 7,418,504. We filed our opening brief on February 28, 2023. Cisco’s response brief was filed on May 10, 2023, and VirnetX reply brief was filed on June 21, 2023. We currently await scheduling of oral arguments.
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 23-1765)
On April 7, 2023, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in 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. Cisco’s response brief was filed on May 10, 2023. VirnetX opening brief is currently due on September 29, 2023.
Other Legal Matters
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,likely valid, commencing a lawsuit can be expensive and time-consuming, and there is no assurance that we willcould prevail on such potential claims.claims if we made them. In addition, bringing a lawsuit may lead to potential counterclaims which may precludedistract our abilitymanagement and our other resources, including capital resources, from efforts to successfully commercialize our initial products, which are currently in development. products.
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.us.
Note 8 — Subsequent EventsLeases
We lease office space under an operating lease which expires on October 31, 2023. On June 30, 2023, the underlying ROU asset and lease liability totaled $18. On December 31, 2022, the underlying ROU asset and lease liability totaled $45. Lease expense totaled $13, for each of the three months ended June 30, 2023 and 2022. Lease expense totaled $27, for each of the six months ended June 30, 2023 and 2022.
We also lease a facility for corporate promotional and marketing purposes which was prepaid at inception and expires in 2025, as amended. On October 16, 2017, we received a final judgment affirming a jury’s verdictJune 30, 2023 and December 31, 2022, the ROU asset totaled $499 and $648, respectively. For the three and six months ended June 30, 2023, lease expense totaled $75 and $150, respectively. For the three and six months ended June 30, 2022, lease expense totaled $75 and $150, respectively.
Note 9 — Earnings Per Share
Basic earnings per share are based on the weighted average number of $1.20 per iPhone royalty in the United States Courtcommon shares outstanding for the Eastern Districtperiod. Diluted earnings per share are based on the weighted average number of Texas, Tyler Division incommon shares and potentially dilutive common shares outstanding. Potential common shares outstanding principally include stock options, RSUs and warrants, excluding any potentially dilutive shares convertible at a price higher than the case VirnetX, Inc. et al. v. Apple Inc., No. 6:10-cv-00417-RWS (Apple I), awardingclosing price of our stock at the Company a totalend of $439.8 million including jury verdict, willful infringement, interest, costseach reporting period. The following table shows the computation of basic and attorney fees, following the previously disclosed jury trial and verdict in the amount of $302.4 million. The Final Judgement is subject to appeal stemming from new issues unresolved in the Apple I case, remanded back from the United States Court of Appealsdiluted earnings per share for the Federal Circuit. 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 Appealsthree and six months ended June 30, 2023 and 2022 (in thousands, except per share amounts):
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
| | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Numerator: | | | | | | | | | | | | |
Net (loss)
| | $ | (11,379 | ) | | $ | (4,437 | ) | | $ | (15,846 | ) | | $ | (7,757 | ) |
| | | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | |
Weighted-average basic shares outstanding | | | 71,466 | | | | 71,255 | | | | 71,445 | | | | 71,244 | |
Effect of dilutive securities | | | — | | | | — | | | | — | | | | — | |
Weighted-average diluted shares | | | 71,466 | | | | 71,255 | | | | 71,445 | | | | 71,244 | |
| | | | | | | | | | | | | | | | |
Basic (loss) per share | | $ | (0.16 | ) | | $ | (0.06 | ) | | $ | (0.22 | ) | | $ | (0.11 | ) |
Diluted (loss) per share | | $ | (0.16 | ) | | $ | (0.06 | ) | | $ | (0.22 | ) | | $ | (0.11 | ) |
We incurred a net loss for the Federal Circuit. (See “Note 7 – Litigation”).
Subsequent to Septemberthree and six months ended June 30, 2017, we sold 527,0392023 and 2022; therefore, all potentially dilutive securities representing shares of common stock under the ATM. The average sales price per common share was $5.49(6,974,580 in 2023 and the aggregate proceeds7,520,546 in 2022) were excluded from the sales totaled $2,806 duringcomputation of diluted earnings per share, because their effect would have been antidilutive.
Note 10 — Subsequent Events
On July 5, 2023 we issued 578,830 shares of restricted stock, with weighted average fair values at the period. Sales commissions,date of grant of $0.48. Restricted stock is subject to forfeiture if service terminates prior to the shares vesting and other costs associated withis expensed ratably over the ATM totaled $87.vesting period.
On October 26th, 2017, we signed a Strategic Service Provider (SSP) Agreement with Benefit One Solutions, Inc., Japan, a company which provides welfare services to employees of over 3,000 government, and corporate organizations in Japan. Benefit One Solutions will be a Strategic Service Provider and a non-exclusive reseller of VirnetX's Gabriel Collaboration Suite of Products in Japan. Under the terms of the agreement, Benefit One will adopt the use of VirnetX Gabriel products within its own organization of approximately 1,300 employees for intra-company communication, and will integrate Gabriel Collaboration Suite of Products into its benefits application platform and offer VirnetX Secure Domain Names and Gabriel Client as a value-added service to its outside businesses. Under the terms of agreement with Benefit One Solutions, public notification of this agreement, in the form of public event(s) and/or press releases, will occur by both parties simultaneously.
ITEM 2 —
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSOPERATIONS.
Note About Forward-Looking Statements
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may appear throughout this report, including without limitation, the following sections: “Management’s Discussion and Analysis,” and “Risk Factors.” These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” (Part II, Item 1A of this Form 10-Q). We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
Company Overview
We are an Internet security software and technology company with patented technology for Zero Trust Network Access (“ZTNA”) based secure communications including 4G Long Term Evolution (“LTE”), security. Ournetwork communications. VirnetX’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, (“VoIP”), mobile services, streaming video, file transfer, remote desktop and Machine-to-Machine (“M2M”) communications.critical infrastructures. Our technology generates secure connections on a ‘‘zero-click’’ or ‘‘single-click’’“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. Our portfolio of intellectual property is the foundation of our business model. We currently own approximately 49205 total patents and pending applications, including 72 U.S. and 69 foreign patents with approximately 50 pending patents/patent applications worldwide.and 133 foreign patents/validations/pending applications. Our patent portfolio is primarily focused on securing real-time communications over the Internet, as well asand related services, such as the establishment and maintenance of a secure domain name registry. Our patented methods also have additional applicationsis used in the key areas of device operating systems and network security for Cloud services, M2M communications in new initiatives including ‘‘Smart City’’, ‘‘Connected Car’’ and ‘‘Connected Home’’ that would connect everything from social services and citizen engagement to public safety, transportation and economic development to the internet to enable more productivity, features and efficiency in our everyday lives. The subject matter of all our U.S. and foreign patents and pending applications relates generally to securing communication over the internet, and as such covers all our technology and other products. Our issued U.S. and foreign patents expire at various times during the period from 2019 to 2024. Someproducts, some of our issued patents and pending patent applicationswhich were acquired by our principal operating subsidiary; VirnetX, Inc., from Leidos, Inc. (“Leidos”), or Leidos, (f/k/a Science Applications International Corporation, or SAIC) in 2006 and we are required to make payments to Leidos, based on cash or certain other values generated from those patents. The amount of such payments depends upon the type of value generated, and certain categories are subject to maximums and other limitations.2006.
Our product Gabriel Secure Communication Platform™, unlike other collaboration and communicationportfolio includes sophisticated technologies, products and services that are available for sale worldwide. Our next-generation, VirnetX One™ platform builds upon our patented Secure Domain Name Registry and Technology and GABRIEL Connection Technology™ to further enhance the security and efficiency of our patented secure communication links. VirnetX One™ is a security-as-a-service platform that protects enterprise applications, services, and infrastructure from cyber-attacks. Our platform allows businesses and other enterprises of all sizes to add a “security umbrella” as an added layer on top of their existing infrastructure to further reduce risk and bolster security against ever-growing cyberthreats to data, operating systems, other infrastructure products and gateway security controllers.
Our War Room™ software product provides safe and secure video conferencing meeting environment where sensitive communications and data is invisible to those not authorized to view it. War Room™ validates permissions of all the market today, does not requireusers, and devices requesting access to user’sany secure meeting room prior to granting access. We believe our War Room™ will be an attractive solution for government and law enforcement agencies as well as all professional sectors such as legal, financial, and medical where limiting access to confidential data is a critical requirement.
Our VirnetX Matrix™ product provides superior security for internet-enabled enterprise applications and reducestheir connected devices, and for control systems currently deployed by those enterprises (e.g., file servers, data back-up systems, VPN/firewalls). VirnetX Matrix™ provides a true “zero-trust” access protection, “single-click” ease of use, and is a highly-effective added layer of protection that is deployed simply, without the threatneed for changes to an enterprise’s existing, in-place infrastructure. We believe VirnetX Matrix™ is an attractive solution for all businesses, cloud and on-premise application service providers, and original equipment manufacturers (“OEMs”), looking to improve visibility and management of hackingtheir networks to mitigate morphing attacks on their networks and data mining. It enables individuals and organizations to maintain complete ownershipfor real time access 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.
Our GabrielGABRIEL Collaboration Suite™ is a set of communication applications and tools that run-on top ofuse our GabrielGABRIEL Secure Communication Platform™. It enables seamless and secure cross-platformcross platform communications between user’s devices that are enrolled in our “VIRNETX SECURED” network and have our software installed. Our GabrielEffective May 31, 2023 we have ended the support for our GABRIEL Collaboration Suite™ is available for download. All the existing customers and free trial, for Android, iOS, Windows, Linuxpartners have been notified of this announcement.
During the first and Mac OS X platforms,second quarters of 2023, we actively engaged in discussions with certain third-parties to pitch the capabilities of VirnetX One™. As a result of our efforts, during the second quarter we made a series of announcements with Solution Synergy, WeSecure, Samsung, Envoy Data Corporation, and ObjectSecurity. We also announced a number of new deployments of our VirnetX Matrix™ product at http://www.gabrielsecure.com/. City of Bridgeport, International Association of Certified ISAOs (IACI) and SkinWalker Ranch as a part of our new sales initiatives. We continue to enhance our products and addactively pursue new functionality to our products. We will provide updates to new and existing customersopportunities as they are released to the public. Over 80 small and medium businesses have installed our Gabriel Secure Communication Platform™ and Gabriel Collaboration Suite™ products in their corporate networks. We seek to expand our customer base with targeted promotions and direct salesa part of these initiatives.
We have executed a number of patent 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, within 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 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, or FRAND, terms and conditions, with compensation to 3GPP members desiring to implement the technical specifications identified by us. We believe that we are positionedthese parties have an interest to license our essential security patents to 3GPP members as they move into deploying 4G/LTE Advancedsecure devices and solutions.systems in areas such as City, County and State Governments, Healthcare, Finance, Legal, Oil and Gas, Medical, Law Enforcement, National Defense and related support industries. Although there can be no assurance in this regard, the Company believes that there are opportunities for Company products sales directly to, resale arrangements with and/or adoption as vendor standards by, one or more of these third parties.
We have an ongoing Gabriel Licensing Programlicensing program under which we offer licenses to a portion of 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. 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 changes and include object libraries, sample code, testing and quality assurance tools and the supporting documentation necessary for a customer to implement our technology.implementations. Customers who want to develop their own implementation of the VirnetX patented techniques for supporting secure domain names, or other techniques that are covered by our patent portfolio for establishing secure communication links, can purchase a patent license. The number of patents licensed, and therefore the cost of the patent license to the customer, will depend upon which of the patents are used in a particular product or service. These licenses will typically include an initial license fee, as well as an ongoing royalty.
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 patents on securing real-time communications over the Internet. Under the multi-year agreement, IPVALUE is expected to originate and assist us with negotiating transactions related to patent licensing worldwide with respect to certain third parties. We have entered into a patent standstill agreement with HTC Corporation, facilitated by IPVALUE, giving both parties more time to discuss and negotiate a broad license, including a license to VirnetX’s LTE-related patents.
We believe that the market opportunity for ourexpect to continue to launch new and enhanced security platforms, software products, 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, includingservices based on our GABRIEL Connection Technology™. We will provide updates to enterprisenew and existing customers developersas they are released to the public. Many small and original equipment manufacturers, or OEMs, of chips, servers, smart phones, tablets, e-Readers, laptops, net booksmedium businesses have installed our software products in their corporate networks. We intend to continue to expand our customer base with targeted promotions and other devices, within the IP-telephony, mobility, fixed-mobile convergence and unified communications markets including 4G/LTE.direct sales initiatives.
Our employees include the core development team behind our patent portfolio, technology, and software. ThisSome members of this team hashave worked together for over tentwenty years and iswere on 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.Leidos. 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 over 110 U.S. and international patents and with over 75 pending applications.patent portfolio. This portfolio now serves as the foundation of our products, services, and our licensing business and planned service offerings andbusiness. It is expected to generate the majoritymost of our future revenue in license fees and royalties. We intend to continue our researchefforts to develop new products and development efforts totechnologies and further strengthen and expand our patent portfolio.
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.
NYSE Deficiency
On May 12, 2023, we received a written notification from the NYSE that as of May 11, 2023, we are not in compliance with the continued listing standard set forth in Section 802.01C of the NYSE Listed Company Manual because the average closing price of our common stock was less than $1.00 per share over a consecutive 30 trading-day period. Pursuant to Section 802.01C, We alsohave a period of six months following the receipt of the notification to regain compliance with the minimum price criteria, we can regain compliance with the minimum share price requirement if, on the last trading-day of any calendar month, our common stock has a closing share price, and a 30 trading-day average closing share price, of at least $1.00. If both a $1.00 closing share price on the last trading day of the cure period and a $1.00 average closing share price over the 30 trading-day period ending on the last trading day of the cure period are not attained and we do not regain compliance by November 12, 2023, NYSE may commence suspension and delisting procedures with respect to our common stock. If shares of our common stock are delisted from the NYSE, there may be no public market for our common shares. Any over-the-counter or other public market that does develop would likely be characterized by decreased liquidity and greater volatility, which may materially and adversely affect the value of our common shares. We have notified the NYSE that we intend to expandcure the continued listing standard deficiency and to return to compliance with Section 802.01C. However, our design pilotcommon stock share price may not meet the applicable requirements during the cure period and there can be no assurances that further options to cure the deficiency that we may consider can or will be effectuated as an alternative to proceeding to delisting.
There can be no assurance that we will regain compliance with the NYSE continued listing standard. Any potential delisting of our common stock from the NYSE would likely result in participation with leading 4G/LTE companies (domain infrastructure providers, chipset manufacturers, service providersdecreased liquidity and others)increased volatility for our common stock and buildwould adversely affect our secure domain name registry.
New Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326) “ASU 2016-13”. The purpose of ASU 2016-13 isability to require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. We are evaluating the impact this guidance will have on our financial position and statement of operations.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”), which simplified certain aspectsraise additional capital or enter into strategic transactions. As of the accounting for share-based payment transactions, including income taxes, classificationdate of awards and classification in the statement of cash flows. We adopted this ASU in 2017Quarterly Report on Form 10-Q, we have not yet regained compliance with the following affects:above-mentioned NYSE continued listing standard.
• ASU 2016-9 requires excess tax benefits to be recognized regardless of whether the benefit reduces taxes payable. We had zero excess tax benefits recognized for the nine months ended September 30, 2017.
• Certain prior period amounts were reclassified to conform to the current year’s presentation. None of these reclassifications had an impact on reported net income for any of the periods presented. As a result of the implementation of ASU 2016-09, our condensed consolidated statements of cash flow for the nine months ended September 30, 2016 has been restated to reflect the reclassification of $93 for payments of taxes on cashless exercise of restricted stock units, previously reported in cash flows from operation activities to the current presentation in cash flows from financing activities.
• The Company has elected to not estimate forfeitures expected to occur to determine the amount of stock-based compensation cost to be recognized in each period. As such, the guidance relating to forfeitures did not have an impact on our accumulated deficit as of January 1, 2017.
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 full retrospective transition method. 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.
Results of OperationsOperation
Three and NineSix Months Ended SeptemberJune 30, 20172023
Compared with the Three and NineSix Months Ended SeptemberJune 30, 20162022
(in thousands, except per share amounts)
Revenue
We had revenuesrecognized revenue of $375$2 and $1,146 for$34 and $4 and $39 in the three and ninesix months ended SeptemberJune 30, 2017, respectively,2023 and revenuesJune 30, 2022, respectively.
Licensing Costs
Licensing costs of $375 and $1,148$4 for the three and ninesix months ended SeptemberJune 30, 2016, respectively.2022 is a refund of licensing costs we incurred in conjunction with a favorable court decision relating to a patent infringement case.
Revenues for the three and nine months ended September 30, 2017 included recognized revenue of $375 and $1,125, respectively, from non-refundable up-front fees earned during the period. In August 2013, we began receiving annual payments on this contract which totaled $10,000 over the 4-year period. Revenues from these fees have been deferred and recognized as revenue when earned in accordance with our revenue recognition policy, but not in advance of collection.
Research and Development Expenses
ResearchOur research and development expenses were $481 and $460increased by $3,500 to $4,755 for the three months ended SeptemberJune 30, 20172023, and 2016, respectively, representing an increase of $21 due primarilyby $3,641 to an increase in staff expense$6,123 for the threesix months ended SeptemberJune 30, 2017. Research and development expenses were $1,473 and $1,391 for2023. The increase was primarily due to higher engineering employee costs, which included a bonus paid in the nine months ended September 30, 2017 and 2016, respectively, representing an increasesecond quarter of $82 due primarily to an increase in staff expense.2023.
Selling, General and Administrative Expenses
Selling, general and administrative expenses includes wages and benefits of management and administrative personnel, as well as outside legal, accounting, and consulting services.
Our selling, general and administrative expenses increased by $4,320 to $7,366 for the three months ended SeptemberJune 30, 2017 compared2023, and by $5,682 to September$11,913 for the six months ended June 30, 2016 decreased by $2,862 to $3,456.2023. The changeincrease is primarily due to a decrease inincreased legal fees, associated with our patent infringement actions. Foroutside services, and compensation costs, which included a bonus paid in the nine months ended September 30, 2017 our selling, general and administrative expenses decreased by $9,179 to $10,953 compared to the nine months ended September 30, 2016. The change was primarily due to an $8,200 decrease in legal fees associated with our patent infringement actions. We expect to incur the same or increased levelssecond quarter of legal fees over the next two quarters and expect to report losses from operations as a result. (See “Legal Proceedings” for additional information regarding these infringement actions.)2023.
Other Income and Expenses17