☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2022
TRANSITION REPORT PURSUANT TO SECTION 13 |
Delaware | 77-0390628 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification |
308 Dorla Court, Suite 206 Zephyr Cove, Nevada | 89448 | |
(Address of principal executive offices) | (Zip Code) |
Former name, former address and former fiscal year, if changed since last report: N/A
Securities registered pursuant to Section 12(b) of the Act:ClassTrading Symbol(s) Name of Exchangeeach exchange on Which Registeredwhich registeredVHC NYSE American LLC
☐ ☐Sectionsection 12(g) of the Act:
NoneRegistrantregistrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o☐ No ☒Registrantregistrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o☐ No ☒oand posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o (Check one):o☐☒☐Smaller reporting company oo (Do not check if a smaller reporting company)☒o☐Smaller reporting company ☒
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60,821,163
27, 2023.
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Item 9C. | 53 | |||||
PART III | ||||||
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PART IV | ||||||
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
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PART I
Item 1. |
2006.
We are actively recruiting best-of-breed partners in various vertical markets including, healthcare, finance, government, etc, to help us rapidly expand our enterprise customer base. A number of International Association of Certified ISAO (IACI) including, ISAO's for Maritime & Ports, ISAO Credit Union ISAO, City of Chicago, ISAO Human Trafficking ISAO have chosen to deploy our software as private and secure e-technology to protect their communications. Several other ISAOs are completing their evaluations before deploying our products within their networks.
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, Systems Architecture Evolution, or SAE project. We have agreed to make available a non-exclusive patent license under fair, reasonable and non-discriminatory terms and conditions, with compensation, or FRAND,
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to 3GPP members desiring to implement the technical specifications identified by us. We believe that we are positioned to license our essential security patents to 3GPP members as they move into deploying 4G/LTE Advanced devices and solutions.
systems in areas such as 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 believe that the market opportunity forinstalled our software and technology solutions is large and expanding as secure domain names are now an integral part of securing the next generation 4G/LTE Advanced wireless networks and M2M communicationsproducts 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.
their corporate networks. We intend to continue to licenseexpand our patent portfolio, technologycustomer base with targeted promotions and software, including our secure domain name registry service, to domain infrastructure providers, communication service providers as well as to system integrators. We intend to seek further license of our technology, including our GABRIEL Connection Technology™ to enterprise customers, developers and original equipment manufacturers, or OEMs, of chips, servers, smart phones, tablets, e-Readers, laptops, net books and other devices, within the IP-telephony, mobility, fixed-mobile convergence and unified communications markets including 4G/LTE.
direct sales initiatives.
Please see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Operations – Research and Development Expenses for a description of our research and development expenses for the past three fiscal years.
We intend to continue using an outsourced and leveraged model to maintain efficiency and manage costs as we grow our licensing business by, for example, offering incentives to early licensing targets or asserting our rights for use of our patents. We also intend to expand our design pilot in participation with leading 4G/LTE companies (domain infrastructure providers, chipset manufacturers, service providers and others) and build our secure domain name registry.
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Industry Overview
& Trends
We believe that as the users become more comfortable with using their smartphones/tablets and other connected devices, they will increasingly treat their mobile and fixed/WiFi networks as a single network and demand seamless transition from one network type to another without any disruption of service. The 4G/LTE standard was developed with the goal of creating a single IP network that is efficient, flexible, open up new business models and services revenues and eventually lead to true “virtual networks” or software-defined networks (SDN). The service providers were forced to perform complete overhaul of their telecom network infrastructure in order to move from TDM paradigm to next generation IP networksauthorization, based on 4G/LTE for dealing with this rapidly growing demand. Before thesepolicy, prior to accessing any applications or resources on the network. ZTNA facilitates security around remote work, because Zero Trust policies enable granular access control, end-to-end encryption of network overhauls could be completed, some service providers decided to label their hybrid 3.5G/HSPA+/partial LTE implementations as 4G networks in order to mitigate the risk of losing revenue. We believe this has led to significant confusion and misunderstanding among users.
Adding to the demand for mobile and fixed broadband services is the fast adoption of connected machines or devices, or embedded systems capable of M2M communication. These M2M communications are made possible by a device (non-phone/tablet/pc such as a sensor) that is attached to a machine to capture an event that is relayed over a network via 3G/4G routers or fixed broadband lines, delivering data or events (such as temperature, location, consumption, heart rate, stress levels, light, movement, altitude and speed) to applications creating an “Internet of Things” or IoT. As the service providers start deploying true 4G (Long Term Evolution-Advanced, or LTE-Advanced) and this pace picks up, we believe that almost every device will get its own unique identity and a high-speed connection to the internet over a high-speed IP (Internet Protocol) based telecommunication network making it an “Internet of Everything”.
We believe that growing security concerns and vulnerabilities in a large number of use-case scenarios due to the inherent “open” nature of this architecture can throttle the successful adoption of these technologies. Security can no longer exist as a point solution, and enterprises are currently upgrading core IT infrastructure (systems, networks, and management) to integrate security into everything. Because of the complexity of today’s networks and the requirement to connect users from any location at any time on any device, enterprise buyers looking to improve security posture have to evaluate everything from software solutions for smartphones to routers and switches with integrated security, massive security appliances for data centers, cloud-based security services, and security solutions for virtualized environments and public and private clouds.
We believe that telecommunication markets are rapidly changing and presenting new challenges to the equipment and service providers, including but not limited to increasing user demand for mobile, always-on connections with multiple devices. We also believe that traffic growth, video acceleration, cloud services and a rapidly growing number of subscriber’s challenge currently available network architectures and that, because of this, service providers and carriers will eventually use a single network for fixed and mobile communications, private/premium communications and remove application visibility from the public Internet access, in spite ofwhich reduces the difficulties involved challenging their business models and forcing the consideration of new network architectures. We believe that LTE technology will deliver users the benefits of faster data speeds and new services by creating a new radio access technology that’s optimized for IP-based traffic and offers operators a simple upgrade path from 3G networks.
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Smartphones are multi-functional devices that handle a wide variety of business-critical applications and support increasingly complex functions including enhanced data processing, Internet access, e-mail access, calendars and scheduling, contact management and the ability to view electronic documents. Users have continual access to these applications while on the move making them an increasingly essential business tool for the mobile worker. These devices enable mobile workers to have similar functionality inside or outside the office thereby increasing employee efficiency. However, it is critical that this mobile environment have the same level of security as an enterprise’s internal network.
Embedded mobile broadband computing devices include PCs, netbooks, tablets, and mobile Internet devices (MIDs) with embedded mobile broadband modems to enable Internet access via a mobile broadband network. A growing number of these devices are now shipping enabled with LTE/4G. Mobile Internet devices (MIDs) include handheld mobile Internet devices; e.g. eReader, gaming console, digital picture frame, digital camera, with embedded mobile broadband modems. Mobile broadband routers have mobile broadband modems or antenna as the broadband connection; have multiple Ethernet ports and integrated wireless access points for local area connectivity and bandwidth sharing; can have integrated hub or switch; may have an integrated stateful firewall or IPSec VPN and are also known as mobile hotspot routers.
Machine-to-Machine, or M2M, connected devices, or embedded systems; connected machines are fast becoming the eyes and ears of the enterprise. By adding sensors and networking technologies to the products they sell and the equipment they employ, companies are finding new ways to gather powerful insights and use new forms of data, thus creating a vast “internet of things”. This communication is made possible by a device (such as an intelligent sensor) that is attached to a machine to capture an event, such as such as temperature, location, consumption, heart rate, stress levels, light, movement, altitude and speed, that is relayed over a network delivering data to applications. The potential applications for this technology are numerous and as such include smart meters in energy and utilities (the “smart grid”), connected vehicles in automotive and logistics, heart monitors in healthcare, RFID tagged inventory in retail and manufacturing, and digital signage in media and communications to name a few. Another fast-growing application is in the wearable technology products namely, fitness and wellness, infotainment (information-based media content), healthcare and medical, and industrial and military. The fitness and wellness segment comprises products like smart clothing and smart sensors, activity monitors, sleep sensors and others, whereas the Infotainment sector consists of products like smart watches, heads-up displays, smart glasses and others. The products like continuous glucose monitor, drug delivery, monitors, wearable patches and others have been covered under healthcare and medical segment and products like hand worn terminals, augmented reality headsets and others have been mentioned under industrial and military segment. We believe that the large revenue potential for M2M services that has attracted the attention of carriers globally risks being thwarted by the growing security concerns in M2M applications. Porous security is exposing vulnerabilities in a large number of use-case scenarios, including Automobiles, energy management systems, telemedicine, and telemetry. While built-in security is a high priority in all other information and communication technologies, it is yet to be considered, even at a basic level, in most M2M applications. The rapid and successful adoption of M2M in automobiles, healthcare, industrial installations, and consumer homes may be jeopardized if communication security is not designed in to all M2M devices and applications. All these new devices will require a unique identity addressable by a secure domain name and all their communications, with application servers and other devices, completely secured automatically and on-demand. IP mobility services require an environment where wired and wireless phones work together with Internet Protocol to deliver services (voice, video, data and combinations thereof) uniformly across multiple access networks, including, among others, LTE, WiMAX, WiFi cellular and fixed.
Voice over LTE (“VoLTE”) technology is the foundation for communication services on any device over LTE, Wi-Fi and 5G. VoLTE is delivered via the IP Multimedia Subsystem (IMS) and enables operators to offer high-quality, simultaneous voice and LTE data services on smartphones and other devices. There are currently more than 1,000 VoLTE-enabled device models, supporting different regions and frequencies. Wi-Fi calling is built on the same core network systems as VoLTE, and enables operators to extend their voice service to places with limited cellular coverage. Over 50 Wi-Fi calling networks have been launched in more than 30 countries (Source: GSMA March 2017).
attack surface. Based on our estimates, using severalpublicly available market data, sources, we believe that Worldwide LTE based subscriptionsthe Zero Trust security market size is projected to grow from $24.8 billion in 2022 to over $60 billion by 2027, at a Compound Annual Growth Rate (CAGR) of 19.4% during the forecast period. We believe Zero Trust represents a growing market and an ideal fit for our technology and products.
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expected to increase from 7.5 Gigabyte per month in 2017 to over 29 Gigabyte per month in 2023. We believe in order to realize the full functionality of IP mobility, several challenges including security must be overcome. When users are mobile, connections and data need to cross multiple network boundaries, each of which poses a security threat. Wireless networks may be threatened or compromised by rogue users who enter through insecure wireless access points. We believe that providing authenticated accessVirnetX One™ software products are positioned to help enterprises adapt to the M2M networksrapidly evolving threat landscape in work environments and enterprise applications are important requirements and representthe growing need to secure communications regardless of a significant market opportunity for our patented technology and secure domain names to provide usersuser’s location, network, or machines fully authenticated secure access on a “zero-click” or “single-click” basis.
Our Solutions
Our software and technology solutions, including our secure domain name registry, our patents anddevice using our GABRIEL Connection Technology™ are designed.
Our Products
Our GABRIEL Secure Communication Platform™, unlike other collaboration and communication products and services, on the market today, does not require access to users’ confidential data and reduces the threateasily deploy our technology through our VirnetX One™ family of hacking and data mining. It enables individuals and organizations to maintain complete ownership and control overproducts for endpoint security or securing their personal and confidential data, secured within their own private network, while enabling authorized secure encrypted access from anywhere at any time. Our GABRIEL Collaboration Suite™ is a set of applications that run on top of our GABRIEL Secure Communication Platform™. It enables seamless and secure cross-platform communications between users’ devices. The following applications are included in the current release and can be easily accessed through the GABRIEL interface:
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Our GABRIEL Collaboration Suite™ is available for download and free trial, for Android, iOS, Windows, Linux and Mac OS X platforms, at http://www.gabrielsecure.com/. We continue to enhance our products and add new functionality to our products. We will provide updates to new and existing customers as they are released publicly. Over 80 small and medium businesses have installed our GABRIEL Secure Communication Platform™ and GABRIEL Collaboration Suite™ products in their corporate networks. We intend to continue to expand our customer base with targeted promotions and direct sales initiatives.
Competitive Strengths
We believe the following competitive strengths will enable our success in the marketplace:
Our Strategy
Our strategy is to become the market leader in securing real-time communications over the Internet and to establish our VirnetX One™ and GABRIEL CommunicationsConnection Technology™ as the industry standard security platform.platforms. Key elements of our strategy are to:
We have submitted a declaration
• | Promote War RoomTM video conferencing product in the general market for sale to end-user enterprises, directly and with partners, with targeted promotions and other marketing programs to assist remote workers and offer an industry leading secure meeting solution. |
• | Unique patented technology. We are focused on developing innovative technology for securing real-time communications over the Internet and establishing the exclusive secure domain name registry in the United States and other key markets around the world. Our unique solutions combine industry standard encryption methods and communication protocols with our patented techniques for automated DNS lookup mechanisms. Our technology and patented approach enable users to create a secure communication link by generating secure domain names. We currently own approximately 205 total patents and pending applications, including 72 U.S. patents/patent applications and 133 foreign patents/validations/pending applications. Our portfolio includes patents and pending patent applications in the United States and other key markets that support our secure domain name registry service for the Internet. |
• | Scalable licensing business model. We are actively engaged in pursuing additional licensing agreements with industry participants OEMs, service providers and system integrators within the IP-telephony, mobility, mobile-to-mobile communications, fixed-mobile convergence, and unified communications end-markets. |
• | Highly experienced research and development team. Our research and development team is comprised of nationally recognized network security and encryption technology scientists and experts that have worked together as a team for over ten years. During their careers, this team has developed several cutting-edge technologies for U.S. national defense, intelligence, and civilian agencies, many of which remain critical to our national security today. Prior to joining VirnetX, our team worked for Leidos, during which time they invented the core technology that is the foundation of our current technology and software. Based on the collective knowledge and experience of our development team, we believe that we have one of the most experienced and sophisticated groups of security experts researching vulnerability and threats to real-time communication over the Internet and developing solutions to mitigate these problems. |
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technical specifications identified by us. We have also submitted a number of updates to our original declaration, identifying additional technical specifications that would also require a license to our US and Foreign patents.
License and Service Offerings
Our research and development team is the team responsible for inventing the claimed subject matter of the patents that form the foundation of our technology. This team has worked together for over ten years. We intend to leverage
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this experience and continue investing in research and development and, over time, expect to strengthen and expand our patent portfolio, technology, and software. While we are currently focused on securing real-time communications overand collaboration applications for the Internetenterprise remote workforce. We are exploring creating a marketplace of applications secured by our VirnetX One platform. This approach will allow us to offer a portfolio of certified applications that can be deployed by the enterprise customers in their business networks with confidence in keeping their confidential data and establishing the firstcommunications secure. This marketplace strategy will allow us to offer more flexible licensing options to solve specific customer use-cases, align with partner product offerings and only secure domain name registry, we believecreate upsell opportunities for our existing and future intellectual property portfolio will extend to additional areas including, among others, network security and operating systems for fixed and mobile devices.
products.
In 2018, wecan be found on our website at https://virnetx.com/partners. We plan to continue working on a number of sales and marketing promotions, in the USU.S. and Japan, to recruit more resellers and partners along with direct sales programs as we seek to extend out our customer base internationally.
In 2017, we began We continue to pursue opportunitiesrapidly expand our customer base with targeted promotions and direct sales initiatives.
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an Amended and Restated Gabriel License Agreement (the “Gabriel License Agreement,” together with the Revenue Sharing Agreement, the “PITA Agreements”) with Public Intelligence Technology Associates (“PITA”) service provider, to sell our software products as well as a related engagement letterVirnetX’s Secure Domain Name technology to its clients in Japan and greater Asia. Jointly with Withlin, a Dentons Innovation Group Partnership, to facilitate our marketing effortsIP Dream, we are currently pursuing several OEM opportunities with some of the largest services providers in Japan. However, since the execution of these agreements, these arrangements have not produced any meaningful results. The engagement letter terminated automatically on July 28, 2017. On March 16, 2018,Along with our efforts with IP Dream, we delivered a letter to PITA acknowledging the termination of the PITA Agreements but also notifying PITA that, though we consider the PITA Agreements effectively terminated, the letter also constituted a notice of termination pursuant to the relevant termination provisions of each PITA Agreement. More recently, we have beguncontinue to explore alternative strategies to pursue opportunities to work with other third parties in Japan, and elsewhere, using an approach that will seek to capitalize on these opportunities in part by placing more emphasis on the use of our own employees.
Competition
Intellectual Property and Patent Rights
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Notwithstanding anything to the contrary set forth in any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 that might incorporate future filings, the information set forth on the United States Patent and Trademark Office or the USPTO Website,(the “USPTO”) website, shall not be deemed to be a part of or incorporated by reference into any such filings. The Company doesWe do not warrant the accuracy, or completeness or adequacy of the USPTO Website,website, and expressly disclaimsdisclaim liability for errors or omissions on such website.
Patent Assignment
• | Patent Assignment. Leidos, unconditionally and irrevocably conveyed, transferred, assigned, and quitclaimed all its right, title, and interest in and to the patents and patent applications, as specifically set forth in the assignment document recorded with the U.S. Patent Office, including, without limitation, the right to sue for past infringement. |
• | License to Leidos, Outside the Field of Use. Effective March 12, 2008, we granted to Leidos, a non-exclusive, royalty free, fully paid, perpetual, worldwide, irrevocable, sub licensable and transferable right and license permitting Leidos, and its assignees to make, have made, import, use, offer for sale, and sell products and services covered by, and to make improvements to, the patents and patent applications we acquired from Leidos, solely outside our field of use. |
• | Compensation Obligations.
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Government Regulation
The laws governing online secure communications remain largely unsettled in various respects, even in areas where there has been legislative action. It may take years to determine whetherUncertainty regarding the interpretation and how existingenforcement of laws governing matters such as intellectual property, privacy, data protection and libel apply toin the context of online communications and media. Suchmedia is likely to remain. New and existing legislation, or changes in its interpretation and enforcement, may interfere with the growth in use of online secure communications and decrease the acceptance of online secure communications as a viable solution, which could adversely affect our business.
adopted and put in force. New and evolving laws and regulations, and changes in their enforcement and interpretation, may have material impacts upon our development and commercialization plans or business practices, and may significantly increase our compliance costs and otherwise adversely affect our business, financial condition, and results of operations.
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Employees
As of December 31, 2017,2022, we had 2125 full and part-time employees.
Corporate Overview and History
part time employees, most of whom work remotely from our corporate offices. We arehave had a holding company and conductwork-from-home workforce since our operations through our wholly-owned subsidiary, VirnetX, Inc. VirnetX, Inc., was incorporated in the State of Delaware in August 2005. In November 2006, VirnetX, Inc. acquired certain patents from SAIC, now Leidos. In July 2007, we effected a merger by and among VirnetX, Inc., VirnetX Holding Corporation and a wholly-owned subsidiary of VirnetX Holding Corporation, whereby VirnetX, Inc. merged with, and became, a wholly-owned subsidiary of VirnetX Holding Corporation and VirnetX Holding Corporation issued shares of its common stock to the stockholders of VirnetX, Inc. as consideration for the merger. As a result of this merger, the former security holders of VirnetX, Inc. came to own a majorityinception. The emphasis of our outstanding common stock. On October 29, 2007,employees is on our technology research and product development with 14 employees focused on this effort. Our team has been working on enhancing our products and adding new functionality along with successfully filing several new patent applications in 2022. We also continue building our sales and marketing teams to expand our product-lines and customer base. In 2021, we changedadded a Chief Operating Officer to our name from PASW, Inc.team in Japan who will be focused on growing our market and products in that region.
our regular employees, we also engage with consultants on a regular basis. These consultants can be involved in our product development, customer relations, legal, and/or regulatory compliance and reporting. We have experienced low employee turnover rates over the years with both employees and consultants participating in our equity incentive plan.
In addition to the materials that are posted on our website, you may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Item 1A. | Risk Factors |
services.Annual Form on Form 10-K,Report, including the section titled “Management’sin “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making any investment in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. If any of these risk factors occur, you could lose substantial value or your entire investment in our shares.Risks RelatedOur Businessbe, negatively affected by shareholders intent upon alternate business strategies.Our Financial Reportingcounterpartcounterparties to our litigation includesinclude large, well-financed companies with substantially greater resources than us. Patent litigation is risky, and the outcome is uncertain, and we cannot assure you that any of our current or future litigation matters will result in a favorable outcome for us. In addition, even if we obtain favorable interim rulings or verdicts, they may be inconsistent with the ultimate resolution of the dispute. Furthermore, any awards we receive may be subject to obligations to Leidos and fee arrangements with outside counsel. Also, we cannot assure you that we will not be exposed to claims or sanctions against us which may be costly or impossible for us to defend. Unfavorable or adverse outcomes may result in losses, exhaustion of financial resources or other adverse effects, which could encumberreduce our ability to return cash to our shareholders by way of distributions or otherwise to develop and commercialize our products.13
We may need to raise additional capital to support our business growth, and this capital will be dilutive, may cause our stock price to drop or may not be available on acceptable terms, if at all.
We may need to raise additional capital, which may not be available to us when needed or may not be available on terms acceptable to us, to support our business growth or to respond to business opportunities, challenges or unforeseen circumstances, including sales under our ATM or our universal shelf registration statement. Our ability to obtain additional capital, if and when required, will depend on our business plans, investor demand, our operating performance, the condition of the capital markets, the terms of our current contractual obligations and other factors. If we raise additional funds through the issuance of equity, equity-linked or debt securities, including those under our ATM or our Universal Shelf Registration Statement, those securities may have rights, preferences, or privileges senior to the rights of our common stock, and our existing stockholders may experience dilution. Additionally, we are unable to predict the future success of our current ATM offering. Sales of a substantial number of shares of our common stock in the public market, the perception that these sales or other financings might occur, could depress the market price of our common stock and could also impair our ability to raise capital through the sale of additional equity securities. If we issue debt securities or incur indebtedness, the incurrence of indebtedness would result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to obtain additional capital, or are unable to obtain additional capital on satisfactory terms, our ability to continue to support our business growth or to respond to business opportunities, challenges, or other circumstances could be adversely affected, and our business may be harmed.
We have terminated our revenue sharing and licensing arrangement with PITA and we cannot be sure any of our potential alternative strategies in Japan, or elsewhere, will be successful.
The PITA Agreements terminated in March 2018 as described elsewhere in this Annual Report on Form 10-K. PITA may dispute the effectiveness of that termination and litigation, which may be expensive and distracting to management, may ensue. Although we intend to pursue alternative strategies in our expansion efforts in Japan and other countries, including potential partnerships, joint ventures and other arrangements with third parties, we cannot be sure these efforts will be successful or be favorable to us.
We may not be able to capitalize on market opportunities related to our product strategy, our licensing strategy or our patent portfolio.
Our
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become involved in, divert resources away from our other activities, limit or cease our revenues related to such patents,revenues, or otherwise materially and adversely affect our business. Similar challenges could also prevent us from obtaining additional patents in the future. Additionally, several of our patents are currently, and other patents may in the future be, subject to United States Patent and Trademark Office (“USPTO”)USPTO post-grant inter partes review proceedings (“IPR”) which may result in all, or part of these patents being invalidated, or the claims of our patents being limited. Unfavorable or adverse outcomes in our litigation or IPRs or material leaks of trade secrets may result in losses, exhaustion of financial resources, reduction in our ability to enforceprotect our intellectual property rights, or other adverse effects, which could encumber our ability to develop and commercialize our products. Even if we are successful in enforcingprotecting our intellectual property rights, our patentsthey may not ultimately provide us with any competitive advantages and may be less valuable than we currently expect. These risks may be heightened in countries other than the United States where laws regarding patent protection are less developed and may be negatively affected by the fact that legal standards in the United States and elsewhere for protection of intellectual property rights in Internet-related businesses are uncertain and still evolving. In addition, there are a significant number of United States and foreign patents and patent applications in our areas of interest, and we expect that significant litigation in these areas will continue and will add uncertainty to the value of certain patents and other intellectual property rights in our areas of interest. If we are unable to protect our intellectual property rights or otherwise realize value from them, our business would be negatively affected.
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More aggressive domestic or international regulation of the Internet in general, and Internet telephony providers and services specifically may materially and adversely affect our business, financial condition, operating results, and future prospects.
prospects.
Therefore,Additionally, we maintain confidential and proprietary business information, including trade secrets. We expect to have to expend significant time and money to maintain or increase the security of our products, facilities, and infrastructure. Security technologies are constantly being tested by computer professionals, academics and “hackers.” Advances in computer capabilities and the techniques for attacking security solutions, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security measures and could make some or all our products obsolete or unmarketable. Likewise, if any of our products are found to have significant security vulnerabilities, then we may need to dedicate engineering and other resources to eliminate thesecurity vulnerabilities and may find it necessary or appropriate to repair or replace products already sold or licensed to our16
customers. Despite the security measures that we and our service providers utilize, our infrastructure and that of our service providers may be vulnerable to physical break-ins, ransomware, computer viruses, other malicious code attacks by hackers, phishing attacks, social engineering, or similar disruptive problems. Any disruption or security breach or incident that we or our service providers suffer or are perceived to suffer, including any such disruption, breach or incident resulting in a loss of, or damage to, data or systems, or inappropriate disclosure, access, loss, or other processing of confidential, financial, proprietary or personal information, including data related to our personnel, could result in loss, disclosure or other unauthorized processing of such data, could delay our research and development or commercialization efforts, could compel us to comply with breach notification laws and regulations, subject us to mandatory corrective action, and otherwise subject us to liability under laws and regulations that protect the privacy and security of personal information. It is possible that we may have to expend additional financial and other resources to address such problems. The COVID-19 pandemic has resulted in increasing vulnerability to cyber-attacks, as more individuals and companies work online, which increases these risks. As a provider of Internet security software and technology, we may be the target of dedicated efforts by hackers and other third parties to overcome or defeat our security measures. Any physical or electronic break-in or other security breach or incident or compromise of theimpacting our products or any information stored at our secure data centers and domain name registration systems, including any compromise due to human error or employee or contractor malfeasance, may jeopardize the security of information stored on our premises or in the computer systems and networks of our customers. In such an event, we could face significant liability and current or potential customers could be reluctant to use our services. Additionally, any such data security incident, or the perception that one has occurred could also result in adverse publicity, harm to our reputation and competitive position, and therefore adversely affect the market’s perception of the security of electronic commerce and communications over IP networks as well as the security or reliability of our services.
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noncompliance. Privacy, information security, and data protection concerns, whether valid or not valid, may inhibit market adoption of our platform, particularly in certain industries and foreign countries.
countries.
VirnetX One™ platform and software products.
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Telephone carriers have petitioned governmental agencies to enforce regulatory tariffs, which, if granted, would increase the cost of online communication, and such increase in cost may impede the growth of online communication and adversely affect our business.
Use of the Internet has over-burdened existing telecommunications infrastructures, and many high traffic areas have begun to experience interruptions in service. As a result, certain local telephone carriers have petitioned governmental agencies to enforce regulatory tariffs on IP telephony traffic that crosses over their traditional telephone networks. If the relief sought in these petitions is granted, the costs of communicating via online could increase substantially, potentially adversely affecting the growth in the use of online secure communications. Any of these developments could have an adverse effect on our business.
The departure of Kendall Larsen, our Chief Executive Officer and President, and/or other key personnel could compromise our ability to execute our strategic plan and may result in additional severance costs to us.
Our success largely depends on the skills, experience and performance of our key personnel. Due to the specialized nature of our business and limited staff, we are particularly dependent on Kendall Larsen, our Chief Executive Officer and President. We have no employment agreements with any of our key executives that prevent them from leaving us at any time. In addition, we do not maintain key person life insurance for any of our officers or key employees. The loss of Mr. Larsen, or our failure to retain other key personnel or failure to adequately plan for the succession of key personnel, would jeopardize our ability to execute our strategic plan and materially harm our business.
We will need to recruit and retain additional qualified personnel to successfully grow our business.
Our future success will depend, in part, on our ability to attract and retain qualified engineering, operations, marketing, sales and executive personnel. Inability to attract and retain such personnel could adversely affect our business. Competition for engineering, operations, marketing, sales and executive personnel is intense, particularly in the technology and Internet sectors and in the regions where we conduct our business. We may need to invest significant amounts of cash and equity to attract and retain employees and expend significant time and resources to identify, recruit, train and integrate such employees, and we may never realize returns on these investments. Additionally, we can provide no assurance that we will attract or retain such personnel.
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Our international expansion will subject us to additional costs and risks, and our plans may not be successful.
We may identify future material weakness which may result in late filings, increased costs or declines in our share price.
efforts to expand internationally.
Risks Relatedwork remotely, it may be difficult or, in certain cases, not possible, for us to Our Common Stock
Tradingcontinue our business for a substantial period of time. The increase in remote working may also result in consumer privacy, IT security and fraud concerns as well as increase our common stock is limitedexposure to potential wage and hour issues. In addition, the priceCOVID-19 pandemic may disrupt the operations of our common shares may be subject to substantial volatility.
Our common stock is listed on the NYSE American LLC (formerly the NYSE MKT LLC). Over the past years, the market pricecustomers, partners, suppliers, and other third-party providers for an indefinite period of our common stock has experienced significant fluctuations. Between January 1, 2017, and December 31, 2017, the reported last adjusted closing price on NYSE American LLC for our common stock ranged between $1.85 and $8.25 per share. The price of our common stock may continue to be volatiletime, including as a result of several factors, sometravel restrictions, adverse effects on budget planning processes, and/or business shutdowns, all of which are beyondcould negatively impact our control. These factors include, but not limitedbusiness, financial condition, and results of operations. More generally, despite continued actions taken by governments and businesses to attempt to contain and treat the following:
In addition, we believe there has been and may continue
The market price of our common stock has been and may continue to be volatile, and you could lose all or part of your investment.
The trading price of our common stock has been volatile since our initial public offering, and is likely to continue to be volatile. Factors that could cause fluctuations in the market price of our common stock include, but are not limited to the following:
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Further, in recent years the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. In addition, the stock prices of many technology companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, government shutdowns, interest rate changes the stability of the EU and the exit of the United Kingdom or international currency fluctuations, may cause the market price of our common stock to decline. In the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies.
We do not currentlyregularly pay dividends on our common stock and thus stockholders must look to appreciation of our common stock to realize a gain on their investments.
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The market price of our common stock may decline because our operating results may not be consistent and may be difficult to predict.
Our reported net income has fluctuated in the past due to several factors. We expect that our future operating results may also fluctuate due to the same or similar factors. We had a net loss of $29.2 million for the year ended December 31, 2015, a net loss of $28.6 million for the year ended December 31, 2016, and a net loss of $17.3 million for the year ended December 31, 2017, with an accumulated deficit of $176 million. The following include some of the factors that may cause our operating results to fluctuate:
These fluctuations may make our business particularly difficult to manage, adversely affect our business and operating results, make our operating results difficult for investors to predict and, further, cause our results to fall below investor’s expectations and adversely affect the market price of our common stock.
Because ownership of our common stock is concentrated, investors may have limited influence on stockholder decisions.
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Item 1B. | Unresolved Staff Comments. |
None
Item 2. | Properties |
Item 3. | Legal Proceedings |
We have eleven intellectual property infringement lawsuits pending
VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED)
On March 30, 2015, the United States Court for the Eastern District of Texas, Tyler Division, issued an order finding substantial overlap between the remanded portions of the Civil Action Case 6:10-CV-00417-LED (VirnetX vs. Cisco et. al.), and the ongoing Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case. The jury trial in this case was held on January 25, 2016. On February 4, 2016, a jury in the United States Court for the Eastern District of Texas, Tyler Division, awarded us $625.6 million in a verdict against Apple Inc. for infringing four of our US patents, marking it the second time a federal jury has found Apple liable for infringing VirnetX’s patented technology. The verdict includes royalties awarded to us based on an earlier patent infringement finding (Case 6:10-CV-00417-LED) against Apple. The jury found that Apple’s modified VPN On-Demand, iMessage and FaceTime services infringed VirnetX’s patents and that Apple’s infringement was willful. In addition to determining the royalty owed by Apple for its prior infringement, this verdict also includes an award based on the
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jury’s finding that Apple’s modified VPN On Demand, iMessage and FaceTime services have continued to infringe VirnetX’s patents. The post-trial hearing was held on May 25, 2016 in the United States Court for the Eastern District of Texas, Texarkana Division. On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases (Case No. 6:10-cv-417, Docket No. 878 (“Apple I case”); Case No. 6:12-cv-855, Docket No. 220 (“Apple II case”)), ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II case will be retried after Apple I case. Events and developments subsequent to the order from the court are described to support Apple I and Apple II matters.
VirnetX Inc. v. Cisco Systems, Inc. et al. (Case 6:10-CV-00417-LED) (“Apple I”)
On August 11, 2010, we initiated a lawsuit by filing a complaint against Aastra USA. Inc. (“Aastra”), Apple, Cisco Systems, Inc. (“Cisco”), and NEC Corporation (“NEC”) in the United States District Court for the Eastern District of Texas, Tyler Division, pursuant to which we alleged that these parties infringe on certain of our patents. We sought damages and injunctive relief. Aastra and NEC agreed to sign license agreements with us and we agreed to drop all the accusations of infringement against them. At the pre-trial hearing, the judge decided to conduct separate jury trial for each defendant, and try only the case against Apple on the scheduled trial date. The jury trial of our case against Cisco was held on March 4, 2013. The jury in our case against Cisco came back with a verdict of non-infringement also determined that all our patents-in-suit patents are not invalid. Our motions for a new trial and Cisco’s infringement of certain VirnetX patents were denied and the case against Cisco was closed.
The jury trial of our case against Apple was held on October 31, 2012. On November 6, 2012, a jury in the United States Court for the Eastern District of Texas, Tyler Division, awarded us over $368 million in a verdict against Apple for infringing four of our patents. On February 26, 2013, the court issued its Memorandum Opinion and Order regarding post-trial motions resulting from the prior jury verdict denying Apple’s motion to reduce the damages awarded by the jury for past infringement. The Court further denied Apple’s request for a new trial on the liability and damages portions of the verdict and granted our motions for pre-judgment interest, post-judgment interest, and post-verdict damages to date. The Court ordered that Apple pay $34 thousand in daily interest up to final judgment and $330 thousand in daily damages for infringement up to final judgment for certain Apple devices included in the verdict. The Court denied our request for a permanent injunction and severed the future infringement portion into its own separate proceedings under Case 6:13-CV-00211-LED.
On July 3, 2013, Apple filed an appeal of the judgment dated February 27, 2013 and order dated June 4, 2013 denying Apple’s motion to alter or amend the judgment to the USCAFC. On September 16, 2014, USCAFC issued their opinion, affirming the jury’s finding that all 4 of our patents are valid, confirming the jury’s finding of infringement of VPN on Demand under many of the asserted claims of our ‘135 and ‘151 patents, and confirming the district’s court’s decision to allow evidence concerning our licenses and royalty rates in connection with the determination of damages. In its opinion, the USCAFC also vacated the jury’s damages award and the district court’s claim construction with respect to parts of our ‘504 and ‘211 patents and remanded the damages award and determination of infringement with respect to FaceTime –for further proceedings consistent with its opinion. On October 16, 2014, we filed a petition with the USCAFC, requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decision concerning VirnetX’s litigation against Apple Inc. On December 16, 2014, USCAFC denied our petition requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decision and remanded the case back to the Eastern District of Texas, Tyler Division, for further proceedings consistent with its opinion. On February 25, 2015, USCAFC granted Apple’s motions to lift stay of proceedings and vacate Case 6:13-CV-00211-LED. On March 30, 2015, the court issued an order finding substantial overlap between the remanded portions of this case and the ongoing Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case.
On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases Apple I case and Apple II case, ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II will be retried after Apple I case. The jury trial in this case was held on September 26, 2016. On September 30, 2016, a Jury in the United States Court for the Eastern District of Texas, Tyler Division, in the case VirnetX Inc., et al. v. Apple Inc., No. Apple I, has awarded VirnetX $302.4 million in a verdict against Apple for infringing four VirnetX patents, marking the third time a federal jury has found Apple liable for infringing VirnetX’s patented technology.
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The verdict includes royalties awarded to VirnetX, for unresolved issues in the Apple I case, remanded back from the USCAFC, related to (1) damages owed to VirnetX for infringement by Apple’s original VPN-on-Demand (VOD) and (2) the alleged infringement by Apple’s original FaceTime product, under the new claim construction of “secure communication link” pertaining to the ’504 and ’211 patents by the USCAFC, and the damages associated with that infringement. The hearing on all the post-trial motions was held on November 22, 2016.
On September 29, 2017, the United States District Court for the Eastern District of Texas, Tyler Division, entered Final Judgement and issued its Memorandum Opinion and Order regarding post-trial motions resulting from the prior $302.4 million jury verdict for VirnetX in the Apple I case.
In the Order, the Court denied all of Apple’s post-trial motions including motion for judgment as a matter of law of non-infringement, motion for judgment as a matter of law on damages, motion for a new trial on infringement, and motion for a new trial on damages. The Court granted all VirnetX’s post-trial motions including motion for willful infringement and enhanced the royalty rate during the willfulness period by 50 percent, from $1.20 to $1.80 per device, awarding VirnetX, enhanced damages in the amount of $41.3 million against Apple thereby, granting VirnetX a total sum of $343.7 million in pre-interest damages. The Court also awarded costs, certain attorneys’ fees, and prejudgment interest to VirnetX, and directed the parties to meet and confer regarding these amounts. On October 13, 2017, having met and conferred and having reached agreements on all amounts, parties jointly filed a motion asking the Court to grant VirnetX an additional sum in the amount of $96 million in agreed Bill of Costs, Attorneys’ Fees, and Prejudgment Interest. The Final Judgement is only subject to appeal stemming from new issues unresolved in the Apple I case, remanded back from the United States Court of Appeals for the Federal Circuit. The total Final Judgement amount including Jury Verdict, Willful Infringement, Interest, Costs and Attorney Fees is $439.7 million.
On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on September 29, 2017 to the United States Court of Appeals for the Federal Circuit. This case has now been closed and events and developments subsequent to the notice of appeal are described below under VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case).
VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”)
On November 6, 2012, we filed a complaint against Apple in the United States District Court for the Eastern District of Texas, Tyler Division for willfully infringing four of our patents, U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151, and seeking both an unspecified amount of damages and injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and the latest Macintosh computers. Due to their release dates, these products were not included in the previous lawsuit that concluded with a Jury verdict on November 6, 2012 that was subsequently upheld by the United States District Court for the Eastern District of Texas, Tyler Division, on February 26, 2013. On July 1, 2013, we filed a consolidated and amended complaint to include U.S. Patent No. 8,051,181 and consolidate Civil Action No. 6:11-cv-00563-LED. On August 27, 2013, we filed an amended complaint including allegations of willful infringement related to U.S. Patent No. 8,504,697 seeking both damages and injunctive relief. The Markman hearing in this case was held on May 20, 2014 and on August 8, 2014, issued its Markman Order, denying Apple’s motion for summary judgment of indefiniteness, in which Apple alleged that some of the disputed claims terms in the patents asserted by us were invalid for indefiniteness. In a separate order, the court granted in part and denied in part our motion for partial summary judgment on Apple’s invalidity counterclaims, precluding Apple from asserting invalidity as a defense against infringement of the claims that were tried before a jury in our prior litigation against Apple (VirnetX vs. Cisco et. al., Case 6:10-CV-00417-LED). The jury trial in this case was scheduled for October 13, 2015. On March 30, 2015, the court issued an order finding substantial overlap between this case and the remanded portions of Case 6:10-CV-00417-LED (VirnetX vs. Cisco et. al.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case. On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases Apple I case and Apple II case, ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II will be retried after Apple I case.
On September 29, 2017, the Court issued an order denying Apple’s Motion to Stay. The Court ordered the parties to meet and confer and file a joint motion with a proposed trial date by October 13, 2017. The parties have met, conferred and filed a joint motion on the proposed trial dates. On November 9, 2017, the court issued its order setting this case for jury selection on April 2, 2018 in Tyler, Texas.
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On January 5, 2018, Apple filed a Petition for Writ of Mandamus with the USCAFC requesting the court to stay the upcoming limited retrial of the Apple II pending the USCAFC’s decision in related consolidated appeal VirnetX Inc. v. Apple Inc., Cases 2017-1591. On February 22, 2018, the USCAFC issued its order denying Apple’s Petition for Writ of Mandamus. The Apple II case is proceeding on schedule for jury selection on April 2, 2018 per the district court’s order.
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case)
On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on September 29, 2017 to the United States Court of Appeals for the Federal Circuit.
On January 5, 2018, Apple filed a motion requesting a stay of the briefing schedule in this appeal pending this court’s decision in related consolidated appeal VirnetX Inc. v. Apple Inc., Cases 2017-1591. On January 24, 2018, USCAFC denied Apple’s motion requesting a stay of the briefing schedule and ordered Apple to file its opening brief no later than March 19, 2018.
VirnetX Inc. v. Apple, Inc. (Case 15-1934)
On July 10, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the United States Patent and Trademark Office, Patent Trial and Appeal Board (“PTAB”) in IPR2014-00237 and IPR2014-00238, related to U.S. Patent No. 8,504,697. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on the grounds discussed in IPR2014-00238. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 16-1211)
On September 28, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2014-00403 and IPR2014-00404 and on October 22, 2015 for IPR2014-00481 and IPR2014-00482 involving our U.S. Patent Nos. 7,188,180, and 7,987,274. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on the grounds discussed in IPR2014-00403 and IPR2014-00481. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 16-1480)
On November 30, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,949 related to U.S. Patent No. 8,051,181. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on certain grounds. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 16-119)
On March 4, 2016, we filed a petition for writ of mandamus with the USCAFC, requesting the USCAFC’s intervention to revoke the PTAB’s decision joining Apple to IPR2015-01046 and IPR2015-01047, related to U.S. Patent Nos. 6,502,135 and 7,490,151. On March 18, 2016, the USCAFC denied the petition without prejudice to us raising the arguments on appeal after the PTAB’s final decisions. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 17-1131)
On October 31, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2015-00810 and IPR2015-00812, on November 9, 2016 for IPR2015-00811, and on November 28, 2016 for IPR2015-00866, IPR2015-00868, IPR2015-00870 and IPR2015-00871 involving our U.S. Patent Nos.8,868,705, 8,850,009, 8,458,341, 8,516,131, and 8,560,705. These appeals have been consolidated. The briefing in these appeals has been concluded; the oral argument were held on March 5, 2018. We are awaiting the courts ruling in this matter.
VirnetX Inc. v. The Mangrove Partners (Case 17-1368)
On December 16, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2015-01046, and on December 20, 2016 for IPR2015-1047, involving our U.S. Patent Nos. 6,502,135, and 7,490,151. These appeals also involve Apple, Inc. and one of them involves Black Swamp IP, LLC. On April 27, 2017, the USCAFC stayed these appeals pending the USCAFC’s en banc decision in Wi-Fi One, LLC v. Broadcom Corporation, No. 2015-1944. The stay was lifted on January 31, 2018, and briefing is now ongoing.
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VirnetX Inc. v. Apple Inc., Cisco Systems, Inc. (Case 17-1591)
On February 7, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-partes reexamination nos. 95/001,788, 95/001,789, and 95/001,856 relatednotes to our U.S. Patent Nos. 7,921,211 and 7,418,504. These appeals have been consolidated. The briefing in these appeals has been concluded; the oral arguments have not yet been scheduled.
VirnetX Inc. v. Apple Inc. (Case 17-2490)
On August 23, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2016-00331 and IPR2016-00332 involving our U.S. Patent No. 8,504,696. These appeals have been consolidated. The briefing in these appeals has been concluded; the oral arguments have not yet been scheduled.
In re VirnetX Inc. (Case 17-2593)
On September 22, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2016-00693 and IPR2016-00957 involving our U.S. Patent Nos. 7,418,504 and 7,921,211. These appeals have been consolidated. The briefing in these appeals is ongoing. The entity that initiated the IPRs, Black Swamp IP, LLC, indicated on October 18, 2017, that it would not participate in the appeals. On November 27, 2017, the United States Patent and Trademark Office indicated that it would intervene in the appeals. On January 19, 2018, the USCAFC stayed these appeals pending the USCAFC’s decision in Case 17-1591.
One or more potential intellectual property infringement claims may also be available to us against certain other companies who have the resources to defend against any such claims. Although we believe these potential claims are worth pursuing, commencing a lawsuit can be expensive and time-consuming, and there is no assurance that we will prevail on such potential claims. In addition, bringing a lawsuit may lead to potential counterclaims which may preclude our ability to commercialize our initial products, which are currently in development.
Currently, we are not a party to any other pending legal proceedings, and are not aware of any proceeding threatened or contemplated against us by any governmental authority or other party.
Item 4. | Mine Safety |
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PART II
Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity |
The following table shows the price range of our common stock, as reported on the NYSE American LLC, for each quarter ended during the last two fiscal years.
VirnetX Holding Corp | HIGH | LOW | ||||
Year ended, December 31, 2017: | ||||||
First quarter | $ | 2.75 | $ | 1.70 | ||
Second quarter | $ | 5.40 | $ | 2.02 | ||
Third quarter | $ | 4.85 | $ | 3.00 | ||
Fourth quarter | $ | 8.75 | $ | 3.55 | ||
Year ended, December 31, 2016: | ||||||
First quarter | $ | 9.64 | $ | 1.95 | ||
Second quarter | $ | 6.50 | $ | 3.83 | ||
Third quarter | $ | 4.64 | $ | 2.14 | ||
Fourth quarter | $ | 5.13 | $ | 2.10 |
The closing price of our common stock on the NYSE American LLC on March 14, 2018 was $4.05 per share.
Dividends
We do not currently intend to begin paying a regular dividend
taxes), after the case concludes.
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Stock Performance Graph
The stock price performance reflected on this graph is not necessarily indicative of future stock price performance. See the disclosure in part I, Item 1A. “Risk Factors”
12/12 | 12/13 | 12/14 | 12/15 | 12/16 | 12/17 | |||||||||||||
VirnetX Holding Corp | $ | 100.00 | $ | 66.29 | $ | 18.75 | $ | 8.78 | $ | 7.51 | $ | 12.64 | ||||||
S&P 500 | $ | 100.00 | $ | 132.39 | $ | 150.51 | $ | 152.59 | $ | 170.84 | $ | 208.14 | ||||||
RDG Technology Composite | $ | 100.00 | $ | 132.51 | $ | 155.05 | $ | 161.00 | $ | 181.12 | $ | 247.79 |
12/17 | 12/18 | 12/19 | 12/20 | 12/21 | 12/22 | |
VirnetX Holding Corp | 100.00 | 64.86 | 102.70 | 186.05 | 95.98 | 47.99 |
S&P 500 | 100.00 | 95.62 | 125.72 | 148.85 | 191.58 | 156.89 |
RDG Technology Composite | 100.00 | 93.54 | 133.70 | 208.19 | 249.39 | 169.48 |
During the year ended December 31, 2017, we had no sales of unregistered securities and no repurchases of stock.
Item 6. | [Reserved] |
The consolidated statement of operations data for the years ended December 31, 2017, 2016 and 2015 and the balance sheet data at December 31, 2017 and 2016, are derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations data for the years ended December 31, 2014 and 2013 and the balance sheet data at December 31, 2015, 2014 and 2013 are derived from our audited financial statements not included in this annual report on Form 10-K.
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The selected consolidated financial data below is not necessarily indicative of future performance and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included in Item 8 of this Annual Report on Form 10-K.
For the year ended December 31, | |||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||
Consolidated Statement of Operations Data: | |||||||||||||||
Revenue | $ | 1,547 | $ | 1,550 | $ | 1,555 | $ | 1,249 | $ | 2,197 | |||||
Gain on settlement(a) | $ | — | $ | — | $ | — | $ | 23,000 | $ | — | |||||
Total operating expenses | $ | (18,868 | ) | $ | (30,055 | ) | $ | (30,732 | ) | $ | (36,414 | ) | $ | (30,784 | ) |
Income tax expense | $ | (3 | ) | $ | (133 | ) | $ | (8 | ) | $ | (15 | ) | $ | (751 | ) |
Net loss | $ | (17,278 | ) | $ | (28,569 | ) | $ | (29,234 | ) | $ | (9,902 | ) | $ | (27,608 | ) |
Loss per share | $ | (0.30 | ) | $ | (0.51 | ) | $ | (0.56 | ) | $ | (0.19 | ) | $ | (0.54 | ) |
Consolidated Balance Sheet Data: | |||||||||||||||
Cash and cash equivalents | $ | 3,135 | $ | 6,627 | $ | 8,726 | $ | 18,658 | $ | 19,173 | |||||
Investments available for sale | $ | 1,453 | $ | 9,249 | $ | 9,954 | $ | 22,571 | $ | 19,815 | |||||
Total assets | $ | 7,175 | $ | 18,871 | $ | 22,172 | $ | 45,090 | $ | 39,398 | |||||
Stockholders’ equity | $ | 1,553 | $ | 11,147 | $ | 15,095 | $ | 32,627 | $ | 34,024 |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of |
We are a holding company and conduct our operations through our wholly-owned subsidiary, VirnetX, Inc. VirnetX, Inc., was incorporated in the Stateresale arrangements with and/or adoption as vendor standards by, one or more of Delaware in August 2005. In November 2006, VirnetX, Inc. acquired certain patents from SAIC, now Leidos. In July 2007, we effected a merger by and among VirnetX, Inc., VirnetX Holding Corporation and a wholly-owned subsidiary of VirnetX Holding Corporation, whereby VirnetX, Inc. merged with, and became, a wholly-owned subsidiary of VirnetX Holding Corporation and VirnetX Holding Corporation issued shares of its common stock to the stockholders of VirnetX, Inc. as consideration for the merger. As a result of this merger, the former security holders of VirnetX, Inc. came to own a majority of our outstanding common stock. On October 29, 2007, we changed our name from PASW, Inc. to VirnetX Holding Corporation.
Our portfolio of intellectual property is the foundation of our business model. We currently own approximately 185 U.S. and foreign patents, patent validations and pending applications. Our patent portfolio is primarily focused on securing real-time communications over the Internet, as well as related services such as the establishment and maintenance of a secure domain name registry. Our patented methods also have additional applications in the key areas of device operating systems and network security for Cloud services, M2M communications in areas of Smart City, Connected Car and Connected Home.
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We have submittedan ongoing licensing program under which we offer licenses to a declaration with the 3rd Generation Partnership Project, or 3GPP, identifying a groupportion of our patents and patent applications that we believe are or may become essential to certain developing specifications in the 3GPP LTE, SAE project. We have agreed to make available a non-exclusive patent license under fair, reasonable and non-discriminatory terms and conditions, with compensation, or FRAND, to 3GPP members desiring to implement the technical specifications identified by us. We believe that we are positioned to license our essential security patents to 3GPP members as they move into 4G.
We believe that the market opportunity for our software and technology solutions is large and expanding as secure domain names are now an integral part of securing the next generation 4G/LTE Advanced wireless networks and M2M communications in areas including Smart City, Connected Car and Connected Home. We also believe that all 4G/LTE Advanced mobile devices will require unique secure domain names and become part of a secure domain name registry.
We intend to license our patent portfolio, technology, and software, including our secure domain name registry service, to domain infrastructure providers, communication service providers as well as to system integrators. Our GABRIEL Connection Technology™ License is offered to original equipment manufacturer (“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 intendhave developed GABRIEL Connection Technology™ Software Development Kit (“SDK”) to seek furtherassist with rapid integration of these techniques into existing software 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 our technology, includingthe patents are used in a particular product or service. These licenses will typically include an initial license fee, as well as an ongoing royalty.
Our software and technology solutions, including our Secure Domain Name Registry and GABRIEL Connection Technology™, are designed to facilitate secure communications and provide the security platform required by next-generation Internet-based applications such as instant messaging, or IM, voice over Internet protocol, or VoIP, mobile services, streaming video, file transfer, remote desktop and, or M2M communications. Our technology generates secure connections on a “zero-click” or “single-click” basis, significantly simplifying the deployment of secure real-time communication solutions by eliminating the need for end-users to enter any encryption information.
Our product GABRIEL Secure Communication Platform™, unlike other collaboration and communication products and services on the market today, does not require access to user’s confidential data and minimizes the threat of hacking and data mining. It enables individuals and organizations to maintain complete ownership and control over their personal and confidential data, secured within their own private network, while enabling authorized secure encrypted access from anywhere at any time. Our GABRIEL Collaboration Suite™ is a set of applications that run on top of our GABRIEL Secure Communication Platform™. It enables seamless and secure cross-platform communications between user’s devices that have our software installed. Our GABRIEL Collaboration Suite™ is available for download and free trial, for Android, iOS, Windows, Linux and Mac OS X platforms, athttp://www.gabrielsecure.com/. We continueexpect to enhance our products and add new functionality to our products. We will provide updates to new and existing customers as they are released to the general public.
Many small and medium businesses have installed our software products in their corporate networks. We have signed Patent License Agreementsintend to continue to expand our customer base with Avaya Inc., Aastra USA, Inc., Microsoft Corporation, Mitel Networks Corporation, NEC Corporationtargeted promotions 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 futuredirect 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 will originate and assist us with negotiating transactions related to patent licensing worldwide with respect to certain third parties.
initiatives.
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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. See – Operations – ResearchWe intend to continue using an outsourced and Development Expensesleveraged model to maintain efficiency and manage costs as we grow our licensing business by, for a descriptionexample, offering incentives to early licensing targets or asserting our rights forum of our patents.
set of patents we acquired in 2006 from Leidos, into a larger patent portfolio. This portfolio now serves as the foundation of our products, services, and our licensing business. It is expected to generate most of our future revenue in license fees and royalties. We intend to continue our efforts to develop new products and technologies 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.
Developments invarious legal proceedings, the Year Ended December 31, 2017
Litigation
outcomes of which are inherently uncertain. We have eleven intellectual property infringement lawsuits pending in the United States District Court for the Eastern District of Texas, Tyler Division, and United States Court of Appeals for the Federal Circuit (“USCAFC”).
VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED)
On March 30, 2015, the United States Court for the Eastern District of Texas, Tyler Division, issued an order finding substantial overlap between the remanded portions of the Civil Action Case 6:10-CV-00417-LED (VirnetX vs. Cisco et. al.),record any potential gains related to legal proceedings only after cash is collected. We record a liability when it is probable that a loss has been incurred and the ongoing Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case. The jury trial in this case was held on January 25, 2016. On February 4, 2016, a jury in the United States Court for the Eastern District of Texas, Tyler Division, awarded us $625.6 million in a verdict against Apple Inc. for infringing four of our US patents, marking it the second time a federal jury has found Apple liable for infringing VirnetX’s patented technology. The verdict includes royalties awarded to us based on an earlier patent infringement finding (Case 6:10-CV-00417-LED) against Apple. The jury found that Apple’s modified VPN On-Demand, iMessage and FaceTime services infringed VirnetX’s patents and that Apple’s infringement was willful. In addition to determining the royalty owed by Apple for its prior infringement, this verdict also includes an award based on the jury’s finding that Apple’s modified VPN On Demand, iMessage and FaceTime services have continued to infringe VirnetX’s patents. The post-trial hearing was held on May 25, 2016 in the United States Court for the Eastern District of Texas, Texarkana Division. On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases (Case No. 6:10-cv-417, Docket No. 878 (“Apple I case”); Case No. 6:12-cv-855, Docket No. 220 (“Apple II case”)), ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both casesamount is bifurcated and that the Apple II case will be retried after Apple I case. Events and developments subsequent to the order from the court are described to support Apple I and Apple II matters.
VirnetX Inc. v. Cisco Systems, Inc. et al. (Case 6:10-CV-00417-LED) (“Apple I”)
On August 11, 2010, we initiated a lawsuit by filing a complaint against Aastra USA. Inc. (“Aastra”), Apple, Cisco Systems, Inc. (“Cisco”), and NEC Corporation (“NEC”) in the United States District Court for the Eastern District of Texas, Tyler Division, pursuant to which we alleged that these parties infringe on certain of our patents. We sought damages and injunctive relief. Aastra and NEC agreed to sign license agreements with us and we agreed to drop all the accusations of infringement against them. At the pre-trial hearing, the judge decided to conduct separate jury trial for each defendant, and try only the case against Apple on the scheduled trial date. The jury trial of our case against Cisco was held on March 4, 2013. The jury in our case against Cisco came back with a verdict of non-infringement also determined that all our patents-in-suit patents are not invalid. Our motions for a new trial and Cisco’s infringement of certain VirnetX patents were denied and the case against Cisco was closed.
The jury trial of our case against Apple was held on October 31, 2012. On November 6, 2012, a jury in the United States Court for the Eastern District of Texas, Tyler Division, awarded us over $368 million in a verdict against Apple for infringing four of our patents. On February 26, 2013, the court issued its Memorandum Opinion and Order regarding post-trial motions resulting from the prior jury verdict denying Apple’s motion to reduce the damages awarded by the jury for past infringement. The Court further denied Apple’s request for a new trial on the liability and damages portions of the verdict and granted our motions for pre-judgment interest, post-judgment interest, and post-verdict damages to date. The Court ordered that Apple pay $34 thousand in daily interest up to final judgment
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and $330 thousand in daily damages for infringement up to final judgment for certain Apple devices included in the verdict. The Court denied our request for a permanent injunction and severed the future infringement portion into its own separate proceedings under Case 6:13-CV-00211-LED.
On July 3, 2013, Apple filed an appeal of the judgment dated February 27, 2013 and order dated June 4, 2013 denying Apple’s motion to alter or amend the judgment to the USCAFC. On September 16, 2014, USCAFC issued their opinion, affirming the jury’s finding that all 4 of our patents are valid, confirming the jury’s finding of infringement of VPN on Demand under many of the asserted claims of our ‘135 and ‘151 patents, and confirming the district’s court’s decision to allow evidence concerning our licenses and royalty rates in connection withreasonably estimable, the determination of damages. In its opinion, the USCAFC also vacated the jury’s damages awardwhich requires significant judgment. Resolution of legal matters in a manner inconsistent with management’s expectations could have a material impact on our financial condition and the district court’s claim construction with respect to parts of our ‘504 and ‘211 patents and remanded the damages award and determination of infringement with respect to FaceTime –for further proceedings consistent with its opinion. On October 16, 2014, we filed a petition with the USCAFC, requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decision concerning VirnetX’s litigation against Apple Inc. On December 16, 2014, USCAFC denied our petition requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decision and remanded the case back to the Eastern District of Texas, Tyler Division, for further proceedings consistent with its opinion. On February 25, 2015, USCAFC granted Apple’s motions to lift stay of proceedings and vacate Case 6:13-CV-00211-LED. On March 30, 2015, the court issued an order finding substantial overlap between the remanded portions of this case and the ongoing Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case.
On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases Apple I case and Apple II case, ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II will be retried after Apple I case. The jury trial in this case was held on September 26, 2016. On September 30, 2016, a Juryoperating results. See Note 12 in the United States Court for the Eastern District of Texas, Tyler Division, in the case VirnetX Inc., et al. v. Apple Inc., No. Apple I, has awarded VirnetX $302.4 million in a verdict against Apple for infringing four VirnetX patents, marking the third time a federal jury has found Apple liable for infringing VirnetX’s patented technology.
The verdict includes royalties awarded to VirnetX, for unresolved issues in the Apple I case, remanded back from the USCAFC, related to (1) damages owed to VirnetX for infringement by Apple’s original VPN-on-Demand (VOD) and (2) the alleged infringement by Apple’s original FaceTime product, under the new claim construction of “secure communication link” pertaining to the ’504 and ’211 patents by the USCAFC, and the damages associated with that infringement. The hearing on all the post-trial motions was held on November 22, 2016.
On September 29, 2017, the United States District Court for the Eastern District of Texas, Tyler Division, entered Final Judgement and issued its Memorandum Opinion and Order regarding post-trial motions resulting from the prior $302.4 million jury verdict for VirnetX in the Apple I case.
In the Order, the Court denied all of Apple’s post-trial motions including motion for judgment as a matter of law of non-infringement, motion for judgment as a matter of law on damages, motion for a new trial on infringement, and motion for a new trial on damages. The Court granted all VirnetX’s post-trial motions including motion for willful infringement and enhanced the royalty rate during the willfulness period by 50 percent, from $1.20 to $1.80 per device, awarding VirnetX, enhanced damages in the amount of $41.3 million against Apple thereby, granting VirnetX a total sum of $343.7 million in pre-interest damages. The Court also awarded costs, certain attorneys’ fees, and prejudgment interest to VirnetX, and directed the parties to meet and confer regarding these amounts. On October 13, 2017, having met and conferred and having reached agreements on all amounts, parties jointly filed a motion asking the Court to grant VirnetX an additional sum in the amount of $96 million in agreed Bill of Costs, Attorneys’ Fees, and Prejudgment Interest. The Final Judgement is only subject to appeal stemming from new issues unresolved in the Apple I case, remanded back from the United States Court of Appeals for the Federal Circuit. The total Final Judgement amount including Jury Verdict, Willful Infringement, Interest, Costs and Attorney Fees is $439.7 million.
On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on September 29, 2017 to the United States Court of Appeals for the Federal Circuit. This case has now been closed and events and developments subsequent to the notice of appeal are described below under VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case).
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VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”)
On November 6, 2012, we filed a complaint against Apple in the United States District Court for the Eastern District of Texas, Tyler Division for willfully infringing four of our patents, U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151, and seeking both an unspecified amount of damages and injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and the latest Macintosh computers. Due to their release dates, these products were not included in the previous lawsuit that concluded with a Jury verdict on November 6, 2012 that was subsequently upheld by the United States District Court for the Eastern District of Texas, Tyler Division, on February 26, 2013. On July 1, 2013, we filed a consolidated and amended complaint to include U.S. Patent No. 8,051,181 and consolidate Civil Action No. 6:11-cv-00563-LED. On August 27, 2013, we filed an amended complaint including allegations of willful infringement related to U.S. Patent No. 8,504,697 seeking both damages and injunctive relief. The Markman hearing in this case was held on May 20, 2014 and on August 8, 2014, issued its Markman Order, denying Apple’s motion for summary judgment of indefiniteness, in which Apple alleged that some of the disputed claims terms in the patents asserted by us were invalid for indefiniteness. In a separate order, the court granted in part and denied in part our motion for partial summary judgment on Apple’s invalidity counterclaims, precluding Apple from asserting invalidity as a defense against infringement of the claims that were tried before a jury in our prior litigation against Apple (VirnetX vs. Cisco et. al., Case 6:10-CV-00417-LED). The jury trial in this case was scheduled for October 13, 2015. On March 30, 2015, the court issued an order finding substantial overlap between this case and the remanded portions of Case 6:10-CV-00417-LED (VirnetX vs. Cisco et. al.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case. On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases Apple I case and Apple II case, ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II will be retried after Apple I case.
On September 29, 2017, the Court issued an order denying Apple’s Motion to Stay. The Court ordered the parties to meet and confer and file a joint motion with a proposed trial date by October 13, 2017. The parties have met, conferred and filed a joint motion on the proposed trial dates. On November 9, 2017, the court issued its order setting this case for jury selection on April 2, 2018 in Tyler, Texas.
On January 5, 2018, Apple filed a Petition for Writ of Mandamus with the USCAFC requesting the court to stay the upcoming limited retrial of the Apple II pending the USCAFC’s decision in related consolidated appeal VirnetX Inc. v. Apple Inc., Cases 2017-1591. On February 22, 2018, the USCAFC issued its order denying Apple’s Petition for Writ of Mandamus. The Apple II case is proceeding on schedule for jury selection on April 2, 2018 per the district court’s order.
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case)
On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on September 29, 2017 to the United States Court of Appeals for the Federal Circuit.
On January 5, 2018, Apple filed a motion requesting a stay of the briefing schedule in this appeal pending this court’s decision in related consolidated appeal VirnetX Inc. v. Apple Inc., Cases 2017-1591. On January 24, 2018, USCAFC denied Apple’s motion requesting a stay of the briefing schedule and ordered Apple to file its opening brief no later than March 19, 2018.
VirnetX Inc. v. Apple, Inc. (Case 15-1934)
On July 10, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the United States Patent and Trademark Office, Patent Trial and Appeal Board (“PTAB”) in IPR2014-00237 and IPR2014-00238, related to U.S. Patent No. 8,504,697. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on the grounds discussed in IPR2014-00238. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 16-1211)
On September 28, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2014-00403 and IPR2014-00404 and on October 22, 2015 for IPR2014-00481 and IPR2014-00482 involving our U.S. Patent Nos. 7,188,180, and 7,987,274. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on the grounds discussed in IPR2014-00403 and IPR2014-00481. We are currently evaluating our options in this case.
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VirnetX Inc. v. Apple, Inc. (Case 16-1480)
On November 30, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,949 related to U.S. Patent No. 8,051,181. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on certain grounds. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 16-119)
On March 4, 2016, we filed a petition for writ of mandamus with the USCAFC, requesting the USCAFC’s intervention to revoke the PTAB’s decision joining Apple to IPR2015-01046 and IPR2015-01047, related to U.S. Patent Nos. 6,502,135 and 7,490,151. On March 18, 2016, the USCAFC denied the petition without prejudice to us raising the arguments on appeal after the PTAB’s final decisions. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 17-1131)
On October 31, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2015-00810 and IPR2015-00812, on November 9, 2016 for IPR2015-00811, and on November 28, 2016 for IPR2015-00866, IPR2015-00868, IPR2015-00870 and IPR2015-00871 involving our U.S. Patent Nos.8,868,705, 8,850,009, 8,458,341, 8,516,131, and 8,560,705. These appeals have been consolidated. The briefing in these appeals has been concluded; the oral argument were held on March 5, 2018. We are awaiting the courts ruling in this matter.
VirnetX Inc. v. The Mangrove Partners (Case 17-1368)
On December 16, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2015-01046, and on December 20, 2016 for IPR2015-1047, involving our U.S. Patent Nos. 6,502,135, and 7,490,151. These appeals also involve Apple, Inc. and one of them involves Black Swamp IP, LLC. On April 27, 2017, the USCAFC stayed these appeals pending the USCAFC’s en banc decision in Wi-Fi One, LLC v. Broadcom Corporation, No. 2015-1944. The stay was lifted on January 31, 2018, and briefing is now ongoing.
VirnetX Inc. v. Apple Inc., Cisco Systems, Inc. (Case 17-1591)
On February 7, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-partes reexamination nos. 95/001,788, 95/001,789, and 95/001,856 relatednotes to our U.S. Patent Nos. 7,921,211 and 7,418,504. These appeals have been consolidated. The briefing in these appeals has been concluded; the oral arguments have not yet been scheduled.
VirnetX Inc. v. Apple Inc. (Case 17-2490)
On August 23, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2016-00331 and IPR2016-00332 involving our U.S. Patent No. 8,504,696. These appeals have been consolidated. The briefing in these appeals has been concluded; the oral arguments have not yet been scheduled.
In re VirnetX Inc. (Case 17-2593)
On September 22, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2016-00693 and IPR2016-00957 involving our U.S. Patent Nos. 7,418,504 and 7,921,211. These appeals have been consolidated. The briefing in these appeals is ongoing. The entity that initiated the IPRs, Black Swamp IP, LLC, indicated on October 18, 2017, that it would not participate in the appeals. On November 27, 2017, the United States Patent and Trademark Office indicated that it would intervene in the appeals. On January 19, 2018, the USCAFC stayed these appeals pending the USCAFC’s decision in Case 17-1591.
One orconsolidated financial statements for more potential intellectual property infringement claims may also be available to us against certain other companies who have the resources to defend against any such claims. Although we believe these potential claims are worth pursuing, commencing a lawsuit can be expensive and time-consuming, and there is no assurance that we will prevail on such potential claims. In addition, bringing a lawsuit may lead to potential counterclaims which may preclude our ability to commercialize our initial products, which are currently in development. Currently, we are not a party to any other pending legal proceedings, and are not aware of any proceeding threatened or contemplated against us by any governmental authority or other party.
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Commitments and Related Party Transactions
and Estimates
Basis of Consolidation
The consolidated financial statements include the accounts of VirnetX Holding Corporation and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
The preparation of
Revenue Recognition (see New Accounting Pronouncements - ASU No. 2014-09, Revenue from Contracts with Customers)
We derive our revenue from patent licensing. The timing and amount of revenue recognized from each licensee depends upon a variety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations. Such agreements may be complex and include multiple elements. These agreements may include, without limitation, elements 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 considerationcircumstances, and we evaluate these estimates on an ongoing basis. We refer to be allocated to each elementaccounting estimates of an agreement that has stand-alone value using the relative fair value method. In other circumstances, suchthis type as those agreements involving consideration for pastcritical accounting policies and expected future patent royalty obligations, after consideration of the particular factsestimates, which we discuss further below. We have reviewed our critical accounting policies 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 upon settlement of litigation, we provide the licensee permission to use our patented technology in specific applications. We account for
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patent license agreements in accordanceestimates 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:
Deferred revenue
In August 2013, we began receiving annual payments on a contract that required payment to us over 4 years of $10,000 (“August 2013 Contract Settlement”). From the inception of that license to December 31, 2017, we received cash totaling $10,000, all of which is non-refundable. We recognized $1,500, $1,500 and $1,500 of revenue related to the August 2013 Contract Settlement during the years ended December 31, 2017, 2016 and 2015, respectively.
Activity under the August 2013 Contract Settlement was as follows (in thousands):
2017 | 2016 | 2015 | |||||||
Deferred Revenue, beginning of year | $ | 4,000 | $ | 3,000 | $ | 2,000 | |||
Payment received | — | 2,500 | 2,500 | ||||||
Less: Amount amortized as revenue | 1,500 | 1,500 | 1,500 | ||||||
Deferred Revenue, end of year | $ | 2,500 | $ | 4,000 | $ | 3,000 |
Royalty Expense
Royalty expense for the years ended December 31, 2017, 2016 and 2015 was $0, $884 and $5,265, respectively, and was a resultAudit Committee of our royalty agreement with Leidos. The agreement provides for revenue sharing and legal
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reimbursements related to attorney time and expenses incurred by Leidos during discovery and other aspects of litigation involving the defense of our patents which have been resolved.
Earnings Per Share
Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. During the years ended 2017, 2016 and 2015 we incurred losses. Therefore, the effects of any common stock equivalent were anti-dilutive during those periods.
Concentration of Credit Risk and Other Risks and Uncertainties
Our cash and cash equivalents are primarily maintained at two major financial institutions in the United States. A portion of those balances are insured by the Federal Deposit Insurance Corporation. During the year ended December 31, 2017, and 2016 we had, at times, funds which were uninsured. We do not believe that we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships with major financial institutions. We have not experienced any losses on our deposits of cash and cash equivalents.
Derivative Instruments
Our Series I Warrants contained an anti-dilution provision which prevented them from being considered indexed to our stock. As a result, the warrants were required to be accounted for as derivative instruments during 2015. The remaining balance of Series 1 Warrants expired during the year ended December 31, 2015.
We recognize derivative instruments as either assets or liabilities on the accompanying Consolidated Balance Sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives in the accompanying Consolidated Statements of Operations.
Impairment of Long-Lived Assets
We identify and record impairment losses on long-lived assets used in operations when events and changes in circumstances indicate that the carrying amount of an asset might not be recoverable, but not less than annually. Recoverability is measured by comparison of the anticipated future net undiscounted cash flows to the related assets’ carrying value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset.
Income Taxes
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against our net deferred income tax assets, we consider all available evidence, both positive and negative. Consistent with our policy, and because of our history of operating losses, we do not currently recognize the benefit of all of our deferred tax assets, including tax loss carry forwards, that may be used to offset future taxable income. We continually assess our ability to generate sufficient taxable income during future periods in which our deferred tax assets may be realized. If and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance if any, as an income tax benefit in our statements of operations.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”). The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate federal tax rate from a maximum of 35% to a 21% rate. The rate reduction will be taking effect on January 1, 2018. Therefore, we applied the tax rate of 21% to the ending balance of federal deferred tax assets, but because we provided a full valuation allowance against our net deferred tax assets, no tax impact is recognized due to the tax rate change.
The Act changes the worldwide territorial tax system. Therefore, the deemed repatriation tax applies to undistributed earnings of certain non-U.S. subsidiaries. The company has no deemed repatriation tax liability because its foreign subsidiary’s accumulated earnings are negative. We also assess the tax impact of the Act for 2018 and future years and do not believe there is a need to change our valuation allowance position as of December 31, 2017.
Stock-based Compensation
We account for stock-based compensation using the fair value recognition method. We recognize these compensation costs net of the applicable forfeiture rate and recognize the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally based the option vesting term of 4 years. Beginning January 1, 2017, we discontinued estimating forfeitures for time-based awards upon adoption of ASU No. 2016-09 – “Compensation – Stock Compensation” discussed below in New Accounting Pronouncements.
In addition, we record stock and options granted to non-employees at fair value of the consideration received or the fair value of the equity investments issued as they vest over the performance period.
We apply fair value accounting to all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis.
Level 1 – Quotedunadjusted quoted prices in active markets for identical assets or liabilities.
liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Level 2 – Observablemeasurements utilize either directly or indirectly observable inputs in markets other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
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Our financial instruments are stated at amounts that equal, or are intended to approximate, fair value. When we approximateestimate fair value, we utilize market data or assumptions that we believe market participants would use in pricing the financial instrument, including assumptions about risk and inputs to the valuation technique. We use quoted valuation techniques, primarily the income and market approach, that maximizewhich maximizes the use of observable inputs and minimize the use of unobservable inputs for recurring fair value measurements.
New Accounting Pronouncements
In June 2016,
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”), which simplified certain aspectsrequisite service period of the accountingaward, which is generally a vesting term of 4 years. We recognize forfeitures, if any, when they occur. In addition, we record stock-based compensation expense for share-based payment transactions, including income taxes, classificationawards granted to non-employees at fair value of awards and classificationthe consideration received or the fair value of the equity instruments issued, as they vest, over the performance period. See Note 6 in the statement of cash flows. We adopted this ASU in 2017 with the following affects:
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We are evaluating the impact this guidance will have on our financial position and statement of operations.
In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) “ASU 2014-09”. ASU 2014-09 was subsequently amended by ASU No. 2016-10 and 2016-12. As amended, Topic 606 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments create a new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For a public entity, the amendments to ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We will adopt the new revenue standards in our first quarter of 2018 utilizing the modified retrospective transition method. We expect the adoption of the standard to result in an approximate $2,500 increase in accumulated deficit and a $2,500 decrease in deferred revenue in our consolidated balance sheet. The new revenue standards are not expected to have a material impact on the amount and timing of revenue recognized in our consolidated financial statements.
41
Results of Operations (all amounts in this section are expressed in thousands)
2017 | 2016 | 2015 | |||||||
Revenue | $ | 1,547 | $ | 1,550 | $ | 1,555 |
2022 2021 2020
In addition to the settlement discussed above, during 2017, 2016 and 2015 wemore information.
2022 | 2021 | 2020 | ||||||||||
Licensing costs | $ | (4 | ) | $ | (9,083 | ) | $ | 90,101 |
our consolidated financial statements for more information.
2017 | 2016 | 2015 | |||||||
Research and Development | $ | 2,674 | $ | 2,499 | $ | 2,277 |
2022 2021 2020
compensation costs.
2017 | 2016 | 2015 | |||||||
Selling, General and Administrative | $ | 16,194 | $ | 26,672 | $ | 23,190 |
2022 2021 2020
Within selling, general2020.
Also included in selling, general and administrative expense in 2017, 2016 and 2015 is royalty expense of $0 for the year ended December 31, 2017, $884 for the year ended December 31, 2016 and $5,265 for the year ended December 31, 2015, paid to Leidos, in connection with the settlement with Microsoft, Avaya and Mitel et al.
Loss on change in value of derivative liability
2017 | 2016 | 2015 | |||||||
Loss on change in value of derivative liability | $ | — | $ | — | $ | (117 | ) |
Our non-cash loss related to the periodic revaluation of our Series I Warrants liability for the year ended December 31, 2015 was $117. All outstanding Series 1 Warrants expired in March 2015.
42
Other Income, and Expenses
2017 | 2016 | 2015 | |||||||
Interest and Other Income | $ | 46 | $ | 69 | $ | 68 |
2022 2021 2020
more information.
Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||
United States federal statutory rate | 35.00 | % | 35.00 | % | 35.00 | % | |||
State taxes, net of federal benefit | (0.01 | )% | (0.31 | )% | (0.04 | )% | |||
Valuation allowance | (35.94 | )% | (35.43 | )% | (33.36 | )% | |||
Stock options | — | — | (1.62 | )% | |||||
Prior year adjustment | — | (0.06 | )% | 0.03 | % | ||||
R&D Credit | 1.43 | % | 0.66 | % | 0.38 | % | |||
Warrants | — | — | (0.14 | )% | |||||
Other | (0.50 | )% | (0.33 | )% | (0.29 | )% | |||
Effective income tax rate | (0.02 | )% | (0.47 | )% | (0.04 | )% |
In 2017, 2016
expiring options.
For the year ended
2021.
In August 2015,
We sold 730,444, 4,760,594 and 835,056 shares of common stock under the ATM program during the years ended December 31, 2017, 2016 and 2015, respectively.purposes. The average sales price per common share sold during the year ended December 31, 2017 was $5.19 and the aggregate proceeds from the sales totaled $3,790 during the period.
43
Sales commissions, fees and other costs associated with the ATM transactions totaled $113 for 2017. The average sales price per common share sold during the year ended December 31, 2016 was $4.16 and the aggregate proceeds from the sales totaled $19,791 during the period. Sales commissions, fees and other costs associated with the ATM transactions totaled $594 for 2016. The average sales price per common share sold during the year ended December 31, 2015 was $4.04 and the aggregate proceeds from the sales totaled $3,378 during the period. Sales commissions, fees and other costs associated with the ATM totaled $101 for 2015. On March 8, 2018, we amended our August 20, 2015 equity offering sales agreement (“Amended Agreement”) with Cowen and Company, LLC (“Cowen”), whereby the maximum aggregate value of the Company’s common stock (“Shares”) we may offer and sell, from time to time, was increased from $35,000,000 to $50,000,000.
Contractual Commitments
Total | 2018 | 2019 | |||||||
Leases | $ | 102 | $ | 56 | $ | 46 | |||
Total | $ | 102 | $ | 56 | $ | 46 |
Off-Balance Sheet Arrangements
As of December 31, 2017, we had no off-balance sheet arrangements.
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
We invest our excess cash primarily in highly liquid debt instruments including corporate, government and federal agency securities. By policy,
Investments in fixed rate securities carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates. Due in part to these factors, our income from investments may decrease in the future.
We considered the historical volatility of short-term interest rates and determined that it was reasonably possible that an adverse change of 100 basis points could be experienced in the near term but would have an immaterial impact in the fair value of our marketable securities as they will be maturing in six months or less.
45
America.
Deferred Taxes | |
Description of the Matter | As discussed in Notes 2 and 10 to the financial statements, the Company recorded a full valuation allowance against the deferred tax assets as of December 31, 2022. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized in the future. In assessing the ability to realize the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The valuation allowance is based on management’s estimates of future taxable income and available evidence, both positive and negative. Our determination that valuation of deferred taxes is a critical audit matter results from the significant judgment by management when assessing the ability to realize the deferred tax assets, particularly as it relates to estimates of future taxable income. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures relating to management’s assessment of the realizability of deferred tax assets. |
Audit Procedures | Our principal audit procedures related to the Company’s deferred taxes included the following: - We evaluated management’s estimates of future taxable income which involved evaluating whether the estimates used by management were reasonable considering the current and past performance of the respective entity and whether the estimates were consistent with evidence obtained in other areas of the audit. - We evaluated management’s assessment of all relevant data that would affect management’s estimate of future taxable income to determine whether a deferred tax asset would be realized in the future. |
46
VIRNETX HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
As of December 31, 2017 | As of December 31, 2016 | |||||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 3,135 | $ | 6,627 | ||
Investments available for sale | 1,453 | 9,249 | ||||
Prepaid expenses and other current assets | 591 | 588 | ||||
Total current assets | 5,179 | 16,464 | ||||
Prepaid expenses, non-current | 1,989 | 2,374 | ||||
Property and equipment, net | 7 | 33 | ||||
Total assets | $ | 7,175 | $ | 18,871 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable and accrued liabilities | $ | 414 | $ | 1,806 | ||
Accrued payroll and related expenses | 2,175 | 1,522 | ||||
Income tax liability | 393 | 396 | ||||
Deferred revenue, current portion | 1,500 | 1,500 | ||||
Total current liabilities | 4,482 | 5,224 | ||||
Deferred revenue, non-current portion | 1,000 | 2,500 | ||||
Other liabilities | 140 | — | ||||
Commitments and contingencies (Note 4) | — | — | ||||
Total liabilities | 5,622 | 7,724 | ||||
Stockholders’ equity: | ||||||
Preferred stock, par value $0.0001 per share Authorized: 10,000,000 shares at December 31, 2017 and December 31, 2016, Issued and outstanding: 0 shares at December 31, 2017 and December 31, 2016 | — | — | ||||
Common stock, par value $0.0001 per share | ||||||
Authorized: 100,000,000 shares at December 31, 2017 and December 31, 2016, Issued and outstanding: 59,051,978 shares and 58,144,888 shares, at December 31, 2017 and December 31, 2016, respectively | 6 | 6 | ||||
Additional paid-in capital | 177,076 | 169,391 | ||||
Accumulated deficit | (175,516 | ) | (158,238 | ) | ||
Accumulated other comprehensive loss | (13 | ) | (12 | ) | ||
Total stockholders’ equity | 1,553 | 11,147 | ||||
Total liabilities and stockholders’ equity | $ | 7,175 | $ | 18,871 |
As of December 31, 2022 | As of December 31, 2021 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 86,561 | $ | 142,018 | ||||
Investments available for sale | 65,462 | 27,254 | ||||||
Accounts receivables | 14 | 17 | ||||||
Prepaid income tax | — | — | ||||||
Prepaid expenses and other current assets | 224 | 203 | ||||||
Total current assets | 152,261 | 169,492 | ||||||
Prepaid expenses and other assets | 703 | 1,056 | ||||||
Property and equipment, net | 11 | 18 | ||||||
Deferred tax asset | — | 15,950 | ||||||
Total assets | $ | 152,975 | $ | 186,516 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 373 | $ | 338 | ||||
Accrued payroll and related expenses | 311 | 270 | ||||||
Accrued licensing costs | — | 355 | ||||||
Other liabilities, current | 47 | 58 | ||||||
Total current liabilities | 731 | 1,021 | ||||||
Other liabilities | — | 46 | ||||||
Total liabilities | 731 | 1,067 | ||||||
Commitments and contingencies (Note 4) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, par value $0.0001 per share Authorized: 10,000,000 shares at December 31, 2022 and December 31, 2021, Issued and outstanding: 0 shares at December 31, 2022 and December 31, 2021 | — | — | ||||||
Common stock, par value $0.0001 per share | ||||||||
Authorized: 100,000,000 shares at December 31, 2022 and December 31, 2021, Issued and outstanding: 71,424,650 and 71,232,856 shares, at December 31, 2022 and December 31, 2021, respectively | 7 | 7 | ||||||
Additional paid-in capital | 239,746 | 236,445 | ||||||
Accumulated deficit | (87,195 | ) | (50,935 | ) | ||||
Accumulated other comprehensive loss | (314 | ) | (68 | ) | ||||
Total stockholders’ equity | 152,244 | 185,449 | ||||||
Total liabilities and stockholders’ equity | $ | 152,975 | $ | 186,516 |
47
VIRNETX HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||
Revenue | $ | 1,547 | $ | 1,550 | $ | 1,555 | |||
Operating expense: | |||||||||
Royalty expense | — | 884 | 5,265 | ||||||
Research and development | 2,674 | 2,499 | 2,277 | ||||||
Selling, general and administrative expenses | 16,194 | 26,672 | 23,190 | ||||||
Total operating expense | 18,868 | 30,055 | 30,732 | ||||||
Loss from operations | (17,321 | ) | (28,505 | ) | (29,177 | ) | |||
Loss on change in value of derivative liability | — | — | (117 | ) | |||||
Interest and other income, net | 46 | 69 | 68 | ||||||
Loss before taxes | (17,275 | ) | (28,436 | ) | (29,226 | ) | |||
Income tax expense | (3 | ) | (133 | ) | (8 | ) | |||
Net loss | $ | (17,278 | ) | $ | (28,569 | ) | $ | (29,234 | ) |
Basic and diluted loss per share | $ | (0.30 | ) | $ | (0.51 | ) | $ | (0.56 | ) |
Weighted average shares outstanding basic and diluted | 58,354,397 | 55,984,825 | 52,384,494 |
VIRNETX HOLDING CORPORATIONCONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(in thousands)
Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||
Net loss | $ | (17,278 | ) | $ | (28,569 | ) | $ | (29,234 | ) |
Other comprehensive gain (loss), net of tax: | |||||||||
Change in equity adjustment from foreign currency translation, net of tax | — | 3 | (1 | ) | |||||
Change in unrealized gain (loss) on investments, net of tax | (1 | ) | 4 | (3 | ) | ||||
Total other comprehensive income (loss), net of tax | (1 | ) | 7 | (4 | ) | ||||
Comprehensive loss | $ | (17,279 | ) | $ | (28,562 | ) | $ | (29,238 | ) |
Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | ||||||||||
Revenue | $ | 48 | $ | 35 | $ | 302,636 | ||||||
Operating expense: | ||||||||||||
Licensing costs | (4 | ) | (9,083 | ) | 90,101 | |||||||
Research and development | 6,406 | 5,577 | 8,830 | |||||||||
Selling, general and administrative expenses | 15,722 | 52,715 | 45,812 | |||||||||
Total operating expense | 22,124 | 49,209 | 144,743 | |||||||||
(Loss) income from operations | (22,076 | ) | (49,174 | ) | 157,893 | |||||||
Gain on settlement | — | — | 41,271 | |||||||||
Interest and other income, net | 1,848 | 48 | 108,288 | |||||||||
(Loss) income before taxes | (20,228 | ) | (49,126 | ) | 307,452 | |||||||
Income tax (provision) benefit | (16,032 | ) | 6,205 | (27,023 | ) | |||||||
Net (loss) income | $ | (36,260 | ) | $ | (42,921 | ) | $ | 280,429 | ||||
Basic (loss) earnings per share | $ | (0.51 | ) | $ | (0.60 | ) | $ | 3.96 | ||||
Diluted (loss) earnings per share | $ | (0.51 | ) | $ | (0.60 | ) | $ | 3.92 | ||||
Weighted average shares outstanding basic | 71,335,046 | 71,159,458 | 70,850,311 | |||||||||
Weighted average shares outstanding diluted | 71,335,046 | 71,159,458 | 71,615,843 |
48
VirnetX Holding Corporation
VIRNETX HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
COMPREHENSIVE (LOSS) INCOME
(in thousands, except share amounts)
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity (Deficit) | ||||||||||||||
Shares | Amount | |||||||||||||||||
Balance at December 31, 2014 | 51,996,701 | $ | 5 | $ | 133,072 | $ | (100,435 | ) | $ | (15 | ) | $ | 32,627 | |||||
Stock issued for cash exercise of warrants at $3.59 per share, net | 120,161 | 431 | 431 | |||||||||||||||
Stock issued for cash at $4.04 per share, net | 835,056 | 3,276 | 3,276 | |||||||||||||||
Advisor warrant issuance | 121 | 121 | ||||||||||||||||
Stock-based compensation | 7,275 | 7,275 | ||||||||||||||||
Exercise of options | 143,100 | 165 | 165 | |||||||||||||||
Stock issued for vested RSUs | 103,817 | |||||||||||||||||
Derivative liability | 438 | 438 | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||
Net Loss | (29,234 | ) | (29,234 | ) | ||||||||||||||
Other comprehensive loss, net of tax | (4 | ) | (4 | ) | ||||||||||||||
Comprehensive loss | (29,238 | ) | ||||||||||||||||
Balance at December 31, 2015 | 53,198,835 | $ | 5 | $ | 144,778 | $ | (129,669 | ) | $ | (19 | ) | $ | 15,095 | |||||
Stock issued for cash at 3.00-$5.05 per share, net | 4,760,594 | 1 | 19,195 | 19,196 | ||||||||||||||
Stock-based compensation | 5,398 | 5,398 | ||||||||||||||||
Exercise of options | 50,357 | 20 | 20 | |||||||||||||||
Stock issued for vested RSUs | 135,102 | |||||||||||||||||
Comprehensive income: | ||||||||||||||||||
Net Loss | (28,569 | ) | (28,569 | ) | ||||||||||||||
Other comprehensive income, net of tax | 7 | 7 | ||||||||||||||||
Comprehensive loss | (28,562 | ) | ||||||||||||||||
Balance at December 31, 2016 | 58,144,888 | $ | 6 | $ | 169,391 | $ | (158,238 | ) | $ | (12 | ) | $ | 11,147 | |||||
Stock issued for cash at $4.00 -$5.69 per share, net | 730,444 | 3,677 | 3,677 | |||||||||||||||
Stock-based compensation | 3,986 | 3,986 | ||||||||||||||||
Exercise of options | 12,500 | 22 | 22 | |||||||||||||||
Stock issued for vested RSUs | 164,146 | |||||||||||||||||
Comprehensive income: | ||||||||||||||||||
Net Loss | (17,278 | ) | (17,278 | ) | ||||||||||||||
Other comprehensive loss, net of tax | (1 | ) | (1 | ) | ||||||||||||||
Comprehensive loss | (17,279 | ) | ||||||||||||||||
Balance at December 31, 2017 | 59,051,978 | $ | 6 | $ | 177,076 | $ | (175,516 | ) | $ | (13 | ) | $ | 1,553 |
Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | ||||||||||
Net (loss) income | $ | (36,260 | ) | $ | (42,921 | ) | $ | 280,429 | ||||
Other comprehensive (loss) income, net of tax: | ||||||||||||
Change in unrealized (loss) gain on investments, net | (246 | ) | (51 | ) | — | |||||||
Change in foreign currency translation, net | — | (4 | ) | 1 | ||||||||
Total other comprehensive (loss) gain, net of tax | (246 | ) | (55 | ) | 1 | |||||||
Comprehensive (loss) income | $ | (36,506 | ) | $ | (42,976 | ) | $ | 280,430 |
49
VIRNETX HOLDING CORPORATIONCONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
STOCKHOLDERS’ EQUITY
(in thousands)
Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||
Cash flows from operating activities: | |||||||||
Net loss | $ | (17,278 | ) | $ | (28,569 | ) | $ | (29,234 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||
Depreciation | 26 | 28 | 26 | ||||||
Amortization of warrant issuance costs | — | 30 | 91 | ||||||
Stock-based compensation | 3,986 | 5,398 | 7,275 | ||||||
Change in value of derivative liability | — | — | 117 | ||||||
Changes in assets and liabilities: | |||||||||
Prepaid expenses and other current assets | (3 | ) | 66 | (2 | ) | ||||
Prepaid expense – Non-current | 385 | 385 | 385 | ||||||
Accounts payable | (1,392 | ) | (477 | ) | (1,044 | ) | |||
Other liabilities | 140 | — | — | ||||||
Accrued payroll and related expenses | 695 | 232 | 1,207 | ||||||
Royalty payable | — | — | (6,100 | ) | |||||
Related-party payable | — | (11 | ) | (70 | ) | ||||
Income tax liability | (3 | ) | (4 | ) | (8 | ) | |||
Deferred revenue | (1,500 | ) | 1,000 | 1,000 | |||||
Net cash used in operating activities | (14,944 | ) | (21,922 | ) | (26,357 | ) | |||
Cash flows from investing activities: | |||||||||
Purchase of property and equipment | — | (13 | ) | (10 | ) | ||||
Purchase of investments | (946 | ) | (10,527 | ) | (10,673 | ) | |||
Proceeds from sale or maturity of investments | 8,741 | 11,240 | 23,287 | ||||||
Net cash provided by investing activities | 7,795 | 700 | 12,604 | ||||||
Cash flows from financing activities: Restate for rule | |||||||||
Proceeds from exercise of options | 22 | 20 | 165 | ||||||
Proceeds from exercise of warrants | — | — | 431 | ||||||
Proceeds from sale of common stock | 3,677 | 19,196 | 3,276 | ||||||
Payments of taxes on cashless exercise of restricted stock units | (42 | ) | (93 | ) | (51 | ) | |||
Net cash provided by financing activities | 3,657 | 19,123 | 3,821 | ||||||
Net decrease in cash and cash equivalents | (3,492 | ) | (2,099 | ) | (9,932 | ) | |||
Cash and cash equivalents, beginning of period | 6,627 | 8,726 | 18,658 | ||||||
Cash and cash equivalents, end of period | $ | 3,135 | $ | 6,627 | $ | 8,726 | |||
Cash paid for income taxes | $ | 5 | $ | 126 | $ | 6 | |||
Non-cash transactions | |||||||||
Fair value of warrants issued for services | $ | — | $ | — | $ | 121 |
Year Ended | ||||||||||||
December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Total shareholders’ equity, beginning balances | $ | 185,449 | $ | 224,437 | $ | 5,628 | ||||||
Common stock and additional paid-in capital: | ||||||||||||
Beginning balances | 236,452 | 232,464 | 223,244 | |||||||||
Common stock issued for cash, net | — | — | 4,488 | |||||||||
Common stock issued for options/RSUs, net | (29 | ) | (196 | ) | 690 | |||||||
Warrants issued for services | — | — | 104 | |||||||||
Stock-based compensation | 3,330 | 4,184 | 3,938 | |||||||||
Ending balances | 239,753 | 236,452 | 232,464 | |||||||||
Accumulated deficit (retained earnings) | ||||||||||||
Beginning balances | (50,935 | ) | (8,014 | ) | (217,602 | ) | ||||||
Net (loss) income | (36,260 | ) | (42,921 | ) | 280,429 | |||||||
Dividends | — | — | (70,841 | ) | ||||||||
Ending balances | (87,195 | ) | (50,935 | ) | (8,014 | ) | ||||||
Accumulated other comprehensive loss: | ||||||||||||
Beginning balances | (68 | ) | (13 | ) | (14 | ) | ||||||
Change in unrealized investment (loss) gain, net | (246 | ) | (51 | ) | — | |||||||
Change in foreign currency translation, net | — | (4 | ) | 1 | ||||||||
Ending balances | (314 | ) | (68 | ) | (13 | ) | ||||||
Total shareholders’ equity, ending balances | $ | 152,244 | $ | 185,449 | $ | 224,437 | ||||||
Dividends per share | $ | — | $ | — | $ | 1.00 |
50
Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net (loss) income | $ | (36,260 | ) | $ | (42,921 | ) | $ | 280,429 | ||||
Adjustments to reconcile net (loss) income to net cash from operating activities: | ||||||||||||
Depreciation | 7 | 4 | 5 | |||||||||
Stock-based compensation | 3,330 | 4,184 | 3,938 | |||||||||
Amortization of warrants issuance costs | — | 34 | 69 | |||||||||
Deferred income taxes | 16,032 | (6,901 | ) | (9,049 | ) | |||||||
Changes in assets and liabilities: | ||||||||||||
Prepaid expenses and other current assets | 331 | 271 | 419 | |||||||||
Accounts payable and accrued liabilities | 35 | (316 | ) | (692 | ) | |||||||
Other liabilities | (54 | ) | 60 | (193 | ) | |||||||
Accrued payroll and related expenses | 41 | 50 | (67 | ) | ||||||||
Accrued licensing costs | (355 | ) | (9,083 | ) | 9,438 | |||||||
Accounts receivable | 3 | (9 | ) | (3 | ) | |||||||
Prepaid income taxes | (3 | ) | 2,905 | (2,905 | ) | |||||||
Net cash (used in) provided by operating activities | (16,893 | ) | (51,722 | ) | 281,389 | |||||||
Cash flows from investing activities: | ||||||||||||
Purchase of property and equipment | — | (11 | ) | — | ||||||||
Purchase of investments | (67,070 | ) | (26,332 | ) | (33,065 | ) | ||||||
Proceeds from sale or maturity of investments | 28,535 | 27,371 | 7,112 | |||||||||
Net cash (used in) provided by investing activities | (38,535 | ) | 1,028 | (25,953 | ) | |||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from exercise of options | — | — | 1,046 | |||||||||
Proceeds from sale of common stock | — | — | 4,488 | |||||||||
Dividends paid on common stock | — | — | (70,841 | ) | ||||||||
Taxes paid on cashless exercise of restricted stock units | (29 | ) | (196 | ) | (356 | ) | ||||||
Net cash used in financing activities | (29 | ) | (196 | ) | (65,663 | ) | ||||||
Net (decrease) increase in cash and cash equivalents | (55,457 | ) | (50,890 | ) | 189,773 | |||||||
Cash and cash equivalents, beginning of period | 142,018 | 192,908 | 3,135 | |||||||||
Cash and cash equivalents, end of period | $ | 86,561 | $ | 142,018 | $ | 192,908 | ||||||
Cash paid for income taxes | $ | 2 | $ | 2 | $ | 38,977 |
amounts)
agreement.
2034.
Directors.
Customers. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our revenue arrangements may consist of multiple-element arrangements, with revenue for each unit of accounting recognized as the product or service is delivered to the customer.
51
The Company actively monitors and obligations. Such agreementsenforces its intellectual property (“IP”) rights, including seeking appropriate compensation from third parties that utilize the Company’s IP without a license. As a result, the Company may, be complex and include multiple elements. These agreements may include, without limitation, elements relatedfrom time to thetime, receive payments as part of a settlement of pastor compensation for a patent infringement liabilities, up-front and non-refundable license fees for the use of patents, patent licensing royalties on covered products sold by licensees, and the compensation structure and ownership of intellectual property rights associated with contractual technology development arrangements. Licensing agreementsdispute. Proceeds received are accounted for under the Financial Accounting Standards Board (“FASB”) revenue recognition guidance, “Revenue Arrangements with Multiple Deliverables.” This guidance requires consideration to be allocated to each element of an agreement that has stand-alone value usingidentified in the relativesettlement or compensation, based on the fair value method. In other circumstances, such as those agreements involving consideration for pastof each element. Generally, settlements and expected future patent royalty obligations, after consideration of the particular facts and circumstances, the appropriate recording of revenue between periodscompensation may require the use of judgment. In all cases, revenue is only recognized after allinclude the following criteriaelements: the value of a license or royalty agreement, cost reimbursement, damages, and interest. Elements identified related to licensing and royalty are met: (1) written agreements have been executed; (2) delivery of technology or intellectual property rights has occurred or services have been rendered; (3) feesrecognized as revenue. Elements identified as reimbursed costs are fixed or determinable; and (4) collectability of fees is reasonably assured.
Patent License Agreements: Upon signinggenerally recorded as a patent license agreement, including licenses entered upon settlement of litigation, we provide the licensee permission to use our patented technology in specific applications. We account for 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 benefitreduction to the licensee. Under our patent license agreements, we doreported expenses. Elements identified as damages or expect to typically receive one or a combinationinterest are generally recorded in other income in the condensed consolidated statement of operations. During the following forms of payment as consideration for permitting our licensees to use our patented inventions in specific applications and products:
Deferred Revenue
In August 2013, we began receiving annual payments on a contract that required payment to us over 4 years totaling $10,000 (“August 2013 Contract Settlement”). As of December 31, 2017, we received cash totaling $10,000, all of
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which is non-refundable. We recognized $1,500, $1,500 and $1,500 of revenue related to the August 2013 Contract Settlement during the yearsyear ended December 31, 2017, 20162020, the Company collected a lump sum payment of $454,034 from Apple, Inc., because of a favorable court decision relating to a patent infringement case. The court decision identified the following as the basis of the award: $302,428 for past royalties, $41,271 in damages for willful infringement, $108,221 for interest, and 2015, respectively.
Activity under$2,114 in reimbursement for court costs and attorney’s fees. Elements of the August 2013 Contract Settlement waspayment were recognized in the Company’s condensed consolidated statement of operations as follows:
2017 | 2016 | 2015 | |||||||
Deferred Revenue, beginning of year | $ | 4,000 | $ | 3,000 | $ | 2,000 | |||
Payment received | — | 2,500 | 2,500 | ||||||
Less: Amount amortized as revenue | 1,500 | 1,500 | 1,500 | ||||||
Deferred Revenue, end of year | $ | 2,500 | $ | 4,000 | $ | 3,000 |
Royalty Expense
Royalty expense forClassification of Payment Received in the Company’s Condensed Consolidated Statement of Operations Year Ended: December 31, 2020 Revenue (royalties) $ 302,428 Operating expenses: selling, general and administrative (reimbursed litigation costs) 2,114 Other income: gain (willful infringement) 41,271 Other income: interest income (pre- and post-judgment interest) 108,221 Total cash received $ 454,034
such realization. Management generally considers any such gains as realized only upon the collection of cash.
Prepaid Expenses and Other Current Assets
Prepaid Expense and Other Current Assets at December 31, 2017 includes the current portion of prepaid rent for a facility lease for corporate promotional and marketing purposes. Beginning March 2014, the prepayment totaling $4,000 is being amortized over the 10-year term of the lease. The unamortized non-current portion of the prepayment is included in Prepaid Expenses-Non-current on the consolidated balance sheet.
Property and Equipment
Property and equipment are stated at historical cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the accelerated and straight-line methods over the estimated useful lives of the assets, which range from five to seven years. Repair and maintenance costs are charged to expense as incurred.
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Intangible Assets
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probability are highly subjective management estimates. Actual results could differ materially from these estimates. We include interest and penalties, if any, in income tax expense. During the years ended December 31, 2017, 2016 and 2015, income tax expense included interest and penalties of $0, $48 and $0, respectively.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”). The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate federal tax rate from a maximum of 35% to a 21% rate. The rate reduction will be taking effect on January 1, 2018. Therefore, we applied the tax rate of 21% to the ending balance of federal deferred tax assets, but because we provided a full valuation allowance against our net deferred tax assets, no tax impact is recognized due to the tax rate change.
The Act changes the worldwide territorial tax system. Therefore, the deemed repatriation tax applies to undistributed earnings of certain non-U.S. subsidiaries. The company has no deemed repatriation tax liability because its foreign subsidiaries accumulated earnings is negative. We also assess the tax impact of the Act for 2018 and future years and do not believe there is a need to change our valuation allowance position as of December 31, 2017.
Derivative Instruments
Our Series I Warrants were accounted for as derivative instruments as a result of an anti-dilution provision which, in accordance with U.S. GAAP, prevented them from being considered indexed to our stock and qualified for an exception to derivative accounting. The balance of our Series I Warrants expired during the year ended December 31, 2015.
We recognize derivative instruments as either assets or liabilities on the accompanying Consolidated Balance Sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives in the accompanying Consolidated Statements of Operations.
any, when they occur. In addition, as required we record stock and optionsstock-based compensation expense for awards granted to non-employees at fair value of the consideration received or the fair value of the equity instruments issued, as they vest, over the performance period.
period (See Note 6 - Stock-Based Compensation).
Reclassifications
Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation.
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In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”), which simplified certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification in the statement of cash flows. We adopted this ASU in 2017 with the following affects:
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We are evaluating the impact this guidance will have on our financial position and statement of operations.
In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) “ASU 2014-09”. ASU 2014-09 was subsequently amended by ASU No. 2016-10 and 2016-12. As amended, Topic 606 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments create a new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For a public entity, the amendments to ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We will adopt the new revenue standards in our first quarter of 2018 utilizing the modified retrospective transition method. We expect the adoption of the standard to result in an approximate $2,500 decrease in accumulated deficit and a $2,500 decrease in deferred revenue in our consolidated balance sheet. The new revenue standards are not expected to have a material impact on the amount and timing of revenue recognized in our consolidated financial statements.
Note 3 − Property and Equipment
December 31 | ||||||
2017 | 2016 | |||||
Office furniture | $ | 79 | $ | 79 | ||
Computer equipment | 172 | 172 | ||||
Total | 251 | 251 | ||||
Less accumulated depreciation | (244 | ) | (218 | ) | ||
$ | 7 | $ | 33 |
December 31 2022 2021 Office furniture $ 79 $ 79 Computer equipment 92 92 Total 171 171 Less accumulated depreciation (160 ) (153 ) Total property and equipment, net $ 11 $ 18
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Note 4 − Commitments,, Contingencies Contingencies andRelated Party Transactions
During 2017, 2016 and 2015 we leased
The 2013 Plan will expireexpires in 2023.
Options Outstanding | Options Vested and Exercisable | |||||||||||||||||
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | ||||||||||||
$ 0.24- 1.58 | 771,045 | 1.26 | $ | 1.16 | 771,045 | 1.26 | $ | 1.16 | ||||||||||
$ 1.74- 6.95 | 3,113,396 | 8.04 | 4.27 | 1,134,677 | 5.86 | 4.63 | ||||||||||||
$ 14.52- 35.25 | 1,253,625 | 4.71 | 23.16 | 1,223,510 | 4.67 | 23.35 | ||||||||||||
5,138,066 | 6.21 | $ | 8.41 | 3,129,233 | 4.26 | $ | 11.09 |
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The following tables summarize activity under the Planplan for the indicated periods:
Options | ||||||||||||
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||
Outstanding at December 31, 2014 | 4,489,028 | $ | 9.33 | — | $ | — | ||||||
Options granted | 694,000 | 4.47 | — | — | ||||||||
Options exercised | (143,100 | ) | 1.15 | — | — | |||||||
Options cancelled | (40,000 | ) | 25.61 | — | — | |||||||
Outstanding at December 31, 2015 | 4,999,928 | $ | 8.76 | — | $ | — | ||||||
Options granted | 429,000 | 4.77 | — | — | ||||||||
Options exercised | (50,357 | ) | 0.40 | — | — | |||||||
Outstanding at December 31, 2016 | 5,378,571 | $ | 8.52 | — | $ | — | ||||||
Options granted | 1,613,500 | 4.06 | — | — | ||||||||
Options exercised | (12,500 | ) | 1.74 | — | — | |||||||
Options cancelled | (1,841,505 | ) | 4.71 | — | — | |||||||
Outstanding at December 31, 2017 | 5,138,066 | $ | 8.41 | 6.21 | $ | 2,529 | ||||||
Options exercisable at December 31, 2017 | 3,129,233 | $ | 11.09 | 4.26 | $ | 2,271 |
RSUs | |||||||||
Number of RSUs | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value | |||||||
Outstanding at December 31, 2014 | 310,394 | $ | 19.74 | $ | — | ||||
RSUs granted | 162,665 | 5.57 | — | ||||||
RSUs vested | (113,103 | ) | 20.11 | — | |||||
Outstanding at December 31, 2015 | 359,956 | $ | 13.22 | $ | — | ||||
RSUs granted | 219,331 | 4.75 | — | ||||||
RSUs vested | (155,852 | ) | 15.27 | — | |||||
Outstanding at December 31, 2016 | 423,435 | $ | 8.08 | $ | — | ||||
RSUs granted | 220,664 | 3.83 | — | ||||||
RSUs vested | (174,438 | ) | 10.47 | — | |||||
Outstanding at December 31, 2017 | 469,661 | $ | 5.19 | $ | — |
Options Outstanding | Options Vested and Exercisable | |||||||||||||||||||||||
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | ||||||||||||||||||
$ 1.22 - 1.58 | 801,004 | 9.40 | $ | 1.48 | 122,001 | 9.38 | $ | 1.45 | ||||||||||||||||
$ 2.35 - 6.95 | 5,504,396 | 5.66 | $ | 4.50 | 4,602,729 | 5.17 | $ | 4.42 | ||||||||||||||||
$ 14.52 - 35.05 | 510,625 | 0.93 | $ | 20.32 | 510,625 | 0.93 | $ | 20.32 | ||||||||||||||||
6,816,025 | 5.75 | $ | 5.33 | 5,235,355 | 4.86 | $ | 5.90 |
Options Outstanding at December 31, 2019 5,630,021 $ 8.49 — $ — Options granted 747,500 6.07 — — Options exercised (262,031 ) 3.99 — — Options cancelled (302,969 ) 5.30 — — 5,812,521 $ 8.55 — $ — Options granted 999,500 4.43 — — Options exercised — — — — Options cancelled (414,584 ) 22.54 — — 6,397,437 $ 6.99 — $ — Options granted 801,004 1.48 — — Options exercised — — — — Options cancelled (382,416 ) 25.06 — — 6,816,025 $ 5.33 5.75 $ 3 5,235,355 $ 5.90 4.86 $ 2
RSUs | ||||||||||||
Number of RSUs | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value | ||||||||||
Outstanding at December 31, 2019 | 498,489 | $ | 4.71 | $ | — | |||||||
RSUs granted | 218,329 | 6.89 | — | |||||||||
RSUs vested | (212,495 | ) | 4.63 | — | ||||||||
RSUs cancelled | — | — | — | |||||||||
Outstanding at December 31, 2020 | 504,323 | $ | 5.69 | $ | — | |||||||
RSUs granted | 236,661 | 4.61 | — | |||||||||
RSUs vested | (215,165 | ) | 5.23 | — | ||||||||
RSUs cancelled | (16,664 | ) | 5.45 | — | ||||||||
Outstanding at December 31, 2021 | 509,155 | $ | 5.38 | $ | — | |||||||
RSUs granted | 258,363 | 1.46 | — | |||||||||
RSUs vested | (215,413 | ) | 5.15 | — | ||||||||
RSUs cancelled | — | — | — | |||||||||
Outstanding at December 31, 2022 | 552,105 | $ | 3.65 | $ | — |
$151 in 2020.
Stock-Based Compensation by Type of Award | Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | ||||||
Stock options | $ | 2,446 | $ | 3,436 | $ | 4,939 | |||
RSUs | 1,540 | 1,962 | 2,336 | ||||||
Total stock-based compensation expense | $ | 3,986 | $ | 5,398 | $ | 7,275 |
Stock-Based Compensation by Type of Award | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | |||||||||
Stock options | $ | 2,303 | $ | 3,067 | $ | 2,872 | ||||||
RSUs | 1,027 | 1,117 | 1,066 | |||||||||
Total stock-based compensation expense | $ | 3,330 | $ | 4,184 | $ | 3,938 |
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As of December 31, 2017,2022, there was $6,086$3,972 of unrecognized stock-based compensation expense expected to be recognized related to unvested employee stock options and $1,767$1,449 of unrecognized stock-based compensation expense to be recognized related to unvested RSUs. These costs are expected to be recognized over a weighted-average period of 3.112.66 and 2.43 years, respectively.
Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |
Expected stock price volatility | 84.91% | 79.6% | 82% |
Risk-free interest rate | 1.94% | 1.85% | 2.12% |
Expected life term (in years) | 6.08 years | 6.03 years | 6.07 years |
Expected dividends | 0% | 0% | 0% |
Expected stock price volatility 85.39 % 90.58 % 93.45 % Risk-free interest rate 3.09 % 1.06 % 0.63 % Expected life term 6.2 years 6.2 years 6.2 years Expected dividends 0 % 0 % 0 %
factors.
years.
Year Ended December 31, | |||||||||
2017 | 2016 | 2015 | |||||||
Net loss | $ | (17,278 | ) | $ | (28,569 | ) | $ | (29,234 | ) |
Basic and diluted weighted average number of shares outstanding | 58,354 | 55,985 | 52,384 | ||||||
Basic and diluted loss per share | $ | (0.30 | ) | $ | (0.51 | ) | $ | (0.56 | ) |
Year Ended December 31, 2022 2021 2020 Net (loss) income $ (36,260 ) $ (42,921 ) $ 280,429 Basic weighted average number of shares outstanding 71,335 71,159 70,850 Effect of dilutive securities — — 766 Diluted weighted average number of shares outstanding 71,335 71,159 71,616 Basic (loss) earnings per share $ (0.51 ) $ (0.60 ) $ 3.96 Diluted (loss) earnings per share $ (0.51 ) $ (0.60 ) $ 3.92
In August 2015,
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We sold 730,444, 4,760,594 and 835,056 sharesbusiness on May 18, 2020 of $1 per share of common stock, under the ATM program during the years ended December 31, 2017, 2016payable on May 26, 2020. The timing and 2015 respectively. The average sales price per common share sold during the year ended December 31, 2017 was $5.19amounts of future dividends, if any, will depend on market conditions, corporate business and the aggregate proceeds from the sales totaled $3,790 during the period. Sales commissions, feesfinancial considerations and other costs associated with the ATM transactions totaled $113 for 2017. The average sales price per common share sold during the year ended December 31, 2016 was $4.16 and the aggregate proceeds from the sales totaled $19,791 during the period. Sales commissions, fees and other costs associated with the ATM transactions totaled $594 for 2016. The average sales price per common share sold during the year ended December 31, 2015 was $4.04 and the aggregate proceeds from the sales totaled $3,378 during the period. Sales commissions, fees and other costs associated with the ATM totaled $101 for 2015 (see Note 15 - Subsequent Events).
Note 9 − Equityregulatory requirements.
During the year ended December 31, 2015
Information about the Advisor Warrants outstanding during the twelve months ended December 31, 2017 follows:
Original Number of Warrants Issued | Exercise Price per Common Share | Exercisable at December 31, 2016 | Became Exercisable | Exercised | Terminated / Cancelled / Expired | Exercisable at December 31, 2017 | Expiration Date |
25,000 | $7.00 | 25,000 | — | — | — | 25,000 | April 2020 |
Warrants Issued | Exercise Price | Outstanding and Exercisable December 31, 2021 | Issued | Exercised | Terminated / Cancelled | Outstanding and Exercisable December 31, 2022 | Expiration Date | |||||||||||||||||||||
25,000 | $ | 5.75 | 25,000 | — | — | — | 25,000 | April 30, 2025 |
Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||
Current: | |||||||||
Federal | $ | — | $ | — | $ | 10 | |||
State | (3 | ) | (133 | ) | (18 | ) | |||
Foreign | — | — | — | ||||||
(3 | ) | (133 | ) | (8 | ) | ||||
Deferred: | |||||||||
Federal | — | — | — | ||||||
State | — | — | — | ||||||
Total income tax provision | $ | (3 | ) | $ | (133 | ) | $ | (8 | ) |
Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | ||||||||||
Current: | ||||||||||||
Federal | $ | — | $ | 661 | $ | 35,122 | ||||||
State | 3 | 35 | 950 | |||||||||
Foreign | — | — | — | |||||||||
3 | 696 | 36,072 | ||||||||||
Deferred: | ||||||||||||
Federal | 15,920 | (7,025 | ) | (8,816 | ) | |||||||
State | 109 | 124 | (233 | ) | ||||||||
16,029 | (6,901 | ) | (9,049 | ) | ||||||||
Total income tax (benefit) provision | $ | 16,032 | $ | (6,205 | ) | $ | 27,023 |
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A reconciliation of the United States federal statutory income tax rate to our effective income tax rate is as follows:
Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||
United States federal statutory rate | 35.00 | % | 35.00 | % | 35.00 | % | |||
State taxes, net of federal benefit | (0.01 | )% | (0.31 | )% | (0.04 | )% | |||
Valuation allowance | (35.94 | )% | (35.43 | )% | (33.36 | )% | |||
Stock options | — | — | (1.62 | )% | |||||
Prior year true-up | — | (0.06 | )% | 0.03 | % | ||||
R&D Credit | 1.43 | % | 0.66 | % | 0.38 | % | |||
Warrants | — | — | (0.14 | )% | |||||
Other | (0.50 | )% | (0.33 | )% | (0.29 | )% | |||
Effective income tax rate | (0.02 | )% | (0.47 | )% | (0.04 | )% |
In 2017, 2016
December 31, 2022
December 31, 2021 Year Ended
December 31, 2020 United States federal statutory rate 21.00 % 21.00 % 21.00 % State taxes, net of federal benefit (0.55 )% (0.31 )% 0.17 % Valuation allowance (91.21 )% — (12.22 )% Stock based compensation (9.44 )% (6.68 )% (0.01 )% R&D Credit 1.22 % 0.19 % (0.21 )% Other (0.29 )% (1.57 )% 0.06 % Effective income tax rate (79.27 )% 12.63 % 8.79 %
expiring options.
Year Ended December 31, 2017 | Year Ended December 31, 2016 | |||||
Deferred tax assets: | ||||||
Reserves and accruals | $ | 963 | $ | 1,063 | ||
State tax | — | 1 | ||||
Research and development credits and other credits | 1,300 | 1,092 | ||||
Net operating loss carry forward | 22,448 | 29,186 | ||||
Stock based compensation | 9,260 | 13,031 | ||||
Other | 54 | 88 | ||||
Total deferred tax assets | 34,025 | 44,461 | ||||
Valuation allowance | (34,025 | ) | (44,455 | ) | ||
Deferred tax assets after valuation allowance | — | 6 | ||||
Deferred tax liability: | ||||||
Depreciation and amortization | — | (6 | ) | |||
Total deferred tax liability | — | (6 | ) | |||
Net deferred tax assets | $ | — | $ | — |
On December 22, 2017, the President
December 31, 2022
December 31, 2021 Deferred tax assets: Reserves and accruals $ 147 $ 58 Research and development credits and other credits 430 92 Net operating loss carry forward 11,988 9,519 Stock based compensation 5,018 6,287 Other 970 — Total deferred tax assets $ 18,553 $ 15,956 Valuation allowance (18,553) — Deferred tax assets after valuation allowance — 15,956 — (6 ) Net deferred tax assets $ — $ 15,950
The Act changes the worldwide territorial tax system. Therefore, the deemed repatriation tax applies to undistributed earnings of certain non-U.S. subsidiaries. The company has no deemed repatriation tax liability because its foreign subsidiary’s accumulated earnings is negative. We also assess the tax impact of the Act for 2018 and future years and do not believe there is a need to change our valuation allowance position as of December 31, 2017.
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In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets at December 31, 2017 will not be fully realizable. Accordingly, management has maintained a full valuation allowance against its net deferred tax assets at December 31, 2017. The net change in the total valuation allowance for the 12 months ended December 31, 2017 was a decrease of $10,430.return. At December 31, 2017,2022, we had federal and state net operating loss carry-forwardscarryforwards of approximately $87,429$57,085 and $98,425, respectively, expiring beginning in 2027 for federal and began expiring in 2016, for state. At December 31, 2017, we had federal research and development credit carry-forwards of approximately $1,300, expiring beginning in 2031.
Internal Revenue Code Section 382 places a limitation (the “Section 382 Limitation”) on the amount of taxable income that can be offset by$108,745, respectively. Federal net operating loss carry forwards after a change in control (generally greater than 50% change in ownership)carryforwards do not expire. None of a loss corporation. California, the state in which our headquarters was once located, has similar rules. Our capitalization described herein may have resulted in such a change. Generally, after a control change, a loss corporation cannot deduct net operating loss carry forwards generatedcarryforward is apportioned to a deferred tax asset, because currently we do not have operations in years prior to the deemed change of control under IRC Section 382states where losses accumulated. The state net operating loss carryforward begins expiring in excess of the Section 382 Limitation.
2029.
which is October 2024.
A reconciliation of beginning and ending amounts of unrecognized tax benefits follows:
Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||
Balance at the beginning of the year | $ | 316 | $ | 316 | $ | 316 | |||
Additions based on tax positions related to the current year | — | — | — | ||||||
Additions for tax positions of prior years | — | — | — | ||||||
Settlements | — | — | — | ||||||
Lapse of applicable statute of limitations | — | — | — | ||||||
Balance at the end of the year | $ | 316 | $ | 316 | $ | 316 |
We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis.
Level 1 – Quotedunadjusted quoted prices in active markets for identical assets or liabilities.
liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Level 2 – Observablemeasurements utilize either directly or indirectly observable inputs in markets other than quoted prices in active markets for identical assets and liabilities, quoted prices for identicalmarkets.
Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that we believe market participants would use in pricing the asset or liability.
The carrying amounts for cashfinancial instrument, including assumptions about risk and cash equivalents, investments in certificates of deposit, accounts payable and accrued expenses approximate their fair values dueinputs to the short periodvaluation technique. We use valuation techniques, primarily the income and market approach, which maximizes the use of time until maturity.
observable inputs and minimize the use of unobservable inputs for recurring fair value measurements.
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U.S. Agency securities:agency and treasury securities: Fair value measured at the closing price reported on the active market on which the individual securities are traded.
December 31, 2017 | ||||||||||||||||||
Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Investments Available for Sale | |||||||||||||
Cash | $ | 1,972 | $ | — | $ | — | $ | 1,972 | $ | 1,972 | $ | — | ||||||
Level 1: | ||||||||||||||||||
Mutual funds | 616 | — | — | 616 | 616 | |||||||||||||
U.S. agency securities | 2,001 | — | (1 | ) | 2,000 | 547 | 1,453 | |||||||||||
2,617 | — | (1 | ) | 2,616 | 1,163 | 1,453 | ||||||||||||
Total | $ | 4,589 | $ | — | $ | (1 | ) | $ | 4,588 | $ | 3,135 | $ | 1,453 |
December 31, 2022 | ||||||||||||||||||||||||
Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Investments Available for Sale | |||||||||||||||||||
Cash | $ | 16,949 | $ | — | $ | — | $ | 16,949 | $ | 16,949 | $ | — | ||||||||||||
Level 1: | ||||||||||||||||||||||||
Mutual funds | 66,493 | — | — | 66,493 | 66,493 | — | ||||||||||||||||||
U.S. agency and treasury securities | 68,958 | 9 | (386 | ) | 68,581 | 3,119 | 65,462 | |||||||||||||||||
135,451 | 9 | (386 | ) | 135,074 | 69,612 | 65,462 | ||||||||||||||||||
Total | $ | 152,400 | $ | 9 | $ | (386 | ) | $ | 152,023 | $ | 86,561 | $ | 65,462 |
December 31, 2021 | ||||||||||||||||||||||||
Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Investments Available for Sale | |||||||||||||||||||
Cash | $ | 35,428 | $ | — | $ | — | $ | 35,428 | $ | 35,428 | $ | — | ||||||||||||
Level 1: | ||||||||||||||||||||||||
Mutual funds | 106,590 | — | — | 106,590 | 106,590 | — | ||||||||||||||||||
U.S. agency and treasury securities | 27,304 | — | (50 | ) | 27,254 | — | 27,254 | |||||||||||||||||
133,894 | — | (50 | ) | 133,844 | 106,590 | 27,254 | ||||||||||||||||||
Total | $ | 169,322 | $ | — | $ | (50 | ) | $ | 169,272 | $ | 142,018 | $ | 27,254 |
December 31, 2016 | ||||||||||||||||||
Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Investments Available for Sale | |||||||||||||
Cash | $ | 3,432 | $ | — | $ | — | $ | 3,432 | $ | 3,432 | $ | — | ||||||
Level 1: | ||||||||||||||||||
Mutual funds | 3,195 | — | — | 3,195 | 3,195 | — | ||||||||||||
U.S. government securities | 1,254 | — | — | 1,254 | — | 1,254 | ||||||||||||
U.S. agency securities | 7,996 | 2 | (3 | ) | 7,995 | — | 7,995 | |||||||||||
12,445 | 2 | (3 | ) | 12,444 | 3,195 | 9,249 | ||||||||||||
Total | $ | 15,877 | $ | 2 | $ | (3 | ) | $ | 15,876 | $ | 6,627 | $ | 9,249 |
The maturities of our marketable securitiesinvestments generally range from within one to two years. Actual maturities could differ from contractual maturities due to call or prepayment provisions.
(all dollar amounts in this section are expressed in thousands except for rates per device)
VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED)
On March 30, 2015, the United States Court for the Eastern District of Texas, Tyler Division, issued an order finding substantial overlap between the remanded portions of the Civil Action Case 6:10-CV-00417-LED (VirnetX vs. Cisco et. al.), and the ongoing Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case. The jury trial in this case was held on January 25, 2016. On February 4, 2016, a jury in the United States Court for the Eastern District of Texas, Tyler Division, awarded us $625.6 million in a verdict against Apple Inc. for infringing four of our US patents, marking it the second time a federal jury has found Apple liable for infringing VirnetX’s patented technology. The verdict includes royalties awarded to us based on an earlier patent infringement finding (Case 6:10-CV-00417-LED) against Apple. The jury found that Apple’s modified VPN On-Demand, iMessage and FaceTime services infringed VirnetX’s patents and that Apple’s infringement was willful. In addition to determining the royalty owed by Apple for its prior infringement, this verdict also includes an award based on the jury’s finding that Apple’s modified VPN On Demand, iMessage and FaceTime services have continued to infringe VirnetX’s patents. The post-trial hearing was held on May 25, 2016 in the United States Court for the Eastern District of Texas, Texarkana Division. On July 29, 2016, the court issued a new order, vacating its previous orders
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consolidating the cases (Case No. 6:10-cv-417, Docket No. 878 (“Apple I case”); Case No. 6:12-cv-855, Docket No. 220 (“Apple II case”)), ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II case will be retried after Apple I case. Events and developments subsequent to the order from the court are described to support Apple I and Apple II matters.
VirnetX Inc. v. Cisco Systems, Inc. et al. (Case 6:10-CV-00417-LED) (“Apple I”)
On August 11, 2010, we initiated a lawsuit by filing a complaint against Aastra USA. Inc. (“Aastra”), Apple, Cisco Systems, Inc. (“Cisco”), and NEC Corporation (“NEC”) in the United States District Court for the Eastern District of Texas, Tyler Division, pursuant to which we alleged that these parties infringe on certain of our patents. We sought damages and injunctive relief. Aastra and NEC agreed to sign license agreements with us and we agreed to drop all the accusations of infringement against them. At the pre-trial hearing, the judge decided to conduct separate jury trial for each defendant, and try only the case against Apple on the scheduled trial date. The jury trial of our case against Cisco was held on March 4, 2013. The jury in our case against Cisco came back with a verdict of non-infringement also determined that all our patents-in-suit patents are not invalid. Our motions for a new trial and Cisco’s infringement of certain VirnetX patents were denied and the case against Cisco was closed.
The jury trial of our case against Apple was held on October 31, 2012. On November 6, 2012, a jury in the United States Court for the Eastern District of Texas, Tyler Division, awarded us over $368 million in a verdict against Apple for infringing four of our patents. On February 26, 2013, the court issued its Memorandum Opinion and Order regarding post-trial motions resulting from the prior jury verdict denying Apple’s motion to reduce the damages awarded by the jury for past infringement. The Court further denied Apple’s request for a new trial on the liability and damages portions of the verdict and granted our motions for pre-judgment interest, post-judgment interest, and post-verdict damages to date. The Court ordered that Apple pay $34 thousand in daily interest up to final judgment and $330 thousand in daily damages for infringement up to final judgment for certain Apple devices included in the verdict. The Court denied our request for a permanent injunction and severed the future infringement portion into its own separate proceedings under Case 6:13-CV-00211-LED.
On July 3, 2013, Apple filed an appeal of the judgment dated February 27, 2013 and order dated June 4, 2013 denying Apple’s motion to alter or amend the judgment to the USCAFC. On September 16, 2014, USCAFC issued their opinion, affirming the jury’s finding that all 4 of our patents are valid, confirming the jury’s finding of infringement of VPN on Demand under many of the asserted claims of our ‘135 and ‘151 patents, and confirming the district’s court’s decision to allow evidence concerning our licenses and royalty rates in connection with the determination of damages. In its opinion, the USCAFC also vacated the jury’s damages award and the district court’s claim construction with respect to parts of our ‘504 and ‘211 patents and remanded the damages award and determination of infringement with respect to FaceTime –for further proceedings consistent with its opinion. On October 16, 2014, we filed a petition with the USCAFC, requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decision concerning VirnetX’s litigation against Apple Inc. On December 16, 2014, USCAFC denied our petition requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decision and remanded the case back to the Eastern District of Texas, Tyler Division, for further proceedings consistent with its opinion. On February 25, 2015, USCAFC granted Apple’s motions to lift stay of proceedings and vacate Case 6:13-CV-00211-LED. On March 30, 2015, the court issued an order finding substantial overlap between the remanded portions of this case and the ongoing Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case.
On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases Apple I case and Apple II case, ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II will be retried after Apple I case. The jury trial in this case was held on September 26, 2016. On September 30, 2016, a Jury in the United States Court for the Eastern District of Texas, Tyler Division, in the case VirnetX Inc., et al. v. Apple Inc., No. Apple I, has awarded VirnetX $302.4 million in a verdict against Apple for infringing four VirnetX patents, marking the third time a federal jury has found Apple liable for infringing VirnetX’s patented technology.
The verdict includes royalties awarded to VirnetX, for unresolved issues in the Apple I case, remanded back from the USCAFC, related to (1) damages owed to VirnetX for infringement by Apple’s original VPN-on-Demand (VOD) and
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(2) the alleged infringement by Apple’s original FaceTime product, under the new claim construction of “secure communication link” pertaining to the ’504 and ’211 patents by the USCAFC, and the damages associated with that infringement. The hearing on all the post-trial motions was held on November 22, 2016.
On September 29, 2017, the United States District Court for the Eastern District of Texas, Tyler Division, entered Final Judgement and issued its Memorandum Opinion and Order regarding post-trial motions resulting from the prior $302.4 million jury verdict for VirnetX in the Apple I case.
In the Order, the Court denied all of Apple’s post-trial motions including motion for judgment as a matter of law of non-infringement, motion for judgment as a matter of law on damages, motion for a new trial on infringement, and motion for a new trial on damages. The Court granted all VirnetX’s post-trial motions including motion for willful infringement and enhanced the royalty rate during the willfulness period by 50 percent, from $1.20 to $1.80 per device, awarding VirnetX, enhanced damages in the amount of $41.3 million against Apple thereby, granting VirnetX a total sum of $343.7 million in pre-interest damages. The Court also awarded costs, certain attorneys’ fees, and prejudgment interest to VirnetX, and directed the parties to meet and confer regarding these amounts. On October 13, 2017, having met and conferred and having reached agreements on all amounts, parties jointly filed a motion asking the Court to grant VirnetX an additional sum in the amount of $96 million in agreed Bill of Costs, Attorneys’ Fees, and Prejudgment Interest. The Final Judgement is only subject to appeal stemming from new issues unresolved in the Apple I case, remanded back from the United States Court of Appeals for the Federal Circuit. The total Final Judgement amount including Jury Verdict, Willful Infringement, Interest, Costs and Attorney Fees is $439.7 million.
On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on September 29, 2017 to the United States Court of Appeals for the Federal Circuit. This case has now been closed and events and developments subsequent to the notice of appeal are described below under VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case).
VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”)
On
On September 29, 2017, the Court issued an order denying Apple’s Motion to Stay. The Court ordered the parties to meet and confer and file a joint motion with a proposed trial date by October 13, 2017. The parties have met, conferred and filed a joint motion on the proposed trial dates. On November 9, 2017, the court issued its order setting this case for jury selection on April 2, 2018 in Tyler, Texas.
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On January 5, 2018,costs. Apple filed a Petition for Writ of Mandamus with the USCAFC requesting the court to stay the upcoming limited retrial of the Apple II pending the USCAFC’s decision in related consolidated appeal VirnetX Inc. v. Apple Inc., Cases 2017-1591. On February 22, 2018, the USCAFC issued its order denying Apple’s Petition for Writ of Mandamus. The Apple II case is proceeding on schedule for jury selection on April 2, 2018 per the district court’s order.
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case)
On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on September 29, 2017 towith the United States Court of Appeals for the Federal Circuit.
Circuit (“USCAFC”) in the Apple II case.
31, 2023, the 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 are evaluating all of our available options in this matter, including potentially seeking rehearing or certiorari review.
(USCAFC Case 20-2271) and VirnetX Inc. v. Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp, LLC (USCAFC Case 20-2272)
VirnetX Inc. v. Apple, Inc. (Case 16-1211)
On September 28, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2014-00403 and IPR2014-00404 and on October 22, 2015 for IPR2014-00481 and IPR2014-00482IPR2016-00062 involving our U.S. Patent Nos. 7,188,180,No. 6,502,135, and 7,987,274. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on the grounds discussed in IPR2014-00403 and IPR2014-00481. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 16-1480)
On November 30, 2015, we filed appeals with the USCAFC, appealingan appeal of the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,949 related toreview proceedings IPR2015-1047, IPR2016- 00063, and IPR2016-00167 involving our U.S. Patent No. 8,051,181. The oral arguments in this case were heard on November 7, 2016.7,490,151. On September 25, 2020, the USCAFC issued an order consolidating the two appeals. On December 9, 2016, the USCAFC affirmed the PTAB based on certain grounds. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 16-119)
On March 4, 2016,15, 2020, we filed a petition for writ of mandamus withmotion to vacate the USCAFC, requestingPTAB decisions below and to remand these appeals to the USCAFC’s intervention to revoke the PTAB’s decision joining Apple to IPR2015-01046 and IPR2015-01047, related to U.S. Patent Nos. 6,502,135 and 7,490,151.PTAB. On March 18, 2016,16, 2021, the USCAFC denied the petitionmotion without prejudice to us raising the argumentschallenges made in the motion in our opening brief. Our opening brief was filed on appeal afterJune 7, 2021.
matter, including potentially seeking rehearing or certiorari review.
Hirshfeld (USCAFC Case 17-2593, -2594)
VirnetX Inc. v. The Mangrove Partners (Case 17-1368)
On December 16, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2015-01046, and on December 20, 2016 for IPR2015-1047, involving our U.S. Patent Nos. 6,502,135, and 7,490,151. These appeals also involve Apple, Inc. and onean appeal of them involves Black Swamp IP, LLC. On April 27, 2017, the USCAFC stayed these appeals pending the USCAFC’s en banc decision in Wi-Fi One, LLC v. Broadcom Corporation, No. 2015-1944. The stay was lifted on January 31, 2018, and briefing is now ongoing.
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VirnetX Inc. v. Apple Inc., Cisco Systems, Inc. (Case 17-1591)
On February 7, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-partes reexamination nos. 95/001,788, 95/001,789, and 95/001,856 related toreview proceeding IPR2016-00693 involving our U.S. Patent Nos. 7,921,211No. 7,418,504, and 7,418,504. These appeals have been consolidated. The briefing in these appeals has been concluded; the oral arguments have not yet been scheduled.
VirnetX Inc. v. Apple Inc. (Case 17-2490)
On August 23, 2017, we filed appeals with the USCAFC, appealingan appeal of the invalidity findings by the PTAB in IPR2016-00331 and IPR2016-00332inter-partes review proceeding IPR2016-00957 involving our U.S. Patent No. 8,504,696. These appeals have been consolidated. The briefing in7,921,211. On September 16, 2021, USCAFC issued an order remanding these appeals has been concluded;for the 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, and we currently await scheduling of oral arguments have not yet been scheduled.
In re arguments.
v. Cisco Systems, Inc. (USCAFC Case 19-1671)
the amount of 5%, compounded annually, until payment of the award. We accrued the resulting $38,284 as of March 31, 2021 and paid that amount to McKool on April 20, 2021. This matter is now closed.
terms of the original agreement were affected and there was no impact on cash flow. At December 31, 2022 and 2021, the ROU asset totaled $648 and $948, respectively; lease expense totaled $300, $300 and $356, during 2022, 2021 and 2020, respectively.
First | Second | Third | Fourth | |||||||||
(in thousands except per share) | ||||||||||||
2017 | ||||||||||||
Revenue | $ | 375 | $ | 396 | $ | 375 | $ | 401 | ||||
Loss from operations | $ | (3,906 | ) | $ | (3,811 | ) | $ | (3,562 | ) | $ | (6,042 | ) |
Net loss | $ | (3,894 | ) | $ | (3,798 | ) | $ | (3,552 | ) | $ | (6,034 | ) |
Basic earnings (loss) per common share | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.10 | ) |
Diluted earnings (loss) per common share | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.10 | ) |
First | Second | Third | Fourth | |||||||||
(in thousands except per share) | ||||||||||||
2016 | ||||||||||||
Revenue | $ | 375 | $ | 398 | $ | 375 | $ | 402 | ||||
Loss from operations | $ | (8,618 | ) | $ | (5,353 | ) | $ | (7,287 | ) | $ | (7,247 | ) |
Net loss | $ | (8,610 | ) | $ | (5,337 | ) | $ | (7,387 | ) | $ | (7,235 | ) |
Basic earnings (loss) per common share | $ | (0.16 | ) | $ | (0.10 | ) | $ | (0.13 | ) | $ | (0.12 | ) |
Diluted earnings (loss) per common share | $ | (0.16 | ) | $ | (0.10 | ) | $ | (0.13 | ) | $ | (0.12 | ) |
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Note 15 – Subsequent Event
On March 8, 2018, we amended our August 20, 2015 equity offering sales agreement (“Amended Agreement”) with Cowen and Company, LLC (“Cowen”), whereby the maximum aggregate value of the Company’s common stock (“Shares”) we may offer and sell, from time to time, was increased from $35,000,000 to $50,000,000. The Company intends to use the proceeds of this offering for Gabriel product development and marketing, and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products, technologies or businesses.
Under the Amended Agreement, Cowen may sell Shares in an “at-the-market” offering (“ATM”) as defined in Rule 415 promulgated under the Securities Act of 1933, including sales made directly on the NYSE American, LLC, on any other existing trading market for the Shares, or to or through a market maker. In addition, under the Amended Agreement, Cowen may sell the Shares by any other method permitted by law, including private offerings. Subject to the terms and conditions of the Amended Agreement, Cowen will act as sales agent and use commercially reasonable efforts to sell on our behalf all the shares of common stock requested to be sold by us, consistent with its normal trading and sales practices, on mutually agreed terms between Cowen and us.
Between January 1, 2018 and March 14, 2018, we sold 1,749,185 shares of common stock under the ATM program. The average sales price per common share sold was $4.02 and the aggregate proceeds from the sales totaled $7,032. Sales commissions, fees and other costs associated with the ATM transactions totaled $211.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors andStockholders of VirnetX Holding Corporation
Opinion on Internal Control over Financial Reporting
We have audited VirnetX Holding Corporation’s (the Company’s) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets and the related consolidated statements of income, comprehensive loss, stockholders’ equity, and cash flows of the Company, and our report dated March 16, 2018, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Farber Hass Hurley LLP
Chatsworth, CaliforniaMarch 16, 2018
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial |
Item 9A. | Controls and |
2022.
Item 9B. | Other |
On March 16, 2018, we sent a letter to PITA acknowledging the termination of the Amended and Restated Revenue Sharing Agreement and the Amended and Restated Gabriel License Agreement with PITA. Although we consider the PITA Agreements terminated as of March 16, 2018, our letter also constituted our (i) notice of termination of the Amended and Restated Revenue Sharing Agreement pursuant to Section 5.2(b) thereof and (ii) notice of termination of the Amended and Restated Gabriel License Agreement pursuant to Section 5.2(b) thereof to PITA.
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Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
PART III
Item 10. | Directors, Executive Officers and Corporate |
Item 11. | Executive |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder |
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | ||||||
Equity compensation plans approved by security holders | 5,632,727 | $ | 8.14 | 2,928,562 | |||||
Equity compensation plans not approved by security holders | — | — | |||||||
Total | 5,632,727 | $ | 8.14 | 2,928,562 |
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options and RSUs | Weighted-Average Exercise Price of Outstanding Options and RSUs | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | |||||||||
Equity compensation plans approved by security holders | 7,368,130 | $ | 5.21 | 1,563,345 | ||||||||
Equity compensation plans not approved by security holders | — | — | ||||||||||
Total | 7,368,130 | $ | 5.21 | 1,563,345 |
Item 13. | Certain Relationships and Related Transactions, and Director |
Item 14. | Principal Accountant Fees and |
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PART IV
Item 15. | Exhibits and Financial Statement |
(a) | The following documents are filed as part of this Annual Report on Form 10-K |
(1) | Financial Statements: See the Index to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K. |
(2) | Financial Statement Schedule: Financial statement schedules are omitted because they are not applicable, or the required information is shown in the financial statements or notes thereto. All other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or the notes thereto. |
(3) | Exhibits: The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K). |
Exhibit Number | Incorporated by reference herein | ||||
Description | Form | Exhibit No. | Filing Date | File No. | |
Certificate of Incorporation of the Company. | 8-K | 3.1 | 11/01/2007 | 000-26895 | |
By-Laws of the Company. | 8-K | 3.2 | 11/01/2007 | 000-26895 | |
Form of Warrant Agency Agreement by and between the Company and Corporate Stock Transfer, Inc. as Warrant Agent. | S-1/A | 4.1 | 01/16/2009 | 333-153645 | |
Form of Series I Warrant. | 8-K | 4.1 | 09/03/2009 | 001-33852 | |
Specimen Common Stock Certificate. | S-3 | 4.1 | 08/21/2015 | 333-206497 | |
Form of Senior Indenture | S-3 | 4.2 | 08/21/2015 | 333-206497 | |
Form of Subordinated Indenture | S-3 | 4.4 | 08/21/2015 | 333-206497 | |
Form of Indemnification Agreement by and between the Company and each of Kendall Larsen, Robert D. Short III, Gary Feiner, Michael F. Angelo, Thomas M. O’Brien and Richard Nance. | 8-K | 10.3 | 07/12/2007 | 000-26895 | |
2007 Stock Plan, as amended on April 13, 2012. | 10-Q | 10.2 | 05/10/2012 | 001-33852 | |
Amended Form of Stock Option Agreement – 2007 Stock Plan. | 10-Q | 4.5 | 05/10/2011 | 001-33852 | |
Form of Restricted Stock Unit Award Agreement – 2007 Stock Plan. | 10-Q | 10.3 | 05/10/2012 | 001-33852 | |
2013 Equity Incentive Plan. | DEF 14A | Appendix A | 04/12/2013 | 001-33852 | |
Form of Stock Option Agreement – 2013 Equity Incentive Plan. | 10-K | 10.6 | 03/02/2015 | 001-33852 | |
Form of Restricted Stock Unit Agreement – 2013 Equity Incentive Plan. | 10-K | 10.7 | 03/02/2015 | 001-33852 | |
Voting Agreement among the Company and certain of its stockholders, dated as of December 12, 2007. | 10-K | 10.11 | 03/31/2008 | 001-33852 | |
Securities Purchase Agreement, dated as of September 2, 2009, by and between the Company and the Purchasers (as defined therein). | 8-K | 10.1 | 09/03/2009 | 001-33852 | |
Form of Registration Rights Agreement by and between the Company and the Purchasers (as defined therein). | 8-K | 10.2 | 09/03/2009 | 001-33852 |
Exhibit Number | Description | Incorporated by reference herein | ||||
Form | Exhibit No. | Filing Date | File No. | Filed Herewith | ||
3.1 | 8-K | 3.1 | 11/01/2007 | 000-26895 | ||
3.2 | 8-K | 3.1 | 1/27/2023 | 001-33852 | ||
4.2 | S-3 | 4.1 | 07/30/2018 | 333-226413 | ||
4.3 | S-3 | 4.2 | 07/30/2018 | 333-226413 | ||
4.4 | S-3 | 4.4 | 07/30/2018 | 333-226413 | ||
4.5 | 10-K | 4.6 | 03/16/2020 | 001-33852 | ||
10.1 | 10-K | 10.1 | 03/18/2019 | 001-33852 | ||
10.2* | 10-Q | 10.2 | 05/10/2012 | 001-33852 | ||
10.3* | 10-Q | 4.5 | 05/10/2011 | 001-33852 | ||
10.4* | 10-Q | 10.3 | 05/10/2012 | 001-33852 | ||
10.5* | DEF 14A | Appendix A | 04/13/2021 | 001-33852 | ||
10.6* | 10-K | 10.6 | 03/02/2015 | 001-33852 | ||
10.7* | 10-K | 10.7 | 03/02/2015 | 001-33852 | ||
10.12 | 8-K | 10.4 | 07/12/2007 | 000-26895 | ||
10.13** | 8-K | 10.6 | 07/12/2007 | 000-26895 | ||
10.14 | 8-K | 10.1 | 03/18/2008 | 001-33852 | ||
10.15 | 8-K | 10.5 | 07/12/2007 | 000-26895 | ||
10.16 | 8-K | 10.7 | 07/12/2007 | 000-26895 | ||
10.17 | 8-K | 10.8 | 07/12/2007 | 000-26895 | ||
10.18** | 10-Q/A | 10.1 | 01/31/2011 | 001-33852 | ||
10.19** | 10-K | 10.23 | 03/02/2015 | 001-33852 | ||
10.20** | 10-Q | 10.1 | 11/09/2017 | 001-33852 | ||
10.21 | 10-Q | 10.2 | 11/09/2017 | 001-33852 | ||
10.22 | 8-K | 10.1 | 08/31/2018 | 001-33852 | ||
10.23* | 10-Q | 10.1 | 11/08/2021 | 001-33852 | ||
21.1 | 10-K | 21.1 | 03/16/2021 | 001-33852 |
72
Exhibit Number | Incorporated by reference herein | ||||
Description | Form | Exhibit No. | Filing Date | File No. | |
Form of Underwriting Agreement between VirnetX Holding Corporation and Gilford Securities Incorporated. | S-1/A | 1.1 | 01/16/2009 | 333-153645 | |
Patent License and Assignment Agreement by and between the Company and Leidos, Inc. (formerly Science Applications International Corporation) dated as of August 12, 2005. | 8-K | 10.4 | 07/12/2007 | 000-26895 | |
Amendment No. 1 to Patent License and Assignment Agreement by and between the Company and Leidos, Inc. dated as of November 2, 2006. | 8-K | 10.6 | 07/12/2007 | 000-26895 | |
Amendment No. 2 to Patent License and Assignment Agreement by and between VirnetX, Inc. and Leidos, Inc. dated as of March 12, 2008. | 8-K | 10.1 | 03/18/2008 | 001-33852 | |
Security Agreement by and between the Company and Leidos, Inc. dated as of August 12, 2005. | 8-K | 10.5 | 07/12/2007 | 000-26895 | |
Assignment Agreement between the Company and Leidos, Inc. dated as of December 21, 2006. | 8-K | 10.7 | 07/12/2007 | 000-26895 | |
Professional Services Agreement by and between the Company and Leidos, Inc. dated as of August 12, 2005. | 8-K | 10.8 | 07/12/2007 | 000-26895 | |
Engagement Letter dated June 8, 2009, by and between McKool Smith, a professional corporation, and VirnetX, Inc. | 10-Q | 10.1 | 08/10/2009 | 001-33852 | |
Engagement Letter dated April 15, 2010, by and between McKool Smith, a professional corporation, and VirnetX, Inc. | 10-Q | 10.1 | 05/07/2010 | 001-33852 | |
Settlement and License Agreement, by and between Microsoft Corporation and VirnetX, Inc., dated May 14, 2010. | 10-Q/A | 10.1 | 01/31/2011 | 001-33852 | |
Amended Settlement and License Agreement, by and between Microsoft Corporation and VirnetX, Inc., dated December 17, 2014. | 10-K | 10.23 | 03/02/2015 | 001-33852 | |
Employment Offer Letter from VirnetX, Inc. to Richard H. Nance. | 10-Q | 10.4 | 05/10/2012 | 001-33852 | |
Patent Licensing Representative Agreement, by and between IPValue Management, Inc. and VirnetX, Inc., dated May 8, 2015. | 10-Q | 10.1 | 05/11/2015 | 001-33852 | |
Amended and Restated Revenue Sharing Agreement by and between VirnetX Holding Corporation and Public Intelligence Technology Associates, dated October 18, 2017. | 10-Q | 10.1 | 11/9/2017 | 001-33852 |
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Exhibit Number | Incorporated by reference herein | ||||
Description | Form | Exhibit No. | Filing Date | File No. | |
Amended and Restated Gabriel License Agreement by and between VirnetX Holding Corporation and Public Intelligence Technology Associates, dated October 18, 2017. | 10-Q | 10.2 | 11/9/2017 | 001-33852 | |
Sales Agreement, dated August 20, 2015, by and between VirnetX Holding Corporation and Cowen and Company, LLC. | S-3 | 1.2 | 8/21/2015 | 333-206497 | |
Amendment No. 1 to Sales Agreement, dated March 8, 2018, by and between VirnetX Holding Corporation and Cowen and Company, LLC. | 8-K | 10.2 | 3/9/2018 | 001-33852 | |
Subsidiaries of VirnetX Holding Corporation. | |||||
Consent of Farber Hass Hurley LLP, Independent Registered Public Accounting Firm. | |||||
Power of Attorney (contained on signature page hereto) | |||||
Chief Executive Officer Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act. | |||||
Chief Financial Officer Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act. | |||||
Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||
Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
101.INS | XBRL Instance Document | ||||
101.SCH | XBRL Taxonomy Extension Schema Document | ||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Consent of Farber Hass Hurley LLP, Independent Registered Public Accounting Firm. | X | |||||
Power of Attorney (contained on signature page hereto) | X | |||||
Chief Executive Officer Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act. | X | |||||
Chief Financial Officer Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act. | X | |||||
Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | |||||
Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | |||||
101.INS | XBRL Instance Document | X | ||||
101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | ||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||||
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | X |
* | Indicates management contract or compensatory plan. |
** | Confidential treatment has been granted by the |
*** | Portions of this |
† | The certifications attached as Exhibit 32.1 and 32.2 that accompany this |
74
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
VirnetX Holding Corporation | ||
By: | /s/ Kendall Larsen | |
Name: Kendall Larsen | ||
Title: Chief Executive Officer and President | ||
Dated: March 31, 2023 |
Dated: March 16, 2018
75
Name | Capacity | Date | |||
/s/Kendall Larsen | Director, Chief Executive Officer and President | March 31, 2023 | |||
Kendall Larsen | (Principal Executive Officer) | ||||
/s/Katherine Allanson | Chief Financial Officer | March | |||
( | |||||
Principal Accounting Officer) | |||||
/s/Robert D. Short III | Director | March | |||
Robert D. Short III | |||||
/s/Gary Feiner | Director | March 31, 2023 | |||
Gary Feiner | |||||
/s/Michael F. Angelo | Director | March 31, 2023 | |||
Michael F. Angelo | |||||
/s/ | Director | March | |||
76