| Summary of Significant Accounting Policies | Note 2 – Summary of Significant Accounting Policies Unaudited Interim Financial Information The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the Securities and Exchange Commission’s (SEC) requirements for Form 10-Q and, in the opinion of management, contain all adjustments, of a normal and recurring nature, which are necessary for a fair statement of (i) the condensed consolidated statements of operations for the three and nine month periods ended September 30, 2015 and 2014; (ii) the condensed consolidated statements of comprehensive loss for the three and nine month periods ended September 30, 2015 and 2014; (iii) the condensed consolidated balance sheets at September 30, 2015 and December 31, 2014; and (iv) the condensed consolidated statements of cash flows for the nine month periods ended September 30, 2015 and 2014. However, the accompanying unaudited condensed consolidated financial statements do not include all information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). The condensed consolidated balance sheet, included in this report, as of December 31, 2014 was derived from our 2014 audited financial statements, but does not include all disclosures required by U.S. GAAP. 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. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the fair values of financial instruments, fair values of stock-based awards, income taxes, and derivative liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Revenue Recognition We derive our revenue from patent licensing. The timing and amount of revenue recognized from each licensee depends upon a variety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations. Such agreements may be complex and include multiple elements. These agreements may include, without limitation, elements related to the settlement of past patent infringement liabilities, up-front and non-refundable license fees for the use of patents, patent licensing royalties on covered products sold by licensees, and the compensation structure and ownership of intellectual property rights associated with contractual technology development arrangements. Licensing agreements are accounted for under the Financial Accounting Standards Board (“FASB”) revenue recognition guidance, "Revenue Arrangements with Multiple Deliverables." This guidance requires consideration to be allocated to each element of an agreement that has stand-alone value using the relative fair value method. In other circumstances, such as those agreements involving consideration for past and expected future patent royalty obligations, after consideration of the particular facts and circumstances, the appropriate recording of revenue between periods may require the use of judgment. In all cases, revenue is only recognized after all of 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 · Consideration for Past Sales · Current Royalty Payments · Non-Refundable Up-Front Fees and Minimum Fee Contracts · Non-Royalty Elements Deferred revenue In August 2013 we began receiving annual payments on a contract with a total value over 5 years of $10,000 (“August 2013 Contract Settlement”). From the inception of that license to September 30, 2015 we received cash totaling $7,500 all of which is non-refundable. We recognized $375 and $1,125 of revenue related to these payments for the three and nine months ended September 30, 2015 and $292 and $792 for the three and nine months ended September 30, 2014, respectively. During 2015, activity under the August 2013 Contract Settlement was as follows: Deferred Revenue, December 31, 2014 $ 2,000 Payment received 2,500 Less: Amount amortized as revenue (1,125 ) Deferred Revenue, September 30, 2015 $ 3,375 Royalties Expense Royalty expense for the three and nine months ended September 30, 2015 was $1,029 and $5,264, respectively and was a result of our royalty agreement with Leidos. There was no expense for the three and nine months ended September 30, 2014. The agreement provides for revenue sharing and legal reimbursements related to attorney time and expenses incurred by Leidos during discovery and other aspects of litigation matters that have been resolved. 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. 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 nine months ended September 30, 2015 and 2014 we had 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 were required to be accounted for as derivative liabilities and carried at fair value on our Condensed Consolidated Balance Sheets as a result of an anti-dilution provision which preclude them from being considered indexed to our stock. The warrant liabilities were marked-to-market each period and the change in the fair value was recorded as gain or loss on derivative liability in the accompanying Condensed Consolidated Statements of Operations. All remaining unexercised Series I Warrants expired during the three months ended March 31, 2015. Impairment of Long-Lived Assets On an annual basis we identify and record impairment losses on long-lived assets when events and changes in circumstances indicate that the carrying amount of an asset might not be recoverable. Recoverability is measured by comparison of the anticipated future net undiscounted cash flows to the related assets’ carrying values. 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. Fair Value of Financial Instruments Fair value is the price that would result from an orderly transaction between market participants at the measurement date. A fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Level 2 measurements utilize either directly or indirectly observable inputs in markets other than quoted prices in active markets. Our financial instruments are stated at amounts that equal, or approximate, fair value. When we approximate fair value, we utilize market data or assumptions that we believe market participants would use in pricing the financial instrument, including assumptions about risk and inputs to the valuation technique. We use valuation techniques, primarily the income and market approach that maximize the use of observable inputs and minimize the use of unobservable inputs for recurring fair value measurements. Mutual Funds: Corporate and U.S. Agency Securities Series I Warrants The following tables show the adjusted cost, gross unrealized gains, gross unrealized losses and fair value of our securities by significant investment category as of September 30, 2015 and December 31, 2014. September 30, 2015 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Investments Available for Sale Cash $ 5,405 $ - $ - $ 5,405 $ 5,405 $ - Level 1: Mutual funds 4,585 - - 4,585 4,585 - Corporate securities 353 - - 353 - 353 U.S agency securities 10,444 4 - 10,448 - 10,448 15,382 4 - 15,386 4,585 10,801 Total $ 20,787 $ 4 $ - $ 20,791 $ 9,990 $ 10,801 December 31, 2014 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Investments Available for Sale Cash $ 1,183 $ - $ - $ 1,183 $ 1,183 $ - Level 1: Mutual funds 10,139 - - 10,139 10,139 - Corporate securities 9,405 1 (3 ) 9,403 1,645 7,758 U.S agency securities 20,504 2 (2 ) 20,504 5,691 14,813 40,048 3 (5 ) 40,046 17,475 22,571 Total $ 41,231 $ 3 $ (5 ) $ 41,229 $ 18,658 $ 22,571 The following tables set forth by level within the fair value hierarchy, our liabilities stated at fair value as of December 31, 2014. December 31, 2014 Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total Series l Warrants $ — $ — $ 320 $ 320 Total $ — $ — $ 320 $ 320 The following table sets forth a summary of changes in the fair value of our Level 3 liability stated at fair value for the nine months ended September 30, 2015 and 2014. Nine Months Ended September 30, 2015 Nine Months Ended September 30, 2014 Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Balance December 31, 2014 $ 320 Balance December 31, 2013 $ 2,564 Loss on derivative liability included in net loss 117 Gain on derivative liability included in net loss (2,126 ) Settlements (333 ) Settlements (7 ) Expiration of warrants (104 ) — Balance September 30, 2015 $ — Balance September 30, 2014 $ 431 New Accounting Pronouncements In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-15, “ Presentation of Financial Statements – Going Concern” Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” substantial doubt, In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation Accounting for Share-Based Payments.” In May 2014, the FASB issued ASU No. 2014-09 " Revenue from Contracts with Customers " (Topic 606). 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 public entities, this Update is effective for annual reporting periods beginning after December 15, 2017, as amended, including interim periods within that reporting period. We are currently evaluating the impact this guidance will have on our financial position and statement of operations. |
