VirnetX Holding Corp 10-Q

ITEM 1- FINANCIAL STATEMENTS. VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) As of March 31, 2021 As of December 31, 2020 ASSETS (unaudited) Current assets: Cash and cash equivalents $ 197,198 $ 192,908 Investments available for sale 19,835 28,348 Accounts receivables 6 8 Prepaid income tax 2,903 2,905 Prepaid expenses and other current assets 586 263 Total current assets 220,528 224,432 Prepaid expenses and other assets 1,213 1,301 Property and equipment, net 10 11 Deferred tax assets 16,245 9,049 Total assets $ 237,996 $ 234,793 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 532 $ 654 Accrued payroll and related expenses 274 220 Accrued licensing costs — 9,438 Accrued legal expenses (Note 7) 38,284 — Other liabilities, current 31 44 Total current liabilities 39,121 10,356 Commitments and contingencies (Note 4) Stockholders’ equity: Preferred stock, par value $ 0.0001 per share Authorized: 10,000,000 shares at March 31 , 2021 and December 31, 2020 , Issued and outstanding: 0 shares at March 31 , 2021 and December 31, 2020 — — Common stock, par value $ 0.0001 per share Authorized: 100,000,000 shares at March 31 , 2021 and December 31, 2020 , Issued and outstanding: 71,058,570 shares and 71,058,570 shares, at March 31 , 2021 and December 31, 2020 , respectively 7 7 Additional paid-in capital 233,336 232,457 Accumulated deficit ( 34,457 ) ( 8,014 ) Accumulated other comprehensive loss ( 11 ) ( 13 ) Total stockholders’ equity 198,875 224,437 Total liabilities and stockholders’ equity $ 237,996 $ 234,793 See accompanying notes to condensed consolidated financial statements. 2 Index VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts) Three Months Ended March 31, 2021 2020 Revenue $ 5 $ 302,576 Operating expense: Licensing costs ( 9,438 ) 90,101 Research and development 1,152 1,905 Selling, general and administrative 41,943 27,376 Total operating expense 33,657 119,382 (Loss) income from operations ( 33,652 ) 183,194 Gain on settlement — 41,271 Interest and other income, net 16 108,239 (Loss) income before taxes ( 33,636 ) 332,704 Income tax benefit (expense) 7,193 ( 32,759 ) Net (Loss) income $ ( 26,443 ) $ 299,945 Basic (loss) income per share $ ( 0.37 ) $ 4.26 Diluted (loss) income per share $ ( 0.37 ) $ 4.20 Weighted average shares outstanding basic 71,059 70,365 Weighted average shares outstanding diluted 71,059 71,384 See accompanying notes to condensed consolidated financial statements. 3 Index VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (in thousands) Three Months Ended March 31, 2021 2020 Net (loss) income $ ( 26,443 ) $ 299,945 Other comprehensive income (loss), net of tax: Change in unrealized gain, net of tax 5 2 Change in foreign currency translation, net of tax ( 3 ) 1 Total other comprehensive income (loss), net of tax 2 3 Comprehensive (loss) income $ ( 26,441 ) $ 299,948 See accompanying notes to condensed consolidated financial statements. 4 Index VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) (in thousands) Three Months Ended March 31, 2021 2020 Total shareholders' equity, beginning balances $ 224,437 $ 5,628 Common stock and additional paid-in capital: Beginning balances 232,464 223,244 Common stock issued for cash, net — 4,488 Common stock issued for options/RSUs, net — 768 Stock-based compensation 879 778 Ending balances 233,343 229,278 Accumulated deficit (retained earnings): Beginning balances ( 8,014 ) ( 217,602 ) Net (loss) income ( 26,443 ) 299,945 Ending balances ( 34,457 ) 82,343 Accumulated other comprehensive loss: Beginning balances ( 13 ) ( 14 ) Change in unrealized investment gain/loss, net 5 2 Change in foreign currency translation, net ( 3 ) 1 Ending balances ( 11 ) ( 11 ) Total shareholders' equity, ending balances $ 198,875 $ 311,610 See accompanying notes to condensed consolidated financial statements. 5 Index VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months Ended March 31, 2021 2020 Cash flows from operating activities: Net (loss) income $ ( 26,443 ) $ 299,945 Adjustments to reconcile net (loss) income to cash flows from operating activities: Depreciation 1 1 Deferred tax assets ( 7,196 ) ( 8,722 ) Amortization of warrant issuance costs 26 — Stock-based compensation 879 778 Changes in assets and liabilities: Accounts receivables 2 — Prepaid expenses and other assets ( 261 ) ( 281 ) Other liabilities ( 13 ) ( 153 ) Accounts payable ( 122 ) 3,274 Accrued licensing costs ( 9,438 ) 90,101 Accrued payroll and related expenses 54 ( 64 ) Income tax payable 2 41,481 Accrued legal expenses 38,284 — Net cash (used in) provided by operating activities ( 4,225 ) 426,360 Cash flows from investing activities: Purchase of investments ( 2,476 ) ( 200 ) Proceeds from sale or maturity of investments 10,991 1,261 Net cash provided by investing activities 8,515 1,061 Cash flows from financing activities: Proceeds from exercise of options — 768 Proceeds from sale of common stock — 4,488 Net cash provided by financing activities — 5,256 Net increase in cash and cash equivalents 4,290 432,677 Cash and cash equivalents, beginning of period 192,908 3,135 Cash and cash equivalents, end of period $ 197,198 $ 435,812 See accompanying notes to condensed consolidated financial statements. 6 Index VIRNETX HOLDING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except litigation, patent, share and per share amounts) (Unaudited) Note 1 — Business Description and Basis of Presentation VirnetX Holding Corporation, which we refer to as” we”, “us”, “our”, “the Company” or “VirnetX”, is engaged in the business of commercializing a portfolio of patents. We seek to license our technology, including GABRIEL Connection Technology™, to various original equipment manufacturers, or OEMs, that use our technologies in the development and manufacturing of their own products within the IP-telephony, mobility, fixed-mobile convergence, and unified communications markets. Prior to 2012, our revenue was limited to an insignificant amount of software royalties pursuant to the terms of a single license agreement. During 2012, 2013 and 2020 we had revenues from settlements of patent infringement disputes whereby we received consideration for past sales of licensees that utilized our technology, where there was no prior patent license agreement (see “Revenue Recognition”). Our portfolio of intellectual property is the foundation of our business model. We currently own approximately 194 total patents and pending applications, including 70 U.S. patents/patent applications and 124 foreign patents/validations/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. The subject matter of all our U.S and foreign patents and pending applications relates generally to securing communications over the Internet and such covers all our technology and other products. Some of our issued U.S. and foreign patents expire at various times during the period from 2021 to 2034. Note 2 — Summary of Significant Accounting Policies Unaudited Interim Financial Information The accompanying Condensed Consolidated Balance Sheet as of March 31, 2021, the Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020, the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020, the Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2021 and 2020, and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). In our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of March 31, 2021, our results of operations for the three months ended March 31, 2021 and 2020, and our cash flows for the three months ended March 31, 2021 and 2020. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 16, 2021. Use of Estimates We prepare our consolidated financial statements in accordance with U.S. GAAP. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below. We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors. 7 Index 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. Leases The Company determines if an arrangement is a lease at inception in accordance with Accounting Standards Codification (“ASC”) Topic 842. Operating lease right-of-use (“ROU”) assets are included in Prepaid expenses, and other assets on the Condensed Consolidated Balance Sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term (see Note 8 – Leases). Revenue Recognition The Company derives revenue from licensing and royalty fees from contracts with customers which often span several years. We account for this revenue in accordance with ASC Topic 606, Revenue from Contracts with 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. With the licensing of our patents, performance obligations are generally satisfied at a point in time as work is complete when our patent rights are transferred to our customers. We generally have no further obligation to our customers regarding our technology. Certain contracts may require our customers to enter into a hosting arrangement with us and for these arrangements, revenue is recognized over time, generally over the life of the servicing contract. The Company actively monitors and enforces 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, from time to time, receive payments as part of a settlement or compensation for a patent infringement dispute. Proceeds received are allocated to each element identified in the settlement or compensation, based on the fair value of each element. Generally, settlements and compensation may include the following elements: the value of a license or royalty agreement, cost reimbursement, damages and interest. Elements identified related to licensing and royalty are recognized as revenue. Elements identified as reimbursed costs are generally recorded as a reduction to the reported expenses. Elements identified as damages or interest are generally recorded in other income in the condensed consolidated statement of operations. Licensing Costs Included in operating expenses licensing are costs we incurred in conjunction with the proceeds received from Apple Inc., pursuant to a favorable court decision relating to a patent infringement case. Contingent Gains ASC Topic 450-30-25, Contingent Gains, prohibits recognition of contingent gains until realized. Accordingly, we do not record contingent gains ahead of such realization. Management generally considers any such gains as realized only upon the collection of cash. 8 Index Cash and Cash Equivalents We consider all highly liquid investments purchased with original maturities of three months or less at the date of purchase to be cash equivalents. Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these investments. Investments Investments are classified as available-for-sale and are recorded at fair market value. Unrealized gains and losses are reported as other comprehensive income. Realized gains and losses are recorded in income in the period they are realized using specific identification of each security’s cost basis. We invest our excess cash primarily in highly liquid debt instruments including corporate, government and federal agency securities, with contractual maturities less than two years . By policy, we limit the amount of credit exposure to any one issuer. 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. Concentration of Credit Risk and Other Risks and Uncertainties Our cash and cash equivalents are primarily maintained at two major financial institutions in the United States. Deposits held with these financial institutions may exceed the amount of insurance provided on such deposits. A portion of those balances are insured by the Federal Deposit Insurance Corporation, or FDIC. During the three months ended March 31, 2021 and 2020, we had, at times, funds that were uninsured. We do not believe that we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships. We have not experienced any losses on our deposits of cash and cash equivalents. Fair Value The carrying amounts of our financial instruments, including cash equivalents, accounts payable, and accrued liabilities, approximate fair value because of their generally short maturities. Intangible Assets We record intangible assets at cost, less accumulated amortization. Amortization of intangible assets is provided over their estimated useful lives, which can range from 3 to 15 years, on either a straight-line basis or as revenue is generated by the assets. 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. Research and Development Research and development costs include expenses paid to outside development consultants and compensation related expenses for our engineering staff. Research and development costs are expensed as incurred. 9 Index Income Taxes We account for income taxes using the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our assets and liabilities. We calculate current and deferred tax provisions based on estimates and assumptions that could differ from actual results reflected on the income tax returns filed during the following years. Adjustments based on filed returns are recorded when identified in the subsequent years. The effect on deferred taxes for a change in tax rates is recognized in income in the period that the tax rate change is enacted. In assessing our deferred tax assets, we consider whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. A valuation allowance is provided for deferred income tax assets when, in our judgment, based upon currently available information and other factors, it is more likely than not that all or a portion of such deferred income tax assets will not be realized. The determination of the need for a valuation allowance is based on an on-going evaluation of current information including, among other things, historical operating results, estimates of future earnings in different taxing jurisdictions and the expected timing of the reversals of temporary differences. We believe the determination to record a valuation allowance to reduce a deferred income tax asset is a significant accounting estimate because it is based, among other things, on an estimate of future taxable income in the United States and certain other jurisdictions, which is susceptible to change and may or may not occur, and because the impact of adjusting a valuation allowance may be material. In determining when to release the valuation allowance established against our net deferred income tax assets, we consider all available evidence, both positive and negative. We continually assess our ability to generate sufficient taxable income during future periods in which our deferred tax assets may be realized. If and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our statements of operations. We account for our uncertain tax positions in accordance with U.S. GAAP. The U.S. GAAP method of accounting for uncertain tax positions utilizes a two-step approach to evaluate tax positions. Step one, recognition, requires evaluation of the tax position to determine if based solely on technical merits it is more likely than not to be sustained upon examination. Step two, measurement, is addressed only if a position is more likely than not to be sustained. In step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement with tax authorities. If a position does not meet the more likely than not threshold for recognition in step one, no benefit is recorded until the first subsequent period in which the more likely than not standard is met, the issue is resolved with the taxing authority, or the statute of limitations expires. Positions previously recognized are derecognized when we subsequently determine the position no longer is more likely than not to be sustained. Evaluation of tax positions, their technical merits, and measurements using cumulative probability are highly subjective management estimates. Actual results could differ materially from these estimates. Stock-Based Compensation We account for stock-based compensation using the fair value recognition method in accordance with U.S. GAAP. We recognize these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the vesting term of 4 years. We do not estimate the forfeiture rate and recognize forfeitures, if any, when they occur. See Note 5 - Stock-Based Compensation below for additional information concerning our share-based compensation awards. In addition, as required we record stock-based compensation expense for awards granted to non-employees at fair value of the consideration received or the fair value of the equity instruments issued as they vest over the performance period. Earnings per Share Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. During the three months ended March 31, 2021 we incurred losses; therefore, the effect of any common stock equivalent would be anti-dilutive. 10 Index Fair Value of Financial Instruments Fair value is the price that would result from an orderly transaction between market participants at the measurement date. A fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Level 2 measurements utilize either directly or indirectly observable inputs in markets other than quoted prices in active markets. Our financial instruments are stated at amounts that equal, or approximate, fair value. When we estimate fair value, we utilize market data or assumptions that we believe market participants would use in pricing the financial instrument, including assumptions about risk and inputs to the valuation technique. We use valuation techniques, primarily the income and market approach, which maximizes the use of observable inputs and minimize the use of unobservable inputs for recurring fair value measurements. Mutual funds: Valued at the quoted net asset value of shares held. U.S. agency and treasury securities : Fair value measured at the closing price reported on the active market on which the individual securities are traded. The following tables show the adjusted cost, gross unrealized gains, gross unrealized losses and fair value of our securities by significant investment category as of March 31, 2021 and December 31, 2020. March 31, 2021 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Investments Available for Sale Cash $ 83,156 $ — $ — $ 83,156 $ 83,156 $ — Level 1: Mutual funds 114,042 — — 114,042 114,042 — U.S. agency securities 12,718 4 — 12,722 — 12,722 U.S. treasury securities 7,110 3 — 7,113 — 7,113 133,870 7 — 133,877 114,042 19,835 Total $ 217,026 $ 7 $ — $ 217,033 $ 197,198 $ 19,835 December 31, 2020 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Investments Available for Sale Cash $ 121,785 $ — $ — $ 121,785 $ 121,785 $ — Level 1: Mutual funds 70,996 — — 70,996 70,996 — U.S. agency securities 13,767 2 — 13,769 127 13,642 U.S. treasury securities 14,707 — ( 1 ) 14,706 — 14,706 99,470 2 ( 1 ) 99,471 71,123 28,348 Total $ 221,255 $ 2 $ (1 ) $ 221,256 $ 192,908 $ 28,348 New Accounting Pronouncements In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12 Income Taxes (Topic 740). The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We adopted this ASU on January 1, 2021 and there was no material impact on our financial position or cash flows as a result. 11 Index Note 3 — Income Taxes For the three months ended March 31, 2021, we recognized income tax benefit of $ 7,193 on a loss before income taxes of $ 33,636 , which is an effective tax rate of 21.38 % . The effective tax rate was higher than the statutory federal income tax rate primarily due to the effect of research and development tax credits. During the three-month period ended March 31, 2021 we had net operating losses (“NOLs”) which increased our deferred tax assets by $ 7,196 to $ 16,245 for NOL carryforwards. We continue to provide a partial allowance against California net operating loss and research credit carryovers due to the fact that we have no income in California. For the three months ended March 31, 2020, income tax expense was $ 32,759 on income before taxes of $ 332,704 and an effective tax rate of 9.9 %. The effective tax rate for the three month period ended March 31, 2020 was favorably impacted by the reversal of valuation allowance reserves totaling $ 38,112 which were established in prior years on our deferred tax assets primarily associated with net operating loss (“NOL”) carryforwards. A valuation allowance is provided for deferred tax assets when, in our judgment, based upon currently available information and other factors, it is more likely than not that all or a portion of such deferred income tax assets will not be realized. The determination of the need for a valuation allowance is based on an on-going evaluation of current information including, among other things, historical operating results, estimates of future earnings in different taxing jurisdictions and the expected timing of the reversals of temporary differences. We believe the determination to record, or reduce, a valuation allowance associated with a deferred income tax asset is a significant accounting estimate because it is based, among other things, on an estimate of future taxable income in the United States and certain other jurisdictions, which is susceptible to change and may or may not occur, and because the impact of adjusting a valuation allowance may be material. In determining when to release the valuation allowance established against our net deferred income tax assets, we consider all available evidence, both positive and negative. Internal Revenue Code Section 382 places a limitation on the amount of net operating loss carryforwards that can be used to offset taxable income after a change in control (generally greater than 50% change in ownership) of a loss corporation. California, the state in which our headquarters was once located, has similar rules. Since the Company did not have a greater than 50% change of control as defined under the Internal Revenue Code, no limitation applies to the Company’s Net Operating Losses. Our tax years for 2005 and forward are subject to examination by the U.S. tax authority and various state tax authorities. These years are open due to NOLs and tax credits generated in these years were utilized in 2020. The statute of limitation for these years shall expire three years after the date of filing 2020 income tax returns. We are required to recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. In 2019, we released all ASC 740-10 uncertain tax positions due to the expiring of the statute of limitation. At December 31, 2020 and March 31, 2021, we have no uncertain tax positions. Our policy is to recognize interest and penalties accrued on uncertain tax positions as a component of income tax expense. At December 31, 2020 and March 31, 2021, we had no accrued interest or penalties related to the uncertain tax positions. Note 4 — Commitments and Related Party Transactions We lease our offices under an operating lease with a third party which expires on October 31, 2021 (see Note 8 - Leases). We entered into a service agreement for the use of an aircraft from K2 Investment Fund LLC (“LLC”) for business travel for employees of the Company. We incurred approximately $ 79 and $ 76 in fees and reimbursements to the LLC during the three months ended March 31, 2021 and 2020, respectively. We pay for the Company’s usage of the aircraft and have no rights to purchase. Our Chief Executive Officer and Chief Administrative Officer are the managing partners of the LLC and control the equity interests of the LLC. We entered into a 12 -month non-exclusive agreement with the LLC for use of the plane at a rate of $ 8 per flight hour, with no minimum usage requirement. The agreement contains other terms and conditions and can be cancelled by either us or the LLC with 30 days’ notice. The agreement renews on an annual basis unless terminated by either party. Neither party has exercised their termination rights . 12 Index Note 5 — Stock Based Compensation We have a stock incentive plan for employees and others called the “VirnetX Holding Corporation 2013 Equity Incentive Plan”, or the Plan, which has been approved by our stockholders. The Plan generally provides for the granting of up to 16,624,469 shares of our common stock, including stock options and stock purchase rights (“RSUs”), and will expire in 2024. As of March 31, 2021, 545,210 shares remained available for grant under the Plan. Stock-based compensation expense included in general and administrative expense was $ 383 and $ 348 , and in research and development expense was $ 496 and $ 430 , for the three months ended March 31, 2021 and 2020, respectively. We did no t grant options during the three months ended March 31, 2021. During the three months ended March 31, 2020, we granted options for a total of 240,000 shares with a weighted average grant date fair value of $ 4.30 per option. We estimated the fair value of the options on the date of grant utilizing the Black-Scholes valuation model with the following assumptions: (i) 0 percent dividend yield, (ii) 93.4 percent volatility, (iii) 0.8 percent risk free rate and (iv) 6.25 years expected term. We did no t grant RSU’s during the three months ended March 31, 2021 or 2020. As of March 31, 2021, the unrecognized stock-based compensation expense related to non-vested stock options and RSUs was $ 4,602 and $ 1,983 , respectively, which will be amortized over an estimated weighted average period of approximately 2.17 and 2.08 years, respectively. Note 6 — Equity Common Stock On July 30, 2018 we filed a $ 100,000 universal shelf registration statement on SEC Form S-3 which was declared effective by the SEC on August 16, 2018. We also entered an at-the-market equity offering sales agreement (“ATM”) with Cowen & Company, LLC on August 31, 2018, under which we can offer and sell shares of our common stock having an aggregate value of up to $ 50,000 . We use the ATM proceeds for GABRIEL product development, marketing and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products, technologies or businesses. As of March 31, 2021, common stock with an aggregate value of up to $ 21,964 remained available for offer and sale under the ATM agreement. We sold no shares under the ATM during the three months ended March 31, 2021. We sold 1,049,382 shares under the ATM during the three months ended March 31, 2020, with an average sales price per common share of $ 4.41 and the aggregate proceeds from the sales totaled $ 4,627 . Sales commissions, fees and other costs associated with the ATM totaled $ 139 . We issued no shares for options during the three months ended March 31, 2021. We issued 202,031 shares of common stock for options during the three months ended March 31, 2020. 13 Index Warrants In 2020, we issued warrants for the purchase of 25,000 shares of common stock at an exercise price of $ 5.75 per share, exercisable on the date of grant expiring in April 2025 . The weighted average fair value at the grant date was $ 4.16 per warrant. The fair value at the grant date was estimated utilizing the Black-Scholes valuation model with the following weighted average assumptions (i) dividend yield on our common stock of 0 percent (ii) expected stock price volatility of 97 percent (iii) a risk-free interest rate of 0.27 percent and (iv) and expected option term of 5 years. Warrants Issued Exercise Price Outstanding and Exercisable December 31, 2020 Issued Exercised Terminated / Cancelled Outstanding and Exercisable March 31, 2021 Expiration Date 25,000 $ 5.75 25,000 - — — 25,000 April 30, 2025 Note 7 — Litigation We have several intellectual property infringement lawsuits pending in the United States District Court for the Eastern District of Texas, Tyler Division (“USDC”), and United States Court of Appeals for the Federal Circuit (“USCAFC”) and the Supreme Court of the United States (“SCOTUS”). VirnetX Inc. v. Cisco Systems, Inc. et al. (Case 6:10-CV-00417-LED) (“Apple I”) On August 11, 2010, we filed a complaint against Aastra USA. Inc. (“Aastra”), Apple Inc. (“Apple”), Cisco Systems, Inc. (“Cisco”), and NEC Corporation (“NEC”) the USDC in which we alleged that these parties infringe on certain of our patents (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages and injunctive relief. The cases against each defendant were separated by the judge. Aastra and NEC agreed to sign license agreements with us, and we dropped all accusations of infringement against them. A jury in USDC decided that our patents were not invalid and rendered a verdict of non-infringement by Cisco on March 4, 2013. Our motion for a new Cisco trial was denied and the case against Cisco was closed. On November 6, 2012, a jury in the USDC awarded us over $ 368,000 for Apple’s infringement of four of our patents, plus daily interest up to the final judgment. Apple filed an appeal of the judgment to the USCAFC. On September 16, 2014, USCAFC affirmed the USDC jury’s finding that all four of our patents at issue are valid and confirmed the USDC jury’s finding of infringement of VPN on Demand under many of the asserted claims of our ‘135 and ‘151 patents, and the USDC’s decision to allow evidence about our license and royalty rates regarding the determination of damages. However, the USCAFC vacated the USDC jury’s damages award and some of the USDC’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 back to the USDC for further proceedings. On September 30, 2016, pursuant to the 2014 remand from the USCAFC, a jury in the USDC awarded us $ 302,400 for Apple’s infringement of four of our patents. On September 29, 2017, the USDC entered its final judgment, denied all of Apple’s post-trial motions, granted all our post-trial motions, including our motion for willful infringement and enhanced the royalty rate during the willfulness period from $ 1.20 to $ 1.80 per device, and awarded us costs, certain attorneys’ fees, and prejudgment interest. The total amount in the final judgment was $ 439,700 , including $ 302,400 (jury verdict), $ 41,300 (enhanced damages) and $ 96,000 (costs, fees and interest). On October 27, 2017 Apple appealed the final judgment entered on September 29, 2017 to the USCAFC. Oral arguments in this case were held on January 8, 2019. On January 15, 2019, the Court issued a Rule 36 order affirming the district court’s final judgment. Apple filed a petition for panel rehearing and rehearing en-banc in this matter on February 21, 2019. On October 1, 2019, USCAFC issued an order denying Apple’s petition. Apple filed a petition for a writ of certiorari with the SCOTUS, which was denied on February 24, 2020. Prior to the SCOTUS decision denying Apple’s petition for a writ of certiorari, on February 20, 2020, Apple filed a Rule 60(b) motion for relief from judgment with the USDC, seeking relief from the district court’s September 29, 2017 final judgment. VirnetX filed a responsive brief in opposition on March 5, 2020. On March 13, 2020, the Company received payment of $ 454,034 from Apple, representing the previously announced final judgment with interest in this case. Apple sought payment relief by filing a motion under rule 60(b). On September 1, 2020 USDC issued an order denying Apple’s motion for relief of judgement. This case is now closed. VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”) This case began on November 6, 2012, when we had filed a complaint against Apple in USDC in which we alleged that Apple infringed on certain of our patents, (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages and injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and the latest Macintosh computers; these products were not included in the Apple I case because they were released after the Apple I case was initiated. Post-trial motions hearing was held on July 18, 2018. On August 31, 2018, the USDC entered a Final Judgment and issued its Memorandum Opinion and Order regarding post-trial motions, affirming the jury’s verdict of $ 502,600 and granting VirnetX motions for supplemental damages, a sunset royalty, and the royalty rate of $ 1.20 per infringing iPhone, iPad and Mac products, pre-judgment and post-judgment interest and costs. Apple filed a notice of appeal with the USCAFC in the Apple II case. On October 9, 2018, USCAFC docketed the appeal as Case No. 19-1050 - VirnetX Inc. v. Apple Inc . On January 24, 2019 Apple filed its opening brief. We filed our response brief on March 1, 2019. Apple filed its reply brief on April 5, 2019. The oral arguments were heard on October 4, 2019. On November 22, 2019, the USCAFC issued an opinion affirming the district court’s findings that Apple is precluded from making certain invalidity arguments and that Apple infringed the ’135 and ’151 patents; reversing the USDC’s finding that Apple infringed the ’504 and ’211 patents; and remanding the case for proceedings on damages. Apple sought panel and en banc rehearing, which the USCAFC denied on February 10, 2020. On February 22, 2020, the USDC issued a scheduling order for the parties to brief the court about the need for a new trial for recalculating the damages. We filed our motion for entry of judgment on February 28, 2020. The arguments on this matter were heard on April 14, 2020. In its order, unsealed on May 1, 2020, the USDC denied VirnetX’s motion for entry of a new judgment based on the prior jury verdict and ordered a new jury trial on damages. On August 10, 2020, the USDC granted Apple’s motion for continuance and reset the date to October 26, 2020. On October 30, 2020, a jury returned a $ 502,800 verdict in favor of VirnetX based on Apple’s infringement of two network security patents: VirnetX US Patents No. 6,502,135 and No. 7,490,151. The jury verdict called for damages of $ 0.84 per accused device since the 2013 launch of Apple’s iOS 7 operating system and represents 598,629,580 infringing units from US sales only. On January 15, 2021, the district court denied Apple’s motion for judgment as a matter of law, and on February 4, 2021, Apple filed a notice of appeal to the USCAFC. Apple’s opening brief is due on June 2, 2021. 14 Index VirnetX Inc. v. Mangrove Partners Master Fund, Ltd., Apple Inc. (USCAFC Case 20-2271) and VirnetX Inc. v. Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp, LLC (USAFC Case 20-2272) On September 15, 2020, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes review proceedings IPR2015-01046 and IPR2016-00062 involving our U.S. Patent No. 6,502,135, and an appeal of the invalidity findings by the PTAB in inter partes review proceedings IPR2015-1047, IPR2016- 00063, and IPR2016-00167 involving our U.S. Patent No. 7,490,151. On September 25, 2020, the USCAFC issued an order consolidating the two appeals. On December 15, 2020, we filed a motion to vacate the PTAB decisions below and to remand these appeals to the PTAB. On March 16, 2021, the USCAFC denied the motion without prejudice to us raising the challenges made in the motion in our opening brief. Our opening brief is currently due on June 7, 2021. Iancu v. Luoma (SCOTUS Case 20-74) On July 23, 2020, the United States and the USPTO (collectively, “the United States”) filed a petition for a writ of certiorari from several decisions by the USAFC, including decisions in VirnetX Inc. v. Cisco Systems, Inc. , Nos. 2019-1671, and VirnetX Inc. v. Iancu, Nos. 2017-2593, -2594. In those cases, the USAFC granted VirnetX’s motions to vacate the underlying decisions of the PTAB on the basis of Arthrex, Inc. v. Smith & Nephew, Inc. , 941 F.3d 1320 (Fed. Cir. 2019), and remanded for further proceedings. The United States requested that the SCOTUS hold its certiorari petition pending the disposition of the United States’ separate petition in United States v. Arthrex, Inc. , No. 19-1434 (filed June 25, 2020). On August 26, 2020, VirnetX filed a response, agreeing that the United States’ certiorari petition should be held pending the disposition of the petition for a writ of certiorari in No. 19-1434 (and related petitions filed by private parties in Nos. 19-1452 and 19-1458), and any further SCOTUS proceedings. On October 13, 2020, SCOTUS granted the United States’ petition for a writ of certiorari in No. 19-1434 as to USAFC Case No. 2018-2140, and the petitions for writs of certiorari in Nos. 19-1452 and 19-1458, all limited to Questions 1 and 2 as set forth in the July 22, 2020 Memorandum for the United States filed in No. 19-1434. The consolidated petition is seeking review of decisions by the USCAFC holding that administrative patent judges ( “ APJ ” ) of the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office must be appointed by the President and confirmed by the Senate; and, whether the remedy imposed by USCAFC that federal laws that place restrictions on when officials can be removed from office cannot apply to APJ, was the appropriate one. SCOTUS heard oral argument in these consolidated cases on March 1, 2021. We are waiting for SCOTUS to rule in this matter. McKool Smith P.C. v. VirnetX, Inc., AAA Case No. 01-20-0003-7975 On March 23, 2020, the law firm of McKool Smith, P.C. (“McKool”) filed a Demand for Arbitration against VirnetX, Inc. with the American Arbitration Association (“AAA”). In its demand, McKool claimed that a retention agreement it entered into in 2010 with VirnetX entitled it to a contingency fee arising from the recent 2020 payment made in the Apple I case. McKool claimed it was owed approximately $ 36,300 (or 8 % of the Apple I payment). We filed a general response with the AAA denying McKool’s claim and contested the matter vigorously. An evidentiary hearing was held on the matter during the week of February 22, 2021 and the parties submitted additional briefings. On April 19, 2021, the arbitrator awarded McKool $ 36,323 in damages, plus pre-judgment interest in the amount of 5 % simple interest from March 23, 2020 to April 18, 2021, and post-judgment interest in 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. Neal Hurwitz v. Kendall Larsen et al. (Case 2020-0425-JRS) On June 2, 2020, stockholder Neal Hurwitz filed a verified derivative complaint in the Delaware Court of Chancery against Kendall Larsen, Robert D. Short Ill, Gary Feiner, Michael F. Angelo, and Thomas M. O’Brien and naming the Company as nominal defendant. The lawsuit alleges breaches of fiduciary duty, corporate waste, and unjust enrichment arising out of a series of previously-disclosed transactions and compensation awards and seeks an award of monetary damages and equitable relief. On July 1, 2020, the defendants filed a motion to dismiss the complaint based on a failure to plead demand futility and a failure to state a claim on which relief can be granted and, on August 19, 2020, the defendants filed an opening brief in support of their motion to dismiss. On October 16, 2020, plaintiff amended his complaint rather than respond to the arguments in the defendants’ opening brief. On October 23, 2020, the defendants filed a renewed motion to dismiss plaintiff’s amended complaint based on a failure to plead demand futility and a failure to state a claim on which relief can be granted. On January 12, 2021, Hurwitz voluntarily dismissed his suit without prejudice. 15 Index Other Legal Matters One or more potential intellectual property infringement claims may also be available to us against certain other companies who have the resources to defend against any such claims. Although we believe these potential claims are likely valid, commencing a lawsuit can be expensive and time-consuming, and there is no assurance that we could prevail on such potential claims if we made them. In addition, bringing a lawsuit may lead to potential counterclaims which may distract our management and our other resources, including capital resources, from efforts to successfully commercialize our products. Currently, we are not a party to any other pending legal proceedings and are not aware of any proceeding threatened or contemplated against us. Note 8 — Leases We lease office space under an operating lease which expires on October 31, 2021. On March 31, 2021, the underlying ROU asset and lease liability totaled $ 31 . On December 31, 2020, the underlying ROU asset and lease liability totaled $ 44 . For the three months ended March 31, 2021 and 2020, lease expense totaled $ 14 and $ 13 , respectively. We also lease a facility for corporate promotional and marketing purposes which was prepaid at inception and expires in 2025, as amended. On March 31, 2021 and December 31, 2020, the ROU asset totaled $ 1,173 and $ 1,248 , respectively; lease expense totaled $ 75 and $ 96 , for the three months ended March 31, 2021 and 2020, respectively. Note 9 — Earnings Per Share Basic earnings per share are based on the weighted average number of common shares outstanding for the period. Diluted earnings per share are based on the weighted average number of common shares and potentially dilutive common shares outstanding. Potential common shares outstanding principally include stock options, RSUs and warrants, excluding any potentially dilutive shares convertible at a price higher than the closing price of our stock at the end of each reporting period. The following table shows the computation of basic and diluted earnings per share for the three months ended March 31, 2021 and 2020 (in thousands, except per share amounts): Three Months Ended March 31, 2021 2020 Numerator: Net (loss) income $ ( 26,443 ) $ 299,945 Denominator: Weighted-average basic shares outstanding 71,059 70,365 Effect of dilutive securities — 1,019 Weighted-average diluted shares 71,059 71,384 Basic (loss) earnings per share $ ( 0.37 ) $ 4.26 Diluted (loss) earnings per share $ ( 0.37 ) $ 4.20 We incurred a net loss for the three months ended March 31, 2021; therefore, all 6,341,844 potentially dilutive securities representing shares of common stock were excluded from the computation of diluted earnings per share, because their effect would have been antidilutive. For the three months ended March 31, 2020, potentially dilutive securities representing 2,161,955 shares of common stock were excluded from the computation of diluted earnings per share, because their effect would have been antidilutive. 16 Index Note 10 — Subsequent Events See Note 7 - Litigation McKool Smith P.C. v. VirnetX, Inc., AAA Case No. 01-20-0003-7975 .