Item 1. Financial Statements
ITEM 1- FINANCIAL STATEMENTS.
VIRNETX HOLDING CORPORATION
CONDENSED CONSOLIDATED
BALANCE SHEETS
(in thousands, except share amounts)
As of
June 30,
2023
As of
December 31,
2022
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
25,970
$
86,561
Investments available for sale
40,259
65,462
Accounts receivables
4
14
Prepaid expenses and other current assets
480
224
Total current assets
66,713
152,261
Prepaid expenses and other assets
526
703
Property and equipment, net
8
11
Total assets
$
67,247
$
152,975
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities
$
397
$
373
Accrued payroll and related expenses
392
311
Accrued dividends
—
—
Other liabilities, current
24
47
Total current liabilities
813
731
Other liabilities
—
—
Total liabilities
813
731
Commitments and contingencies (Note 4)
Stockholders’ equity:
Preferred stock, par value $ 0.0001 per share Authorized: 10,000,000 shares at June 30 , 2023 and December 31,
2022 ; Issued and outstanding: 0
shares at June 30 , 2023
and December 31, 2022
—
—
Common stock, par value $ 0.0001
per share Authorized: 100,000,000 shares at June 30 , 2023 and December 31, 2022 ; Issued and outstanding: 71,639,905
shares at June 30 , 2023
and 71,424,650 at December 31, 2022
7
7
Additional paid-in capital
241,105
239,746
Accumulated deficit
( 174,470
)
( 87,195
)
Accumulated other comprehensive loss
( 208
)
( 314
)
Total stockholders’ equity
66,434
152,244
Total liabilities and stockholders’ equity
$
67,247
$
152,975
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
Six Months
Ended
June 30,
2023
June 30,
2022
June 30 ,
2023
June 30 ,
2022
Revenue
$
2
$
34
$
4
$
39
Operating expense:
Licensing costs
—
—
—
( 4
)
Research and development
4,755
1,255
6,123
2,482
Selling, general and administrative
7,366
3,046
11,913
6,231
Total operating expense
12,121
4,301
18,036
8,709
(Loss) from operations
( 12,119
)
( 4,267
)
( 18,032
)
( 8,670
)
Interest and other income, net
740
203
2,108
229
(Loss) before taxes
( 11,379
)
( 4,064
)
( 15,924
)
( 8,441
)
Income tax (expense) benefit
—
( 373
)
78
684
Net (loss)
$
( 11,379
)
$
( 4,437
)
$
( 15,846
)
$
( 7,757
)
Basic (loss) per share
$
( 0.16
)
$
( 0.06
)
$
( 0.22
)
$
( 0.11
)
Diluted (loss) per share
$
( 0.16
)
$
( 0.06
)
$
( 0.22
)
$
( 0.11
)
Weighted average shares outstanding - basic
71,466
71,255
71,445
71,244
Weighted average shares outstanding - diluted
71,466
71,255
71,445
71,244
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
Six Months Ended
June 30,
2023
June 30,
2022
June 30 ,
2023
June 30 ,
2022
Net (loss)
$
( 11,379
)
$
( 4,437
)
$
( 15,846
)
$
( 7,757
)
Other comprehensive income (loss):
Change in unrealized gain (loss) on investments, net of tax
3
( 110
)
110
( 281
)
Change in foreign currency translation, net of tax
( 3
)
( 3
)
( 4
)
( 6
)
Total other comprehensive income (loss)
—
( 113
)
106
( 287
)
Comprehensive (loss)
$
( 11,379
)
$
( 4,550
)
$
( 15,740
)
$
( 8,044
)
See accompanying notes to condensed consolidated financial statements.
4
Index
VIRNETX HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS ’ EQUITY (Unaudited)
(in thousands, except per share amounts)
Three Months Ended
June 30,
Six Months
Ended
June 30 ,
2023
2022
2023
2022
Total shareholders’ equity, beginning balances
$
77,136
$
182,733
$
152,244
$
185,449
Common stock and additional paid-in capital:
Beginning balances
240,435
237,230
239,753
236,452
Common stock issued for options/RSUs, net
( 5
)
( 29
)
( 5
)
( 29
)
Stock-based compensation
682
812
1,364
1,590
Ending balances
241,112
238,013
241,112
238,013
Accumulated deficit:
Beginning balances
( 163,091
)
( 54,255
)
( 87,195
)
( 50,935
)
Net (loss)
( 11,379
)
( 4,437
)
( 15,846
)
( 7,757
)
Dividends
—
—
( 71,429
)
—
Ending balances
( 174,470
)
( 58,692
)
( 174,470
)
( 58,692
)
Accumulated other comprehensive loss:
Beginning balances
( 208
)
( 242
)
( 314
)
( 68
)
Change in unrealized investment gain/loss, net
3
( 110
)
110
( 281
)
Change in foreign currency translation, net
( 3
)
( 3
)
( 4
)
( 6
)
Ending balances
( 208
)
( 355
)
( 208
)
( 355
)
Total shareholders’ equity, ending balances
$
66,434
$
178,966
$
66,434
$
178,966
Dividends per share
$
—
$
—
$
1.00
$
—
See accompanying notes to condensed consolidated financial statements.
5
Index
VIRNETX HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (Unaudited)
(in thousands)
Six Months Ended
June 30,
2023
2022
Cash flows from operating activities:
Net (loss)
$
( 15,846
)
$
( 7,757
)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation
3
3
Deferred tax assets
—
( 685
)
Bad debt
11
—
Stock-based compensation
1,364
1,590
Changes in assets and liabilities:
Accounts receivables
( 1
)
( 2
)
Prepaid expenses and other assets
( 79
)
( 134
)
Accounts payable
24
12
Accrued payroll and related expenses
81
63
Accrued licensing costs
—
( 355
)
Other liabilities
( 23
)
( 31
)
Net cash used in operating activities
( 14,466
)
( 7,296
)
Cash flows from investing activities:
Purchase of investments
( 25,753
)
( 13,203
)
Proceeds from sale or maturity of investments
51,062
5,688
Net cash provided by (used in) investing activities
25,309
( 7,515
)
Cash flows from financing activities:
Payment of dividends
( 71,429
)
—
Payment of payroll taxes on vested restricted stock units
( 5
)
( 29
)
Net cash used in financing activities
( 71,434
)
( 29
)
Net change in cash and cash equivalents
( 60,591
)
( 14,840
)
Cash and cash equivalents, beginning of period
86,561
142,018
Cash and cash equivalents, end of period
$
25,970
$
127,178
Cash paid for income taxes
$
—
$
2
See accompanying notes to condensed consolidated financial statements.
6
Index
VIRNETX HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(in thousands, except per share amounts)
(Unaudited)
Note 1 — Business Description
and Basis of Presentation
VirnetX Holding Corporation (the “Company,” “we,” “us,” or “our”) is an Internet security software and technology company with patented technology for Zero Trust Network Access (“ZTNA”) based secure network
communications. VirnetX’s software and technology solutions, including its Secure Domain Name Registry and Technology, VirnetX One ™, War Room™, VirnetX Matrix™, and GABRIEL
Connection Technology™, are designed to be device- and location-independent, and enable a secure real-time communication environment for all types of enterprise applications, services, and critical infrastructures. Our technology generates secure
connections on a “single-click” basis, significantly simplifying the deployment of secure real-time communication solutions by eliminating the need for end-users to enter any encryption information . Our portfolio of intellectual property
is the foundation of our business model. We currently own approximately 205 total patents and pending applications, including 72 U.S. patents/patent applications and 133
foreign patents/validations/pending applications. Our patent portfolio is primarily focused on securing real-time communications over the Internet and related services, and is used in
all our technology and products, some of which were acquired by our principal operating subsidiary; VirnetX, Inc., from Leidos, Inc., or Leidos, (f/k/a Science Applications International Corporation, or SAIC) in 2006.
Our product portfolio includes sophisticated technologies, products and services that are available
for sale worldwide. Our next-generation, VirnetX One ™ platform builds upon our patented Secure Domain Name Registry and Technology and GABRIEL Connection Technology™ to
further enhance the security and efficiency of our patented secure communication links. VirnetX One ™ is a security-as-a-service platform that protects enterprise
applications, services, and infrastructure from cyber-attacks. Our platform allows businesses and other enterprises of all sizes to add a “security umbrella” as an added layer on top of their existing infrastructure to further reduce risk and
bolster security against ever-growing cyberthreats to data, operating systems, other infrastructure products and gateway security controllers.
Note 2 — Summary of Significant Accounting Policies
Unaudited Interim Financial
Information
The accompanying Condensed Consolidated Balance Sheet as of June 30, 2023, the Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 2023 and 2022, the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2023 and 2022, the Condensed Consolidated Statements of Shareholders’ Equity for the three and six months
ended June 30, 2023 and 2022, and the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States (“U.S. GAAP”). In our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our
financial position as of June 30, 2023, our results of operations for the three and six months ended June 30, 2023 and 2022, and our cash flows for the six months ended June 30, 2023 and 2022. The results of operations for interim periods are not
necessarily indicative of the results to be expected for a full year .
These unaudited interim consolidated financial statements
should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 31, 2023.
Use of Estimates
We prepare our consolidated financial statements in accordance
with U.S. GAAP. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, we could
reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the
extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable
under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below. We have reviewed our critical accounting
policies and estimates with the audit committee of our Board of Directors.
Basis of Consolidation
The consolidated financial statements include the accounts of
VirnetX Holding Corporation and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
7
Index
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 can 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 rights, including seeking appropriate compensation from third parties that utilize the Company’s intellectual property without a license. As a result, the Company may, from time to time, receive payments as part of a settlement or
compensation for a patent infringement dispute. Proceeds received are allocated to each element identified in the settlement or compensation, based on the fair value of each element. Generally, settlements and compensation may include the following
elements: the value of a license or royalty agreement, cost reimbursement, damages, and interest. Elements identified related to licensing and royalty are recognized as revenue. Elements identified as reimbursed costs are generally recorded as a
reduction to the reported expenses. Elements identified as damages or interest are generally recorded in other income in the condensed consolidated statement of operations.
Licensing Costs
Included in operating expenses in 2022 is a refund of licensing costs we incurred in conjunction with a favorable court decision relating to a patent infringement case .
Contingent Gains
ASC Topic 450-30-25, Contingent Gains, prohibits recognition of
contingent gains until realized. Accordingly, we do not record contingent gains ahead of such realization. Management generally considers any such gains as realized only upon the collection of cash.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with
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 six months ended June 30, 2023, 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.
8
Index
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 three 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.
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.
The 2017 U.S. Tax Cuts and Jobs Act changes IRC Section 174, regarding capitalization of book research and development (“R&D”) expenses
for income tax purposes. Effective for tax years beginning in 2022, IRC Section 174 requires the capitalization of book R&D expenses which are capitalized and amortized over 5 years for domestic R&D expenses and over 15 years for foreign
R&D expenses. To date there has been limited guidance from the IRS on how to quantify the amount of book R&D expenses subject to capitalization, including the indirect expenses supporting the R&D function. Due to the limited guidance,
some assumptions were made in our estimates.
A valuation allowance is provided for deferred income tax
assets when, in our judgment, based upon currently available information and other factors, it is more likely than not that all or a portion of such deferred income tax assets will not be realized. The determination of the need for a valuation
allowance is based on an on-going evaluation of current information including, among other things, historical operating results, estimates of future earnings in different taxing jurisdictions and the expected timing of the reversals of temporary
differences. We believe the determination to record a valuation allowance to reduce a deferred income tax asset is a significant accounting estimate because it is based, among other things, on an estimate of future taxable income in the United
States and certain other jurisdictions, which is susceptible to change and may or may not occur, and because the impact of adjusting a valuation allowance may be material. In determining when to release the valuation allowance established against
our net deferred income tax assets, we consider all available evidence, both positive and negative. We continually assess our ability to generate sufficient taxable income during future periods in which our deferred tax assets may be realized. If
and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our statements of operations.
We account for our uncertain tax positions in accordance with
U.S. GAAP, which utilizes a two-step approach to evaluate tax positions. Step one, recognition, requires evaluation of the tax position to determine if based solely on technical merits it is more likely than not to be sustained upon examination. Step
two, measurement, is addressed only if a position is more likely than not to be sustained. In step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be
realized upon ultimate settlement with tax authorities. If a position does not meet the more likely than not threshold for recognition in step one, no benefit is recorded until the first subsequent period in which the more likely than not standard is
met, the issue is resolved with the taxing authority, or the statute of limitations expires. Positions previously recognized are reversed if and when we subsequently determine the position no longer is more likely than not to be sustained. Evaluation
of tax positions, their technical merits, and measurements using cumulative probability are highly subjective management estimates. Actual results could differ materially from these estimates.
9
Index
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 a vesting term of four years . We recognize forfeitures, if any, when they occur. In addition, we record stock-based compensation expense for awards granted to non-employees at fair value of the
consideration received or the fair value of the equity instruments issued, as they vest, over the performance period (See Note 5 - Stock-Based Compensation).
Earnings per Share
Basic earnings per share are computed by dividing earnings
available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period
increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued.
Fair Value of Financial
Instruments
Fair value is the price that would result from an orderly
transaction between market participants at the measurement date. A fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Level 2 measurements utilize either directly or indirectly observable inputs in markets other than quoted prices in active markets.
Our financial instruments are stated at amounts that equal, or
approximate, fair value. When we estimate fair value, we utilize market data or assumptions that we believe market participants would use in pricing the financial instrument, including assumptions about risk and inputs to the valuation technique. We
use valuation techniques, primarily the income and market approach, which maximizes the use of observable inputs and minimize the use of unobservable inputs for recurring fair value measurements.
Mutual
funds: 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 June 30, 2023 and December 31, 2022.
June 30, 2023
Adjusted
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
Cash and
Cash
Equivalents
Investments
Available
for Sale
Cash
$
1,693
$
—
$
—
$
1,693
$
1,693
$
—
Level 1:
Mutual funds
20,077
—
—
20,077
20,077
—
U.S. agency and
treasury securities
44,645
3
( 189
)
44,459
4,200
40,259
64,722
3
( 189
)
64,536
24,277
40,259
Total
$
66,415
$
3
$
(189
)
$
66,229
$
25,970
$
40,259
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
10
Index
Note 3 — Income Taxes
For the three months ended June 30, 2023, we recognized no
income tax on loss before taxes of $ 11,379 , which is an effective tax rate of 0.0 %. For the six months ended June 30, 2023, we recognized an income tax benefit of $ 78 on loss of $ 15,924 , which is an effective tax rate of 0.49 %. The effective rate is lower than the statutory federal rate primarily due to the change in valuation allowance. For the three months ended
June 30, 2022, we recognized an income tax expense of $ 373 on loss before taxes of $ 4,064 , an effective tax rate of 9.18 %. For the six months
ended June 30, 2022, we recognized an income tax benefit of $ 684 on loss before taxes of $ 8,441 , which is an effective tax rate of 8.10 %. The
effective rate is lower than the statutory federal rate primarily due to the effect of stock-based compensation and expiring options, requiring us to reduce our deferred tax asset. Management provided a full valuation allowance against net
deferred income tax assets at June 30, 2023 .
Our tax years for 2005 and forward are subject to examination by the U.S. tax authority and various state tax authorities because we utilized the NOLs and tax
credits generated in those years in 2020. The statute of limitation for those years shall expire three years after the date of filing 2020 income tax returns.
We are required to
recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. At December 31, 2022 and June 30, 2023, we have no uncertain tax positions. Our policy is to recognize interest and penalties accrued on uncertain tax positions as a component of income tax
expense. We had no accrued interest or penalties related to uncertain tax positions at June 30, 2023.
Note 4 — Commitments and
Related Party Transactions
We lease our office under
an operating lease with a third party which expires on October 31, 2023 (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 $ 112
and $ 399 compared to $ 249
and $ 514 in fees and reimbursements to the LLC during the three and six months ended June 30, 2023 and 2022, respectively. We pay for the
Company’s usage of the aircraft and have no rights to purchase. Our Chief Executive Officer and Chief Administrative Officer are the managing partners of the LLC and control the equity interests of the LLC. 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.
Note 5 — Stock Based
Compensation
Our stockholders
approved the Amended and Restated Equity Incentive Plan (the “A&R Plan”) at our annual shareholders’ meeting in June 2023, which added 3,500,000
shares to the plan. Our prior plan expired March 29, 2023; no further awards will be made under the prior plan, but the A&R Plan will govern awards granted under the prior plan. At June 30, 2023, there were 5,253,971 shares available for grant under the A&R Plan.
Stock-based
compensation expense included in general and administrative expense was $ 393 and $ 487 , and in research and development expense was $ 289 and $ 325 , for the three months ended June 30, 2023 and 2022, respectively. Stock-based compensation expense included in general and administrative expense
was $ 764 and $ 953 , and
in research and development expense was $ 600 and $ 637 , for the six months ended June 30, 2023 and 2022, respectively.
During the three
months ended June 30, 2023, we granted options for a total of 37,500 shares with a weighted average grant date fair value of $ 0.35 per option. During the three months ended June 30, 2022, we granted options for a total of 801,004 shares with a weighted average grant date fair value of $ 1.09
per option.
During the six
months ended June 30, 2023, we granted options for a total of 37,500 shares with a weighted average grant date fair value of $ 0.35 per option. We estimated the fair value of the options on the date of grant utilizing the Black-Scholes valuation model with the following
assumptions: (i) 0 percent dividend yield, (ii) 81 percent volatility, (iii) 4 % risk free rate and (iv) 6 years expected term. During the six months ended June 30, 2022, we granted options for a total of 801,004 shares with a weighted average grant date fair value of $ 1.09
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) 86 percent volatility, (iii) 3 percent risk free rate and (iv) 6 years
expected term.
During the three
months ended June 30, 2023 and 2022, we granted 24,999 and 258,363 RSUs respectively, with weighted average fair values at the date of grant of $ 0.50
and $ 1.46 , respectively. RSUs, which are subject to forfeiture if service terminates prior to the shares vesting, are expensed
ratably over the vesting period. During the three months ended June 30, 2023 and 2022, we paid $ 5 and $ 29 in withholding taxes on shares issued upon conversion of RSUs, respectively. The underlying shares were cancelled. The amounts are reflected as
financing costs in the accompanying statement of cash flows. No RSUs were granted during the first three months of 2023 or
2022.
As of
June 30, 2023, the unrecognized stock-based compensation expense related to non-vested stock options and RSUs was $ 3,009 and $ 1,074 , respectively, which will be amortized over an estimated weighted average period of approximately 2.25 and 2.24 years, respectively.
During the three
and six months ended June 30, 2023 and 2022 no options were exercised.
11
Index
During the three
months ended June 30, 2023 and 2022, we issued 215,255 and 191,795 shares as a result of vesting RSUs, respectively. No
shares were issued during the first three months of 2023 or 2022 as a result of vesting RSUs.
During the three
ended June 30, 2023 and 2022, there were 213,125 and 255,000 options returned to the plan due to the 10 -year expiration for unexercised options
respectively. During six months ended June 30, 2023 and 2022, there were 253,125 and 255,000 options returned to the plan due to the 10 -year
expiration for unexercised options respectively.
Note 6 — Equity
Common Stock
We issued no shares for options exercised during the three and six months ended June 30, 2023 or 2022, respectively. We issued 215,255 and 191,795 shares as a result of vesting RSUs during the
three months ended June 30, 2023 and 2022, respectively. No shares were issued during the first three months of 2023 or 2022 as a
result of vesting RSUs .
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,
2022
Issued
Exercised
Terminated /
Cancelled
Outstanding
and
Exercisable
June 30, 2023
Expiration
Date
25,000
$
5.75
25,000
—
—
—
25,000
April 30, 2025
Note 7 — Litigation (all
dollar amounts in this section are expressed in thousands except for rates per device)
We have several
intellectual property infringement lawsuits pending in the United States Court of Appeals for the Federal Circuit (“USCAFC”).
VirnetX Inc. v. Apple,
Inc. (Case 6:12-CV-00855-LED) (“Apple II”)
This case began on
November 6, 2012, when we filed a complaint against Apple Inc. (“Apple”) in United States District Court (“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. 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 United States Court of Appeals for the Federal Circuit (“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 November 22, 2019, the USCAFC issued an opinion affirming the district court’s findings that Apple is precluded from making certain invalidity arguments and that Apple
infringed the ‘135 and ‘151 patents; reversing the USDC’s finding that Apple infringed the ‘504 and ‘211 patents; and remanding the case for proceedings on damages. Apple sought panel and en banc rehearing, which the USCAFC denied on February 10,
2020.
On February 22, 2020,
the USDC issued a scheduling order for the parties to brief the court about the need for a new trial for recalculating the damages. We filed our motion for entry of judgment on February 28, 2020. The arguments on this matter were heard on April 14,
2020. In its order, unsealed on May 1, 2020, the USDC denied VirnetX’s motion for entry of a new judgment based on the prior jury verdict and ordered a new jury trial on damages. On August 10, 2020, the USDC granted Apple’s motion for continuance
and reset the date to October 26, 2020. On October 30, 2020, a jury returned a $ 502,800 verdict in favor of VirnetX based on Apple’s
infringement of two network security patents: VirnetX US Patents No. 6,502,135 and No. 7,490,151. The jury verdict called for damages of
$ 0.84 per accused device since the 2013 launch of Apple’s iOS 7 operating system and represents 598,629,580 infringing units from US sales only. On January 15, 2021, the USDC denied Apple’s motion for judgment as a matter of law, and on February 4, 2021, Apple filed a
notice of appeal to the USCAFC.
12
Index
On February 22, 2021, the USCAFC docketed the appeal as Case No. 19-1672. Apple’s opening brief was filed on
June 2, 2021. VirnetX filed its responsive brief on July 26, 2021. Apple filed its reply brief on September 13, 2021. Oral arguments were held on September 8, 2022. On March 31, 2023, the USCAFC issued its decision vacating the USDC’s judgement
in this matter and remanding it back to the USDC with instructions to dismiss the case as moot. On July 14, 2023 the District Court vacated its prior Final Judgment against Apple dated January 6, 2021 and dismissed the case as moot. On
May 1, 2023, VirnetX filed a petition for panel rehearing. On June 27, 2023, the petition for panel rehearing was denied, and the mandate issued on June 30, 2023. The current deadline to file any petition for a writ of certiorari from the
USCAFC’s decision is September 25, 2023 .
VirnetX Inc. v. Mangrove
Partners Master Fund, Ltd., Apple Inc. (USCAFC Case 20-2271) and VirnetX Inc. v. Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp, LLC (USCAFC Case 20-2272)
On September 15, 2020, we filed with the USCAFC an appeal of the invalidity findings by the Patent Trial and Appeal Board (“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 was filed on June 7, 2021.
On June 23, 2021, the USCAFC entered an order directing us (and parties in other appeals that raised
Appointments Clause challenges) to file a brief explaining how they believe their cases should proceed in light of the Supreme Court’s decision in United States v. Arthrex, Inc., 141 S. Ct. 1970 (2021). On July 7, 2021, we filed a brief in
response to the court’s order. Other parties, including the U.S. Patent and Trademark Office (“USPTO”) filed their responses on July 21, 2021. On August 19, 2021, USCAFC issued an order remanding these appeals for the limited purpose of
allowing VirnetX the opportunity to request rehearing of the PTAB’s final written decisions by the Director of the USPTO. The USCAFC retained jurisdiction over the appeals in the meantime. On September 20, 2021, we filed our requests for
Director rehearing with the USPTO. On October 29, 2021, our requests for Director rehearing were denied. We subsequently filed an amended opening brief to the USCAFC on December 10, 2021, the other parties filed response briefs on February 2,
2022, and we filed a reply brief on February 22, 2022. All the briefings have been completed. The oral arguments in this matter were held on September 8, 2022. On March 30, 2023, the USCAFC issued its decision affirming PTAB’s decisions finding
certain claims of the ‘135 patent and the ‘151 patent to be unpatentable. On June 5, 2023, VirnetX filed a petition for panel rehearing. On June 22, 2023, the petition for panel rehearing was denied, and the mandate issued on June 29,
2023. The current deadline to file any petition for a writ of certiorari from the USCAFC’s decision is September 20, 2023 .
VirnetX Inc. v. Hirshfeld (USCAFC Case 17-2593, -2594)
On September 22, 2017, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in
inter-partes review proceeding IPR2016-00693 involving our U.S. Patent No. 7,418,504, and an appeal of the invalidity findings by the PTAB in inter-partes review proceeding IPR2016-00957 involving our U.S. Patent No. 7,921,211. On September
16, 2021, USCAFC issued an order remanding these appeals for the limited purpose of allowing VirnetX the opportunity to request rehearing of the PTAB’s final written decisions by the Director of the USPTO. The USCAFC retained jurisdiction
over the appeals in the meantime. On October 18, 2021, we filed our requests for Director rehearing with the USPTO. On January 7, 2022, our requests for Director rehearing were denied. On January 21, 2022, we informed the USCAFC about the
denial of Director rehearing and requested that the court dismiss the appeal involving IPR2016-00957 as moot and vacate the PTAB’s underlying decision. On April 4, 2022, the USCAFC vacated the PTAB’s decision in IPR2016-00957 and remanded
Appeal No. 17-2594 with instructions to dismiss. In the April 4, 2022 order, the USCAFC further set a briefing schedule, in Appeal No. 17-2593. VirnetX filed its opening brief on September 12, 2022. The USPTO filed its response brief on
December 20, 2022. VirnetX filed its reply brief on February 14, 2023. On April 18, 2023, VirnetX filed a motion to hold this appeal in abeyance pending the disposition of any petition for rehearing in the No. 20-2271, -2272 appeal,
and pending the Supreme Court’s disposition of a pending petition for a writ of certiorari in Arthrex, Inc. v. Smith & Nephew, Inc. , No. 22-639. That motion was denied on June 1, 2023, and we
currently await scheduling of oral arguments .
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 19-1671)
On March 18, 2019, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in
inter-partes re-examination proceeding 95/001,679 involving our U.S. Patent No. 6,502,135. On October 5, 2021, USCAFC issued an order remanding these appeals for the limited purpose of allowing VirnetX the opportunity to request rehearing of
the PTAB’s final written decisions by the Director of the PTO. The USCAFC retained jurisdiction over the appeals in the meantime. Our request for Director rehearing with the PTO was filed on November 5, 2021. On January 10, 2022, our request
for Director rehearing was denied. We informed the USCAFC about the denial of Director rehearing. VirnetX’s opening brief was filed on June 23, 2022. The USPTO’s response brief was filed on August 2, 2022, and Cisco’s response brief was filed
on September 2, 2022. VirnetX filed its reply brief on October 7, 2022. On April 18, 2023, VirnetX filed a motion to hold this appeal in abeyance pending the disposition of any petition for rehearing in the No. 20-2271, -2272 appeal,
and pending the Supreme Court’s disposition of a pending petition for a writ of certiorari in Arthrex, Inc. v. Smith & Nephew, Inc. , No. 22-639. That motion was denied on June 1, 2023, and we
currently await scheduling of oral arguments.
13
Index
VirnetX Inc. v. Apple Inc. (USCAFC Case 22-1523) (“Apple Reexam I”)
On March 10, 2022, we filed with the
USCAFC an appeal of the invalidity findings by the PTAB in inter-partes re-examination proceeding 95/001,682 involving our U.S. Patent No. 6,502,135. Our opening brief was filed on August 22, 2022. Apple and USPTO each filed a response brief
on December 28, 2022. VirnetX filed its reply brief on February 8, 2023. On April 18, 2023, VirnetX filed a motion to hold this appeal in abeyance pending the disposition of any petition for rehearing in the No. 20-2271, -2272 appeal,
and pending the Supreme Court’s disposition of a pending petition for a writ of certiorari in Arthrex, Inc. v. Smith & Nephew, Inc. , No. 22-639. That motion was denied on June 1, 2023, and we
currently await scheduling of oral arguments.
VirnetX Inc. v. Apple Inc. (USCAFC C ase 22 - 1997 ) (“Apple Reexam II”)
On July 6, 2022, we filed with the
USCAFC an appeal of the invalidity findings by the PTAB in inter-partes re-examination proceeding 95/001,697 involving our U.S. Patent No. 7,490,151. On October 17, 2022, we filed a motion to remand the appeal in light of the PTAB’s
refusal to permit Director rehearing. On January 23, 2023, the USCAFC denied that motion without prejudice to the parties raising their arguments in the merits briefs. VirnetX opening brief was filed on May 8, 2023, and Apple and
the USPTO each filed a response brief on July 24, 2023. VirnetX reply brief is currently due on August 14, 2023.
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 22-2234)
On September 16, 2022, we filed
with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes re-examination proceeding 95/001,851 involving our U.S. Patent No. 7,418,504. We filed our opening brief on February 28, 2023. Cisco’s response brief
was filed on May 10, 2023, and VirnetX reply brief was filed on June 21, 2023. We currently await scheduling of oral arguments.
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case
23-1765)
On April 7, 2023, we filed with
the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes re-examination proceeding 95/001,714 involving our U.S. Patent No. 7,490,151. The certified list is due to be filed by the USPTO by May 30, 2023, and our opening
brief will be due 60 days thereafter. In addition, on April 21, 2023, Cisco filed a cross-appeal. Cisco’s response brief was
filed on May 10, 2023. VirnetX opening brief is currently due on September 29, 2023.
Other Legal Matters
One or more potential intellectual property infringement
claims may also be available to us against certain other companies who have the resources to defend against any such claims. Although we believe these potential claims are 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, 2023. On June 30, 2023, the underlying ROU asset and lease liability totaled $ 18 . On December 31, 2022, the
underlying ROU asset and lease liability totaled $ 45 . Lease expense totaled $ 13 , for each of the three months ended June 30, 2023 and 2022. Lease expense totaled $ 27 , for each of the six months ended June 30, 2023 and 2022.
We also lease a facility for corporate promotional and
marketing purposes which was prepaid at inception and expires in 2025, as amended. On June 30, 2023 and December 31, 2022, the ROU asset totaled $ 499
and $ 648 , respectively. For the three and six months ended June 30, 2023, lease expense totaled $ 75 and $ 150 , respectively. For the
three and six months ended June 30, 2022, lease expense totaled $ 75 and $ 150 , respectively.
14
Index
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 and six months ended June 30, 2023 and 2022 (in thousands, except per share amounts):
Three Months Ended
Six
Months Ended
June 30,
June 30 ,
2023
2022
2023
2022
Numerator:
Net (loss)
$
( 11,379
)
$
( 4,437
)
$
( 15,846
)
$
( 7,757
)
Denominator:
Weighted-average
basic shares outstanding
71,466
71,255
71,445
71,244
Effect of
dilutive securities
—
—
—
—
Weighted-average
diluted shares
71,466
71,255
71,445
71,244
Basic (loss) per
share
$
( 0.16
)
$
( 0.06
)
$
( 0.22
)
$
( 0.11
)
Diluted (loss)
per share
$
( 0.16
)
$
( 0.06
)
$
( 0.22
)
$
( 0.11
)
We incurred a net
loss for the three and six months ended June 30, 2023 and 2022; therefore, all potentially dilutive securities representing shares of common stock ( 6,974,580
in 2023 and 7,520,546 in 2022) were excluded from the computation of diluted earnings per share, because their effect would have
been antidilutive.
Note 10 — Subsequent Events
On July 5, 2023 we issued 578,830 shares of restricted stock, with weighted average fair values at
the date of grant of $ 0.48 . Restricted stock is subject to forfeiture if service terminates prior to the shares vesting and is expensed
ratably over the vesting period.
15
Index
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.