VirnetX Holding Corp 10-Q

ITEM 1-FINANCIAL STATEMENTS. VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) As of September 30, 2024 As of December 31, 2023 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 25,130 $ 26,289 Investments available for sale 18,624 27,258 Accounts receivables — 2 Prepaid expenses and other current assets 266 282 Total current assets 44,020 53,831 Other investments at cost 2,500 2,500 Prepaid expenses and other assets 9,005 4,014 Property and equipment, net 62 67 Total assets $ 55,587 $ 60,412 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 280 $ 440 Accrued payroll and related expenses 384 316 Other liabilities, current 6,471 498 Total current liabilities 7,135 1,254 Other liabilities 2,959 3,145 Total liabilities 10,094 4,399 Commitments and contingencies (Note 4) Stockholders’ equity: Preferred stock, par value $ 0.0001 per share Authorized: 10,000,000 shares at September 30 , 2024 and December 31, 2023 ; Issued and outstanding: 0 shares at September 30 , 2024 and December 31, 2023 — — Common stock, par value $ 0.0001 per share Authorized: 100,000,000 shares at September 30 , 2024 and December 31, 2023 ; Issued and outstanding: 3,729,122 shares at September 30 , 2024 and 3,618,431 at December 31, 2023 — — Additional paid-in capital 243,916 242,520 Accumulated deficit ( 198,455 ) ( 186,495 ) Accumulated other comprehensive loss 32 ( 12 ) Total stockholders’ equity 45,493 56,013 Total liabilities and stockholders’ equity $ 55,587 $ 60,412 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 September 30, Nine Months Ended September 30 , 2024 2023 2024 2023 Revenue $ 2 $ 3 $ 5 $ 7 Operating expense: Research and development 1,176 1,218 3,667 7,341 Selling, general and administrative 3,213 4,420 10,066 16,333 Total operating expense 4,389 5,638 13,733 23,674 (Loss) from operations ( 4,387 ) ( 5,635 ) ( 13,728 ) ( 23,667 ) Interest and other income, net 548 716 1,771 2,824 (Loss) before taxes ( 3,839 ) ( 4,919 ) ( 11,957 ) ( 20,843 ) Income tax (expense) benefit — 1 ( 3 ) 79 Net (loss) $ ( 3,839 ) $ ( 4,918 ) $ ( 11,960 ) $ ( 20,764 ) Basic (loss) per share $ ( 1.07 ) $ ( 1.36 ) $ ( 3.32 ) $ ( 5.79 ) Diluted (loss) per share $ ( 1.07 ) $ ( 1.36 ) $ ( 3.32 ) $ ( 5.79 ) Weighted average shares outstanding - basic 3,603 3,612 3,600 3,586 Weighted average shares outstanding - diluted 3,603 3,612 3,600 3,586 See accompanying notes to condensed consolidated financial statements. 3 Index VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net (loss) $ ( 3,839 ) $ ( 4,918 ) $ ( 11,960 ) $ ( 20,764 ) Other comprehensive income (loss): Change in unrealized gain (loss) on investments, net of tax 68 96 46 206 Change in foreign currency translation, net of tax 4 — ( 2 ) ( 4 ) Total other comprehensive income (loss) 72 96 44 202 Comprehensive (loss) $ ( 3,767 ) $ ( 4,822 ) $ ( 11,916 ) $ ( 20,562 ) 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 September 30, Nine Months Ended September 30 , 2024 2023 2024 2023 Total shareholders’ equity, beginning balances $ 48,809 $ 66,434 $ 56,013 $ 152,244 Common stock and additional paid-in capital: Beginning balances 243,465 241,112 242,520 239,753 Common stock issued for equity awards, net ( 6 ) ( 6 ) ( 9 ) ( 11 ) Stock-based compensation 457 706 1,405 2,070 Ending balances 243,916 241,812 243,916 241,812 Accumulated deficit: Beginning balances ( 194,616 ) ( 174,470 ) ( 186,495 ) ( 87,195 ) Net (loss) ( 3,839 ) ( 4,918 ) ( 11,960 ) ( 20,764 ) Dividends — — — ( 71,429 ) Ending balances ( 198,455 ) ( 179,388 ) ( 198,455 ) ( 179,388 ) Accumulated other comprehensive loss: Beginning balances ( 40 ) ( 208 ) ( 12 ) ( 314 ) Change in unrealized investment gain/loss, net 68 96 46 206 Change in foreign currency translation, net 4 — ( 2 ) ( 4 ) Ending balances 32 ( 112 ) 32 ( 112 ) Total shareholders’ equity, ending balances $ 45,493 $ 62,312 $ 45,493 $ 62,312 Dividends per share $ — $ — $ — $ 20.00 See accompanying notes to condensed consolidated financial statements. 5 Index VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended September 30, 2024 2023 Cash flows from operating activities: Net (loss) $ ( 11,960 ) $ ( 20,764 ) Adjustments to reconcile net loss to cash flows from operating activities: Depreciation 16 5 Bad debt — 15 Stock-based compensation 1,405 2,070 Changes in assets and liabilities: Accounts receivables 2 ( 3 ) Prepaid expenses and other assets 537 50 Accounts payable ( 160 ) 810 Accrued payroll and related expenses 68 99 Other liabilities 275 ( 39 ) Net cash used in operating activities ( 9,817 ) ( 17,757 ) Cash flows from investing activities: Purchase of property and equipment ( 11 ) — Purchase of investments ( 26,469 ) ( 36,330 ) Proceeds from sale or maturity of investments 35,147 66,811 Net cash provided by investing activities 8,667 30,481 Cash flows from financing activities: Payment of dividends — ( 71,429 ) Payment of payroll taxes on equity awards ( 9 ) ( 11 ) Net cash used in financing activities ( 9 ) ( 71,440 ) Net change in cash and cash equivalents ( 1,159 ) ( 58,716 ) Cash and cash equivalents, beginning of period 26,289 86,561 Cash and cash equivalents, end of period $ 25,130 $ 27,845 Non-cash transactions ROU asset and lease liability at lease modification date (Note 8) $ 5,512 $ — 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. Our software and technology solutions, including Secure Domain Name Registry and Technology, VirnetX One™, War Room™, and VirnetX Matrix™ 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 platform allows government agencies, 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 September 30, 2024, the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2024 and 2023, the Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2024 and 2023, the Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2024 and 2023, and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and 2023 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 September 30, 2024, our results of operations for the three and nine months ended September 30, 2024 and 2023, and our cash flows for the nine months ended September 30, 2024 and 2023. 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, 2023, filed with the SEC on March 15, 2024. 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 Revenue Recognition We derive revenue from licensing and royalty fees from contracts with customers which often span several years. We account for this revenue in accordance with Accounting Standards Codification (“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. 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 classified as available-for-sale 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 of less than two years . By policy, we limit the amount of credit exposure to any one issuer. We have elected the investment measurement alternative for other investments without readily determinable fair values. During 2023, we invested $ 2,000 in L2 Holdings, LLC (“Omniteq”) and $ 500 in OP Media, Inc. These investments are carried at our initial cost less any impairment because we do not have the ability to exercise significant influence over operating and financial matters. For these investments, we adjust the carrying value for any purchases or sales of our ownership interests. Periodically, we evaluate these investments for impairment. If we identify an impairment, we reduce the carrying value for the impairment loss with a charge to earnings. We have no t identified any impairment as of September 30, 2024. 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. Leases The Company determines if an arrangement is a lease at inception in accordance 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, using the risk-free rate. 8 Index 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. At times, we had 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 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 deemed 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. 9 Index 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. 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 common shares outstanding 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. Additionally, weighted average shares outstanding for both basic and diluted earnings per share include all vested restricted shares issued and outstanding. New Accounting Pronouncements In December 2023, the FASB issued Accounting Standards Updated (“ASU”) No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires disaggregated information about an entity’s effective tax rate reconciliation as well as information on income tax paid. The guidance in this ASU is effective for public companies with annual periods beginning after December 15, 2024. We plan to adopt the guidance for the fiscal year ending December 31, 2025. We are currently evaluating the effect adoption of this ASU will have on our consolidated financial statements. In March 2024, the FASB issued ASU No. 2024-01, Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards. The guidance in this ASU is effective for public companies with annual periods beginning after December 15, 2024. We plan to adopt the guidance for the fiscal year ending December 31, 2025. We are currently evaluating the effect adoption of this ASU will have on our consolidated financial statements. 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. 10 Index 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 : Valued 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 September 30, 2024 and December 31, 2023. September 30, 2024 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Investments Available for Sale Cash $ 1,864 $ — $ — $ 1,864 $ 1,864 $ — Level 1: Mutual funds 20,035 — — 20,035 20,035 — U.S. agency and treasury securities 21,798 57 — 21,855 3,231 18,624 41,833 57 — 41,890 23,266 18,624 Total $ 43,697 $ 57 $ — $ 43,754 $ 25,130 $ 18,624 December 31, 2023 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Investments Available for Sale Cash $ 1,452 $ — $ — $ 1,452 $ 1,452 $ — Level 1: Mutual funds 20,040 — — 20,040 20,040 — U.S. agency and treasury securities 32,046 27 ( 18 ) 32,055 4,797 27,258 52,086 27 ( 18 ) 52,095 24,837 27,258 Total $ 53,538 $ 27 $ (18 ) $ 53,547 $ 26,289 $ 27,258 Note 3 — Income Taxes For the three and nine months ended September 30, 2024, we recognized income tax expense of $ 0 and $ 3 , an effective income tax rate of approximately 0.0 % for both periods. For the three and nine months ended September 30, 2023, we recognized an income tax benefit of $ 1 and $ 79 , an effective income tax rate of 0.0 % and 0.4 %. The effective tax rate was lower than the statutory federal income tax rate during 2023 and 2024 primarily due to the change in valuation allowance. 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 limitations for those years expires three years after October 2021, the date we filed our 2020 income tax returns. The California Franchise Tax Board is currently conducting an audit on the Company's 2019, 2020 and 2021 California tax returns; the outcome of the audit is yet to be determined. 11 Index 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 September 30, 2024, 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 September 30, 2024. Note 4 — Commitments and Related Party Transactions We have a non-exclusive service agreement for the use of an aircraft from K2 Investment Fund LLC (“LLC”) for business travel for employees of the Company. We incurred fees and reimbursemen ts to the LLC of approximately $ 446 and $ 1,132 during the three and nine months ended September 30, 2024, and $ 314 and $ 713 during the three and nine months ended September 30, 2023. 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. The agreement with the LLC provides for use of the plane at an initial rate of $ 8 per flight hour which increased to $ 9.8 per flight hour in April 2024. The agreement contains no minimum usage requirement and includes other terms and conditions. The agreement can be cancelled by either us or the LLC with 30 days’ notice and renews on an annual basis unless terminated by either party. Neither party has exercised their termination rights. S ee Note 8 – Leases for further discussion of our lease commitments. Note 5 — Stock-Based Compensation Our stockholders approved an amendment to the Amended and Restated 2013 Equity Incentive Plan (the “Plan”) at our annual shareholders’ meeting in June 2024, which among other things, added 1,000,000 shares to the plan. The Plan provides for the granting of equity awards including stock options, restricted stock units (“RSUs”) and restricted stock. Options granted under the Plan are granted with an exercise price equal to the fair value of our stock on the date of grant. RSUs and restricted stock are granted at the fair value of our stock on the date of grant because they have no exercise price. The fair value of options, RSUs and restricted stock are expensed over the vesting periods. All options, RSUs and restricted stock are subject to forfeiture if service terminates prior to the shares vesting. At September 30, 2024, there were 1,081,278 shares available for grant under the Plan. Stock-based compensation expense included in general and administrative expense was $ 309 and $ 449 , and in research and development expense was $ 149 and $ 257 , for the three months ended September 30, 2024 and 2023, respectively. Stock-based compensation expense included in general and administrative expense was $ 802 and $ 1,213 , and in research and development expense was $ 603 and $ 857 , for the nine months ended September 30, 2024 and 2023, respectively. No restricted stock awards were granted during the three months ended September 30, 2024. During the nine months ended September 30, 2024, we granted 119,000 shares of restricted stock with a weighted average grant date fair value of $ 5.58 . We paid $ 6 in withholding taxes on shares of restricted stock, which is reflected as financing costs in the accompanying statement of cash flows; the grantees surrendered shares of equal value, and those surrendered shares were cancelled. During the three and nine months ended September 30, 2023, we granted 36,927 shares of restricted stock with a weighted average grant date fair value of $ 9.12 . We paid $ 6 in withholding taxes on shares of restricted stock, which is reflected as financing costs in the accompanying statement of cash flows; the grantees surrendered shares of equal value, and those surrendered shares were cancelled. No options were granted during the three and nine months ended September 30, 2024. During the three and nine months ended September 30, 2023, we granted 1,875 options with a weighted average grant date fair value of $ 7 per share. No options were exercised during the three and nine months ended September 30, 2024 or 2023. 12 Index No RSUs were granted during the three and nine months ended September 30, 2024. No RSUs were granted during the three months ended September 30, 2023. During the nine months ended September 30, 2023, we granted 1,248 RSUs with a grant date fair value of $ 10 per share. During the nine months ended September 30, 2024 and 2023, we issued 7,166 and 10,763 shares of common stock as a result of vesting RSUs, for which we paid $ 3 and $ 5 , respectively, in withholding taxes, which is reflected as financing costs in the accompanying statement of cash flows; the grantees surrendered shares of equal value, and those surrendered shares were cancelled. As of September 30, 2024 and 2023, the unrecognized stock-based compensation expense related to unvested awards (including stock options, RSUs, and restricted stock) was $ 1,778 and $ 3,712 , respectively, which will be amortized over an estimated weighted average period of approximately 2.16 years and 2.62 years, respectively. During the nine months ended September 30, 2024, we returned 49,937 options, 2,897 RSUs and 12,494 shares of restricted stock to the plan due to termination of employees and the expiration of unexercised options. Note 6 — Equity Common Stock During the nine months ended September 30, 2024, we issued 119,000 shares of restricted stock, as well as 7,166 shares of common stock as a result of vesting RSUs. During the nine months ended September 30, 2023, we issued 36,927 shares of restricted stock, as well as 10,763 shares of common stock as a result of vesting RSUs. Warrants In 2020, we issued warrants for the purchase of 1,250 shares of common stock at an exercise price of $ 115 per share, exercisable on the date of grant, expiring in April 2025 . The weighted average fair value at the grant date was $ 83.20 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, 2023 Issued Exercised Terminated / Cancelled Outstanding and Exercisable September 30, 2024 Expiration Date 1,250 $ 115 1,250 — — — 1,250 April 30, 2025 Note 7 — Litigation From time to time, we are subject to various legal proceedings, the outcomes of which are inherently uncertain. We record any potential gains related to legal proceedings only after cash is collected. We record a liability when it is probable that a loss has been incurred and the amount is reasonably estimable, the determination of which requires significant judgment. As additional information becomes available, we reassess our potential liability and may revise our estimates. Such resolutions could have a material impact on future quarterly or annual results of operations. 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. Note 8 — Leases We lease office space in Nevada. The operating lease requires monthly payments of $ 5 and expires in October 2025 . At September 30, 2024, our ROU asset and lease liability totaled $ 55 . Lease expense totaled $ 14 and $ 42 for the three and nine months ended September 30, 2024. Lease expense totaled $ 13 and $ 41 for the three and nine months ended September 30, 2023. 13 Index We lease a facility in Utah to be used for technical integration and as a training facility. This operating lease requires monthly payments starting at $ 72 , includes periodic increases, provides nine months of free rent, and expires in April 2029. At September 30, 2024, our ROU asset and lease liability totaled $ 3,099 and $ 3,578 , respectively. Lease expense totaled $ 210 and $ 629 for the three and nine months ended September 30, 2024. We also lease a facility in California for corporate promotional and marketing purposes which was prepaid at inception and expires in 2025. In March 2024, we renewed the lease recording an ROU asset and lease liability of $ 5,512 . The renewal period begins in 2025, continues through 2035, and requires either a single payment of $ 6,000 or annual payments each March beginning at $ 600 , increasing annually, for a total commitment of approximately $ 7,500 . At September 30, 2024, our ROU asset totaled $ 5,757 and our lease liability totaled $ 5,792 . Lease expense totaled $ 143 and $ 384 for the three and nine months ended September 30, 2024, and $ 75 and $ 225 for the three and nine months ended September 30, 2023. Payments due under the above leases as of September 30, 2024 are as follows: Due in 2024 $ 235 Due in 2025 6,946 Due in 2026 927 Due in 2027 954 Due in 2028 983 Thereafter 336 10,381 Less imputed interest ( 956 ) Total $ 9,425 We have a service agreement for the use of an aircraft from a related party discussed in more detail in Note 4 – Commitments and Related Party Transactions. We incurred rental fees and reimbursements to the entity of approximately $ 446 and $ 1,132 during the three and nine months ended September 30, 2024 compared to $ 314 and $ 713 incurred during the three and nine months ended September 30, 2023. 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. Unvested restricted shares ( 127,865 in 2024 and 34,990 in 2023) are excluded from weighted average 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 nine months ended September 30, 2024 and 2023 (in thousands, except per share amounts): Three Months Ended Nine Months Ended September 30, September 30 , 2024 2023 2024 2023 Numerator: Net (loss) $ ( 3,839 ) $ ( 4,918 ) $ ( 11,960 ) $ ( 20,764 ) Denominator: Weighted-average basic shares outstanding 3,603 3,612 3,600 3,586 Effect of dilutive securities — — — — Weighted-average diluted shares 3,603 3,612 3,600 3,586 Basic (loss) per share $ ( 1.07 ) $ ( 1.36 ) $ ( 3.32 ) $ ( 5.79 ) Diluted (loss) per share $ ( 1.07 ) $ ( 1.36 ) $ ( 3.32 ) $ ( 5.79 ) We incurred a net loss for the three and nine months ended September 30, 2024 and 2023; therefore, all potentially dilutive securities representing shares of common stock ( 287,908 at September 30, 2024 and 348,729 at September 30, 2023) were excluded from the computation of diluted earnings per share, because their effect would have been antidilutive. Note 10 — Subsequent Events On November 12, 2024 we issued 507,000 shares of restricted stock, with a weighted average fair values at the date of grant of $ 6.08 . Restricted stock is subject to forfeiture if service terminates prior to the shares vesting and is expensed ratably over the vesting period. 14 Index