VirnetX Holding Corp 10-K

Item 8. Financial Statements and Supplementary Data Set forth below, are the audited consolidated financial statements for our company accompanied by all reports thereon of Farber Hass Hurley LLP (PCAOB No. 223 ). 27 Index FINANCIAL STATEMENTS Financial Statements Index Page Report of Farber Hass Hurley LLP, Independent Registered Public Accounting Firm 29 Consolidated Balance Sheet at December 31, 2024 and December 31, 2023 31 Consolidated Statements of Operations of VirnetX Holding Corporation for the years ended December 31, 2024 and 2023 32 Consolidated Statements of Comprehensive (Loss) of VirnetX Holding Corporation for the years ended December 31, 2024 and 2023 33 Consolidated Statements of Stockholders’ Equity of VirnetX Holding Corporation for the years ended December 31, 2024 and 2023 34 Consolidated Statements of Cash Flows of VirnetX Holding Corporation for the years ended December 31, 2024 and 2023 35 Notes to Consolidated Financial Statements of VirnetX Holding Corporation 36 28 Index REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of VirnetX Holding Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of VirnetX Holding Corporation (the “Company”) as of December 31, 2024 and 2023, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 29 Description of the Matter Other Investments As discussed in Note 2 to the financial statements, in 2023 the Company purchased equity interests in two private entities. Given that the entities do not have a readily determinable fair market value, the investments in the entities are measured at cost minus impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer minus impairment, if any in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 321: Investments - Equity Securities. Management must consider various factors, including the Company’s ability to apply significant influence to the overall operations of the entities and also evaluate the investments as of each reporting period to determine if there are any factors that would impact the recorded value of Other Investments reflected on the consolidated balance sheet. Our determination that the classification and the valuation of Other Investments is a critical audit matter results from the significant judgment by management when assessing the recognition method, the limited availability of public information related to the entities, and the subjectivity of the qualitative factors involved in the assessment. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures relating to management’s assessment of the recognition method and valuation of Other Investments. Audit Procedures Our principal audit procedures related to the Company’s Other Investments included the following: - We evaluated management’s analysis regarding their ability to apply significant influence in the operations of the entities by obtaining information of the ownership percentage of the entities, composition of the respective boards, and any other relevant factors in determining their recognition method being recognized as cost in accordance with Accounting Standards Codification 321. - We also evaluated management’s assessment of impairment factors or any observable transactions of the entities through the year to determine whether an adjustment in the recognized value was necessary. This includes testing management’s internal analysis as well as reviewing for any publicly available data regarding any factors or events that could impact the entities’ values. /s/ Farber Hass Hurley LLP We have served as the Company’s auditor since 2008. Chatsworth, California March 17, 2025 30 Index VIRNETX HOLDING CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) As of December 31, 2024 As of December 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 23,296 $ 26,289 Investments available for sale 14,786 27,258 Accounts receivables — 2 Prepaid expenses and other current assets 122 282 Total current assets 38,204 53,831 Prepaid expenses and other assets 8,838 4,014 Property and equipment, net 67 67 Other investments 2,500 2,500 Total assets $ 49,609 $ 60,412 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 336 $ 440 Accrued payroll and related expenses 257 316 Other liabilities, current 6,602 498 Total current liabilities 7,195 1,254 Other liabilities 2,791 3,145 Total liabilities 9,986 4,399 Commitments and contingencies (Note 4) Stockholders’ equity: Preferred stock, par value $ 0.0001 per share Authorized: 10,000,000 shares at December 31, 2024 and December 31, 2023, Issued and outstanding: 0 shares at December 31, 2024 and December 31, 2023 — — Common stock, par value $ 0.0001 per share Authorized: 100,000,000 shares at December 31, 2024 and December 31, 2023, Issued and outstanding: 4,238,581 and 3,618,431 shares, at December 31, 2024 and December 31, 2023, respectively — — Additional paid-in capital 244,293 242,520 Accumulated deficit ( 204,670 ) ( 186,495 ) Accumulated other comprehensive loss — ( 12 ) Total stockholders’ equity 39,623 56,013 Total liabilities and stockholders’ equity $ 49,609 $ 60,412 See accompanying notes to consolidated financial statements. 31 Index VIRNETX HOLDING CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) Year Ended December 31, 2024 Year Ended December 31, 2023 Revenue $ 5 $ 7 Operating expense: Research and development 6,038 9,713 Selling, general and administrative expenses 14,364 21,739 Total operating expense 20,402 31,452 (Loss) from operations ( 20,397 ) ( 31,445 ) Interest and other income, net 2,225 3,495 (Loss) before taxes ( 18,172 ) ( 27,950 ) Income tax (provision) benefit ( 3 ) 79 Net (loss) $ ( 18,175 ) $ ( 27,871 ) Basic (loss) per share $ ( 5.05 ) $ ( 7.79 ) Diluted (loss) per share $ ( 5.05 ) $ ( 7.79 ) Weighted average shares outstanding basic 3,596 3,579 Weighted average shares outstanding diluted 3,596 3,579 See accompanying notes to consolidated financial statements. 32 Index VIRNETX HOLDING CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (in thousands) Year Ended December 31, 2024 Year Ended December 31, 2023 Net (loss) $ ( 18,175 ) $ ( 27,871 ) Other comprehensive (loss) income, net of tax: Change in unrealized gain on investments, net 15 306 Change in foreign currency translation, net ( 3 ) ( 4 ) Total other comprehensive gain, net of tax 12 302 Comprehensive (loss) $ ( 18,163 ) $ ( 27,569 ) See accompanying notes to consolidated financial statements. 33 Index VIRNETX HOLDING CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share amounts) Year Ended December 31, 2024 2023 Total shareholders’ equity, beginning balances $ 56,013 $ 152,244 Common stock and additional paid-in capital: Beginning balances 242,520 239,753 Common stock issued for options/RSUs/RS, net ( 129 ) ( 11 ) Stock-based compensation 1,902 2,778 Ending balances 244,293 242,520 Accumulated deficit Beginning balances ( 186,495 ) ( 87,195 ) Net (loss) ( 18,175 ) ( 27,871 ) Dividends — ( 71,429 ) Ending balances ( 204,670 ) ( 186,495 ) Accumulated other comprehensive loss: Beginning balances ( 12 ) ( 314 ) Change in unrealized investment (loss) gain, net 15 306 Change in foreign currency translation, net ( 3 ) ( 4 ) Ending balances — ( 12 ) Total shareholders’ equity, ending balances $ 39,623 $ 56,013 Dividends per share $ — $ 20 See accompanying notes to consolidated financial statements. 34 Index VIRNETX HOLDING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2024 Year Ended December 31, 2023 Cash flows from operating activities: Net (loss) $ ( 18,175 ) $ ( 27,871 ) Adjustments to reconcile net (loss) to net cash from operating activities: Depreciation 21 9 Stock-based compensation 1,902 2,778 Bad debt 1 15 Changes in assets and liabilities: Prepaid expenses and other current assets 848 ( 3,369 ) Accounts payable and accrued liabilities ( 104 ) 67 Other liabilities 238 3,596 Accrued payroll and related expenses ( 59 ) 5 Accounts receivable 1 ( 3 ) Net cash used in operating activities ( 15,327 ) ( 24,773 ) Cash flows from investing activities: Purchase of property and equipment ( 22 ) ( 65 ) Purchase of investments at cost — ( 2,500 ) Purchase of investments ( 28,625 ) ( 47,215 ) Proceeds from sale or maturity of investments 41,110 85,721 Net cash provided by investing activities 12,463 35,941 Cash flows from financing activities: Dividend — ( 71,429 ) Withholding taxes paid on cashless exercise of restricted stock and restricted stock units ( 129 ) ( 11 ) Net cash used in financing activities ( 129 ) ( 71,440 ) Net (decrease) in cash and cash equivalents ( 2,993 ) ( 60,272 ) Cash and cash equivalents, beginning of period 26,289 86,561 Cash and cash equivalents, end of period $ 23,296 $ 26,289 Cash paid for income taxes $ 3 — Non-cash transaction ROU asset and lease liability $ 5,512 $ 3,689 See accompanying notes to consolidated financial statements. 35 Index VIRNETX HOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands except share, per share and per device amounts) Note 1 − Formation and Business of the Company 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 derive revenue from selling our software products including VirnetX War Room™ and VirnetX Matrix™ and licensing our technology, including VirnetX One™, to various original equipment manufacturers (“OEMs”) and others, 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 or who seek to secure their systems and applications. Our portfolio of intellectual property is the foundation of our business model. We currently own U.S. and 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. 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 2024 to 2034. Note 2 − Summary of Significant Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. The critical accounting policies we employ in the preparation of our consolidated financial statements are those which involve impairment of long-lived assets, income taxes, fair value of financial instruments and stock-based compensation. 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. 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 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. 36 Index 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 are licensing costs. 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 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 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 less than two years . By policy, we limit the amount of credit exposure to any one issuer. We elected the investment measurement alternative for other investments without readily determinable fair values. During 2023, we invested $ 2,000 in L2 Holdings LLC and $ 500 in OP Media Inc. These investments are carried at our initial cost 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 and other observable transactions. 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 December 31, 2024. 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 (“FDIC”). In 2024, 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. 37 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. 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 with ASC Topic 842. Operating lease right-of-use (“ROU”) assets are included in Prepaid expenses, and other assets, and lease liabilities are included in other liabilities in 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 incremental borrowing rate, U.S. prime rate, of 8.5 % in both 2023 and 2024. 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 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. 38 Index 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 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 a vesting term of 4 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 6 - 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. 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 November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . The amendments in this ASU require disclosures, on an annual and interim basis, of significant segment expenses that are regularly provided to the chief operating officer decision maker (“CODM”), as well as the aggregate amount of other segment items included in the reported measure of segment profit or loss. The ASU requires that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. The Company adopted ASU 2023-07 on January 1, 2024. In December 2023, the FASB issued 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. 39 Index Note 3 − Property and Equipment Our major classes of property and equipment were as follows: December 31 2024 2023 Office furniture $ 165 $ 143 Computer equipment 92 92 Total 257 235 Less accumulated depreciation ( 190 ) ( 168 ) Total property and equipment, net $ 67 $ 67 Depreciation expense for 2024 and 2023 was $ 21 and $ 9 , respectively. Note 4 − Commitments, Contingencies 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 our employees. Our Chief Executive Officer and Chief Administrative Officer are the managing partners and control the equity interests of the LLC. The agreement provided for the use of the plane at an initial rate of $ 8.1 per flight hour, which increased to $ 9.8 per flight hour in April 2024, includes no minimum usage requirement, contains other terms and conditions normal in such transactions and can be cancelled by either us or the LLC with 30 days’ notice. Neither party has exercised their termination rights. We incurred approximately $ 1,556 and $ 1,097 in rental fees and reimbursements to the LLC in 2024 and 2023, respectively. See Note 13 for further discussion of our lease commitments. Note 5 − Stock Plan Our stockholders approved the Amended and Restated Equity Incentive Plan (the “A&R Plan”) at our annual shareholders’ meeting in June 2024, which added 1,000,000 shares to the plan. Our prior plan expired March 29, 2023; no further awards will be made under the prior plan, and the A&R Plan will govern awards granted under the prior plan. The A&R Plan provides for the granting of stock options, restricted stock units (“RSUs”) and restricted stock. Options granted under the A&R Plan are granted with an exercise price equal to the fair value of the 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 December 31, 2024, there were 575,055 shares available for grant under the A&R Plan. Note 6 − Stock-Based Compensation The following tables summarize information and activity under the plan for the indicated periods. Options Outstanding Options Vested and Exercisable Range of Exercise Prices Number Outstanding Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Exercisable Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price $ 10.00 -  29.80 35,438 7.45 $ 28.47 24,219 7.47 $ 27.85 $ 47.00 -   138.40   222,254 3.81 $ 90.17 216,883 3.74 $ 90.32 257,692 4.31 $ 81.69 241,102 4.12 $ 84.04 40 Index Options Number Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value Outstanding, December 31, 2022 340,798 $ 106.60 — $ — Options granted 1,875 10.00 — — Options exercised — — — — Options cancelled ( 12,656 ) 510.21 — — Outstanding, December 31, 2023 330,017 $ 90.63 — $ — Options granted — — — — Options exercised — — — — Options cancelled ( 72,325 ) 123.61 — — Outstanding, December 31, 2024 257,692 $ 81.69 4.31 $ — Options exercisable, December 31, 2024 241,102 $ 84.04 4.12 $ — RSUs Number Weighted Average Grant Date Fair Value Aggregate Intrinsic Value Outstanding, December 31, 2022 27,605 $ 73.00 $ — RSUs granted 1,250 10.00 — RSUs vested ( 11,405 ) 83.81 — RSUs cancelled — — — Outstanding, December 31, 2023 17,450 $ 60.81 $ — RSUs granted — — — RSUs vested ( 7,971 ) 70.88 — RSUs cancelled ( 3,376 ) 58.91 — Outstanding, December 31, 2024 6,103 $ 49.20 $ — Restricted Stock Number Weighted Average Grant Date Fair Value Aggregate Intrinsic Value Outstanding, December 31, 2022 — $ — $ — Restricted stock granted 36,927 9.12 — Restricted stock vested ( 3,617 ) 9.19 — Restricted stock cancelled ( 604 ) 9.60 — Outstanding, December 31, 2023 32,706 $ 9.11 $ — Restricted stock granted 649,000 5.91 — Restricted stock vested ( 12,866 ) 9.35 — Restricted stock cancelled ( 36,025 ) 7.97 — Outstanding, December 31, 2024 632,815 $ 5.95 $ 1,215 Intrinsic value is calculated as the difference between the per-share market price of our common stock on the last trading day of 2024, which was $ 7.85 and the grant price of the awards. For awards exercised, the intrinsic value is the difference between market price and the exercise price on the date of exercise. 41 Index Stock-based compensation expense is included in operating expense for each period as follows: Stock-Based Compensation by Type of Award Year Ended December 31, 2024 Year Ended December 31, 2023 Stock options $ 1,240 $ 1,960 RSUs 333 778 Restricted stock 329 40 Total stock-based compensation expense $ 1,902 $ 2,778 As of December 31, 2024, there was $ 4,412 of unrecognized stock-based compensation expense; $ 551 related to unvested stock options, $ 162 related to unvested RSUs, and $ 3,699 related to unvested restricted stock. These costs are expected to be recognized over a weighted-average period of 1.14 years for options, 1.12 years for RSUs, and 3.53 years for restricted stock. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions: Year Ended December 31, 2024 Year Ended December 31, 2023 Expected stock price volatility — % 81.39 % Risk-free interest rate — % 3.9 % Expected life term — 5.5 years Expected dividends — % 0 % Based on the Black-Scholes option pricing model, the weighted average estimated fair value of employee stock options granted was $ 6.96 per share during 2023. The expected life was determined using the simplified method outlined in ASC 718, “ Compensation - Stock Compensation ”. Expected volatility of the stock options was based upon historical data and other relevant factors. Note 7 − Earnings Per Share Basic earnings per share are based on the weighted average number of shares outstanding for a period. Diluted earnings per share are based upon the weighted average number of shares and potentially dilutive common shares outstanding. Potential common shares outstanding principally include stock options, RSUs and unvested restricted stock under our stock plan and warrants. During 2024 and 2023 we incurred losses; therefore, the effect of any common stock equivalent would be anti-dilutive. The table below sets forth the basic and diluted loss per share calculations: Year Ended December 31, 2024 2023 Net (loss) $ ( 18,175 ) $ ( 27,871 ) Basic weighted average number of shares outstanding 3,596 3,579 Effect of dilutive securities — — Diluted weighted average number of shares outstanding 3,596 3,579 Basic (loss) per share $ ( 5.05 ) $ ( 7.79 ) Diluted (loss) per share $ ( 5.05 ) $ ( 7.79 ) 42 Index Note 8 − Common Stock Each share of common stock has the right to one vote . The holders of common stock are entitled to receive dividends whenever funds are legally available and when declared by our Board of Directors, subject to the prior rights of holders of all classes of stock outstanding having priority rights as to dividends. Our amended and restated certificate of incorporation authorize us to issue up to 100,000,000 shares of $ 0.0001 par value common stock. Effective October 25, 2023, every 20 shares of our common stock outstanding was combined into one share of common stock. Proportional adjustments were also made to the number of restricted stock, common stock issuable upon the exercise of options, warrants as well as common stock issuable upon the vesting of RSUs. The exercise price of all equity awards were also proportionally adjusted. The accompanying financial statements include the effect of this adjustment on all periods presented. Dividends In 2023, we paid a one-time capital dividend of $ 20 per share of common stock to shareholders. The timing and amount of future dividends, if any, will depend on market conditions, corporate business and financial considerations and regulatory requirements . 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, 2024 Issued Exercised Terminated / Cancelled Outstanding and Exercisable December 31, 2023 Expiration Date 1,250 $ 115 1,250 — — — 1,250 April 30, 2025 Note 9 − Employee Benefit Plan We sponsor a defined contribution 401(k) plan covering substantially all our employees. Our matching contribution to the plan was approximately $ 189 and $ 229 in 2024 and 2023, respectively. Note 10 − Income Taxes The income tax provision (benefit) is comprised of the following: Year Ended December 31, 2024 Year Ended December 31, 2023 Current: Federal $ — $ — State 3 2 Foreign — — 3 2 Deferred: Federal — ( 79 ) State — ( 2 ) — ( 81 ) Total income tax (benefit) provision $ 3 $ ( 79 ) 43 Index A reconciliation of the United States federal statutory income tax rate to our effective income tax rate is as follows: Year Ended December 31, 2024 Year Ended December 31, 2023 United States federal statutory rate 21.00 % 21.00 % State taxes, net of federal benefit ( 0.01 )% ( 0.01 )% Valuation allowance ( 20.50 )% ( 20.31 )% Stock based compensation ( 0.62 )% ( 0.58 )% R&D Credit 1.55 % 2.20 % Other ( 1.41 )% ( 2.02 )% Effective income tax rate 0.01 % 0.28 % Deferred tax assets (liabilities) consist of the following: As of December 31, 2024 As of December 31, 2023 Deferred tax assets: Reserves and accruals $ 2,066 $ 65 Research and development credits and other credits 1,115 1,110 Net operating loss carry forward 17,907 15,262 Stock based compensation 3,451 4,360 Other 2,796 2,382 Total deferred tax assets $ 27,335 $ 23,179 Valuation allowance ( 25,460 ) ( 23,179 ) Deferred tax assets after valuation allowance $ 1,875 — Total deferred tax liability ROU $ ( 1,870 ) — Depreciation and amortization ( 5 ) — Net deferred tax assets $ — $ — Pursuant to IRC Section 174, we capitalized direct and indirect research and development costs for our tax return totaling $ 5,251 in 2024 $ 8,599 in 2023, of which $ 3,273 will be amortized in our 2024 tax return and $ 1,888 will be amortized in our 2023 tax return. Unamortized capitalized R&D expenditures as of December 31, 2024 total $ 18,989 and after deducting amortization amounts the net captizaized R&D expenditures total $ 13,315 . At December 31, 2024, we had federal and state net operating loss carryforwards of approximately $ 85,241 and $ 109,618 , respectively. Federal net operating loss carryforwards do not expire. None of the state net operating loss carryforward is apportioned to a deferred tax asset, because currently we do not have operations in states where losses accumulated. The state net operating loss carryforward begins expiring in 2029 . We provide valuation allowances for our net deferred tax assets, including NOL carryforwards generated during the years, based on our evaluation of positive and negative evidence, including our history of operating losses and the uncertainty of generating future taxable income that would enable us to realize our deferred tax assets. 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, 2024, we have no uncertain tax positions. Our policy is to recognize interest and penalties, if any, accrued on any unrecognized tax benefits, as a component of income tax expense. We had no interest or penalties accrued in 2024. 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 because NOLs and tax credits generated in these years were utilized in 2020. The statute of limitations for these years shall expire three years after the date of filing 2020 income tax returns. 44 Index Note 11 − Fair Value Measurement 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 (NAV) 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 table shows the adjusted cost, gross unrealized gains, gross unrealized losses, and fair value of our financial assets as of December 31, 2024 and 2023 (in thousands): December 31, 2024 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Investments Available for Sale Cash $ 1,777 $ — $ — $ 1,777 $ 1,777 $ — Level 1: Mutual funds 20,077 — — 20,077 20,077 — U.S. agency and treasury securities 16,204 25 ( 1 ) 16,228 1,442 14,786 36,281 25 ( 1 ) 36,305 21,519 14,786 Total $ 38,058 $ 25 $ (1 ) $ 38,082 $ 23,296 $ 14,786 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 The maturities of our investments generally range from within one to two years . Actual maturities could differ from contractual maturities due to call or prepayment provisions. Note 12 − 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. 45 Index 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 13 − Leases In October 2023, we renewed our lease for office space in Nevada with a third party recording an ROU asset and lease liability of $ 102 . The lease requires monthly payments of $ 4.6 and expires in October 2025. At December 31, 2024 and 2023, our ROU asset and lease liability totaled $ 42 and $ 93 , respectively. Lease expense totaled $ 56 in 2024 and $ 55 in 2023. In October 2023, we executed a facility lease in Utah to be used for technical integration and as a training facility recording an ROU asset and a lease liability of $ 3,587 . This operating lease requires monthly payments starting at $ 72 , includes periodic increases, provides six months of free rent, and expires in April 2029. At December 31, 2024, our ROU asset and lease liability totaled $ 2,963 and $ 3,430 , respectively . At December 31, 2023, our ROU asset and lease liability totaled $ 3,479 and $ 3,546 , respectively. Lease expense totaled $ 838 in 2024 and $ 140 in 2023 . The weighted average remaining life of the office and facility leases discussed above is approximately 8 years , and the related lease liability is as follows: Due in 2025 $ 6,946 Due in 2026 $ 927 Due in 2027 $ 954 Due in 2028 $ 983 Thereafter $ 336 Total undiscounted lease liability $ 10,146 Less: imputed interest $ ( 757 ) Total lease liability $ 9,389 We also lease a facility for corporate promotional and marketing purposes in California 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 for 10 years through 2035, requires either a single payment of $ 6,000 , or annual payments each March, beginning in 2025 starting at $ 600 and increasing annually for a total commitment of approximately $ 7,500 . (In January 2025, the Company elected the 10 annual payments option which will result in an adjustment to the carrying amount of the ROU asset and lease liability of just over $ 600 .) At December 31, 2024, the ROU asset totaled $ 5,739 and our lease liability totaled $ 5,917 ; at December 31, 2023, the ROU asset totaled $ 349 and our lease liability was nil . Lease expense totaled $ 527 in 2024 and $ 300 in 2023. We have a service agreement for the use of an aircraft from a related party discussed in more detail in Note 4. We incurred approximately $ 1,556 and $ 1,097 in rental fees and reimbursements to the LLC in 2024 and 2023, respectively. Note 14 - Segment Reporting The Company views its operations and makes decisions regarding how to allocate resources and manages its business as one reportable segment and one reporting unit. The Company's Chief Executive Officer, who is the chief operating decision maker ("CODM"), regularly assesses performance of the aggregated single operating and reporting segment and decides how to allocate resources based on net income calculated on the same basis as net income reported in the Company's consolidated statements of income and other comprehensive income. The CODM is also regularly provided with expense information at a level consistent with that disclosed in the Company's consolidated statements of income and other comprehensive income. 46 Index Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.