QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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(Address of principal executive offices)
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(Zip Code)
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Large accelerated filer ☐
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Smaller reporting company
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Non-accelerated filer ☐
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Emerging growth company
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•
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In the VirnetX Inc. v. Apple, Inc. (Case Nos. 6:11-cv-00563-RWS, 6:12-cv-00855-RWS) (“Apple II”) litigation, the United States Court of Appeals for the
Federal Circuit (the “Federal Circuit”) in November 2019, affirmed-in-part, and reversed-in-part the judgment issued by the United States District Court for the Eastern District of Texas (the “district court”) in the case awarding VirnetX
damages of $595.9 million. On October 30, 2020, after a trial in the district court, a jury returned a verdict in favor of VirnetX, awarding VirnetX over $502 million in damages. On January 15, 2021, the district court denied Apple’s
motion for judgment as a matter of law and affirmed the jury findings. This may imply that VirnetX may soon receive over $500 million in cash, however, Apple has appealed to the Federal Circuit with regards to the judgement from the
district court and this appeal is scheduled for oral arguments on September 8, 2022. In addition, the patents in this case are being challenged in the United States Patent and Trademark Office. If those challenges are successful, the
award in the case may be reduced, eliminated and/or delayed for a lengthy period. The continuation of this litigation is distracting to our management, expensive, and these distractions and expenses may continue.
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•
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We have undertaken activities to commercialize our products and
patent portfolio in and outside the United States including the successful launch of War Room™ and VirnetX Matrix™. These statements may imply that the worldwide market for our commercialized products is large and will result in
significant future licensing or software revenue for us. However, commercialization of products such as ours is subject to significant obstacles and risks, including but not limited to a perception by some potential partners and customers
that they should await the outcome of the Apple II litigation before entering or considering entering any agreement with us, and that or other factors may prevent significant future revenues for us.
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37 | ||
SIGNATURES | 38 |
As of
June 30,
2022
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As of
December 31, 2021
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|||||||
ASSETS
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(unaudited)
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|||||||
Current assets:
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||||||||
Cash and cash equivalents
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$
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$
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||||
Investments available for sale
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||||||
Accounts receivables
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||||||
Prepaid expenses and other current assets
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Total current assets
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||||||
Prepaid expenses and other assets
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||||||
Property and equipment, net
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||||||
Deferred tax assets
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||||||
Total assets
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$
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$
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||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
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||||||||
Current liabilities:
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||||||||
Accounts payable and accrued liabilities
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$
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$
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||||
Accrued payroll and related expenses
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|
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||||||
Accrued licensing costs
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||||||
Other liabilities, current
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Total current liabilities
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||||||
Other liabilities |
||||||||
Total liabilities |
||||||||
Commitments and contingencies (Note 4)
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||||||
Stockholders’ equity:
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||||||||
Preferred stock, par value $
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||||||
Common stock, par value $
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||||||
Additional paid-in capital
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||||||
Accumulated deficit
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(
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)
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(
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)
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||||
Accumulated other comprehensive loss
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(
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)
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(
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)
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||||
Total stockholders’ equity
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||||||
Total liabilities and stockholders’ equity
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$
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$
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Three Months Ended
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Six Months
Ended
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|||||||||||||||
June 30,
2022
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June 30,
2021
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June 30,
2022
|
June 30,
2021
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|||||||||||||
Revenue
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$
|
|
$
|
|
$
|
|
$
|
|
||||||||
Operating expense:
|
||||||||||||||||
Licensing costs
|
|
|
(
|
)
|
(
|
)
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||||||||||
Research and development
|
|
|
|
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||||||||||||
Selling, general and administrative
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|
|
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||||||||||||
Total operating expense
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|
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|
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||||||||||||
Income (loss) from operations
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(
|
)
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(
|
)
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(
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)
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(
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)
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||||||||
Interest and other income, net
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|
|
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||||||||||||
Income (loss) before taxes
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(
|
)
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(
|
)
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(
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)
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(
|
)
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||||||||
Income tax (expense) benefit
|
(
|
)
|
(
|
)
|
|
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||||||||||
Net income (loss)
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$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
Basic income (loss) per share
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$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
Diluted income (loss) per share
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
Weighted average shares outstanding - basic
|
|
|
|
|
||||||||||||
Weighted average shares outstanding - diluted
|
|
|
|
|
|
Three Months Ended
|
Six Months Ended
|
||||||||||||||
|
June 30,
2022
|
June 30,
2021
|
June 30,
2022
|
June 30,
2021
|
||||||||||||
Net income (loss)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
Other comprehensive income (loss):
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||||||||||||||||
Change in unrealized gain (loss) on investments, net of tax
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(
|
)
|
(
|
)
|
(
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)
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|
|||||||||
Change in foreign currency translation, net of tax
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(
|
)
|
|
(
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)
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(
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)
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|||||||||
Total other comprehensive income (loss)
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(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
Comprehensive income (loss)
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$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
Three Months Ended
June 30,
|
Six Months
Ended
June 30,
|
|||||||||||||||
2022
|
2021
|
2022
|
2021
|
|||||||||||||
Total shareholders’ equity, beginning balances
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$
|
|
$
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|
$
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|
$
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|
||||||||
Common stock and additional paid-in capital:
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||||||||||||||||
Beginning balances
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|
|
|
|
||||||||||||
Common stock issued for options/RSUs, net
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( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Stock-based compensation
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|
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||||||||||||
Ending balances
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|
||||||||||||
Accumulated deficit (retained earnings):
|
||||||||||||||||
Beginning balances
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
Net (loss) income
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
Ending balances
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
Accumulated other comprehensive loss:
|
||||||||||||||||
Beginning balances
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
Change in unrealized investment gain/loss, net
|
(
|
)
|
(
|
)
|
(
|
)
|
|
|||||||||
Change in foreign currency translation, net
|
(
|
)
|
|
(
|
)
|
(
|
)
|
|||||||||
Ending balances
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
Total shareholders’ equity, ending balances
|
$
|
|
$
|
|
$
|
|
$
|
|
Six Months Ended
June 30,
|
||||||||
2022
|
2021
|
|||||||
Cash flows from operating activities:
|
||||||||
Net (loss) income
|
$
|
(
|
)
|
$
|
(
|
)
|
||
Adjustments to reconcile net (loss) income to cash flows from operating activities:
|
||||||||
Depreciation
|
|
|
||||||
Deferred tax assets
|
(
|
)
|
(
|
)
|
||||
Amortization of warrant issuance costs
|
|
|
||||||
Stock-based compensation
|
|
|
||||||
Changes in assets and liabilities:
|
||||||||
Accounts receivables
|
(
|
)
|
(
|
)
|
||||
Prepaid expenses and other assets
|
(
|
)
|
(
|
)
|
||||
Accounts payable
|
|
(
|
)
|
|||||
Accrued payroll and related expenses
|
|
|
||||||
Accrued licensing costs
|
(
|
)
|
(
|
)
|
||||
Other liabilities
|
( |
) | ( |
) | ||||
Net cash (used in) operating activities
|
(
|
)
|
(
|
)
|
||||
Cash flows from investing activities:
|
||||||||
Purchase of investments
|
(
|
)
|
(
|
)
|
||||
Proceeds from sale or maturity of investments
|
|
|
||||||
Net cash (used in) provided by investing activities
|
(
|
)
|
|
|||||
Cash flows from financing activities: |
||||||||
Payment of payroll taxes on vested restricted stock units |
( |
) | ( |
) | ||||
Net cash used in financing activities |
( |
) | ( |
) | ||||
Net change in cash and cash equivalents
|
(
|
)
|
(
|
)
|
||||
Cash and cash equivalents, beginning of period
|
|
|
||||||
Cash and cash equivalents, end of period
|
$
|
|
$
|
|
||||
Cash paid for income taxes |
$ | $ |
June 30, 2022
|
||||||||||||||||||||||||
Adjusted Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair Value
|
Cash and Cash
Equivalents
|
Investments
Available for
Sale
|
|||||||||||||||||||
Cash
|
$
|
|
$
|
—
|
$
|
—
|
$
|
|
$
|
|
$
|
—
|
||||||||||||
Level 1:
|
||||||||||||||||||||||||
Mutual funds
|
|
|
|
|
|
|
||||||||||||||||||
U.S. agency
securities
|
|
|
(
|
)
|
|
|
|
|||||||||||||||||
U.S. treasury
securities
|
|
|
(
|
)
|
|
|
|
|||||||||||||||||
|
|
(
|
)
|
|
|
|
||||||||||||||||||
Total
|
$
|
|
$
|
4
|
$ | (335 | ) |
$
|
|
$
|
|
$
|
|
December 31, 2021
|
||||||||||||||||||||||||
Adjusted Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair Value
|
Cash and Cash
Equivalents
|
Investments
Available for
Sale
|
|||||||||||||||||||
Cash
|
$
|
|
$
|
—
|
$
|
—
|
$
|
|
$
|
|
$
|
—
|
||||||||||||
Level 1:
|
||||||||||||||||||||||||
Mutual funds
|
|
|
|
|
|
|
||||||||||||||||||
U.S. agency
securities
|
|
|
(
|
)
|
|
|
|
|||||||||||||||||
U.S. treasury
securities
|
|
|
(
|
)
|
|
|
|
|||||||||||||||||
|
|
(
|
)
|
|
|
|
||||||||||||||||||
Total
|
$
|
|
$
|
-
|
$
|
(50
|
)
|
$
|
|
$
|
|
$
|
|
Warrants
Issued
|
Exercise
Price
|
Outstanding and
Exercisable
December 31,
2021
|
Issued
|
Exercised
|
Terminated /
Cancelled
|
Outstanding and
Exercisable
June 30, 2022
|
Expiration Date
|
||||||||||||||||||||
|
$
|
|
|
|
|
|
|
|
Three Months Ended | Six Months Ended | |||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2022
|
2021
|
2022
|
2021
|
|||||||||||||
Numerator:
|
||||||||||||||||
Net (loss)
income
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
Denominator:
|
||||||||||||||||
Weighted-average
basic shares outstanding
|
|
|
|
|
||||||||||||
Effect of
dilutive securities
|
|
|
|
|
||||||||||||
Weighted-average
diluted shares
|
|
|
|
|
||||||||||||
Basic (loss)
earnings per share
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
Diluted (loss)
earnings per share
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
• |
We may not generate significant sales revenues from our new software products and services.
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• |
We are involved and will continue to be involved in litigation defending our patent portfolio, which can be time-consuming and costly, and we cannot anticipate the results.
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• |
We may not be able to capitalize on market opportunities related to our product strategy, our licensing strategy or our patent portfolio.
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• |
If we are not able to adequately protect our patent rights, our business would be negatively impacted.
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• |
Because our business is conducted or expected to be conducted in an environment that is subject to rapid change, we may be subject to various developments in regulation, law, and consumer preferences to which we may not be able to
adapt successfully.
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• |
Our exposure to outside influences beyond our control, including new legislation, court rulings or actions by the USPTO could adversely affect our licensing and enforcement activities and results of operations.
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• |
New legislation, regulations or court rulings related to enforcing patents could harm our business and operating results.
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• |
Privacy and data security concerns, and data collection and transfer restrictions and related domestic or foreign regulations may limit the use and adoption of our solutions and adversely affect our business.
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• |
If we are unable to expand our revenue sources or establish, sustain, grow, or replace relationships with a diversified customer base, our revenues may be limited.
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• |
We have limited technical resources and are at an early stage in commercialization of our software products.
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• |
Our international expansion will subject us to additional costs and risks, and our plans may not be successful.
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• |
We have had to restate our previously issued financial statements and in connection with such process identified a material weakness in our internal control
over financial reporting.
|
• |
We may face litigation over the restatement of our previously issued financial statements.
|
• |
Third parties may challenge the validity of our patents;
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• |
The pendency of our various litigations may cause potential licensees not to do business with us;
|
• |
Our patents may expire before we can make our business strategy successful;
|
• |
We face, and we expect to continue to face, intense competition from new and established competitors who may have superior products and services or better marketing, financial or other capacities than we do; and
|
• |
It is possible that one or more of our potential customers or licensees develops or otherwise sources products or technologies similar to, competitive with or superior to ours.
|
• |
New legislation, regulations or rules related to obtaining patents or enforcing patents could significantly increase our operating costs and decrease our revenue. For instance, the United States Supreme Court has modified some tests
used by the USPTO in granting patents during the past 20 years which may decrease the likelihood that we will be able to obtain patents and increase the likelihood of challenge of any patents we obtain or license. In addition, in 2012 the
United States enacted sweeping changes to the United States patent system under the Leahy-Smith America Invents Act, including changes that transition the United States from a “first-to-invent” system to a “first to file” system and alter
the processes for challenging issued patents;
|
• |
More patent applications are filed each year resulting in longer delays in getting patents issued by the USPTO;
|
• |
Federal courts are becoming more crowded, and as a result, patent enforcement litigation is taking longer; and
|
• |
As patent enforcement becomes more prevalent, it may become more difficult for us to voluntarily license our patents.
|
• |
The need to educate potential customers about our patent rights and our product and service capabilities;
|
• |
The impact of the COVID-19 pandemic on our potential customers and their business operations, including their budgetary constraints and resources devoted to adopting new products.
|
• |
Our customers’ willingness to invest potentially substantial resources and modify their network infrastructures to take advantage of our products;
|
• |
Our customers’ budgetary constraints;
|
• |
The timing of our customers’ budget cycles;
|
• |
Delays caused by customers’ internal review processes; and
|
• |
Long sales cycles that may increase the risk that our financial resources are exhausted before we are able to generate significant revenue.
|
• |
Generate revenues or profit from product sales;
|
• |
Drive adoption of our products;
|
• |
Attract and retain customers for our products;
|
• |
Provide appropriate levels of customer training and support for our products;
|
• |
Implement an effective marketing strategy to promote awareness of our products;
|
• |
Focus our research and development efforts in areas that generate returns on our efforts;
|
• |
Anticipate and adapt to changes in our market; or
|
• |
Protect our products from any system failures or other breaches.
|
• |
Power loss, transmission cable cuts and other telecommunications failures;
|
• |
Damage or interruption caused by fire, earthquake, and other natural disasters;
|
• |
Computer viruses or software defects; and
|
• |
Physical or electronic break-ins, sabotage, intentional acts of vandalism, terrorist attacks and other events beyond our control.
|
• |
A staggered Board of Directors: This means that only one or two directors (since we have a five-person Board of Directors) will be up for election at any given annual meeting. This has the effect
of delaying the ability of stockholders to affect a change in control of us because it would take two annual meetings to effectively replace a majority of the Board of Directors.
|
• |
Blank check preferred stock: Our Board of Directors has the authority to establish the rights, preferences, and privileges of our 10,000,000 authorized, but unissued, shares of preferred stock. Therefore, this stock may be issued at
the discretion of our Board of Directors with preferences over your shares of our common stock in a manner that is materially dilutive to you. In addition, blank check preferred stock can be used to create a “poison pill” which is
designed to deter a hostile bidder from buying a controlling interest in our stock without the approval of our Board of Directors. We have not adopted such a “poison pill;” but our Board of Directors has the ability to do so in the
future, very rapidly and without stockholder approval.
|
• |
Advance notice requirements for director nominations and for new business to be brought up at stockholder meetings: Stockholders wishing to submit director nominations or raise matters to a vote
of the stockholders must provide notice to us within very specific date windows and in very specific form in order to have the matter voted on at a stockholder meeting. This has the effect of giving our Board of Directors and management
more time to react to stockholder proposals generally and could also have the effect of disregarding a stockholder proposal or deferring it to a subsequent meeting to the extent such proposal is not raised properly.
|
• |
No stockholder actions by written consent: No stockholder or group of stockholders may take actions rapidly and without prior notice to our Board of Directors and management or to the minority
stockholders. Along with the advance notice requirements described above, this provision also gives our Board of Directors and management more time to react to proposed stockholder actions.
|
• |
Super majority requirement for stockholder amendments to the bylaws: Stockholder proposals to alter or amend our bylaws or to adopt new bylaws can only be approved by the affirmative vote of at
least 66 2/3% of the outstanding shares of our common stock.
|
• |
No ability of stockholders to call a special meeting of the stockholders: Only the Board of Directors or management can call special meetings of the stockholders. This could mean that
stockholders, even those who represent a significant percentage of our shares of common stock, may need to wait for the annual meeting before nominating directors or raising other business proposals to be voted on by the stockholders.
|
• |
Developments or lack thereof in any then-outstanding litigation;
|
• |
Quarterly variations in our operating results;
|
• |
Large purchases or sales of common stock or derivative transactions related to our stock;
|
• |
Actual or anticipated announcements of new products or services by us or competitors;
|
• |
General conditions in the markets in which we compete; and
|
• |
General social, political, economic, and financial conditions, including the significant volatility in the global financial markets, and impacts from the COVID-19 pandemic.
|
• |
Price and volume fluctuations in the overall stock market from time to time, including fluctuations due to general economic uncertainty or negative market sentiment;
|
• |
Volatility in the market prices and trading volumes of companies in our industry or companies that investors consider comparable;
|
• |
Changes in operating performance and stock market valuations of other companies generally, or those in our industry;
|
• |
Sales of shares of our common stock by us or our stockholders;
|
• |
Failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow us, or our failure to meet these estimates or the expectations of investors;
|
• |
The financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;
|
• |
Announcements by us or our competitors of new products or services;
|
• |
The public’s reaction to our press releases, other public announcements, and filings with the SEC;
|
• |
Rumors and market speculation involving us or other companies in our industry;
|
• |
Actual or anticipated changes in our results of operations;
|
• |
Actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape generally;
|
• |
Litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;
|
• |
Announced or completed acquisitions of businesses or technologies by us or our competitors;
|
• |
New laws or regulations or new interpretations of existing laws or regulations applicable to our business;
|
• |
Changes in accounting standards, policies, guidelines, interpretations, or principles;
|
• |
Any significant change in our management; and
|
• |
General economic conditions and slow or negative growth of our markets, including any economic downturn from the COVID-19 pandemic.
|
• |
The outcome of actions to enforce our intellectual property rights currently in progress or that we may undertake in the future, and the timing thereof;
|
• |
The impact of the COVID-19 pandemic on our sales cycle and results;
|
• |
The amount and timing of receipt of license fees from potential infringers, licensees, or customers;
|
• |
The rate of adoption of our patented technologies;
|
• |
The number of new license arrangements we may execute, or that may expire, within a particular period and the scope of those licenses, including the number of our patents which are licensed, the extent of prior infringement of our
patent rights, royalty rates, timing of payment obligations, expiration date etc.;
|
• |
The success of a licensee in selling products that use our patented technologies; and
|
• |
The amount and timing of expenses related to our patent filings and enforcement proceedings, including litigation, related to our intellectual property rights.
|
Exhibit
Number
|
Description
|
Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
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Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
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Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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101.INS
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Inline XBRL Instance Document.
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101.SCH
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Inline XBRL Taxonomy Extension Schema Document.
|
101.CAL
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
|
101.DEF
|
Inline XBRL Taxonomy Extension Definition Linkbase Document.
|
101.LAB
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Inline XBRL Taxonomy Extension Label Linkbase Document.
|
101.PRE
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Inline XBRL Taxonomy Extension Presentation Linkbase Document.
|
104
|
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
|
** |
This exhibit is furnished herewith, but not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject
to liability under that section. Such certifications will not be deemed to be incorporated by reference in any filing under the Securities Act or the Exchange Act, except to the extent that we explicitly incorporate them by reference.
|
VIRNETX HOLDING CORPORATION
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|||
By:
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/s/ Kendall Larsen
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||
Name
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Kendall Larsen
|
||
Chief Executive Officer (Principal Executive Officer)
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By:
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/s/ Katherine Allanson
|
||
Name
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Katherine Allanson
|
||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
|
|||
Date: August 09, 2022
|
/s/ Kendall Larsen
|
|
Kendall Larsen
|
|
President and Chief Executive Officer
|
|
(Principal Executive Officer)
|
|
Date: August 09, 2022
|
/s/ Katherine Allanson
|
|
Katherine Allanson
|
|
Chief Financial Officer
|
|
(Principal Financial Officer and Principal Accounting Officer)
|
|
Date: August 09, 2022
|
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
|
/s/ Kendall Larsen
|
|
Kendall Larsen
|
|
President and Chief Executive Officer
|
|
(Principal Executive Officer)
|
|
Date: August 09, 2022
|
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
|
/s/ Katherine Allanson
|
|
Katherine Allanson
|
|
Chief Financial Officer
|
|
(Principal Financial Officer and Principal Accounting Officer)
|
|
Date: August 09, 2022
|
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - $ / shares |
Jun. 30, 2022 |
Dec. 31, 2021 |
---|---|---|
Stockholders' equity: | ||
Preferred stock, par value (in dollars per share) | $ 0.0001 | $ 0.0001 |
Preferred stock, shares authorized (in shares) | 10,000,000 | 10,000,000 |
Preferred stock, shares issued (in shares) | 0 | 0 |
Preferred stock, shares outstanding (in shares) | 0 | 0 |
Common stock, par value (in dollars per share) | $ 0.0001 | $ 0.0001 |
Common stock, shares authorized (in shares) | 100,000,000 | 100,000,000 |
Common stock, shares issued (in shares) | 71,424,650 | 71,232,856 |
Common stock, shares outstanding (in shares) | 71,424,650 | 71,232,856 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($) shares in Thousands, $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
|
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) [Abstract] | ||||
Revenue | $ 34 | $ 15 | $ 39 | $ 20 |
Operating expense: | ||||
Licensing costs | 0 | 0 | (4) | (9,438) |
Research and development | 1,255 | 1,149 | 2,482 | 2,301 |
Selling, general and administrative | 3,046 | 3,008 | 6,231 | 44,951 |
Total operating expense | 4,301 | 4,157 | 8,709 | 37,814 |
Income (loss) from operations | (4,267) | (4,142) | (8,670) | (37,794) |
Interest and other income, net | 203 | 10 | 229 | 26 |
Income (loss) before taxes | (4,064) | (4,132) | (8,441) | (37,768) |
Income tax (expense) benefit | (373) | (2,719) | 684 | 4,474 |
Net income (loss) | $ (4,437) | $ (6,851) | $ (7,757) | $ (33,294) |
Basic income (loss) per share (in dollars per share) | $ (0.06) | $ (0.10) | $ (0.11) | $ (0.47) |
Diluted income (loss) per share (in dollars per share) | $ (0.06) | $ (0.10) | $ (0.11) | $ (0.47) |
Weighted average shares outstanding - basic (in shares) | 71,255 | 71,111 | 71,244 | 71,085 |
Weighted average shares outstanding - diluted (in shares) | 71,255 | 71,111 | 71,244 | 71,085 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
|
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) [Abstract] | ||||
Net income (loss) | $ (4,437) | $ (6,851) | $ (7,757) | $ (33,294) |
Other comprehensive income (loss): | ||||
Change in unrealized gain (loss) on investments, net of tax | (110) | (3) | (281) | 2 |
Change in foreign currency translation, net of tax | (3) | 0 | (6) | (3) |
Total other comprehensive income (loss) | (113) | (3) | (287) | (1) |
Comprehensive income (loss) | $ (4,550) | $ (6,854) | $ (8,044) | $ (33,295) |
Business Description and Basis of Presentation |
6 Months Ended |
---|---|
Jun. 30, 2022 | |
Business Description and Basis of Presentation [Abstract] | |
Business Description and Basis of Presentation |
Note 1 — Business Description
and Basis of Presentation
VirnetX Holding Corporation, which we refer
to as “we,” “us,” “our,” “the Company” or “VirnetX,” is engaged in the business of commercializing a portfolio of patents. We derive revenue licensing technology, including GABRIEL Connection Technology™, to various original equipment manufacturers
(“OEMs”), that use our technologies in the development and manufacturing of their own products within the IP-telephony, mobility, fixed-mobile convergence, and unified communications markets. We also may derive future revenue from sales of software
services, including War Room™ and VirnetX Matrix™.
Our portfolio of intellectual property is
the foundation of our business model. We currently own approximately 201 total patents and pending applications, including 70 U.S. patents/patent applications and 131
foreign patents/validations/pending applications. Our patent portfolio is primarily focused on securing real-time communications over the Internet, as well as related services such as the establishment and maintenance of a secure domain name
registry. Our patented methods also have additional applications in the key areas of device operating systems and network security for Cloud services, M2M communications in areas of Smart City, Connected Car and Connected Home. The subject matter
of all our U.S and foreign patents and pending applications relates generally to securing communications over the Internet and such covers all our technology and other products. Some of our issued U.S. and foreign patents expire at various times
during the period from 2022 to 2034.
|
Summary of Significant Accounting Policies |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Significant Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Significant Accounting Policies |
Note 2 — Summary of Significant Accounting Policies
Unaudited Interim Financial
Information
The accompanying Condensed Consolidated Balance Sheet as of
June 30, 2022, the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021, the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2022 and
2021, the Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2022 and 2021, and the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 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, 2022, our results of operations for the three and six months ended June 30, 2022 and 2021, and our cash flows for the
six months ended June 30, 2022 and 2021. 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/A for the fiscal year ended December 31, 2021, filed with the SEC on May 13, 2022.
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.
Leases
The Company determines if an arrangement is a lease at
inception in accordance with Accounting Standards Codification (“ASC”) Topic 842. Operating lease right-of-use (“ROU”) assets are included in Prepaid expenses, and other assets on the Condensed Consolidated Balance Sheets. ROU assets represent the
Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on
the present value of lease payments over the lease term (see Note 8 – Leases).
Revenue Recognition
The Company derives revenue from licensing and royalty fees
from contracts with customers which often span several years. We account for this revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. A performance obligation is a promise in a contract to transfer a distinct good or
service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our revenue arrangements may consist of multiple-element
arrangements, with revenue for each unit of accounting recognized as the product or service is delivered to the customer.
With the licensing of our patents, performance obligations are
generally satisfied at a point in time as work is complete when our patent rights are transferred to our customers. We generally have no further obligation to our customers regarding our technology.
Certain contracts may require our customers to enter into a
hosting arrangement with us and for these arrangements, revenue is recognized over time, generally over the life of the servicing contract.
The Company actively monitors and enforces its intellectual
property 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 are licensing costs we incurred
in conjunction with the proceeds received from Apple Inc., pursuant to a favorable court decision relating to a patent infringement case.
Contingent Gains
ASC Topic 450-30-25, Contingent Gains, prohibits recognition of
contingent gains until realized. Accordingly, we do not record contingent gains ahead of such realization. Management generally considers any such gains as realized only upon the collection of cash.
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
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, 2022, we had, at times, funds
that were uninsured. We do not believe that we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships. We have not experienced any losses on our deposits of cash and cash equivalents.
Fair Value
The carrying amounts of our financial instruments, including
cash equivalents, accounts payable, and accrued liabilities, approximate fair value because of their generally short maturities.
Intangible Assets
We record intangible assets at cost, less accumulated
amortization. Amortization of intangible assets is provided over their estimated useful lives, which can range from 3 to 15 years, on either a straight-line basis or as revenue is generated by the assets.
Impairment of Long-Lived Assets
We identify and record impairment losses on long-lived assets
used in operations when events and changes in circumstances indicate that the carrying amount of an asset might not be recoverable, but not less than annually. Recoverability is measured by comparison of the anticipated future net undiscounted cash
flows to the related assets’ carrying value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows
arising from the asset.
Research and Development
Research and development costs include expenses paid to outside
development consultants and compensation related expenses for our engineering staff. Research and development costs are expensed as incurred.
Income Taxes
We account for income taxes using the asset and liability
method. The asset and liability method requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our
assets and liabilities. We calculate current and deferred tax provisions based on estimates and assumptions that could differ from actual results reflected on the income tax returns filed during the following years. Adjustments based on filed
returns are recorded when identified in the subsequent years. The effect on deferred taxes for a change in tax rates is recognized in income in the period that the tax rate change is enacted. In assessing our deferred tax assets, we consider
whether it is more likely than not that all or some portion of the deferred tax assets will not be realized.
A valuation allowance is provided for deferred income tax
assets when, in our judgment, based upon currently available information and other factors, it is more likely than not that all or a portion of such deferred income tax assets will not be realized. The determination of the need for a valuation
allowance is based on an on-going evaluation of current information including, among other things, historical operating results, estimates of future earnings in different taxing jurisdictions and the expected timing of the reversals of temporary
differences. We believe the determination to record a valuation allowance to reduce a deferred income tax asset is a significant accounting estimate because it is based, among other things, on an estimate of future taxable income in the United
States and certain other jurisdictions, which is susceptible to change and may or may not occur, and because the impact of adjusting a valuation allowance may be material. In determining when to release the valuation allowance established against
our net deferred income tax assets, we consider all available evidence, both positive and negative. We continually assess our ability to generate sufficient taxable income during future periods in which our deferred tax assets may be realized. If
and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our statements of operations.
We account for our uncertain tax positions in accordance with
U.S. GAAP, 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 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, 2022 and December 31, 2021.
New Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) 2019-12 Income Taxes (Topic 740). The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also
improve consistent application of and simplify U. S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2020. We adopted this ASU on January 1, 2021 and there was no material impact on our financial position or cash flows as a result.
|
Income Taxes |
6 Months Ended |
---|---|
Jun. 30, 2022 | |
Income Taxes [Abstract] | |
Income Taxes |
Note 3 — Income Taxes
For the three months ended June 30, 2022, we recognized income tax expense of $373 on loss before taxes of $4,064, which is 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 rate of 8.10%. The effective tax rate was lower than the statutory federal income tax rate primarily due to the
effect of stock-based compensation and expiring options, requiring us to reduce our deferred tax asset. During the six months ended June 30, 2022, our deferred tax asset increased by $685 to $16,635.
On May 13, 2022, the Company notified the public of the restatement via Form 8-K stating the Company's previously issued 2021 Financials because of an error in our deferred tax assets affecting the annual period covered by the financial statements.
The Company determined that the three and six months ended June 30, 2021 interim statements should be revised as the 2021 restatement related primarily to options expiring in second quarter 2021. The accompanying Deferred tax asset previously
reported as $16,854 has now been reduced to $13,526
as of June 30, 2021. The income tax benefit for the three months ended June 30, 2021, previously reported as $609 has been corrected to
income tax expense of $2,719. The income tax benefit for the six months ended June 30, 2021, previously reported as $7,802 has been reduced to $4,474.
For the three months ended June 30, 2021, we recognized an income tax expense of $2,719 on loss before taxes of $4,132. Income tax for the three months was
primarily affected by expiring options and net operating loss. For the six months ended June 30, 2021, we recognized an income tax benefit of $4,474
on loss before income taxes of $37,768. Income tax for the six months was primarily affected by expiring options and research and
development credits. During the six months ended June 30, 2021 , our deferred tax asset increased by $4,477 to $13,526.
A valuation allowance is provided for deferred tax assets when, in our judgment, based upon currently available information and other factors,
it is more likely than not that all or a portion of such deferred income tax assets will not be realized. The determination of the need for a valuation allowance is based on an on-going evaluation of current information including, among other
things, historical operating results, estimates of future earnings in different taxing jurisdictions and the expected timing of the reversals of temporary differences. We believe the determination to record, or reduce, a valuation allowance
associated with a deferred income tax asset is a significant accounting estimate because it is based, among other things, on an estimate of future taxable income in the United States and certain other jurisdictions, which is susceptible to change
and may or may not occur, and because the impact of adjusting a valuation allowance may be material. In determining when to release the valuation allowance established against our net deferred income tax assets, we consider all available
evidence, both positive and negative.
Our tax years for 2005 and forward are subject to examination by the U.S. tax authority and various state tax authorities. These years are open
due to NOLs, and tax credits generated in these years were utilized in 2020. The statute of limitation for these years shall expire three years after the date of filing 2020 income tax returns.
We are required to
recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. At December 31, 2021 and June 30, 2022, 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, 2022.
|
Commitments and Related Party Transactions |
6 Months Ended |
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Jun. 30, 2022 | |
Commitments and Related Party Transactions [Abstract] | |
Commitments and Related Party Transactions |
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 $249
and $514 compared to $95 and
$174 in fees and reimbursements to the LLC during the three and six months ended June 30, 2022 and 2021, 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.
|
Stock Based Compensation |
6 Months Ended |
---|---|
Jun. 30, 2022 | |
Stock Based Compensation [Abstract] | |
Stock Based Compensation |
Note 5 — Stock Based
Compensation
We have a stock incentive
plan for employees and others called the VirnetX Holding Corporation 2013 Equity Incentive Plan (the “2013 Plan”), which has been approved by our stockholders. To the extent that any award should expire, become un-exercisable or is otherwise
forfeited, the shares subject to such award will again become available for issuance under the 2013 Plan. The 2013 Plan provides for the granting of stock options and restricted stock units purchase rights (“RSUs”) to our employees and consultants.
Stock options granted under the 2013 Plan may be incentive stock options or nonqualified stock options. Incentive stock options (“ISOs”) may only be granted to our employees (including officers and directors). Nonqualified stock options (“NSOs”) and
stock purchase rights may be granted to our employees and consultants. The 2013 Plan expires in 2023.
Options may be granted
under the 2013 Plan with an exercise price determined by our Board of Directors, or a duly appointed committee thereof, provided, however, that the exercise price of an option granted to any employee shall be not less than 100% of the fair market value at the date of grant in the case of ISOs or 85% of the fair market value at the date of grant in the case of an NSO. The exercise price of an ISO or NSO granted to one of our Named Executive Officers shall not be less than 100% of the fair market value of the shares at the date of grant and the exercise price of an ISO granted to a 10% shareholder shall not be less
than 110% of the fair market value of the shares on the date of grant. Stock options granted under the 2013 Plan typically vest over four years and have a 10-year term. All
RSUs are considered to be granted at the fair value of our stock on the date of grant because they have no exercise price. RSUs typically vest over four years. As of June 30, 2022, there were 1,435,929 shares available for grant under the 2013 Plan.
Stock-based
compensation expense included in general and administrative expense was $487 and $463, and in research and development expense was $325 and $511, for the three months ended June 30, 2022 and 2021, respectively. Stock-based compensation expense included in general and administrative expense
was $953 and $846, and
in research and development expense was $637 and $1,007, for the six months ended June 30, 2022 and 2021, respectively.
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 $1.18
per option. During the three months ended June 30, 2021, we granted options for a total of 779,500 shares with a weighted average grant
date fair value of $3.45 per option.
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 $1.18
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 six months ended June 30, 2021, we granted options for a total of 779,500 shares with a weighted average grant date fair value of $3.45 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) 91 percent volatility, (iii) 1 percent risk free rate and (iv) 6 years expected term.
During the three months ended June 30, 2022 and 2021, we granted 258,363 and 236,661 RSUs respectively, with weighted average
fair values at the date of grant of $1.46 and $4.61, 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, 2022 and 2021, we
paid $29 and $196 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 2022 or 2021.
As of June 30, 2022, the unrecognized stock-based compensation expense related to non-vested stock
options and RSUs was $5,242 and $1,988,
respectively, which will be amortized over an estimated weighted average period of approximately 3.02 and 2.93 years, respectively.
During the three and six months ended June 30, 2022, and 2021 no options were exercised.
During the three months ended June 30, 2022 and 2021, we issued 191,795 and 174,285 shares as a result of vesting RSUs,
respectively. No shares were issued during the first three months of 2022 or 2021 as a result of vesting RSUs.
During the three and six months ended June 30, 2022 and 2021, there were 255,000 and 390,000 options
returned to the plan due to the 10-year expiration for unexercised options respectively.
|
Equity |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity |
Note 6 — Equity
Common Stock
We issued no shares for options exercised during the three and six months ended June 30, 2022 or 2021, respectively. We issued 191,795 and 174,285 shares as a result of vesting RSUs during the three months
ended June 30, 2022 and 2021, respectively. No shares were issued during the first three months of 2022 or 2021 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 . 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.
|
Litigation |
6 Months Ended |
---|---|
Jun. 30, 2022 | |
Litigation [Abstract] | |
Litigation |
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 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. Post-trial motions hearing was held on July 18, 2018. On August 31, 2018, the
USDC entered a Final Judgment and issued its Memorandum Opinion and Order regarding post-trial motions, affirming the jury’s verdict of $502,600
and granting VirnetX motions for supplemental damages, a sunset royalty, and the royalty rate of $1.20 per infringing iPhone, iPad and
Mac products, pre-judgment and post-judgment interest and costs. Apple filed a notice of appeal with the 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 January 24, 2019 Apple filed its opening brief. We filed our response brief on March 1, 2019. Apple filed its reply brief on April 5, 2019. The oral arguments were heard
on October 4, 2019. On November 22, 2019, the USCAFC issued an opinion affirming the district court’s findings that Apple is precluded from making certain invalidity arguments and that Apple infringed the ‘135 and ‘151 patents; reversing the USDC’s
finding that Apple infringed the ‘504 and ‘211 patents; and remanding the case for proceedings on damages. Apple sought panel and en banc rehearing, which the USCAFC denied on February 10, 2020.
On February 22, 2020,
the USDC issued a scheduling order for the parties to brief the court about the need for a new trial for recalculating the damages. We filed our motion for entry of judgment on February 28, 2020. The arguments on this matter were heard on April 14,
2020. In its order, unsealed on May 1, 2020, the USDC denied VirnetX’s motion for entry of a new judgment based on the prior jury verdict and ordered a new jury trial on damages. On August 10, 2020, the USDC granted Apple’s motion for continuance
and reset the date to October 26, 2020. On October 30, 2020, a jury returned a $502,800 verdict in favor of VirnetX based on Apple’s
infringement of two network security patents: VirnetX US Patents No. 6,502,135 and No. 7,490,151. The jury verdict called for damages of
$0.84 per accused device since the 2013 launch of Apple’s iOS 7 operating system and represents 598,629,580 infringing units from US sales only. On January 15, 2021, the district court denied Apple’s motion for judgment as a matter of law, and on February 4, 2021, Apple
filed a notice of appeal to the USCAFC.
On February 22, 2021, 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. The briefing is complete, and the oral arguments have been scheduled on September 8, 2022 in this matter.
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 have been scheduled on September 8, 2022.
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, with VirnetX’s opening brief currently due on August 22, 2022.
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.
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 is currently due August 22, 2022.
VirnetX Inc. v. Apple Inc. (USCAFC Case 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. Our opening brief is currently due October 21, 2022.
McKool Smith P.C. v.
VirnetX, Inc., AAA Case No. 01-20-0003-7975
On March 23, 2020, the
law firm of McKool Smith, P.C. (“McKool”) filed a Demand for Arbitration against VirnetX, Inc. with the American Arbitration Association (“AAA”). In its demand, McKool claimed that a retention agreement it entered into in 2010 with VirnetX entitled
it to a contingency fee arising from the recent 2020 payment made in the Apple I case. McKool claimed it was owed approximately $36,300
(or 8% of the Apple I payment). We filed a general response with the AAA denying McKool’s claim and contested the matter vigorously. An
evidentiary hearing was held on the matter during the week of February 22, 2021 and the parties submitted additional briefings. On April 19, 2021, the arbitrator awarded McKool $36,323 in damages, plus pre-judgment interest in the amount of 5%
simple interest from March 23, 2020 to April 18, 2021, and post-judgment interest in the amount of 5%, compounded annually, until
payment of the award. We accrued the resulting $38,284 as of March 31, 2021 and paid that amount to McKool on April 20, 2021. This matter is now closed.
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.
|
Leases |
6 Months Ended |
---|---|
Jun. 30, 2022 | |
Leases [Abstract] | |
Leases |
Note 8 — Leases
We lease
office space under an operating lease which expires on October 31, 2023. On June 30, 2022, the underlying ROU asset and lease liability totaled $71.
On December 31, 2021, the underlying ROU asset and lease liability totaled $98. For the three and six months ended June 30, 2022,
lease expense totaled $13 and $27,
respectively. For the three and six months ended June 30, 2021, the lease expense totaled $14 and $28, respectively.
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, 2022 and December
31, 2021, the ROU asset totaled $799 and $948,
respectively. For the three and six months ended June 30, 2022, lease expense totaled $75 and $150, respectively. For the three and six months ended June 30, 2021, lease expense totaled $75 and $150, respectively.
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Earnings Per Share |
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Earnings Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share |
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, 2022 and 2021 (in thousands, except per share amounts):
We incurred a net
loss for the three and six months ended June 30, 2022 and 2021; therefore, all potentially dilutive securities representing shares of common stock (7,520,546
in 2022 and 6,752,839 in 2021) were excluded from the computation of diluted earnings per share, because their effect would have
been antidilutive.
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Subsequent Events |
6 Months Ended |
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Jun. 30, 2022 | |
Subsequent Events [Abstract] | |
Subsequent Events |
Note 10 — Subsequent Events
None
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Summary of Significant Accounting Policies (Policies) |
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Summary of Significant Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unaudited Interim Financial Information |
Unaudited Interim Financial
Information
The accompanying Condensed Consolidated Balance Sheet as of
June 30, 2022, the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021, the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2022 and
2021, the Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2022 and 2021, and the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 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, 2022, our results of operations for the three and six months ended June 30, 2022 and 2021, and our cash flows for the
six months ended June 30, 2022 and 2021. 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/A for the fiscal year ended December 31, 2021, filed with the SEC on May 13, 2022.
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Use of Estimates |
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.
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Basis of Consolidation |
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.
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Leases |
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).
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Revenue Recognition |
Revenue Recognition
The Company derives revenue from licensing and royalty fees
from contracts with customers which often span several years. We account for this revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. A performance obligation is a promise in a contract to transfer a distinct good or
service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our revenue arrangements may consist of multiple-element
arrangements, with revenue for each unit of accounting recognized as the product or service is delivered to the customer.
With the licensing of our patents, performance obligations are
generally satisfied at a point in time as work is complete when our patent rights are transferred to our customers. We generally have no further obligation to our customers regarding our technology.
Certain contracts may require our customers to enter into a
hosting arrangement with us and for these arrangements, revenue is recognized over time, generally over the life of the servicing contract.
The Company actively monitors and enforces its intellectual
property 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.
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Licensing Costs |
Licensing Costs
Included in operating expenses are licensing costs we incurred
in conjunction with the proceeds received from Apple Inc., pursuant to a favorable court decision relating to a patent infringement case.
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Contingent Gains |
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.
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Cash and Cash Equivalents |
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.
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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.
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Property and Equipment |
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
to seven years. Repair and maintenance costs are charged to
expense as incurred. |
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Concentration of Credit Risk and Other Risks and Uncertainties |
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, 2022, 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.
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Fair Value |
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.
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Intangible Assets |
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.
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Impairment of Long-Lived 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.
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Research and Development |
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.
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Income Taxes |
Income Taxes
We account for income taxes using the asset and liability
method. The asset and liability method requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our
assets and liabilities. We calculate current and deferred tax provisions based on estimates and assumptions that could differ from actual results reflected on the income tax returns filed during the following years. Adjustments based on filed
returns are recorded when identified in the subsequent years. The effect on deferred taxes for a change in tax rates is recognized in income in the period that the tax rate change is enacted. In assessing our deferred tax assets, we consider
whether it is more likely than not that all or some portion of the deferred tax assets will not be realized.
A valuation allowance is provided for deferred income tax
assets when, in our judgment, based upon currently available information and other factors, it is more likely than not that all or a portion of such deferred income tax assets will not be realized. The determination of the need for a valuation
allowance is based on an on-going evaluation of current information including, among other things, historical operating results, estimates of future earnings in different taxing jurisdictions and the expected timing of the reversals of temporary
differences. We believe the determination to record a valuation allowance to reduce a deferred income tax asset is a significant accounting estimate because it is based, among other things, on an estimate of future taxable income in the United
States and certain other jurisdictions, which is susceptible to change and may or may not occur, and because the impact of adjusting a valuation allowance may be material. In determining when to release the valuation allowance established against
our net deferred income tax assets, we consider all available evidence, both positive and negative. We continually assess our ability to generate sufficient taxable income during future periods in which our deferred tax assets may be realized. If
and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our statements of operations.
We account for our uncertain tax positions in accordance with
U.S. GAAP, 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.
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Stock-Based Compensation |
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 5 - Stock-Based Compensation).
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Earnings per Share |
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.
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Fair Value of Financial Instruments |
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, 2022 and December 31, 2021.
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New Accounting Pronouncements |
New Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) 2019-12 Income Taxes (Topic 740). The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also
improve consistent application of and simplify U. S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2020. We adopted this ASU on January 1, 2021 and there was no material impact on our financial position or cash flows as a result.
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Summary of Significant Accounting Policies (Tables) |
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Summary of Significant Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjusted Cost, Gross Unrealized Gains, Gross Unrealized Losses and Fair Value of Financial Assets |
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, 2022 and December 31, 2021.
|
Equity (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Information about Warrants Outstanding |
|
Earnings Per Share (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Computation of Basic and Diluted Earnings Per Share | The following
table shows the computation of basic and diluted earnings per share for the three and six months ended June 30, 2022 and 2021 (in thousands, except per share amounts):
|
Business Description and Basis of Presentation (Details) - Patents [Member] |
Jun. 30, 2022
Patent
|
---|---|
Business Description [Abstract] | |
Number of patents and pending applications | 201 |
U.S. [Member] | |
Business Description [Abstract] | |
Number of patents and pending applications | 70 |
Foreign [Member] | |
Business Description [Abstract] | |
Number of patents and pending applications | 131 |
Income Taxes (Details) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
Dec. 31, 2021 |
|
Income Taxes [Abstract] | |||||
Income tax expense (benefit) | $ 373 | $ 2,719 | $ (684) | $ (4,474) | |
Loss before income taxes | $ (4,064) | (4,132) | $ (8,441) | (37,768) | |
Effective tax rate | 9.18% | 8.10% | |||
Increase in deferred tax assets | $ 685 | 4,477 | |||
Deferred tax asset | $ 16,635 | 13,526 | 16,635 | 13,526 | $ 15,950 |
Uncertain tax positions | 0 | 0 | $ 0 | ||
Accrued interest | 0 | 0 | |||
Accrued penalties | $ 0 | $ 0 | |||
Previously Reported [Member] | |||||
Income Taxes [Abstract] | |||||
Income tax expense (benefit) | (609) | (7,802) | |||
Deferred tax asset | $ 16,854 | $ 16,854 |
Commitments and Related Party Transactions (Details) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
|
Office [Member] | ||||
Commitments, Contingencies and Related Party Transactions [Abstract] | ||||
Operating lease, expiration date | Oct. 31, 2023 | |||
K2 Investment Fund LLC [Member] | Aircraft [Member] | ||||
Commitments, Contingencies and Related Party Transactions [Abstract] | ||||
Rental fees incurred for use of aircraft | $ 249 | $ 95 | $ 514 | $ 174 |
Term of lease | 12 months | 12 months | ||
Rate of aircraft lease (in dollars per flight hour) | $ 8 | |||
Term of notice for cancellation of lease | 30 days |
Equity, Common Stock (Details) - shares |
3 Months Ended | 6 Months Ended | ||||
---|---|---|---|---|---|---|
Jun. 30, 2022 |
Mar. 31, 2022 |
Jun. 30, 2021 |
Mar. 31, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
|
Restricted Stock Units (RSUs) [Member] | ||||||
Common Stock [Abstract] | ||||||
Common stock issued upon vesting RSUs (in shares) | 191,795 | 0 | 174,285 | 0 | ||
ATM Agreement [Member] | Common Stock [Member] | ||||||
Common Stock [Abstract] | ||||||
Number of shares of common stock issued for options (in shares) | 0 | 0 | 0 | 0 |
Equity, Warrants (Details) - Warrants [Member] - Warrants Issued in 2020 [Member] - $ / shares |
6 Months Ended | 12 Months Ended |
---|---|---|
Jun. 30, 2022 |
Dec. 31, 2020 |
|
Warrants [Abstract] | ||
Weighted average fair value of warrants at grant date (in dollars per share) | $ 4.16 | |
Dividend yield | 0.00% | |
Volatility | 97.00% | |
Risk-free rate | 0.27% | |
Expected option term | 5 years | |
Warrants issued (in shares) | 25,000 | |
Exercise price (in dollars per share) | $ 5.75 | |
Outstanding and exercisable (in shares) | 25,000 | |
Issued (in shares) | 0 | |
Exercised (in shares) | 0 | |
Terminated/ cancelled (in shares) | 0 | |
Outstanding and exercisable (in shares) | 25,000 | |
Expiration date | Apr. 30, 2025 |
Leases (Details) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
Dec. 31, 2021 |
|
Office [Member] | |||||
Leases [Abstract] | |||||
Operating lease ROU assets | $ 71 | $ 71 | $ 98 | ||
Lease liability | 71 | 71 | 98 | ||
Lease expense | 13 | $ 14 | 27 | $ 28 | |
Corporate Promotional and Marketing Facility [Member] | |||||
Leases [Abstract] | |||||
Operating lease ROU assets | 799 | 799 | $ 948 | ||
Lease expense | $ 75 | $ 75 | $ 150 | $ 150 |
Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2022 |
Jun. 30, 2021 |
Jun. 30, 2022 |
Jun. 30, 2021 |
|
Numerator [Abstract] | ||||
Net (loss) income | $ (4,437) | $ (6,851) | $ (7,757) | $ (33,294) |
Denominator [Abstract] | ||||
Weighted-average basic shares outstanding (in shares) | 71,255,000 | 71,111,000 | 71,244,000 | 71,085,000 |
Effect of dilutive securities (in shares) | 0 | 0 | 0 | 0 |
Weighted-average diluted shares (in shares) | 71,255,000 | 71,111,000 | 71,244,000 | 71,085,000 |
Basic (loss) earnings per share (in dollars per share) | $ (0.06) | $ (0.10) | $ (0.11) | $ (0.47) |
Diluted (loss) earnings per share (in dollars per share) | $ (0.06) | $ (0.10) | $ (0.11) | $ (0.47) |
Antidilutive securities excluded from the computation of diluted earnings per share (in shares) | 7,520,546 | 6,752,839 | 7,520,546 | 6,752,839 |
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