NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
Note 1 — Business Description and Basis of Presentation
VirnetX Holding Corporation, which we refer to as “we”, “us”, “our”, “the Company” or “VirnetX”, is engaged in the business of commercializing a portfolio of patents. We seek to license our technology,
including GABRIEL Connection Technology™, to various original equipment manufacturers, or OEMs, that use our technologies in the development and manufacturing of their own products within the IP-telephony, mobility, fixed-mobile convergence and
unified communications markets. Prior to 2012 our revenue was limited to an insignificant amount of software royalties pursuant to the terms of a single license agreement. Since 2012 we had revenues from settlements of patent infringement disputes
whereby we received consideration for past sales of licensees that utilized our technology, where there was no prior patent license agreement, as well as license agreement revenues from settlements providing licensing for the continued use of our
technology (see “Revenue Recognition”).
Our portfolio of intellectual property is the foundation of our business model. We currently own approximately 191 total patents and pending applications, including 75 U.S. patents/patent applications
and 116 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, Machine-to-Machine (“M2M”), and communications in areas including “Smart City,” “Connected Car” and
“Connected Home.” All our U.S. and foreign patents and pending patent applications relate generally to securing communications over the internet and as such, cover all our technology and other products. Our issued U.S. and foreign patents expire at
various times during the period from 2019 to 2024. Some of our issued patents and pending patent applications were acquired by our principal operating subsidiary, VirnetX, Inc., from Leidos, Inc. (“Leidos”) (f/k/a Science Applications International
Corporation, or SAIC) in 2006 and we are required to make payments to Leidos based on cash or certain other values generated from those patents in certain circumstances. The amount of such payments depends upon the type of value generated and certain
categories are subject to maximums and other limitations.
Note 2 — Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The accompanying Condensed Consolidated Balance Sheet as of September 30, 2019, the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018, the
Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018, the Condensed Consolidated Statements of Stockholders’ Equity for each of the three and nine months ended September 30, 2019 and
2018, and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted
accounting principles in the United States (“U.S. GAAP”). In our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of
September 30, 2019, our results of operations for the three and nine months ended September 30, 2019 and 2018, and our cash flows for the nine months ended September 30, 2019 and 2018. The results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year.
These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2018, filed with the SEC on March 18, 2019.
Use of Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP. In doing so, we must 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 our accounting estimates are reasonably likely to occur.
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, at the time they are made, 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.
Reclassifications
Certain prior period amounts were reclassified to conform to the current year’s presentation. None of these reclassifications had an impact on reported operating expenses, operating income or net income
for any of the periods presented.
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 other
assets on the Condensed Consolidated Balance Sheet. 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.
Revenue Recognition
Most of our revenue is derived from licensing and royalty fees from contracts with customers which often span several years. We account for 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.
Deferred revenue
From 2013 to 2016, we received contractual payments totaling $10,000. In accordance with our revenue recognition policy, we deferred and then recognized revenue over the life of the contract, but not
ahead of collection. On January 1, 2018, we adopted Topic 606 and applied the modified retrospective approach.
Earnings (Loss) Per Share
Basic earnings (loss) per share are computed by dividing earnings (loss) available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted earnings
per share are 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.
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. A portion of those balances are insured by the Federal Deposit Insurance Corporation.
During the nine months ended September 30, 2019 we had funds which were uninsured. We do not believe that we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships with major financial
institutions. We have not experienced any losses on our deposits of cash and cash equivalents.
Other Assets
Other assets at September 30, 2019 include a right-of-use asset related to a facility lease for corporate promotional and marketing purposes. The facility lease was paid in full at inception and the ROU
asset is being amortized over the remaining term of the lease. Other assets also include an ROU asset related to our office operating lease which expires in October 2019, and had subsequently been extended to October 2021 (See Note 8).
Impairment of Long-Lived Assets
On an annual basis, we identify and record impairment losses on long-lived assets when events and changes in circumstances indicate that the carrying amount of an asset might not be recoverable.
Recoverability is measured by comparison of the anticipated future net undiscounted cash flows to the related assets’ carrying value. If such assets are 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.
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 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 September 30, 2019, and December
31, 2018.
|
|
September 30, 2019
|
|
|
|
Adjusted
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Cash
and Cash
Equivalents
|
|
|
Investments
Available
for Sale
|
|
Cash
|
|
$
|
1,756
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,756
|
|
|
$
|
1,756
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
624
|
|
|
|
—
|
|
|
|
—
|
|
|
|
624
|
|
|
|
624
|
|
|
|
—
|
|
U.S. agency securities
|
|
|
2,811
|
|
|
|
2
|
|
|
|
—
|
|
|
|
2,813
|
|
|
|
192
|
|
|
|
2,621
|
|
Total investments
|
|
|
3,435
|
|
|
|
2
|
|
|
|
—
|
|
|
|
3,437
|
|
|
|
816
|
|
|
|
2,621
|
|
Total
|
|
$
|
5,191
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
5,193
|
|
|
$
|
2,572
|
|
|
$
|
2,621
|
|
|
|
December 31, 2018
|
|
|
|
Adjusted
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Cash and Cash
Equivalents
|
|
|
Investments
Available for
Sale
|
|
Cash
|
|
$
|
5,048
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,048
|
|
|
$
|
5,048
|
|
|
$
|
—
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
1,107
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,107
|
|
|
|
1,107
|
|
|
|
—
|
|
U.S. agency securities
|
|
|
3,259
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,259
|
|
|
|
1,456
|
|
|
|
1,803
|
|
Total investments
|
|
|
4,366
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,366
|
|
|
|
2,563
|
|
|
|
1,803
|
|
Total
|
|
$
|
9,414
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,414
|
|
|
$
|
7,611
|
|
|
$
|
1,803
|
|
New Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326). The purpose of this ASU is to
require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. This ASU is
effective for interim and annual reporting periods beginning after December 15, 2019. We will adopt ASU 2016-13 effective January 1, 2020 with any cumulative effect of adoption recorded as an adjustment to retained earnings. The effect on our
consolidated financial statements will largely depend on the composition and credit' quality of our investment portfolio and the economic conditions and forecasts at the time of adoption. Based on the current composition of our investment portfolio,
current market conditions, and historical credit loss activity, the impact on our consolidated financial statements and related disclosures is not expected to be material.
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) as amended and supplemented by subsequent ASU’s, (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize ROU assets and lease
liabilities on its balance sheet and disclose key information about leasing arrangements. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting
period, and requires a modified retrospective adoption, with early adoption permitted. We adopted this ASU on January 1, 2019 which had no impact on our condensed consolidated statements of operations or cash flow (See Note 8 for impact on our
Condensed Consolidated Balance Sheets).
Note 3 - Income Taxes
We had an income tax benefit of $393 for the nine months ended September 30, 2019, due to a release of a state reserve as the statute of limitation for the tax return expired during the year. We had
an income tax expense of ($5) for the same period in 2018.We had income tax expense of $0 for the three months ended September 30, 2019 and 2018. During the three and nine-month periods ended September 30, 2019 and 2018, we had net operating losses
(“NOLs”) which generated deferred tax assets for NOL carryforwards. We provided valuation allowances against the net deferred tax assets including the deferred tax assets for NOL carryforwards.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based on the available objective evidence, management believes it is more
likely than not that the net deferred tax assets at September 30, 2019 will not be fully realizable. Accordingly, management has maintained a full valuation allowance against its net deferred tax assets at September 30, 2019. The valuation allowance
carried against our net deferred tax assets was approximately $37,000 at September 30, 2019 and $36,000 at December 31, 2018.
As of September 30, 2019, we have federal and state net operating loss carryforwards of approximately $127,000 and $108,000, respectively, expiring beginning in 2027 and 2028, respectively.
Our policy is to recognize interest and penalties accrued on uncertain tax positions as a component of income tax expense.
Note 4 — Commitments and Related Party Transactions
We lease our offices under an operating lease with a third party which expires in October 2019, and has subsequently been extended to October 2021 (see Note 8).
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 $442 and $1,327 compared to
$579 and $1,262 in rental fees and reimbursements to the LLC during the three and nine months ended September 30, 2019 and 2018, 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 normal in such transactions and can be cancelled by either us or the LLC with 30 days’ notice. The agreement renews on an annual basis unless terminated by either party. Neither
party has exercised their termination rights.
Note 5 — Stock-Based Compensation
We have a stock incentive plan for employees and others called the VirnetX Holding Corporation 2013 Equity Incentive Plan (the “Plan”), which has been approved by our stockholders. In April 2017, the
Board approved an amendment and restatement of the Plan to, among other things, increase the shares reserved under the Plan by 2,500,000 shares (the “Plan Amendment”). Our stockholders approved of the Plan Amendment at the 2017 Annual Meeting of
Stockholders held on June 1, 2017. The Plan provides for grants of 16,624,469 shares of our common stock, including stock options and restricted stock units (“RSUs”), and will expire in 2023. As of September 30, 2019, 1,128,903 shares remained
available for grant under the Plan.
During the three months ended September 30, 2019, we did not grant any options. During the three months ended September 30, 2018, we granted options totaling 85,000 shares with a weighted average grant
date fair value of $3.16.
During the nine months ended September 30, 2019, we granted options for a total of 345,000 shares. The weighted average fair value at the grant dates for options issued during the nine months ended
September 30, 2019 was $4.63 per option. The fair values of options at the grant date were estimated utilizing the Black-Scholes valuation model with the following weighted average assumptions for the nine months ended September 30, 2019 (i)
dividend yield on our common stock of 0 percent (ii) expected stock price volatility of 92 percent (iii) a risk-free interest rate of 2.09 percent and (iv) an expected option term of 6 years.
During the nine months ended September 30, 2018, we granted options for a total of 1,095,000 shares with a weighted average grant date fair value of $2.58. The fair values of options at the grant date
were estimated utilizing the Black-Scholes valuation model with the following weighted average assumptions for the nine months ended September 30, 2018 (i) dividend yield on our common stock of 0 percent (ii) expected stock price volatility of 84
percent (iii) a risk-free interest rate average of 2.73 percent and (iv) an expected option term of 6 years.
During the three months ended September 30, 2019 and 2018, we did not grant any RSUs.
During the nine months ended September 30, 2019 and 2018, we granted 229,996 and 243,997 RSUs, respectively. The weighted average fair values at the grant dates for RSUs issued during the nine months
ended September 30, 2019 and 2018 were $6.06 and $3.26 per RSU, respectively. RSUs, which are subject to forfeiture if service terminates prior to the shares vesting, are expensed ratably over the vesting period. During the nine months ended
September 30, 2019 and 2018, we paid $47 and $42 in withholding taxes on shares issued upon conversion of RSUs. The underlying shares were canceled. These amounts are reflected as financing costs in the accompanying condensed consolidated statements
of cash flows.
Stock-based compensation expense included in general and administrative expense was $565 and $1,437 and in research and development expense was $434 and $1,275 for the three and nine months ended
September 30, 2019, respectively, and $592 and $1,447 for general and administrative expense and $425 and $1,580 for research and development expense for the three and nine months ended September 30, 2018, respectively.
As of September 30, 2019, the unrecognized stock-based compensation expense related to non-vested stock options and RSUs was $5,542 and $2,139, respectively, which will be amortized over an estimated
weighted average period of approximately 2.31 and 2.59 years, respectively.
Note 6 — Equity
Common Stock
On July 30, 2018 we filed a $100,000 universal shelf registration statement on SEC Form S-3 which was declared effective by the SEC on August 16, 2018. We also entered an at-the-market equity offering
sales agreement (“ATM”) with Cowen & Company, LLC on August 31, 2018, under which we can offer and sell shares of our common stock having an aggregate value of up to $50,000.
We use the ATM proceeds for GABRIEL product development, marketing and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of
complementary products, technologies or businesses. As of September 30, 2019, common stock with an aggregate value of up to $30,327 remained available for offer and sale under the ATM agreement.
During the three months ended September 30, 2019, we sold 203,754 shares under the ATM. The average sales price per common share was $6.17 and the aggregate proceeds from the sales totaled $1,257 during
the period. Sales commissions, fees and other costs associated with the ATM totaled $38. During the nine months ended September 30, 2019, we sold 1,232,020 shares under the ATM. The average sales price per common share was $5.79 and the aggregate
proceeds from the sales totaled $7,131 during the period. Sales commissions, fees and other costs associated with the ATM totaled $214.
Warrants
In 2015 we issued warrants for the purchase of 25,000 shares of common stock at an exercise price of $7 per share, which expire in April 2020. Information about warrants outstanding as of September 30,
2019 is as follows:
Number
of
Warrants
Issued
|
|
|
Exercise
Price per
Common
Share
|
|
|
Exercisable at
December 31,
2018
|
|
|
Became
Exercisable
|
|
|
Exercised
|
|
|
Terminated /
Cancelled /
Expired
|
|
|
Exercisable
at September 30,
2019
|
|
Expiration
Date
|
|
25,000
|
|
|
$
|
7.00
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,000
|
|
April 2020
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,000
|
|
|
Note 7 — Litigation
We have multiple intellectual property infringement lawsuits pending in the United States District Court for the Eastern District of Texas, Tyler Division (“USDC”), and United States Court of Appeals
for the Federal Circuit (“USCAFC”).
VirnetX Inc. v. Cisco Systems, Inc. et al. (Case 6:10-CV-00417-LED) (“Apple I”)
On August 11, 2010, we filed a complaint against Aastra USA. Inc. (“Aastra”), Apple Inc. (“Apple”), Cisco Systems, Inc. (“Cisco”), and NEC Corporation (“NEC”) the USDC in which we alleged that these
parties infringe on certain of our patents (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages and injunctive relief. The cases against each defendant were separated by the judge. Aastra and NEC agreed to sign license
agreements with us, and we dropped all accusations of infringement against them. A jury in USDC decided that our patents were not invalid and rendered a verdict of non-infringement by Cisco on March 4, 2013. Our motion for a new Cisco trial was
denied and the case against Cisco was closed.
On November 6, 2012, a jury in the USDC awarded us over $368,000 for Apple’s infringement of four of our patents, plus daily interest up to the final judgment.
Apple filed an appeal of the judgment to the USCAFC. On September 16, 2014, USCAFC affirmed the USDC jury’s finding that all four of our patents at issue are valid and confirmed the USDC jury’s finding
of infringement of VPN on Demand under many of the asserted claims of our ‘135 and ‘151 patents, and the USDC’s decision to allow evidence about our license and royalty rates regarding the determination of damages. However, the USCAFC vacated the
USDC jury’s damages award and some of the USDC’s claim construction with respect to parts of our ‘504 and ‘211 patents and remanded the damages award and determination of infringement with respect to FaceTime back to the USDC for further proceedings.
On September 30, 2016, pursuant to the 2014 remand from the USCAFC, a jury in the USDC awarded us $302,400 for Apple’s infringement of four of our patents. On September 29, 2017, the USDC entered its
final judgement, denied all of Apple’s post-trial motions, granted all our post-trial motions, including our motion for willful infringement and enhanced the royalty rate during the willfulness period from $1.20 to $1.80 per device, and awarded us
costs, certain attorneys’ fees, and prejudgment interest. The total amount in the final judgement was $439,700, including $302,400 (jury verdict), $41,300 (enhanced damages) and $96,000 (costs, fees and interest).
On October 27, 2017 Apple filed its notice of appeal of this final judgement to the USCAFC. Apple filed its opening brief on March 19, 2018. We filed our response on April 4, 2018. On April 11, 2018,
USCAFC designated Cases 18-1197-CB, Case 17-1368 and Case 17-1591 as companion cases and assigned to the same merits panel. Events and developments after this order are described below under VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368) (“Consolidated Appeal”).
VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”)
This case began on November 6, 2012, when we had filed a complaint against Apple in USDC in which we alleged that Apple infringed on certain of our patents, (U.S. Patent Nos. 6,502,135, 7,418,504,
7,921,211 and 7,490,151). We sought damages and injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4 th Generation, iPad mini, and the latest Macintosh computers; these products were not included
in the Apple I case because they were released after the Apple I case was initiated. Post-Trial Motions hearing was held on July 18, 2018. On August 31, 2018, the USDC entered a Final Judgment and issued its Memorandum Opinion and Order regarding
post-trial motions, affirming the jury’s verdict of $502,600 and granting VirnetX’s 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. On September 20, 2018, pursuant to a Court’s order, attorneys from VirnetX and Apple conferred and agreed, without dispute, to add an amount totaling $93,300 for Bill of Costs and Prejudgment Interest to the $502,600 jury verdict. The
total amount in the final judgement in the Apple II case is now $595,900. Apple has filed a notice of appeal with the USCAFC in the Apple II case. On October 9, 2018, USCAFC accepted the notice and docketed it as Case
No. 19-1050 - VirnetX Inc. v. Apple Inc. All subsequent events and developments in this case are described below under VirnetX Inc. v. Apple Inc. (USCAFC Case
19-1050) (“Apple II Appeal”).
VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368) (“Consolidated Appeal”)
On April 11, 2018, the USCAFC in an order designated the following appeals as companion cases and assigned to the same merits panel;
•
|
VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368)
|
On December 16, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the Patent Trial and Appeal Board (“PTAB”) in IPR2015-01046, and on December 20, 2016 for IPR2015-1047,
involving our U.S. Patent Nos. 6,502,135, and 7,490,151. These appeals also involve Apple and one of them involves Black Swamp IP, LLC. Oral arguments in this case were argued on January 8, 2019.
On July 8, 2019, the USCAFC issued its opinion vacating and remanding both decisions. The court agreed with us that the PTAB misconstrued the patent claims, that many of the PTAB’s invalidity
findings lacked substantial evidence, and that the PTAB Board abused its discretion in denying us the opportunity to file a motion for additional discovery as to the real party-in-interest issues. The underlying inter partes review (“IPR”)
proceedings are currently pending before the PTAB.
•
|
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case)
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On October 27, 2017, Apple appealed the Final Judgment entered on September 29, 2017 to the USCAFC. Oral arguments in this case were held on January 8, 2019. On January 15, 2019 the Court issued a
Rule 36 order affirming the District Court Judgement. Apple filed a request for panel rehearing and rehearing en-banc in this matter on February 21, 2019. On March 12, 2019, the Court invited us to respond to Apple’s petition on or before March 26,
2019. We filed our response on March 22, 2019.
On July 1, 2019 Apple filed a motion for leave to file a supplemental brief regarding the impact of the USCAFC’s decision in VirnetX Inc. v. Cisco Systems, Inc.
(USCAFC Case 18-1751), issued on June 28, 2019 (described below). We filed a response to Apple’s motion and a contingent motion for leave to file a responsive supplemental brief on July 11, 2019. On July 17, 2019, the USCAFC granted both
motions and ordered Apple’s and our supplemental briefs filed. On August 1, 2019, USCAFC issued an order denying Apple’s petition for panel and en banc rehearing. On August 7, 2019, Apple filed a motion to vacate the August 1, 2019 order and for
leave to file a second request for panel rehearing and rehearing en-banc. On October 1, 2019, USCAFC issued an order denying Apple’s motion. Apple subsequently requested an extension for its deadline to petition for a writ of certiorari, and that
deadline was extended until December 29, 2019.
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VirnetX Inc. v. Apple Inc., Cisco Systems, Inc. (USCAFC Case 17-1591)
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On February 7, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-parties’ reexamination nos. 95/001,788, 95/001,789, and 95/001,856 related to our U.S.
Patent Nos. 7,921,211 and 7,418,504. Oral arguments in this case were argued on January 8, 2019.
On July 1, 2019 Apple filed a motion for leave to file a supplemental brief regarding the impact of the USCAFC’s decision in VirnetX Inc. v. Cisco Systems, Inc. (USCAFC
Case 18-1751), issued on June 28, 2019 (described below). We filed a response to Apple’s motion and a contingent motion for leave to file a responsive supplemental brief on July 11, 2019. On July 15, 2019, we filed a corrected response and a
corrected supplemental brief. On July 17, 2019, the USAFC granted both motions and ordered Apple’s and supplemental briefs filed.
On August 1, 2019, the USCAFC issued an opinion in this case agreeing with us that the PTAB could not maintain two of those reexaminations (initiated by Apple) with respect to claims as to which there
has been a prior “final decision” on patent validity entered by a federal court. The court instructed PTAB to terminate those reexamination proceedings with respect to claims 1-35 of the ‘504 patent and claims 36-59 of the ‘211 patent. The court
affirmed PTAB’s invalidity findings with respect to the remaining patent claims. Apple filed a request for panel rehearing and rehearing en-banc in this matter on August 26, 2019. We filed a separate request for panel rehearing on September 3, 2019.
Our request was denied on September 19, 2019, and Apple’s request was denied on October 11, 2019.
VirnetX Inc. v. Apple Inc. (USCAFC Case 19-1050) (“Apple II Appeal”)
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. A
decision by the USCAFC has not yet been issued.
VirnetX Inc. v. Apple Inc. (USCAFC Case 17-2490)
On August 23, 2017, we filed with the USCAFC appeals of the invalidity findings by the PTAB in IPR2016-00331 and IPR2016-00332 involving our U.S. Patent No. 8,504,696. On December 10, 2018, the USCAFC
issued an opinion affirming the PTAB’s invalidity findings.
VirnetX Inc. (USCAFC Case 17-2593)
On September 22, 2017, we filed with the USCAFC appeals of the invalidity findings by the PTAB in IPR2016-00693 and IPR2016-00957 involving our U.S. Patent Nos. 7,418,504 and 7,921,211. The briefing in
these appeals has not taken place. The entity that initiated the IPRs, Black Swamp IP, LLC, indicated on October 18, 2017, that it would not participate in the appeals. On November 27, 2017, the USPTO indicated that it would intervene in the appeals.
On January 19, 2018, the USCAFC stayed these appeals pending the USCAFC’s decision in Case 17-1591. On October 25, 2019, we and the USPTO filed a joint request that the deadline to inform the USCAFC how these appeals should proceed be extended until
November 1, 2019.
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1751)
On March 30, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,851 involving our U.S. Patent No. 7,418,504. Oral arguments in this
case were held on June 4, 2019.
On June 28, 2019, the USCAFC issued its opinion vacating the PTAB’s invalidity findings with respect to claims 5, 12, and 13 and remanding to the PTAB for further proceedings. The court affirmed the
PTAB’s invalidity findings with respect to the remaining patent claims. Cisco filed a request for panel rehearing and rehearing en-banc in this matter on August 12, 2019. Cisco’s request was denied on October 1, 2019.
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 19-1043)
On October 1, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,746 involving our U.S. Patent No. 6,839,759. We filed our opening
brief on March 15, 2019. Cisco filed its response brief on June 19, 2019. We filed our reply brief on August 14, 2019. Cisco filed a motion to submit a sur-reply brief on August 26, 2019, which we opposed. On September 27, 2019, the USCAFC issued an
order deferring resolution of Cisco’s motion for the merits panel. The oral arguments have not yet been scheduled.
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 19-1671)
On March 18, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,679 involving our U.S. Patent No. 6,502,135. We filed a motion to
remand on August 23, 2019, which the USCAFC denied on October 1, 2019, directing the parties to address the issues in the merits briefs. Our opening brief is currently due on November 12, 2019.
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 19-1725)
On March 29, 2019, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,792 involving our U.S. Patent No. 7,188,180. We filed a motion to
remand on September 10, 2019, which remains pending.
One or more potential intellectual property infringement claims may also be available to us against certain other companies who have the resources to defend against any such claims. Although we believe
these potential claims are likely valid, commencing a lawsuit can be expensive and time-consuming, and there is no assurance that we could prevail on such potential claims if we made them. In addition, bringing a lawsuit may lead to potential
counterclaims which may distract our management and our other resources, including capital resources, from efforts to successfully commercialize our products.
Currently, we are not a party to any other pending legal proceedings and are not aware of any proceeding threatened or contemplated against us.
Note 8 — Leases
We determine if an arrangement is a lease at inception. Operating lease ROU assets are included in other assets on the Condensed Consolidated Balance Sheet as of September 30, 2019. ROU assets represent
our right to use an underlying asset for the lease term and lease liabilities represent our 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.
We lease office space under an operating lease which initially expired in October 2019. On October 31, 2019, we executed a two-year extension to the lease, extending existing rates through October 31,
2021. Our extended office lease continues as an operating lease. We also entered an operating lease for a facility used for corporate promotional and marketing purposes which was prepaid in full in a prior year and expires in 2024.
As described under New Accounting Pronouncements above, we adopted ASU 2016-02 effective January 1, 2019. As a result of the adoption, on January 1, 2019 we reclassified $385 of prepaid
lease payments for the promotional and marketing facility from current assets to non-current assets. At January 1, 2019 we recorded an ROU asset and lease liability of $45 for the office lease with a balance of $4 at September 30, 2019. On October
31, 2019, the lease extension date, we increased our ROU and lease liability by $111, of which $9 is due in 2019, $56 is due in 2020, and $46 is due in 2021. For
the three and nine months ended September 30, 2019, we recorded lease expense of $14 and $41, respectively. Adoption of the ASU had no impact on the Condensed Consolidated Statement of Operations.
Note 9 — Subsequent Events
Between October 1, 2019 and November 6, 2019, we sold 551,795 shares of common stock under the ATM program. The average sales price per common share sold was $6.09 and the aggregate proceeds from the sales totaled $3,360.
Sales commissions, fees and other costs associated with these ATM transactions totaled $101.