☒
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
☐
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
77-0390628
|
||
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification Number)
|
89448
|
||
(Address of principal executive offices)
|
(Zip Code)
|
Title of Class
|
Trading Symbol
|
Name of Exchange on Which Registered
|
Common Stock, par value $0.0001 per share
|
VHC
|
NYSE American LLC
|
Accelerated filer ☒
|
Smaller reporting company ☐
|
Non-accelerated filer ☐
|
|
Emerging growth company ☐
|
Page
|
||
1
|
||
1
|
||
1
|
||
2
|
||
2
|
||
3
|
||
5 | ||
6
|
||
14
|
||
18
|
||
18
|
||
19
|
||
19
|
||
22
|
||
33
|
||
34
|
||
35
|
|
As of
September 30,
2019
|
As of
December 31, 2018
|
||||||
ASSETS
|
(unaudited)
|
|||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$
|
2,572
|
$
|
7,611
|
||||
Investments available for sale
|
2,621
|
1,803
|
||||||
Accounts receivables
|
6
|
6
|
||||||
Prepaid expenses and other current assets
|
315
|
718
|
||||||
Total current assets
|
5,514
|
10,138
|
||||||
Other assets
|
1,721
|
1,604
|
||||||
Property and equipment, net
|
5
|
9
|
||||||
Total assets
|
$
|
7,240
|
$
|
11,751
|
||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
Current liabilities:
|
||||||||
Accounts payable and accrued liabilities
|
$
|
1,168
|
$
|
1,050
|
||||
Accrued payroll and related expenses
|
292
|
277
|
||||||
Other current liabilities
|
140
|
140
|
||||||
Income tax liability
|
—
|
396
|
||||||
Total current liabilities
|
1,600
|
1,863
|
||||||
Commitments and contingencies (Note 4)
|
—
|
—
|
||||||
Stockholders’ equity:
|
||||||||
Preferred stock, par value $0.0001 per share Authorized: 10,000,000 shares at September 30, 2019 and December 31, 2018 Issued and outstanding: 0 shares at September 30,
2019 and December 31, 2018
|
—
|
—
|
||||||
Common stock, par value $0.0001 per share Authorized: 100,000,000 shares at September 30, 2019 and December 31, 2018 Issued and outstanding: 68,958,301 shares and
66,879,847 shares, at September 30, 2019 and December 31, 2018, respectively
|
7
|
7
|
||||||
Additional paid-in capital
|
218,761
|
208,317
|
||||||
Accumulated deficit
|
(213,116
|
)
|
(198,422
|
)
|
||||
Accumulated other comprehensive loss
|
(12
|
)
|
(14
|
)
|
||||
Total stockholders’ equity
|
5,640
|
9,888
|
||||||
Total liabilities and stockholders’ equity
|
$
|
7,240
|
$
|
11,751
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
2019
|
September 30,
2018
|
September 30,
2019
|
September 30,
2018
|
|||||||||||||
Revenue
|
$
|
4
|
$
|
7
|
$
|
50
|
$
|
28
|
||||||||
Operating expense:
|
||||||||||||||||
Research and development
|
964
|
932
|
2,886
|
3,123
|
||||||||||||
Selling, general and administrative expenses
|
4,016
|
4,023
|
12,326
|
15,923
|
||||||||||||
Total operating expense
|
4,980
|
4,955
|
15,212
|
19,046
|
||||||||||||
Loss from operations
|
(4,976
|
)
|
(4,948
|
)
|
(15,162
|
)
|
(19,018
|
)
|
||||||||
Interest and other income, net
|
20
|
14
|
75
|
34
|
||||||||||||
Loss before taxes
|
(4,956
|
)
|
(4,934
|
)
|
(15,087
|
)
|
(18,984
|
)
|
||||||||
Income tax benefit (expense)
|
—
|
—
|
393
|
(5
|
)
|
|||||||||||
Net loss
|
$
|
(4,956
|
)
|
$
|
(4,934
|
)
|
$
|
(14,694
|
)
|
$
|
(18,989
|
)
|
||||
Basic and diluted loss per share
|
$
|
(0.07
|
)
|
$
|
(0.08
|
)
|
$
|
(0.22
|
)
|
$
|
(0.31
|
)
|
||||
Weighted average shares outstanding basic and diluted
|
68,943
|
63,385
|
68,278
|
61,691
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
2019
|
September 30,
2018
|
September 30,
2019
|
September 30,
2018
|
|||||||||||||
Net loss
|
$
|
(4,956
|
)
|
$
|
(4,934
|
)
|
$
|
(14,694
|
)
|
$
|
(18,989
|
)
|
||||
Other comprehensive gain (loss), net of tax:
|
||||||||||||||||
Change in unrealized gain (loss) on investments, net of tax
|
1
|
(1
|
)
|
2
|
(1
|
)
|
||||||||||
1
|
(1
|
)
|
2
|
(1
|
)
|
|||||||||||
Comprehensive loss
|
$
|
(4,955
|
)
|
$
|
(4,935
|
)
|
$
|
(14,692
|
)
|
$
|
(18,990
|
)
|
Common Stock
|
Additional
Paid-in
Capital
|
Accumulated
Deficit
|
Accumulated
Other
Comprehensive
Loss
|
Total
Stockholders’
Equity
(Deficit)
|
||||||||||||||||||||
Shares |
Amount |
|||||||||||||||||||||||
Balance, December 31, 2018
|
66,879,847
|
$
|
7
|
$
|
208,317
|
$
|
(198,422
|
)
|
$
|
(14
|
)
|
$
|
9,888
|
|||||||||||
Stock issued for cash at $5.05 -$5.42 per share, net
|
560,338
|
2,848
|
2,848
|
|||||||||||||||||||||
Stock-based compensation
|
785
|
785
|
||||||||||||||||||||||
Exercise of options
|
663,816
|
816
|
816
|
|||||||||||||||||||||
Comprehensive loss:
|
||||||||||||||||||||||||
Net Loss
|
(5,608
|
)
|
(5,608
|
)
|
||||||||||||||||||||
Other comprehensive income (loss), net of tax
|
1
|
1
|
||||||||||||||||||||||
Comprehensive loss
|
(5,607
|
)
|
||||||||||||||||||||||
Balance, March 31, 2019
|
68,104,001
|
$
|
7
|
$
|
212,766
|
$
|
(204,030
|
)
|
$
|
(13
|
)
|
$
|
8,730
|
|||||||||||
Stock issued for cash at $6.02 -$6.49 per share, net
|
467,928
|
2,849
|
2,849
|
|||||||||||||||||||||
Stock-based compensation
|
928
|
928
|
||||||||||||||||||||||
Stock issued for vested RSUs
|
182,618
|
|||||||||||||||||||||||
Comprehensive loss:
|
||||||||||||||||||||||||
Net Loss
|
(4,130
|
)
|
(4,130
|
)
|
||||||||||||||||||||
Comprehensive loss
|
(4,130
|
)
|
||||||||||||||||||||||
Balance, June 30, 2019
|
68,754,547
|
$
|
7
|
$
|
216,543
|
$
|
(208,160
|
)
|
$
|
(13
|
)
|
$
|
8,377
|
|||||||||||
Stock issued for cash at $5.53 -$6.28 per share, net
|
203,754
|
1,219
|
1,219
|
|||||||||||||||||||||
Stock-based compensation
|
999
|
999
|
||||||||||||||||||||||
Comprehensive loss:
|
||||||||||||||||||||||||
Net Loss
|
(4,956
|
)
|
(4,956
|
)
|
||||||||||||||||||||
Other comprehensive income (loss), net of tax
|
1
|
1
|
||||||||||||||||||||||
Comprehensive loss
|
(4,955
|
)
|
||||||||||||||||||||||
Balance, September 30, 2019
|
68,958,301
|
$
|
7
|
$
|
218,761
|
$
|
(213,116
|
)
|
$
|
(12
|
)
|
$
|
5,640
|
Common Stock
|
Additional
Paid-in
Capital
|
Accumulated
Deficit
|
Accumulated
Other
Comprehensive
Loss
|
Total
Stockholders’
Equity
(Deficit)
|
||||||||||||||||||||
Shares
|
Amount
|
|||||||||||||||||||||||
Balance, December 31, 2017
|
59,051,978
|
$
|
6
|
$
|
177,076
|
$
|
(175,516
|
)
|
$
|
(13
|
)
|
$
|
1,553
|
|||||||||||
Cumulative effects of accounting change ASC 606
|
2,500
|
2,500
|
||||||||||||||||||||||
Stock issued for cash at $4.02 per share, net
|
1,751,689
|
6,830
|
6,830
|
|||||||||||||||||||||
Stock-based compensation
|
887
|
887
|
||||||||||||||||||||||
Stock issued for vested RSUs
|
20,000
|
|||||||||||||||||||||||
Comprehensive loss:
|
||||||||||||||||||||||||
Net Loss
|
(7,605
|
)
|
(7,605
|
)
|
||||||||||||||||||||
Other comprehensive income (loss), net of tax
|
1
|
1
|
||||||||||||||||||||||
Comprehensive loss
|
(7,604
|
)
|
||||||||||||||||||||||
Balance, March 31, 2018
|
60,823,667
|
$
|
6
|
$
|
184,793
|
$
|
(180,621
|
)
|
$
|
(12
|
)
|
$
|
4,166
|
|||||||||||
Stock issued for cash at $3.45 - $4.13 per share, net
|
1,320,921
|
4,809
|
4,809
|
|||||||||||||||||||||
Stock-based compensation
|
1,121
|
1,121
|
||||||||||||||||||||||
Stock issued for vested RSUs
|
148,219
|
|||||||||||||||||||||||
Comprehensive loss:
|
||||||||||||||||||||||||
Net Loss
|
(6,450
|
)
|
(6,450
|
)
|
||||||||||||||||||||
Comprehensive loss
|
(6,450
|
)
|
||||||||||||||||||||||
Balance, June 30, 2018
|
62,292,807
|
$
|
6
|
$
|
190,723
|
$
|
(187,071
|
)
|
$
|
(12
|
)
|
$
|
3,646
|
|||||||||||
Stock issued for cash at $3 - $4.89 per share, net
|
4,083,377
|
1
|
13,634
|
13,635
|
||||||||||||||||||||
Stock-based compensation
|
1,018
|
1,018
|
||||||||||||||||||||||
Comprehensive loss:
|
||||||||||||||||||||||||
Net Loss
|
(4,934
|
)
|
(4,934
|
)
|
||||||||||||||||||||
Other comprehensive income (loss), net of tax
|
(2
|
)
|
(2
|
)
|
||||||||||||||||||||
Comprehensive loss
|
(4,936
|
)
|
||||||||||||||||||||||
Balance, September 30, 2018
|
66,376,184
|
$
|
7
|
$
|
205,375
|
$
|
(192,004
|
)
|
$
|
(14
|
)
|
$
|
13,363
|
Nine Months Ended
|
||||||||
September 30,
2019
|
September 30,
2018
|
|||||||
Cash flows from operating activities:
|
||||||||
Net loss
|
$
|
(14,694
|
)
|
$
|
(18,989
|
)
|
||
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
Depreciation
|
4
|
14
|
||||||
Stock-based compensation
|
2,712
|
3,026
|
||||||
Changes in assets and liabilities:
|
||||||||
Prepaid expenses and other assets
|
286
|
89
|
||||||
Accounts payable and accrued liabilities
|
118
|
(18
|
)
|
|||||
Accrued payroll and related expenses
|
62
|
(1,882
|
)
|
|||||
Accounts receivable
|
—
|
(4
|
)
|
|||||
Income tax liability
|
(396
|
)
|
5
|
|||||
Net cash used in operating activities
|
(11,908
|
)
|
(17,759
|
)
|
||||
Cash flows from investing activities:
|
||||||||
Purchase of investments
|
(5,319
|
)
|
(1,430
|
)
|
||||
Proceeds from sale or maturity of investments
|
4,503
|
2,219
|
||||||
Net cash (used in) provided by investing activities
|
(816
|
)
|
789
|
|||||
Cash flows from financing activities:
|
||||||||
Proceeds from exercise of options
|
816
|
—
|
||||||
Proceeds from sale of common stock
|
6,916
|
25,273
|
||||||
Payments of taxes on cashless exercise of restricted stock units
|
(47
|
)
|
(42
|
)
|
||||
Net cash provided by financing activities
|
7,685
|
25,231
|
||||||
Net increase (decrease) in cash and cash equivalents
|
(5,039
|
)
|
8,261
|
|||||
Cash and cash equivalents, beginning of period
|
7,611
|
3,135
|
||||||
Cash and cash equivalents, end of period
|
$
|
2,572
|
$
|
11,396
|
||||
Cash paid for income taxes
|
$
|
—
|
$
|
3
|
||||
Non-cash transactions
|
||||||||
Deferred revenue reclassified to retained earnings – ASC 606 adoption
|
$
|
—
|
$
|
2,500
|
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
|
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
|
•
|
VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368)
|
•
|
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case)
|
•
|
VirnetX Inc. v. Apple Inc., Cisco Systems, Inc. (USCAFC Case 17-1591)
|
•
|
VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368)
|
•
|
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case)
|
•
|
VirnetX Inc. v. Apple Inc., Cisco Systems, Inc. (USCAFC Case 17-1591)
|
• |
Third parties may challenge the validity of our patents;
|
• |
The pendency of our various litigations may cause potential licensees not to do business with us;
|
• |
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 recently 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, the United States recently 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.
|
• |
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;
|
• |
Focus our research and development efforts in areas that generate returns on our efforts;
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• |
Protect our products from any system failures or other breaches.
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• |
Power loss, transmission cable cuts and other telecommunications failures;
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• |
Computer viruses or software defects; and
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• |
Physical or electronic break-ins, sabotage, intentional acts of vandalism, terrorist attacks and other events beyond our control.
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• |
Developments or lack thereof in any then-outstanding litigation;
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• |
Quarterly variations in our operating results;
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• |
Large purchases or sales of common stock or derivative transactions related to our stock;
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• |
Actual or anticipated announcements of new products or services by us or competitors;
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• |
General social, political, economic and financial conditions, including the significant volatility in the global financial markets.
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• |
Price and volume fluctuations in the overall stock market from time to time;
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• |
Volatility in the market prices and trading volumes of companies in our industry or companies that investors consider comparable;
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• |
Changes in operating performance and stock market valuations of other companies generally, or those in our industry;
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• |
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;
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• |
The financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;
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• |
Rumors and market speculation involving us or other companies in our industry;
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• |
Actual or anticipated changes in our results of operations;
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• |
New laws or regulations or new interpretations of existing laws or regulations applicable to our business;
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• |
Any significant change in our management; and
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• |
General economic conditions and slow or negative growth of our markets.
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• |
The amount and timing of receipt of license fees from potential infringers, licensees or customers;
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• |
The rate of adoption of our patented technologies;
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• |
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.;
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• |
The amount and timing of expenses related to our patent filings and enforcement proceedings, including litigation, related to our intellectual property rights.
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• |
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.
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• |
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.
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• |
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.
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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
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Title
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Chief Executive Officer (Principal Executive Officer)
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By:
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/s/ Richard H. Nance
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Name
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Richard H. Nance
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||
Title
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Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
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Date: November 8, 2019
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Number
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Certification of the President and Chief Executive Officer pursuant to Exchange Act Rules 13a – 14(a) and 15d – 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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Certification of the Chief Financial Officer pursuant to Exchange Act Rules 13a – 14(a) and 15d – 14(a), as adopted 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
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Interactive Data Files
|
**
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Filed herewith.
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***
|
The certifications attached as Exhibit 32.1 and Exhibit 32.2 that accompany this Quarterly Report on Form 10-Q are deemed furnished and not filed with the Securities and
Exchange Commission and are not to be incorporated by reference into any filing of VirnetX Holding Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after
the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.
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/s/ Kendall Larsen
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Kendall Larsen
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President and Chief Executive Officer
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(Principal Executive Officer)
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Date: November 8, 2019
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/s/ Richard H. Nance
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Richard H. Nance
|
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Chief Financial Officer
|
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(Principal Financial Officer and Principal Accounting Officer)
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|
Date: November 8, 2019
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(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.
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/s/ Kendall Larsen
|
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Kendall Larsen
|
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President and Chief Executive Officer
|
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(Principal Executive Officer)
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|
Date: November 8, 2019
|
(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.
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/s/ Richard H. Nance
|
|
Richard H. Nance
|
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Chief Financial Officer
|
|
(Principal Financial Officer and Principal Accounting Officer)
|
|
Date: November 8, 2019
|
Business Description and Basis of Presentation |
9 Months Ended |
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Sep. 30, 2019 | |
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 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. |
Document and Entity Information - shares |
9 Months Ended | |
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Sep. 30, 2019 |
Nov. 06, 2019 |
|
Cover [Abstract] | ||
Entity Registrant Name | VirnetX Holding Corp | |
Entity Central Index Key | 0001082324 | |
Current Fiscal Year End Date | --12-31 | |
Entity Current Reporting Status | Yes | |
Entity Interactive Data Current | Yes | |
Entity Shell Company | false | |
Entity Filer Category | Accelerated Filer | |
Entity Small Business | false | |
Entity Emerging Growth Company | false | |
Entity Common Stock, Shares Outstanding | 69,510,097 | |
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Sep. 30, 2019 | |
Document Fiscal Year Focus | 2019 | |
Document Fiscal Period Focus | Q3 | |
Entity Address, State or Province | NV |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
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Sep. 30, 2019 |
Sep. 30, 2018 |
Sep. 30, 2019 |
Sep. 30, 2018 |
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) [Abstract] | ||||
Net loss | $ (4,956) | $ (4,934) | $ (14,694) | $ (18,989) |
Other comprehensive gain (loss), net of tax: | ||||
Change in unrealized gain (loss) on investments, net of tax | 1 | (1) | 2 | (1) |
Total other comprehensive income gain (loss), net of tax | 1 | (1) | 2 | (1) |
Comprehensive loss | $ (4,955) | $ (4,935) | $ (14,692) | $ (18,990) |
Equity |
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Sep. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity | 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:
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Summary of Significant Accounting Policies |
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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 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.
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). |
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 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. |
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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 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. |
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Reclassifications | 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. |
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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 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. |
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Revenue Recognition | 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. |
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Deferred revenue | 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. |
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Earnings (Loss) Per Share | 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. |
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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. 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. |
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Other Assets | 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). |
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Impairment of Long-Lived Assets | 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. |
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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 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.
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New Accounting Pronouncements | 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). |
Summary of Significant Accounting Policies (Tables) |
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Cash and Available-for-Sale Securities Adjusted Cost, Gross Unrealized Gains, Gross Unrealized Losses and Fair Value by Significant Investment Category | 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.
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Litigation |
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Litigation [Abstract] | |||||||
Litigation | 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;
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.
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.
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. |
Income Taxes |
9 Months Ended |
---|---|
Sep. 30, 2019 | |
Income Taxes [Abstract] | |
Income Taxes | 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 $108,000, respectively, expiring beginning in 2027 and 2028, respectively. Our policy is to recognize interest and penalties accrued on uncertain tax positions as a component of income tax expense. |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($) shares in Thousands, $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2019 |
Sep. 30, 2018 |
Sep. 30, 2019 |
Sep. 30, 2018 |
|
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) [Abstract] | ||||
Revenue | $ 4 | $ 7 | $ 50 | $ 28 |
Operating expense: | ||||
Research and development | 964 | 932 | 2,886 | 3,123 |
Selling, general and administrative expenses | 4,016 | 4,023 | 12,326 | 15,923 |
Total operating expense | 4,980 | 4,955 | 15,212 | 19,046 |
Loss from operations | (4,976) | (4,948) | (15,162) | (19,018) |
Interest and other income, net | 20 | 14 | 75 | 34 |
Loss before taxes | (4,956) | (4,934) | (15,087) | (18,984) |
Income tax benefit (expense) | 0 | 0 | 393 | (5) |
Net loss | $ (4,956) | $ (4,934) | $ (14,694) | $ (18,989) |
Basic and diluted loss per share (in dollars per share) | $ (0.07) | $ (0.08) | $ (0.22) | $ (0.31) |
Weighted average shares outstanding basic and diluted (in shares) | 68,943 | 63,385 | 68,278 | 61,691 |
Equity, Warrants (Details) - Warrants [Member] |
9 Months Ended |
---|---|
Sep. 30, 2019
$ / shares
shares
| |
Information about warrants outstanding [Abstract] | |
Exercisable, beginning of period (in shares) | 25,000 |
Became exercisable (in shares) | 0 |
Exercised (in shares) | 0 |
Terminated/cancelled/expired (in shares) | 0 |
Exercisable, end of period (in shares) | 25,000 |
Advisor Warrants [Member] | |
Information about warrants outstanding [Abstract] | |
Original number of warrants issued (in shares) | 25,000 |
Exercise price per common share (in dollars per share) | $ / shares | $ 7.00 |
Exercisable, beginning of period (in shares) | 25,000 |
Became exercisable (in shares) | 0 |
Exercised (in shares) | 0 |
Terminated/cancelled/expired (in shares) | 0 |
Exercisable, end of period (in shares) | 25,000 |
Expiration date | Apr. 30, 2020 |
Income Taxes (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | |||
---|---|---|---|---|---|
Sep. 30, 2019 |
Sep. 30, 2018 |
Sep. 30, 2019 |
Sep. 30, 2018 |
Dec. 31, 2018 |
|
Income Taxes [Abstract] | |||||
Income tax (benefit) expense | $ 0 | $ 0 | $ (393) | $ 5 | |
Valuation allowance carried against net deferred tax assets | 37,000 | 37,000 | $ 36,000 | ||
Federal [Member] | |||||
Income Taxes [Abstract] | |||||
Net operating loss carryforwards | 127,000 | $ 127,000 | |||
Federal [Member] | Earliest Tax Year [Member] | |||||
Income Taxes [Abstract] | |||||
Operating loss carryforwards, expiration dates | Dec. 31, 2027 | ||||
State [Member] | |||||
Income Taxes [Abstract] | |||||
Net operating loss carryforwards | $ 108,000 | $ 108,000 | |||
State [Member] | Earliest Tax Year [Member] | |||||
Income Taxes [Abstract] | |||||
Operating loss carryforwards, expiration dates | Dec. 31, 2028 |
Subsequent Events |
9 Months Ended |
---|---|
Sep. 30, 2019 | |
Subsequent Events [Abstract] | |
Subsequent Events | 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. |
Stock-Based Compensation |
9 Months Ended |
---|---|
Sep. 30, 2019 | |
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 “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. |
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