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Share Name | Share Symbol | Market | Type |
---|---|---|---|
VirnetX Holding Corp | AMEX:VHC | AMEX | Common Stock |
Price Change | % Change | Share Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 5.19 | 0 | 01:00:00 |
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o |
TRANSITION REPORT PURSUANT TO SECTION 13 Or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
Delaware
|
|
77-0390628
|
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification Number)
|
|
|
|
308 Dorla Court, Suite 206
|
|
|
Zephyr Cove, Nevada
|
|
89448
|
(Address of principal executive offices)
|
|
(Zip Code)
|
Title of Class
|
|
Name of Exchange on Which Registered
|
Common Stock, par value $0.0001 per share
|
|
NYSE MKT LLC
|
Large accelerated filer
x
|
Accelerated filer
o
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Non-accelerated filer
o
|
Smaller reporting company
o
|
|
|
Page
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PART I
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||
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Item 1.
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5
|
|
Item 1A.
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15
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Item 1B.
|
22
|
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Item 2.
|
22
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Item 3.
|
22
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Item 4.
|
23
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|
|
|
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PART II
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||
|
|
|
Item 5.
|
24
|
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Item 6.
|
26
|
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Item 7.
|
27
|
|
Item 7A.
|
35
|
|
Item 8.
|
36
|
|
Item 9.
|
58
|
|
Item 9A.
|
58
|
|
Item 9B.
|
58
|
|
|
|
|
PART III
|
||
|
|
|
Item 10.
|
59
|
|
Item 11.
|
59
|
|
Item 12.
|
59
|
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Item 13.
|
59
|
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Item 14.
|
59
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|
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PART IV
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||
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Item 15.
|
60
|
● | THE DESCIPTION OF OUR BUSINESS INCLUDES A STATEMENT THAT WE INTEND TO MARKET OUR GABRIEL CONNECTION TECHNOLOGY™. AN IMPLICATION OF THIS STATEMENT MAY BE THAT WE WILL BE ABLE TO SUCCESSFULLY MARKET THIS TECHNOLOGY AND THAT IT WILL GENERATE REVENUE IN THE FUTURE. IN FACT, THERE ARE MANY FACTORS WHICH WILL IMPACT THE SUCCESS OF THIS TECHNOLOGY FOR US, INCLUDING SEVERAL FACTORS WHICH ARE BEYOND OUR CONTROL, SUCH AS THE DEMAND FOR THIS TECHNOLOGY BY POTENTIAL CUSTOMERS AND THE LEVEL OF COMPETITION IN OUR BUSINESS. |
● | THE DESCRIPTION OF OUR BUSINESS INCLUDES STATEMENTS RELATING TO OUR INTENT TO ESTABLISH A SECURE DOMAIN NAME REGISTRY IN THE U.S. AND OTHER PARTS OF THE WORLD AND THAT WE ARE CONSIDERING MAKING APPLICATIONS TO BECOME ACCREDITED TO DO SO UNDER AUTHORITY OF THE U.S. GOVERNMENT. THE IMPLICATION OF THOSE STATEMENTS MAY BE THAT WE WILL BE ABLE TO ESTABLISH A REGISTRY THAT WILL HAVE MARKET ACCEPTANCE AND THAT IT WILL GENERATE REVENUE FOR US IN THE FUTURE. THERE ARE MANY FACTORS WHICH WILL IMPACT OUR ABILITY TO SUCCESSFULLY ESTABLISH A DOMAIN NAME REGISTRY, INCLUDING SEVERAL FACTORS WHICH ARE BEYOND OUR CONTROL, SUCH AS THE ACCREDITATION APPLICATION PROCESS OR THE ACCEPTANCE OF OUR REGISTRY OVER OTHERS IN THE MARKET, PARTICULARLY IF WE DETERMINE TO ESTABLISH A REGISTRY WITHOUT ACCREDITATION. |
● | THE STATEMENTS THAT WE HAVE SUBMITTED A LICENSING DECLARATION TO THE 3RD GENERATION PARTNERSHIP, OR 3GPP, UPDATED SUCH DECLARATIONS AT THE REQUEST OF THE EUROPEAN TELECOMMUNICATIONS STANDARDS INSTITUTE, OR ETSI, AND THE ALLIANCE FOR TELECOMMUNICATIONS INDUSTRY SOLUTIONS, OR ATIS, AND THAT WE BELIEVE WE ARE POSITIONED TO LICENSE OUR PATENTS TO 3GPP MEMBERS DESIRING TO IMPLEMENT THE TECHNICAL SPECIFICATIONS IDENTIFIED BY US, MAY IMPLY THAT THE PATENTS WE HAVE IDENTIFIED TO 3GPP WILL GENERATE LICENSING REVENUE FOR US IN THE FUTURE. WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN LICENSING OUR PATENTS OR THAT THIRD PARTIES WILL BE WILLING TO ENTER INTO LICENSES WITH US ON REASONABLE TERMS OR AT ALL. |
● |
OUR STATEMENT THAT WE BELIEVE WE HAVE THE FINANCIAL AND OTHER RESOURCES TO COMPLETE OUR BUSINESS PLAN MAY IMPLY THAT OUR RESOURCES WILL BE SUFFICIENT TO COMPLETE THAT PLAN SUCCESSFULLY. HOWEVER, WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS PLAN FOR MANY REASONS, INCLUDING MANY REASONS THAT ARE BEYOND OUR CONTROL, SUCH AS THE POSSIBILITY THAT OUR FINANCIAL RESOURCES BECOME EXHAUSTED DUE TO INCREASED COSTS ASSOCIATED WITH OUR ATTEMPTS TO COMPETE WITH OTHERS WHO MAY HAVE GREATER RESOURCES, OR DUE TO OUR OTHER ACTIVITIES, INCLUDING OUR LITIGATION ACTIVITIES.
|
● | STATEMENTS DESCRIBING OUR CONTINUED LITIGATION EFFORTS MAY IMPLY THAT WE WILL PREVAIL IN SOME OR ALL OF OUR LITIGATION. HOWEVER, WE CANNOT ASSURE YOU WE WILL PREVAIL IN OUR PENDING LITIGATION MATTERS AND ANY ADVERSE RULING MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. ALSO, THE LEGAL AND OTHER COSTS WE MAY INCUR IN CONNECTION WITH LITIGATION MATTERS WILL DEPEND, IN PART, UPON ACTIONS TAKEN BY OTHER PARTIES, WHICH ACTIONS ARE NOT WITHIN OUR CONTROL AND THESE COSTS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. |
● | OUR REFERENCES TO THE FACTS THAT OUR CORE DEVELOPMENT TEAM HAS SPENT OVER TEN YEARS WORKING TOGETHER, AND HAS HAD PRIOR SUCCESS AT LEIDOS, INC. MAY IMPLY THAT OUR TEAM WILL BE SUCCESSFUL IN THE FUTURE. HOWEVER, THIS TEAM MAY NOT BE SUCCESSFUL FOR MANY REASONS, INCLUDING MANY REASONS THAT ARE BEYOND OUR CONTROL, SUCH AS THE POSSIBILITY THAT ONE OR MORE KEY MEMBERS OF THE TEAM BECOMES INCAPACITATED, OR THAT COMPETITORS ARE SUCCESSFUL IN DEVELOPING SUPERIOR PRODUCTS. |
● | OUR STATEMENT WITH RESPECT TO OUR INTENT TO MARKET AND SELL LICENSE AND SERVICES TO OTHERS MAY IMPLY THAT OUR PLANS TO DO SO ARE IMMINENT OR WILL BE SUCCESSFUL. HOWEVER, MARKETING AND SELLING OUR PRODUCT AND SERVICES WHILE SIMULTANEOUSLY PURSUING OUR LITIGATION AND OUR FURTHER DEVELOPMENT ACTIVITIES CAN PRESENT SIGNIFICANT CHALLENGES. OUR MARKETING AND SALES PLANS MAY TAKE LONGER TO IMPLEMENT THAN WE NOW EXPECT, MAY NOT BE IMPLEMENTED, OR MAY FAIL. |
● | THE IMPACT OF CHANGES IN THE U.S. AND GLOBAL ECONOMIES IN GENERAL AND THE CAPITAL MARKETS ON US AND OUR INTENDED CUSTOMERS; |
● | COMPLIANCE WITH, AND CHANGES TO, U.S. FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS, FOREIGN LAWS AND REGULATIONS, ACCOUNTING RULES, TAX RATES AND SIMILAR MATTERS; AND |
● | COMPETITION WITHIN OUR INDUSTRY. |
● | Automatic and seamless to the user . After a one-time registration, users connect securely on a “zero-click” or “single-click” basis. |
● | Secure data communications . Users create secure networks with people they trust and communicate over a secure channel. |
● | Control of data at all times . Users can secure and customize their unified communication and collaboration applications such as file sharing and remote desktop with policy-based access and secure presence information. |
● | Authenticated users . Users know they are communicating with authenticated users with secure domain names. |
● | Application-agnostic technology . Our solution provides security at the IP layer of the network by using patented DNS lookup mechanisms to make connections between secure domain names, thereby obviating the need to provide application specific security. |
● | Unique patented technology . We are focused on developing innovative technology for securing real-time communications over the Internet, and establishing the exclusive secure domain name registry in the United States and other key markets around the world. Our unique solutions combine industry standard encryption methods and communication protocols with our patented techniques for automated DNS lookup mechanisms. Our technology and patented approach enables users to create a secure communication link by generating secure domain names. We have a portfolio comprised of over 80 U.S. and international patents with over 100 pending applications. Our portfolio includes patents and pending patent applications in the United States and other key markets that support our secure domain name registry service for the Internet. |
● | Scalable licensing business model . We are actively engaged in pursuing additional licensing agreements with OEMs, service providers and system integrators within the IP-telephony, mobility, mobile-to-mobile communications, fixed-mobile convergence and unified communications end-markets. |
● | Highly experienced research and development team . Our research and development team is comprised of nationally recognized network security and encryption technology scientists and experts that have worked together as a team for over ten years. During their careers, this team has developed several cutting-edge technologies for U.S. national defense, intelligence and civilian agencies, many of which remain critical to our national security today. Prior to joining VirnetX, our team worked for Leidos, Inc. during which time they invented the technology that is the foundation of our technology, and software. Based on the collective knowledge and experience of our development team, we believe that we have one of the most experienced and sophisticated groups of security experts researching vulnerability and threats to real-time communication over the Internet and developing solutions to mitigate these problems. |
● | Implement a technology licensing program to commercialize our intellectual property, including our GABRIEL Connection Technology™. |
● | Establish VirnetX as the exclusive universal registry of secure domain names and to enable our customers to act as registrars for their users and broker secure communication between users on different registries. |
● | Leverage our existing technology to develop a suite of products that can be sold directly to end-user enterprises. |
● | VirnetX technology licensing : Customers who want to develop their own implementation of the VirnetX code module for supporting secure domain names, or who want to use their own techniques that are covered by our patent portfolio for establishing secure communication links, will purchase a technology license. We anticipate that these licenses would typically include an initial license fee, as well as an ongoing royalty. We expect that these licenses will include a one-time delivery of GABRIEL software development kit including object libraries, sample code, testing and quality assurance tools and the supporting documentation necessary for a customer to implement of the techniques we have developed. |
● | GABRIEL Connection Technology™ Software Development Kit or SDK : OEM customers who want to adopt the GABRIEL Connection Technology™ as their solution for establishing secure connections using secure domain names within their products will purchase an SDK license. The software development kit consists of object libraries, sample code, testing and quality assurance tools and the supporting documentation necessary for a customer to implement our technology. These tools are comprised of software for a secure domain name connection test server, a relay test server and a registration test server. We expect that customers would pay an up-front license fee to purchase an SDK license and a royalty fee for every product shipped with the embedded VirnetX code module. |
● | Secure domain name registrar service : Customers, including service providers, telecommunication companies, ISPs, system integrators and OEMs could purchase a license to our secure domain name registrar service. We would provide the software suite and technology support to enable such customers to provision devices with secure domain names and facilitate secure connections between registered devices. This suite includes the following server software modules: |
● | Registrar server software : We anticipate that our registrar server software would enable customers to operate as a secure domain name registrar that provisions devices with secure domain names. The registrar server software is designed to provide an interface for our customers to register new virtual private domains and sub-domain names. This server module must be enrolled with the VirnetX secure domain name master registry to obtain its credentials before functioning as an authorized registrar. |
● | Connection server software : We anticipate that our connection server software would allow customers to provide connection services to enrolled devices. The connection services include registration of presence information for authenticated users and devices, presence information query request services, enforcement of policies and support for communication with peers behind firewalls. |
● | Relay server software : We anticipate that our relay server software would allow customers to dynamically maintain connections and relay data to private IP addresses for network devices that reside behind firewalls. Secure domain name registrar service customers will enter into a technology licensing and revenue sharing agreement with VirnetX whereby we will typically receive an up-front licensing fee for the secure domain name registrar technology, as well as ongoing annual royalties for each secure domain name issued by the customer. |
● | Secure domain name master registry and connection service : As part of enabling the secure domain name registrar service, we expect that we will maintain and manage the secure domain name master registry. This service is expected to enroll all secure domain name registrar customers and generate the credentials required to function as an authorized registrar. It also is expected to provide connection services and universal name resolution, presence information and secure connections between authorized devices with secure domain names. |
● | Technical support services : We intend to provide high-quality technical support services to licensees and customers for the rapid customization and deployment of GABRIEL Connection Technology™ in an individual customer’s products and services. |
● | Proprietary or home-grown application specific security solutions have been developed by vendors and integrated directly into their products for our target markets including IP-telephony, mobility, fixed-mobile convergence, and unified communications. These proprietary solutions have been developed due to the lack of standardized approaches to securing real-time communications. This approach has led to corporate networks that are isolated and, as a result, restrict enterprises to using these next-generation networks within the boundaries of their private network. These solutions generally do not provide security for communications over the Internet or require network administrators to manually exchange keys and other security parameters with each destination network outside their corporate network boundary. The cost-savings and other benefits of IP-based real-time communications are significantly limited by this approach to securing real-time communications. |
● | A session border controller, or SBC, is a device used in networks to exert control over the signaling and media streams involved in establishing, conducting and terminating VoIP calls. A traditional firewall or network address translation, or NAT, device typically block information like endpoint IP addresses and port numbers required by signaling protocols, such as SIP and XMPP, to reach and communicate with their intended destination. SBCs are used in physical networks to address these limitations and enable real-time session traffic to cross the boundaries created by firewalls and other NAT devices and enable VoIP calls to be established successfully. However, SBCs must decrypt and analyze every single data packet for the information to be transmitted successfully, thereby preventing end-to-end encryption. This network design results in SBCs becoming a single point of congestion on the network, as well as a single point of failure. SBCs are also limited to the physical network they secure. |
● | SIP firewalls, or SIP-aware firewalls, and application layer gateways, manage and protect the traffic, flow and quality of VoIP and other SIP-related communications. They perform real-time network address translation, dynamic firewall functions; support multiple signaling protocols, and media functionality, allowing secure interconnection and the flow of IP media streams across multiple networks. While SIP firewalls assist in analyzing SIP traffic transmitted over the corporate network to filter out various threats, they do not necessarily encrypt the traffic. As a result, this traffic is not entirely secure from end-to-end nor is it protected against threats like man-in-middle and eavesdropping. |
· | Although we have to date entered into a limited number of settlement and license agreements, we may not be successful in entering into further licensing relationships and existing settlement and license agreements may not generate the financial results we expect; |
· | 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 expect that we will face intense competition 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, court and agency decisions, or rules related to obtaining patents or enforcing patents could significantly increase our operating costs and decrease our revenue. For instance, the U.S. Supreme Court has recently modified some tests used by the United States Patent and Trademark Office (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 U.S. recently enacted sweeping changes to the United States patent system under the Leahy-Smith America Invents Act (“AIA”), 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. |
· | The need to educate potential customers about our patent rights and our product and service capabilities; |
· | Customers’ willingness to invest potentially substantial resources and modify their network infrastructures to take advantage of our products; |
· | Customers’ budgetary constraints; |
· | The timing of customers’ budget cycles; and |
· | Delays caused by customers’ internal review processes. |
· | power loss, transmission cable cuts and other telecommunications failures; |
· | damage or interruption caused by fire, earthquake, and other natural disasters |
· | computer viruses or software defects; and |
· | physical or electronic break-ins, sabotage, intentional acts of vandalism, terrorist attacks and other events beyond our control |
● | developments in any then-outstanding litigation; |
● | quarterly variations in our operating results; |
● | large purchases or sales of common stock or derivatives transactions related to our stock; |
● | actual or anticipated announcements of new products or services by us or competitors; |
● | general conditions in the markets in which we compete; and |
● | economic and financial conditions |
· | the outcome of actions to enforce our intellectual property rights currently in progress or that we may undertake in the future, and the timing thereof; |
· | the amount and timing of receipt of license fees from potential infringers, licensees or customers; |
· | the rate of adoption of our patented technologies; |
· | the number of new license arrangements we may execute, or that may expire, within a particular period and the scope of those licenses, including the number of our patents which are licensed, the extent of prior infringement of our patent rights, royalty rates, timing of payment obligations, expiration date etc.; |
· | the success of a licensee in selling products that use our patented technologies; and |
· | the amount and timing of expenses related to our patent filings and enforcement proceedings, including litigation, related to our intellectual property rights |
● | 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 effect a change in control of us because it would take two annual meetings to effectively replace a majority of the Board of Directors. |
● | Blank check preferred stock : Our Board of Directors has the authority to establish the rights, preferences and privileges of our 10,000,000 authorized, but unissued, shares of preferred stock. Therefore, this stock may be issued at the discretion of our Board of Directors with preferences over your shares of our common stock in a manner that is materially dilutive to you. In addition, blank check preferred stock can be used to create a “poison pill” which is designed to deter a hostile bidder from buying a controlling interest in our stock without the approval of our Board of Directors. We have not adopted such a “poison pill;” but our Board of Directors has the ability to do so in the future, very rapidly and without stockholder approval. |
● | Advance notice requirements for director nominations and for new business to be brought up at stockholder meetings : Stockholders wishing to submit director nominations or raise matters to a vote of the stockholders must provide notice to us within very specific date windows and in very specific form in order to have the matter voted on at a stockholder meeting. This has the effect of giving our Board of Directors and management more time to react to stockholder proposals generally and could also have the effect of disregarding a stockholder proposal or deferring it to a subsequent meeting to the extent such proposal is not raised properly. |
● | No stockholder actions by written consent : No stockholder or group of stockholders may take actions rapidly and without prior notice to our Board of Directors and management or to the minority stockholders. Along with the advance notice requirements described above, this provision also gives our Board of Directors and management more time to react to proposed stockholder actions. |
● | Super majority requirement for stockholder amendments to the By-laws : Stockholder proposals to alter or amend our By-laws or to adopt new By-laws can only be approved by the affirmative vote of at least 66 2/3% of the outstanding shares of our common stock. |
● | No ability of stockholders to call a special meeting of the stockholders : Only the Board of Directors or management can call special meetings of the stockholders. This could mean that stockholders, even those who represent a significant percentage of our shares of common stock, may need to wait for the annual meeting before nominating directors or raising other business proposals to be voted on by the stockholders. |
Item 5. | Market for the Registrant’s Common Eq uity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Quarter Ended
|
High
|
Low
|
||||||
3/31/12
|
$
|
27.97
|
$
|
19.13
|
||||
6/30/12
|
$
|
36.25
|
$
|
21.71
|
||||
9/30/12
|
$
|
41.93
|
$
|
21.25
|
||||
12/31/12
|
$
|
37.65
|
$
|
23.41
|
||||
3/31/13
|
$
|
36.84
|
$
|
17.98
|
||||
6/30/13
|
$
|
26.25
|
$
|
16.10
|
||||
9/30/13
|
$
|
22.41
|
$
|
16.70
|
||||
12/31/13
|
$
|
23.20
|
$
|
17.16
|
|
12/08
|
12/09
|
12/10
|
12/11
|
12/12
|
12/13
|
|||||||||||||||||||
|
|||||||||||||||||||||||||
VirnetX Holding Corp
|
100.00
|
198.65
|
1087.70
|
1828.94
|
2144.63
|
1421.70
|
|||||||||||||||||||
S&P 500
|
100.00
|
126.46
|
145.51
|
148.59
|
172.37
|
228.19
|
|||||||||||||||||||
RDG Technology Composite
|
100.00
|
160.94
|
181.64
|
181.83
|
208.18
|
274.77
|
|
For the year ended December 31,
|
|||||||||||||||||||
|
2013
|
2012
|
2011
|
2010
|
2009
|
|||||||||||||||
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|||||||||||||||
Revenue
|
$
|
2,197
|
$
|
412
|
$
|
20
|
$
|
68
|
$
|
26
|
||||||||||
Gain on settlement
|
—
|
—
|
—
|
$
|
200,000
|
—
|
||||||||||||||
Other operating expenses
|
$
|
(30,784
|
)
|
$
|
(39,273
|
) |
$
|
(17,396
|
)
|
$
|
(95,383
|
)
|
$
|
(13,114
|
)
|
|||||
Income tax benefit (expense )
|
$
|
(751
|
)
|
$
|
12,535
|
$
|
5,480
|
$
|
(34,062
|
)
|
—
|
|||||||||
Net (loss) income
|
$ |
(27,608
|
)
|
$
|
(26,924
|
) |
$
|
(17,263
|
)
|
$
|
41,417
|
$
|
(12,524
|
)
|
||||||
Earnings (loss) per share
|
$
|
(0.54
|
)
|
$
|
(0.53
|
) |
$
|
(0.35
|
)
|
$
|
0.91
|
$
|
(0.33
|
)
|
||||||
Dividends declared per common share
|
$
|
0.00
|
$
|
0.00
|
$
|
0.00
|
$
|
0.50
|
$
|
0.00
|
||||||||||
Consolidated Balance Sheet Data:
|
||||||||||||||||||||
Cash and cash equivalents
|
$
|
19,173
|
$
|
19,661
|
$
|
49,482
|
$
|
34,635
|
$
|
2,011
|
||||||||||
Investments available for sale
|
$
|
19,815
|
$
|
26,493
|
$
|
14,438
|
$
|
43,457
|
—
|
|||||||||||
Total assets
|
$
|
39,398
|
$
|
61,313
|
$
|
74,633
|
$
|
81,694
|
$
|
2,242
|
||||||||||
Long-term obligation
|
—
|
—
|
—
|
---
|
$
|
120
|
||||||||||||||
Stockholders’ equity (deficit)
|
$
|
34,024
|
$
|
53,944
|
$
|
68,277
|
$
|
59,453
|
$
|
(8,708
|
)
|
• | Patent License Agreements : Upon signing a patent license agreement, including licenses entered into settlement of litigation, we provide the licensee permission to use our patented technology in specific applications. We account for patent license agreements in accordance with the guidance for revenue recognition for arrangements with multiple deliverables, with amounts allocated to each element based on their fair values. We have elected to utilize the leased-based model for revenue recognition with revenue being recognized over the expected period of benefit to the licensee. Under our patent license agreements, we typically receive one or a combination of the following forms of payment as consideration for permitting our licensees to use our patented inventions in specific applications and products: |
• | Consideration for Past Sales : Consideration related to a licensee’s product sales from prior periods may result from a negotiated agreement with a licensee that utilized our patented technology prior to signing a patent license agreement with us or from the resolution of a litigation, disagreement or arbitration with a licensee over the specific terms of an existing license agreement. We may also receive royalty for past sales in connection with the settlement of patent litigation where there was no prior patent license agreement. These amounts are negotiated, typically based upon application of a royalty rate to historical sales prior to the execution of the license agreement. In each of these cases, since delivery has occurred, we record the consideration as revenue when we have obtained a signed agreement, identified a fixed or determinable price, and determined that collectability is reasonably assured. |
• | Current Royalty Payments : We may also receive ongoing royalty payments covering a licensee’s obligations to us related to its sales of covered products in the current contractual reporting period. Licensees that owe these current royalty payments are obligated to provide us with quarterly or semi-annual royalty reports that summarize their sales of covered products and their related royalty obligations to us. We expect to receive these royalty reports subsequent to the period in which our licensees’ underlying sales occurred. As a result, it is impractical for us to recognize revenue in the period in which the underlying sales occur, and, in most cases, we will recognize revenue in the period in which the royalty report is received and other revenue recognition criteria are met due to the fact that without royalty reports from our licensees, our visibility into our licensees’ sales is limited. |
• | Non-Refundable Prepaid Fees and Minimum Fee Contracts : For contracts which contain non-refundable prepayment or fixed minimum payments over the remaining term of the license, where we have no future obligations or performance requirements, revenue will generally be deferred and recognized over the license term, depending on how and when the revenue recognition process is complete. Revenue for contracts longer than one year may not be recognized in advance of collections as the fee may be considered to be not fixed and determinable. |
• | Non-Royalty Elements : Elements that are not related to royalty revenue in nature, such as settlement fees, expense reimbursement, and damages, if any, are recorded as gain from settlement which is reflected as a separate line item within the operating expenses section in the consolidated statements of operations. |
|
2013
|
2012
|
2011
|
|||||||||
|
|
|
|
|||||||||
Revenue
|
$
|
2,197
|
$
|
412
|
$
|
20
|
|
2013
|
2012
|
2011
|
|||||||||
|
|
|
|
|||||||||
Research and Development
|
$
|
1,782
|
$
|
1,555
|
$
|
1,464
|
|
2013
|
2012
|
2011
|
|||||||||
|
|
|
|
|||||||||
Selling, General and Administration
|
$
|
29,002
|
$
|
37,718
|
$
|
15,932
|
|
2013
|
2012
|
2011
|
|||||||||
|
|
|
|
|||||||||
Other Income and Expense
|
$
|
1,608
|
|
$
|
(927
|
) |
$
|
(5,595
|
) |
|
Total
|
2014
|
2015
|
There after
|
||||||||||||
Contractual obligations
|
$
|
3,750
|
$
|
3,750
|
$
|
—
|
—
|
|||||||||
|
||||||||||||||||
Leases
|
102
|
56
|
46
|
—
|
||||||||||||
Total
|
$
|
3,852
|
$
|
3,806
|
$
|
46
|
—
|
|
Page
|
Report of Farber Hass Hurley LLP, Independent Registered Public Accounting Firm
|
37
|
Consolidated Balance Sheets of VirnetX Holding Corporation as of December 31, 2013 and December 31, 2012
|
38
|
Consolidated Statements of Operations of VirnetX Holding Corporation for the years ended December 31, 2013, December 31, 2012 and December 31, 2011
|
39
|
Consolidated Statements of Comprehensive Loss of VirnetX Holding Corporation for the years ended December 31, 2013, December 31, 2012 and December 31, 2011
|
39
|
Consolidated Statements of Stockholders’ Equity of VirnetX Holding Corporation for the years ended December 31, 2013, December 31, 2012 and December 31, 2011
|
40
|
Consolidated Statements of Cash Flows of VirnetX Holding Corporation for the years ended December 31, 2013, December 31, 2012 and December 31, 2011
|
41
|
Notes to Financial Statements of VirnetX Holding Corporation
|
42
|
|
/s/
Farber Hass Hurley LLP
|
|
|
Chatsworth, California
|
|
March 3, 2014
|
|
|
As of December 31,
2013
|
As of December 31,
2012
|
||||||
ASSETS
|
|
|
||||||
Current assets:
|
|
|
||||||
Cash and cash equivalents
|
$
|
19,173
|
$
|
19,661
|
||||
Investments available for sale
|
19,815
|
26,493
|
||||||
Prepaid taxes
|
—
|
14,963
|
||||||
Prepaid expenses and other current assets
|
357
|
114
|
||||||
Total current assets
|
39,345
|
61,231
|
||||||
Property and equipment, net
|
53
|
70
|
||||||
Intangible and other assets
|
—
|
12
|
||||||
Total assets
|
$
|
39,398
|
$
|
61,313
|
||||
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
Current liabilities:
|
||||||||
Accounts payable and accrued liabilities
|
$
|
1,748
|
$
|
3,197
|
||||
Income tax liability
|
395
|
—
|
||||||
Deferred revenue
|
667
|
—
|
||||||
Derivative liability
|
2,564
|
4,172
|
||||||
Total current liabilities
|
5,374
|
7,369
|
||||||
Commitments and contingencies |
—
|
—
|
||||||
Stockholders' equity:
|
||||||||
Preferred stock, par value $0.0001 per share
|
||||||||
Authorized: 10,000,000 shares at December 31, 2013 and 2012,
|
||||||||
Issued and outstanding: 0 shares at December 31, 2013 and 2012
|
—
|
—
|
||||||
Common stock, par value $0.0001 per share
|
||||||||
Authorized: 100,000,000 shares at December 31, 2013 and 2012, Issued and outstanding: 51,236,141 shares and 51,150,242 shares, at December 31, 2013 and 2012, respectively
|
5
|
5
|
||||||
Additional paid-in capital
|
124,589
|
116,856
|
||||||
Accumulated deficit
|
(90,533
|
)
|
(62,925
|
)
|
||||
Accumulated other comprehensive income (loss)
|
(37
|
)
|
8
|
|||||
Total stockholders' equity
|
34,024
|
53,944
|
||||||
Total liabilities and stockholders' equity
|
$
|
39,398
|
$
|
61,313
|
|
Year Ended
December 31,
2013
|
Year Ended
December 31,
2012
|
Year Ended
December 31,
2011
|
|||||||||
Revenue
|
$
|
2,197
|
$
|
412
|
$
|
20
|
||||||
Operating expenses:
|
||||||||||||
Research and development
|
1,782
|
1,555
|
1,464
|
|||||||||
General, selling and administrative
|
29,002
|
37,718
|
15,932
|
|||||||||
Total operating expenses
|
30,784
|
39,273
|
17,396
|
|||||||||
Loss from operations
|
(28,587
|
)
|
(38,861
|
)
|
(17,376
|
)
|
||||||
Gain (loss) on change in value of embedded derivative and warrants
|
1,608
|
(927
|
)
|
(5,595
|
)
|
|||||||
Interest income, net
|
122
|
329
|
228
|
|||||||||
Loss before taxes
|
(26,857
|
)
|
(39,459
|
)
|
(22,743
|
)
|
||||||
Income tax (expense) benefit
|
(751
|
)
|
12,535
|
5,480
|
||||||||
Net loss
|
$
|
(27,608
|
)
|
$
|
(26,924
|
)
|
$
|
(17,263
|
)
|
|||
Basic and diluted loss per share:
|
$
|
(0.54
|
)
|
$
|
(0.53
|
)
|
$
|
(0.35
|
)
|
|||
Weighted average shares outstanding basic and diluted
|
51,188,006
|
50,934,266
|
50,028,413
|
|
Year Ended
December 31,
2013
|
Year Ended
December 31,
2012
|
Year Ended
December 31,
2011
|
|||||||||
Net loss
|
$
|
(27,608
|
)
|
$
|
(26,924
|
)
|
$
|
(17,263
|
)
|
|||
Other comprehensive income (loss), net of tax:
|
||||||||||||
Change in equity adjustment from foreign currency translation, net of tax
|
(12
|
)
|
—
|
—
|
||||||||
Change in unrealized gain (loss) on investments, net of tax
|
(33
|
)
|
12
|
(3
|
)
|
|||||||
Total other comprehensive income (loss), net of tax
|
(45
|
)
|
12
|
(3
|
)
|
|||||||
Comprehensive loss
|
$
|
(27,653
|
)
|
$
|
(26,912
|
)
|
$
|
(17,266
|
)
|
|
|
|
|
|
Other
|
Total
|
||||||||||||||||||
|
|
|
Additional
|
|
Comprehensive
|
Stockholders'
|
||||||||||||||||||
|
Common Stock
|
Paid-in
|
Accumulated
|
Income
|
Equity
|
|||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
(Expense)
|
(Deficit)
|
||||||||||||||||||
Balance at December 31, 2010
|
49,341,028
|
$
|
5
|
$
|
78,187
|
$
|
(17,755
|
)
|
$
|
(984
|
)
|
$
|
59,453
|
|||||||||||
|
||||||||||||||||||||||||
Stock issued for cash exercise of warrants at $3.93-3.59 per share, net
|
855,536
|
3,063
|
3,063
|
|||||||||||||||||||||
Stock-based compensation
|
4,368
|
4,368
|
||||||||||||||||||||||
Deferred tax benefit related to stock based compensation
|
2,331
|
2,331
|
||||||||||||||||||||||
Derivative liability
|
15,260
|
15,260
|
||||||||||||||||||||||
Cashless exercise of $4.80 underwriter warrants
|
24,178
|
--
|
||||||||||||||||||||||
Exercise of options
|
398,394
|
1,068
|
1,068
|
|||||||||||||||||||||
Comprehensive income:
|
||||||||||||||||||||||||
Reclassification adjustment for net loss included in net income
|
(983
|
)
|
983
|
--
|
||||||||||||||||||||
Net loss
|
(17,263
|
)
|
(17,263
|
)
|
||||||||||||||||||||
Other comprehensive income net of tax
|
(3
|
)
|
(3
|
)
|
||||||||||||||||||||
Comprehensive loss
|
(17,266
|
)
|
||||||||||||||||||||||
Balance at December 31, 2011
|
50,619,136
|
5
|
104,277
|
(36,001
|
)
|
(4
|
)
|
68,277
|
||||||||||||||||
|
||||||||||||||||||||||||
Stock issued for cash exercise of warrants at $3.93-3.59 per share, net
|
44,941
|
161
|
161
|
|||||||||||||||||||||
Stock-based compensation
|
6,162
|
6,162
|
||||||||||||||||||||||
Deferred tax benefit related to stock based compensation
|
3,111
|
3,111
|
||||||||||||||||||||||
Derivative liability
|
1,454
|
1,454
|
||||||||||||||||||||||
Exercise of options
|
486,165
|
1,691
|
1,691
|
|||||||||||||||||||||
Comprehensive income:
|
||||||||||||||||||||||||
Net loss
|
(26,924
|
)
|
(26,924
|
)
|
||||||||||||||||||||
Other comprehensive income net of tax
|
12
|
12
|
||||||||||||||||||||||
Comprehensive loss
|
(26,912
|
)
|
||||||||||||||||||||||
Balance at December 31, 2012
|
51,150,242
|
5
|
116,856
|
(62,925
|
)
|
8
|
53,944
|
|||||||||||||||||
Stock-based compensation
|
7,563
|
7,563
|
||||||||||||||||||||||
Exercise of options
|
39,833
|
170
|
170
|
|||||||||||||||||||||
Vested RSU's
|
46,066
|
|||||||||||||||||||||||
Comprehensive income:
|
||||||||||||||||||||||||
Net loss
|
(27,608
|
)
|
(27,608
|
)
|
||||||||||||||||||||
Other comprehensive income net of tax
|
(45
|
)
|
(45
|
)
|
||||||||||||||||||||
Comprehensive loss
|
(27,653 | ) | ||||||||||||||||||||||
Balance at December 31, 2013
|
51,236,141
|
$
|
5
|
$
|
124,589
|
$
|
(90,533
|
)
|
$
|
(37
|
)
|
$
|
34,024
|
|
Year Ended
December 31,
2013
|
Year Ended
December 31,
2012
|
Year Ended
December 31,
2011
|
|||||||||
Cash flows from operating activities:
|
|
|
|
|||||||||
Net (loss)
|
$
|
(27,608
|
)
|
$
|
(26,924
|
)
|
$
|
(17,263
|
)
|
|||
Adjustments to reconcile net (loss) to net cash used in operating activities:
|
||||||||||||
Depreciation and amortization
|
36
|
71
|
68
|
|||||||||
Stock-based compensation
|
7,563
|
6,162
|
4,367
|
|||||||||
Net change in deferred taxes
|
—
|
3,158
|
5,663
|
|||||||||
Change in value of derivative liability
|
(1,608
|
)
|
927
|
5,595
|
||||||||
Changes in assets and liabilities:
|
||||||||||||
Prepaid expenses and other current assets
|
(243
|
)
|
(23
|
)
|
(3
|
)
|
||||||
Prepaid taxes
|
14,963
|
(4,934
|
)
|
(10,459
|
)
|
|||||||
Deferred revenue
|
667
|
—
|
—
|
|||||||||
Accounts payable and accrued liabilities
|
(1,449
|
)
|
1,970
|
708
|
||||||||
Income tax liability
|
395
|
—
|
(6,928
|
)
|
||||||||
Net cash used in operating activities
|
(7,284
|
)
|
(19,593
|
)
|
(18,252
|
)
|
||||||
Cash flows from investing activities:
|
||||||||||||
Purchase of property and equipment
|
(7
|
)
|
(37
|
)
|
(51
|
)
|
||||||
Purchase of investments
|
(92,729
|
)
|
(59,342
|
)
|
(34,082
|
)
|
||||||
Proceeds from sale, maturity of investments
|
99,362
|
47,299
|
63,101
|
|||||||||
Net cash provided by (used in) investing activities
|
6,626
|
(12,080
|
)
|
28,968
|
|
|||||||
Cash flows from financing activities:
|
||||||||||||
Proceeds from exercise of options
|
170
|
1,691
|
1,068
|
|||||||||
Proceeds from exercise of warrants
|
—
|
161
|
3,063
|
|||||||||
Net cash provided by financing activities
|
170
|
1,852
|
4,131
|
|||||||||
Net increase (decrease) in cash and cash equivalents
|
(488
|
)
|
(29,821
|
)
|
14,847
|
|||||||
Cash and cash equivalents, beginning of year
|
19,661
|
49,482
|
34,635
|
|||||||||
Cash and cash equivalents, end of year
|
$
|
19,173
|
$
|
19,661
|
$
|
49,482
|
||||||
Supplemental disclosure of cash flow information:
|
||||||||||||
Cash paid during the year for taxes
|
$
|
—
|
$
|
—
|
$
|
9,600
|
||||||
Cash paid during the year for interest
|
$
|
—
|
$
|
—
|
$
|
—
|
· | Consideration for Past Sales : Consideration related to a licensee’s product sales from prior periods may result from a negotiated agreement with a licensee that utilized our patented technology prior to signing a patent license agreement with us or from the resolution of a litigation, disagreement or arbitration with a licensee over the specific terms of an existing license agreement. We may also receive royalty for past sales in connection with the settlement of patent litigation where there was no prior patent license agreement. These amounts are negotiated, typically based upon application of a royalty rate to historical sales prior to the execution of the license agreement. In each of these cases, since delivery has occurred, we record the consideration as revenue when we have obtained a signed agreement, identified a fixed or determinable price, and determined that collectability is reasonably assured. |
· | Current Royalty Payments : We may also receive ongoing royalty payments covering a licensee’s obligations to us related to its sales of covered products in the current contractual reporting period. Licensees that owe these current royalty payments are obligated to provide us with quarterly or semi-annual royalty reports that summarize their sales of covered products and their related royalty obligations to us. We expect to receive these royalty reports subsequent to the period in which our licensees’ underlying sales occurred. As a result, it is impractical for us to recognize revenue in the period in which the underlying sales occur, and, in most cases, we will recognize revenue in the period in which the royalty report is received and other revenue recognition criteria are met due to the fact that without royalty reports from our licensees, our visibility into our licensees’ sales is limited. |
· | Non-Refundable Prepaid Fees and Minimum Fee Contracts : For contracts which contain non-refundable prepayment or fixed minimum payments over the remaining term of the license, where we have no future obligations or performance requirements, revenue will generally be deferred and recognized over the license term, depending on how and when the revenue recognition process is complete. Revenue for contracts longer than one year may not be recognized in advance of collections as the fee may be considered to be not fixed and determinable. |
· | Non-Royalty Elements : Elements that are not related to royalty revenue in nature, such as settlement fees, expense reimbursement, and damages, if any, are recorded as gain from settlement which is reflected as a separate line item within the operating expenses section in the consolidated statements of operations. |
|
December 31
|
|||||||||||
|
2013
|
2012
|
2011
|
|||||||||
Office furniture
|
$
|
70
|
$
|
70
|
$
|
57
|
||||||
Computer equipment
|
121
|
115
|
91
|
|||||||||
Total
|
191
|
185
|
148
|
|||||||||
Less accumulated depreciation
|
(138
|
)
|
(115
|
)
|
(92
|
)
|
||||||
|
$
|
53
|
$
|
70
|
$
|
56
|
|
Total
|
2014
|
2015
|
Thereafter
|
||||||||||||
Contractual obligations
|
$
|
3,750
|
$
|
3,750
|
$
|
—
|
—
|
|||||||||
|
||||||||||||||||
Leases
|
102
|
56
|
46
|
—
|
||||||||||||
Total
|
$
|
3,852
|
$
|
3,806
|
$
|
46
|
—
|
Options Outstanding
|
Options Vested and Exercisable
|
||||||||||||||||||||||||||||
Date of
Option Issue
|
Range of
Exercise Prices
|
Number
Outstanding
|
Weighted
Average
Remaining
Contractual Life (Years)
|
Weighted Average
Exercise Price
|
Number
Exercisable
|
Weighted
Average
Remaining
Contractual Life (Years)
|
Weighted
Average
Exercise
Price
|
||||||||||||||||||||||
2006
|
$
|
0.24
|
690,612
|
2.22
|
$
|
0.24
|
690,612
|
2.22
|
$
|
0.24
|
|||||||||||||||||||
2007
|
$
|
4.20
|
1,277,574
|
3.56
|
4.20
|
1,277,574
|
3.56
|
4.20
|
|||||||||||||||||||||
2007
|
$
|
5.88-6.47
|
563,931
|
3.99
|
5.88
|
563,931
|
3.99
|
5.88
|
|||||||||||||||||||||
2008
|
$
|
1.74-6.20
|
169,500
|
4.37
|
5.13
|
169,500
|
4.37
|
5.13
|
|||||||||||||||||||||
2009
|
$
|
1.15- 1.58
|
933,211
|
5.26
|
1.16
|
933,211
|
5.26
|
1.16
|
|||||||||||||||||||||
2010
|
$
|
5.48-6.03
|
279,896
|
6.17
|
5.49
|
268,440
|
6.17
|
5.49
|
|||||||||||||||||||||
2011
|
$
|
19.85-23.62
|
425,000
|
7.37
|
23.62
|
290,416
|
7.37
|
23.62
|
|||||||||||||||||||||
2012
|
$
|
23.84 – 35.25
|
362,500
|
8.39
|
27.00
|
164,166
|
8.35
|
27.16
|
|||||||||||||||||||||
2013
|
$
|
23.72 – 35.05
|
274,625
|
9.37
|
25.37
|
52,561
|
9.36
|
25.70
|
|||||||||||||||||||||
|
4,976,849
|
4.91
|
$
|
7.86
|
4,410,411
|
4.45
|
$
|
5.66
|
|
|
RSU's Outstanding
|
|||||||||||
Grant Date
|
Range of
Grant Prices
|
Number
Outstanding
|
Weighted Average
Grant Price
|
|||||||||
2012
|
$
|
24.75 – 29.90
|
92,500
|
$
|
24.75
|
|||||||
2013
|
$
|
23.72
|
156,415
|
23.72
|
||||||||
|
248,915
|
$
|
24.10
|
Options | ||||||||||||||||
|
Number of
Shares
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual
Life (Years)
|
Aggregate Intrinsic
Value
|
||||||||||||
Outstanding at December 31, 2010
|
4,830,391
|
$
|
3.14
|
—
|
—
|
|||||||||||
Options granted
|
475,000
|
23.80
|
—
|
—
|
||||||||||||
Options exercised
|
(398,393
|
)
|
2.68
|
—
|
—
|
|||||||||||
Options cancelled
|
—
|
—
|
—
|
—
|
||||||||||||
Outstanding at December 31, 2011
|
4,906,998
|
5.12
|
—
|
—
|
||||||||||||
Options granted
|
367,500
|
26.97
|
—
|
—
|
||||||||||||
Options exercised
|
(486,165
|
)
|
3.48
|
—
|
—
|
|||||||||||
Options cancelled
|
(12,109
|
)
|
17.34
|
—
|
—
|
|||||||||||
Outstanding at December 31, 2012
|
4,776,224
|
6.94
|
—
|
—
|
||||||||||||
Options granted
|
274,625
|
25.37
|
—
|
—
|
||||||||||||
Options exercised
|
(39,833
|
)
|
4.27
|
—
|
—
|
|||||||||||
Options cancelled
|
(34,167
|
)
|
20.57
|
—
|
—
|
|||||||||||
Outstanding at December 31, 2013
|
4,976,849
|
$
|
7.86
|
4.91
|
$
|
63,649
|
RSU's | ||||||||||||
|
Number of
RSU's
|
Weighted Average
Grant Date
Fair Value
|
Aggregate Intrinsic
Value
|
|||||||||
Outstanding at December 31, 2011
|
—
|
—
|
—
|
|||||||||
RSU's granted |
151,665
|
25.60
|
—
|
|||||||||
Outstanding at December 31, 2012
|
151,665
|
$
|
25.60
|
$
|
—
|
|||||||
RSU's granted
|
156,415
|
23.72
|
—
|
|||||||||
RSU's vested
|
(55,832
|
)
|
27.06
|
—
|
||||||||
RSU's cancelled
|
(3,333
|
)
|
24.75
|
—
|
||||||||
Outstanding at December 31, 2013
|
248,915
|
$
|
24.10
|
$
|
—
|
Stock-Based Compensation by Type of Award
|
Year Ended
December 31, 2013
|
Year Ended
December 31, 2012
|
Year Ended
December 31, 2011
|
|||||||||
Employee stock options
|
$
|
6,488
|
$
|
5,171
|
$
|
4,367
|
||||||
RSU’s
|
1,075
|
991
|
—
|
|||||||||
Total stock-based compensation expense
|
$
|
7,563
|
$
|
6,162
|
$
|
4,367
|
|
Year Ended
December 31,
2013
|
Year Ended
December 31,
2012
|
Year Ended
December 31,
2011
|
|||||||||
Expected stock price volatility
|
93
|
%
|
111
|
%
|
123
|
%
|
||||||
Risk-free interest rate
|
2.04
|
%
|
1.90
|
%
|
3.05
|
%
|
||||||
Expected life term (in years)
|
6.10 years
|
6.8 years
|
6.6 years
|
|||||||||
Expected dividends
|
0
|
%
|
0
|
%
|
0
|
%
|
|
Period Ended December 31,
|
|||||||||||
|
2013
|
2012
|
2011
|
|||||||||
Net loss
|
$
|
(27,608
|
)
|
$
|
(26,924
|
)
|
$
|
(17,263
|
)
|
|||
Basic weighted average number of shares outstanding
|
51,188
|
50,934
|
50,028
|
|||||||||
Diluted weighted average number of shares outstanding
|
51,188
|
50,934
|
50,028
|
|||||||||
Basic and diluted loss per share
|
$
|
(0.54
|
)
|
$
|
(0.53
|
)
|
$
|
(0.35
|
)
|
Original
Number of
Warrants
Issued
|
Exercise
Price per
Common
Share
|
Exercisable at
December 31,
2012
|
Became
Exercisable
|
Exercised
|
Terminated /
Cancelled /
Expired
|
Exercisable at
December 31,
2013
|
Expiration
Date
|
|||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||
2,619,036
|
(1)
|
$
|
3.59
|
159,967
|
—
|
—
|
—
|
159,967
|
March 2015
|
|||||||||||||||||||
Total
|
159,967
|
—
|
—
|
—
|
159,967
|
|
(1) | Referred to as our Series I Warrants. |
|
Year Ended
December 31,
2013
|
Year Ended
December 31,
2012
|
Year Ended
December 31,
2011
|
|||||||||
Current:
|
|
|
|
|||||||||
Federal
|
$
|
(354
|
)
|
$
|
12,154
|
$
|
8,036
|
|||||
State
|
(397
|
)
|
428
|
767
|
||||||||
Foreign
|
-
|
-
|
9
|
|||||||||
|
(751
|
)
|
12,582
|
8,812
|
||||||||
Deferred:
|
||||||||||||
Federal
|
-
|
(40
|
)
|
(3,331
|
)
|
|||||||
State
|
-
|
(7
|
)
|
(1
|
)
|
|||||||
|
-
|
(47
|
)
|
(3,332
|
)
|
|||||||
Total benefit (provision) for income taxes
|
$
|
(751
|
)
|
$
|
12,535
|
$
|
5,480
|
|
Year Ended
December 31,
2013
|
Year Ended
December 31,
2012
|
Year Ended
December 31,
2011
|
|||||||||
|
|
|
|
|||||||||
United States federal statutory rate
|
35.00
|
%
|
35.00
|
%
|
35.00
|
%
|
||||||
State taxes, net of federal benefit
|
(1.48
|
)%
|
1.07
|
%
|
2.19
|
%
|
||||||
Valuation allowance
|
(37.11
|
)%
|
(4.41
|
)%
|
(4.39
|
)%
|
||||||
Stock options
|
(0.17
|
)%
|
0.14
|
%
|
(1.92
|
)%
|
||||||
Prior year true-up
|
(1.32
|
)%
|
1.03
|
%
|
-
|
|||||||
Warrants
|
2.10
|
%
|
(0.82
|
)%
|
(8.60
|
)%
|
||||||
Other
|
0.18
|
%
|
(0.32
|
)%
|
1.79
|
%
|
||||||
Balance at the end of the year
|
(2.80
|
)%
|
31.69
|
%
|
24.07
|
%
|
|
Year Ended
December 31,
2013
|
Year Ended
December 31,
2012
|
Year Ended
December 31,
2011
|
|||||||||
Deferred tax assets:
|
|
|
|
|||||||||
Reserves and accruals
|
$
|
58
|
$
|
50
|
$
|
46
|
||||||
State tax
|
1
|
1
|
1
|
|||||||||
Research and development credits and other credits
|
907
|
-
|
-
|
|||||||||
Net operating loss carry forward
|
8,249
|
2,254
|
2,822
|
|||||||||
Stock based compensation
|
6,600
|
4,506
|
3,155
|
|||||||||
Other
|
154
|
177
|
211
|
|||||||||
Total deferred tax assets
|
15,969
|
6,988
|
6,235
|
|||||||||
|
||||||||||||
Valuation allowance
|
(15,955
|
)
|
(6,969
|
)
|
(6,168
|
)
|
||||||
Deferred tax assets after valuation allowance
|
14
|
19
|
67
|
|||||||||
|
||||||||||||
Deferred tax liability:
|
||||||||||||
Depreciation and amortization
|
(14
|
)
|
(19
|
)
|
(20
|
)
|
||||||
|
||||||||||||
Total deferred tax liability
|
(14
|
)
|
(19
|
)
|
(20
|
)
|
||||||
|
||||||||||||
Net deferred tax assets
|
$
|
-
|
$
|
-
|
$
|
47
|
|
Year Ended
December 31,
2013
|
Year Ended
December 31,
2012
|
Year Ended
December 31,
2011
|
|||||||||
|
|
|
|
|||||||||
Balance at the beginning of the year
|
$
|
128
|
$
|
128
|
$
|
128
|
||||||
Additions based on tax positions related to the current year
|
-
|
-
|
-
|
|||||||||
Additions for tax positions of prior years
|
188
|
-
|
-
|
|||||||||
Settlements
|
-
|
-
|
-
|
|||||||||
Lapse of applicable statute of limitations
|
-
|
-
|
-
|
|||||||||
Balance at the end of the year
|
$
|
316
|
$
|
128
|
$
|
128
|
|
December 31, 2013
|
|||||||||||||||||||||||
|
|
|
|
|
Cash
|
Investments
|
||||||||||||||||||
|
Adjusted
|
Unrealized
|
Unrealized
|
Fair
|
and Cash
|
Available
|
||||||||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
Equivalents
|
for Sale
|
||||||||||||||||||
Cash
|
$
|
11,699
|
$
|
-
|
$
|
-
|
$
|
11,699
|
$
|
11,699
|
$
|
-
|
||||||||||||
|
||||||||||||||||||||||||
Level 1:
|
||||||||||||||||||||||||
Mutual funds
|
73
|
-
|
-
|
73
|
73
|
-
|
||||||||||||||||||
Corporate securities
|
10,782
|
-
|
-
|
10,782
|
2,325
|
8,457
|
||||||||||||||||||
Municipal securities
|
2,173
|
-
|
-
|
2,173
|
665
|
1,508
|
||||||||||||||||||
U.S agency securities
|
14,287
|
-
|
(25
|
)
|
14,262
|
4,411
|
9,851
|
|||||||||||||||||
|
27,315
|
-
|
(25
|
)
|
27,289
|
7,474
|
19,815
|
|||||||||||||||||
Total
|
$
|
39,014
|
$
|
-
|
$
|
(25
|
)
|
$
|
38,988
|
$
|
19,173
|
$
|
19,815
|
|
December 31, 2012
|
|||||||||||||||||||||||
|
|
|
|
|
Cash
|
Investments
|
||||||||||||||||||
|
Adjusted
|
Unrealized
|
Unrealized
|
Fair
|
and Cash
|
Available
|
||||||||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
Equivalents
|
for Sale
|
||||||||||||||||||
Cash
|
$
|
19,661
|
$
|
-
|
$
|
-
|
$
|
19,661
|
$
|
19,661
|
$
|
-
|
||||||||||||
|
||||||||||||||||||||||||
Level 1:
|
||||||||||||||||||||||||
Certificates of deposit
|
17,836
|
-
|
-
|
17,836
|
-
|
17,836
|
||||||||||||||||||
Corporate securities
|
8,649
|
8
|
-
|
8,657
|
-
|
8,657
|
||||||||||||||||||
|
26,485
|
8
|
-
|
26,493
|
-
|
26,493
|
||||||||||||||||||
Total
|
$
|
46,146
|
$
|
8
|
$
|
-
|
$
|
46,154
|
$
|
19,661
|
$
|
26,493
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
|
||||||||||||
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Total
|
||||||||||||
Series l Warrants
|
$
|
—
|
$
|
—
|
$
|
2,564
|
$
|
2,564
|
||||||||
Total
|
$
|
—
|
$
|
—
|
$
|
2,564
|
$
|
2,564
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
|
||||||||||||
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Total
|
||||||||||||
Series l Warrants
|
$
|
—
|
$
|
—
|
$
|
4,172
|
$
|
4,172
|
||||||||
Total
|
$
|
—
|
$
|
—
|
$
|
4,172
|
$
|
4,172
|
|
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
|
|||||||||||
|
Year ended
December 31,
2013
|
Year ended
December 31,
2012
|
Year ended
December 31,
2011
|
|||||||||
Beginning Balance
|
$
|
4,172
|
$
|
4,699
|
$
|
14,364
|
||||||
(Gain) losses included in losses
|
(1,608
|
)
|
927
|
5,595
|
||||||||
Settlements
|
—
|
(1,454
|
)
|
(15,260
|
)
|
|||||||
Ending Balance
|
$
|
2,564
|
$
|
4,172
|
$
|
4,699
|
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||
|
(in thousands except per share)
|
|||||||||||||||
2013
|
|
|
|
|
||||||||||||
Revenue
|
$
|
293
|
$
|
6
|
$
|
1,612
|
$
|
286
|
||||||||
Loss from operations
|
(9,529
|
)
|
(6,578
|
)
|
(5,133
|
)
|
(7,347
|
)
|
||||||||
Net loss
|
(7,891
|
)
|
(7,029
|
)
|
(5,134
|
)
|
(7,554
|
)
|
||||||||
Basic and diluted loss per common share
|
$
|
(0.15
|
)
|
$
|
(0.14
|
)
|
$
|
(0.10
|
)
|
$
|
(0.15
|
)
|
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||
|
(in thousands except per share)
|
|||||||||||||||
2012
|
|
|
|
|
||||||||||||
Revenue
|
$
|
-
|
$
|
36
|
$
|
368
|
$
|
8
|
||||||||
Loss from operations
|
(7,223
|
)
|
(11,734
|
)
|
(9,371
|
)
|
(10,533
|
)
|
||||||||
Net loss
|
(4,707
|
)
|
(10,264
|
)
|
(4,719
|
)
|
(7,234
|
)
|
||||||||
Basic and diluted loss per common share
|
$
|
(0.09
|
)
|
$
|
(0.20
|
)
|
$
|
(0.09
|
)
|
$
|
(0.14
|
)
|
Item 12. | Securi ty Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . |
Plan Category
|
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
|
Weighted-Average
Exercise Price of Outstanding
Options, Warrants
and Rights
|
Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans
|
|||||||||
Equity compensation plans approved by security holders
|
5,385,731
|
$
|
8.48
|
2,227,882
|
||||||||
Equity compensation plans not approved by security holders
|
—
|
—
|
||||||||||
Total
|
5,385,731
|
$
|
8.48
|
2,227,882
|
(a) | The following documents are filed as part of this Annual Report on Form |
(1) | Financial Statements : See the Index to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K. |
(2) | Financial Statement Schedule : Financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. All other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or the notes thereto. |
(3) | Exhibits : See Exhibit Index immediately following the signature page of this Form 10-K. |
|
VirnetX Holding Corporation
|
|
|
|
|
|
By:
|
/s/ Kendall Larsen
|
|
|
Name: Kendall Larsen
|
|
|
Title: Chief Executive Officer and President
|
Name
|
|
Capacity
|
|
Date
|
|
|
|
|
|
/s/ Kendall Larsen
|
|
Director, Chief Executive Officer and President
|
|
March 3, 2014
|
Kendall Larsen
|
|
(
Principal Executive Officer
)
|
|
|
|
|
|
|
|
/s/ Richard H. Nance
|
|
Chief Financial Officer
|
|
March 3, 2014
|
Richard H. Nance
|
|
(
Principal Financial Officer and
Principal Accounting Officer
)
|
|
|
|
|
|
|
|
/s/ Robert D. Short III
|
|
Director
|
|
March 3, 2014
|
Robert D. Short III
|
|
|
|
|
|
|
|
|
|
/s/ Scott C. Taylor
|
|
Director
|
|
March 3, 2014
|
Scott C. Taylor
|
|
|
|
|
|
|
|
|
|
/s/ Michael F. Angelo
|
|
Director
|
|
March 3, 2014
|
Michael F. Angelo
|
|
|
|
|
|
|
|
|
|
/s/ Thomas M. O'Brien
|
|
Director
|
|
March 3, 2014
|
Thomas M. O'Brien
|
|
|
|
|
Exhibit Number
|
|
Description
|
3.1
|
|
Certificate of Incorporation of the Company. (1)
|
3.2
|
|
By-Laws of the Company. (1)
|
4.1
|
|
Form of Warrant Agency Agreement by and between the Company and Corporate Stock Transfer, Inc. as Warrant Agent. (2)
|
4.2
|
|
Form of Series I Warrant. (3)
|
10.1
|
|
Form of Indemnification Agreement by and between the Company and each of Kendall Larsen, Robert D. Short III, Scott C. Taylor, Michael F. Angelo, Thomas M. O'Brien and Richard Nance. (1)
|
10.2
|
|
Voting Agreement among the Company and certain of its stockholders, dated as of December 12, 2007. (5)
|
10.3**
|
|
2007 Stock Plan, as amended on April 13, 2012.
|
10.4
|
|
Securities Purchase Agreement, dated as of September 2, 2009, by and between the Company and the Purchasers. (3)
|
10.5
|
|
Form of Registration Rights Agreement by and between the Company and the Purchasers. (3)
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10.6
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Form of Underwriting Agreement between VirnetX Holding Corporation and Gilford Securities Incorporated. (2)
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10.7
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Patent License and Assignment Agreement by and between the Company and Leidos, Inc. dated as of August 12, 2005. (6)
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10.8
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Security Agreement by and between the Company and Leidos, Inc. dated as of August 12, 2005. (6)
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10.9
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Amendment No. 1 to Patent License and Assignment Agreement by and between the Company and Leidos, Inc. dated as of November 2, 2006. (6)
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10.10
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Assignment Agreement between the Company and Leidos, Inc. dated as of December 21, 2006. (6)
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10.11
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Professional Services Agreement by and between the Company and Leidos, Inc. dated as of August 12, 2005. (6)
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10.12
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Amendment No. 2 to Patent License and Assignment Agreement by and between VirnetX, Inc. and Leidos, Inc. dated as of March 12, 2008. (7)
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10.13
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IP Brokerage Agreement by and between ipCapital Group, Inc. and VirnetX, Inc., effective as of March 13, 2008. (7)
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10.14
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Engagement Letter by and between VirnetX Holding Corporation and ipCapital Group, Inc. dated March 12, 2008. (7)
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10.15*
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Engagement Letter dated June 9, 2009, by and between McKool Smith, a professional corporation, and the Company. (8)
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10.16
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Engagement Letter dated April 15, 2010, by and between McKool Smith, a professional corporation, and the Company. (9)
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10.17*
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Settlement and License Agreement, by and between Microsoft Corporation, a Washington corporation, and VirnetX, Inc., a Delaware corporation. (10)
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10.18**
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Amended Form of Stock Option Agreement - 2007 Stock Plan. (10)
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10.19** |
Form of Restricted Stock Unit Award Agreement - 2007 Stock Plan. (4)
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10.20** |
Employment Offer Letter from VirnetX, Inc. to Richard H. Nance. (4)
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10.21** |
2013 Equity Incentive Plan. (11)
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Subsidiaries of VirnetX Holding Corporation.
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Consent of Farber Hass Hurley LLP, Independent Registered Public Accounting Firm.
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Chief Executive Officer Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act.
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Chief Financial Officer Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act.
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Chief Executive Officer Certification 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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Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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101.INS††
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XBRL Instance Document
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101.SCH††
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XBRL Taxonomy Extension Schema Document
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101.CAL††
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|
XBRL Taxonomy Extension Calculation Linkbase Document
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101.DEF††
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|
XBRL Taxonomy Extension Definition Linkbase Document
|
101.LAB††
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XBRL Taxonomy Extension Label Linkbase Document
|
101.PRE††
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|
XBRL Taxonomy Extension Presentation Linkbase Document
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(1) | Incorporated herein by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 1, 2007. |
(2) | Incorporated herein by reference to the Company's Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on January 16, 2009. |
(3) | Incorporated herein by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on September 3, 2009. |
(4) | Incorporated herein by reference to the Company's Form 10-Q (Commission File No. 001-33852) filed with the Securities and Exchange Commission on May 10, 2012. |
(5) | Incorporated herein by reference to the Company's Form 10-K filed with the Securities and Exchange Commission on March 31, 2008. |
(6) | Incorporated by reference to the Company's Form 8-K (Commission File No. 001-33852) filed with the Securities and Exchange Commission on July 12, 2007. |
(7) | Incorporated by reference to the Company's Form 8-K (Commission File No. 001-33852) filed with the Securities and Exchange Commission on March 18, 2008. |
(8) | Incorporated by reference to the Company's Form 10-Q (Commission File No. 001-33852) filed with the Securities and Exchange Commission on May 7, 2010. |
(9) | Incorporated by reference to the Company's Form 10-Q/A (Commission File No. 001-33852) for the period ended June 30, 2010, filed with the Securities and Exchange Commission on January 31, 2011. |
(10) | Incorporated by reference to the Company's Form 10-Q (Commission File No. 001-33852) filed with the Securities and Exchange Commission on May 10, 2011. |
(11) | Incorporated by reference to Annex A of the Company's Proxy Statement (Commission File No. 001-33852) filed with the Securities and Exchange Commission on April 12, 2013. |
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