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 185 total patents and pending applications, including 70 U.S. patents/patent applications and 115 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”), communications in areas including “Smart City,” “Connected Car” and “Connected Home.” All our U.S. and foreign patents and pending patent applications relate generally to securing communications over the internet and as such, cover all our technology and other products. Our issued U.S. and foreign patents expire at various times during the period from 2019 to 2024. Some of our issued patents and pending patent applications were acquired by our principal operating subsidiary, VirnetX, Inc., from Leidos, Inc. (“Leidos”) (f/k/a Science Applications International Corporation, or SAIC) in 2006 and we are required to make payments to Leidos based on cash or certain other values generated from those patents in certain circumstances. The amount of such payments depends upon the type of value generated and certain categories are subject to maximums and other limitations.
Note 2 — Subsequent Events
On April 12, 2018, a jury in the United States Court for the Eastern District of Texas, Tyler Division, in the case VirnetX Inc., et al. v. Apple Inc., Case 6:12-CV-00855-LED (“Apple II”) awarded VirnetX $502.6 million in a verdict against Apple Corporation for infringing four VirnetX patents, marking the fourth time a federal jury has found that Apple has infringed VirnetX’s patented technology. The jury also found that Apple willfully infringed VirnetX’s patents.
The verdict covers issues of infringement by Apple’s redesigned VOD (VPN on Demand) in iOS 7 to iOS 11, the redesigned FaceTime in iOS 7 to iOS 11 and OS X 10.9 and later.
Between April 1, 2018 and April 10, 2018, we sold 622,448 shares of common stock under the ATM program.The average sales price per common share sold was $4.07 and the aggregate proceeds from the sales totaled $2,531. Sales commissions, fees and other costs associated with the ATM transactions totaled $76.
Note 3 — Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The accompanying Condensed Consolidated Balance Sheet as of March 31, 2018, the Condensed Consolidated Statements of Income for the three months ended March 31, 2018 and 2017, the Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2018 and 2017, and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 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 March 31, 2018, our results of operations for the three months ended March 31, 2018 and 2017, and our cash flows for the three months ended March 31, 2018 and 2017. 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, 2017, filed with the SEC on March 16, 2018.
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.
Revenue Recognition
Most of our revenue historically has been derived from licensing and royalty fees from contracts with customers which often spanned several years. We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which we adopted on January 1, 2018 using the modified-retrospective method (see Note 9 – Effects of Adopting ASC Topic 606).
Prior to January 1, 2018 the Company recognized revenue in accordance with previous guidance as described in our Annual Report on Form 10-K for the year ended December 31, 2017.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer in accordance with ASC Topic 606. 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
In August 2013, we began receiving annual payments on a contract requiring payment to us over 4 years totaling $10,000 (“August 2013 Contract Settlement”). In accordance with our revenue recognition policy, we were deferring and recognizing revenue over the life of the contract, but not ahead of collection. We collected the final payment under the contract in 2016 and recognized $375 of revenue, related to the August 2013 Contract Settlement, during the three months ended March 31, 2017. On January 1, 2018, we adopted ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) and applied the modified retrospective approach as discussed above.
Earnings Per Share
Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted earnings per share 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 three months ended March 31, 2018 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.
Prepaid Expenses
Prepaid expenses at March 31, 2018 include the current portion of prepaid rent for a facility lease for corporate promotional and marketing purposes. From inception, the prepayment totaling $4,000 is being amortized over the 10-year term of the lease. The unamortized non-current portion of the prepayment is included in Prepaid expenses-non-current on the Condensed Consolidated balance sheet.
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 considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset.
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. government and 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 March 31, 2018 and December 31, 2017.
|
|
March 31, 2018
|
|
|
|
Adjusted
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Cash and
Cash
Equivalents
|
|
|
Investments
Available for
Sale
|
|
Cash
|
|
$
|
3,501
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,501
|
|
|
$
|
3,501
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
1,177
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,177
|
|
|
|
1,177
|
|
|
|
—
|
|
U.S. government securities
|
|
|
80
|
|
|
|
—
|
|
|
|
—
|
|
|
|
80
|
|
|
|
—
|
|
|
|
80
|
|
U.S. agency securities
|
|
|
1,369
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,369
|
|
|
|
866
|
|
|
|
503
|
|
|
|
|
2,626
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,626
|
|
|
|
2,043
|
|
|
|
583
|
|
Total
|
|
$
|
6,127
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,127
|
|
|
$
|
5,544
|
|
|
$
|
583
|
|
|
|
December 31, 2017
|
|
|
|
Adjusted
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Cash and
Cash
Equivalents
|
|
|
Investments
Available
for Sale
|
|
Cash
|
|
$
|
1,972
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,972
|
|
|
$
|
1,972
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
616
|
|
|
|
—
|
|
|
|
—
|
|
|
|
616
|
|
|
|
616
|
|
|
|
|
|
U.S. agency securities
|
|
|
2,001
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
2,000
|
|
|
|
547
|
|
|
|
1,453
|
|
|
|
|
2,617
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
2,616
|
|
|
|
1,163
|
|
|
|
1,453
|
|
Total
|
|
$
|
4,589
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
4,588
|
|
|
$
|
3,135
|
|
|
$
|
1,453
|
|
New Accounting Pronouncements
In June 2016, the 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 are evaluating the impact this guidance will have on our financial position and statement of operations.
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize right-of-use 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 are evaluating the impact this guidance will have on our financial position and statement of operations.
In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606). This ASU was subsequently amended by ASU No. 2016-10 and 2016-12. As amended, Topic 606 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments create a new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers
.
In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. On January 1, 2018 we adopted the standard which resulted in an approximate $2,500 decrease in accumulated deficit and a $2,500 decrease in deferred revenue in our consolidated balance sheet (see Note 9 – Effects of Adopting ASC Topic 606).
Note 4 — Income Taxes
We had income tax expense of $5 and $5 for the three months ended March 31, 2018 and 2017, respectively, as a result of minimum tax payments. During the three-month period ended March 31, 2018 and 2017, we had net operating losses (“NOLs”) which generated deferred tax assets for NOL carry-forwards. We provided valuation allowances against the net deferred tax assets including the deferred tax assets for NOL carryforwards. Valuation allowances provided for our net deferred tax assets increased by approximately $4,796 and $1,786 for the three months ended March 31, 2018 and 2017, respectively.
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 March 31, 2018 will not be fully realizable. Accordingly, management has maintained a full valuation allowance against its net deferred tax assets at March 31, 2018. The valuation allowance carried against our net deferred tax assets was approximately $39,000 and $34,000 at March 31, 2018 and December 31, 2017, respectively.
At March 31, 2018, we have federal and state net operating loss carry-forwards of approximately $94,000 and $108,000, respectively, expiring beginning in 2027 and 2028, respectively.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, (“Topic 606”) which amends revenue recognition principles and provides a single set of criteria for revenue recognition among all industries. We adopted the new standard effective January 1, 2018 under the modified retrospective method. Under the modified retrospective method, we recognized deferred revenue of $2.5 million through retained earnings. The tax provision is prepared based on the assumption that the Company will file accounting method change form 3115 with 2018 tax return to reflect the adoption of Topic 606.
Our tax years for 2005 and forward are subject to examination by the U.S. tax authority and various state tax authorities. These years are open due to net operating losses and tax credits remaining unutilized from such years.
Our policy is to recognize interest and penalties accrued on uncertain tax positions as a component of income tax expense. As of March 31, 2018, we had accrued immaterial amounts of interest and penalties related to the uncertain tax positions.
Note 5 — Commitments and Related Party Transactions
We lease our offices under an operating lease with a third party expiring in October 2019. We recognize rent expense on a straight-line basis over the term of the lease.
We lease the use of an aircraft from K2 Investment Fund LLC (‘‘LLC’’) for business travel for employees of the Company. We incurred approximately $608 and $252 in rental fees and reimbursements to LLC during the three months ended March 31, 2018 and 2017, respectively, of which $258 is payable as of March 31, 2018. Our Chief Executive Officer and Chief Administrative Officer are the managing partners of the LLC and control the equity interests of LLC. On January 31, 2015, we entered into a 12-month non-exclusive lease with LLC for use of the plane at a rate of $8 per flight hour, with no minimum usage requirement. The agreement contains other terms and conditions normal in such transactions and can be cancelled by either us or LLC with 30 days’ notice. The lease renews on an annual basis unless terminated by the lessor or lessee. Neither party has exercised their termination rights.
Note 6 — Stock Based Compensation
We have a stock incentive plan for employees and others called the “VirnetX Holding Corporation 2013 Equity Incentive Plan”, or the Plan, which has been approved by our stockholders. The Plan provides for the granting of up to 16,624,469 shares of our common stock, including stock options and stock purchase rights (“RSUs”), and will expire in 2024. As of March 31, 2018, 2,238,562 shares remained available for grant under the Plan. During the three months ending March 31, 2018, we granted options for a total of 670,000 shares with a weighted average grant date fair value of $2.61. During the three months ended March 31, 2018, we granted 20,000 RSU’s with an average grant date fair value of $4.05.
Stock-based compensation expense included in general and administrative expense was $388 and $494, and in research and development expense was $498 and $339, for the three months ended March 31, 2018 and 2017, respectively.
As of March 31, 2018, the unrecognized stock-based compensation expense related to non-vested stock options and RSUs was $7,179 and $1,614, respectively, which will be amortized over an estimated weighted average period of approximately 3.16 and 2.18 years, respectively.
Note 7 — Equity
Common Stock
On August 21, 2015, we filed a universal shelf registration statement with the U.S. Securities and Exchange Commission enabling us to offer and sell from time to time up to $100 million of equity, debt or other types of securities. We also entered into an at-the-market (“ATM”) equity offering sales agreement with Cowen & Company, LLC (“Cowen”) on August 20, 2015, under which we may offer and sell shares of our common stock having an aggregate value of up to $35 million. On March 8, 2018, we amended our August 20, 2015 equity offering sales agreement (“Amended Agreement”) with Cowen whereby the maximum aggregate value of the Company’s common stock (“Shares”) we may offer and sell, from time to time, was increased from $35,000,000 to $50,000,000. The Company intends to use the proceeds of this offering for Gabriel product development and marketing, and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products, technologies or businesses.
During the three months ended March 31, 2018, we sold 1,751,689 shares under the ATM. The average sales price per common share was $4.02 and the aggregate proceeds from the sales totaled $7,042 during the period. Sales commissions, fees and other costs associated with the ATM totaled $212.
Warrants
In 2015 we issued warrants (“Advisor Warrants”) for the purchase of 25,000 shares of common stock at an exercise price of $7 per share, which expire in April 2020. The Advisor Warrants were issued for advisory services provided by a third party. Our Advisor Warrants were recorded at fair value on the issuance date and included in Additional Paid in Capital on our Condensed Consolidated Balance Sheet. The Advisor Warrants are exercisable by the holder, in whole or in part, until expiration, and may also be net-share-settled. Terms of the warrant agreement include no registration requirements for the underlying common stock and there are no anti-dilution provisions. The fair value at issuance of the warrants was recorded in Prepaid Expenses and Other Current Assets and was amortized over the twelve-month life of the service contract, with the expense included in Selling, General and Administrative Expense in our Condensed Consolidated Statements of Operations.
The fair value of the Advisor Warrants at the issuance date of $121 was estimated utilizing the Black-Scholes valuation model with the following assumptions: (i) dividend yield on our common stock of 0 percent, (ii) expected stock price volatility of 87.5 percent, (iii) a risk-free interest rate of 1.33 percent, and (iv) an expected warrant term of 5 years.
Information about warrants outstanding during the three months ended March 31, 2018 follows:
Original
Number
of
Warrants
Issued
|
|
|
Exercise
Price per
Common
Share
|
|
|
Exercisable at
December 31,
2017
|
|
|
Became
Exercisable
|
|
|
Exercised
|
|
|
Terminated /
Cancelled /
Expired
|
|
|
Exercisable
at March 31,
2018
|
|
Expiration
Date
|
|
25,000
|
|
|
$
|
7.00
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,000
|
|
April 2020
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,000
|
|
|
Note 8 — Litigation
We have multiple intellectual property infringement lawsuits pending in the United States District Court for the Eastern District of Texas, Tyler Division, and United States Court of Appeals for the Federal Circuit (“USCAFC”).
VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED)
On March 30, 2015, the United States Court for the Eastern District of Texas, Tyler Division, issued an order finding substantial overlap between the remanded portions of the Civil Action Case 6:10-CV-00417-LED (VirnetX vs. Cisco et. al.), and the ongoing Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case. The jury trial in this case was held on January 25, 2016. On February 4, 2016, a jury in the United States Court for the Eastern District of Texas, Tyler Division, awarded us $625.6 million in a verdict against Apple Inc. for infringing four of our US patents, marking it the second time a federal jury has found Apple liable for infringing our patented technology. The verdict includes royalties awarded to us based on an earlier patent infringement finding
(Case 6:10-CV-00417-LED)
against Apple. The jury found that Apple’s modified VPN On-Demand, iMessage and FaceTime services infringed our patents and that Apple’s infringement was willful. In addition to determining the royalty owed by Apple for its prior infringement, this verdict also includes an award based on the jury’s finding that Apple’s modified VPN On Demand, iMessage and FaceTime services have continued to infringe our patents. The post-trial hearing was held on May 25, 2016 in the United States Court for the Eastern District of Texas, Texarkana Division. On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases (Case No. 6:10-cv-417, Docket No. 878 (“Apple I case”); Case No. 6:12-cv-855, Docket No. 220 (“Apple II case”)), ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II case will be retried after Apple I case. Events and developments subsequent to the order from the court are described to support Apple I and Apple II matters.
VirnetX Inc. v. Cisco Systems, Inc. et al. (Case 6:10-CV-00417-LED) (“Apple I”)
On August 11, 2010, we initiated a lawsuit by filing a complaint against Aastra USA. Inc. (“Aastra”), Apple, Cisco Systems, Inc. (“Cisco”), and NEC Corporation (“NEC”) in the United States District Court for the Eastern District of Texas, Tyler Division, pursuant to which we alleged that these parties infringe on certain of our patents. We sought damages and injunctive relief. Aastra and NEC agreed to sign license agreements with us and we agreed to drop all the accusations of infringement against them. At the pre-trial hearing, the judge decided to conduct separate jury trial for each defendant and try only the case against Apple on the scheduled trial date. The jury trial of our case against Cisco was held on March 4, 2013. The jury in our case against Cisco came back with a verdict of non-infringement also determined that all our patents-in-suit patents are not invalid. Our motions for a new trial and Cisco’s infringement of certain VirnetX patents were denied and the case against Cisco was closed.
The jury trial of our case against Apple was held on October 31, 2012. On November 6, 2012, a jury in the United States Court for the Eastern District of Texas, Tyler Division, awarded us over $368 million in a verdict against Apple for infringing four of our patents. On February 26, 2013, the court issued its Memorandum Opinion and Order regarding post-trial motions resulting from the prior jury verdict denying Apple’s motion to reduce the damages awarded by the jury for past infringement. The Court further denied Apple’s request for a new trial on the liability and damages portions of the verdict and granted our motions for pre-judgment interest, post-judgment interest, and post-verdict damages to date. The Court ordered that Apple pay $34 thousand in daily interest up to final judgment and $330 thousand in daily damages for infringement up to final judgment for certain Apple devices included in the verdict. The Court denied our request for a permanent injunction and severed the future infringement portion into its own separate proceedings under Case 6:13-CV-00211-LED.
On July 3, 2013, Apple filed an appeal of the judgment dated February 27, 2013 and order dated June 4, 2013 denying Apple’s motion to alter or amend the judgment to the USCAFC. On September 16, 2014, USCAFC issued their opinion, affirming the jury’s finding that all 4 of our patents are valid, confirming the jury’s finding of infringement of VPN on Demand under many of the asserted claims of our ‘135 and ‘151 patents, and confirming the district’s court’s decision to allow evidence concerning our licenses and royalty rates in connection with the determination of damages. In its opinion, the USCAFC also vacated the jury’s damages award and the district court’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 –for further proceedings consistent with its opinion. On October 16, 2014, we filed a petition with the USCAFC, requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decision concerning our litigation against Apple Inc. On December 16, 2014, USCAFC denied our petition requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decision and remanded the case back to the Eastern District of Texas, Tyler Division, for further proceedings consistent with its opinion. On February 25, 2015, USCAFC granted Apple’s motions to lift stay of proceedings and vacate Case 6:13-CV-00211-LED. On March 30, 2015, the court issued an order finding substantial overlap between the remanded portions of this case and the ongoing Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case.
On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases Apple I case and Apple II case, ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II case will be retried after Apple I case. The jury trial in the Apple I case was held on September 26, 2016. On September 30, 2016, a Jury in the United States Court for the Eastern District of Texas, Tyler Division, in the Apple I case awarded us $302.4 million in a verdict against Apple for infringing four of our patents.
The verdict includes royalties awarded to us, for unresolved issues in the Apple I case, remanded back from the USCAFC, related to (1) damages owed to us for infringement by Apple’s original VPN-on-Demand (VOD) and (2) the alleged infringement by Apple’s original FaceTime product, under the new claim construction of “secure communication link” pertaining to the ‘504 and ‘211 patents by the USCAFC, and the damages associated with that infringement. The hearing on all post-trial motions was held on November 22, 2016.
On September 29, 2017, the United States District Court for the Eastern District of Texas, Tyler Division, entered Final Judgement and issued its Memorandum Opinion and Order regarding post-trial motions resulting from the prior $302.4 million jury verdict for us in the Apple I case.
In that September 29, 2017, order, the Court denied all of Apple’s post-trial motions including motion for judgment as a matter of law of non-infringement, motion for judgment as a matter of law on damages, motion for a new trial on infringement, and motion for a new trial on damages. The Court granted all our post-trial motions including motion for willful infringement and enhanced the royalty rate during the willfulness period by 50 percent, from $1.20 to $1.80 per device, awarding us, enhanced damages in the amount of $41.3 million against Apple thereby, granting us a total sum of $343.7 million in pre-interest damages. The Court also awarded costs, certain attorneys’ fees, and prejudgment interest to us, and directed the parties to meet and confer regarding these amounts. On October 13, 2017, having met and conferred and having reached agreements on all amounts, parties jointly filed a motion asking the Court to grant us an additional sum in the amount of $96 million in agreed Bill of Costs, Attorneys’ Fees, and Prejudgment Interest. The Final Judgement is only subject to appeal stemming from new issues unresolved in the Apple I case, remanded back from the United States Court of Appeals for the Federal Circuit. The total Final Judgement amount including Jury Verdict, Willful Infringement, Interest, Costs and Attorney Fees is $439.7 million.
On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on September 29, 2017 to the United States Court of Appeals for the Federal Circuit. This case has now been closed and events and developments subsequent to the notice of appeal are described below under
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case)
.
VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”)
On November 6, 2012, we filed a complaint against Apple in the United States District Court for the Eastern District of Texas, Tyler Division for willfully infringing four of our patents, U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151, and seeking both an unspecified amount of damages and injunctive relief. The accused products include the iPhone 5, iPod Touch 5
th
Generation, iPad 4
th
Generation, iPad mini, and the latest Macintosh computers. Due to their release dates, these products were not included in the previous lawsuit that concluded with a Jury verdict on November 6, 2012 that was subsequently upheld by the United States District Court for the Eastern District of Texas, Tyler Division, on February 26, 2013. On July 1, 2013, we filed a consolidated and amended complaint to include U.S. Patent No. 8,051,181 and consolidate Civil Action No. 6:11-cv-00563-LED. On August 27, 2013, we filed an amended complaint including allegations of willful infringement related to U.S. Patent No. 8,504,697 seeking both damages and injunctive relief. The Markman hearing in this case was held on May 20, 2014 and on August 8, 2014, issued its Markman Order, denying Apple’s motion for summary judgment of indefiniteness, in which Apple alleged that some of the disputed claims terms in the patents asserted by us were invalid for indefiniteness. In a separate order, the court granted in part and denied in part our motion for partial summary judgment on Apple’s invalidity counterclaims, precluding Apple from asserting invalidity as a defense against infringement of the claims that were tried before a jury in our prior litigation against Apple (VirnetX vs. Cisco et. al., Case 6:10-CV-00417-LED). The jury trial in this case was scheduled for October 13, 2015. On March 30, 2015, the court issued an order finding substantial overlap between this case and the remanded portions of the Apple I case. The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case. On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases Apple I case and Apple II case, ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II will be retried after the Apple I case.
On September 29, 2017, the Court issued an order denying Apple’s Motion to Stay. The Court ordered the parties to meet and confer and file a joint motion with a proposed trial date by October 13, 2017. The parties have met, conferred and filed a joint motion on the proposed trial dates. On November 9, 2017, the court issued its order setting this case for jury selection on April 2, 2018 in Tyler, Texas.
On January 5, 2018, Apple filed a Petition for Writ of Mandamus with the USCAFC requesting the court to stay the upcoming limited retrial of the Apple II pending the USCAFC’s decision in related consolidated appeal VirnetX Inc. v. Apple Inc., Cases 2017-1591. On February 22, 2018, the USCAFC issued its order denying Apple’s Petition for Writ of Mandamus. The jury trial in Apple II case took place in the United States Court for the Eastern District of Texas, Tyler Division on April 2, 2018 per the district court’s order. On April 12, 2018, a federal jury, in the case Apple II, awarded us $502.6 million in a verdict against Apple for infringing four of our patents. The same jury also found that Apple had willfully infringed all the patents in the case. The verdict covers issues of infringement by Apple’s redesigned VOD (VPN on Demand) in iOS 7 to iOS 11, the redesigned FaceTime in iOS 7 to iOS 11 and OS X 10.9 and later. We are awaiting the order from the court regarding the final post-trial briefing schedule. (see Note 2 - Subsequent events)
VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case)
On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on September 29, 2017 to the United States Court of Appeals for the Federal Circuit.
On January 5, 2018, Apple filed a motion requesting a stay of the briefing schedule in this appeal pending this court’s decision in related consolidated appeal VirnetX Inc. v. Apple Inc., Cases 2017-1591. On January 24, 2018, USCAFC denied Apple’s motion requesting a stay of the briefing schedule and ordered Apple to file its opening brief no later than March 19, 2018. We filed our response on April 4, 2018. On April 11, 2018, USCAFC in an order designated
Cases 18-1197-CB, Case 17-1368 and Case 17-1591
as companion cases and assigned to the same merits panel. Apple’s response to our response in this case is due on May 14, 2018.
VirnetX Inc. v. Apple, Inc. (Case 15-1934)
On July 10, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the United States Patent and Trademark Office, Patent Trial and Appeal Board (“PTAB”) in IPR2014-00237 and IPR2014-00238, related to U.S. Patent No. 8,504,697. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on the grounds discussed in IPR2014-00238. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 16-1211)
On September 28, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2014-00403 and IPR2014-00404 and on October 22, 2015 for IPR2014-00481 and IPR2014-00482 involving our U.S. Patent Nos. 7,188,180, and 7,987,274. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on the grounds discussed in IPR2014-00403 and IPR2014-00481. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 16-1480)
On November 30, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,949 related to U.S. Patent No. 8,051,181. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on certain grounds. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 16-119)
On March 4, 2016, we filed a petition for writ of mandamus with the USCAFC, requesting the USCAFC’s intervention to revoke the PTAB’s decision joining Apple to IPR2015-01046 and IPR2015-01047, related to U.S. Patent Nos. 6,502,135 and 7,490,151. On March 18, 2016, the USCAFC denied the petition without prejudice to us raising the arguments on appeal after the PTAB’s final decisions. We are currently evaluating our options in this case.
VirnetX Inc. v. Apple, Inc. (Case 17-1131)
On October 31, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2015-00810 and IPR2015-00812, on November 9, 2016 for IPR2015-00811, and on November 28, 2016 for IPR2015-00866, IPR2015-00868, IPR2015-00870 and IPR2015-00871 involving our U.S. Patent Nos.8,868,705, 8,850,009, 8,458,341, 8,516,131, and 8,560,705. These appeals were consolidated. On March 16, 2018, the USCAFC affirmed the PTAB. We are currently evaluating our options in this case.
VirnetX Inc. v. The Mangrove Partners (Case 17-1368)
On December 16, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the 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, Inc. and one of them involves Black Swamp IP, LLC. On April 27, 2017, the USCAFC stayed these appeals pending the USCAFC’s en banc decision in
Wi-Fi One, LLC v. Broadcom Corporation,
No. 2015-1944. The stay was lifted on January 31, 2018, and briefing is now ongoing. On April 11, 2018, USCAFC in an order designated
Cases 18-1197-CB, Case 17-1368
and Case 17-1591
as companion cases and assigned to the same merits panel.
VirnetX Inc. v. Apple Inc., Cisco Systems, Inc. (Case 17-1591)
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
.
These appeals have been consolidated. The briefing in these appeals has been concluded; the oral arguments have not yet been scheduled. On April 11, 2018, USCAFC in an order designated
Cases 18-1197-CB, Case 17-1368
and Case 17-1591
as companion cases and assigned to the same merits panel.
VirnetX Inc. v. Apple Inc. (Case 17-2490)
On August 23, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2016-00331 and IPR2016-00332 involving our U.S. Patent No. 8,504,696. These appeals have been consolidated. The briefing in these appeals has been concluded; the oral arguments have not yet been scheduled.
In re VirnetX Inc. (Case 17-2593)
On September 22, 2017, we filed appeals with the USCAFC, appealing 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. These appeals have been consolidated. The briefing in these appeals is ongoing. 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 United States Patent and Trademark Office 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.
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 worth pursuing, commencing a lawsuit can be expensive and time-consuming, and there is no assurance that we will prevail on such potential claims. In addition, bringing a lawsuit may lead to potential counterclaims which may preclude our ability to commercialize our initial products, which are currently in development.
Currently, we are not a party to any other pending legal proceedings and are not aware of any proceeding threatened or contemplated against us by any governmental authority or other party.
Note 9 — Effects of Adopting ASC Topic 606
The following tables summarize the effects of adopting this standard on our unaudited consolidated financial statements: