NOTES TO CONDENSED CONSOLIDATED FINANCIAL STA
TEMENTS
(in thousands, except share and per share amounts)
(Unaudited)
Note 1 — Business Description and Basis of Presentation
We develop software and technology solutions for securing real-time communications over the Internet. Our patented GABRIEL Connection Technology™ combines industry standard encryption protocols with our patented techniques for automated domain name system, or DNS, lookup mechanisms, and enables users to create a secure communication link using secure domain names over wired or wireless (4G/LTE) networks. We are currently beta testing our GABRIEL Connection Technology™ as part of our Secure Domain Name Initiative, or (SDNI), on various platforms including PCs, smart phones and tablets. We also intend to establish the exclusive secure domain name registry in the United States and other key markets around the world.
Our portfolio of intellectual property is the foundation of our business model. We currently own over 80 U.S. and foreign patents with several pending patent 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, Mobile-to-Mobile (M2M) communications in areas of Smart City, Connected Car and Connected Home. 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 Science Applications International Corporation (now “Leidos, Inc.”) in 2006 and we are required to make payments to Leidos based on cash or certain other values generated from those patents. The amount of such payments depends upon the type of value generated, and certain categories are subject to maximums and other limitations.
We have submitted a declaration with the 3rd Generation Partnership Project, or 3GPP, identifying a group of our patents and patent applications that we believe are or may become essential to certain developing specifications in the 3GPP LTE, SAE project. We have agreed to make available a non-exclusive patent license under fair, reasonable and non-discriminatory terms and conditions, with compensation, or FRAND, to 3GPP members desiring to implement the technical specifications identified by us. We believe that we are positioned to license our essential security patents to 3GPP members as they move into 4G.
We believe that the market opportunity for our software and technology solutions is large and expanding as secure domain names are now an integral part of securing the next generation 4G/LTE Advanced wireless networks and M2M communications in areas including Smart City, Connected Car and Connected Home. We also believe that all 4G/LTE Advanced mobile devices will require unique secure domain names and become part of a secure domain name registry.
We intend to continue to license our patent portfolio, technology and software, including our secure domain name registry service, to domain infrastructure providers, communication service providers as well as to system integrators. We intend to seek further license of our technology, including our GABRIEL Connection Technology™ to enterprise customers, developers and original equipment manufacturers, or OEMs, of chips, servers, smart phones, tablets, e-Readers, laptops, net books and other devices, within the IP-telephony, mobility, fixed-mobile convergence and unified communications markets including 4G/LTE. We have published our royalty rates and guidelines on our website. All forward moving licenses have adhered to these guidelines and have met or exceeded these rates and we will continue to use these rates and guidelines in all future license negotiations.
Our software and technology solutions provide the security platform required by next-generation Internet-based applications such as instant messaging, or IM, voice over Internet protocol, or VoIP, mobile services, streaming video, file transfer, remote desktop and M2M communications in areas including Smart City, Connected Car and Connected Home. Our technology generates secure connections on a “zero-click” or “single-click” basis, significantly simplifying the deployment of secure real-time communication solutions by eliminating the need for end-users to enter any encryption information.
Our employees include the core development team behind our patent portfolio, technology and software. This team has worked together for over ten years and is the same team that invented and developed this technology while working at Leidos, Inc. (“Leidos”, formerly “SAIC”). Leidos is a FORTUNE 500® scientific, engineering and technology applications company that uses its deep domain knowledge to solve problems of vital importance to the nation and the world, in national security, energy and the environment, critical infrastructure and health. The team has continued its research and development work started at Leidos and expanded the set of patents we acquired in 2006 from Leidos into a larger portfolio with over 80 U.S. and foreign patents with several pending patent applications. This portfolio now serves as the foundation of our licensing business and planned service offerings and is expected to generate the majority of our future revenue in license fees and royalties. We intend to continue our research and development efforts to further strengthen and expand our patent portfolio. See – Operations – Research and Development Expenses for a description of our research and development expenses for the past three fiscal years discussed below.
We intend to continue using an outsourced and leveraged model to maintain efficiency and manage costs as we grow our licensing business by, for example, offering incentives to early licensing targets or asserting our rights for use of our patents. We also intend to expand our design pilot in participation with leading 4G/LTE companies (domain infrastructure providers, chipset manufacturers, service providers, and others) and build our secure domain name registry.
Note 2 – Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The accompanying Condensed Consolidated Balance Sheet as of March 31, 2014, the Condensed Consolidated Statements of Income for the three months ended March 31, 2014 and 2013, the Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2014 and 2013, and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (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, 2014, our results of operations for the three months ended March 31, 2014 and 2013, and our cash flows for the three months ended March 31, 2014 and 2013. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014.
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, 2013, filed with the SEC on March 3, 2014.
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.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the fair values of financial instruments, fair values of stock-based awards, income taxes, and derivative liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Revenue Recognition
We derive our revenue from patent licensing. The timing and amount of revenue recognized from each licensee depends upon a variety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations. Such agreements may be complex and include multiple elements. These agreements may include, without limitation, elements related to the settlement of past patent infringement liabilities, up-front and non-refundable license fees for the use of patents, patent licensing royalties on covered products sold by licensees, and the compensation structure and ownership of intellectual property rights associated with contractual technology development arrangements. Licensing agreements are accounted for under the FASB revenue recognition guidance, "Revenue Arrangements with Multiple Deliverables." This guidance requires consideration to be allocated to each element of an agreement that has stand-alone value using the relative fair value method. In other circumstances, such as those agreements involving consideration for past and expected future patent royalty obligations, after consideration of the particular facts and circumstances, the appropriate recording of revenue between periods may require the use of judgment. In all cases, revenue is only recognized after all of the following criteria are met: (1) written agreements have been executed; (2) delivery of technology or intellectual property rights has occurred or services have been rendered; (3) fees are fixed or determinable; and (4) collectability of fees is reasonably assured.
Patent License Agreements
: As of March 31, 2014, we have 6 patent license agreements in place. 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 do or expect to 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:
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·
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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.
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|
·
|
Current Royalty Payments
: Ongoing royalty payments cover 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.
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|
·
|
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 is generally deferred and recognized over the license term, depending on how and when the revenue recognition process is complete. However, revenue for contracts longer than one year may not be recognized in advance of collections.
|
|
·
|
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.
|
Deferred revenue
Revenue from non-refundable prepaid fees for contracts extending beyond one year are not recognized in advance of collections. In August 2013 we began receiving annual payments on a contract with a total value over 5 years of $10,000. As of March 31, 2014 we received a total of $2,500 under that contract. Revenues from these non-refundable prepaid fees are deferred and recognized as revenue when earned over a 12 month period.
Deferred Revenue, December 31, 2013
|
|
$
|
667
|
|
Less: Amount amortized as revenue
|
|
|
250
|
|
Deferred Revenue, March 31, 2014
|
|
$
|
417
|
|
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 ended March 31, 2014 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.
Derivative Instruments
Our Series I Warrants are required to be accounted for as derivative liabilities and carried at fair value on our Condensed Consolidated Balance Sheets as a result of an anti-dilution provision which precludes them from being considered indexed to our stock. The warrant liabilities are marked-to-market each period and the change in the fair value is recorded as gain or loss on derivative liability in the accompanying Condensed Consolidated Statements of Operations.
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 approximate 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 that maximize 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 (NAV) of shares held.
Corporate, Municipal and U.S. Agency Securities
: Fair value measured at the closing price reported on the active market on which the individual securities are traded.
Series I Warrants
: Fair value measured by using a binomial valuation model. The assumptions used to measure fair value of our outstanding Series I Warrants carried as derivative liabilities on our Condensed Consolidated Balance Sheet for March 31, 2014, included a warrant exercise price of $3.59 per share, a common share price of $14.18 discount rate of 1.73%, and a volatility of 89.35%. The assumptions used for December 31, 2013, were a warrant exercise price of $3.59 per share, a common share price of $19.41, a discount rate of 1.75%, and a volatility of 91.55%.
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, 2014 and December 31, 2013.
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
Investments
|
|
|
|
Adjusted
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
and Cash
|
|
|
Available
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Equivalents
|
|
|
for Sale
|
|
Cash
|
|
$
|
6,640
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,640
|
|
|
$
|
6,640
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
141
|
|
|
|
-
|
|
|
|
-
|
|
|
|
141
|
|
|
|
141
|
|
|
|
-
|
|
Corporate securities
|
|
|
10,929
|
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
10,927
|
|
|
|
1,858
|
|
|
|
9,069
|
|
Municipal securities
|
|
|
1,996
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,996
|
|
|
|
513
|
|
|
|
1,483
|
|
U.S agency securities
|
|
|
11,272
|
|
|
|
4
|
|
|
|
(38
|
)
|
|
|
11,238
|
|
|
|
4,304
|
|
|
|
6,934
|
|
|
|
|
24,338
|
|
|
|
5
|
|
|
|
(41
|
)
|
|
|
24,302
|
|
|
|
6,816
|
|
|
|
17,486
|
|
Total
|
|
$
|
30,978
|
|
|
$
|
5
|
|
|
$
|
(41
|
)
|
|
$
|
30,942
|
|
|
$
|
13,456
|
|
|
$
|
17,486
|
|
|
|
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
|
|
The following tables set forth by level within the fair value hierarchy, our liabilities stated at fair value as of March 31, 2014 and December 31, 2013.
|
|
March 31, 2014
|
|
|
|
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
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,726
|
|
|
$
|
1,726
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,726
|
|
|
$
|
1,726
|
|
|
|
December 31, 2013
|
|
|
|
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
|
|
The following table sets forth a summary of changes in the fair value of our Level 3 liability stated at fair value for the three months ended March 31, 2014 and 2013.
|
|
Three Months Ended
March 31, 2014
|
|
|
Three Months Ended
March 31, 2013
|
|
|
|
Fair Value
Measurements
Using
Significant
Unobservable
Inputs (Level 3)
|
|
|
Fair Value
Measurements
Using
Significant
Unobservable
Inputs (Level 3)
|
|
Balance December 31, 2013
|
|
$
|
2,564
|
|
Balance December 31, 2012
|
|
$
|
4,172
|
|
Gain on derivative liability included in net loss
|
|
|
(838
|
)
|
Gain on derivative liability included in net loss
|
|
|
(1,606
|
)
|
Balance March 31, 2014
|
|
$
|
1,726
|
|
Balance March 31, 2013
|
|
$
|
2,566
|
|
New Accounting Pronouncement
In July 2013, the FASB issued Accounting Standards Update ("ASU") No. 2013-11 "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry forward, a Similar Tax Loss, or a Tax Credit Carry forward Exists." The guidance is a new accounting standard on the financial statement presentation of unrecognized tax benefits. The standard provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carry forward, a similar tax loss or a tax credit carry forward if such settlement is required or expected in the event the uncertain tax position is disallowed. The standard became effective for us on January 1, 2014, and had no material effect on our financial position or results of operations when implemented.
Note 3 - Income Taxes
Our income tax expense for the three months ended March 31, 2014 and 2013 was $2 and $2, respectively. As a result of net operating losses during the periods the provisions reflect only minimum tax payments. We have valuation allowances covering our deferred tax assets including net operating loss carry-forwards.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred 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, 2014 will not be fully realizable. Accordingly, management has maintained a valuation allowance against its net deferred tax assets at March 31, 2014. The valuation allowance carried against our net deferred tax assets was approximately $18,000 and $16,000 at March 31, 2014 and December 31, 2013, respectively.
At March 31, 2014, we have federal and state net operating loss carry-forwards of approximately $28,000 and $38,000, respectively, expiring beginning in 2027 and 2016, respectively.
Effective January 1, 2009, we adopted accounting guidance for income taxes, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold and measurement attribute for the financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return. We are now required to recognize in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position.
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 position as a component of income tax expense. As of March 31, 2014, we had accrued immaterial amounts of interest and penalties related to the uncertain tax positions.
Note 4 — Commitments
We lease our corporate headquarters for $5 per month. Our lease expires in October 2015.
Note 5 — 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 14,124,469 shares of our common stock, including stock options and stock purchase rights (“RSUs”), and will expire in 2023. As of March 31, 2014, 2,227,882 shares remained available for grant under the Plan. During the three months ending March 31, 2014 there were no options or RSUs granted.
Stock-based compensation expense included in general and administrative expense was $1,828 and $1,585 for the three months ended March 31, 2014 and 2013, respectively.
As of March 31, 2014, the unrecognized stock-based and RSUs compensation expense related to non-vested stock options and RSUs was $10,384 and $4,313, respectively, which will be amortized over an estimated weighted average period of approximately 2.26 and 2.45 years, respectively.
Note 6 — Warrants
Information about warrants outstanding during the three months ended March 31, 2014 follows:
Original Number of
Warrants Issued
|
|
|
Exercise
Price per Common
Share
|
|
|
|
Exercisable at
December 31,
2013
|
|
|
|
Became
Exercisable
|
|
|
|
Exercised
|
|
|
|
Terminated /
Cancelled /
Expired
|
|
|
|
Exercisable
at March 31, 2014
|
|
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.
|
Note 7 — Litigation
We have four intellectual property infringement lawsuits pending against multiple parties in the United States District Court for the Eastern District of Texas, Tyler Division, pursuant to which we allege that these parties infringe on certain of our patents. We seek damages and injunctive relief in all the complaints.
VirnetX Inc. et al., v. Microsoft Corporation
On April 22, 2013, we initiated a lawsuit by filing a complaint against Microsoft Corporation in the United States District Court for the Eastern District of Texas, Tyler Division, pursuant to which we allege that Microsoft has infringed U.S. Patent Nos. 6,502,135, 7,188,180, 7,418,504, 7,490,151, 7,921,211, and 7,987,274. We seek damages and injunctive relief. The Markman hearing in this case is scheduled for September 4, 2014 and the jury trial is scheduled for July 13, 2015.
VirnetX Inc. v. Cisco Systems, Inc. et al and VirnetX Inc. v. Apple Inc. (Severed Case)
On August 11, 2010, we initiated a lawsuit by filing a complaint against Aastra, Apple, Cisco, and NEC in the United States District Court for the Eastern District of Texas, Tyler Division, pursuant to which we allege that these parties infringe on certain of our patents. We seek damages and injunctive relief. On February 4, 2011, we amended our original complaint, filed on August 11, 2010, against Aastra, Apple, Cisco and NEC in the United States District Court for the Eastern District of Texas, Tyler Division, to assert U.S. Patent No. 7,418,504 against Apple and Aastra. On April 5, 2011, we again amended our complaint against Aastra, Apple, Cisco and NEC in the United States District Court for the Eastern District of Texas, Tyler Division, to include Apple’s iPad 2 in the list of Apple products that are accused of infringing our patents. We also asserted our newly-issued patent, U.S. Patent No. 7,921,211 against all of the defendants in that lawsuit. A claim construction hearing was held on January 5, 2012 and the court issued a Markman ruling on April 25, 2012. Aastra and NEC have signed license agreements with us and we have agreed to drop all the accusations of infringement against them. At the pre-trial hearing, the judge decided to postpone the trial against Cisco to March 4, 2013 and just try the case against Apple. 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 Corporation for infringing four of our patents. A post-trial hearing in the case against Apple was held on December 20, 2012. On February 26, 2013, the United States District Court for the Eastern District of Texas, Tyler Division issued its Memorandum Opinion and Order regarding post-trial motions resulting from the prior jury verdict. The Court denied 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. Additionally, the Court granted our motions for pre-judgment interest, post-judgment interest, and post-verdict damages to date. Specifically, the Court ordered that Apple pay $34 in daily interest up to final judgment and $330 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. In doing so, the Court ordered the parties to mediate over a license in the following 45 days for Apple’s future infringing use not covered by the Court’s Order, and ordered us to file an appropriate motion with the court if the parties fail to agree to a license. On March 28, 2013, Apple filed a motion to alter or amend the judgment entered by the Court. The mediation was held on April 9, 2013 and the parties did not come to an agreement on an ongoing royalty rate for infringing Apple products. We filed our opposition to this motion on April 10, 2013. As ordered by the Court, we filed a sealed motion with the Court on April 16, 2013, requesting the Court’s assistance in deciding an appropriate royalty rate for all infringing products shipped by Apple that are “not more than colorably different” with regards to the accused functionality. However, the judgment may be appealed and no assurances can be given as to when or if we will receive any proceeds in connection with these matters, and accordingly there has been no recognition of the jury awards or royalties in our accompanying financial statements. Under our agreements with Leidos we would pay to Leidos 25% of the proceeds obtained by us in this lawsuit against Apple after reduction for attorneys’ fees and costs incurred in litigating those claims.
On August 1, 2013, a hearing was held in the United States District Court for the Eastern District of Texas, Tyler Division on our motion for an ongoing royalty. On March 6, 2014, t
he court issued a public version of the order previously issued under seal on March 3, 2014, awarding us an on-going royalty of 0.98% on adjudicated products and products “not colorably” different from those adjudicated at trial that incorporate any of the FaceTime or VPN on Demand features found to infringe at trial.
On March 27, 2014, Apple filed its notice of appeal to the United States Court of Appeals for the Federal Circuit. On March 28, 2014 Apple also filed a motion for Entry of Final Judgment by Apple Inc. with the United States District Court for the Eastern District of Texas, Tyler Division. We are awaiting the Court’s ruling on this matter.
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 United States Court of Appeals for the Federal Circuit. On October 16, 2013 Apple filed its opening appeal brief to the United States Court of Appeals for the Federal Circuit. Our response to the opening brief was filed on December 2, 2013, and on December 19, 2013, Apple filed its final response to complete the briefing of the court. A hearing was held on March 3, 2014 at the United States Court of Appeals for the Federal Circuit. We are awaiting the Court’s ruling on this matter.
The jury trial against Cisco was held on March 4, 2013. At the end of the trial, the jury came back with a verdict of non-infringement in the trial. The same jury determined that all our patents-in-suit patents are not invalid. On April 3, 2013, we filed a request for a new trial regarding Cisco’s infringement of four of our patents based primarily on our allegations of Cisco’s inappropriate conduct and arguments during the jury trial that concluded on March 14, 2013. In addition to the request for a new trial, we filed a motion for a judgment as a matter of law on Cisco’s infringement of the ‘759 patent. On April 11, 2013, in response to our motion, Cisco filed its renewed motion to dismiss as moot its invalidity counterclaims against the claims in our patents that were not asserted in the lawsuit as well as a conditional motion for a new trial on certain limited claims and defenses. A hearing on our motion for new trial and Cisco’s renewed motion to dismiss as moot its invalidity counterclaims and conditional motion for a new trial was held on June 17, 2013. On March 28, 2014 the court issued a memorandum opinion and order denying our motion for new trial and for Judgment as a Matter of Law. The court granted Cisco's request to dismiss and dismissed both our unasserted claims and Cisco's unasserted counterclaims without prejudice and denied as moot Cisco's request for a new trial on invalidity. We are currently reviewing options in this matter.
VirnetX Inc. v. Apple, Inc.
On November 1, 2011, we initiated a lawsuit against Apple in the United States District Court, Tyler Division, pursuant to which we allege that Apple infringes one or more claims of our U.S. Patent No. 8,051,181. We seek damages and injunctive relief. On June 17, 2013 the Court granted our unopposed motion to lift the stay ordered by the Court on December 15, 2011. On June 18, 2013 the Court granted the parties unopposed motion to consolidate this case with Civil Action No. 6:12-cv-00855-LED.
VirnetX Inc. v. Apple, Inc.
On November 6, 2012, we filed a new complaint against Apple Inc., 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 damages and injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and the latest Macintosh computers. 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 is now scheduled for May 20, 2014 and the jury trial is scheduled for October 13, 2015.
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 8 — Subsequent Events
None