UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2024.

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-33852

VirnetX Holding Corporation

(Exact name of registrant as specified in its charter)

Delaware		77-0390628
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

308 Dorla Court, Suite 206 Zephyr Cove, Nevada		89448
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (775) 548-1785

Former name, former address and former fiscal year, if changed since last report: N/A

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	VHC	NYSE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☒
Emerging growth company ☐	Smaller reporting company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

3,735,270 shares of the registrant’s Common Stock were outstanding as of August 9, 2024.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have included or incorporated by reference in this Quarterly Report on Form 10-Q (this “Report”), and from time to time we may make statements that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are based upon our current expectations, estimates, assumptions, and beliefs concerning future events and conditions and may discuss, among other things, anticipated future performance (including sales and earnings), products, expected growth, future business plans and costs (including investments, partnerships and collabarations, marketing and business development, staffing strategies and entering into another sector), the impact of potential litigation, the expectation of future stockholder distributions, statements regarding our efforts and ability to maintain compliance with the New York Stock Exchange (“NYSE”) continued listing standard, our beliefs and statements regarding general industry and market conditions and growth rates, as well as general domestic and international economic conditions. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result in,” and similar expressions. Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties, and other factors, many of which are outside our control, which could cause actual results to differ materially from such statements and from our historical results and experience. These risks, uncertainties and other factors include, but are not limited to those described in Item 1A – Risk Factors of this Report and elsewhere in this Report and those described from time to time in our reports filed with the Securities and Exchange Commission (the “SEC”). Readers are cautioned that it is not possible to predict or identify all the risks, uncertainties and other factors that may affect future results and that the risks described herein should not be considered a complete list. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Among others, the forward-looking statements appearing in this Report that may not occur include statements that pertain to the activities we have undertaken to commercialize our products and patent portfolio in and outside of the United States including VirnetX One™, War Room™, VirnetX Matrix™ and our Secured Domain Name Registry and Technology. These statements may imply that the worldwide market for our commercialized products is large and will result in significant future revenue for us. However, commercialization of products such as ours is subject to significant obstacles and risks that may delay or prevent future revenues for us.

EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

VIRNETX HOLDING CORPORATION

INDEX

		Page

PART I — FINANCIAL INFORMATION		2
	Item 1 — Financial Statements	2
	Condensed Consolidated Balance Sheets at June 30, 2024 (unaudited) and December 31, 2023	2
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2024 and 2023 (unaudited)	3
	Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2024 and 2023 (unaudited)	4
	Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2024 and 2023 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and 2023 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements	7
	Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3 — Quantitative and Qualitative Disclosures About Market Risk	18
	Item 4 — Controls and Procedures	18

PART II — OTHER INFORMATION		18
	Item 1 — Legal Proceedings	18
	Item 1A — Risk Factors	18
	Item 5 — Other Information	29
	Item 6 — Exhibits	30

SIGNATURES		31

Index

PART I — FINANCIAL INFORMATION

ITEM 1-FINANCIAL STATEMENTS.

VIRNETX HOLDING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

	As of June 30, 2024			As of December 31, 2023
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	26,285		$	26,289
Investments available for sale		20,624			27,258
Accounts receivables		—			2
Prepaid expenses and other current assets		299			282
Total current assets		47,208			53,831
Other investments at cost		2,500			2,500
Prepaid expenses and other assets		9,172			4,014
Property and equipment, net		68			67
Total assets	$	58,948		$	60,412

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	325		$	440
Accrued payroll and related expenses		353			316
Other liabilities, current		6,329			498
Total current liabilities		7,007			1,254

Other liabilities		3,132			3,145
Total liabilities		10,139			4,399
Commitments and contingencies (Note 4)

Stockholders’ equity:
Preferred stock, par value $0.0001 per share Authorized: 10,000,000 shares at June 30, 2024 and December 31, 2023; Issued and outstanding: 0 shares at June 30, 2024 and December 31, 2023		—			—
Common stock, par value $0.0001 per share Authorized: 100,000,000 shares at June 30, 2024 and December 31, 2023; Issued and outstanding: 3,735,270 shares at June 30, 2024 and 3,618,431 at December 31, 2023		—			—
Additional paid-in capital		243,465			242,520
Accumulated deficit		(194,616	)		(186,495	)
Accumulated other comprehensive loss		(40	)		(12	)
Total stockholders’ equity		48,809			56,013
Total liabilities and stockholders’ equity	$	58,948		$	60,412

See accompanying notes to condensed consolidated financial statements.

Index

VIRNETX HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(in thousands, except per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2024			2023			2024			2023
Revenue	$	1		$	2		$	3		$	4
Operating expense:
Research and development		1,223			4,755			2,491			6,123
Selling, general and administrative		3,193			7,366			6,854			11,913
Total operating expense		4,416			12,121			9,345			18,036
(Loss) from operations		(4,415	)		(12,119	)		(9,342	)		(18,032	)
Interest and other income, net		588			740			1,224			2,108
(Loss) before taxes		(3,827	)		(11,379	)		(8,118	)		(15,924	)
Income tax (expense) benefit		(3	)		—			(3	)		78
Net (loss)	$	(3,830	)	$	(11,379	)	$	(8,121	)	$	(15,846	)
Basic (loss) per share	$	(1.07	)	$	(3.18	)	$	(2.26	)	$	(4.44	)
Diluted (loss) per share	$	(1.07	)	$	(3.18	)	$	(2.26	)	$	(4.44	)
Weighted average shares outstanding - basic		3,593			3,573			3,593			3,572
Weighted average shares outstanding - diluted		3,593			3,573			3,593			3,572

See accompanying notes to condensed consolidated financial statements.

Index

VIRNETX HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

(in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2024			2023			2024			2023
Net (loss)	$	(3,830	)	$	(11,379	)	$	(8,121	)	$	(15,846	)
Other comprehensive income (loss):
Change in unrealized gain (loss) on investments, net of tax		(1	)		3			(22	)		110
Change in foreign currency translation, net of tax		(4	)		(3	)		(6	)		(4	)
Total other comprehensive income (loss)		(5	)		—			(28	)		106
Comprehensive (loss)	$	(3,835	)	$	(11,379	)	$	(8,149	)	$	(15,740	)

See accompanying notes to condensed consolidated financial statements.

Index

VIRNETX HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

(in thousands, except per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2024			2023			2024			2023
Total shareholders’ equity, beginning balances	$	52,184		$	77,136		$	56,013		$	152,244

Common stock and additional paid-in capital:
Beginning balances		243,005			240,435			242,520			239,753
Common stock issued for equity awards, net		—			(5	)		(3	)		(5	)
Stock-based compensation		460			682			948			1,364
Ending balances		243,465			241,112			243,465			241,112

Accumulated deficit:
Beginning balances		(190,786	)		(163,091	)		(186,495	)		(87,195	)
Net (loss)		(3,830	)		(11,379	)		(8,121	)		(15,846	)
Dividends		—			—			—			(71,429	)
Ending balances		(194,616	)		(174,470	)		(194,616	)		(174,470	)

Accumulated other comprehensive loss:
Beginning balances		(35	)		(208	)		(12	)		(314	)
Change in unrealized investment gain/loss, net		(1	)		3			(22	)		110
Change in foreign currency translation, net		(4	)		(3	)		(6	)		(4	)
Ending balances		(40	)		(208	)		(40	)		(208	)

Total shareholders’ equity, ending balances	$	48,809		$	66,434		$	48,809		$	66,434

Dividends per share	$	—		$	—		$	—		$	20.00

See accompanying notes to condensed consolidated financial statements.

Index

VIRNETX HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

	Six Months Ended June 30,
	2024			2023
Cash flows from operating activities:
Net (loss)	$	(8,121	)	$	(15,846	)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation		10			3
Bad debt		—			11
Stock-based compensation		948			1,364
Changes in assets and liabilities:
Accounts receivables		2			(1	)
Prepaid expenses and other assets		337			(79	)
Accounts payable		(115	)		24
Accrued payroll and related expenses		37			81
Other liabilities		306			(23	)
Net cash used in operating activities		(6,596	)		(14,466	)
Cash flows from investing activities:
Purchase of property and equipment		(11	)		—
Purchase of investments		(18,248	)		(25,753	)
Proceeds from sale or maturity of investments		24,854			51,062
Net cash provided by investing activities		6,595			25,309
Cash flows from financing activities:
Payment of dividends		—			(71,429	)
Payment of payroll taxes on equity awards		(3	)		(5	)
Net cash used in financing activities		(3	)		(71,434	)
Net change in cash and cash equivalents		(4	)		(60,591	)
Cash and cash equivalents, beginning of period		26,289			86,561
Cash and cash equivalents, end of period	$	26,285		$	25,970
Non-cash transactions
ROU asset and lease liability at lease modification date (Note 8)	$	5,512		$	—

See accompanying notes to condensed consolidated financial statements.

Index

VIRNETX HOLDING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share amounts)

(Unaudited)

Note 1 — Business Description and Basis of Presentation

VirnetX Holding Corporation (the “Company,” “we,” “us,” or “our”) is an Internet security software and technology company with patented technology for Zero Trust Network Access (“ZTNA”) based secure network communications. Our software and technology solutions, including Secure Domain Name Registry and Technology, VirnetX One™, War Room™, and VirnetX Matrix™ are designed to be device and location-independent, and enable a secure real-time communication environment for all types of enterprise applications, services, and critical infrastructures. Our platform allows government agencies, businesses and other enterprises of all sizes to add a “security umbrella” as an added layer on top of their existing infrastructure to further reduce risk and bolster security against ever-growing cyberthreats to data, operating systems, other infrastructure products and gateway security controllers.

Note 2 — Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying Condensed Consolidated Balance Sheet as of June 30, 2024, the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2024 and 2023, the Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2024 and 2023, the Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2024 and 2023, and the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and 2023 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 June 30, 2024, our results of operations for the three and six months ended June 30, 2024 and 2023, and our cash flows for the six months ended June 30, 2024 and 2023. 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, 2023, filed with the SEC on March 15, 2024.

Use of Estimates

We prepare our consolidated financial statements in accordance with U.S. GAAP. In doing so, we have to 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 the accounting estimates are reasonably likely to occur from period to period. 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, 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. We have reviewed our critical accounting policies and estimates with the audit committee of our Board of Directors.

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.

Index

Revenue Recognition

We derive revenue from licensing and royalty fees from contracts with customers which often span several years. We account for this revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our revenue arrangements may consist of multiple-element arrangements, with revenue for each unit of accounting recognized as the product or service is delivered to the customer. With the licensing of our patents, performance obligations are generally satisfied at a point in time as work is complete when our patent rights are transferred to our customers. We generally have no further obligation to our customers regarding our technology.

Certain contracts may require our customers to enter into a hosting arrangement with us and for these arrangements, revenue is recognized over time, generally over the life of the servicing contract.

Cash and Cash Equivalents

We consider all highly liquid investments purchased with maturities of three months or less at the date of purchase to be cash equivalents. Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these investments.

Investments

Investments classified as available-for-sale are recorded at fair market value. Unrealized gains and losses are reported as other comprehensive income. Realized gains and losses are recorded in income in the period they are realized using specific identification of each security’s cost basis. We invest our excess cash primarily in highly liquid debt instruments including corporate, government and federal agency securities, with contractual maturities of less than two years. By policy, we limit the amount of credit exposure to any one issuer.

We have elected the investment measurement alternative for other investments without readily determinable fair values. During 2023, we invested $2,000 in L2 Holdings, LLC (“Omniteq”) and $500 in OP Media, Inc. These investments are carried at our initial cost less any impairment because we do not have the ability to exercise significant influence over operating and financial matters. For these investments, we adjust the carrying value for any purchases or sales of our ownership interests. Periodically, we evaluate these investments for impairment. If we identify an impairment, we reduce the carrying value for the impairment loss with a charge to earnings. We have not identified any impairment as of June 30, 2024.

Property and Equipment

Property and equipment are stated at historical cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the accelerated and straight-line methods over the estimated useful lives of the assets, which range from five to seven years. Repair and maintenance costs are charged to expense as incurred.

Leases

The Company determines if an arrangement is a lease at inception in accordance ASC Topic 842. Operating lease right-of-use (“ROU”) assets are included in Prepaid expenses and other assets on the Condensed Consolidated Balance Sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term, using the risk-free rate.

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. Deposits held with these financial institutions may exceed the amount of insurance provided on such deposits. A portion of those balances are insured by the Federal Deposit Insurance Corporation. At times, we had funds that were uninsured. We do not believe that we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships. We have not experienced any losses on our deposits of cash and cash equivalents.

Index

Fair Value

The carrying amounts of our financial instruments, including cash equivalents, accounts payable, and accrued liabilities, approximate fair value because of their generally short maturities.

Intangible Assets

We record intangible assets at cost, less accumulated amortization. Amortization of intangible assets is provided over their estimated useful lives, which can range from three to 15 years, on either a straight-line basis or as revenue is generated by the assets.

Impairment of Long-Lived Assets

We identify and record impairment losses on long-lived assets used in operations when events and changes in circumstances indicate that the carrying amount of an asset might not be recoverable, but not less than annually. Recoverability is measured by comparison of the anticipated future net undiscounted cash flows to the related assets’ carrying value. If such assets are deemed 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.

Research and Development

Research and development costs include expenses paid to outside development consultants and compensation related expenses for our engineering staff. Research and development costs are expensed as incurred.

Income Taxes

We account for income taxes using the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our assets and liabilities. We calculate current and deferred tax provisions based on estimates and assumptions that could differ from actual results reflected on the income tax returns filed during the following years. Adjustments based on filed returns are recorded when identified in the subsequent years. The effect on deferred taxes for a change in tax rates is recognized in income in the period that the tax rate change is enacted. In assessing our deferred tax assets, we consider whether it is more likely than not that all or some portion of the deferred tax assets will not be realized.

The 2017 U.S. Tax Cuts and Jobs Act changes IRC Section 174, regarding capitalization of book research and development (“R&D”) expenses for income tax purposes. Effective for tax years beginning in 2022, IRC Section 174 requires the capitalization of book R&D expenses which are capitalized and amortized over 5 years for domestic R&D expenses and over 15 years for foreign R&D expenses. To date there has been limited guidance from the IRS on how to quantify the amount of book R&D expenses subject to capitalization, including the indirect expenses supporting the R&D function. Due to the limited guidance, some assumptions were made in our estimates.

A valuation allowance is provided for deferred income tax assets when, in our judgment, based upon currently available information and other factors, it is more likely than not that all or a portion of such deferred income tax assets will not be realized. The determination of the need for a valuation allowance is based on an on-going evaluation of current information including, among other things, historical operating results, estimates of future earnings in different taxing jurisdictions and the expected timing of the reversals of temporary differences. We believe the determination to record a valuation allowance to reduce a deferred income tax asset is a significant accounting estimate because it is based, among other things, on an estimate of future taxable income in the United States and certain other jurisdictions, which is susceptible to change and may or may not occur, and because the impact of adjusting a valuation allowance may be material. In determining when to release the valuation allowance established against our net deferred income tax assets, we consider all available evidence, both positive and negative. We continually assess our ability to generate sufficient taxable income during future periods in which our deferred tax assets may be realized. If and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our statements of operations.

Index

We account for our uncertain tax positions in accordance with U.S. GAAP, which utilizes a two-step approach to evaluate tax positions. Step one, recognition, requires evaluation of the tax position to determine if based solely on technical merits it is more likely than not to be sustained upon examination. Step two, measurement, is addressed only if a position is more likely than not to be sustained. In step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement with tax authorities. If a position does not meet the more likely than not threshold for recognition in step one, no benefit is recorded until the first subsequent period in which the more likely than not standard is met, the issue is resolved with the taxing authority, or the statute of limitations expires. Positions previously recognized are reversed if and when we subsequently determine the position no longer is more likely than not to be sustained. Evaluation of tax positions, their technical merits, and measurements using cumulative probability are highly subjective management estimates. Actual results could differ materially from these estimates.

Stock-Based Compensation

We account for stock-based compensation using the fair value recognition method in accordance with U.S. GAAP. We recognize these compensation costs on a straight-line basis over the requisite service period of the award, which is generally a vesting term of four years. We recognize forfeitures, if any, when they occur. In addition, we record stock-based compensation expense for awards granted to non-employees at fair value of the consideration received or the fair value of the equity instruments issued, as they vest, over the performance period (See Note 5 – Stock-Based Compensation).

Earnings per Share

Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is 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. Additionally, weighted average shares outstanding for both basic and diluted earnings per share include all vested restricted shares issued and outstanding.

New Accounting Pronouncements

In December 2023, the FASB issued Accounting Standards Updated (“ASU”) No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires disaggregated information about an entity’s effective tax rate reconciliation as well as information on income tax paid. The guidance in this ASU is effective for public companies with annual periods beginning after December 15, 2024. We plan to adopt the guidance for the fiscal year ending December 31, 2025. We are currently evaluating the effect adoption of this ASU will have on our consolidated financial statements.

In March 2024, the FASB issued ASU No. 2024-01, Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards. The guidance in this ASU is effective for public companies with annual periods beginning after December 15, 2024. We plan to adopt the guidance for the fiscal year ending December 31, 2025. We are currently evaluating the effect adoption of this ASU will have on our consolidated financial statements.

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.

Index

Our financial instruments are stated at amounts that equal, or approximate, fair value. When we estimate fair value, we utilize market data or assumptions that we believe market participants would use in pricing the financial instrument, including assumptions about risk and inputs to the valuation technique. We use valuation techniques, primarily the income and market approach, which maximizes the use of observable inputs and minimize the use of unobservable inputs for recurring fair value measurements.

Mutual funds: Valued at the quoted net asset value of shares held.

U.S. agency and treasury securities: Valued 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 June 30, 2024 and December 31, 2023.

	June 30, 2024
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Investments Available for Sale
Cash	$	2,628	$	—	$	—		$	2,628	$	2,628	$	—
Level 1:
Mutual funds		20,024		—		—			20,024		20,024		—
U.S. agency and treasury securities		24,269		—		(12	)		24,257		3,633		20,624
		44,293		—		(12	)		44,281		23,657		20,624
Total	$	46,921	$	—	$	(12	)	$	46,909	$	26,285	$	20,624

	December 31, 2023
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Investments Available for Sale
Cash	$	1,452	$	—	$	—		$	1,452	$	1,452	$	—
Level 1:
Mutual funds		20,040		—		—			20,040		20,040		—
U.S. agency and treasury securities		32,046		27		(18	)		32,055		4,797		27,258
		52,086		27		(18	)		52,095		24,837		27,258
Total	$	53,538	$	27	$	(18	)	$	53,547	$	26,289	$	27,258

Note 3 — Income Taxes

For the three and six months ended June 30, 2024, we recognized no income tax benefit which is an effective tax rate of 0%. For the three and six months ended June 30, 2023, we recognized an income tax benefit of $0 and $78, respectively, which is an effective tax rate of 0.0% and 0.49%. The effective tax rate was lower than the statutory federal income tax rate during 2023 and 2024 primarily due to the change in valuation allowance.

Our tax years for 2005 and forward are subject to examination by the U.S. tax authority and various state tax authorities because we utilized the NOLs and tax credits generated in those years in 2020. The statute of limitation for those years expires three years after October 2021, the date we filed our 2020 income tax returns. The California Franchise Tax Board is currently conducting an audit on the Company's 2019, 2020 and 2021 California tax returns. The outcome of the audit is yet to be determined.

We are required to recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. At June 30, 2024, we have no uncertain tax positions. Our policy is to recognize interest and penalties accrued on uncertain tax positions as a component of income tax expense. We had no accrued interest or penalties related to uncertain tax positions at June 30, 2024.

Index

Note 4 — Commitments and Related Party Transactions

We have a non-exclusive service agreement for the use of an aircraft from K2 Investment Fund LLC (“LLC”) for business travel for employees of the Company. We incurred approximately $315 and $686 compared to $112 and $399 in fees and reimbursements to the LLC during the three and six months ended June 30, 2024 and 2023, respectively. We pay for the Company’s usage of the aircraft and have no rights to purchase. Our Chief Executive Officer and Chief Administrative Officer are the managing partners of the LLC and control the equity interests of the LLC. The agreement with the LLC provides for use of the plane at an initial rate of $8 per flight hour which increased to $9.8 per flight hour in April 2024. The agreement contains no minimum usage requirement and includes other terms and conditions. The agreement can be cancelled by either us or the LLC with 30 days’ notice and renews on an annual basis unless terminated by either party. Neither party has exercised their termination rights.

See Note 8 – Leases for further discussion of our lease commitments.

Note 5 — Stock-Based Compensation

Our stockholders approved an amendment to the Amended and Restated 2013 Equity Incentive Plan (the “Plan”) at our annual shareholders’ meeting in June 2024, which among other things, added 1,000,000 shares to the plan. The Plan provides for the granting of equity awards including stock options, restricted stock units (“RSUs”) and restricted stock. Options granted under the Plan are granted with an exercise price equal to the fair value of our stock on the date of grant. RSUs and restricted stock are granted at the fair value of our stock on the date of grant because they have no exercise price. The fair value of options, RSUs and restricted stock are expensed over the vesting periods. All options, RSUs and restricted stock are subject to forfeiture if service terminates prior to the shares vesting. At June 30, 2024, there were 1,058,006 shares available for grant under the Plan.

Stock-based compensation expense included in general and administrative expense was $264 and $393, and in research and development expense was $196 and $289, for the three months ended June 30, 2024 and 2023, respectively. Stock-based compensation expense included in general and administrative expense was $494 and $764, and in research and development expense was $454 and $600, for the six months ended June 30, 2024 and 2023, respectively.

During the three months ended June 30, 2024, we granted 48,000 shares of restricted stock with a weighted average grant date fair value of $3.77. During the six months ended June 30, 2024, we granted 119,000 shares of restricted stock with a weighted average grant date fair value of $5.58. During the six months ended June 30, 2024, we paid $3 in withholding taxes on shares of restricted stock; the grantees surrendered shares of equal value and those surrendered shares were cancelled. The amounts are reflected as financing costs in the accompanying statement of cash flows. No restricted stock was issued during the six months ended June 30, 2023.

No options were granted during the three and six months ended June 30, 2024. During the three and six months ended June 30, 2023, we granted 1,875 options with a weighted average grant date fair value of $7 per share. No options were exercised during the three and six months ended June 30, 2024 or 2023.

No RSUs were granted during the three and six months ended June 30, 2024. During the three and six months ended June 30, 2023, we granted 1,248 RSUs with a grant date fair value of $10 per share. We issued 7,168 shares of common stock as a result of vesting RSUs in the three and six months ended June 30, 2024. We issued 10,763 shares of common stock as a result of vesting RSUs in the three and six months ended June 30, 2023, for which we paid $5 in withholding taxes.

As of June 30, 2024 and 2023, the unrecognized stock-based compensation expense related to unvested stock options, RSUs, and restricted stock was $2,374 and $4,082, respectively, which will be amortized over an estimated weighted average period of approximately 2.37 years and 2.25 years, respectively.

During the six months ended June 30, 2024, we returned 32,750 options, 2,210 RSUs and 7,138 shares of restricted stock to the plan due to termination of employees and the expiration of unexercised options.

Index

Note 6 — Equity

Common Stock

During the six months ended June 30, 2024, we issued 119,000 shares of restricted stock, as well as 7,168 shares of common stock as a result of vesting RSUs. During the six months ended June 30, 2023 we issued 10,763 shares of common stock as a result of vesting RSUs.

Warrants

In 2020, we issued warrants for the purchase of 1,250 shares of common stock at an exercise price of $115 per share, exercisable on the date of grant, expiring in April 2025. The weighted average fair value at the grant date was $83.20 per warrant. The fair value at the grant date was estimated utilizing the Black-Scholes valuation model with the following weighted average assumptions (i) dividend yield on our common stock of 0 percent (ii) expected stock price volatility of 97 percent (iii) a risk-free interest rate of 0.27 percent and (iv) and expected option term of 5 years.

Warrants Issued				Exercise Price				Outstanding and Exercisable December 31, 2023				Issued				Exercised				Terminated / Cancelled				Outstanding and Exercisable June 30, 2024			Expiration Date
	1,250			$	115				1,250				—				—				—				1,250		April 30, 2025

SEC Form 10-Q filed by VirnetX Holding Corp