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 March 31, 2021

☐

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, a 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 ☐	Smaller reporting company ☒	Non-accelerated filer ☒
			Emerging growth 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 ☒

71,058,570 shares of Registrant’s Common Stock were outstanding as of May 7, 2021.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

We have included or incorporated by reference in this Quarterly Report on Form 10-Q (including in the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations), 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, and Section 21E of the Securities Exchange Act of 1934, as amended. 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), expected growth, future business plans and costs and the impact of potential and ongoing litigation. 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. These statements include our beliefs and statements regarding general industry and market conditions and growth rates, as well as general domestic and international economic conditions. 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 Quarterly Report and elsewhere in this Quarterly Report and those described from time to time in our future reports filed with the Securities and Exchange Commission. 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 Quarterly Report that may not occur include statements that:

•

In the VirnetX Inc. v. Apple, Inc. (Case Nos. 6:11-cv-00563-RWS, 6:12-cv-00855-RWS) (“Apple II”) litigation, the United States Court of Appeals for the Federal Circuit (the “Federal Circuit”) in November 2019, affirmed-in-part and reversed-in-part the judgment issued by the United States District Court for the Eastern District of Texas (the “district court”) in the case awarding VirnetX damages of $595.9 million. On October 30, 2020, after a trial in the district court, a jury returned a verdict in favor of VirnetX, awarding VirnetX with over $502 million in damages. On January 15, 2021, the district court denied Apple’s motion for judgment as a matter of law and affirmed the jury findings. This may imply that VirnetX may soon receive over $500 million in cash, however, on February 4, 2021, Apple has filed a notice of appeal to the Federal Circuit with regards to this judgement from the district court. In addition, the patents in this case are being challenged in the United States Patent and Trademark Office. If those challenges are successful, the award in the case may be reduced, eliminated and/or delayed for a lengthy period. The continuation of this litigation is distracting to our management, expensive, and these distractions and expenses may continue.

•

We have undertaken activities to commercialize our products and patent portfolio in and outside the United States. These statements may imply that the worldwide market for our commercialized products is large and will result in significant future revenues for us. However, commercialization of products such as ours are subject to significant obstacles and risks, including but not limited to a perception by some potential partners and customers that they should await the outcome of the Apple II litigation before entering or considering to enter any agreement with us, and that or other factors may lead us to be unsuccessful in obtaining further licensing agreements or making arrangements or entering contracts which create significant 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.

		Page

PART I — FINANCIAL INFORMATION		2
	Item 1 — Financial Statements.	2

	Condensed Consolidated Balance Sheets at March 31, 2021 (unaudited) and December 31, 2020	2
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020 (unaudited)	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020 (unaudited)	4
	Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2021 and 2020 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements	7
	Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3 — Quantitative and Qualitative Disclosures About Market Risk	21
	Item 4 —Controls and Procedures	21

PART II —OTHER INFORMATION		21
	Item 1 —Legal Proceedings	21
	Item 1A —Risk Factors	22
	Item 5 —Exhibits	36

SIGNATURES		37

	As of March 31, 2021			As of December 31, 2020
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	197,198		$	192,908
Investments available for sale		19,835			28,348
Accounts receivables		6			8
Prepaid income tax		2,903			2,905
Prepaid expenses and other current assets		586			263
Total current assets		220,528			224,432
Prepaid expenses and other assets		1,213			1,301
Property and equipment, net		10			11
Deferred tax assets		16,245			9,049
Total assets	$	237,996		$	234,793

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	532		$	654
Accrued payroll and related expenses		274			220
Accrued licensing costs		—			9,438
Accrued legal expenses (Note 7)		38,284			—
Other liabilities, current		31			44
Total current liabilities		39,121			10,356

Commitments and contingencies (Note 4)

Stockholders’ equity:
Preferred stock, par value $0.0001 per share Authorized: 10,000,000 shares at March 31, 2021 and December 31, 2020, Issued and outstanding: 0 shares at March 31, 2021 and December 31, 2020		—			—
Common stock, par value $0.0001 per share Authorized: 100,000,000 shares at March 31, 2021 and December 31, 2020, Issued and outstanding: 71,058,570 shares and 71,058,570 shares, at March 31, 2021 and December 31, 2020, respectively		7			7
Additional paid-in capital		233,336			232,457
Accumulated deficit		(34,457	)		(8,014	)
Accumulated other comprehensive loss		(11	)		(13	)
Total stockholders’ equity		198,875			224,437
Total liabilities and stockholders’ equity	$	237,996		$	234,793

	Three Months Ended March 31,
	2021			2020
Revenue	$	5		$	302,576
Operating expense:
Licensing costs		(9,438	)		90,101
Research and development		1,152			1,905
Selling, general and administrative		41,943			27,376
Total operating expense		33,657			119,382
(Loss) income from operations		(33,652	)		183,194
Gain on settlement		—			41,271
Interest and other income, net		16			108,239
(Loss) income before taxes		(33,636	)		332,704
Income tax benefit (expense)		7,193			(32,759	)
Net (Loss) income	$	(26,443	)	$	299,945
Basic (loss) income per share	$	(0.37	)	$	4.26
Diluted (loss) income per share	$	(0.37	)	$	4.20
Weighted average shares outstanding basic		71,059			70,365
Weighted average shares outstanding diluted		71,059			71,384

	March 31, 2021
	Adjusted Cost		Unrealized Gains		Unrealized Losses		Fair Value		Cash and Cash Equivalents		Investments Available for Sale
Cash	$	83,156	$	—	$	—	$	83,156	$	83,156	$	—
Level 1:
Mutual funds		114,042		—		—		114,042		114,042		—
U.S. agency securities		12,718		4		—		12,722		—		12,722
U.S. treasury securities		7,110		3		—		7,113		—		7,113
		133,870		7		—		133,877		114,042		19,835
Total	$	217,026	$	7	$	—	$	217,033	$	197,198	$	19,835

	December 31, 2020
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Investments Available for Sale
Cash	$	121,785	$	—	$	—		$	121,785	$	121,785	$	—
Level 1:
Mutual funds		70,996		—		—			70,996		70,996		—
U.S. agency securities		13,767		2		—			13,769		127		13,642
U.S. treasury securities		14,707		—		(1	)		14,706		—		14,706
		99,470		2		(1	)		99,471		71,123		28,348
Total	$	221,255	$	2	$	(1	)	$	221,256	$	192,908	$	28,348

Warrants Issued				Exercise Price				Outstanding and Exercisable December 31, 2020				Issued				Exercised				Terminated / Cancelled				Outstanding and Exercisable March 31, 2021			Expiration Date
	25,000			$	5.75				25,000				-				—				—				25,000		April 30, 2025

Classification in the Company’s Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2020
Revenue (royalties)	$	302,428
Operating expenses: selling, general and administrative (reimbursed litigation costs)		2,114
Other income: gain (willful infringement)		41,271
Other income: interest income (pre and post judgment interest)		108,221
Total cash received	$	454,034

Exhibit Number	Description

31.1	Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive Data Files

VIRNETX HOLDING CORPORATION

By:	/s/ Kendall Larsen
	Name	Kendall Larsen

		Chief Executive Officer (Principal Executive Officer)

	By:	/s/ Richard H. Nance
		Name	Richard H. Nance

			Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Date: May 10, 2021

	Three Months Ended March 31,
	2021			2020
Total shareholders' equity, beginning balances	$	224,437		$	5,628

Common stock and additional paid-in capital:
Beginning balances		232,464			223,244
Common stock issued for cash, net		—			4,488
Common stock issued for options/RSUs, net		—			768
Stock-based compensation		879			778
Ending balances		233,343			229,278

Accumulated deficit (retained earnings):
Beginning balances		(8,014	)		(217,602	)
Net (loss) income		(26,443	)		299,945
Ending balances		(34,457	)		82,343

Accumulated other comprehensive loss:
Beginning balances		(13	)		(14	)
Change in unrealized investment gain/loss, net		5			2
Change in foreign currency translation, net		(3	)		1
Ending balances		(11	)		(11	)

Total shareholders' equity, ending balances	$	198,875		$	311,610

SEC Form 10-Q filed by VirnetX Holding Corp