FINJAN HOLDINGS, INC. The following discussion includes 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, aboutFinjan Holdings, Inc. , (the "Company" or "Finjan Holdings "), financial condition and results of operations, including discussions about management's expectations for the business. These include statements regarding our expectations, intentions, beliefs and projections about our future results, performance, prospects and opportunities. These statements can be identified by the fact that they do not relate strictly to historical or current facts or by the use of words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "project," "potential," "should," "will," "will be," "would," and the negative of these terms and similar expressions, but this is not an exclusive way of identifying such statements. Readers are cautioned that forward-looking statements are not guarantees of future performance. Our actual results, performance and achievements may differ materially from those expressed in, or implied by, the forward-looking statements contained in this report as a result of various risks, uncertainties and other factors. Important factors that could cause our actual results to differ materially from our expectations include, without limitation, our ability to execute our business plan, the outcome of pending or future enforcement actions, our ability to expand our technology portfolio, the enforceability of our patents, the continued use of our technologies in the market, the development of products and services for the consumer and enterprise market, the sufficiency of our existing cash and investments to meet our cash needs for at least the next 12 months, the development or continuation of a liquid trading market for our securities, regulatory developments and other factors described under Item 1A. "Risk Factors," as set forth in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 and any subsequent quarterly or current reports. The following discussion should also be read in conjunction with the audited and unaudited consolidated financial statements and notes thereto, as set forth in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 and any subsequent quarterly or current reports, including this Quarterly Report on Form 10-Q. The Company will continue to file annual, quarterly and current reports, proxy statements and other information with theU.S. Securities and Exchange Commission (the "SEC"). Forward-looking statements speak only as of the dates specified in such filings. Except as expressly required under federal securities laws and the rules and regulations of theSEC , we do not undertake any obligation to update any forward-looking statements to reflect events or circumstances arising after any such date, whether as a result of new information or future events or otherwise. You should not place undue reliance on the forward-looking statements included in this report or that may be made elsewhere from time to time by us, or on our behalf. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. 18 -------------------------------------------------------------------------------- Table of
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Overview
We operate a cybersecurity business, focused on licensing and enforcement, developing mobile security applications, and investing in emerging cybersecurity technologies and intellectual property.
Finjan recognizes that the dynamic nature of the COVID-19 Pandemic requires flexibility in its normal business activities particularly with respect to ongoing litigation. Most courts have postponed long-set trials and hearings or are conducting them via virtual meeting platforms. This impacts the Operations and Industry Trends which are ongoing, the expectation is that these will return to normal once the Pandemic has eased.
Operations
Finjan Holdings, Inc. (the "Company" or "Finjan Holdings ") is a pioneer in cybersecurity focused in three business lines; intellectual property licensing and enforcement, mobile security application development, and investing in cybersecurity technologies and intellectual property. Licensing and enforcement of the Company's cybersecurity patent portfolio is operated by its wholly-owned subsidiariesFinjan, Inc. ("Finjan") andFinjan Blue, Inc. ("Finjan Blue"). The Company's mobile security business is operated through its wholly-owned subsidiaryFinjan Mobile, Inc. ("Finjan Mobile"). Through Finjan, we own a portfolio of patents, focused on software and hardware technologies that proactively detect malicious code and thereby protect end users from identity and data theft, spyware, malware, phishing, trojans and other web and network threats. Founded in 1997, Finjan developed and patented technologies that are capable of detecting previously unknown and emerging threats on a real-time, behavior-based, basis, in contrast to signature-based methods of intercepting only known threats to computers. The older signature-based methods, were standard in the web and network security industry during the 1990s. As the web and endpoint security industries - known as cybersecurity - have transitioned to behavior-based detection of malicious code, we believe that our patented technologies continue to be widely used by third parties in a number of market segments. We intend to maximize the economic benefits of our technologies through further licensing and to broaden our technologies and patent holdings through acquisitions and strategic partnerships. As a core element of our continued patent licensing and enforcement business, Finjan monitors a number of markets and assesses and observes the adoption of our patented technologies in these markets. Our management team, in conjunction with the internal team, external legal, technical, and financial experts concludes on a case-by-case basis whether or not they believe that Finjan's patented technologies are being used. Based on these observations, we continue to believe our patented technologies are highly relevant in specific cybersecurity technology areas including, but not limited to, endpoint/cloud software, web gateway/internet infrastructure, and networking equipment markets. From that basis, the Company pursues unlicensed entities through licensing, assertion of claims or both to preserve the value of our portfolio in general. This also reinforces the value to existing licensees of the Finjan patent portfolio. Since the sale of its hardware and software operations in 2009, Finjan's primary source of income and related cash flows has been the enforcement of its patent rights against unauthorized use and income derived from intellectual property licenses granted to third parties for the use of patented technologies that are owned by Finjan. Finjan Blue was founded to support our development and licensing efforts of the IBM Security Patents obtained by Finjan Blue through theAugust 2017 Patent Assignment and Support Agreement and theMay 2018 Patent Assignment Agreement with IBM. The Agreements, the terms of which are confidential, includes pathways for Finjan and IBM to consider development efforts in the future and provides for the sharing of pertinent institutional knowledge and resources by IBM to Finjan Blue. Finjan Mobile was founded to ensure that consumer mobile devices are protected against spies, phishing and malware attacks. Given the uptrend in mobile device usage coupled with the amount of transient corporate data, the average mobile user presents and represents higher risks of data loss through hacking. The mobile device has become so convenient that consumers often ignore online security and download apps and blindly agree to terms of service, purchase products, pay bills, connect to free Wi-Fi, and do not think twice about personal data and photos stored on their devices. We started research and development of security products for mobile devices which benefit from technologies developed and patented by Finjan but also include the invention of new mobile technologies that will help expand our existing patent portfolio. Products currently available include our Finjan Mobile Secure Browser and a Virtual Private Network (VPN), recently re-branded as InvinciBull, which can be used within the Finjan Browser or separately to encrypt data and keep consumers' data secure. As ofMarch 31, 2020 , we had 9 employees. However, in the current environment impacted by COVID-19, we have reduced our headcount and continue to execute our business plans with the remaining team. As the business allows, we intend to hire or engage additional full-time professionals, employees, and/or consultants in alignment with our growth strategy. While the 19 -------------------------------------------------------------------------------- Table of
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market is highly competitive for attracting and retaining highly qualified professionals in our industry, we continue our endeavor to find such candidates for our Company. Our management team and additional personnel that we may hire in the future will be primarily responsible for executing and implementing our licensing and enforcement strategy, including analyzing licensing and enforcement opportunities, making tactical decisions related to our strategy, identifying new applications for our existing cybersecurity technologies and pursuing opportunities to invest in new technologies through strategic partnerships and acquisitions.
Industry Trends and Outlook
Cybersecurity is not just another technology but a critical business issue that intersects government, corporations and individual citizens. We have seen a number of devastating cybersecurity breaches targeting high profile government offices and corporations. The full extent of the cost and damage associated with these attacks are often hard to quantify. Nonetheless, these attacks are expected to continue, along with their associated and sometimes unprecedented costs. In many cases, it is not just the government or corporation that suffers losses or damages but their clients and customers, who can also fall victim by the breach of their personal and otherwise confidential data. These issues have forced both government and corporations to take a serious look at their vulnerabilities, which will lead to increased spending on cybersecurity infrastructure, including hardware and software. Given our experience of over 20 years in the cybersecurity market we have had the benefit of actively participating in the progression on how technology has moved to meet the new threats and demands. We believe this puts us in a unique position to make observations and determine the best course of action in order to make investments in new developing technologies. There is still a limited appreciation for how much personal data is being pushed out over the internet for anyone to capture and unlike desktops and laptop computers, mobile devices do not have the same kind of access to security. We believe this represents a unique opportunity for Finjan to develop products for consumer mobile devices that were once only available to our enterprise customers. As such, we are using and building upon our current patented technology and migrating it into the mobile platform so consumers can have greater control of their security and personal information. We believe that there are some proponents of patent law reform, largely made up of an individual or coalitions of technology corporations that continue to seek statutory limitations on how companies can enforce their patents. In an effort to ensure fair and balanced protections for all good faith patent owners, our executives have dedicated time and resources to actively educate our lawmakers and existing and prospective stakeholders on how certain proposed reforms could harm individual inventors, startups, small companies, the licensing industry and therefore,U.S. innovation and the economy as a whole. Further, since the enactment of the Leahy-Smith America Invents Act ("AIA") onSeptember 16, 2011 , several aspects of the patent law have been interpreted by the courts, including what constitutes patentable subject matter, inducement of infringement, and (attorney) fee-shifting to the non-prevailing party in the context of litigation, among other issues. Moreover, under AIA, patents previously granted by the USPTO may be reviewed through post-patent grant proceedings such as reexamination or inter partes review (IPR). It is becoming a trend, if not a practice, for accused infringers to petition for reexaminations or IPRs of asserted patents as these proceedings may give the petitioner "two bites at the apple." The outcome of the proceedings can range from decisions favorable to the patent holder, favorable to both parties, or favorable to the petitioner. If the outcome is the latter, the value of the challenged patent can be materially reduced or extinguished. Thus, patent rights, including enforcement of such rights against unauthorized use is inherently subject to uncertainties. Future Growth Strategy Our mission, for the foreseeable future, is to build a diversified cybersecurity company benefiting from historical investments in technology and patents while expanding into new product and service offerings. We believe our patented technologies continue to hold significant value and we intend to vigorously protect our investment, the value of our existing licensees' investments, and the value that technology and intellectual property represents for our shareholders. We are pursuing and will continue to pursue our growth through the following strategies: •Expand our IP Assets through Acquisitions and Strategic Partnerships - We intend to acquire and develop new patents, technologies or other business assets or companies and invest in intellectual property through strategic partnerships, acquisitions of technology-focused companies, IP portfolios or other assets and other initiatives. We endeavor to identify relevant security technologies and patents that have been, or are anticipated to be, widely adopted by third parties in connection with the manufacture or sale of products and services, and to which we can bring enforcement actions (i.e., licensing or litigation) and other expertise. We may also broaden our technology and patent holdings by working with inventors and universities, acquiring technology companies, investing in research laboratories, start-ups, and by creating strategic partnerships with companies, large and small, seeking to effectively 20 -------------------------------------------------------------------------------- Table of
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and efficiently monetize their technology and patent assets. Our experience with monetizing both technologies and patents may be considered valuable by potential acquisition candidates and strategic partners who may lack resources or know-how to effectively and efficiently generate a return for those investments. Through Finjan Blue, we entered into a Patent Assignment and Support Agreement with International Business Machines Corporation, aNew York corporation ("IBM"), effectiveAugust 24, 2017 ("Patent Assignment Agreement"). Pursuant to the Patent Assignment Agreement, Finjan Blue acquired 41 select issued and pending IBM patents in the security sector in exchange for$8.5 million cash, payable as follows: (i)$2.0 million which was paid upon execution of the Patent Assignment Agreement and (ii)$6.5 million over the subsequent four years, with a final payment dueAugust 24, 2021 . IBM will support Finjan Blue in its development and licensing of the IBM Security Patents and provide assistance for such efforts as needed for the term of the Agreement and Finjan Blue will reimburse IBM for reasonable time and out of pocket costs for such assistance, however IBM will not receive further proceeds from such efforts. IBM has reservation of rights with respect to the IBM Security Patents for its current licensees and open source initiatives. Finjan Blue and IBM also agreed to explore further development and licensing opportunities. The relationship with IBM was further expanded onMay 15, 2018 with a second Patent Assignment and Support Agreement (the "May 2018 Patent Assignment Agreement"). Pursuant to theMay 2018 Patent Assignment Agreement, Finjan Blue acquired 56 select issued and pending IBM patents in the security sector. The terms of theMay 2018 Patent Assignment Agreement are confidential. OnJune 29, 2018 , the Company including its wholly-owned subsidiaries, entered into a license agreement with Trend Micro Incorporated (K.K.), a Japanese corporation and Trend Micro, Inc., aCalifornia corporation, which included the transfer of 18 select issued security-related patent assets to the Company.
•Develop and Expand Existing Patent Portfolio - We have obtained and continue our efforts to obtain new patents relating to security technologies through research and development and/or acquisitions.
•Continue to Demonstrate Best Practices in Pursuing Licensing Relationships and Enforcing our Patent Rights - InMarch 2014 , we adopted Best Practices to demonstrate our commitment to ethical, transparent and consistent business practices for intellectual property licensing. We called upon and continue to promote industry-wide adoption of a set of best practices through leadership organizations such as theLicensing Executive Society (LES) and theOpen Register of Patent Owners that support technological advancements, investments in innovation, and continued job creation while protected by a robust patent system. In February of 2017, theAmerican National Standards Institute or ANSI had approved LES' application to receive accreditation to become aStandards Development Organization or SDO. With this new endorsement and governance from ANSI, Finjan is moving swiftly to build industry consensus for IP and patent related matters in a number of disciplines. We intend to continue pursuing a proactive campaign that adheres to our best practices guidelines while rigorously protecting our intellectual property rights. We have entered into preliminary discussions with numerous potential licensees in accordance with these Best Practices but acknowledge that it takes many discussions and many months for preliminary discussions to culminate in a license agreement, if at all. While it is our preference to resolve our patent-related disputes through amicable business solutions, protecting the value of our patented technology is paramount and enforcement actions are sometimes required. •Invest inInternal Research & Development through Finjan Mobile - We continue to pursue internal research and development of security technologies that both relate to Finjan's existing patented inventions as well as new concepts to meet an ever-expanding market need. Since we do not yet have sufficient internal personnel to engage in large-scale research and development, we currently operate this business with limited internal staff focused on strategy and market development while software development is completed under contract with external developers. Products currently available include our Finjan Mobile Secure Browser and a Virtual Private Network (VPN), re-branded as InvinciBull, which can be used within the Finjan Browser or separately to encrypt data and keep consumers secure. Finjan Mobile released InvinciBull VPN in the latter part of 2018. The VPN is available for use on Apple and Android mobile platforms and Mac and Windows desktop applications. The InvinciBull VPN sits in the VitalSecurity family of products and builds upon the incorporation of Finjan's core security patented technology. InvinciBull VPN is available for download on the Apple and Android platforms in the iTunes and Google Play stores and desktop versions for Mac and Windows can be downloaded from InvinciBull.io.
The Company continues to explore inorganic growth and acquisition opportunities along with additional marketing efforts to complement the vision for Finjan Mobile.
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Although we currently pursue growth initiatives through the above strategies, unforeseen market and industry conditions and new developments may necessitate changes in our strategies. We intend to remain resilient, flexible, and open to new opportunities that benefit our shareholders.
Recent Accounting Pronouncements
See "Note 1 - Nature of operations and summary of significant accounting policies, - Recent adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted "
Comparability to Future Results
We have set forth below selected factors that we believe have had, or can be expected to have, a significant effect on the comparability of our recent or future results. In addition to the factors described below, please see Item 1A. "Risk Factors" for additional factors that may affect our operating results.
Fluctuations of Income, Expenses and Cash Flows Related to Licensing and Enforcement
Our licenses and judgments may not be recurring and are not necessarily indicative of the income or cash flows that we expect to generate in the future from our existing technology portfolio or otherwise. We expect income, expenses and cash flows related to patent enforcement to be unpredictable and to fluctuate significantly from period to period. A number of factors, many of which are beyond our control, may affect the timing and amount of our income and cash flows related to patent licensing and enforcement actions, including, but not limited to, trial dates, the strength of our claims and likelihood of achieving an acceptable license on settlement, the timing and nature of any appeals and our ability to collect on any favorable judgments. Significant fluctuations in our income and cash flows may make our business difficult to manage and adversely affect our business and operating results. We do not recognize income from our licensing and enforcement actions until the terms are fixed and determinable or litigation is finalized (whether resolved at trial or in a settlement). Our expenses, principally with respect to litigation costs, may also vary significantly from period to period depending upon a number of factors, including, but not limited to, whether fees of outside legal counsel are paid on an hourly, contingent or other basis, the timing of depositions, discovery and other elements of litigation, costs of expert witnesses and other consultants, and other costs incurred in support of enforcement actions.
As a result of the factors described above and other known and unknown risks affecting our business, our historical operating performance may not be indicative of our future results.
Stock-Based and Other Executive Compensation
Our Board of Directors has adopted the Finjan Holdings Amended and Restated 2014
Incentive Compensation Plan ("Restated 2014 Plan"), which our shareholders
approved at our 2014 annual meeting of stockholders on July 10, 2014 , pursuant
to which 2,196,836 shares of common stock are authorized for issuance and on
June 21, 2017 , at our 2017 annual meeting of stockholders, the Company's
shareholders approved (i) an increase of 1,000,000 shares to the Finjan
Holdings, Inc. Restated 2014 Plan and (ii) the addition of an "evergreen"
feature which provides for the annual replenishment of shares to the Restated
2014 Plan share reserve without stockholder approval, which represented an
additional 1,385,366 shares as of January 1, 2018 , 1,378,432 shares as of
January 1, 2019 and 1,382,546 shares as of January 1, 2020 (equal to 5.0% of our
outstanding shares of Common Stock as of the end of our immediately preceding
fiscal year). A total of 538,691 restricted stock units and 2,399,013 options
remain outstanding as of March 31, 2020 , under the Restated 2014 Plan. We expect
that future equity-based awards will continue to be made under the Restated 2014
Plan to our directors, officers and other employees and consultants. As a
result, to the extent relevant, we may incur non-cash, stock-based compensation
expenses in future periods that may not be comparable to past periods. As of
March 31, 2020 , we have 4,133,416 shares available for issuance under the 2014
Plan.
We expect to increase the number of employees and consultants to help execute
our strategy in the cybersecurity business and support our public company
functions. Accordingly, we will continue to incur compensation expenses in
future periods that we did not incur during the historical periods presented in
our financial statements.
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Results of Operations
Three months ended
For
Three Months ended
2020 2019 Change
%
(In millions, except percentages)
Revenue $ 3.8 $ - $ 3.8 100 %
Cost of revenues 0.9 - 0.9 100 %
Gross profit 2.9 - 2.9 100 %
Gross Margin 76 % - %
Operating expenses:
Research and development 0.4 0.5 (0.1) (20) %
Selling, general and administrative (1) 6.7 7.9 (1.2) (15) %
Total operating expenses 7.1 8.4 (1.3) (15) %
Income (loss) from operations (4.2) (8.4) 4.2 (50) %
Other income, net - 0.1 (0.1) (100) %
Loss before income taxes (4.2) (8.3) 4.1 (49) %
Benefit for income taxes 0.0 (2.3) 2.3 (100) %
Net loss $ (4.2) $ (6.0) $ 1.8 (30) %
(1) Includes stock based compensation $ 0.3 $ 0.2 $ 0.1 50 %
Revenue is derived from license agreements that we enter into with third-parties
following negotiations pursuant to our licensing and enforcement program.
Revenue is determined by the timing of licensing agreements and enforcement
programs and can vary significantly period to period. During the three months
ended March 31, 2020 we entered into one license agreement for $3.8 million
compared to nil for the same period in 2019.
Costs of revenues includes legal expense directly associated with our licensing
and enforcement programs and vary as a percentage of revenues, as does gross
margin, due to the timing of legal expense paid on settlement.
Research and development expenses ("R&D") are primarily from our Finjan Mobile
security business. Our focus on R&D consisted primarily of professional services
associated with the development of mobile security application products, these
expenses are consistent quarter over quarter.
Selling, general and administrative expenses ("SG&A") are largely related to
litigation, personnel and amortization of the IBM patents. Litigation expenses
were $3.8 million and $5.1 million for the three months ended March 31, 2020 and
2019, a decrease of $1.3 million . These costs are primarily due to the timing of
various outstanding actions as described in "Note 9 - Litigation, claims and
assessments".
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Liquidity and Capital Resources
Overview
Our cash requirements are, and will continue to be, dependent upon a variety of factors. We expect to continue devoting significant capital resources to the litigations in process and any other litigation we pursue. We also expect to require significant capital resources to maintain our issued patents, prosecute our patent applications, acquire new technologies as part of our growth strategy, and attract and retain qualified personnel on a full-time basis.
In addition:
•OnApril 21, 2017 , we entered into a$3.9 million agreement with.Avira, Inc. , to provide services to support our VPN Platform effectiveJuly 1, 2017 , payable over 3 years in quarterly payments of$0.3 million . As ofMarch 31, 2020 , the Company has a$0.3 million contractual obligation dueApril 2020 . •We entered into a$8.5 million Patent Assignment and Support Agreement with IBM effectiveAugust 24, 2017 . As ofMarch 31, 2020 , the Company has a$4.0 million obligation due over the next 1.5 years, with a final payment dueAugust 24, 2021 . •OnJuly 19, 2018 , we entered into a lease for our corporate headquarters office inEast Palo Alto, California . Under the terms of the lease, we owe minimum lease obligations of$3.7 million over 57 months. As ofMarch 31, 2020 , we have an outstanding obligation of$2.6 million . The amount and timing of cash flows from our licensing and enforcement activities are subject to uncertainties stemming primarily from uncertainties regarding the rates of adoption of our patented technologies, the success of our licensing efforts and the outcome of enforcement actions. As a result, our income and cash flows may vary significantly from period to period.
Our cash, cash equivalents and short term investments are as follows:
March 31, 2020 December 31, 2019
(in millions)
Cash & cash equivalents $ 18.7 $ 18.3
Short term investments $ 13.3 $ 17.8
$ 32.0 $ 36.1
As of
Based on current forecasts, management believes that our cash and cash
equivalents will be sufficient to meet our anticipated cash needs for working
capital for the next 12 months from the date of filing of this quarterly report.
Three Months ended March 31
2020 2019
(in millions)
Net cash used in operating activities $ (4.1) Net cash provided by (used in) investing activities $ 4.5
Net cash provided by financing activities $ -
$ -
Cash flows from operating activities:
Net cash used by our operating activities of$4.1 million during the three months endedMarch 31, 2020 , is primarily due to our net loss of$4.2 million , less$0.6 million in depreciation, amortization and non-cash lease expense,$0.3 million of stock-based compensation and$3.2 million in deferred income taxes offset by$4.0 million of net change in operating assets and liabilities. 24 -------------------------------------------------------------------------------- Table of
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Net cash used in our operating activities of$2.9 million during the three months endedMarch 31, 2019 , is primarily due to our net loss of$6.0 million , less$0.5 million in depreciation and amortization and$0.2 million of stock-based compensation,$2.3 million in deferred taxes,$2.6 million related to the right of use assets, offset by approximately$7.3 million of net change in other operating assets and liabilities.
Cash used in investing activities:
During the three months endedMarch 31, 2020 , net cash provided by investing activities of$4.5 million was related to the$3.0 million purchases of marketable securities, offset by$7.5 million in redemptions and maturities of marketable securities.
During the three months ended
Cash used in financing activities:
During the three months ended
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements.
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