What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-16 compared with 2020-03-16 · 255 added, 266 removed, 443 unchanged (54% of the section changed)

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Consolidated Statements of Operations of VirnetX Holding Corporation for the years ended December 31, 2020 and, December 31, 2019

Consolidated Statements of Comprehensive Loss of VirnetX Holding Corporation for the years ended December 31, 2019 and December 31, 2018

Consolidated Statements of Comprehensive Income (Loss) of VirnetX Holding Corporation for the years ended December 31, 2020 and December 31, 2019

Consolidated Statements of Stockholders’ Equity of VirnetX Holding Corporation for the years ended December 31, 2020 and, December 31, 2019

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of VirnetX Holding Corporation (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive loss, stockholders equity, and cash flows for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively referred to as the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2019 and 2018, and the consolidated results of their operations and cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheets of VirnetX Holding Corporation (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 16, 2021, expressed an unqualified opinion.

Basis for Opinion

These consolidated financial statements are the responsibility of the Companys management.

Our responsibility is to express an opinion on the Companys consolidated financial statements based on our audits.

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

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We believe that our audits provide a reasonable basis for our opinion.

Emphasis of Matter

As discussed in Notes 12 and 15 to the financial statements, as part of ongoing litigation, the Company received approximately $454,034,000 from Apple on March 13, 2020.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Description of the Matter

Revenue Recognition

As discussed in Notes 2 and 12 to the financial statements, during the year ended December 31, 2020 the Company collected a lump sum payment in the amount of $454 million from Apple Inc.

on a judgement as a result of a favorable verdict relating to a patent infringement lawsuit.

As disclosed by management, the process for determining the value of revenue from the basis of the award was identified in the Final Judgement which included, fixed royalty rate per device, damages for willful infringement, interest, and reimbursement for court costs and attorney’s fees.

Our determination that revenue recognition pertaining to the Final Judgement is a critical audit matter results from the significant judgment exercised by management in determining the classification.

Processes involving higher amounts of management judgment include the interpretation of the provisions of the Final Judgement to determine the amount of revenue to recognize and whether or not the Company is acting as a principal in the fulfillment of the identified performance obligations.

Audit Procedures

Our principal audit procedures related to the Company’s revenue recognition for the Final Judgement included the following:

- We evaluated the Company’s internal controls related to the identification of distinct performance obligations and the determination of the timing of revenue recognition.

- We evaluated management’s significant accounting policies related to the Final Judgement .

- We obtained and read the Final Judgement and evaluated and tested management’s identification of the significant terms for completeness.

From the terms in the Final Judgement , we evaluated the appropriateness of management’s application of their accounting principles, in their determination of revenue recognition conclusions.

- We tested the mathematical accuracy of management’s calculations of the classification of the Final Judgement as well as the associated timing of revenue recognized in the financial statements.

Description of the Matter

Deferred Taxes

As discussed in Notes 2 and 10 to the financial statements, the Company recorded a deferred tax asset, net of a valuation allowance as of December 31, 2020.

In assessing the ability to realize the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The valuation allowance is based on management’s estimates of future taxable income and application of relevant income tax law.

Our determination that valuation of deferred taxes is a critical audit matter results from the significant judgment by management when assessing the ability to realize the deferred tax assets, particularly as it relates to estimates of future taxable income.

This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures relating to management’s assessment of the realizability of deferred tax assets, as it relates to estimates of future taxable income and application of income tax law.

Audit Procedures

Our principal audit procedures related to the Company’s deferred taxes included the following:

- We evaluated management’s assessment of the realizability of deferred tax assets on a jurisdictional basis.

This included evaluating estimates of future taxable income, evaluating management's application of income tax law, and testing the completeness and accuracy of underlying data used in management’s assessment.

- We evaluated management’s estimates of future taxable income which involved evaluating whether the estimates used by management were reasonable considering the current and past performance of the respective entity and whether the estimates were consistent with evidence obtained in other areas of the audit.

/s/ Farber Hass Hurley LLP

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Accounts receivables

Prepaid income tax

Prepaid expenses and other current assets

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Property and equipment, net

Long term, deferred tax asset

LIABILITIES AND STOCKHOLDERS’ EQUITY

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Accrued payroll and related expenses

Accrued licensing costs

Other liabilities, current

Income tax liability

Total current liabilities

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Operating expense:

Licensing costs

Research and development

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Total operating expense

Loss from operations

Income (loss) from operations

Gain on settlement

Interest and other income, net

Loss before taxes

Income tax benefit (expense)

Basic and diluted loss per share

Weighted average shares outstanding basic and diluted

Income (loss) before taxes

Income tax (expense) benefit

Net income (loss)

Basic earnings (loss) per share

Diluted earnings (loss) per share

Weighted average shares outstanding basic

Weighted average shares outstanding diluted

VIRNETX HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

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December 31, 2019

Net income (loss)

Other comprehensive (loss), net of tax:

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Total other comprehensive gain (loss), net of tax

Comprehensive loss

Comprehensive income (loss)

See accompanying notes to consolidated financial statements.

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(in thousands, except share amounts)

Comprehensive

Stockholders’

Comprehensive

Balance at December 31, 2018

Cumulative effect of accounting change

Stock issued for cash at $ 4.00 -$ 6.49 per share, net

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Stock-based compensation

Comprehensive income:

Change in unrealized

losses, net of tax

Comprehensive loss:

Change in foreign currency translation, net of tax

Change in unrealized gains, net of tax

Comprehensive loss

Balance at December 31, 2019

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Stock-based compensation

Warrants issued for services

Dividends declared and paid, $ 1.00 per share

Comprehensive income:

Change in foreign currency translation, net of tax

Change in unrealized gains,

Comprehensive loss

Comprehensive income

Balance at December 31, 2020

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Cash flows from operating activities:

Adjustments to reconcile net loss to net cash from operating activities:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Stock-based compensation

Amortization of warrant issuance costs

Deferred income taxes

Changes in assets and liabilities:

Prepaid expenses and other current assets

Accounts payable

Prepaid expenses and other assets

Accounts payable and accrued liabilities

Other liabilities

Accrued payroll and related expenses

Accrued licensing costs

Accounts receivable

Income tax liability

Net cash used in operating activities

Prepaid income taxes

Net cash provided by (used in) operating activities

Cash flows from investing activities:

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Proceeds from sale of common stock

Payments on payroll taxes on cashless exercise of RSUs

Net cash provided by financing activities

Payment of dividends on common stock

Payments on payroll taxes on cashless vesting of RSUs

Net cash (used in) provided by financing activities

Net increase (decrease) in cash and cash equivalents

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Cash paid for income taxes

Deferred revenue reclassified to retained earnings – ASC 606 adoption

See accompanying notes to consolidated financial statements.

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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.

(See Note 14)

ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term (see Note 13 – Leases).

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.

We account for revenue in accordance with Accounting Standards Update (ASU) No.2014-09, Revenue from Contracts with Customers (Topic 606), which we adopted on January 1, 2018 using the modified-retrospective method.

Under Topic 606 a performance obligation is a promise in a contract to transfer a distinct good or service to the customer.

The Company derives 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 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 and our patent rights are transferred to our customers.

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.

The Company actively monitors and enforces its intellectual property (“IP”) rights, including seeking appropriate compensation from third parties that utilize the Company’s IP without a license.

As a result, the Company may, from time to time, receive payments as part of a settlement or compensation for a patent infringement dispute.

Proceeds received are allocated to each element identified in the settlement or compensation, based on the fair value of each element.

Generally, settlements and compensation may include the following elements:

the value of a license or royalty agreement, cost reimbursement, damages, and interest.

Elements identified related to licensing and royalty are recognized as revenue.

Elements identified as reimbursed costs are generally recorded as a reduction to the reported expenses.

Elements identified as damages or interest are generally recorded in other income in the condensed consolidated statement of operations.

During the year ended December 31, 2020, the Company collected a lump sum payment of $ 454,034 from Apple, Inc., because of a favorable court decision relating to a patent infringement case.

The court decision identified the following as the basis of the award:

$ 302,428 for past royalties, $ 41,271 in damages for willful infringement, $ 108,221 for interest, and $ 2,114 in reimbursement for court costs and attorney’s fees (see Note 12 - Litigation).

Elements of the payment were recognized in the Company’s condensed consolidated statement of operations as follows:

Classification of Payment Received in the Company’s Condensed Consolidated Statement of Operations

December 31, 2020

Revenue (royalties)

Operating expenses:

selling, general and administrative (reimbursed litigation costs)

Other income:

gain (willful infringement)

Other income:

interest income (pre- and post-judgment interest)

Total cash received

Licensing Costs

Included in operating expenses for the year ended December 31, 2020, is $ 90,101 in licensing costs we incurred in conjunction with the proceeds received from Apple Inc., pursuant to a favorable court decision relating to a patent infringement case.

Contingent Gains

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Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these investments.

Prepaid Expenses and Other Current Assets

Prepaid Expense and Other Current Assets on the consolidated balance sheet at December 31, 2018 includes the current portion of prepaid rent for a facility lease for corporate promotional and marketing purposes, and this balance is included in ROU assets as of December 31, 2019 (see Note 14 - Effects of Adopting ASU Topic 842 – Leases, below).

In a prior year, the Company prepaid $4,000 which is being amortized over the remaining balance of the lease.

The unamortized non-current portion of the prepayment is included in Prepaid Expenses-Non-current on the consolidated balance sheet.

Investments are classified as available-for-sale and are recorded at fair market value.

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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.

Consistent with our policy, and because of our history of operating losses, we do not currently recognize the benefit of all of our deferred tax assets, including tax loss carry forwards, that may be used to offset future taxable income.

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.

Due to the 2020 income, we have released the valuation allowance against federal net deferred tax assets, and we maintain a partial valuation allowance against the state net operating loss and credit carryovers due to lack of income in California.

We continually assess our ability to generate sufficient taxable income during future periods in which our deferred tax assets may be realized.

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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.

During 2019, and 2018 we incurred losses;

therefore, the effect of any common stock equivalent would be anti-dilutive during these periods.

During 2019 we incurred losses;

therefore, the effect of any common stock equivalent would be anti-dilutive during the year.

New Accounting Pronouncements

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The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740.

The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

The amendments also improve consistent application of and simplify U.S.

GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

We are currently evaluating the impact, if any this ASU will have on our consolidated financial statements and related disclosures .

In August 2018 the FASB issued ASU 2018-13 - Fair Value Measurement (Topic 820).

The FASB is issuing the amendments in this ASU as part of the disclosure framework project.

On March 4, 2014, the Board issued a proposed FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8:

Notes to Financial Statements, which the Board finalized on August 28, 2018.

The disclosure framework projects objective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by GAAP that is most important to users of each entitys financial statements.

The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

We will adopt this guidance on January 1, 2020 and expect this guidance will have no material impact on our financial position and statement of operations.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments-Credit Losses (Topic 326).

The purpose of this ASU is to require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected.

Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses.

This ASU is effective for interim and annual reporting periods beginning after December 15, 2019.

We will adopt this guidance on January 1, 2020 and expect this guidance will have no material impact on our financial position and statement of operations.

In February 2016, FASB issued ASU No.

2016-02, Leases (Topic 842) as amended and supplemented by subsequent ASUs, (ASU 2016-02).

ASU 2016-02 requires an entity to recognize ROU assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements.

For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted.

We adopted this ASU on January 1, 2019 which had no impact on our consolidated statements of operations.

In May 2014, the FASB issued ASU No.

2014-09 Revenue from Contracts with Customers (Topic 606).

As amended, Topic 606 supersedes prior revenue recognition requirements including most industry-specific revenue recognition guidance.

On January 1, 2018 we adopted this standard using the modified retrospective method which resulted in a $2,500 decrease in accumulated deficit and a $2,500 decrease in deferred revenue in our consolidated balance sheet.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments, and issued subsequent amendments to the initial guidance within ASU 2019-04 and ASU 2019-05 (collectively, “ASU 2016-13”).

The amendments in ASU 2016-13 replace the incurred loss impairment methodology with the current expected credit loss model, which requires consideration of a broader range of reasonable and supportable information to estimate credit losses.

The Company adopted this ASU effective January 1, 2020 and the adoption did not have a material impact on the Company’s financial position, results of operations or cash flows .

Note 3 − Property and Equipment

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Rent expense was $ 56 , for each of the years ended December 31, 2020, and 2019.

Future minimum rents due under the lease total $102 in 2019, of which $56 is due in 2020 and $46 is due in 2021, when the lease expires.

Future minimum rents due under the lease total $ 46 in 2021, when the lease expires.

We entered into a service agreement for the use of an aircraft from K2 Investment Fund LLC (“LLC”) for business travel for employees of the Company.

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The 2013 Plan provides for the granting of stock options and restricted stock units purchase rights (“RSUs”) to our employees and consultants.

Stock options granted under the 2013 Plan may be

incentive stock options or nonqualified stock options.

Stock options granted under the 2013 Plan may be incentive stock options or nonqualified stock options.

Incentive stock options (“ISOs”) may only be granted to our employees (including officers and directors).

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Outstanding at December 31, 2018

RSUs cancelled

Outstanding at December 31, 2019

Outstanding at December 31, 2020

Intrinsic value is calculated as the difference between the per-share market price of our common stock on the last trading day of 2020, which was $ 5.04 and the exercise price of the options.

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The total intrinsic value of options exercised was $ 151 and $ 2,473 during the years ended December 31, 2020 and 2019, respectively.

Stock-based compensation expense is included in general and administrative expense for each period as follows:

Stock-based compensation expense is included in operating expense for each period as follows:

Stock-Based Compensation by Type of Award

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Diluted earnings per share are based upon the weighted average number of shares and potentially dilutive common shares outstanding.

Potential common shares outstanding principally include stock options, under our stock plan and warrants.

During 2019, and 2018 we incurred losses;

therefore, the effect of any common stock equivalent would be anti-dilutive during those periods.

Potential common shares outstanding principally include stock options and RSUs under our stock plan and warrants.

During 2019, we incurred losses;

therefore, the effect of any common stock equivalent would be anti-dilutive during the year.

The table below sets forth the basic and diluted loss per share calculations:

Basic and diluted weighted average number of shares outstanding

Basic and diluted loss per share

Net income (loss)

Basic weighted average number of shares outstanding

Effect of dilutive securities

Diluted weighted average number of shares outstanding

Basic earnings (loss) per share

Diluted earnings (loss) per share

Note 8 − Common Stock

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Our restated articles of incorporation authorize us to issue up to 100,000,000 shares of $ 0.0001 par value common stock.

In August 2015, we filed a universal shelf registration statement with the SEC enabling us to offer and sell from time to time up to $100 million of equity, debt or other types of securities.

We also entered into an at-the-market (ATM)

equity offering sales agreement with Cowen & Company, LLC in August 2015, under which we may offer and sell shares of our common stock having an aggregate value of up to $35 million.

On March 8, 2018, we amended our August 20, 2015 equity offering sales agreement with Cowen whereby the maximum aggregate value of the Companys common stock we could offer and sell, from time to time, was increased from $35,000 to $50,000.

This registration statement expired on September 2, 2018.

On July 30, 2018 we filed a $100,000 replacement universal shelf registration statement on SEC Form S-3.

On July 30, 2018 we filed a $ 100,000 universal shelf registration statement on SEC Form S-3.

This replacement registration statement was declared effective by the SEC on August 16, 2018.

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The average sales price per common share sold during the year ended December 31, 2019 was $ 5.84 and the aggregate proceeds from the sales totaled $ 10,866 during the period.

Sales commissions, fees and other costs associated with the ATM transactions totaled $785 for 2018 (see Note 15 Subsequent Events).

In addition, in 2015 we issued warrants for the purchase of 25,000 shares of common stock which are exercisable at a price of $7 per share and expire in April 2020.

Sales commissions, fees and other costs associated with the ATM transactions totaled $ 326 for 2019.

On May 8, 2020 , we declared a one-time cash dividend to shareholders of record as of the close of business on May 18, 2020 of $ 1 per share of common stock, payable on May 26, 2020 .

The timing and amounts of future dividends, if any, will depend on market conditions, corporate business and financial considerations and regulatory requirements.

In 2020, we issued warrants for the purchase of 25,000 shares of common stock at an exercise price of $ 5.75 per share, exercisable on the date of grant expiring in April 2025 .

The weighted average fair value at the grant date was $ 4.16 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

Outstanding and

December 31, 2019

Outstanding and Exercisable

December 31, 2020

Expiration Date

April 30, 2020

April 30, 2025

Note 9 − Employee Benefit Plan

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Note 10 − Income Taxes

The income tax benefit (provision) is comprised of the following:

The income tax provision (benefit) is comprised of the following:

December 31, 2020

December 31, 2019

Total income tax provision

Total income tax provision (benefit)

A reconciliation of the United States federal statutory income tax rate to our effective income tax rate is as follows:

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Valuation allowance

Accounting method change - ASC 606

Stock based compensation

Effective income tax rate

In 2019 and 2018, we had pre-tax losses of $19,573 and $25,403 respectively, which are available for carry forward to offset future taxable income.

We made determinations to provide full valuation allowances for our net deferred tax assets at the end of 2019 and 2018, including NOL carryforwards generated during the years, based on our evaluation of positive and negative evidence, including our history of operating losses and the uncertainty of generating future taxable income that would enable us to realize our deferred tax assets.

The Company’s effective tax rate for both 2020 and 2019 was lower than the statutory federal income tax rate primarily due to the change of valuation allowance.

Due to the income in 2020, our valuation allowance against federal net deferred tax assets was fully released in 2020.

We continue to provide partial valuation allowance against California net operating loss and research credit carryovers due to the fact that we have no income in California.

Deferred tax assets (liabilities) consist of the following:

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Total deferred tax liability

Net deferred tax assets (liabilities)

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that a portion of the net deferred assets will not be realized.

The ultimate realization of the net 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 December 31, 2019 will not be realizable.

Accordingly, management has maintained a full valuation allowance against its net deferred tax assets at December 31, 2019.

The net change in the total valuation allowance for the 12 months ended December 31, 2019 was an increase of $1,816.

At December 31, 2019, we had federal and state net operating loss carryforwards of approximately $131,055 and $107,989, respectively, expiring beginning in 2028 for federal and in 2029 for state, respectively.

At December 31, 2019, we had federal research and development creditcarryforwards of approximately $1,730, expiring beginning in 2032.

Internal Revenue Code Section 382 places a limitation (the Section 382 Limitation) on the amount of net operating loss carry forwards that can be used to offset taxable income after a change in control (generally greater than 50% change in ownership) of a loss corporation.

Net deferred tax assets

In 2020 and 2019, we had pre-tax income of $ 307,452 and pre-tax losses of $ 19,573 , respectively.

At December 31, 2020, we had federal and state net operating loss carryforwards of approximately $ 0 and $ 107,989 , respectively.

All of the federal net operating loss carryforwards has been utilized to offset taxable income in 2020.

The state net operating loss carryforward will be expiring beginning in 2029 .

A valuation allowance is provided for deferred 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, or reduce, a valuation allowance associated with 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.

Internal Revenue Code Section 382 places a limitation on the amount of net operating loss carryforwards that can be used to offset taxable income after a change in control (generally greater than 50% change in ownership) of a loss corporation.

California, the state in which our headquarters was once located, has similar rules.

Our capitalization may have resulted in such a change.

Generally, after a control change, a loss corporation cannot deduct net operating loss carry forwards generated in years prior to the deemed change of control under IRC Section 382 in excess of the Section 382 Limitation.

Since the Company did not have a greater than 50% change of control as defined under the Internal Revenue Code, no limitation applies to the Company’s Net Operating Losses.

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.

As a result, we have provided an allowance for an uncertain tax position under ASC 740-10 of $0 and $316 at December 31, 2019 and December 31, 2018, respectively.

In 2019, we released all ASC 740-10 uncertain tax positions due to the expiring of the statute of limitation.

Our tax returns are subject to review by various tax authorities.

The returns subject to review are those from 2005 forward.

At December 31, 2020, we have no uncertain tax positions.

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 NOLs and tax credits generated in these years were utilized in 2020.

The statute of limitation for these years shall expire three years after the date of filing 2020 income tax returns.

Our policy is to recognize interest and penalties, if any, accrued on any unrecognized tax benefits, as a component of income tax expense.

We had no interest or penalties accrued for the year ended December 31, 2019.

We had no interest or penalties accrued for the year ended December 31, 2020 or 2019.

Reconciliation of provision for uncertain tax position discussed above:

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Valued at the quoted net asset value (NAV) of shares held.

agency securities :

agency and treasury securities :

Fair value measured at the closing price reported on the active market on which the individual securities are traded.

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agency securities

treasury securities

December 31, 2019

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Note 12 – Litigation (all dollar amounts in this section are expressed in thousands except for rates per device)

We have multiple intellectual property infringement lawsuits pending in the United States District Court for the Eastern District of Texas, Tyler Division (USDC), and United States Court of Appeals for the Federal Circuit (USCAFC).

We have several intellectual property infringement lawsuits pending in the United States District Court for the Eastern District of Texas, Tyler Division (“USDC”), and United States Court of Appeals for the Federal Circuit (“USCAFC”) and the Supreme Court of the United States (“SCOTUS”).

Cisco Systems, Inc.

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On September 30, 2016, pursuant to the 2014 remand from the USCAFC, a jury in the USDC awarded us $ 302,400 for Apple’s infringement of four of our patents.

On September 29, 2017, the USDC entered its final judgement, denied all of Apples post-trial motions, and granted all our post-trial motions, including our motion for willful infringement and enhanced the royalty rate during the willfulness period from $1.20 to $1.80 per device, and awarded us costs, certain attorneys fees, and prejudgment interest.

The total amount in the final judgement was $439,700, including $302,400 (jury verdict), $41,300 (enhanced damages) and $96,000 (costs, fees and interest).

On October 27, 2017 Apple filed its notice of appeal of this final judgement to the USCAFC.

Apple filed its opening brief on March 19, 2018.

We filed our response on April 4, 2018.

On April 11, 2018, USCAFC designated Cases 18-1197-CB, Case 17-1368 and Case 17-1591 as companion cases and assigned to the same merits panel.

Events and developments after this order are described below under VirnetX Inc.

The Mangrove Partners (USCAFC Case 17-1368) (Consolidated Appeal) .

On September 29, 2017, the USDC entered its final judgment, denied all of Apple’s post-trial motions, granted all our post-trial motions, including our motion for willful infringement and enhanced the royalty rate during the willfulness period from $ 1.20 to $ 1.80 per device, and awarded us costs, certain attorneys’ fees, and prejudgment interest.

The total amount in the final judgment was $ 439,700 , including $ 302,400 (jury verdict), $ 41,300 (enhanced damages) and $ 96,000 (costs, fees and interest).

On October 27, 2017 Apple appealed the final judgment entered on September 29, 2017 to the USCAFC.

Oral arguments in this case were held on January 8, 2019 .

On January 15, 2019 , the Court issued a Rule 36 order affirming the district court’s final judgment.

Apple filed a petition for panel rehearing and rehearing en-banc in this matter on February 21, 2019 .

On October 1, 2019 , USCAFC issued an order denying Apple’s petition.

Apple filed a petition for a writ of certiorari with the SCOTUS, which was denied on February 24, 2020 .

Prior to the SCOTUS decision denying Apple’s petition for a writ of certiorari, on February 20, 2020 , Apple filed a Rule 60 (b) motion for relief from judgment with the USDC, seeking relief from the district court’s September 29, 2017 final judgment.

VirnetX filed a responsive brief in opposition on March 5, 2020 .

On March 13, 2020 , the Company received payment of $ 454,034 from Apple, representing the previously announced final judgment with interest in this case.

Apple sought payment relief by filing a motion under rule 60(b).

On September 1, 2020 USDC issued an order denying Apple’s motion for relief of judgement.

This case is now closed.

(Case 6:12-CV-00855-LED) (“Apple II”)

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We sought damages and injunctive relief.

The accused products include the iPhone 5, iPod Touch 5th Generation, iPad

4 th Generation, iPad mini, and the latest Macintosh computers; These products were not included in the Apple I case because they were released after the Apple I case was initiated.

The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4 th Generation, iPad mini, and the latest Macintosh computers ;

these products were not included in the Apple I case because they were released after the Apple I case was initiated.

Post-trial motions hearing was held on July 18, 2018.

On August 31, 2018, the USDC entered a Final Judgment and issued its Memorandum Opinion and Order regarding post-trial motions, affirming the jury’s verdict of $ 502,600 and granting VirnetX motions for supplemental damages, a sunset royalty and the royalty rate of $ 1.20 per infringing iPhone, iPad and Mac products, pre-judgment and post-judgment interest and costs.

On September 20, 2018, pursuant to a Courts order, attorneys from VirnetX and Apple conferred and agreed, without dispute, to add an amount totaling $93,300 for Bill of Costs and Prejudgment Interest to the $502,600 jury verdict.

The total amount in the final judgement in the Apple II case is now $595,900.

Apple has filed a notice of appeal with the USCAFC in the Apple II case.

On October 9, 2018, USCAFC accepted the notice and docketed it as Case No.

19-1050 - VirnetX Inc.

All subsequent events and developments in this case are described below under VirnetX Inc.

(USCAFC Case 19-1050) (Apple II Appeal) .

The Mangrove Partners (USCAFC Case 17-1368) (Consolidated Appeal)

On April 11, 2018, the USCAFC in an order designated the following appeals as companion cases and assigned to the same merits panel;

• VirnetX Inc.

The Mangrove Partners (USCAFC Case 17-1368)

On December 16, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the Patent Trial and Appeal Board (PTAB) in IPR2015-01046, and on December 20, 2016 for IPR2015-1047, involving our U.S.

6,502,135, and 7,490,151.

These appeals also involve Apple, and one of them involves Black Swamp IP, LLC.

Oral arguments in this case were argued on January 8, 2019.

On July 8, 2019, the USCAFC issued its opinion vacating and remanding both decisions.

The court agreed with us that the PTAB misconstrued the patent claims, that many of the PTABs invalidity findings lacked substantial evidence, and that the PTAB Board abused its discretion in denying us the opportunity to file a motion for additional discovery as to the real party-in-interest issues.

The underlying inter partes review (IPR) proceedings are currently pending before the PTAB.

• VirnetX Inc.

Cisco Systems, Inc.

(USCAFC Case 18-1197-CB) (Appeal of Apple I Case)

On October 27, 2017 Apple appealed the Final Judgment entered on September 29, 2017 to the USCAFC.

Oral arguments in this case were held on January 8, 2019.

On January 15, 2019 the Court issued a Rule 36 order affirming the District Court Judgement.

Apple filed a request for panel rehearing and rehearing en-banc in this matter on February 21, 2019.

On March 12, 2019, the Court invited us to respond to Apples petition on or before March 26, 2019.

We filed our response on March 22, 2019.

On July 1, 2019 Apple filed a motion for leave to file a supplemental brief regarding the impact of the USCAFCs decision in VirnetX Inc.

Cisco Systems, Inc.

(USCAFC Case 18-1751) , issued on June 28, 2019 (described below).

We filed a response to Apples motion and a contingent motion for leave to file a responsive supplemental brief on July 11, 2019.

On July 17, 2019, the USCAFC granted both motions and ordered Apples and our supplemental briefs filed.

On August 1, 2019, USCAFC issued an order denying Apples petition for panel and en banc rehearing.

On August 7, 2019, Apple filed a motion to vacate the August 1, 2019 order and for leave to file a second request for panel rehearing and rehearing en-banc.

On October 1, 2019, USCAFC issued an order denying Apples motion.

Apple subsequently requested an extension for its deadline to petition for a writ of certiorari, and that deadline was extended until December 29, 2019.

Apple filed a petition for a writ of certiorari with the U.S.

Supreme Court, which was denied on February 24, 2020.

Prior to the Supreme Court decision denying Apples Petition for Writ of Certiorari, on Ferbuary 20, 2020, Apple filed a Rule 60(b) Motion for Relief from Judgement in the U.S.

District Court (VirnetX Inc.

Apple, 6:10-cv-00417) seeking relief from the Courts September 29, 2017 Final Judgment.

VirnetX filed a responsive brief in opposition on March 5, 2020.

On March 13, 2020, the Company received payment of $454,034 from Apple, representing the previously announced final judgment with interest in this case.

Apple has filed a motion in the USDC seeking to vacate the USDCs final judgment and has indicated that it will seek restitution of the payment if relief is awarded.

The USDC has not ruled in this matter.

Apple filed a notice of appeal with the USCAFC in the Apple II case.

On October 9, 2018 , USCAFC docketed the appeal as Case No .

19-1050 - VirnetX Inc.

Apple Inc., Cisco Systems, Inc.

(USCAFC Case 17-1591)

On February 7, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-parties reexamination nos.

95/001,788, 95/001,789, and 95/001,856 related to our U.S.

7,921,211 and 7,418,504 .

Oral arguments in this case were argued on January 8, 2019.

On July 1, 2019 Apple filed a motion for leave to file a supplemental brief regarding the impact of the USCAFCs decision in VirnetX Inc.

Cisco Systems, Inc.

(USCAFC Case 18-1751) , issued on June 28, 2019 (described below).

On August 1, 2019, the USCAFC issued an opinion in this case agreeing with us that the PTAB could not maintain two of those reexaminations (initiated by Apple) with respect to claims as to which there has been a prior final decision on patent validity entered by a federal court.

The court instructed PTAB to terminate those reexamination proceedings with respect to claims 1-35 of the ‘504 patent and claims 36-59 of the ‘211 patent.

The court affirmed PTABs invalidity findings with respect to the remaining patent claims.

Apple filed a request for panel rehearing and rehearing en-banc in this matter on August 26, 2019.

We filed a separate request for panel rehearing on September 3, 2019.

Our request was denied on September 19, 2019, and Apples request was denied on October 11, 2019.

All decisions are final in this case.

(USCAFC Case 19-1050) (Apple II Appeal)

On January 24, 2019 Apple filed its opening brief.

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On November 22, 2019 , the USCAFC issued an opinion affirming the district court’s findings that Apple is precluded from making certain invalidity arguments and that Apple infringed the ’ 135 and ’ 151 patents;

reversing the district courts finding that Apple infringed the 504 and 211 patents;

reversing the USDC’s finding that Apple infringed the ’ 504 and ’ 211 patents;

and remanding the case for proceedings on damages.

Apple sought panel and en banc rehearing, which the USCAFC denied on February 10, 2020 .

On February 22, 2020, USDC issued a scheduling order for the parties to brief the court about the need for a new trial for recalculating the damages.

We filed our initial brief on February 28, 2020.

All briefings have been completed.

Courts decision in the matter is awaited.

(USCAFC Case 17-2593)

On September 22, 2017, we filed with the USCAFC appeals of the invalidity findings by the PTAB in IPR2016-00693 and IPR2016-00957 involving our U.S.

7,418,504 and 7,921,211.

The briefing in these appeals has not taken place.

The entity that initiated the IPRs, Black Swamp IP, LLC, indicated on October 18, 2017, that it would not participate in the appeals.

On November 27, 2017, the USPTO indicated that it would intervene in the appeals.

On January 19, 2018, the USCAFC stayed these appeals pending the USCAFCs decision in Case 17-1591.

On October 25, 2019, we and the USPTO filed a joint request that the deadline to inform the USCAFC how these appeals should proceed be extended until November 1, 2019.

On November 15, 2019, we and the USPTO requested that the USCAFC stay this appeal pending resolution of any petition for rehearing in Arthrex, Inc.

Smith & Nephew, Inc., No.

The USCAFC denied the stay request on November 27, 2019.

On January 6, 2020, we filed a motion to vacate and remand in light of Arthrex, Inc.

Smith & Nephew, Inc., 941 F.3d 1320 (Fed.

2019), which was granted on February 27, 2020.

Cisco Systems, Inc.

(USCAFC Case 18-1751)

On March 30, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no.

95/001,851 involving our U.S.

Oral arguments in this case were held on June 4, 2019.

On June 28, 2019, the USCAFC issued its opinion vacating the PTABs invalidity findings with respect to claims 5, 12, and 13 and remanding to the PTAB for further proceedings.

The court affirmed the PTABs invalidity findings with respect to the remaining patent claims.

Cisco filed a request for panel rehearing and rehearing en-banc in this matter on August 12, 2019.

Ciscos request was denied on October 1, 2019.

Cisco Systems, Inc.

(USCAFC Case 19-1043)

On October 1, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no.

95/001,746 involving our U.S.

We filed our opening brief on March 15, 2019.

Cisco filed its response brief on June 19, 2019.

We filed our reply brief on August 14, 2019.

Cisco filed a motion to submit a sur-reply brief on August 26, 2019, which we opposed.

On September 27, 2019, the USCAFC issued an order deferring resolution of Ciscos motion for the merits panel.

Oral argument was held on January 8, 2020.

On January 21, 2020, the USCAFC issued a Rule 36 judgment affirming the PTABs decision.

Cisco Systems, Inc.

(USCAFC Case 19-1671)

On March 18, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no.

95/001,679 involving our U.S.

We filed a motion to remand on August 23, 2019,

which the USCAFC denied on October 1, 2019, directing the parties to address the issues in the merits briefs.

Our opening brief is currently due on November 12, 2019.

On November 7, 2019, we filed another motion to vacate and remand in light of Arthrex .

The USPTO intervened and opposed the remand.

The USCAFC granted our motion on January 24, 2020.

On February 22, 2020 , the USDC issued a scheduling order for the parties to brief the court about the need for a new trial for recalculating the damages.

We filed our motion for entry of judgment on February 28, 2020 .

The arguments on this matter were heard on April 14, 2020 .

In its order, unsealed on May 1, 2020 , the USDC denied VirnetX’s motion for entry of a new judgment based on the prior jury verdict and ordered a new jury trial on damages.

On August 10, 2020 , the USDC granted Apple’s motion for continuance and reset the date to October 26, 2020 .

On October 30, 2020 , a jury returned a $ 502,800 verdict in favor of VirnetX based on Apple’s infringement of two network security patents:

VirnetX US Patents No .

6,502,135 and No .

The jury verdict called for damages of $ 0.84 per accused device since the 2013 launch of Apple’s iOS 7 operating system and represents 598,629,580 infringing units from US sales only.

On January 15, 2021 , the district court denied Apple’s motion for judgment as a matter of law, and on February 4, 2021 , Apple filed a notice of appeal to the USCAFC.

Mangrove Partners Master Fund, Ltd., Apple Inc.

(USCAFC Case 20-2271 ) and VirnetX Inc.

Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp, LLC (USAFC Case 20-2272 )

On September 15, 2020 , we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes review proceedings IPR 2015-01046 and IPR 2016-00062 involving our U.S.

6,502,135 , and an appeal of the invalidity findings by the PTAB in inter partes review proceedings IPR 2015-1047 , IPR 2016 - 00063 , and IPR 2016-00167 involving our U.S.

On September 25, 2020 , the USCAFC issued an order consolidating the two appeals.

On December 15, 2020 , we filed a motion to vacate the PTAB decisions below and to remand these appeals to the PTAB, which remains pending.

In view of our motion to remand, our deadline to file an initial brief is currently stayed.

Luoma (SCOTUS Case 20-74 )

On July 23, 2020 , the United States and the USPTO (collectively, “the United States”) filed a petition for a writ of certiorari from several decisions by the USAFC, including decisions in VirnetX Inc.

Cisco Systems, Inc.

(USCAFC Case 19-1725)

On March 29, 2019, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no.

95/001,792 involving our U.S.

We filed a motion to remand on September 10, 2019.

We filed a supplemental motion to remand in light of Arthrex on November 22, 2019, which the USCAFC granted on January 24, 2020.

Cisco filed a petition for panel and en banc rehearing on February 24, 2020, which remains pending.

2019-1671 , and VirnetX Inc.

2017-2593 , -2594 .

In those cases, the USAFC granted VirnetX’s motions to vacate the underlying decisions of the PTAB on the basis of Arthrex, Inc.

Smith & Nephew, Inc.

, 941 F .3 d 1320 (Fed.

2019 ), and remanded for further proceedings.

The United States requested that the SCOTUS hold its certiorari petition pending the disposition of the United States’ separate petition in United States v.

Arthrex, Inc.

19-1434 (filed June 25, 2020 ).

On August 26, 2020 , VirnetX filed a response, agreeing that the United States’ certiorari petition should be held pending the disposition of the petition for a writ of certiorari in No .

19-1434 (and related petitions filed by private parties in Nos.

19-1452 and 19-1458 ), and any further SCOTUS proceedings.

On October 13, 2020 , SCOTUS granted the United States’ petition for a writ of certiorari in No .

19-1434 as to USAFC Case No .

2018-2140 , and the petitions for writs of certiorari in Nos.

19-1452 and 19-1458 , all limited to Questions 1 and 2 as set forth in the July 22, 2020 Memorandum for the United States filed in No .

The consolidated petition is seeking review of decisions by the USCAFC holding that administrative patent judges (“APJ”) of the Patent Trial and Appeal Board of the U.S.

Patent and Trademark Office must be appointed by the President and confirmed by the Senate;

and, whether the remedy imposed by USCAFC that federal laws that place restrictions on when officials can be removed from office cannot apply to APJ, was the appropriate one .

SCOTUS heard oral argument in these consolidated cases on March 1, 2021 .

McKool Smith P.C.

VirnetX, Inc., AAA Case No .

01-20-0003-7975

On March 23, 2020 , the law firm of McKool Smith, P.C.

(“McKool”) filed a Demand for Arbitration against VirnetX, Inc.

with the American Arbitration Association (“AAA”).

In its demand, McKool claims that a retention agreement it entered into in 2010 with VirnetX entitles it to a contingency fee arising from the recent 2020 payment made by Apple.

McKool claims it is owed approximately $ 36,300 (or 8 % of the Apple I payment).

We have filed a general response with the AAA denying McKool’s claim and are contesting the matter vigorously.

An evidentiary hearing was held on the matter during the week of February 22, 2021 and the parties will be submitting additional briefing.

A ruling is expected sometime thereafter.

Neal Hurwitz v.

Kendall Larsen et al.

(Case 2020-0425 -JRS)

On June 2, 2020 , stockholder Neal Hurwitz filed a verified derivative complaint in the Delaware Court of Chancery against Kendall Larsen, Robert D.

Short Ill, Gary Feiner, Michael F.

Angelo, and Thomas M.

O’Brien and naming the Company as nominal defendant.

The lawsuit alleges breaches of fiduciary duty, corporate waste, and unjust enrichment arising out of a series of previously-disclosed transactions and compensation awards and seeks an award of monetary damages and equitable relief.

On July 1, 2020 , the defendants filed a motion to dismiss the complaint based on a failure to plead demand futility and a failure to state a claim on which relief can be granted and, on August 19, 2020 , the defendants filed an opening brief in support of their motion to dismiss.

On October 16, 2020 , plaintiff amended his complaint rather than respond to the arguments in the defendants’ opening brief.

On October 23, 2020 , the defendants filed a renewed motion to dismiss plaintiff’s amended complaint based on a failure to plead demand futility and a failure to state a claim on which relief can be granted.

On January 12, 2021 , Hurwitz voluntarily dismissed his suit without prejudice.

Other Legal Matters

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.

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Currently, we are not a party to any other pending legal proceedings and are not aware of any proceeding threatened or contemplated against us.

Note 13 − Quarterly Financial Information (unaudited)

(in thousands except per share)

Loss from operations

Basic and diluted (loss) per common share

(in thousands except per share)

Loss from operations

Basic and diluted (loss) per common share

Note 14 – Effects of Adopting ASU Topic 842 - Leases

We determine if an arrangement is a lease at inception.

Operating lease ROU assets are included in Prepaid expense and other assets on the Consolidated Balance Sheet as of December 31, 2019.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our 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.

Note 13 – Leases

We lease office space under an operating lease which expires on October 31, 2021 .

We also entered an operating lease for a facility used for corporate promotional and marketing purposes which was prepaid in full in a prior year and expires in 2024.

As described under New Accounting Pronouncements above, we adopted ASU Topic 842 - Leases effective January 1, 2019.

As a result of the adoption, on January 1, 2019 we reclassified $385 of prepaid lease payments for the promotional and marketing facility from current assets to non-current assets.

At January 1, 2019 we recorded a ROU asset and lease liability of $45 for the office lease with a balance of $97 at December 31, 2019.

Adoption of the ASU had no impact on the Consolidated Statement of Operations.

Note 15 – Subsequent Events

Between January 1, 2020 and February 21, 2020, we sold 1,049,382 shares of common stock under the ATM program.

The average sales price per common shares sold was $4.41 and the aggregate proceeds from the sales totaled $4,627.

Sales commissions, fees and other costs associated with these ATM transactions totaled $139.

Between January 1, 2020 and March 10, 2020 our employees exercised 151,308 options.

On March 13, 2020, the Company received payment of $454,034 from Apple, Inc.

(Apple), representing the previously announced final judgment with interest in the VirnetX Inc.

Cisco Systems, Inc.

et al (Case 6:10-CV-00417-LED) litigation (Apple I).

(See Note 12 - Litigation)

At December 31, 2020, the underlying ROU asset and lease liability totaled $ 44 .

At December 31, 2019, the underlying ROU asset and lease liability totaled $ 97 .

Lease expense totaled $ 56 in both 2020 and 2019.

We also lease a facility for corporate promotional and marketing purposes which was prepaid at inception and originally expired in 2024 .

In September 2020, the lease was extended for one year to 2025, due to COVID use-restrictions in 2020.

No other terms of the original agreement were affected and there was no impact on cash flow.

At December 31, 2020 and 2019, the ROU asset totaled $ 1,248 and $ 1,604 , respectively;

lease expense totaled $ 356 and $ 385 , during 2020 and 2019, respectively.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets and the related consolidated statements of operations, comprehensive loss, stockholders equity, and cash flows of the Company, and our report dated March 16, 2020, expressed an unqualified opinion.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows of the Company, and our report dated March 16, 2021, expressed an unqualified opinion.

Basis for Opinion

20 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data