What changed in this filing

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Item 1. Financial Statements

2021-05-10 compared with 2020-11-06 · 216 added, 262 removed, 280 unchanged (63% of the section changed)

3 unchanged sentences

(in thousands, except share amounts)

September 30,

December 31, 2020

2 unchanged sentences

Investments available for sale

Accounts receivable

Accounts receivables

Prepaid income tax

Prepaid expenses and other current assets

2 unchanged sentences

Property and equipment, net

Deferred tax asset

Deferred tax assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

1 unchanged sentence

Accounts payable and accrued liabilities

Accrued licensing costs

Accrued payroll and related expenses

Accrued licensing costs

Accrued legal expenses (Note 7)

Other liabilities, current

Income taxes payable

Total current liabilities

Other liabilities

Total liabilities

Commitments and contingencies (Note 4)

1 unchanged sentence

Preferred stock, par value $ 0.0001 per share Authorized:

10,000,000 shares at September 30, 2020 and December 31, 2019, issued and outstanding:

0 shares at September 30, 2020 and December 31,2019

10,000,000 shares at March 31 , 2021 and December 31, 2020 , Issued and outstanding:

0 shares at March 31 , 2021 and December 31, 2020

Common stock, par value $ 0.0001 per share Authorized:

100,000,000 shares at September 30, 2020 and December 31, 2019, issued and outstanding:

71,058,570 shares and 69,586,764 shares, at September 30, 2020 and December 31, 2019, respectively

100,000,000 shares at March 31 , 2021 and December 31, 2020 , Issued and outstanding:

71,058,570 shares and 71,058,570 shares, at March 31 , 2021 and December 31, 2020 , respectively

Additional paid-in capital

7 unchanged sentences

(in thousands, except per share amounts)

Three Months Ended

Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Three Months Ended March 31,

Operating expense:

1 unchanged sentence

Research and development

Selling, general and administrative expenses

Selling, general and administrative

Total operating expense

Income (loss) from operations

(Loss) income from operations

Gain on settlement

Interest and other income, net

Income (loss) before taxes

(Loss) income before taxes

Income tax benefit (expense)

Net income (loss)

Basic earnings (loss) per share

Diluted earnings (loss) per share

Net (Loss) income

Basic (loss) income per share

Diluted (loss) income per share

Weighted average shares outstanding basic

Weighted average shares outstanding diluted

See accompanying notes to condensed consolidated financial statements.

VIRNETX HOLDING CORPORATION

1 unchanged sentence

(in thousands)

Three Months Ended

Nine Months Ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Net income (loss)

Other comprehensive gain (loss), net of tax:

Change in unrealized gain (loss) on investments, net of tax

Change in foreign currency translation, net

Comprehensive income (loss)

Three Months Ended March 31,

Net (loss) income

Other comprehensive income (loss), net of tax:

Change in unrealized gain, net of tax

Change in foreign currency translation, net of tax

Total other comprehensive income (loss), net of tax

Comprehensive (loss) income

See accompanying notes to condensed consolidated financial statements.

VIRNETX HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(in thousands, except per share amounts)

Retained Earnings

Comprehensive

Stockholders’

Balance, December 31, 2019

Stock issued for cash, $ 4.00 - $ 4.96 , net

Stock-based compensation

Stock issued for options and RSUs, net

Comprehensive income:

Change in unrealized gain, net

Change in foreign currency, net

Comprehensive income

Balance, March 31, 2020

Stock-based compensation

Warrant issued for services

Stock issued for options and RSUs, net

Dividends paid

Comprehensive loss:

Change in unrealized loss, net

Comprehensive loss

Balance, June 30, 2020

Stock-based compensation

Comprehensive loss:

Comprehensive loss

Balance, September 30, 2020

Dividends paid in the three and nine months ended September 30, 2020 totaled $ 0 and $ 1.00 per share, respectively.

See accompanying notes to condensed consolidated financial statements.

Retained Earnings

Comprehensive

Stockholders’

Balance, December 31, 2018

Stock issued for cash, $ 5.05 - $ 5.42 , net

Stock-based compensation

Stock issued for options and RSUs, net

Comprehensive loss:

Change in unrealized gain, net

Comprehensive loss

Balance, March 31, 2019

Stock issued for cash, $ 6.02 - $ 6.49 , net

Stock-based compensation

Stock issued for options and RSUs, net

Comprehensive loss:

Comprehensive loss

Balance, June 30, 2019

Stock issued for cash, $ 5.53 - $ 6.49 , net

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

(in thousands)

Three Months Ended March 31,

Total shareholders' equity, beginning balances

Common stock and additional paid-in capital:

Beginning balances

Common stock issued for cash, net

Common stock issued for options/RSUs, net

Stock-based compensation

Comprehensive loss:

Change in unrealized gain, net

Comprehensive loss

Balance, September 30, 2019

No dividends declared or paid in 2019.

Ending balances

Accumulated deficit (retained earnings):

Beginning balances

Net (loss) income

Ending balances

Accumulated other comprehensive loss:

Beginning balances

Change in unrealized investment gain/loss, net

Change in foreign currency translation, net

Ending balances

Total shareholders' equity, ending balances

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

(in thousands)

Nine Months Ended

September 30,

Three Months Ended March 31,

Cash flows from operating activities:

Net income (loss)

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

Net (loss) income

Adjustments to reconcile net (loss) income to cash flows from operating activities:

Deferred tax assets

Amortization of warrant issuance costs

Stock-based compensation

Amortization of warrant issued for services

Deferred income taxes

Changes in assets and liabilities:

Accounts receivables

Prepaid expenses and other assets

Accounts payable and accrued liabilities

Other liabilities

Accounts payable

Accrued licensing costs

Accrued payroll and related expenses

Other liabilities

Accounts receivable

Income taxes payable

Net cash provided by (used in) operating activities

Income tax payable

Accrued legal expenses

Net cash (used in) provided by operating activities

Cash flows from investing activities:

1 unchanged sentence

Proceeds from sale or maturity of investments

Net cash used in investing activities

Net cash provided by investing activities

Cash flows from financing activities:

1 unchanged sentence

Proceeds from sale of common stock

Dividends paid

Payments of taxes on cashless exercise of restricted stock units

Net cash (used in) provided by financing activities

Net increase (decrease) in cash and cash equivalents

Net cash provided by financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

Supplemental cash flow information:

Cash paid for income taxes

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(in thousands, except litigation, patent, share and per share amounts)

Note 1 — Business Description and Basis of Presentation

1 unchanged sentence

We seek to license our technology, including GABRIEL Connection Technology™, to various original equipment manufacturers, or OEMs, that use our technologies in the development and manufacturing of their own products within the IP-telephony, mobility, fixed-mobile convergence, and unified communications markets.

Since 2012 we had revenues from settlements of patent infringement disputes whereby, we received consideration for past sales of licensees that utilized our technology, where there was no prior patent license agreement, as well as license agreement revenues from settlements providing licensing for the continued use of our technology (see “Revenue Recognition”).

Prior to 2012, our revenue was limited to an insignificant amount of software royalties pursuant to the terms of a single license agreement.

During 2012, 2013 and 2020 we had revenues from settlements of patent infringement disputes whereby we received consideration for past sales of licensees that utilized our technology, where there was no prior patent license agreement (see “Revenue Recognition”).

Our portfolio of intellectual property is the foundation of our business model.

2 unchanged sentences

Our patent portfolio is primarily focused on securing real-time communications over the Internet, as well as related services such as the establishment and maintenance of a secure domain name registry.

Our patented methods also have additional applications in the key areas of device operating systems and network security for Cloud services, Machine-to-Machine (“M2M”), communications in areas including “Smart City,” “Connected Car” and “Connected Home.” All our U.S.

and foreign patents and pending patent applications relate generally to securing communications over the internet and as such, cover all our technology and other products.

Our issued U.S.

Our patented methods also have additional applications in the key areas of device operating systems and network security for Cloud services, M2M communications in areas of Smart City, Connected Car and Connected Home.

The subject matter of all our U.S and foreign patents and pending applications relates generally to securing communications over the Internet and such covers all our technology and other products.

Some of our issued U.S.

and foreign patents expire at various times during the period from 2021 to 2034.

Some of our issued patents and pending patent applications were acquired by our principal operating subsidiary, VirnetX, Inc., from Leidos, Inc.

(“Leidos”) (f/k/a Science Applications International Corporation, or SAIC) in 2006 and we are required to make payments to Leidos based on cash or certain other values generated from those patents in certain circumstances.

The amount of such payments depends upon the type of value generated and certain categories are subject to maximums and other limitations.

Note 2 — Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying Condensed Consolidated Balance Sheet as of September 30, 2020, the Condensed Consolidated Statements of Operations, the Condensed Consolidated Statements of Comprehensive Income (Loss), the Condensed Consolidated Statements of Shareholders’ Equity (Deficit) for the three and nine months ended September 30, 2020 and 2019, and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 are unaudited.

The accompanying Condensed Consolidated Balance Sheet as of March 31, 2021, the Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020, the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020, the Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2021 and 2020, and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 are unaudited.

These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S.

In our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of September 30, 2020, our results of operations for the three and nine months ended September 30, 2020 and 2019, and our cash flows for the nine months ended September 30, 2020 and 2019.

In our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of March 31, 2021, our results of operations for the three months ended March 31, 2021 and 2020, and our cash flows for the three months ended March 31, 2021 and 2020.

The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.

2 unchanged sentences

We prepare our consolidated financial statements in accordance with U.S.

In doing so, we must make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosure of contingent assets and liabilities.

In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosure of contingent assets and liabilities.

In some cases, we could reasonably have used different accounting policies and estimates.

In some cases, changes in our accounting estimates are reasonably likely to occur.

In some cases, changes in the accounting estimates are reasonably likely to occur from period to period.

Accordingly, actual results could differ materially from our estimates.

To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected.

We base our estimates on experience and other assumptions that we believe are reasonable under the circumstances, at the time they are made, and we evaluate these estimates on an ongoing basis.

We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.

We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below.

Reclassifications

Certain prior period amounts were reclassified to conform to the current year’s presentation.

None of these reclassifications had an impact on reported operating expenses, operating income or net income for any of the periods presented.

We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors.

Basis of Consolidation

1 unchanged sentence

All intercompany balances and transactions have been eliminated.

The Company determines if an arrangement, giving the Company a right-of-use (“ROU”) asset, is a lease at inception.

Operating lease ROU assets are included in other assets on the Condensed Consolidated Balance Sheet.

The Company determines if an arrangement is a lease at inception in accordance with Accounting Standards Codification (“ASC”) Topic 842.

Operating lease right-of-use (“ROU”) assets are included in Prepaid expenses, and other assets on the Condensed Consolidated Balance Sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

ROU assets and lease liabilities are recognized at the commencement date of the arrangement based on the present value of lease payments over the lease term.

Other assets at September 30, 2020, includes a ROU asset related to a facility lease for corporate promotional and marketing purposes.

The facility lease was paid in full at inception and the ROU is being amortized over the term of the lease.

Other assets also include an ROU related to our office operating lease which expires in October 2021 (See Note 8 - Leases).

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 8 – Leases).

Revenue Recognition

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 (“ASC”) Topic 606, Revenue from Contracts with Customers.

We account for this revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.

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

12 unchanged sentences

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

During the nine months ended September 30, 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 7 - 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

Nine Months Ended

September 30,

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 nine months ended September 30, 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.

Included in operating expenses licensing are 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

2 unchanged sentences

Management generally considers any such gains as realized only upon the collection of cash.

Earnings (Loss) Per Share

Basic earnings (loss) per share are computed by dividing earnings (loss) available to common stockholders by the weighted average number of outstanding common shares during the period.

Diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued.

Cash and Cash Equivalents

We consider all highly liquid investments purchased with original maturities of three months or less at the date of purchase to be cash equivalents.

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

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

Unrealized gains and losses are reported as other comprehensive income.

Realized gains and losses are recorded in income in the period they are realized using specific identification of each security’s cost basis.

We invest our excess cash primarily in highly liquid debt instruments including corporate, government and federal agency securities, with contractual maturities less than two years .

By policy, we limit the amount of credit exposure to any one issuer.

Property and Equipment

Property and equipment are stated at historical cost, less accumulated depreciation, and amortization.

Depreciation and amortization are computed using the accelerated and straight-line methods over the estimated useful lives of the assets, which range from five to seven years .

Repair and maintenance costs are charged to expense as incurred.

Concentration of Credit Risk and Other Risks and Uncertainties

Our cash and cash equivalents are primarily maintained at two major financial institutions in the United States.

A portion of those balances are insured by the Federal Deposit Insurance Corporation.

During the nine months ended September 30, 2020, we had funds which were uninsured.

We do not believe that we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships with major financial institutions.

Deposits held with these financial institutions may exceed the amount of insurance provided on such deposits.

A portion of those balances are insured by the Federal Deposit Insurance Corporation, or FDIC.

During the three months ended March 31, 2021 and 2020, we had, at times, funds that were uninsured.

We do not believe that we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships.

We have not experienced any losses on our deposits of cash and cash equivalents.

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

Intangible Assets

We record intangible assets at cost, less accumulated amortization.

Amortization of intangible assets is provided over their estimated useful lives, which can range from 3 to 15 years, on either a straight-line basis or as revenue is generated by the assets.

Impairment of Long-Lived Assets

On an annual basis, we identify and record impairment losses on long-lived assets when events and changes in circumstances indicate that the carrying amount of an asset might not be recoverable.

We identify and record impairment losses on long-lived assets used in operations when events and changes in circumstances indicate that the carrying amount of an asset might not be recoverable, but not less than annually.

Recoverability is measured by comparison of the anticipated future net undiscounted cash flows to the related assets’ carrying value.

If such assets are impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset.

If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset.

Research and Development

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

Research and development costs are expensed as incurred.

We account for income taxes using the asset and liability method.

The asset and liability method requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our assets and liabilities.

We calculate current and deferred tax provisions based on estimates and assumptions that could differ from actual results reflected on the income tax returns filed during the following years.

Adjustments based on filed returns are recorded when identified in the subsequent years.

The effect on deferred taxes for a change in tax rates is recognized in income in the period that the tax rate change is enacted.

In assessing our deferred tax assets, we consider whether it is more likely than not that all or some portion of the deferred tax assets will not be realized.

A valuation allowance is provided for deferred income tax assets when, in our judgment, based upon currently available information and other factors, it is more likely than not that all or a portion of such deferred income tax assets will not be realized.

The determination of the need for a valuation allowance is based on an on-going evaluation of current information including, among other things, historical operating results, estimates of future earnings in different taxing jurisdictions and the expected timing of the reversals of temporary differences.

We believe the determination to record a valuation allowance to reduce a deferred income tax asset is a significant accounting estimate because it is based, among other things, on an estimate of future taxable income in the United States and certain other jurisdictions, which is susceptible to change and may or may not occur, and because the impact of adjusting a valuation allowance may be material.

In determining when to release the valuation allowance established against our net deferred income tax assets, we consider all available evidence, both positive and negative.

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

If and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our statements of operations.

We account for our uncertain tax positions in accordance with U.S.

GAAP method of accounting for uncertain tax positions utilizes a two-step approach to evaluate tax positions.

Step one, recognition, requires evaluation of the tax position to determine if based solely on technical merits it is more likely than not to be sustained upon examination.

Step two, measurement, is addressed only if a position is more likely than not to be sustained.

In step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement with tax authorities.

If a position does not meet the more likely than not threshold for recognition in step one, no benefit is recorded until the first subsequent period in which the more likely than not standard is met, the issue is resolved with the taxing authority, or the statute of limitations expires.

Positions previously recognized are derecognized when we subsequently determine the position no longer is more likely than not to be sustained.

Evaluation of tax positions, their technical merits, and measurements using cumulative probability are highly subjective management estimates.

Actual results could differ materially from these estimates.

Stock-Based Compensation

We account for stock-based compensation using the fair value recognition method in accordance with U.S.

We recognize these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the vesting term of 4 years.

We do not estimate the forfeiture rate and recognize forfeitures, if any, when they occur.

See Note 5 - Stock-Based Compensation below for additional information concerning our share-based compensation awards.

In addition, as required we record stock-based compensation expense for awards granted to non-employees at fair value of the consideration received or the fair value of the equity instruments issued as they vest over the performance period.

Earnings per Share

Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of outstanding common shares during the period.

Diluted earnings per share 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 the three months ended March 31, 2021 we incurred losses;

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

Fair Value of Financial Instruments

8 unchanged sentences

Valued at the quoted net asset value of shares held.

Government and U.S.

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.

The following tables show the adjusted cost, gross unrealized gains, gross unrealized losses and fair value of our securities by significant investment category as of September 30, 2020 and December 31, 2019.

September 30, 2020

The following tables show the adjusted cost, gross unrealized gains, gross unrealized losses and fair value of our securities by significant investment category as of March 31, 2021 and December 31, 2020.

March 31, 2021

Adjusted Cost

1 unchanged sentence

Available for

government securities

agency securities

Total investments

treasury securities

December 31, 2020

3 unchanged sentences

agency securities

Total investments

treasury securities

New Accounting Pronouncements

1 unchanged sentence

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 U.S.

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

The amendments also improve consistent application of and simplify 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 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 .

We adopted this ASU on January 1, 2021 and there was no material impact on our financial position or cash flows as a result.

Note 3 — Income Taxes

For the three months ended September 30, 2020, we recognized an income tax benefit of $ 1,293 on a loss before income taxes of $ 5,318 , which is an effective tax rate of a 24.3 %.

For the nine months ended September 30, 2020, we recognized income tax expense of $ 29,036 on income before income taxes of $ 316,916 which is an effective tax rate of 9.2 %.

For the three and nine months ended September 30, 2019, we had an income tax benefit of zero and $ 393 , respectively, due to a release of a state reserve as the statute of limitation for the tax return expired.

The effective tax rate for the 2020 nine-month period was favorably impacted by the reversal of valuation allowance reserves totaling $ 37,585 , which were established in prior years on our deferred tax assets primarily associated with net operating loss (“NOL”) carryforwards.

For the three and nine months ended September 30, 2019, we had NOLs which generated deferred tax assets for NOL carryforwards.

During 2019, we provided valuation allowances against the net deferred tax assets including the deferred tax assets for NOL carryforwards.

At September 30, 2020, we had deferred tax assets of $ 8,754 .

For the three months ended March 31, 2021, we recognized income tax benefit of $ 7,193 on a loss before income taxes of $ 33,636 , which is an effective tax rate of 21.38 % .

The effective tax rate was higher than the statutory federal income tax rate primarily due to the effect of research and development tax credits.

During the three-month period ended March 31, 2021 we had net operating losses (“NOLs”) which increased our deferred tax assets by $ 7,196 to $ 16,245 for NOL carryforwards.

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

For the three months ended March 31, 2020, income tax expense was $ 32,759 on income before taxes of $ 332,704 and an effective tax rate of 9.9 %.

The effective tax rate for the three month period ended March 31, 2020 was favorably impacted by the reversal of valuation allowance reserves totaling $ 38,112 which were established in prior years on our deferred tax assets primarily associated with net operating loss (“NOL”) carryforwards.

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.

2 unchanged sentences

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.

As a result of the significant taxable income recognized in the nine months ended September 30, 2020, we determined that it was more likely than not that we will recover our deferred tax assets and accordingly the valuation allowances were reduced during the period.

During 2019, consistent with our policy, and because of our history of operating losses, we did not recognize the benefit of our deferred tax assets, including NOL carryforwards, that may have been used to offset future taxable income.

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

Internal Revenue Code Section 382 places a limitation (the ‘‘IRC Section 382 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.

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.

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

Because we have concluded that the Company has not experienced a change in control under Section 382, all NOL carryforwards were utilized to offset taxable income generated in the period.

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.

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 to be utilized from such years.

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.

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.

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

At December 31, 2020 and March 31, 2021, we have no uncertain tax positions.

Our policy is to recognize interest and penalties accrued on uncertain tax positions as a component of income tax expense.

As of September 30, 2020, we had accrued immaterial amounts of interest and penalties related to the uncertain tax positions.

At December 31, 2020 and March 31, 2021, we had no accrued interest or penalties related to the uncertain tax positions.

Note 4 — Commitments and Related Party Transactions

We lease our offices under an operating lease with a third party which expires in October 2021 (see “Note 8 - Leases”).

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

We incurred approximately $ 67 , and $ 157 compared to $ 442 , and $ 1,327 in rental fees and reimbursements to the LLC during the three and nine months ended September 30, 2020 and 2019, respectively.

We lease our offices under an operating lease with a third party which expires on October 31, 2021 (see Note 8 - Leases).

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.

We incurred approximately $ 79 and $ 76 in fees and reimbursements to the LLC during the three months ended March 31, 2021 and 2020, respectively.

We pay for the Company’s usage of the aircraft and have no rights to purchase.

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Note 5 — Stock Based Compensation

We have a stock incentive plan for employees and others called the VirnetX Holding Corporation 2013 Equity Incentive Plan (the “Plan”), which has been approved by our stockholders.

In April 2017, the Board approved an amendment and restatement of the Plan to, among other things, increase the shares reserved under the Plan by 2,500,000 shares (the “Plan Amendment”).

Our stockholders approved of the Plan Amendment at the 2017 Annual Meeting of Stockholders held on June 1, 2017.

The Plan provides for grants of 16,624,469 shares of our common stock, including stock options and restricted stock units (“RSUs”), and will expire in 2023.

As of September 30, 2020, 675,210 shares remained available for grant under the Plan.

During the three months ended September 30, 2020 and 2019, we did no t grant options or RSUs.

During the nine months ended September 30, 2020, we granted options for a total of 617,500 shares.

The weighted average fair value at the grant dates was $ 4.77 per option.

The fair values of options at the grant date were 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 94 percent (iii) a risk-free interest rate of 0.65 percent and (iv) and expected option term of 6 years .

During the nine months ended September 30, 2019 , we granted options for a total of 345,000 shares.

The weighted average fair value at the grant dates was $ 4.63 per option.

The fair values of options at the grant date were 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 92 percent (iii) a risk-free interest rate of 2.09 percent and (iv) and expected option term of 6 years .

During the nine months ended September 30, 2020 and 2019, we granted 218,329 and 229,996 RSUs, respectively.

The weighted average fair values at the grant dates for RSUs issued during the nine months ended September 30, 2020 and 2019 were $ 6.89 and $ 6.06 per RSU, respectively.

RSUs, which are subject to forfeiture if service terminates prior to the shares vesting, are expensed ratably over the vesting period.

Stock-based compensation expense included in general and administrative expense was $ 576 and $ 1,399 and in research and development expense was $ 496 and $ 1,404 for the three and nine months ended September 30, 2020, respectively.

Stock-based compensation expense included in general and administrative expense was $ 565 and $ 1,437 and in research and development expense was $ 434 and $ 1,275 for the three and nine months ended September 30, 2019, respectively.

As of September 30, 2020, the unrecognized stock-based compensation expense related to non-vested stock options and RSUs was $ 5,571 and $ 2,522 , respectively, which will be amortized over an estimated weighted average period of approximately 2.2 and 2.6 years, respectively.

During the three months ended September 30, 2020 and 2019, no shares were issued as a result of exercised options or vested RSUs.

During the nine months ended September 30, 2020, we issued 262,031 shares of common stock as a result of the exercise of options and 160,393 shares of common stock as a result of vesting RSUs.

During the nine months ended September 30, 2019, we issued 663,816 shares of common stock as a result of the exercise of options and 182,618 shares of commons stock as a result of vesting RSUs .

We have a stock incentive plan for employees and others called the “VirnetX Holding Corporation 2013 Equity Incentive Plan”, or the Plan, which has been approved by our stockholders.

The Plan generally provides for the granting of up to 16,624,469 shares of our common stock, including stock options and stock purchase rights (“RSUs”), and will expire in 2024.

As of March 31, 2021, 545,210 shares remained available for grant under the Plan.

Stock-based compensation expense included in general and administrative expense was $ 383 and $ 348 , and in research and development expense was $ 496 and $ 430 , for the three months ended March 31, 2021 and 2020, respectively.

We did no t grant options during the three months ended March 31, 2021.

During the three months ended March 31, 2020, we granted options for a total of 240,000 shares with a weighted average grant date fair value of $ 4.30 per option.

We estimated the fair value of the options on the date of grant utilizing the Black-Scholes valuation model with the following assumptions:

(i) 0 percent dividend yield, (ii) 93.4 percent volatility, (iii) 0.8 percent risk free rate and (iv) 6.25 years expected term.

We did no t grant RSU’s during the three months ended March 31, 2021 or 2020.

As of March 31, 2021, the unrecognized stock-based compensation expense related to non-vested stock options and RSUs was $ 4,602 and $ 1,983 , respectively, which will be amortized over an estimated weighted average period of approximately 2.17 and 2.08 years, respectively.

Note 6 — Equity

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We use the ATM proceeds for GABRIEL product development, marketing and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products, technologies or businesses.

As of September 30, 2020, common stock with an aggregate value of up to $ 21,964 remained available for offer and sale under the ATM agreement.

We did no t sell any shares under the ATM during the three months ended September 30, 2020.

During the nine months ended September 30, 2020, we sold 1,049,382 shares under the ATM.

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

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

During the three months ended September 30, 2019, we sold 203,754 shares under the ATM.

The average sales price per common share was $ 6.17 and the aggregate proceeds from the sales totaled $ 1,257 during the period.

Sales commissions, fees and other costs associated with the ATM totaled $ 38 .

During the nine months ended September 30, 2019, we sold 1,232,020 shares under the ATM.

The average sales price per common share was $ 5.79 and the aggregate proceeds from the sales totaled $ 7,131 during the period.

As of March 31, 2021, common stock with an aggregate value of up to $ 21,964 remained available for offer and sale under the ATM agreement.

We sold no shares under the ATM during the three months ended March 31, 2021.

We sold 1,049,382 shares under the ATM during the three months ended March 31, 2020, with an average sales price per common share of $ 4.41 and the aggregate proceeds from the sales totaled $ 4,627 .

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

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, which will expire in April 2025 .

We issued no shares for options during the three months ended March 31, 2021.

We issued 202,031 shares of common stock for options during the three months ended March 31, 2020.

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.

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Exercise Price

Exercisable at

Outstanding and

December 31, 2020

Newly Exercisable

Exercisable at

September 30, 2020

Outstanding and

March 31, 2021

Expiration Date

April 30, 2025

Note 7 — Litigation

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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 indicated that it will seek restitution of the payment if relief sought in its Rule 60(b) motion is awarded.

On April 16, 2020, the USDC ordered Apple to file a supplemental brief with respect to its Rule 60(b) motion within 7 days.

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.

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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 trial date to October 26, 2020.

On October 30, 2020, a federal jury in the U.S.

District Court for the Eastern District of Texas issued a $ 502,800 verdict in favor of VirnetX based on Apple's infringement of two network security patents;

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.

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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.

We are currently awaiting court order scheduling the hearing for the judgement as a matter of law (JMOL) motions filed by both parties.

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.

Apple’s opening brief is due on June 2, 2021.

Mangrove Partners Master Fund, Ltd., Apple Inc.

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

Our initial briefs are due by December 21, 2020.

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

On March 16, 2021, the USCAFC denied the motion without prejudice to us raising the challenges made in the motion in our opening brief.

Our opening brief is currently due on June 7, 2021.

Luoma (SCOTUS Case 20-74)

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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.

We are waiting for SCOTUS to rule in this matter.

McKool Smith P.C.

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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 $ 36,300 (or 8 % of the payment).

We have filed a general response with AAA denying McKool’s claim and intend to vigorously contest the matter.

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

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

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

An evidentiary hearing was held on the matter during the week of February 22, 2021 and the parties submitted additional briefings.

On April 19, 2021, the arbitrator awarded McKool $ 36,323 in damages, plus pre-judgment interest in the amount of 5 % simple interest from March 23, 2020 to April 18, 2021, and post-judgment interest in the amount of 5 %, compounded annually, until payment of the award.

We accrued the resulting $ 38,284 as of March 31, 2021 and paid that amount to McKool on April 20, 2021.

This matter is now closed.

Neal Hurwitz v.

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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

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Note 8 — Leases

We lease office space under an operating lease which expires in October 2021;

at September 30, 2020, the underlying ROU asset and lease liability totaled $ 57 .

For the three and nine months ended September 30, 2020, we recorded lease expense of $ 14 and $ 42 .

For the three and nine months ended September 30, 2019, we recorded lease expense of $ 14 and $ 42 .

We also entered into an operating lease for a facility used for corporate promotional and marketing purposes which was prepaid at inception and would have originally expired in 2024.

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

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

At September 30, 2020, the ROU totaled $ 1,323 .

For the three and nine months ended September 30, 2020, we recorded promotional and marketing lease expense of $ 89 and $ 282 .

For the three and nine months ended September 30, 2019, we recorded lease expense of $ 96 and $ 289 .

Note 9 — Earnings (Loss) Per Share

Basic earnings (loss) per are share based on the weighted average number of common shares outstanding for the period.

Diluted earnings (loss) per share are based on the weighted average number of common shares and potentially dilutive securities which for the Company include stock options, RSUs and warrants.

The following table shows the computation of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2020 and 2019 (shares in thousands):

Three Months Ended

Nine Months Ended

September 30,

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

On March 31, 2021, the underlying ROU asset and lease liability totaled $ 31 .

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

For the three months ended March 31, 2021 and 2020, lease expense totaled $ 14 and $ 13 , respectively.

We also lease a facility for corporate promotional and marketing purposes which was prepaid at inception and expires in 2025, as amended.

On March 31, 2021 and December 31, 2020, the ROU asset totaled $ 1,173 and $ 1,248 , respectively;

lease expense totaled $ 75 and $ 96 , for the three months ended March 31, 2021 and 2020, respectively.

Note 9 — Earnings Per Share

Basic earnings per share are based on the weighted average number of common shares outstanding for the period.

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

Potential common shares outstanding principally include stock options, RSUs and warrants, excluding any potentially dilutive shares convertible at a price higher than the closing price of our stock at the end of each reporting period.

The following table shows the computation of basic and diluted earnings per share for the three months ended March 31, 2021 and 2020 (in thousands, except per share amounts):

Three Months Ended March 31,

Net (loss) income

Weighted-average basic shares outstanding

Effect of dilutive securities

Weighted-average diluted shares outstanding

Basic earnings (loss) per share

Diluted earnings (loss) per share

Potentially dilutive securities representing 2,814,179 shares of common stock were excluded from the computation of diluted earnings per share for the nine months ended September 30, 2020, because their effect would have been antidilutive.

We incurred a net loss for the three months ended September 30, 2020, and the three and nine months ended September 30, 2019;

therefore, all potentially dilutive securities representing shares of common stock were excluded from the computation of diluted loss per share for those periods, because their effect would have been antidilutive.

Weighted-average diluted shares

Basic (loss) earnings per share

Diluted (loss) earnings per share

We incurred a net loss for the three months ended March 31, 2021;

therefore, all 6,341,844 potentially dilutive securities representing shares of common stock were excluded from the computation of diluted earnings per share, because their effect would have been antidilutive.

For the three months ended March 31, 2020, potentially dilutive securities representing 2,161,955 shares of common stock were excluded from the computation of diluted earnings per share, because their effect would have been antidilutive.

Note 10 — Subsequent Events

On October 30, 2020, a federal jury in the U.S.

District Court for the Eastern District of Texas issued a $ 502,800 verdict in favor of VirnetX based on Apples infringement of two network security patents.

The verdict calls for damages of $ 0.84 per accused device since the 2013 launch of Apples iOS 7 operating system (see "Note 7 - Litigation").

See Note 7 - Litigation McKool Smith P.C.

VirnetX, Inc., AAA Case No.

01-20-0003-7975 .

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-Q

Item 1. Financial Statements