VirnetX Holding Corp 10-Q

ITEM 1-FINANCIAL STATEMENTS. VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) As of September 30, 2021 As of December 31, 2020 ASSETS (unaudited) Current assets: Cash and cash equivalents $ 148,042 $ 192,908 Investments available for sale 24,450 28,348 Accounts receivables 15 8 Prepaid income tax 2,903 2,905 Prepaid expenses and other current assets 324 263 Total current assets 175,734 224,432 Prepaid expenses and other assets 1,037 1,301 Property and equipment, net 19 11 Deferred tax assets 17,749 9,049 Total assets $ 194,539 $ 234,793 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 247 $ 654 Accrued payroll and related expenses 319 220 Accrued licensing costs — 9,438 Other liabilities, current 4 44 Total current liabilities 570 10,356 Commitments and contingencies (Note 4) Stockholders’ equity: Preferred stock, par value $ 0.0001 per share Authorized: 10,000,000 shares at September 30 , 2021 and December 31, 2020 , Issued and outstanding: 0 shares at September 30 , 2021 and December 31, 2020 — — Common stock, par value $ 0.0001 per share Authorized: 100,000,000 shares at September 30 , 2021 and December 31, 2020 , Issued and outstanding: 71,232,856 shares and 71,058,570 shares, at September 30 , 2021 and December 31, 2020 , respectively 7 7 Additional paid-in capital 235,290 232,457 Accumulated deficit ( 41,311 ) ( 8,014 ) Accumulated other comprehensive loss ( 17 ) ( 13 ) Total stockholders’ equity 193,969 224,437 Total liabilities and stockholders’ equity $ 194,539 $ 234,793 See accompanying notes to condensed consolidated financial statements. 2 Index VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, 2021 September 30, 2020 September 30 , 2021 September 30 , 2020 Revenue $ 4 $ 26 $ 24 $ 302,620 Operating expense: Licensing costs — — ( 9,438 ) 90,101 Research and development 1,151 1,091 3,452 6,799 Selling, general and administrative 3,089 4,270 48,040 38,347 Total operating expense 4,240 5,361 42,054 135,247 Income (loss) from operations ( 4,236 ) ( 5,335 ) ( 42,030 ) 167,373 Gain — — — 41,271 Interest and other income, net 10 17 36 108,272 Income (loss) before taxes ( 4,226 ) ( 5,318 ) ( 41,994 ) 316,916 Income tax (expense) benefit 895 1,293 8,697 ( 29,036 ) Net income (loss) $ ( 3,331 ) $ ( 4,025 ) $ ( 33,297 ) $ 287,880 Basic income (loss) per share $ ( 0.05 ) $ ( 0.06 ) $ ( 0.47 ) $ 4.07 Diluted income (loss) per share $ ( 0.05 ) $ ( 0.06 ) $ ( 0.47 ) $ 4.02 Weighted average shares outstanding - basic 71,233 71,059 71,135 70,780 Weighted average shares outstanding - diluted 71,233 71,059 71,135 71,663 See accompanying notes to condensed consolidated financial statements. 3 Index VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (in thousands) Three Months Ended Nine Months Ended September 30, 2021 September 30, 2020 September 30 , 2021 September 30 , 2020 Net income (loss) $ ( 3,331 ) $ ( 4,025 ) $ ( 33,297 ) $ 287,880 Other comprehensive income (loss): Change in unrealized gain (loss) on investments, net of tax ( 3 ) — ( 1 ) 1 Change in foreign currency translation, net of tax — — ( 3 ) 1 Total other comprehensive income (loss) ( 3 ) — ( 4 ) 2 Comprehensive income (loss) $ ( 3,334 ) $ ( 4,025 ) $ ( 33,301 ) $ 287,882 See accompanying notes to condensed consolidated financial statements. 4 Index VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’ EQUITY (Unaudited) (in thousands) Three Months Ended September 30, Nine Months Ended September 30 , 2021 2020 2021 2020 Total shareholders’ equity, beginning balances $ 196,127 $ 233,707 $ 224,437 $ 5,628 Common stock and additional paid-in capital: Beginning balances 234,121 230,257 232,464 223,244 Common stock issued for cash, net — — — 4,488 Common stock issued for options/RSUs, net — — ( 196 ) 690 Warrants issued for services — — — 104 Stock-based compensation 1,176 1,072 3,029 2,803 Ending balances 235,297 231,329 235,297 231,329 Accumulated deficit (retained earnings): Beginning balances ( 37,980 ) 3,462 ( 8,014 ) ( 217,602 ) Net (loss) income ( 3,331 ) ( 4,025 ) ( 33,297 ) 287,880 Dividends — — — ( 70,841 ) Ending balances ( 41,311 ) ( 563 ) ( 41,311 ) ( 563 ) Accumulated other comprehensive loss: Beginning balances ( 14 ) ( 12 ) ( 13 ) ( 14 ) Change in unrealized investment gain/loss, net ( 3 ) — ( 1 ) 1 Change in foreign currency translation, net — — ( 3 ) 1 Ending balances ( 17 ) ( 12 ) ( 17 ) ( 12 ) Total shareholders’ equity, ending balances $ 193,969 $ 230,754 $ 193,969 $ 230,754 See accompanying notes to condensed consolidated financial statements. 5 Index VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended September 30, 2021 2020 Cash flows from operating activities: Net (loss) income $ ( 33,297 ) $ 287,880 Adjustments to reconcile net (loss) income to cash flows from operating activities: Depreciation 3 4 Deferred tax assets ( 8,700 ) ( 8,754 ) Amortization of warrant issuance costs 34 43 Stock-based compensation 3,029 2,803 Changes in assets and liabilities: Accounts receivables ( 7 ) ( 1 ) Prepaid expenses and other assets 169 224 Other liabilities ( 40 ) ( 180 ) Accounts payable ( 407 ) ( 763 ) Accrued licensing costs ( 9,438 ) 9,438 Accrued payroll and related expenses 99 12 Income tax payable 2 17,414 Net cash (used in) provided by operating activities ( 48,553 ) 308,120 Cash flows from investing activities: Purchase of property and equipment ( 11 ) — Purchase of investments ( 18,735 ) ( 22,519 ) Proceeds from sale or maturity of investments 22,629 2,838 Net cash provided by (used in) investing activities 3,883 ( 19,681 ) Cash flows from financing activities: Proceeds from exercise of options — 1,046 Proceeds from sale of common stock — 4,488 Dividend paid — ( 70,841 ) Pay ment of payroll taxes on vested restricted stock units ( 196 ) ( 356 ) Net cash used in financing activities ( 196 ) ( 65,663 ) Net change in cash and cash equivalents ( 44,866 ) 222,776 Cash and cash equivalents, beginning of period 192,908 3,135 Cash and cash equivalents, end of period $ 148,042 $ 225,911 Cash paid for income taxes $ 2 $ 20,237 See accompanying notes to condensed consolidated financial statements. 6 Index VIRNETX HOLDING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) (Unaudited) Note 1 — Business Description and Basis of Presentation VirnetX Holding Corporation, which we refer to as “we”, “us”, “our”, “the Company” or “VirnetX”, is engaged in the business of commercializing a portfolio of patents. We derive revenue licensing technology, including GABRIEL Connection Technology™, to various original equipment manufacturers (“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. During 2020, we had revenues from settlement of a patent infringement dispute whereby we received consideration for past sales of licensee 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. We currently own approximately 201 total patents and pending applications, including 70 U.S. patents/patent applications and 131 foreign patents/validations/pending applications. 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, 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. Note 2 — Summary of Significant Accounting Policies Unaudited Interim Financial Information The accompanying Condensed Consolidated Balance Sheet as of September 30, 2021, the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020, the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2021 and 2020, the Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2021 and 2020, and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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. GAAP”). In our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of September 30, 2021, our results of operations for the three and nine months ended September 30, 2021 and 2020, and our cash flows for the nine months ended September 30, 2021 and 2020. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 16, 2021. Use of Estimates We prepare our consolidated financial statements in accordance with U.S. GAAP. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below. We have reviewed our critical accounting policies and estimates with the audit committee of our Board of Directors. Basis of Consolidation The consolidated financial statements include the accounts of VirnetX Holding Corporation and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. Leases 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 based on the present value of lease payments over the lease term (see Note 8 – Leases). 7 Index 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 ASC Topic 606, Revenue from Contracts with Customers. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our revenue arrangements may consist of multiple-element arrangements, with revenue for each unit of accounting recognized as the product or service is delivered to the customer. With the licensing of our patents, performance obligations are generally satisfied at a point in time as work is complete when our patent rights are transferred to our customers. We generally have no further obligation to our customers regarding our technology. Certain contracts may require our customers to enter into a hosting arrangement with us and for these arrangements, revenue is recognized over time, generally over the life of the servicing contract. The Company actively monitors and enforces its intellectual property rights, including seeking appropriate compensation from third parties that utilize the Company’s intellectual property 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. Licensing Costs Included in operating expenses are 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 ASC Topic 450-30-25, Contingent Gains, prohibits recognition of contingent gains until realized. Accordingly, we do not record contingent gains ahead of such realization. Management generally considers any such gains as realized only upon the collection of cash. 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 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. 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 nine months ended September 30, 2021, 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. Fair Value The carrying amounts of our financial instruments, including cash equivalents, accounts payable, and accrued liabilities, approximate fair value because of their generally short maturities. 8 Index 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 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 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. Income Taxes We account for income taxes using the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our assets and liabilities. We calculate current and deferred tax provisions based on estimates and assumptions that could differ from actual results reflected on the income tax returns filed during the following years. Adjustments based on filed returns are recorded when identified in the subsequent years. The effect on deferred taxes for a change in tax rates is recognized in income in the period that the tax rate change is enacted. In assessing our deferred tax assets, we consider whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. 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, which utilizes a two-step approach to evaluate tax positions. Step one, recognition, requires evaluation of the tax position to determine if based solely on technical merits it is more likely than not to be sustained upon examination. Step two, measurement, is addressed only if a position is more likely than not to be sustained. In step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement with tax authorities. If a position does not meet the more likely than not threshold for recognition in step one, no benefit is recorded until the first subsequent period in which the more likely than not standard is met, the issue is resolved with the taxing authority, or the statute of limitations expires. Positions previously recognized are 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. GAAP. We recognize these compensation costs on a straight-line basis over the requisite service period of the award, which is generally a vesting term of 4 years . We recognize forfeitures, if any, when they occur. In addition, we record stock-based compensation expense for awards granted to non-employees at fair value of the consideration received or the fair value of the equity instruments issued, as they vest, over the performance period (See Note 5 - Stock-Based Compensation). Earnings per Share Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of 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. 9 Index Fair Value of Financial Instruments Fair value is the price that would result from an orderly transaction between market participants at the measurement date. A fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Level 2 measurements utilize either directly or indirectly observable inputs in markets other than quoted prices in active markets. Our financial instruments are stated at amounts that equal, or approximate, fair value. When we estimate fair value, we utilize market data or assumptions that we believe market participants would use in pricing the financial instrument, including assumptions about risk and inputs to the valuation technique. We use valuation techniques, primarily the income and market approach, which maximizes the use of observable inputs and minimize the use of unobservable inputs for recurring fair value measurements. Mutual funds: Valued at the quoted net asset value of shares held. U.S. agency and treasury securities : 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 S eptember 30, 2021 and December 31, 2020. September 30, 2021 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Investments Available for Sale Cash $ 38,607 $ — $ — $ 38,607 $ 38,607 $ — Level 1: Mutual funds 109,435 — — 109,435 109,435 — U.S. agency securities 16,373 1 ( 2 ) 16,372 — 16,372 U.S. treasury securities 8,077 2 ( 1 ) 8,078 — 8,078 133,885 3 ( 3 ) 133,885 109,435 24,450 Total $ 172,492 $ 3 $ (3 ) $ 172,492 $ 148,042 $ 24,450 December 31, 2020 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Investments Available for Sale Cash $ 121,785 $ — $ — $ 121,785 $ 121,785 $ — Level 1: Mutual funds 70,996 — — 70,996 70,996 — U.S. agency securities 13,767 2 — 13,769 127 13,642 U.S. treasury securities 14,707 — ( 1 ) 14,706 — 14,706 99,470 2 ( 1 ) 99,471 71,123 28,348 Total $ 221,255 $ 2 $ (1 ) $ 221,256 $ 192,908 $ 28,348 New Accounting Pronouncements In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12 Income Taxes (Topic 740). 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 in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. 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 F or the three months ended September 30, 2021, we recognized income tax benefit of $ 895 on loss before income taxes of $ 4,226 , which is an effective tax rate of 21.18 %. For the nine months ended September 30, 2021, we recognized income tax benefit of $ 8,697 on loss before income taxes of $ 41,994 which is an effective tax rate of 20.71 %. For the three and nine months ended September 30, 2020, we had an income tax benefit of $ 1,293 and an income tax expense of $ 29,036 , respectively. The effective tax rate for the three-month period ended September 30, 2021, was favorably impacted by the net operating loss ( “NOL” ) generated in the quarter. As of December 31, 2020, we had deferred tax assets of $ 9,049 . As of September 30, 2021, we had net deferred tax assets of $ 17,749 . 10 Index 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 NOL 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. Since we did not have a greater than 50% change of control as defined under the Internal Revenue Code, no limitation applies to our NOLs. 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. We are required to recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. At December 31, 2020 and September 30, 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 December 31, 2020 and September 30, 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 on October 31, 2023 (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 $ 280 and $ 454 compared to $ 67 and $ 157 in fees and reimbursements to the LLC during the three and nine months ended September 30, 2021 and 2020, respectively. We pay for the Company’s usage of the aircraft and have no rights to purchase. Our Chief Executive Officer and Chief Administrative Officer are the managing partners of the LLC and control the equity interests of the LLC. We entered into a 12 -month non-exclusive agreement with the LLC for use of the plane at a rate of $ 8 per flight hour, with no minimum usage requirement. The agreement contains other terms and conditions and can be cancelled by either us or the LLC with 30 days’ notice. The agreement renews on an annual basis unless terminated by either party. Neither party has exercised their termination rights. 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 “2013 Plan”), which has been approved by our stockholders. To the extent that any award should expire, become un-exercisable or is otherwise forfeited, the shares subject to such award will again become available for issuance under the 2013 Plan. 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. Incentive stock options (“ISOs”) may only be granted to our employees (including officers and directors). Nonqualified stock options (“NSOs”) and stock purchase rights may be granted to our employees and consultants. The 2013 Plan expires in 2023. In April 2021, the Board approved an amendment and restatement of the 2013 Plan to, among other things, increase the shares reserved under the Plan by 2,500,000 shares (the “Plan Amendment”). Our stockholders approved the Plan Amendment at the 2021 Annual Meeting of the Stockholders held on June 3, 2021. The 2013 Plan generally provides for the granting of shares of our common stock, including stock options and stock purchase rights (“RSUs”). Options may be granted under the 2013 Plan with an exercise price determined by our Board of Directors, or a duly appointed committee thereof, provided, however, that the exercise price of an option granted to any employee shall be not less than 100 % of the fair market value at the date of grant in the case of ISOs or 85 % of the fair market value at the date of grant in the case of an NSO. The exercise price of an ISO or NSO granted to one of our Named Executive Officers shall not be less than 100 % fair market value of the shares at the date of grant and the exercise price of an ISO granted to a 10% shareholder shall not be less than 110 % of the fair market value of the shares on the date of grant. Stock options granted under the 2013 Plan typically vest over four years and have a 10 -year term. All RSUs are considered to be granted at the fair value of our stock on the date of grant because they have no exercise price. RSUs typically vest over four years . As of September 30, 2021, there were 2,265,712 shares available for grant under the 2013 Plan. 11 Index Stock-based compensation expense included in general and administrative expense was $ 703 and $ 576 , and in research and development expense was $ 473 and $ 496 , for the three months ended September 30, 2021 and 2020, respectively. Stock-based compensation expense included in general and administrative expense was $ 1,549 and $ 1,399 , and in research and development expense was $ 1,480 and $ 1,404 , for the nine months ended September 30, 2021 and 2020, respectively. During the three months ended September 30, 2021, we granted options for a total of 170,000 shares with a weighted average grant date fair value of $ 3.10 per option. During the three months ended September 30, 2020, we granted zero options. During the nine months ended September 30, 2021, we granted options for a total of 949,500 shares with a weighted average grant date fair value of $ 3.39 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) 90 percent volatility, (iii) 1 percent risk free rate and (iv) 6 years expected term. During the nine months ended September 30, 2020, we granted options for a total of 617,500 shares with a weighted average grant date fair value of $ 4.77 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) 94 percent volatility, (iii) 0.65 percent risk free rate and (iv) 6 years expected term. During the three months ended September 30, 2021 and 2020, we did no t grant any RSUs. During the nine months ended September 30, 2021 and 2020, we granted 236,661 and 218,329 RSUs respectively, with weighted average fair values at the date of grant of $ 4.61 and $ 6.89 , respectively. RSUs, which are subject to forfeiture if service terminates prior to the shares vesting, are expensed ratably over the vesting period. During the nine months ended September 30, 2021 and 2020, we paid $ 196 and $ 356 in withholding taxes on shares issued upon conversion of RSUs, respectively. The underlying shares were cancelled. The amounts are reflected as financing costs in the accompanying statement of cash flows. As of September 30, 2021, the unrecognized stock-based compensation expense related to non-vested stock options and RSUs was $ 6,249 and $ 2,491 , respectively, which will be amortized over an estimated weighted average period of approximately 2.98 and 2.63 years, respectively. During the three and nine months ended September 30, 2021, no options were exercised. During the nine months ended September 30, 2020, we issued 262,031 shares as a result of the exercise of options . Note 6 — Equity Common Stock On July 30, 2018 we filed a $ 100,000 universal shelf registration statement on SEC Form S-3 which was declared effective by the SEC on August 16, 2018. We also entered an at-the-market equity offering sales agreement (“ATM”) with Cowen & Company, LLC on August 31, 2018, under which we can offer and sell shares of our common stock having an aggregate value of up to $ 50,000 . 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. This registration statement expired on August 13, 2021. We sold no shares under the ATM during the three and nine months ended September 30, 2021. We sold no shares under the ATM during the three months ended September 30, 2020. We sold 1,049,382 shares under the ATM during the nine months ended September 30, 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 . We issued no shares for options during the three and nine months ended September 30, 2021. We issued zero and 262,031 shares of common stock for options during the three and nine months ended September 30, 2020, respectively. We issued no shares as a result of vesting RSUs during the three months ended September 30, 2021 or 2020 respectively. We issued 174,285 and 160,393 shares as a result of vesting RSUs during the nine months ended September 30, 2021 and 2020, respectively. 12 Index Warrants 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 Exercise Price Outstanding and Exercisable December 31, 2020 Issued Exercised Terminated / Cancelled Outstanding and Exercisable September 30, 2021 Expiration Date 25,000 $ 5.75 25,000 — — — 25,000 April 30, 2025 Note 7 — Litigation We have several intellectual property infringement lawsuits pending in the United States Court of Appeals for the Federal Circuit (“USCAFC”). VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”) This case began on November 6, 2012, when we had filed a complaint against Apple in United States District Court (“USDC”) in which we alleged that Apple infringed on certain of our patents, (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages and injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th 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. 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. v. Apple Inc . On January 24, 2019 Apple filed its opening brief. We filed our response brief on March 1, 2019. Apple filed its reply brief on April 5, 2019. The oral arguments were heard on October 4, 2019. 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 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, 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. 7,490,151. 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. On February 22, 2021, USCAFC docketed the appeal as Case No. 19-1672. Apple’s opening brief was filed on June 2, 2021. VirnetX filed its responsive brief on July 26, 2021. Apple filed its reply brief on September 13, 2021. The briefing is complete, and the appeal is awaiting calendaring for oral argument. VirnetX Inc. v. Mangrove Partners Master Fund, Ltd., Apple Inc. (USCAFC Case 20-2271) and VirnetX Inc. v. Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp, LLC (USCAFC Case 20-2272) On September 15, 2020, we filed with the USCAFC an appeal of the invalidity findings by the Patent Trial and Appeal Board (“PTAB”) in inter-partes review proceedings IPR2015-01046 and IPR2016-00062 involving our U.S. Patent No. 6,502,135, and an appeal of the invalidity findings by the PTAB in inter partes review proceedings IPR2015-1047, IPR2016- 00063, and IPR2016-00167 involving our U.S. Patent No. 7,490,151. 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. 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 was filed on June 7, 2021. On June 23, 2021, the USCAFC entered an order directing us (and parties in other appeals that raised Appointments Clause challenges) to file a brief explaining how they believe their cases should proceed in light of the Supreme Court’s decision in United States v. Arthrex, Inc., 141 S. Ct. 1970 (2021). On July 7, 2021, we filed a brief in response to the court’s order. Other parties, including the U.S. Patent and Trademark Office (“PTO”) filed their responses on July 21, 2021. On August 19, 2021, USCAFC issued an order remanding these appeals for the limited purpose of allowing VirnetX the opportunity to request rehearing of the PTAB’s final written decisions by the Director of the USPTO. The USCAFC retained jurisdiction over the appeals in the meantime. On September 20, 2021, we filed our requests for Director rehearing with the PTO. On October 29, 2021, our requests for Director rehearing were denied. 13 Index VirnetX Inc. v. Hirshfeld (USCAFC Case 17-2593, -2594) On September 22, 2017, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes review proceeding IPR2016-00693 involving our U.S. Patent No. 7,418,504, and an appeal of the invalidity findings by the PTAB in inter partes review proceeding IPR2016-00957 involving our U.S. Patent No. 7,921,211. On September 16, 2021, USCAFC issued an order remanding these appeals for the limited purpose of allowing VirnetX the opportunity to request rehearing of the PTAB’s final written decisions by the Director of the PTO. The USCAFC retained jurisdiction over the appeals in the meantime. On October 18, 2021, we filed our requests for Director rehearing with the PTO. VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 19-1671) On March 18, 2019, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination proceeding 95/001,679 involving our U.S. Patent No. 6,502,135. On October 5, 2021, USCAFC issued an order remanding these appeals for the limited purpose of allowing VirnetX the opportunity to request rehearing of the PTAB’s final written decisions by the Director of the PTO. The USCAFC retained jurisdiction over the appeals in the meantime. Our request for Director rehearing with the PTO is due on November 5, 2021. McKool Smith P.C. v. 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 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. 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. Although we believe these potential claims are likely valid, commencing a lawsuit can be expensive and time-consuming, and there is no assurance that we could prevail on such potential claims if we made them. In addition, bringing a lawsuit may lead to potential counterclaims which may distract our management and our other resources, including capital resources, from efforts to successfully commercialize our products. 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 8 — Leases We lease office space under an operating lease which expired on October 31, 2021. This lease was extended until October 31, 2023. On September 30, 2021, the underlying ROU asset and lease liability totaled $ 4 . On December 31, 2020, the underlying ROU asset and lease liability totaled $ 44 . For the three and nine months ended September 30, 2021, lease expense totaled $ 14 and $ 42 , respectively. For the three and nine months ended September 30, 2020, the lease expense totaled $ 14 and $ 42 , respectively. We also lease a facility for corporate promotional and marketing purposes which was prepaid at inception and expires in 2025, as amended. On September 30, 2021 and December 31, 2020, the ROU asset totaled $ 1,023 and $ 1,248 , respectively. For the three and nine months ended September 30, 2021, lease expense totaled $ 75 and $ 225 , respectively. For the three and nine months ended September 30, 2020, lease expense totaled $ 89 and $ 282 , respectively. 14 Index 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 and nine months ended September 30, 2021 and 2020 (in thousands, except per share amounts): Three Months Ended September 30, Nine Months Ended September 30 , 2021 2020 2021 2020 Numerator: Net (loss) income $ ( 3,331 ) $ ( 4,025 ) $ ( 33,297 ) $ 287,880 Denominator: Weighted-average basic shares outstanding 71,233 71,059 71,135 70,780 Effect of dilutive securities — — — 883 Weighted-average diluted shares 71,233 71,059 71,135 71,663 Basic (loss) earnings per share $ ( 0.05 ) $ ( 0.06 ) $ ( 0.47 ) $ 4.07 Diluted (loss) earnings per share $ ( 0.05 ) $ ( 0.06 ) $ ( 0.47 ) $ 4.02 We incurred a net loss for the three and nine months ended September 30, 2021; therefore, all 6,906,176 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. We incurred a net loss for the three months ended September 30, 2020; therefore, all 6,211,844 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 nine months ended September 30, 2020, potentially dilutive securities representing 2,814,179 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 We lease office space under an operating lease which expired on October 31, 2021. This lease was extended until October 31,2023. 15 Index ITEM 2 — MAN AGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Company Overview We are an Internet security software and technology company with patented technology for various types of secure network communications, including 5G and 4G LTE network security. Our patented Secure Domain Name Registry and GABRIEL Connection Technology™, are the foundation for our GABRIEL Secure Communication Platform™ that protects communications using Zero Trust Network Access (ZTNA). Our technology generates secure connections on a “zero-click” or “single-click” basis, significantly simplifying the deployment of secure real-time communication solutions by eliminating the need for end-users to enter any encryption information. Our portfolio of intellectual property is the foundation of our business model. We currently own approximately 201 total patents and pending applications, including 70 U.S. patents/patent applications and 131 foreign patents/validations/pending applications. Our patent portfolio is primarily focused on securing real-time communications over the Internet, and related services, and is used in all our technology and products, some of which were acquired by our principal operating subsidiary; VirnetX, Inc., from Leidos, Inc., or Leidos, (f/k/a Science Applications International Corporation, or SAIC) in 2006. Our product portfolio includes sophisticated technologies, products and services that are available for sale worldwide. Our GABRIEL Secure Communication Platform™ includes a set of software libraries with application interfaces available for securing third-party applications seamlessly across multiple operating systems. It enables individuals and organizations to maintain complete ownership and control over their personal and confidential data, secured within their own private network, while enabling authorized secure encrypted access from anywhere at any time. Our GABRIEL Gateway product extends our Secure Communication Platform™ by allowing existing networked devices and services to seamlessly join the “GABRIEL SECURED” network without requiring any modifications. All these devices or services, including on-premise or cloud-based services, can now be assigned a VirnetX Secure Domain Name and use fully authenticated, secure communication channels for its communications. Our GABRIEL Collaboration Suite™ is a set of communication applications and tools that use our GABRIEL Secure Communication Platform™. It enables seamless and secure cross-platform communications between devices that are enrolled in our “GABRIEL SECURED” network and have our software installed. Our GABRIEL Collaboration Suite™ is available for download and free trial, for Android, iOS, Windows, Linux, and Mac OS X platforms, at https://virnetx.com. We continue to enhance our products and add new functionality. We will provide updates to new and existing customers as they are released to the public. Many small and medium businesses have installed our GABRIEL Secure Communication Platform™ and GABRIEL Collaboration Suite™ products in their corporate networks. We intend to continue to expand our customer base with targeted promotions and direct sales initiatives. We have an ongoing GABRIEL Licensing Program under which we offer licenses to a portion of our patent portfolio, technology, and software, including our secure domain name registry service, to domain infrastructure providers, communication service providers as well as to system integrators. Our GABRIEL Connection Technology™ License is offered to OEM customers who want to adopt the GABRIEL Connection Technology™ as their solution for establishing secure connections using secure domain names within their products. We have developed GABRIEL Connection Technology™ Software Development Kit (SDK) to assist with rapid integration of these techniques into existing software implementations. Customers who want to develop their own implementation of the VirnetX patented techniques for supporting secure domain names, or other techniques that are covered by our patent portfolio for establishing secure communication links, can purchase a patent license. The number of patents licensed, and therefore the cost of the patent license to the customer, will depend upon which of the patents are used in a particular product or service. These licenses will typically include an initial license fee, as well as an ongoing royalty. Our employees include the core development team behind our patent portfolio, technology, and software. Some members of this team have worked together for over twenty years and were on same team that invented and developed this technology while working at Leidos. The team has continued its research and development work and expanded the set of patents we acquired in 2006 from Leidos, into a larger patent portfolio. This portfolio now serves as the foundation of our products, services, and our licensing business. It is expected to generate most of our future revenue in license fees and royalties. We intend to continue our efforts to develop new products and technologies and further strengthen and expand our patent portfolio. We intend to continue using an outsourced and leveraged model to maintain efficiency and manage costs as we grow our licensing business by, for example, offering incentives to early licensing targets or asserting our rights for use of our patents. New Accounting Pronouncements In December 2019 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12 Income Taxes (Topic 740). 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 in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We adopted this ASU on January 1, 2021 with no material impact on our financial position, results of operations or cash flows. 16 Index Results of Operation Three and Nine Months Ended September 30, 2021 Compared with the Three and Nine Months Ended September 30, 2020 (in thousands, except per share amounts) Revenue For the three and nine months ended September 30, 2021, we recognized revenue of $4 and $24, respectively, and revenues of $26 and $302,620, for the three and nine months ended September 30, 2020, respectively. During the nine months ended September 30, 2020, we collected a lump sum payment of $454,034 from Apple, Inc. as a result of a favorable court decision relating to a patent infringement case. The payment includes past royalties, damages for willful infringement, interest, court costs and attorneys’ fees. The elements of the payment were recognized in our condensed consolidated statement of operations as follows: Classification in the Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 2020 Revenue (royalties) $ 302,428 Operating expenses: selling, general and administrative (reimbursed litigation costs) 2,114 Other income: gain (willful infringement) 41,271 Other income: interest income (pre and post judgment interest) 108,221 Total cash received $ 454,034 Licensing Costs Licensing costs for the nine months ended September 30, 2020, include $90,101 accrued in conjunction with the proceeds received from Apple, Inc., pursuant to the favorable court decision relating to a patent infringement case. Accrued licensing costs of $9,438 were reversed during the nine months ended September 30, 2021, as a result of the McKool award (See Note 7 — Litigation). Research and Development Expenses Our research and development expenses increased by $60 to $1,151 for the three months ended September 30, 2021, and decreased by $3,347 to $3,452 for the nine months ended September 30, 2021. Our research and development expenses were $1,091 and $6,799 for the three and nine months ended September 30, 2020, respectively. The decrease in 2021 was primarily due to lower engineering employee benefits. Selling, General and Administrative Expenses Our selling, general and administrative expenses decreased by $1,181 to $3,089 and increased by $9,693 to $48,040 for the three and nine months ended September 30, 2021, from $4,270 and $38,347 for the three and nine months ended September 30, 2020, respectively. The increase is primarily due to $38,284 disputed legal fees accrued to McKool (See Note — 7 Litigation), offset by a $24,104 decrease in other attorney fees. Gain on Settlement For the nine months ended September 30, 2020, we recorded a gain of $41,271 pursuant to the favorable court ruling in the case regarding Apple, Inc. discussed above. Interest and other income, net For the nine months ended September 30, 2020, we recognized interest income of $108,272 largely related to the favorable ruling against Apple, Inc. discussed above. Liquidity and Capital Resources As of September 30, 2021, our cash and cash equivalents totaled approximately $148,042 and our short-term investments totaled approximately $24,450, compared to cash and cash equivalents of approximately $192,908 and short-term investments of approximately $28,348 at December 31, 2020, respectively. Working capital was $175,164 at September 30, 2021, and $214,076 at December 31, 2020. The decrease in cash and investments during the nine months ended September 30, 2021 was primarily attributed to operating expenses. We expect that our cash and cash equivalents and short-term investments as of September 30, 2021, will be sufficient to fund our current level of operating expense, including legal expenses and provide related working capital for the foreseeable future. Over the longer term, we expect to derive the majority of our future revenue from license fees and royalties associated with our patent portfolio, technology, software and secure domain name registry in the United States and other markets around the world. 17 Index Universal Shelf Registration Statement and ATM Offering On July 30, 2018 we filed a $100,000 universal shelf registration statement on SEC Form S-3 which was declared effective by the SEC on August 16, 2018. We also entered an at-the-market equity offering sales agreement (“ATM”) with Cowen & Company, LLC on August 31, 2018, under which we can offer and sell shares of our common stock having an aggregate value of up to $50,000. 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. This registration statement expired on August 13, 2021. We sold no shares under the ATM during 2021. During the nine months ended September 30, 2020, we sold 1,049,382 shares under the ATM. The average sales price per common share was $4.41 and the aggregate proceeds from the sales totaled $4,627 during the period. Sales commissions, fees and other costs associated with the ATM totaled $139. This registration expired on August 13, 2021. Income Taxes For the three months ended September 30, 2021, we recognized income tax benefit of $895 on loss before income taxes of $4,226, which is an effective tax rate of 21.18%. For the nine months ended September 30, 2021, we recognized income tax benefit of $8,697 on loss before income taxes of $41,994 which is an effective tax rate of 20.71%. For the three and nine months ended September 30, 2020, we had an income tax benefit of $1,293 and an income tax expense of $29,036, respectively. The effective tax rate for the three-month period ended September 30, 2021, was favorably impacted by the net operating loss generated in the quarter. As of December 31, 2020, we had deferred tax assets of $9,049. As of September 30, 2021, we had net deferred tax assets of $17,749. Contractual Obligations There have been no material changes to the contractual obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Off-Balance Sheet Arrangements None. 18 Index