VirnetX Holding Corp 10-K/A

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, December 31, 2021. The purpose of this evaluation was to determine whether as of December 31, 2021 our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in our filings with the SEC, (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. At the time of the filing of the Original Form 10-K , our Chief Executive Officer and Chief Financial Officer had concluded that as of December 31, 2021, our disclosure controls and procedures were effective. Subsequent to that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, our disclosure controls and procedures were not effective, due solely to the material weakness in our internal control over financial reporting described below in “Management’s Report on Internal Control Over Financial Reporting”. In light of this material weakness, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with U.S. generally accepted principles. Accordingly, management believes that the financial statements included in this Annual Report on Form 10-K/A present fairly in all material responds our financial position, results of operations and cash flows for the period presented. Changes in Internal Control Over Financial Reporting Other than those items noted herein, there were no changes in our internal controls over financial reporting (as such term is defined in rules 13a-15(f) under the Securities Exchange Act of 1934, as amended) during the fiscal year ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of Company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. 48 Index In Management’s Report on Internal Control over Financial Reporting included in the Original Form 10-K, our management previously concluded that we maintained effective internal control over financial reporting as of December 31, 2021. Management subsequently concluded that the material weakness existed as of December 31, 2021. As discussed in the Explanatory Note to this Annual Report on Form 10-K/A and in Note 2, of the Notes to Consolidated Financial Statements in Item 8, the Company determined that there had been an overstatement of its deferred tax assets. The error related to the carrying balance of our deferred tax asset that included the fair value of NSOs expensed for book purposes but the impact of that expense is deferred for income tax purposes. In connection with accounting for NSOs, the Company expenses the fair value of NSOs granted over the vesting period of the NSOs. For income tax purposes, the tax impact of that expense is deferred as part of our deferred tax asset, until the NSO holder converts the NSO to stock, at which time the deferred tax asset is reduced and tax expense is recognized. If an NSO is never exercised, and then expires in accordance with the contract, any amounts included in our deferred tax asset are written off and income tax expense is recognized. As of December 31, 2021, the Company incorrectly included $3,328 in deferred tax assets related to expired NSOs, which should have reduced the income tax benefit when the NSOs expired. In reviewing our controls over accounting for infrequent transactions affecting deferred taxes, management identified a deficiency in the effectiveness of a control intended to ensure appropriate accounting for infrequent transactions affecting our deferred tax assets. As a result, management concluded we had inadequate supervisory review of tax professionals to provide the necessary assurance that transactions affecting our deferred tax calculation, specifically that unexercised NSOs would be monitored for expiration and evaluation of the impact of expired NSOs on the accounting and reporting of deferred tax assets. The control deficiency resulted in a material misstatement of our account balances and as such, our management concluded that the deficiency constitutes a material weakness in our internal control over financial reporting. As a result, we determined that a material misstatement of the consolidated financial statements had occurred which required a restatement of the 2021 consolidated financial statements included in the Original Form 10-K. Accordingly, management has restated its report on internal control over financial reporting. The Company acknowledges that its management is responsible for establishing and maintaining adequate internal control over financial reporting and assessing the effectiveness of its internal controls. The Company is committed to maintaining a strong internal control environment and implementing measures to ensure that the control deficiencies identified above are remediated as soon as possible. The Company will consider the material weakness remediated after the applicable controls operate for a sufficient period of time, and management has concluded, through testing, that the controls are operating effectively Farber Hass Hurley LLP has audited our internal control over financial reporting as of December 31, 2021; their report is included elsewhere herein. Remediation Plan Management has begun implementing a remediation plan to address the control deficiency that led to the material weakness. The remediation plan includes implementing specific review procedures, including the involvement of external tax experts in the supervisory review of tax accounting designed to enhance our income tax control, and strengthening our income tax control with technical training. 49 Index PART IV Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as part of this Annual Report on Form 10-K (1) Financial Statements: See the Index to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K. (2) Financial Statement Schedule: Financial statement schedules are omitted because they are not applicable, or the required information is shown in the financial statements or notes thereto. All other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or the notes thereto. (3) Exhibits: The documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K). EXHIBIT INDEX Exhibit Incorporated by reference herein Number Description Form Exhibit No. Filing Date File No. 3.1 Certificate of Incorporation of the Company. 8-K 3.1 11/01/2007 000-26895 3.2 Bylaws of the Company . 8-K 3.2 11/01/2007 000-26895 4.1 Form of Warrant Agency Agreement by and between the Company and Corporate Stock Transfer, Inc. as Warrant Agent . S-1/A 4.1 01/16/2009 333-153645 4.2 Form of Series I Warrant . 8-K 4.1 09/03/2009 001-33852 4.3 Specimen Common Stock Certificate . S-3 4.1 07/30/2018 333-226413 4.4 Form of Senior Indenture . S-3 4.2 07/30/2018 333-226413 4.5 Form of Subordinated Indenture . S-3 4.4 07/30/2018 333-226413 4.6 Description of Capital Stock . 10-K 4.6 03/16/2020 001-33852 10.1 Form of Indemnification Agreement . 10-K 10.1 03/18/2019 001-33852 10.2* 2007 Stock Plan, as amended. 10-Q 10.2 05/10/2012 001-33852 10.3* Amended Form of Stock Option Agreement – 2007 Stock Plan . 10-Q 4.5 05/10/2011 001-33852 10.4* Form of Restricted Stock Unit Award Agreement – 2007 Stock Plan . 10-Q 10.3 05/10/2012 001-33852 10.5* 2013 Equity Incentive Plan, as amended . DEF 14A Appendix A 04/13/2021 001-33852 10.6* Form of Stock Option Agreement – 2013 Equity Incentive Plan . 10-K 10.6 03/02/2015 001-33852 10.7* Form of Restricted Stock Unit Agreement – 2013 Equity Incentive Plan . 10-K 10.7 03/02/2015 001-33852 10.8 Voting Agreement among the Company and certain of its stockholders, dated as of December 12, 2007 . 10-K 10.11 03/31/2008 001-33852 10.9 Securities Purchase Agreement, dated as of September 2, 2009, by and between the Company and the Purchasers (as defined therein) . 8-K 10.1 09/03/2009 001-33852 10.10 Form of Registration Rights Agreement by and between the Company and the Purchasers (as defined therein) . 8-K 10.2 09/03/2009 001-33852 10.11 Form of Underwriting Agreement between VirnetX Holding Corporation and Gilford Securities Incorporated . S-1/A 1.1 01/16/2009 333-153645 10.12 Patent License and Assignment Agreement by and between the Company and Leidos, Inc. (formerly Science Applications International Corporation) dated as of August 12, 2005 . 8-K 10.4 07/12/2007 000-26895 10.13** Amendment No. 1 to Patent License and Assignment Agreement by and between the Company and Leidos, Inc. dated as of November 2, 2006 . 8-K 10.6 07/12/2007 000-26895 10.14 Amendment No. 2 to Patent License and Assignment Agreement by and between VirnetX, Inc. and Leidos, Inc. dated as of March 12, 2008 . 8-K 10.1 03/18/2008 001-33852 10.15 Security Agreement by and between the Company and Leidos, Inc. dated as of August 12, 2005 . 8-K 10.5 07/12/2007 000-26895 10.16 Assignment Agreement between the Company and Leidos, Inc. dated as of December 21, 2006 . 8-K 10.7 07/12/2007 000-26895 10.17 Professional Services Agreement by and between the Company and Leidos, Inc. dated as of August 12, 2005 . 8-K 10.8 07/12/2007 000-26895 10.18** Settlement and License Agreement, by and between Microsoft Corporation and VirnetX, Inc., dated May 14, 2010 . 10-Q/A 10.1 01/31/2011 001-33852 10.19** Amended Settlement and License Agreement, by and between Microsoft Corporation and VirnetX, Inc., dated December 17, 2014 . 10-K 10.23 03/02/2015 001-33852 10.20** Amended and Restated Revenue Sharing Agreement by and between VirnetX Holding Corporation and Public Intelligence Technology Associates, dated October 18, 2017 . 10-Q 10.1 11/09/2017 001-33852 10.21 Amended and Restated Gabriel License Agreement by and between VirnetX Holding Corporation and Public Intelligence Technology Associates, dated October 18, 2017 . 10-Q 10.2 11/09/2017 001-33852 10.22 Sales Agreement, dated August 31, 2018, by and between VirnetX Holding Corporation and Cowen and Company, LLC . 8-K 10.1 08/31/2018 001-33852 10.23* Hire Letter by and between Katherine Allanson and the Company, dated as of September 1, 2021. 10-Q 10.1 11/08/2021 001-33852 23.1 Consent of Farber Hass Hurley LLP, Independent Registered Public Accounting Firm. 24.1 Power of Attorney. 10-K 24.1 3/16/2022 001-33852 31.1 Chief Executive Officer Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act. 31.2 Chief Financial Officer Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act. 32.1† Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2† Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) * Indicates management contract or compensatory plan. ** Confidential treatment has been granted by the SEC as to certain portions of this exhibit. *** Portions of this exhibit have been omitted pending a determination by the SEC as to whether these portions should be granted confidential treatment. † The certifications attached as Exhibit 32.1 and 32.2 that accompany this Report are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of VirnetX Holding Corporation under the Securities Act or the Exchange Act, whether before or after the date of this Report, irrespective of any general incorporation language contained in such filing. 50 Index SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. VirnetX Holding Corporation By: /s/ Kendall Larsen Name: Kendall Larsen Title: Chief Executive Officer and President Dated: May 13, 2022