What changed in this filing

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Item 1. Financial Statements

2022-05-13 compared with 2021-11-08 · 212 added, 423 removed, 367 unchanged (63% of the section changed)

3 unchanged sentences

(in thousands, except share amounts)

September 30,

December 31, 2021

3 unchanged sentences

Accounts receivables

Prepaid income tax

Prepaid expenses and other current assets

8 unchanged sentences

Accrued licensing costs

Income tax liability

Other liabilities, current

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 , 2021 and

December 31, 2020 , Issued and outstanding:

0 shares at September 30 , 2021 and December 31, 2020

10,000,000 shares at March 31 , 2022 and December 31,

Issued and outstanding:

shares at March 31 , 2022

and December 31, 2021

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

100,000,000 shares at March 31 , 2022 and December 31,

Issued and outstanding:

shares at March 31 , 2022

and December 31, 2021

Additional paid-in capital

5 unchanged sentences

VIRNETX HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

Three Months Ended

September 30, 2021

September 30, 2020

September 30 ,

March 31, 2022

March 31, 2021

Operating expense:

3 unchanged sentences

Total operating expense

Income (loss) from operations

Loss from operations

Interest and other income, net

Income (loss) before taxes

Income tax (expense) benefit

Net income (loss)

Basic income (loss) per share

Diluted income (loss) per share

Loss before taxes

Income tax benefit

Basic loss per share

Diluted loss per share

Weighted average shares outstanding - basic

2 unchanged sentences

VIRNETX HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE

INCOME (LOSS) (Unaudited)

(in thousands)

Three Months Ended

September 30, 2021

September 30, 2020

September 30 ,

Net income (loss)

March 31, 2022

March 31, 2021

Other comprehensive income (loss):

2 unchanged sentences

Total other comprehensive income (loss)

Comprehensive income (loss)

Comprehensive loss

See accompanying notes to condensed consolidated financial statements.

VIRNETX HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’ EQUITY (Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’

EQUITY (Unaudited)

(in thousands)

Three Months Ended

September 30,

Nine Months Ended

September 30 ,

Total shareholders’ equity, beginning balances

1 unchanged sentence

Beginning balances

Common stock issued for cash, net

Common stock issued for options/RSUs, net

Warrants issued for services

Stock-based compensation

Ending balances

Accumulated deficit (retained earnings):

Accumulated deficit:

Beginning balances

Net (loss) income

Ending balances

9 unchanged sentences

(in thousands)

September 30,

Three Months Ended

Cash flows from operating activities:

Net (loss) income

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

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

Deferred tax assets

4 unchanged sentences

Prepaid expenses and other assets

Other liabilities

Accounts payable

Accrued licensing costs

Accrued payroll and related expenses

Accrued licensing costs

Income tax payable

Net cash (used in) provided by operating activities

Other liabilities

Accrued licensing

Net cash (used in) operating activities

Cash flows from investing activities:

Purchase of property and equipment

Purchase of investments

1 unchanged sentence

Net cash provided by (used in) investing activities

Cash flows from financing activities:

Proceeds from exercise of options

Proceeds from sale of common stock

Dividend paid

Pay ment of payroll taxes

on vested restricted stock units

Net cash used in financing activities

Net change in cash and cash equivalents

12 unchanged sentences

(“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”).

We also may derive future revenue from sales of software

services, including War Room™ and VirnetX Matrix™.

Our portfolio of intellectual property is

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Note 2 — Summary of Significant Accounting Policies

Unaudited Interim Financial

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.

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.

Unaudited Interim Financial Information

The accompanying Condensed Consolidated Balance Sheet as of March

31, 2022, the Condensed Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021, the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2022 and 2021, the Condensed

Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2022 and 2021, and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 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 March 31, 2022, our results of operations for the three months ended March 31, 2022 and 2021, and our cash flows for the three months ended March 31, 2022 and

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.

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/A for the fiscal year ended December 31, 2021, filed with the SEC on May 13, 2022.

Use of Estimates

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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).

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).

Revenue Recognition

The Company derives revenue from licensing and royalty fees

from contracts with customers which often span several years.

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 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.

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

5 unchanged sentences

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.

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

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

Generally, settlements and compensation may include the following elements:

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 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.

9 unchanged sentences

We consider all highly liquid investments purchased with

original maturities of three months or less at the date of purchase to be cash equivalents.

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.

11 unchanged sentences

expense as incurred.

Concentration of Credit

Risk and Other Risks and Uncertainties

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.

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

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.

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

During the three months ended March 31, 2022, 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.

20 unchanged sentences

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.

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.

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

2 unchanged sentences

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

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.

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.

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

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.

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.

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.

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 a vesting term of 4 years .

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 a vesting term of 4

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).

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

3 unchanged sentences

increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued.

Fair Value of Financial

Fair Value of Financial Instruments

Fair value is the price that would result from an orderly

9 unchanged sentences

Mutual funds:

Valued at the quoted net asset

value of shares held.

at the quoted net asset value of shares held.

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

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, 2022 and December 31, 2021.

March 31, 2022

Adjusted Cost

9 unchanged sentences

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.

The amendments also improve

consistent application of and simplify U.

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.

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

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 .

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.

For the three months ended March 31, 2022, we recognized income tax benefit of $ 1,059 on loss before taxes of $ 4,379 , which is an effective tax

rate of 24.45 %.

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

development tax credits.

For the three months ended March 31, 2021, income tax benefit was $ 7,193 on loss before income taxes of $ 33,636 and 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 months ended March 31, 2022, our deferred tax asset increased by $ 1,059 to $ 17,009 .

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.

We accumulated a net operating loss (“NOL”) carryforward in the state in which we were once headquartered, which will begin to expire in 2029 ;

none of the NOL carryforward is included in our deferred tax asset because we currently have no operations in the state where such accumulated.

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.

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.

At December 31, 2021 and March 31, 2022, 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

We had no accrued interest or penalties related to uncertain tax positions at March 31, 2022.

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 lease our office under

an operating lease with a third party which expires on October 31, 2023 (see Note 8 - Leases).

We entered into a service

1 unchanged sentence

We incurred approximately $ 265

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.

and $ 79 in fees and reimbursements to the LLC during the three months ended March 31, 2022 and 2021, 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.

14 unchanged sentences

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.

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 % of the 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

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.

As of March 31, 2022, there were 2,240,296 shares available for grant under the 2013 Plan.

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

(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

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

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 .

expense included in general and administrative expense was $ 466 and $ 383 , and in research and development expense was $ 312 and $ 496 , for the three months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022, the

unrecognized stock-based compensation expense related to non-vested stock options and RSUs was $ 4,865 and $ 1,858 , respectively, which will be amortized over an estimated weighted average period of approximately 2.71 and 2.13 years, respectively.

Note 6 — Equity

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.

We issued no shares for options exercised during the three months ended March 31, 2022 or 2021, respectively.

We issued no shares as a result of vesting RSUs during the three months ended March 31, 2022 or 2021, respectively.

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

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.

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

Warrants Issued

3 unchanged sentences

Outstanding and

September 30, 2021

March 31, 2022

Expiration Date

April 30, 2025

Note 7 — Litigation

Note 7 — Litigation (all

dollar amounts in this section are expressed in thousands except for rates per device)

We have several

6 unchanged sentences

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 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,

4 unchanged sentences

Apple filed its reply brief on April 5, 2019.

The oral arguments were

heard on October 4, 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;

reversing the USDC’s

finding that Apple infringed the ‘504 and ‘211 patents;

and remanding the case for proceedings on damages.

12 unchanged sentences

The jury verdict called for damages of

per accused device since the 2013 launch of Apple’s iOS 7 operating system and represents 598,629,580 infringing units from US sales

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.

$ 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.

3 unchanged sentences

Apple filed its reply brief on September 13, 2021.

The briefing is complete, and the appeal is awaiting calendaring for oral argument.

The briefing is complete, and we are awaiting the court order with the schedule for oral arguments in this matter.

Partners Master Fund, Ltd., Apple Inc.

5 unchanged sentences

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 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.

5 unchanged sentences

parties, including the U.S.

Patent and Trademark Office (“PTO”) filed their responses on July 21, 2021.

Patent and Trademark Office (“USPTO”) 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

1 unchanged sentence

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 September 20, 2021, we filed our requests for Director rehearing with the USPTO.

On October 29,

2021, our requests for Director rehearing were denied.

We subsequently filed an amended opening brief to the USCAFC on December 10, 2021, the other parties filed response briefs on February 2, 2022, and we filed a reply brief on February 22,

All the briefings have been completed.

We are awaiting the court order with the schedule for oral arguments in this matter.

Hirshfeld (USCAFC Case 17-2593, -2594)

3 unchanged sentences

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.

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.

October 18, 2021, we filed our requests for Director rehearing with the PTO.

October 18, 2021, we filed our requests for Director rehearing with the USPTO.

On January 7, 2022, our requests for Director rehearing were denied.

On January 21, 2022, we informed the USCAFC about the denial of Director rehearing and requested

that the court dismiss the appeal involving IPR2016-00957 as moot and vacate the PTAB’s underlying decision.

On April 4, 2022, the USCAFC vacated the PTAB’s decision in IPR2016-00957 and remanded Appeal No.

17-2594 with instructions to dismiss.

In the April 4, 2022 order, the USCAFC further set a briefing schedule, with VirnetX’s opening brief currently due June 17, 2022.

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.

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.

On March 18, 2019, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes re-examination

proceeding 95/001,679 involving our U.S.

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.

Our request for Director rehearing with the PTO was filed on November 5, 2021.

On January 10, 2022, our request for Director rehearing was denied.

We informed the USCAFC about the denial of Director rehearing.

On March 1, 2022, the USCAFC issued an order setting a briefing

schedule, with VirnetX’s opening brief currently due May 9, 2022.

(USCAFC Case 22-1523) (“Apple Reexam”)

On March 10, 2022, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes

re-examination proceeding 95/001,682 involving our U.S.

Our opening brief is currently due June 20, 2022.

McKool Smith P.C.

25 unchanged sentences

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 .

We lease office space under an operating lease which expires on October 31, 2023.

On March 31, 2022, the underlying ROU asset and lease liability totaled $ 85 .

On December 31, 2021, the underlying ROU asset and lease liability totaled $ 98 .

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.

For the three months ended March 31, 2022 and 2021, lease expense totaled $ 13

and $ 14 , respectively.

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

On March 31, 2022 and December 31, 2021, the ROU asset totaled $ 873 and $ 948 , respectively.

For the three months ended March 31, 2022 and 2021, lease expense totaled $ 75 and $ 75 , 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.

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):

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, 2022 and 2021 (in thousands, except per share amounts):

Three Months Ended

September 30,

Nine Months Ended

September 30 ,

Weighted-average

basic shares outstanding

dilutive securities

Weighted-average

diluted shares

earnings per share

Diluted (loss)

earnings per share

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.

Weighted-average basic shares outstanding

Effect of dilutive securities

Weighted-average diluted shares

Basic loss per share

Diluted loss per share

We incurred a net loss for the three months ended March 31, 2022 and 2021;

therefore, all potentially dilutive securities representing shares of common

stock ( 6,931,592 in 2022 and 6,341,844 ,

in 2021) 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.

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.

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.

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

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.

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)

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)

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

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.

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.

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.

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

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