What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-31 compared with 2022-03-16 · 178 added, 196 removed, 618 unchanged (38% of the section changed)

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in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December

31, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 16,

2022, expressed an unqualified opinion.

Basis for Opinion

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Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was

communicated or required to be communicated to the audit committee and that:

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated

or required to be communicated to the audit committee and that:

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

communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit

matter or on the accounts or disclosures to which it relates.

The communication of

the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the

accounts or disclosures to which it relates.

Deferred Taxes

Description of the Matter

As discussed in Notes 2 and 10 to the financial statements, the Company recorded a deferred tax asset, net of a valuation allowance as of December 31, 2021.

In assessing the ability to realize the deferred tax

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

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

relevant income tax law.

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

it relates to estimates of future taxable income.

This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures relating to management’s assessment of the realizability of deferred tax assets, as it

relates to estimates of future taxable income and application of income tax law.

As discussed in Notes 2 and 10 to the financial statements, the Company recorded a full valuation allowance against the deferred tax assets as of December 31,

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized in the future.

In assessing the ability to realize the deferred tax assets, management considers whether it is more

likely than not that some portion or all of the deferred tax assets will not be realized.

The valuation allowance is based on management’s estimates of future taxable income and available evidence, both positive and negative.

Our determination that valuation of deferred taxes is a critical audit matter results from the significant judgment by management when assessing the ability to

realize the deferred tax assets, particularly as it relates to estimates of future taxable income.

This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures relating to management’s assessment of

the realizability of deferred tax assets.

Audit Procedures

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

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

This included evaluating estimates of future taxable income,

evaluating management’s application of income tax law, and testing the completeness and accuracy of underlying data used in management’s assessment.

- We evaluated management’s estimates of future taxable income which involved evaluating whether the estimates used by management were reasonable considering the current and past

performance of the respective entity and whether the estimates were consistent with evidence obtained in other areas of the audit.

- We evaluated management’s assessment of all relevant data that would affect management’s estimate of future taxable income to determine whether a deferred tax asset would be realized

in the future.

/s/ Farber Hass Hurley LLP

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Preferred stock, par value $ 0.0001 per share Authorized:

10,000,000 shares at

December 31, 2021 and December 31, 2020, Issued and outstanding:

10,000,000 shares at December 31, 2022

and December 31, 2021, Issued and outstanding:

0 shares at December 31, 2022 and December 31, 2021

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100,000,000 shares at December 31, 2022 and December 31, 2021, Issued and outstanding:

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

and 71,232,856 shares, at December 31, 2022 and December 31, 2021, respectively

Additional paid-in capital

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(Loss) income before taxes

Income tax benefit (provision)

Income tax (provision) benefit

Net (loss) income

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Weighted average shares outstanding diluted

See accompanying notes to consolidated financial statements.

VIRNETX HOLDING CORPORATION

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Proceeds from sale or maturity of investments

Net cash provided by (used in) investing activities

Net cash (used in) provided by investing activities

Cash flows from financing activities:

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Taxes paid on cashless exercise of restricted stock units

Net cash (used in) provided by financing activities

Net cash used in financing activities

Net (decrease) increase in cash and cash equivalents

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portfolio of patents.

We derive revenue from selling our software products and licensing our 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.

We seek to derive revenue from selling our software products including VirnetX War Room™ and VirnetX Matrix™ and licensing our technology, including VirnetX One™, and our secure domain name technology GABRIEL Connection

Technology™, to various original equipment manufacturers (“OEMs”) and others, 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 or who seek to secure their systems and applications.

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.

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

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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.

systems and network security.

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.

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balances and transactions have been eliminated.

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

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.

Revenue Recognition

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We account for this

revenue in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.

revenue in accordance with Accounting Standards Codification (“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.

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

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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

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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.

A portion of those balances are insured by the

Federal Deposit Insurance Corporation, or FDIC.

In 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.

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

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

The carrying amounts of our financial instruments, including cash equivalents, accounts payable, and accrued liabilities, approximate fair value

because of their generally short maturities.

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.

The Company determines if an arrangement is a lease at inception in accordance with 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.

Intangible Assets

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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.

The 2017 U.S.

and Jobs Act changes IRC Section 174, regarding capitalization of book research and development (“R&D”) expenses for income tax purposes.

Effective for tax years beginning in 2022 IRC Section 174 requires the capitalization of book R&D

expenses which are capitalized and amortized over 5 years for domestic R&D expenses and over 15 years for foreign R&D expenses.

To date there has been limited guidance from the IRS on how to quantify the amount of book R&D expenses

subject to capitalization, including the indirect expenses supporting the R&D function.

Due to the limited guidance, some assumptions were made in our estimates.

A valuation allowance is provided for deferred income tax assets when, in our judgment, based upon currently available information and other

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We recognize rent expense on a straight-line basis over the term of the lease.

Rent expense was $ 56 , for each of the years 2021, 2020 and 2019.

Future minimum rents due under the lease total $ 56

in 2022 and $ 46 in 2023 when the lease expires.

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

We incurred approximately $ 791 , $ 324 ,

and $ 1,790 in rental fees and reimbursements to the LLC during the years 2021, 2020 and 2019, respectively.

We pay for the Company’s usage

of the aircraft and have no rights to purchase.

Rent expense was $ 54 in 2022 and $ 56 for both 2021 and 2020.

Future minimum rents due under the lease total $ 46 in 2023, when the lease expires.

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

incurred approximately $ 1,123 , $ 791 ,

and $ 324 in rental fees and reimbursements to the LLC in 2022, 2021 and 2020, respectively.

We pay for the Company’s business usage of the

aircraft and have no right 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.

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Note 6 − Stock-Based Compensation

The following tables summarize information about stock options and RSUs outstanding at December 31, 2021:

The following tables summarize information and activity under the plan for the indicated periods.

Options Outstanding

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Exercise Prices

The following tables summarize activity under the Plan for the indicated periods:

$ 1.22 - 1.58

Outstanding at December 31, 2019

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the date of exercise.

In 2021, no options were exercised.

In 2020 and 2019, we received cash proceeds of $ 1,046 and $ 816 from stock options

exercised, respectively.

The total intrinsic value of options exercised was $ 151 and $ 2,473 in 2020 and 2019, respectively.

In 2022 and 2021, no options were exercised.

In 2020, we received cash proceeds of $ 1,046 from stock options exercised.

The total intrinsic value of options exercised was $ 151 in 2020.

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

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Expected dividends

Based on the Black-Scholes option pricing

model, the weighted average estimated fair value of employee stock options granted was $ 3.32 , $ 4.62 and $ 4.63 per share during 2021, 2020 and 2019, respectively.

the Black-Scholes option pricing model, the weighted average estimated fair value of employee stock options granted was $ 1.09 , $ 3.32 and $ 4.62 per share during 2022,

2021 and 2020, respectively.

expected life was determined using the simplified method outlined in ASC 718, “ Compensation - Stock Compensation ”.

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During 2022 and 2021, we incurred losses;

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

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

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

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

On July 30, 2018 we filed a $ 100,000

universal shelf registration statement on SEC Form S-3.

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

We also entered a new ATM with Cowen on August 31, 2018, under which we could offer and sell shares

of our common stock having an aggregate value of up to $ 50,000 .

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

As of August 16, 2021, the

universal shelf registration expired.

shares of common stock under the ATM program during 2021.

In 2020, we sold 1,049,382 shares of common stock under the ATM program.

average sales price per common share sold during the year ended December 31, 2020 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 transactions totaled $ 139 for 2020.

In 2019, we sold 1,860,483

shares under the ATM.

The average sales priced during the year ended December 31, 2019 per common share was $ 5.84 and the aggregate

proceeds from the sales totaled $ 10,866 during the period.

Sales commissions, fees and other costs associated with the ATM totaled $ 327 .

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

This replacement registration statement was declared effective by the

SEC on August 16, 2018.

We used the universal shelf proceeds for development and marketing of our software product and services, and general corporate purposes.

The universal shelf registration expired August 16, 2021.

On May 8, 2020 , we declared a

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

special cash dividend to shareholders of record as of the close of business on May 18, 2020 of $ 1 per share of common stock, payable on May 26, 2020 .

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

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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 .

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

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April 30, 2025

In April 2020, 25,000 warrants with an exercise price of $ 7.00 per share expired.

In April 2020, 25,000 warrants with an exercise price of $ 7.00 per share

Note 9 − Employee Benefit Plan

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Effective income tax rate

The Company’s effective tax rate for both 2020 and 2019 was significantly lower than the statutory federal income tax rate primarily due to the

change of valuation allowance.

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

The Company’s effective tax rate for 2022 and 2020 was substantially lower than the statutory Federal income tax rate primarily due to the change in valuation

The Company’s effective tax rate for 2021 was substantially lower than the statutory Federal income tax rate primarily due to the effect of stock based compensation, including expiring options.

Deferred tax assets (liabilities) consist of the following:

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Deferred tax assets after valuation allowance

Total deferred tax liability – depreciation

Total deferred tax liability – depreciation and

Net deferred tax assets

In 2021, 2020 and 2019, we had pre-tax losses of $ 49,126 ,

pre-tax income of $ 307,452 , and pre-tax losses of $ 19,573 , respectively.

At December 31, 2021, we had federal and state net operating loss carryforwards of approximately $ 45,326

and $ 107,989 , respectively.

However, none of the state net operating loss carryover is apportioned to a deferred tax asset, because

currently we do not have operations in the state where losses accumulated.

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

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;

management determined no valuation allowance is necessary for 2021.

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.

Pursuant to changes in

IRC Section 174 effective for 2022, we capitalized direct and indirect research and development costs in our tax return totaling $ 5,140 ;

$ 514 of these expenses will be amortized in our 2022 tax return.

At December 31, 2022, we had federal and state net operating loss

carryforwards of approximately $ 57,085 and $ 108,745 ,

respectively.

Federal net operating loss carryforwards do not expire.

None of the state net operating loss carryforward is apportioned to a deferred tax asset, because currently we do not have operations in states where losses accumulated.

state net operating loss carryforward begins expiring in 2029 .

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, 2022, we have no uncertain tax positions.

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The statute of limitation for

these years shall expire three years after the date of filing 2020 income tax returns.

these years shall expire three years after the date of filing 2020 income tax returns, which is October 2024.

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

We had no interest or penalties accrued for 2021 and 2020.

We had no interest or penalties accrued in 2022.

Note 11 − Fair Value Measurement

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).

measurements utilize either directly or indirectly observable inputs in markets other than quoted prices in active markets.

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.

financial instruments are stated at amounts that equal, or approximate, fair value.

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December 31, 2022

agency securities

treasury securities

agency and treasury securities

December 31, 2021

agency securities

treasury securities

agency and treasury securities

The maturities of our investments generally range from within one to two years .

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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.

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.

6,502,135, 7,418,504, 7,921,211 and 7,490,151).

We sought damages and injunctive

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.

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,

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.

Apple filed a notice of appeal with the United States Court of Appeals for the Federal Circuit (“USCAFC”) in the Apple II case.

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

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Apple filed its reply brief on September 13, 2021.

The briefing is complete, and we are awaiting the court order with

the schedule for oral arguments in this matter.

The briefing is complete, and oral arguments were held on September

On March 31, 2023, the Federal Circuit issued its decision vacating the district court’s judgement in this matter and remanding it back to the district court with instructions to dismiss the case as moot.

We are evaluating all of our

available options in this matter, including potentially seeking rehearing or certiorari review.

Mangrove Partners Master Fund, Ltd., Apple Inc.

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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 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

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Other parties, including the U.S.

Patent and Trademark Office (“PTO”) filed their

Patent and Trademark Office (“USPTO”) filed their

responses on July 21, 2021.

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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, 2022.

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, 2022.

All the briefings have been completed.

We are awaiting the court order with

the schedule for oral arguments in this matter.

(USCAFC Case 17-2593, -2594)

The oral arguments in this matter

were held on September 8, 2022.

On March 30, 2023, the USCAFC issued its decision affirming PTAB’s decisions finding certain claims of the ‘135 patent and the ‘151 patent to be unpatentable.

We are evaluating all of our available

options in this matter, including potentially seeking rehearing or certiorari review.

Hirshfeld (USCAFC Case

17-2593, -2594)

On September 22, 2017,

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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.

decisions by the Director of the USPTO.

The USCAFC retained jurisdiction over the appeals in the meantime.

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

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

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

On January 7, 2022, our requests for Director rehearing

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 February 15, 2022, the USCAFC

directed the PTO to respond to our request.

The PTO’s response is due on March 8, 2022.

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, in Appeal No.

VirnetX filed its opening brief on September

The USPTO filed its response brief on December 20, 2022.

VirnetX filed its reply brief on February 14, 2023, and we currently await scheduling of oral arguments.

Cisco Systems, Inc.

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.

The USCAFC retained jurisdiction over the appeals in the meantime.

Our request for Director rehearing with the PTO was filed

on November 5, 2021.

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 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 and are awaiting the court order with a schedule for briefings in this matter.

We informed the USCAFC about the denial of Director rehearing.

VirnetX’s opening brief was filed on June 23, 2022.

The USPTO’s response brief was filed on August 2, 2022, and Cisco’s response brief was filed on September 2, 2022.

VirnetX filed its reply brief on October 7, 2022, and we currently await

scheduling of oral arguments.

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

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 was filed on August 22, 2022.

Apple and USPTO each filed a response brief on December 28, 2022.

VirnetX filed its reply brief on February 8, 2023, and we currently await scheduling of oral arguments.

(USCAFC Case 22-1997 ) (“Apple Reexam II”)

On July 6, 2022, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes re-examination proceeding 95/001,697 involving our U.S.

On October 17, 2022, we filed a motion to remand the appeal in light of the PTAB’s refusal to permit Director rehearing.

On January 23, 2023, the USCAFC denied that motion without prejudice to the parties raising their

arguments in the merits briefs.

VirnetX’s opening brief is currently due April 24, 2023.

Cisco Systems, Inc.

(USCAFC Case 22-2234)

On September 16, 2022, we filed with the

USCAFC an appeal of the invalidity findings by the PTAB in inter-partes re-examination proceeding 95/001,851 involving our U.S.

We filed our opening brief on February 28, 2023.

McKool Smith P.C.

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Lease expense totaled $ 54 in

2021, 2020 and 2019.

We also lease a facility for corporate

promotional and marketing purposes which was prepaid at inception and originally expired in 2024.

In September 2020, the lease was extended for one year

to 2025, due to COVID use-restrictions.

2022 and $ 56 in 2021 and 2020.

We also lease a

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

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

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

At December 31, 2021 and 2020, the ROU asset totaled $ 948 and $ 1,248 , respectively;

lease expense totaled $ 300 , $ 356 and $ 385 , during 2021, 2020 and 2019, respectively.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of VirnetX Holding Corporation

Opinion on Internal Control over Financial Reporting

We have audited VirnetX Holding Corporation’s (the Company’s) internal control over financial reporting as of December 31, 2021, based on criteria

established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated

balance sheets and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows of the Company, and our report dated March 16, 2022, expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the

effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial

reporting based on our audit.

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

federal securities laws and the applicable rules and regulations of

the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain

reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over

financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as

we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial

reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain

to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit

preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any

evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Farber Hass Hurley LLP

Chatsworth, California

March 16, 2022

At December 31, 2022 and 2021, the ROU asset

totaled $ 648 and $ 948 ,

respectively;

lease expense totaled $ 300 , $ 300

and $ 356 , during 2022, 2021 and 2020, respectively.

Note 14 − Subsequent Event

On March 30, 2023 ,

we declared a special cash dividend of $ 1.00 per common share to be paid on or about April 17, 2023 to shareholders of record on April 10, 2023 .

final outcome of the Apple II litigation described elsewhere in this Form 10-K results in proceeds to us, we are committed to distribute to our shareholders a substantial portion of the net proceeds (after legal costs, licensing costs and taxes),

after the case concludes.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data