VirnetX Holding Corp 10-K

Item 8. Financial Statements and Supplementary Data Set forth below, are the audited consolidated financial statements for our company accompanied by all reports thereon of Farber Hass Hurley LLP (PCAOB No. 223 ) FINANCIAL STATEMENTS Financial Statements Index Page Report of Farber Hass Hurley LLP, Independent Registered Public Accounting Firm 32 Consolidated Balance Sheets of VirnetX Holding Corporation as of December 31, 2022 and December 31, 2021 34 Consolidated Statements of Operations of VirnetX Holding Corporation for the years ended December 31, 2022, December 31, 2021 and, December 31, 2020 35 Consolidated Statements of Comprehensive (Loss) Income of VirnetX Holding Corporation for the years ended December 31, 2022, December 31, 2021, and December 31, 2020 36 Consolidated Statements of Stockholders’ Equity of VirnetX Holding Corporation for the years ended December 31, 2022, December 31, 2021 and, December 31, 2020 37 Consolidated Statements of Cash Flows of VirnetX Holding Corporation for the years ended December 31, 2022, December 31, 2021, and December 31, 2020 38 Notes to Consolidated Financial Statements of VirnetX Holding Corporation 39 31 Index REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of VirnetX Holding Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of VirnetX Holding Corporation (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. 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: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. 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. 32 Index Deferred Taxes Description of the Matter 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, 2022. 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 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 We have served as the Company’s auditor since 2008. Chatsworth, California March 31, 2023 33 Index VIRNETX HOLDING CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) As of December 31, 2022 As of December 31, 2021 ASSETS Current assets: Cash and cash equivalents $ 86,561 $ 142,018 Investments available for sale 65,462 27,254 Accounts receivables 14 17 Prepaid income tax — — Prepaid expenses and other current assets 224 203 Total current assets 152,261 169,492 Prepaid expenses and other assets 703 1,056 Property and equipment, net 11 18 Deferred tax asset — 15,950 Total assets $ 152,975 $ 186,516 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 373 $ 338 Accrued payroll and related expenses 311 270 Accrued licensing costs — 355 Other liabilities, current 47 58 Total current liabilities 731 1,021 Other liabilities — 46 Total liabilities 731 1,067 Commitments and contingencies (Note 4) Stockholders’ equity: Preferred stock, par value $ 0.0001 per share Authorized: 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 — — Common stock, par value $ 0.0001 per share Authorized: 100,000,000 shares at December 31, 2022 and December 31, 2021, Issued and outstanding: 71,424,650 and 71,232,856 shares, at December 31, 2022 and December 31, 2021, respectively 7 7 Additional paid-in capital 239,746 236,445 Accumulated deficit ( 87,195 ) ( 50,935 ) Accumulated other comprehensive loss ( 314 ) ( 68 ) Total stockholders’ equity 152,244 185,449 Total liabilities and stockholders’ equity $ 152,975 $ 186,516 See accompanying notes to consolidated financial statements. 34 Index VIRNETX HOLDING CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) Year Ended December 31, 2022 Year Ended December 31, 2021 Year Ended December 31, 2020 Revenue $ 48 $ 35 $ 302,636 Operating expense: Licensing costs ( 4 ) ( 9,083 ) 90,101 Research and development 6,406 5,577 8,830 Selling, general and administrative expenses 15,722 52,715 45,812 Total operating expense 22,124 49,209 144,743 (Loss) income from operations ( 22,076 ) ( 49,174 ) 157,893 Gain on settlement — — 41,271 Interest and other income, net 1,848 48 108,288 (Loss) income before taxes ( 20,228 ) ( 49,126 ) 307,452 Income tax (provision) benefit ( 16,032 ) 6,205 ( 27,023 ) Net (loss) income $ ( 36,260 ) $ ( 42,921 ) $ 280,429 Basic (loss) earnings per share $ ( 0.51 ) $ ( 0.60 ) $ 3.96 Diluted (loss) earnings per share $ ( 0.51 ) $ ( 0.60 ) $ 3.92 Weighted average shares outstanding basic 71,335,046 71,159,458 70,850,311 Weighted average shares outstanding diluted 71,335,046 71,159,458 71,615,843 See accompanying notes to consolidated financial statements. 35 Index VIRNETX HOLDING CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (in thousands) Year Ended December 31, 2022 Year Ended December 31, 2021 Year Ended December 31, 2020 Net (loss) income $ ( 36,260 ) $ ( 42,921 ) $ 280,429 Other comprehensive (loss) income, net of tax: Change in unrealized (loss) gain on investments, net ( 246 ) ( 51 ) — Change in foreign currency translation, net — ( 4 ) 1 Total other comprehensive (loss) gain, net of tax ( 246 ) ( 55 ) 1 Comprehensive (loss) income $ ( 36,506 ) $ ( 42,976 ) $ 280,430 See accompanying notes to consolidated financial statements. 36 Index VIRNETX HOLDING CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share amounts) Year Ended December 31, 2022 2021 2020 Total shareholders’ equity, beginning balances $ 185,449 $ 224,437 $ 5,628 Common stock and additional paid-in capital: Beginning balances 236,452 232,464 223,244 Common stock issued for cash, net — — 4,488 Common stock issued for options/RSUs, net ( 29 ) ( 196 ) 690 Warrants issued for services — — 104 Stock-based compensation 3,330 4,184 3,938 Ending balances 239,753 236,452 232,464 Accumulated deficit (retained earnings) Beginning balances ( 50,935 ) ( 8,014 ) ( 217,602 ) Net (loss) income ( 36,260 ) ( 42,921 ) 280,429 Dividends — — ( 70,841 ) Ending balances ( 87,195 ) ( 50,935 ) ( 8,014 ) Accumulated other comprehensive loss: Beginning balances ( 68 ) ( 13 ) ( 14 ) Change in unrealized investment (loss) gain, net ( 246 ) ( 51 ) — Change in foreign currency translation, net — ( 4 ) 1 Ending balances ( 314 ) ( 68 ) ( 13 ) Total shareholders’ equity, ending balances $ 152,244 $ 185,449 $ 224,437 Dividends per share $ — $ — $ 1.00 See accompanying notes to consolidated financial statements. 37 Index VIRNETX HOLDING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2022 Year Ended December 31, 2021 Year Ended December 31, 2020 Cash flows from operating activities: Net (loss) income $ ( 36,260 ) $ ( 42,921 ) $ 280,429 Adjustments to reconcile net (loss) income to net cash from operating activities: Depreciation 7 4 5 Stock-based compensation 3,330 4,184 3,938 Amortization of warrants issuance costs — 34 69 Deferred income taxes 16,032 ( 6,901 ) ( 9,049 ) Changes in assets and liabilities: Prepaid expenses and other current assets 331 271 419 Accounts payable and accrued liabilities 35 ( 316 ) ( 692 ) Other liabilities ( 54 ) 60 ( 193 ) Accrued payroll and related expenses 41 50 ( 67 ) Accrued licensing costs ( 355 ) ( 9,083 ) 9,438 Accounts receivable 3 ( 9 ) ( 3 ) Prepaid income taxes ( 3 ) 2,905 ( 2,905 ) Net cash (used in) provided by operating activities ( 16,893 ) ( 51,722 ) 281,389 Cash flows from investing activities: Purchase of property and equipment — ( 11 ) — Purchase of investments ( 67,070 ) ( 26,332 ) ( 33,065 ) Proceeds from sale or maturity of investments 28,535 27,371 7,112 Net cash (used in) provided by investing activities ( 38,535 ) 1,028 ( 25,953 ) Cash flows from financing activities: Proceeds from exercise of options — — 1,046 Proceeds from sale of common stock — — 4,488 Dividends paid on common stock — — ( 70,841 ) Taxes paid on cashless exercise of restricted stock units ( 29 ) ( 196 ) ( 356 ) Net cash used in financing activities ( 29 ) ( 196 ) ( 65,663 ) Net (decrease) increase in cash and cash equivalents ( 55,457 ) ( 50,890 ) 189,773 Cash and cash equivalents, beginning of period 142,018 192,908 3,135 Cash and cash equivalents, end of period $ 86,561 $ 142,018 $ 192,908 Cash paid for income taxes $ 2 $ 2 $ 38,977 See accompanying notes to consolidated financial statements. 38 Index VIRNETX HOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands except share, per share and per device amounts) Note 1 − Formation and Business of the Company VirnetX Holding Corporation, which we refer to as “we”, “us”, “our”, “the Company” or “VirnetX”, is engaged in the business of commercializing a portfolio of patents. We 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. We currently own approximately 205 total patents and pending applications, including 72 U.S. patents/patent applications and 133 foreign patents/validations/pending applications. Our patent portfolio is primarily focused on securing real-time communications over the Internet, as well as related services such as the establishment and maintenance of a secure domain name registry. Our patented methods also have additional applications in the key areas of device operating systems and network security. The subject matter of all our U.S and foreign patents and pending applications relates generally to securing communications over the Internet and such covers all our technology and other products. Some of our issued U.S. and foreign patents expire at various times during the period from 2023 to 2034. Note 2 − Summary of Significant Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. The critical accounting policies we employ in the preparation of our consolidated financial statements are those which involve impairment of long-lived assets, income taxes, fair value of financial instruments and stock-based compensation. Use of Estimates We prepare our consolidated financial statements in accordance with U.S. GAAP. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below. We have reviewed our critical accounting policies and estimates with the Audit Committee of our Board of Directors. Basis of Consolidation The consolidated financial statements include the accounts of VirnetX Holding Corporation and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. 39 Index Revenue Recognition The Company derives revenue from licensing and royalty fees from contracts with customers which often span several years. We account for this revenue in accordance with 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. With the licensing of our patents, performance obligations are generally satisfied at a point in time as work is complete when our patent rights are transferred to our customers. We generally have no further obligation to our customers regarding our technology. Certain contracts may require our customers to enter into a hosting arrangement with us and for these arrangements, revenue is recognized over time, generally over the life of the servicing contract. The Company actively monitors and enforces its intellectual property (“IP”) rights, including seeking appropriate compensation from third parties that utilize the Company’s IP without a license. As a result, the Company may, from time to time, receive payments as part of a settlement or compensation for a patent infringement dispute. Proceeds received are allocated to each element identified in the settlement or compensation, based on the fair value of each element. Generally, settlements and compensation may include the following elements: the value of a license or royalty agreement, cost reimbursement, damages, and interest. Elements identified related to licensing and royalty are recognized as revenue. Elements identified as reimbursed costs are generally recorded as a reduction to the reported expenses. Elements identified as damages or interest are generally recorded in other income in the condensed consolidated statement of operations. During the year ended December 31, 2020, the Company collected a lump sum payment of $ 454,034 from Apple, Inc., because of a favorable court decision relating to a patent infringement case. The court decision identified the following as the basis of the award: $ 302,428 for past royalties, $ 41,271 in damages for willful infringement, $ 108,221 for interest, and $ 2,114 in reimbursement for court costs and attorney’s fees. Elements of the payment were recognized in the Company’s condensed consolidated statement of operations as follows: Classification of Payment Received in the Company’s Condensed Consolidated Statement of Operations Year Ended: December 31, 2020 Revenue (royalties) $ 302,428 Operating expenses: selling, general and administrative (reimbursed litigation costs) 2,114 Other income: gain (willful infringement) 41,271 Other income: interest income (pre- and post-judgment interest) 108,221 Total cash received $ 454,034 Licensing Costs Included in operating expenses are licensing costs we incurred in conjunction with the proceeds received from Apple Inc., pursuant to a favorable court decision relating to a patent infringement case. Contingent Gains ASC Topic 450-30-25, Contingent Gains, prohibits recognition of contingent gains until realized. Accordingly, we do not record contingent gains ahead of such realization. Management generally considers any such gains as realized only upon the collection of cash. Cash and Cash Equivalents We consider all highly liquid investments purchased with original maturities of three months or less at the date of purchase to be cash equivalents. Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these investments. Investments Investments are classified as available-for-sale and are recorded at fair market value. Unrealized gains and losses are reported as other comprehensive income. Realized gains and losses are recorded in income in the period they are realized using specific identification of each security’s cost basis. We invest our excess cash primarily in highly liquid debt instruments including corporate, government and federal agency securities, with contractual maturities less than two years . By policy, we limit the amount of credit exposure to any one issuer. 40 Index Concentration of Credit Risk and Other Risks and Uncertainties Our cash and cash equivalents are primarily maintained at two major financial institutions in the United States. Deposits held with these financial institutions may exceed the amount of insurance provided on such deposits. A portion of those balances are insured by the Federal Deposit Insurance Corporation, or FDIC. 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. Fair Value The carrying amounts of our financial instruments, including cash equivalents, accounts payable, and accrued liabilities, approximate fair value because of their generally short maturities. 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. Leases 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 We record intangible assets at cost, less accumulated amortization. Amortization of intangible assets is provided over their estimated useful lives, which can range from 3 to 15 years , on either a straight-line basis or as revenue is generated by the assets. Impairment of Long-Lived Assets We identify and record impairment losses on long-lived assets used in operations when events and changes in circumstances indicate that the carrying amount of an asset might not be recoverable, but not less than annually. Recoverability is measured by comparison of the anticipated future net undiscounted cash flows to the related assets’ carrying value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset. Research and Development Research and development costs include expenses paid to outside development consultants and compensation related expenses for our engineering staff. Research and development costs are expensed as incurred. 41 Index Income Taxes We account for income taxes using the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our assets and liabilities. We calculate current and deferred tax provisions based on estimates and assumptions that could differ from actual results reflected on the income tax returns filed during the following years. Adjustments based on filed returns are recorded when identified in the subsequent years. The effect on deferred taxes for a change in tax rates is recognized in income in the period that the tax rate change is enacted. In assessing our deferred tax assets, we consider whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The 2017 U.S. Tax Cuts 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 factors, it is more likely than not that all or a portion of such deferred income tax assets will not be realized. The determination of the need for a valuation allowance is based on an on-going evaluation of current information including, among other things, historical operating results, estimates of future earnings in different taxing jurisdictions and the expected timing of the reversals of temporary differences. We believe the determination to record a valuation allowance to reduce a deferred income tax asset is a significant accounting estimate because it is based, among other things, on an estimate of future taxable income in the United States and certain other jurisdictions, which is susceptible to change and may or may not occur, and because the impact of adjusting a valuation allowance may be material. In determining when to release the valuation allowance established against our net deferred income tax assets, we consider all available evidence, both positive and negative. We continually assess our ability to generate sufficient taxable income during future periods in which our deferred tax assets may be realized. If and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our statements of operations. We account for our uncertain tax positions in accordance with U.S. GAAP, which utilizes a two-step approach to evaluate tax positions. Step one, recognition, requires evaluation of the tax position to determine if based solely on technical merits it is more likely than not to be sustained upon examination. Step two, measurement, is addressed only if a position is more likely than not to be sustained. In step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement with tax authorities. If a position does not meet the more likely than not threshold for recognition in step one, no benefit is recorded until the first subsequent period in which the more likely than not standard is met, the issue is resolved with the taxing authority, or the statute of limitations expires. Positions previously recognized are derecognized when we subsequently determine the position no longer is more likely than not to be sustained. Evaluation of tax positions, their technical merits, and measurements using cumulative probability are highly subjective management estimates. Actual results could differ materially from these estimates. Stock-Based Compensation We account for stock-based compensation using the fair value recognition method in accordance with U.S. GAAP. We recognize these compensation costs on a straight-line basis over the requisite service period of the award, which is generally a vesting term of 4 years. We recognize forfeitures, if any, when they occur. In addition, we record stock-based compensation expense for awards granted to non-employees at fair value of the consideration received or the fair value of the equity instruments issued, as they vest, over the performance period (See Note 6 - Stock-Based Compensation). Earnings per Share Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. 42 Index New Accounting Pronouncements In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12 Income Taxes (Topic 740). The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify U. S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We adopted this ASU on January 1, 2021 and there was no material impact on our financial position or cash flows as a result. Note 3 − Property and Equipment Our major classes of property and equipment were as follows: December 31 2022 2021 Office furniture $ 79 $ 79 Computer equipment 92 92 Total 171 171 Less accumulated depreciation ( 160 ) ( 153 ) Total property and equipment, net $ 11 $ 18 Depreciation expense for 2022, 2021 and 2020 was $ 7 , $ 4 , and $ 5 , respectively. Note 4 − Commitments, Contingencies and Related Party Transactions We lease our offices under an operating lease with a third party expiring in October 2023 . We recognize rent expense on a straight-line basis over the term of the lease. 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. We 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. We entered into a 12 -month non-exclusive agreement with the LLC for use of the plane at a rate of $ 8 per flight hour, with no minimum usage requirement. The agreement contains other terms and conditions normal in such transactions and can be cancelled by either us or the LLC with 30 days’ notice. The agreement renews on an annual basis unless terminated by either party. Neither party has exercised their termination rights. Note 5 − Stock Plan We have an equity incentive plan for employees and others called the VirnetX Holding Corporation 2013 Equity Incentive Plan (the “2013 Plan”), which has been approved by our stockholders. To the extent that any award should expire, become un-exercisable or is otherwise forfeited, the shares subject to such award will again become available for issuance under the 2013 Plan. The 2013 Plan provides for the granting of stock options and restricted stock units purchase rights (“RSUs”) to our employees and consultants. Stock options granted under the 2013 Plan may be incentive stock options or nonqualified stock options. Incentive stock options (“ISOs”) may only be granted to our employees (including officers and directors). Nonqualified stock options (“NSOs”) and stock purchase rights may be granted to our employees and consultants. The 2013 Plan expires in 2023. 43 Index 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 RSUs. Options may be granted under the 2013 Plan with an exercise price determined by our Board of Directors, or a duly appointed committee thereof, provided, however, that the exercise price of an option granted to any employee shall be not less than 100 % of the fair market value at the date of grant in the case of ISOs or 85 % of the fair market value at the date of grant in the case of an NSO. The exercise price of an ISO or NSO granted to one of our Named Executive Officers shall not be less than 100 % fair market value of the shares at the date of grant and the exercise price of an ISO granted to a 10% shareholder shall not be less than 110 % of the fair market value of the shares on the date of grant. Stock options granted under the 2013 Plan typically vest over four years and have a 10 -year term. All RSUs are considered to be granted at the fair value of our stock on the date of grant because they have no exercise price. RSUs typically vest over four years . As of December 31, 2022, there were 1,563,345 shares available for grant under the 2013 Plan. Note 6 − Stock-Based Compensation The following tables summarize information and activity under the plan for the indicated periods. Options Outstanding Options Vested and Exercisable Range of Exercise Prices Number Outstanding Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Exercisable Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price $ 1.22 -  1.58 801,004 9.40 $ 1.48 122,001 9.38 $ 1.45 $ 2.35 -   6.95   5,504,396 5.66 $ 4.50 4,602,729 5.17 $ 4.42 $ 14.52 -  35.05   510,625 0.93 $ 20.32 510,625 0.93 $ 20.32 6,816,025 5.75 $ 5.33 5,235,355 4.86 $ 5.90 Options Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value Outstanding at December 31, 2019 5,630,021 $ 8.49 — $ — Options granted 747,500 6.07 — — Options exercised ( 262,031 ) 3.99 — — Options cancelled ( 302,969 ) 5.30 — — Outstanding at December 31, 2020 5,812,521 $ 8.55 — $ — Options granted 999,500 4.43 — — Options exercised — — — — Options cancelled ( 414,584 ) 22.54 — — Outstanding at December 31, 2021 6,397,437 $ 6.99 — $ — Options granted 801,004 1.48 — — Options exercised — — — — Options cancelled ( 382,416 ) 25.06 — — Outstanding at December 31, 2022 6,816,025 $ 5.33 5.75 $ 3 Options exercisable at December 31, 2022 5,235,355 $ 5.90 4.86 $ 2 44 Index RSUs Number of RSUs Weighted Average Grant Date Fair Value Aggregate Intrinsic Value Outstanding at December 31, 2019 498,489 $ 4.71 $ — RSUs granted 218,329 6.89 — RSUs vested ( 212,495 ) 4.63 — RSUs cancelled — — — Outstanding at December 31, 2020 504,323 $ 5.69 $ — RSUs granted 236,661 4.61 — RSUs vested ( 215,165 ) 5.23 — RSUs cancelled ( 16,664 ) 5.45 — Outstanding at December 31, 2021 509,155 $ 5.38 $ — RSUs granted 258,363 1.46 — RSUs vested ( 215,413 ) 5.15 — RSUs cancelled — — — Outstanding at December 31, 2022 552,105 $ 3.65 $ — Intrinsic value is calculated as the difference between the per-share market price of our common stock on the last trading day of 2022, which was $ 1.30 and the exercise price of the options. For options exercised, the intrinsic value is the difference between market price and the exercise price on the date of exercise. 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: Stock-Based Compensation by Type of Award Year Ended December 31, 2022 Year Ended December 31, 2021 Year Ended December 31, 2020 Stock options $ 2,303 $ 3,067 $ 2,872 RSUs 1,027 1,117 1,066 Total stock-based compensation expense $ 3,330 $ 4,184 $ 3,938 As of December 31, 2022, there was $ 3,972 of unrecognized stock-based compensation expense related to unvested stock options and $ 1,449 of unrecognized stock-based compensation expense related to unvested RSUs. These costs are expected to be recognized over a weighted-average period of 2.66 and 2.43 years, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions: Year Ended December 31, 2022 Year Ended December 31, 2021 Year Ended December 31, 2020 Expected stock price volatility 85.39 % 90.58 % 93.45 % Risk-free interest rate 3.09 % 1.06 % 0.63 % Expected life term 6.2 years 6.2 years 6.2 years Expected dividends 0 % 0 % 0 % Based on 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. The expected life was determined using the simplified method outlined in ASC 718, “ Compensation - Stock Compensation ”. Expected volatility of the stock options was based upon historical data and other relevant factors. Note 7 − Earnings Per Share Basic earnings per share are based on the weighted average number of shares outstanding for a period. Diluted earnings per share are based upon the weighted average number of shares and potentially dilutive common shares outstanding. Potential common shares outstanding principally include stock options and RSUs under our stock plan and warrants. During 2022 and 2021, we incurred losses; therefore, the effect of any common stock equivalent would be anti-dilutive during those years. 45 Index The table below sets forth the basic and diluted loss per share calculations: Year Ended December 31, 2022 2021 2020 Net (loss) income $ ( 36,260 ) $ ( 42,921 ) $ 280,429 Basic weighted average number of shares outstanding 71,335 71,159 70,850 Effect of dilutive securities — — 766 Diluted weighted average number of shares outstanding 71,335 71,159 71,616 Basic (loss) earnings per share $ ( 0.51 ) $ ( 0.60 ) $ 3.96 Diluted (loss) earnings per share $ ( 0.51 ) $ ( 0.60 ) $ 3.92 Note 8 − Common Stock Each share of common stock has the right to one vote . The holders of common stock are entitled to receive dividends whenever funds are legally available and when declared by our Board of Directors, subject to the prior rights of holders of all classes of stock outstanding having priority rights as to dividends. 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 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. Dividends On May 8, 2020 , we declared a 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 . The timing and amounts of future dividends, if any, will depend on market conditions, corporate business and financial considerations and regulatory requirements. Warrants In 2020, we issued warrants for the purchase of 25,000 shares of common stock at an exercise price of $ 5.75 per share, exercisable on the date of grant expiring in April 2025 . The weighted average fair value at the grant date was $ 4.16 per warrant. The fair value at the grant date was estimated utilizing the Black-Scholes valuation model with the following weighted average assumptions (i) dividend yield on our common stock of 0 percent (ii) expected stock price volatility of 97 percent (iii) a risk-free interest rate of 0.27 percent and (iv) and expected option term of 5 years . Warrants Issued Exercise Price Outstanding and Exercisable December 31, 2021 Issued Exercised Terminated / Cancelled Outstanding and Exercisable December 31, 2022 Expiration Date 25,000 $ 5.75 25,000 — — — 25,000 April 30, 2025 In April 2020, 25,000 warrants with an exercise price of $ 7.00 per share expired. Note 9 − Employee Benefit Plan We sponsor a defined contribution 401k plan covering substantially all our employees. Our matching contribution to the plan was approximately $ 179 , $ 145 , and $ 112 in 2022, 2021 and 2020, respectively. 46 Index Note 10 − Income Taxes The income tax provision (benefit) is comprised of the following: Year Ended December 31, 2022 Year Ended December 31, 2021 Year Ended December 31, 2020 Current: Federal $ — $ 661 $ 35,122 State 3 35 950 Foreign — — — 3 696 36,072 Deferred: Federal 15,920 ( 7,025 ) ( 8,816 ) State 109 124 ( 233 ) 16,029 ( 6,901 ) ( 9,049 ) Total income tax (benefit) provision $ 16,032 $ ( 6,205 ) $ 27,023 A reconciliation of the United States federal statutory income tax rate to our effective income tax rate is as follows: Year Ended December 31, 2022 Year Ended December 31, 2021 Year Ended December 31, 2020 United States federal statutory rate 21.00 % 21.00 % 21.00 % State taxes, net of federal benefit ( 0.55 )% ( 0.31 )% 0.17 % Valuation allowance ( 91.21 )% — ( 12.22 )% Stock based compensation ( 9.44 )% ( 6.68 )% ( 0.01 )% R&D Credit 1.22 % 0.19 % ( 0.21 )% Other ( 0.29 )% ( 1.57 )% 0.06 % Effective income tax rate ( 79.27 )% 12.63 % 8.79 % 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 allowance. 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: As of December 31, 2022 As of December 31, 2021 Deferred tax assets: Reserves and accruals $ 147 $ 58 Research and development credits and other credits 430 92 Net operating loss carry forward 11,988 9,519 Stock based compensation 5,018 6,287 Other 970 — Total deferred tax assets $ 18,553 $ 15,956 Valuation allowance ( 18,553 ) — Deferred tax assets after valuation allowance — 15,956 Total deferred tax liability – depreciation and amortization — ( 6 ) Net deferred tax assets $ — $ 15,950 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. The state net operating loss carryforward begins expiring in 2029 . 47 Index 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. 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, 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 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). Level 2 measurements utilize either directly or indirectly observable inputs in markets other than quoted prices in active markets. Our financial instruments are stated at amounts that equal, or approximate, fair value. When we estimate fair value, we utilize market data or assumptions that we believe market participants would use in pricing the financial instrument, including assumptions about risk and inputs to the valuation technique. We use valuation techniques, primarily the income and market approach, which maximizes the use of observable inputs and minimize the use of unobservable inputs for recurring fair value measurements. Mutual funds: Valued at the quoted net asset value (NAV) of shares held. U.S. agency and treasury securities: Fair value measured at the closing price reported on the active market on which the individual securities are traded. The following table shows the adjusted cost, gross unrealized gains, gross unrealized losses, and fair value of our financial assets as of December 31, 2022 and 2021 (in thousands): December 31, 2022 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Investments Available for Sale Cash $ 16,949 $ — $ — $ 16,949 $ 16,949 $ — Level 1: Mutual funds 66,493 — — 66,493 66,493 — U.S. agency and treasury securities 68,958 9 ( 386 ) 68,581 3,119 65,462 135,451 9 ( 386 ) 135,074 69,612 65,462 Total $ 152,400 $ 9 $ (386 ) $ 152,023 $ 86,561 $ 65,462 48 Index December 31, 2021 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Investments Available for Sale Cash $ 35,428 $ — $ — $ 35,428 $ 35,428 $ — Level 1: Mutual funds 106,590 — — 106,590 106,590 — U.S. agency and treasury securities 27,304 — ( 50 ) 27,254 — 27,254 133,894 — ( 50 ) 133,844 106,590 27,254 Total $ 169,322 $ — $ (50 ) $ 169,272 $ 142,018 $ 27,254 The maturities of our investments generally range from within one to two years . Actual maturities could differ from contractual maturities due to call or prepayment provisions. Note 12 − Litigation (all dollar amounts in this section are expressed in thousands except for rates per device) We have several intellectual property infringement lawsuits pending in the United States Court of Appeals for the Federal Circuit (“USCAFC”). VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”) This case began on November 6, 2012, when we filed a complaint against Apple in United States District Court (“USDC”) in which we alleged that Apple infringed on certain of our patents, (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages and injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and the latest Macintosh computers. 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 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. 19-1050 - VirnetX Inc. v. Apple Inc. On January 24, 2019 Apple filed its opening brief. We filed our response brief on March 1, 2019. Apple filed its reply brief on April 5, 2019. The oral arguments were heard on October 4, 2019. On November 22, 2019, the USCAFC issued an opinion affirming the district court’s findings that Apple is precluded from making certain invalidity arguments and that Apple infringed the ‘135 and ‘151 patents; reversing the USDC’s finding that Apple infringed the ‘504 and ‘211 patents; and remanding the case for proceedings on damages. Apple sought panel and en banc rehearing, which the USCAFC denied on February 10, 2020. On February 22, 2020, the USDC issued a scheduling order for the parties to brief the court about the need for a new trial for recalculating the damages. We filed our motion for entry of judgment on February 28, 2020. The arguments on this matter were heard on April 14, 2020. In its order, unsealed on May 1, 2020, the USDC denied VirnetX’s motion for entry of a new judgment based on the prior jury verdict and ordered a new jury trial on damages. On August 10, 2020, the USDC granted Apple’s motion for continuance and reset the date to October 26, 2020. On October 30, 2020, a jury returned a $ 502,800 verdict in favor of VirnetX based on Apple’s infringement of two network security patents: VirnetX US Patents No. 6,502,135 and No. 7,490,151. The jury verdict called for damages of $ 0.84 per accused device since the 2013 launch of Apple’s iOS 7 operating system and represents 598,629,580 infringing units from US sales only. On January 15, 2021, the district court denied Apple’s motion for judgment as a matter of law, and on February 4, 2021, Apple filed a notice of appeal to the USCAFC. On February 22, 2021, USCAFC docketed the appeal as Case No. 19-1672. Apple’s opening brief was filed on June 2, 2021. VirnetX filed its responsive brief on July 26, 2021. Apple filed its reply brief on September 13, 2021. The briefing is complete, and oral arguments were held on September 8, 2022. 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. 49 Index VirnetX Inc. v. Mangrove Partners Master Fund, Ltd., Apple Inc. (USCAFC Case 20-2271) and VirnetX Inc. v. Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp, LLC (USCAFC Case 20-2272) On September 15, 2020, we filed with the USCAFC an appeal of the invalidity findings by the Patent Trial and Appeal Board (“PTAB”) in inter-partes review proceedings IPR2015-01046 and IPR2016-00062 involving our U.S. Patent No. 6,502,135, and an appeal of the invalidity findings by the PTAB in inter-partes review proceedings IPR2015-1047, IPR2016- 00063, and IPR2016-00167 involving our U.S. Patent No. 7,490,151. On September 25, 2020, the USCAFC issued an order consolidating the two appeals. On December 15, 2020, we filed a motion to vacate the PTAB decisions below and to remand these appeals to the PTAB. On March 16, 2021, the USCAFC denied the motion without prejudice to us raising the challenges made in the motion in our opening brief. Our opening brief was filed on June 7, 2021. On June 23, 2021, the USCAFC entered an order directing us (and parties in other appeals that raised Appointments Clause challenges) to file a brief explaining how they believe their cases should proceed in light of the Supreme Court’s decision in United States v. Arthrex, Inc., 141 S. Ct. 1970 (2021). On July 7, 2021, we filed a brief in response to the court’s order. Other parties, including the U.S. Patent and Trademark Office (“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 rehearing of the PTAB’s final written decisions by the Director of the USPTO. The USCAFC retained jurisdiction over the appeals in the meantime. On September 20, 2021, we filed our requests for Director rehearing with the 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. All the briefings have been completed. 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. VirnetX Inc. v. Hirshfeld (USCAFC Case 17-2593, -2594) On September 22, 2017, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes review proceeding IPR2016-00693 involving our U.S. Patent No. 7,418,504, and an appeal of the invalidity findings by the PTAB in inter-partes review proceeding IPR2016-00957 involving our U.S. Patent No. 7,921,211. On September 16, 2021, USCAFC issued an order remanding these appeals for the limited purpose of allowing VirnetX the opportunity to request rehearing of the PTAB’s final written decisions by the Director of the USPTO. The USCAFC retained jurisdiction over the appeals in the meantime. On 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, in Appeal No. 17-2593. VirnetX filed its opening brief on September 12, 2022. 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. VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 19-1671) On March 18, 2019, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes re-examination proceeding 95/001,679 involving our U.S. Patent No. 6,502,135. On October 5, 2021, USCAFC issued an order remanding these appeals for the limited purpose of allowing VirnetX the opportunity to request rehearing of the PTAB’s final written decisions by the Director of the PTO. The USCAFC retained jurisdiction over the appeals in the meantime. Our request for Director rehearing with the PTO 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. 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. VirnetX Inc. v. Apple Inc. (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. Patent No. 6,502,135. 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. 50 Index VirnetX Inc. v. Apple Inc. (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. Patent No. 7,490,151. 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. VirnetX Inc. v. 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. Patent No. 7,418,504. We filed our opening brief on February 28, 2023. McKool Smith P.C. v. VirnetX, Inc., AAA Case No. 01-20-0003-7975 On March 23, 2020, the law firm of McKool Smith, P.C. (“McKool”) filed a Demand for Arbitration against VirnetX, Inc. with the American Arbitration Association (“AAA”). In its demand, McKool claimed that a retention agreement it entered into in 2010 with VirnetX entitled it to a contingency fee arising from the recent 2020 payment made in the Apple I case. McKool claimed it was owed approximately $ 36,300 (or 8 % of the Apple I payment). We filed a general response with the AAA denying McKool’s claim and contested the matter vigorously. An evidentiary hearing was held on the matter during the week of February 22, 2021 and the parties submitted additional briefings. On April 19, 2021, the arbitrator awarded McKool $ 36,323 in damages, plus pre-judgment interest in the amount of 5 % simple interest from March 23, 2020 to April 18, 2021, and post-judgment interest in the amount of 5 %, compounded annually, until payment of the award. We accrued the resulting $ 38,284 as of March 31, 2021 and paid that amount to McKool on April 20, 2021. This matter is now closed. Other Legal Matters One or more potential intellectual property infringement claims may also be available to us against certain other companies who have the resources to defend against any such claims. Although we believe these potential claims are likely valid, commencing a lawsuit can be expensive and time-consuming, and there is no assurance that we could prevail on such potential claims if we made them. In addition, bringing a lawsuit may lead to potential counterclaims which may distract our management and our other resources, including capital resources, from efforts to successfully commercialize our products. Currently, we are not a party to any other pending legal proceedings and are not aware of any proceeding threatened or contemplated against us. Note 13 − Leases We lease office space under an operating lease which expires on October 31, 2023. At December 31, 2022, the underlying ROU asset and lease liability totaled $ 45 . At December 31, 2021, the underlying ROU asset and lease liability totaled $ 98 . Lease expense totaled $ 54 in 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, 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 . If the 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. 51 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.