What changed in this filing

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Item 1. Financial Statements

2023-05-15 compared with 2022-11-08 · 212 added, 296 removed, 366 unchanged (58% of the section changed)

4 unchanged sentences

(in thousands, except share amounts)

September 30,

December 31, 2021

Current assets:

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Property and equipment, net

Deferred tax assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

2 unchanged sentences

Accrued payroll and related expenses

Accrued licensing costs

Income tax liability

Accrued dividends

Other liabilities, current

5 unchanged sentences

Preferred stock, par value $ 0.0001 per share Authorized:

10,000,000 shares at September 30 , 2022 and

December 31, 2021 ;

10,000,000 shares at March 31 , 2023 and December

Issued and outstanding:

0 shares at September 30 , 2022 and December 31, 2021

0 shares at March 31 , 2023 and December 31, 2022

Common stock, par value $ 0.0001

per share Authorized:

100,000,000 shares at September 30 , 2022 and December 31, 2021 ;

100,000,000 shares at March 31 , 2023 and December 31, 2022 ;

Issued and outstanding:

shares at September 30 , 2022

shares at March 31 , 2023

and 71,424,650 at December 31, 2022

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VIRNETX HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF

OPERATIONS (Unaudited)

CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS (Unaudited)

(in thousands, except per share amounts)

Three Months Ended

September 30,

September 30 ,

Operating expense:

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Three Months Ended

Nine Months Ended

September 30,

September 30 ,

Net income (loss)

8 unchanged sentences

SHAREHOLDERS’ EQUITY (Unaudited)

(in thousands)

(in thousands, except per share amounts)

Three Months Ended

September 30,

September 30 ,

Total shareholders’ equity, beginning balances

1 unchanged sentence

Beginning balances

Common stock issued for options/RSUs, net

Stock-based compensation

Ending balances

Accumulated deficit (retained earnings):

Accumulated deficit:

Beginning balances

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Total shareholders’ equity, ending balances

Dividends per share

See accompanying notes to condensed consolidated financial statements.

3 unchanged sentences

(in thousands)

Nine Months Ended

September 30,

Three Months Ended

Cash flows from operating activities:

2 unchanged sentences

Deferred tax assets

Amortization of warrant issuance costs

Stock-based compensation

5 unchanged sentences

Accrued licensing costs

Income tax payable

Other liabilities

1 unchanged sentence

Cash flows from investing activities:

Purchase of property and equipment

Purchase of investments

Proceeds from sale or maturity of investments

Net cash (used in) provided by investing activities

Cash flows from financing activities:

Payment of payroll taxes on vested restricted stock units

Net cash used in financing activities

Net cash provided by (used in) investing activities

Net change in cash and cash equivalents

1 unchanged sentence

Cash and cash equivalents, end of period

Cash paid for income taxes

Non-cash transactions

Dividends approved and accrued on March 30, 2023, paid in April 2023

See accompanying notes to condensed consolidated financial statements.

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and Basis of Presentation

VirnetX Holding Corporation, which we refer

to as “we,” “us,” “our,” “the Company” or “VirnetX,” is engaged in the business of commercializing a portfolio of patents.

We derive revenue licensing technology, including GABRIEL Connection Technology™, to various original equipment manufacturers

(“OEMs”), that use our technologies in the development and manufacturing of their own products within the IP-telephony, mobility, fixed-mobile convergence, and unified communications markets.

We also may derive future revenue from sales of software

services, including War Room™ and VirnetX Matrix™.

Our portfolio of intellectual property is

the foundation of our business model.

VirnetX Holding Corporation (the “Company,” “we,” “us,” or “our”) is an Internet security software and technology company with patented technology for Zero Trust Network Access (“ZTNA”) based secure network

communications.

VirnetX’s software and technology solutions, including its Secure Domain Name Registry and Technology, VirnetX One ™, War Room™, VirnetX Matrix™, and Gabriel

Connection Technology™, are designed to be device- and location-independent, and enable a secure real-time communication environment for all types of enterprise applications, services, and critical infrastructures.

Our technology generates secure

connections on a “single-click” basis, significantly simplifying the deployment of secure real-time communication solutions by eliminating the need for end-users to enter any encryption information .

Our portfolio of intellectual property

is the foundation of our business model.

We currently own approximately 205 total patents and pending applications, including 72 U.S.

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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

Our patented methods also have additional applications in the key areas of device operating systems and network security for Cloud services, M2M communications in areas of Smart City, Connected Car and Connected Home.

The subject matter

of all our U.S and foreign patents and pending applications relates generally to securing communications over the Internet and such covers all our technology and other products.

Some of our issued U.S.

and foreign patents expire at various times

during the period from 2022 to 2034.

Our patent portfolio is primarily focused on securing real-time communications over the Internet and related services, and is used in

all our technology and products, some of which were acquired by our principal operating subsidiary;

VirnetX, Inc., from Leidos, Inc., or Leidos, (f/k/a Science Applications International Corporation, or SAIC) in 2006.

Our product portfolio includes sophisticated technologies, products and services that are available

for sale worldwide.

Our next-generation, VirnetX One ™ platform builds upon our patented Secure Domain Names and GABRIEL Connection Technology™ to further enhance the

security and efficiency of our patented secure communication links.

VirnetX One ™ is a security-as-a-service platform that protects enterprise applications, services, and

infrastructure from cyber-attacks.

Our platform allows businesses and other enterprises of all sizes to add a “security umbrella” as an added layer on top of their existing infrastructure to further reduce risk and bolster security against

ever-growing cyberthreats to data, operating systems, other infrastructure products and gateway security controllers.

Note 2 — Summary of Significant Accounting Policies

Unaudited Interim Financial

Unaudited Interim Financial Information

The accompanying Condensed Consolidated Balance Sheet as of

September 30, 2022, the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021, the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended

September 30, 2022 and 2021, the Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2022 and 2021, and the Condensed Consolidated Statements of Cash Flows for the nine months ended September

30, 2022 and 2021 are unaudited.

These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S.

In our opinion, the unaudited interim

consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of September 30, 2022, our results of operations for the three and nine months ended September 30,

2022 and 2021, and our cash flows for the nine months ended September 30, 2022 and 2021.

March 31, 2023, the Condensed Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022, the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2023 and 2022, the

Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2023 and 2022, and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 are unaudited.

These unaudited

interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S.

In our opinion, the unaudited interim consolidated financial statements include all

adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of March 31, 2023, our results of operations for the three months ended March 31, 2023 and 2022, and our cash flows for the three months ended

March 31, 2023 and 2022.

The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.

These unaudited interim consolidated financial statements

should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2021, filed with the SEC on May 13, 2022.

should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 31, 2023.

Use of Estimates

We prepare our consolidated financial statements in accordance

We prepare our consolidated financial statements in

accordance with U.S.

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, 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.

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.

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.

We have reviewed our critical

accounting policies and estimates with the audit committee of our Board of Directors.

Basis of Consolidation

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Operating lease right-of-use (“ROU”) assets are included in Prepaid expenses, and other assets on the Condensed Consolidated Balance Sheets.

ROU assets represent the

Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

ROU assets and lease liabilities are recognized at the commencement date based on

the present value of lease payments over the lease term (see Note 8 – Leases).

represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

ROU assets and lease liabilities are recognized at the commencement

date based on the present value of lease payments over the lease term (see Note 8 – Leases).

Revenue Recognition

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Licensing Costs

Included in operating expenses primarily in 2021 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.

Included in operating expenses in 2022 is a refund of

licensing costs we incurred in conjunction with a favorable court decision relating to a patent infringement case.

Contingent Gains

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expense as incurred.

Concentration of Credit

Risk and Other Risks and Uncertainties

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.

Concentration of Credit Risk and Other Risks and Uncertainties

Our cash and cash equivalents are primarily maintained at two major financial institutions in the United States.

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

such deposits.

A portion of those balances are insured by the Federal Deposit Insurance Corporation, or FDIC.

During the nine months ended September 30, 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.

During the three months ended March 31, 2023, 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.

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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 include expenses paid to

outside development consultants and compensation related expenses for our engineering staff.

Research and development costs are expensed as incurred.

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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.

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

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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

We account for our uncertain tax positions in accordance with U.S.

GAAP, which utilizes a two-step approach to evaluate tax positions.

Step one, recognition, requires evaluation of the tax position to determine if based solely on technical merits it is more likely than not to be sustained upon examination.

two, measurement, is addressed only if a position is more likely than not to be sustained.

In step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be

realized upon ultimate settlement with tax authorities.

If a position does not meet the more likely than not threshold for recognition in step one, no benefit is recorded until the first subsequent period in which the more likely than not standard is

met, the issue is resolved with the taxing authority, or the statute of limitations expires.

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

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 reversed if and when we subsequently determine the position no longer is more likely than not to be sustained.

of tax positions, their technical merits, and measurements using cumulative probability are highly subjective management estimates.

Evaluation of tax positions, their technical merits, and measurements using

cumulative probability are highly subjective management estimates.

Actual results could differ materially from these estimates.

Stock-Based Compensation

We account for stock-based compensation using the fair value

recognition method in accordance with U.S.

We recognize these compensation costs on a straight-line basis over the requisite service period of the award, which is generally a vesting term of 4 years .

We recognize forfeitures, if any, when they occur.

In addition, we record stock-based compensation expense for awards granted to non-employees at fair value of the

consideration received or the fair value of the equity instruments issued, as they vest, over the performance period (See Note 5 - Stock-Based Compensation).

We account for stock-based compensation using the fair value recognition method in accordance with U.S.

We recognize these compensation

costs on a straight-line basis over the requisite service period of the award, which is generally a vesting term of 4 years.

recognize forfeitures, if any, when they occur.

In addition, we record stock-based compensation expense for awards granted to non-employees at fair value of the consideration received or the fair value of the equity instruments issued, as they

vest, over the performance period (See Note 5 - Stock-Based Compensation).

Earnings per Share

3 unchanged sentences

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

Fair Value of Financial

Fair Value of Financial Instruments

Fair value is the price that would result from an orderly

1 unchanged sentence

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).

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.

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.

Valued at the quoted net asset value of shares held.

Our financial instruments are stated at amounts that equal,

or approximate, fair value.

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:

at the quoted net asset value of shares held.

agency and treasury securities :

value measured at the closing price reported on the active market on which the individual securities are traded.

following tables show the adjusted cost, gross unrealized gains, gross unrealized losses, and fair value of our securities by significant investment category as of September 30, 2022 and December 31, 2021.

September 30, 2022

Fair value measured at the closing price reported on the active market on which the individual securities are traded.

The following tables show the adjusted cost, gross unrealized

gains, gross unrealized losses, and fair value of our securities by significant investment category as of March 31, 2023 and December 31, 2022.

March 31, 2023

Adjusted Cost

1 unchanged sentence

Available for

treasury securities

December 31, 2022

2 unchanged sentences

Available for

treasury securities

New Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board

(“FASB”) issued Accounting Standards Update (“ASU”) 2019-12 Income Taxes (Topic 740).

The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740.

The amendments also

improve consistent application of and simplify U.

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

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.

In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards

Update (“Update”) 2022-04, “Liabilities – Supplier Finance Programs (Subtopic 405-50):

Disclosure of Supplier Finance Program Obligations”, which requires entities to disclose the key terms of supplier finance programs used in connection with

the purchase of goods and services along with information about their obligations under these programs.

This Update does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations.

Update is effective for all entities for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years, except for the rollforward requirement, which is effective for fiscal years beginning after December

We do not have a supplier finance program currently in place, and, therefore, there was no impact on our financial position or cash flows as a result.

Note 3 — Income Taxes

For the three months ended September 30, 2022, we recognized an income tax benefit of $ 486 on loss before taxes of $ 4,766 , which is an effective tax

rate of 10.3 %.

For the nine months ended September 30, 2022, we recognized an income tax benefit of $ 1,171 on loss before taxes of $ 13,208

which is an effective rate of 8.3 %.

The effective tax rate was lower than the statutory federal income tax rate primarily due to the

effect of stock-based compensation and expiring options, requiring us to reduce our deferred tax asset.

During the nine months ended September 30, 2022, our deferred tax asset increased to $ 17,122 .

May 13, 2022, the Company notified the public of the restatement via Form 8-K stating the Company’s previously issued 2021 Financials because of an error in our deferred tax assets affecting the annual period covered by the financial

The Company determined that the nine months ended September 30, 2021 interim statements should be revised as the 2021 restatement related primarily to options expiring in second quarter 2021.

The accompanying Deferred tax asset

previously reported as $ 17,749 has now been reduced to $ 14,421 as of September 30, 2021.

The income tax benefit for the nine months ended September 30, 2021, previously reported as $ 8,697 has been reduced to $ 5,369 .

For the three months ended September 30, 2021, we recognized an income tax benefit of $ 895 on loss before taxes of $ 4,226 .

For the nine months ended September 30,

2021, we recognized an income tax benefit of $ 5,369 on loss before income taxes of $ 41,994 .

Income tax for the nine months was primarily affected by expiring options and research and development credits.

During the nine months ended September 30, 2021, our

deferred tax asset increased by $ 5,372 to $ 14,421 .

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

more likely than not that all or a portion of such deferred income tax assets will not be realized.

The determination of the need for a valuation allowance is based on an on-going evaluation of current information including, among other things,

historical operating results, estimates of future earnings in different taxing jurisdictions and the expected timing of the reversals of temporary differences.

We believe the determination to record, or reduce, a valuation allowance associated

with a deferred income tax asset is a significant accounting estimate because it is based, among other things, on an estimate of future taxable income in the United States and certain other jurisdictions, which is susceptible to change and may or

may not occur, and because the impact of adjusting a valuation allowance may be material.

In determining when to release the valuation allowance established against our net deferred income tax assets, we consider all available evidence, both

positive and negative.

For the three months ended March 31, 2023, we recognized an income tax benefit of $ 78 on loss before taxes of $ 4,545 , which is an effective tax rate of 1.71 %.

The effective rate is lower than the statutory federal rate primarily due to the change in valuation allowance.

For the three months ended

March 31, 2022, we recognized an income tax benefit of $ 1,059 on loss before taxes of $ 4,379 , an effective tax rate of 24.45 %.

The effective rate

is higher than the statutory federal rate primarily due to the effect of research and development tax credits.

Management determined that a full valuation allowance should be provided against net deferred income tax assets at March 31, 2023.

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.

tax authority and various state tax authorities because we utilized the

NOLs and tax credits generated in those years in 2020.

The statute of limitation for those years shall expire three years after the date of filing 2020 income tax returns.

We are required to

recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination.

At December 31, 2021 and September 30, 2022, we have no uncertain tax positions.

At December 31, 2022 and March 31, 2023, we have no uncertain tax positions.

Our policy is to recognize interest and penalties accrued on uncertain tax positions as a component of income tax

We had no accrued interest or penalties related to uncertain tax positions at September 30, 2022.

We had no accrued interest or penalties related to uncertain tax positions at March 31, 2023.

Note 4 — Commitments and

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We incurred approximately $ 287

and $ 782 compared to $ 280

and $ 454 in fees and reimbursements to the LLC during the three and nine months ended September 30, 2022 and 2021, respectively.

the Company’s usage of the aircraft and have no rights to purchase.

compared to $ 265 in fees and reimbursements to the LLC during the three months ended March 31, 2023 and 2022, respectively.

We pay for the

Company’s usage of the aircraft and have no rights to purchase.

Our Chief Executive Officer and Chief Administrative Officer are the managing partners of the LLC and control the equity interests of the LLC.

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Note 5 — Stock Based

We have a stock incentive

plan for employees and others called the VirnetX Holding Corporation 2013 Equity Incentive Plan (the “2013 Plan”), which has been approved by our stockholders.

To the extent that any award should expire, become un-exercisable or is otherwise

forfeited, the shares subject to such award will again become available for issuance under the 2013 Plan.

The 2013 Plan provides for the granting of stock options and restricted stock units purchase rights (“RSUs”) to our employees and consultants.

Stock options granted under the 2013 Plan may be incentive stock options or nonqualified stock options.

Incentive stock options (“ISOs”) may only be granted to our employees (including officers and directors).

Nonqualified stock options (“NSOs”) and

stock purchase rights may be granted to our employees and consultants.

The 2013 Plan expires in 2023.

Options may be granted

under the 2013 Plan with an exercise price determined by our Board of Directors, or a duly appointed committee thereof, provided, however, that the exercise price of an option granted to any employee shall be not less than 100 % of the fair market value at the date of grant in the case of ISOs or 85 % of the fair market value at the date of grant in the case of an NSO.

The exercise price of an ISO or NSO granted to one of our Named Executive Officers shall not be less

than 100 % of the fair market value of the shares at the date of grant and the exercise price of an ISO granted to a 10% shareholder

shall not be less than 110 % of the fair market value of the shares on the date of grant.

Stock options granted under the 2013 Plan

typically vest over four years and have a 10 -year

All RSUs are considered to be granted at the fair value of our stock on the date of grant because they have no exercise price.

RSUs typically vest over four years .

As of September 30, 2022, there were 1,513,345 shares available for grant under the 2013

compensation expense included in general and administrative expense was $ 573 and $ 703 , and in research and development expense was $ 301 and $ 473 , for the three months ended September 30, 2022 and 2021, respectively.

Stock-based compensation expense included in general and administrative

expense was $ 1,526 and $ 1,549 ,

and in research and development expense was $ 938 and $ 1,480 , for the nine months ended September 30, 2022 and 2021, respectively.

During the three months ended September 30, 2022, we did no t grant any options.

During the three months ended September 30, 2021, we granted options for a total of 170,000 shares with a weighted average grant date fair value of $ 3.10 per

During the nine months ended September 30, 2022, we granted options for a total of 801,004 shares with a weighted average grant date fair value of $ 1.09

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

(i) 0 percent dividend yield, (ii) 86 percent volatility, (iii) 3 percent risk free rate and (iv) 6 years

expected term.

During the nine months ended September 30, 2021, we granted options for a total of 949,500 shares with a weighted average

grant date fair value of $ 3.39 per option.

We estimated the fair value of the options on the date of grant utilizing the Black-Scholes

valuation model with the following assumptions:

(i) 0 percent dividend yield, (ii) 90 percent volatility, (iii) 1 percent risk free rate and (iv) 6 years expected term.

During the three months ended September 30, 2022 and 2021, we did no t grant any RSUs.

During the nine months ended September 30, 2022 and 2021, we granted 258,363 and 236,661 RSUs respectively, with weighted average fair values at

the date of grant of $ 1.46 and $ 4.61 ,

respectively.

RSUs, which are subject to forfeiture if service terminates prior to the shares vesting, are expensed ratably over the vesting period.

During the nine months ended September 30, 2022 and 2021, we paid $ 29 and $ 196 in withholding taxes on

shares issued upon conversion of RSUs, respectively.

The underlying shares were cancelled.

The amounts are reflected as financing costs in the accompanying statement of cash flows.

As of September 30, 2022, the unrecognized stock-based compensation expense related to non-vested stock

options and RSUs was $ 4,571 and $ 1,716 ,

respectively, which will be amortized over an estimated weighted average period of approximately 2.86 and 2.68 years, respectively.

During the three and nine months ended September 30, 2022, and 2021 no options were exercised.

During the nine months ended September 30, 2022 and 2021, we issued 191,795 and 174,285 shares,

respectively, as a result of vesting RSUs, all of which occurred in the second quarter of each respective year.

During the nine months ended September 30, 2022 and 2021, there were 332,416 and 390,000 options returned to

the plan due to the expiration of unexercised options, respectively.

Our stockholders are

being asked to approve the Amended and Restated Equity Incentive Plan (the “Amended 2013 Plan”) at our annual shareholders’ meeting in June 2023.

Our shareholder-approved 2013 Equity Incentive Plan (the “Prior Plan”) expired March 29, 2023;

further awards will be made under the Prior Plan, but the Amended 2013 Plan will govern awards granted under the Prior Plan.

compensation expense included in general and administrative expense was $ 371 and $ 466 , and in research and development expense was $ 311 and $ 312 , for the three months ended March 31, 2023 and 2022, respectively.

During the three

months ended March 31, 2023 and 2022, we did no t grant any options or RSUs.

As of March 31, 2023,

the unrecognized stock-based compensation expense related to unvested stock options and RSUs was $ 3,484 and $ 1,256 , respectively, which will be amortized over an estimated weighted average period of approximately 2.47 and 2.18 years, respectively.

Note 6 — Equity

We issued no shares for options exercised during the three and nine months ended September 30, 2022 or 2021, respectively.

No shares were issued during the three months ended September 30, 2022 or 2021 as a result of vesting RSUs.

We issued 191,795 and 174,285 shares as a result of vesting RSUs during the

nine months ended September 30, 2022 and 2021, respectively.

We issued no shares for options exercised during the three months ended March

31, 2023 or 2022, respectively.

We issued no shares as a result of vesting RSUs during the three months ended March 31, 2023 or 2022.

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 .

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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

Outstanding and

September 30, 2022

Expiration Date

March 31, 2023

April 30, 2025

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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.

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.

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19-1050 - VirnetX 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;

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.

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$ 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.

On January 15, 2021, the USDC 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, the USCAFC docketed the appeal as Case No.

Apple’s opening brief was filed on June 2, 2021.

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Apple filed its reply brief on September 13, 2021.

The briefing is complete, and oral arguments were held on September 8, 2022.

We are currently waiting for the USCAFC ruling.

Oral arguments were held on September 8, 2022.

On March 31, 2023, the USCAFC

issued its decision vacating the USDC’s judgement in this matter and remanding it back to the USDC with instructions to dismiss the case as moot.

On April 20, 2023, VirnetX filed a motion to extend the time to file a petition for rehearing from

May 1, 2023, until June 5, 2023, and remains pending.

Partners Master Fund, Ltd., Apple Inc.

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The oral arguments in this matter were held on September 8, 2022.

We are currently waiting for the USCAFC ruling.

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.

On April 19, 2023, VirnetX filed a motion to extend the time to file a petition for rehearing from May 15, 2023, until June 5, 2023.

was granted on April 20, 2023.

Hirshfeld (USCAFC Case 17-2593, -2594)

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VirnetX filed its opening brief on September 12, 2022.

The USPTO’s response brief is currently due December 2, 2022.

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 has filed a motion to hold this appeal in abeyance pending the disposition of any

petition for rehearing in the No.

20-2271, -2272 appeal, and pending the Supreme Court’s disposition of a pending petition for a writ of certiorari in Arthrex, Inc.

Smith & Nephew, Inc.

That motion, filed on April 18, 2023, and remains pending.

Cisco Systems, Inc.

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(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’s response brief is currently due November 17, 2022.

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.

VirnetX has, however, filed a motion to hold

this appeal in abeyance pending the disposition of any petition for rehearing in the No.

20-2271, -2272 appeal, and pending the Supreme Court’s disposition of a pending petition for a writ of certiorari in Arthrex,

Smith & Nephew, Inc.

That motion, filed on April 18, 2023, and remains pending.

(USCAFC C ase 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 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 was filed on May 10, 2023, and remains pending.

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.

Our opening brief is currently due December 30, 2022 .

McKool Smith P.C.

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.

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

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.

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, and remains pending.

Cisco Systems, Inc.

(USCAFC Case 23-1765)

On April 7, 2023, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes re-examination proceeding 95/001,714 involving our U.S.

The certified list is due to be filed by the USPTO by May 30, 2023, and our opening brief will be due 60

days thereafter.

In addition, on April 21, 2023, Cisco filed a cross-appeal.

Cisco’s response brief was filed on May 10, 2023.

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.

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.

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

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Note 8 — Leases

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

On September 30, 2022, the underlying ROU asset and lease liability totaled $ 58 .

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

On March 31, 2023, the underlying ROU asset and lease liability totaled $ 31 .

On December 31, 2022, the underlying ROU asset and lease liability totaled $ 45 .

For the three and nine months ended September 30, 2022, lease expense

totaled $ 13 and $ 40 ,

respectively.

For the three and nine months ended September 30, 2021, the lease expense totaled $ 14 and $ 42 , respectively.

For the three months ended March 31, 2023 and 2022, lease expense totaled $ 14 and $ 13 , respectively.

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

On September 30, 2022 and December 31,

2021, the ROU asset totaled $ 724 and $ 948 ,

On March 31, 2023 and December 31, 2022, the ROU asset

totaled $ 573 and $ 648 ,

respectively.

For the three and nine months ended September 30, 2022, lease expense totaled $ 75 and $ 224 , respectively.

For the three and nine months ended September 30, 2021, lease expense totaled $ 75

and $ 225 , respectively.

For the three months ended March 31, 2023 and 2022, lease expense totaled $ 75 and $ 75 , respectively.

Note 9 — Earnings Per Share

earnings per share are based on the weighted average number of common shares outstanding for the period.

Diluted earnings per share are based on the weighted average number of common shares and potentially dilutive common shares outstanding.

Potential common shares outstanding principally include stock options, RSUs and warrants, excluding any potentially dilutive shares convertible at a price higher than the closing price of our stock at the end of each reporting period.

The following

table shows the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2022 and 2021 (in thousands, except per share amounts):

Basic earnings per share are based on the weighted average number of common shares outstanding for the period.

Diluted earnings per share are based on the

weighted average number of common shares and potentially dilutive common shares outstanding.

Potential common shares outstanding principally include stock options, RSUs and warrants, excluding any potentially dilutive shares convertible at a price

higher than the closing price of our stock at the end of each reporting period.

The following table shows the computation of basic and diluted earnings per share for the three months ended March 31, 2023 and 2022 (in thousands, except per share amounts):

Three Months Ended

September 30,

September 30 ,

Weighted-average

basic shares outstanding

dilutive securities

Weighted-average

diluted shares

earnings per share

Diluted (loss)

earnings per share

We incurred a net

loss for the three and nine months ended September 30, 2022 and 2021;

therefore, all potentially dilutive securities representing shares of common stock ( 7,443,130 in 2022 and 6,906,176 in 2021) were excluded from the

computation of diluted earnings per share, because their effect would have been antidilutive.

Net (loss) income

Weighted-average basic shares outstanding

Effect of dilutive securities

Weighted-average diluted shares

Basic (loss) earnings

Diluted (loss) earnings

We incurred a net loss for the three months ended March

31, 2023 and 2022;

therefore, all potentially dilutive securities representing shares of common stock ( 7,353,129 in 2023 and 6,931,592 in 2022) were excluded from the computation of diluted earnings per share, because their effect would have been antidilutive.

Note 10 — Subsequent Events

2023, the Company paid $ 71,429 for a special dividend of $ 1 per share.

Additionally in April 2023, the Company paid $ 7,245 for a special

bonus to employees.

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

What changed 10-Q

Item 1. Financial Statements