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Item 8. Financial Statements and Supplementary Data

2024-03-15 compared with 2023-03-31 · 276 added, 291 removed, 505 unchanged (53% of the section changed)

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.

Set forth below, are the audited consolidated financial statements for our company accompanied by all reports thereon of Farber Hass Hurley LLP

FINANCIAL STATEMENTS

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Consolidated Balance Sheets of VirnetX Holding Corporation as of December 31, 2023 and December 31, 2022

Consolidated Statements of Operations of VirnetX Holding Corporation for the years ended December 31, 2022, December 31, 2021 and, December 31, 2020

Consolidated Statements of Comprehensive (Loss) Income of VirnetX Holding Corporation for the years ended December 31, 2022, December 31, 2021, and December 31, 2020

Consolidated Statements of Stockholders’ Equity of VirnetX Holding Corporation for the years ended December 31, 2022, December 31, 2021 and, December 31, 2020

Consolidated Statements of Cash Flows of VirnetX Holding Corporation for the years ended December 31, 2022, December 31, 2021, and December 31, 2020

Consolidated Statements of Operations of VirnetX Holding Corporation for the years ended December 31, 2023, and December 31, 2022

Consolidated Statements of Comprehensive (Loss) of VirnetX Holding Corporation for the years ended December 31, 2023, and December 31,

Consolidated Statements of Stockholders’ Equity of VirnetX Holding Corporation for the years ended December 31, 2023, and December 31,

Consolidated Statements of Cash Flows of VirnetX Holding Corporation for the years ended December 31, 2023, and December 31, 2022,

Notes to Consolidated Financial Statements of VirnetX Holding Corporation

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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.

We have audited the accompanying consolidated balance sheets of VirnetX Holding Corporation (the “Company”) as of December 31, 2023 and 2022, and the related

consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year

period ended December 31, 2023, 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

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.

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.

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:

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.

Deferred Taxes

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.

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,

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.

Other Investments

As discussed in Note 2 to the financial statements, the Company purchased equity interests in two private entities.

Given that the entities

do not have a readily determinable fair market value, management must consider various factors, including the Company’s ability to apply significant influence to the overall operations of the entities, in determining the classification

and the initial value of the Other Investments.

In addition, management must also evaluate the investments as of each reporting period to determine if there are any factors that would impact the recognized value of Other Investments.

Our determination that the classification and the valuation of Other Investments is a critical audit matter results from the significant

judgment by management when assessing the recognition method of the initial purchase as well as the ongoing analysis of the valuation of the investments.

This in turn led to a high degree of auditor judgment, subjectivity, and effort in

performing procedures relating to management’s assessment of the initial recognition and valuation of Other Investments.

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.

Our principal audit procedures related to the Company’s Other Investments included the following:

- We evaluated management’s analysis regarding their ability to apply significant influence in the operations of the entities by obtaining information of the ownership percentage of the entities, composition of the respective

boards, and any other relevant factors in determining their recognition method being recognized as cost in accordance with Accounting Standards Codification 321.

- We also evaluated management’s assessment of impairment factors or any observable transactions from inception of the investments through year-end to determine whether an adjustment in the recognized value was necessary.

includes reviewing management’s internal analysis as well as any publicly available data regarding any factors or events that could impact the entities’ values.

/s/ Farber Hass Hurley LLP

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Accounts receivables

Prepaid income tax

Prepaid expenses and other current assets

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Property and equipment, net

Deferred tax asset

Other investments

LIABILITIES AND STOCKHOLDERS’ EQUITY

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Accrued payroll and related expenses

Accrued licensing costs

Other liabilities, current

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December 31, 2022

December 31, 2020

Operating expense:

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Total operating expense

(Loss) income from operations

Gain on settlement

(Loss) from operations

Interest and other income, net

(Loss) income before taxes

(Loss) before taxes

Income tax (provision) benefit

Net (loss) income

Basic (loss) earnings per share

Diluted (loss) earnings per share

Basic (loss) per share

Diluted (loss) per share

Weighted average shares outstanding basic

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VIRNETX HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)

(in thousands)

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December 31, 2022

December 31, 2020

Net (loss) income

Other comprehensive (loss) income, net of tax:

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Total other comprehensive (loss) gain, net of tax

Comprehensive (loss) income

Comprehensive (loss)

See accompanying notes to consolidated financial statements.

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Beginning balances

Common stock issued for cash, net

Common stock issued for options/RSUs, net

Warrants issued for services

Common stock issued for options/RSUs/RS, net

Stock-based compensation

Ending balances

Accumulated deficit (retained earnings)

Accumulated deficit

Beginning balances

Net (loss) income

Ending balances

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December 31, 2022

December 31, 2020

Cash flows from operating activities:

Net (loss) income

Adjustments to reconcile net (loss) income to

net cash from operating activities:

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

Stock-based compensation

Amortization of warrants issuance costs

Deferred income taxes

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Prepaid income taxes

Net cash (used in) provided by operating activities

Net cash used in operating activities

Cash flows from investing activities:

Purchase of property and equipment

Purchase of investments at cost

Purchase of investments

Proceeds from sale or maturity of investments

Net cash (used in) provided by investing activities

Net cash provided by (used in) investing activities

Cash flows from financing activities:

Proceeds from exercise of options

Proceeds from sale of common stock

Dividends paid on common stock

Taxes paid on cashless exercise of restricted stock units

Withholding taxes paid on cashless exercise of restricted stock and restricted stock units

Net cash used in financing activities

Net (decrease) increase in cash and cash equivalents

Net (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of period

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markets or who seek to secure their systems and applications.

During 2020, we had revenues from settlement of a patent infringement dispute whereby we received consideration for past sales of licensee that utilized our technology, where there was no

prior patent license agreement.

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

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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

December 31, 2020

Revenue (royalties)

Operating expenses:

selling, general and administrative (reimbursed litigation costs)

Other income:

gain (willful infringement)

Other income:

interest income (pre- and post-judgment interest)

Total cash received

Licensing Costs

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.

Included in operating expenses are licensing costs we incurred in conjunction with a patent infringement case.

Contingent Gains

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Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these 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.

Investments classified as available-for-sale are recorded at fair market value.

Unrealized gains and losses are reported as other comprehensive

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.

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.

We have elected the

investment measurement alternative for other investments without readily determinable fair values.

During 2023, we invested $ 2,000 in L2

Holdings LLC and $ 500 in OP Media Inc.

These investments are carried at our initial cost less any impairment, because we do not have the

ability to exercise significant influence over operating and financial matters.

For these investments, we adjust the carrying value for any purchases or sales of our ownership interests.

Periodically, we evaluate these investments for impairment.

If we identify an impairment, we reduce the carrying value for the impairment loss with a charge to earnings.

We have no t identified any

impairment as of December 31, 2023.

Concentration of Credit Risk and Other Risks and Uncertainties

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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.

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

ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term, using the risk-free rate, U.S.

prime rate, of 8.5 % in 2023.

Intangible Assets

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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.

If such assets are deemed 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

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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,

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 December 2023, the FASB issued ASU No.

2023-09, Income Taxes

Improvements to Income Tax Disclosures, which requires disaggregated information about an entity’s effective tax rate reconciliation as well as information on income tax paid.

The guidance in this ASU is effective for public companies

with annual periods beginning after December 15, 2024.

We plan to adopt the guidance for the fiscal year ending December 31, 2025.

We are currently evaluating the effect adoption of this ASU will have on our consolidated financial statements.

Note 3 − Property and Equipment

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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.

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.

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

approximately $ 1,097 and $ 1,123

in rental fees and reimbursements to the LLC in 2023 and 2022, 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.

See Note 13 for further discussion of our lease commitments.

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.

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

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.

typically vest over four years .

As of December 31, 2022, there were 1,563,345 shares available for grant under the 2013 Plan.

Our stockholders approved the Amended and Restated Equity Incentive Plan (the “A&R Plan”) at our annual shareholders’ meeting in June 2023,

which added 175,000 shares to the plan.

Our prior plan expired March 29, 2023;

no further awards will be made under the prior plan, and

the A&R Plan will govern awards granted under the prior plan.

The A&R Plan provides for the granting of stock options, restricted stock units (“RSUs”) and restricted stock.

Options granted under the A&R Plan are granted with an exercise

price equal to the fair value of the of our stock on the date of grant.

RSUs and restricted stock are granted at the fair value of our stock on the date of grant because they have no exercise price.

The fair value of options, RSUs and restricted

stock are expensed over the vesting periods.

All options, RSUs and restricted stock are subject to forfeiture if service terminates prior to the shares vesting.

At December 31, 2023, there were 225,778 shares available for grant under the A&R Plan.

Note 6 − Stock-Based Compensation

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$ 10.00 - 31.60

Outstanding at December 31, 2019

Options granted

Options exercised

Options cancelled

Outstanding at December 31, 2020

Outstanding, December 31, 2021

Options granted

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Options cancelled

Outstanding at December 31, 2021

Outstanding, December 31, 2022

Options granted

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Options cancelled

Outstanding at December 31, 2022

Options exercisable at December 31, 2022

Outstanding at December 31, 2019

RSUs cancelled

Outstanding at December 31, 2020

Outstanding, December 31, 2023

Options exercisable, December 31, 2023

Outstanding, December 31, 2021

RSUs cancelled

Outstanding at December 31, 2021

Outstanding, December 31, 2022

RSUs cancelled

Outstanding at December 31, 2022

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.

Outstanding, December 31, 2023

Restricted Stock

Outstanding, December 31, 2022

Restricted stock granted

Restricted stock vested

Restricted stock cancelled

Outstanding, December 31, 2023

Intrinsic value is calculated as the difference between the per-share market price of our common stock on the last trading day of 2023, which was $ 7 and the exercise price of the awards.

For awards exercised, the intrinsic value is the difference between market price and the exercise price on the

date of exercise.

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

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December 31, 2022

December 31, 2020

Stock options

Restricted stock

Total stock-based compensation expense

As of December 31, 2023, there was $ 3,006

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.

of unrecognized stock-based compensation expense;

$ 2,025 related to unvested stock options, $ 683 related to unvested RSUs, and $ 298 related to unvested

restricted stock.

These costs are expected to be recognized over a weighted-average period of 1.8 years for options, 1.74 years for RSUs, and 3.54 years for

restricted stock.

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

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December 31, 2022

December 31, 2020

Expected stock price volatility

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Expected dividends

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

2021 and 2020, respectively.

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

Expected volatility of the stock options was based upon historical data and other relevant

Based on the Black-Scholes option pricing

model, the weighted average estimated fair value of employee stock options granted was $ 6.96 and $ 21.77 per share during 2023 and 2022, 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

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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.

Potential common shares outstanding principally include stock options, RSUs and unvested restricted stock under our stock plan and warrants.

During 2023 and 2022 we

incurred losses;

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

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

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

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

This replacement registration statement was declared effective by the

SEC on August 16, 2018.

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

The universal shelf registration expired August 16, 2021.

On May 8, 2020 , we declared a

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

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

October 25, 2023, every 20 shares of our common stock outstanding was combined into one share of common stock.

Proportional adjustments

were also made to the number of restricted stock, common stock issuable upon the exercise of options, warrants as well as common stock issuable upon the vesting of RSUs.

The exercise price of all equity awards were also proportionally adjusted.

accompanying financial statements include the effect of this adjustment on all periods presented.

In 2023, we paid a one-time capital dividend of $ 20 per share of common stock to shareholders.

The timing and

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

In 2020, we issued warrants for the purchase of 1,250

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The weighted average fair value at the grant date was $ 83.20 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

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 .

Outstanding and

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April 30, 2025

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

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.

Our matching contribution to the plan was approximately $ 229 and $ 179 in 2023 and 2022,

respectively.

Note 10 − Income Taxes

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December 31, 2022

December 31, 2020

Total income tax (benefit) provision

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December 31, 2022

December 31, 2020

United States federal statutory rate

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Effective income tax rate

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

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

Deferred tax assets (liabilities) consist of the following:

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Net deferred tax assets

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.

Pursuant to IRC Section

174, we capitalized direct and indirect research and development costs for our tax return totaling $ 8,599 in 2023 and $ 5,140 in 2022, of which $ 1,888 will be

amortized in our 2023 tax return and $ 514 in our 2022 tax return.

At December 31, 2023, unamortized capitalized direct and indirect

research and development costs for our tax return totaled $ 11,337 , resulting in a deferred tax asset of $ 2,381 .

At December 31, 2023,

we had federal and state net operating loss carryforwards of approximately $ 72,645 and $ 109,435 , respectively.

Federal net operating loss carryforwards do not expire.

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

state net operating loss carryforward begins expiring in 2029 .

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 .

We provide full valuation allowances for our net deferred tax assets, including NOL carryforwards generated during the years, based on our evaluation of positive and negative evidence, including our history of operating losses and the uncertainty

of generating future taxable income that would enable us to realize our deferred tax assets.

We are required to

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

tax years for 2005 and forward are subject to examination by the U.S.

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.

The statute of limitation for these years shall

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

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

interest or penalties accrued in 2023.

Note 11 − Fair Value Measurement

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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.

filed a complaint against Apple Inc.

(“Apple”) in United States District Court (“USDC”) in which we alleged that Apple infringed on certain of our patents, (U.S.

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

We sought damages and injunctive relief.

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.

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.

On January 24, 2019 Apple filed its opening brief.

We filed our response brief on March 1, 2019.

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;

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

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.

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.

panel and en banc rehearing, which the USCAFC denied on February 10, 2020.

On February 22, 2021, the USCAFC docketed the appeal as Case No.

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

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.

Apple filed its

reply brief on September 13, 2021.

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

On July 14, 2023 the District Court vacated its prior Final Judgment against Apple dated January 6, 2021 and dismissed the case as moot.

On May 1, 2023, VirnetX filed a petition for panel rehearing.

On June 27, 2023, the petition for panel

rehearing was denied, and the mandate issued on June 30, 2023.

VirnetX filed a petition for a writ of certiorari with the United States Supreme Court, on September 20, 2023.

On February 20, 2024, the Supreme Court denied our petition.

evaluating all our options in this matter.

Mangrove Partners Master Fund, Ltd., Apple Inc.

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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.

On June 5, 2023, VirnetX filed a petition for

panel rehearing.

On June 22, 2023, the petition for panel rehearing was denied, and the mandate issued on June 29, 2023.

VirnetX filed a petition for a writ of certiorari with the United States Supreme Court, on September 20, 2023.

20, 2024, the Supreme Court denied our petition.

We are evaluating all our options in this matter.

Hirshfeld (USCAFC Case

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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 filed its reply brief on February 14, 2023.

On April 18, 2023, VirnetX filed a motion to hold this appeal in abeyance pending the disposition of any petition for rehearing

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

Smith & Nephew, Inc.

That motion was denied on June 1, 2023.

On October 20, 2023, the USCAFC issued a decision finding the appeal moot in view of its concurrent decision in USCAFC No.

VirnetX sought rehearing, which

was denied, and the mandate to close the case was issued on January 12, 2024.

Cisco Systems, Inc.

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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 filed its reply brief on October 7, 2022.

On April 18, 2023, VirnetX

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.

The motion, filed on April 18, 2023, was denied on June 1, 2023.

On October 20, 2023, the USCAFC issued a decision finding the appeal moot in view of its

concurrent decision in USCAFC No.

22-1523 and its prior decision in USCAFC No.

VirnetX sought rehearing, which was denied, and the mandate to close the case was issued on January 12, 2024.

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

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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 filed its reply brief on February 8, 2023.

On April 18, 2023, VirnetX 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.

22-639, which was denied on June 1, 2023.

On October 20, 2023, the USCAFC issued a decision affirming the PTAB’s invalidity findings.

VirnetX sought rehearing, which was denied, and the mandate to close the

case was issued on January 12, 2024.

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

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arguments in the merits briefs.

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

VirnetX opening brief was filed on May 8, 2023, and Apple and the USPTO each filed a response brief on July 24, 2023.

VirnetX filed its reply brief on September 1, 2023.

We currently await scheduling of oral

Cisco Systems, Inc.

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We filed our opening brief on February 28, 2023.

McKool Smith P.C.

VirnetX, Inc., AAA Case No.

01-20-0003-7975

On March 23, 2020, the law firm of McKool

(“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.

matter is now closed.

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

and VirnetX reply brief was filed on June 21, 2023.

On October 20, 2023, the USCAFC issued a decision affirming the PTAB’s invalidity findings.

The mandate to close the case was issued on December 26, 2023.

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.

On September 29, 2023, VirnetX filed a motion to remand.

was denied without prejudice to VirnetX raising the same arguments in its opening appeal brief in an order dated December 27, 2023, which also set the deadline for VirnetX to file an opening brief for February 5, 2024.

VirnetX filed its opening

brief on February 5, 2024, and Cisco’s opening/response brief’s is currently due March 18, 2024

Other Legal Matters

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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.

In October 2023, we renewed our lease for office space in Nevada with a third party recording an ROU asset and lease liability of $ 102 .

The lease requires monthly payments of $ 4.6

and expires in October 2025.

At December 31, 2023, our ROU asset and lease liability totaled $ 93 .

Lease expense totaled $ 55 in 2023 and $ 54 in 2022.

In October 2023, we executed a facility lease in Utah to be used for technical integration and as a training facility recording an ROU asset and a lease liability of $ 3,587 .

This operating lease requires monthly payments starting at $ 72 ,

includes periodic increases, provides six months of free rent, and expires in April 2029.

At December 31, 2023, our ROU asset and

lease liability totaled $ 3,479 and $ 3,546 , respectively .

Lease expense

totaled $ 140 in 2023.

weighted average remaining life of the office and facility leases discussed above is approximately 5 years , and the related

lease liability is as follows:

Total undiscounted lease liability

imputed interest

Total lease liability

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.

facility for corporate promotional and marketing purposes which was prepaid at inception and expires in 2025.

At December 31, 2023 and 2022, the ROU asset totaled $ 349 and $ 648 , respectively;

lease expense totaled $ 300 per year in 2023 and 2022.

In March 2024, we renewed our facility lease, used for corporate, promotional and marketing purposes.

period begins in 2025, continues for 10 years through 2035, requires either a single payment of $ 6,000 , or annual payments each March, beginning in 2025 starting at $ 600 and increasing annually for a total commitment of approximately $ 7,500 .

We have a service agreement for the use of

an aircraft from a related party discussed in more detail in Note 4.

We incurred approximately $ 1,097 and $ 1,123 in rental fees and reimbursements to the entity in 2023 and 2022, respectively.

Note 14 − Subsequent Event

On March 30, 2023 ,

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

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

after the case concludes.

In January 2024, we issued 71,000

shares of restricted stock from our Amended and Restated Equity Incentive Plan.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data