VirnetX Holding Corp 10-Q

ITEM 1- FINANCIAL STATEMENTS. VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) As of March 31, 2024 As of December 31, 2023 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 27,593 $ 26,289 Investments available for sale 22,412 27,258 Accounts receivables — 2 Prepaid expenses and other current assets 367 282 Total current assets 50,372 53,831 Other investments at cost 2,500 2,500 Prepaid expenses and other assets 9,341 4,014 Property and equipment, net 62 67 Total assets $ 62,275 $ 60,412 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 490 $ 440 Accrued payroll and related expenses 324 316 Other liabilities, current 6,215 498 Total current liabilities 7,029 1,254 Other liabilities 3,062 3,145 Total liabilities 10,091 4,399 Commitments and contingencies (Note 4) Stockholders’ equity: Preferred stock, par value $ 0.0001 per share Authorized: 10,000,000 shares at March 31 , 2024 and December 31, 2023 ; Issued and outstanding: 0 shares at March 31 , 2024 and December 31, 2023 — — Common stock, par value $ 0.0001 per share Authorized: 100,000,000 shares at March 31 , 2024 and December 31, 2023 ; Issued and outstanding: 3,680,661 shares at March 31 , 2024 and 3,618,431 at December 31, 2023 — — Additional paid-in capital 243,005 242,520 Accumulated deficit ( 190,786 ) ( 186,495 ) Accumulated other comprehensive loss ( 35 ) ( 12 ) Total stockholders’ equity 52,184 56,013 Total liabilities and stockholders’ equity $ 62,275 $ 60,412 See accompanying notes to condensed consolidated financial statements. 2 Index VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts) Three Months Ended March 31, 2024 2023 Revenue $ 2 $ 2 Operating expense: Research and development 1,268 1,368 Selling, general and administrative 3,660 4,548 Total operating expense 4,928 5,916 Loss from operations ( 4,926 ) ( 5,914 ) Interest and other income, net 635 1,369 Loss before taxes ( 4,291 ) ( 4,545 ) Income tax benefit — 78 Net loss $ ( 4,291 ) $ ( 4,467 ) Basic loss per share $ ( 1.19 ) $ ( 1.25 ) Diluted loss per share $ ( 1.19 ) $ ( 1.25 ) Weighted average shares outstanding - basic 3,616 3,571 Weighted average shares outstanding - diluted 3,616 3,571 See accompanying notes to condensed consolidated financial statements. 3 Index VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) (in thousands) Three Months Ended March 31, 2024 2023 Net loss $ ( 4,291 ) $ ( 4,467 ) Other comprehensive income (loss): Change in unrealized (loss) gain on investments, net of tax ( 21 ) 107 Change in foreign currency translation, net of tax ( 2 ) ( 1 ) Total other comprehensive income (loss) ( 23 ) 106 Comprehensive loss $ ( 4,314 ) $ ( 4,361 ) See accompanying notes to condensed consolidated financial statements. 4 Index VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) (in thousands, except per share amounts) Three Months Ended March 31, 2024 2023 Total shareholders’ equity, beginning balances $ 56,013 $ 152,244 Common stock and additional paid-in capital: Beginning balances 242,520 239,753 Common stock issued for options/RSUs/restricted stock, net ( 3 ) — Stock-based compensation 488 682 Ending balances 243,005 240,435 Accumulated deficit: Beginning balances ( 186,495 ) ( 87,195 ) Net loss ( 4,291 ) ( 4,467 ) Dividends — ( 71,429 ) Ending balances ( 190,786 ) ( 163,091 ) Accumulated other comprehensive loss: Beginning balances ( 12 ) ( 314 ) Change in unrealized investment (loss) gain, net ( 21 ) 107 Change in foreign currency translation, net ( 2 ) ( 1 ) Ending balances ( 35 ) ( 208 ) Total shareholders’ equity, ending balances $ 52,184 $ 77,136 Dividends per share $ — $ 20.00 See accompanying notes to condensed consolidated financial statements. 5 Index VIRNETX HOLDING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three months Ended March 31, 2024 2023 Cash flows from operating activities: Net (loss) $ ( 4,291 ) $ ( 4,467 ) Adjustments to reconcile net loss to cash flows from operating activities: Depreciation 5 1 Bad debt — 10 Stock-based compensation 488 682 Changes in assets and liabilities: Accounts receivables 2 — Prepaid expenses and other assets 100 ( 301 ) Accounts payable 50 1,320 Accrued payroll and related expenses 8 54 Other liabilities 122 ( 10 ) Net cash used in operating activities ( 3,516 ) ( 2,711 ) Cash flows from investing activities: Purchase of investments ( 7,370 ) ( 16,638 ) Proceeds from sale or maturity of investments 12,193 29,838 Net cash provided by investing activities 4,823 13,200 Cash flows from financing activities: Payment of payroll taxes on restricted stock and vested RSUs ( 3 ) — Net cash used in financing activities ( 3 ) — Net change in cash and cash equivalents 1,304 10,489 Cash and cash equivalents, beginning of period 26,289 86,561 Cash and cash equivalents, end of period $ 27,593 $ 97,050 Non-cash transactions ROU asset and lease liability at lease modification date $ 5,512 $ — See accompanying notes to condensed consolidated financial statements. 6 Index VIRNETX HOLDING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) (Unaudited) Note 1 — Business Description and Basis of Presentation VirnetX Holding Corporation (the “Company,” “we,” “us,” or “our”) We are an Internet security software and technology company with patented technology for Zero Trust Network Access (“ZTNA”) based secure network communications. Our software and technology solutions, including Secure Domain Name Registry and Technology, VirnetX One™, War Room™, and VirnetX Matrix™ 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 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 Information The accompanying Condensed Consolidated Balance Sheet as of March 31, 2024, the Condensed Consolidated Statements of Operations for the three months ended March 31, 2024 and 2023, the Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2024 and 2023, the Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2024 and 2023, and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). 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, 2024, our results of operations for the three months ended March 31, 2024 and 2023, and our cash flows for the three months ended March 31, 2024 and 2023. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 15, 2024. Use of Estimates We prepare our consolidated financial statements in accordance with U.S. GAAP. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below. We have reviewed our critical accounting policies and estimates with the audit committee of our Board of Directors. Basis of Consolidation The consolidated financial statements include the accounts of VirnetX Holding Corporation and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. 7 Index Revenue Recognition The Company derives revenue from licensing and royalty fees from contracts with customers which often span several years. We account for this revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our revenue arrangements may consist of multiple-element arrangements, with revenue for each unit of accounting recognized as the product or service is delivered to the customer. With the licensing of our patents, performance obligations are generally satisfied at a point in time as work is complete when our patent rights are transferred to our customers. We generally have no further obligation to our customers regarding our technology. Certain contracts may require our customers to enter into a hosting arrangement with us and for these arrangements, revenue is recognized over time, generally over the life of the servicing contract. Cash and Cash Equivalents We consider all highly liquid investments purchased with maturities of three months or less at the date of purchase to be cash equivalents. Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these investments. Investments Investments classified as available-for-sale are recorded at fair market value. Unrealized gains and losses are reported as other comprehensive income. Realized gains and losses are recorded in income in the period they are realized using specific identification of each security’s cost basis. We invest our excess cash primarily in highly liquid debt instruments including corporate, government and federal agency securities, with contractual maturities of 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 March 31, 2024. Property and Equipment Property and equipment are stated at historical cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the accelerated and straight-line methods over the estimated useful lives of the assets, which range from five to seven years . Repair and maintenance costs are charged to expense as incurred. Leases The Company determines if an arrangement is a lease at inception in accordance 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, using the risk-free rate. 8 Index Concentration of Credit Risk and Other Risks and Uncertainties Our cash and cash equivalents are primarily maintained at two major financial institutions in the United States. Deposits held with these financial institutions may exceed the amount of insurance provided on such deposits. A portion of those balances are insured by the Federal Deposit Insurance Corporation, or FDIC. At times, we had funds that were uninsured. We do not believe that we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships. We have not experienced any losses on our deposits of cash and cash equivalents. Fair Value The carrying amounts of our financial instruments, including cash equivalents, accounts payable, and accrued liabilities, approximate fair value because of their generally short maturities. Intangible Assets We record intangible assets at cost, less accumulated amortization. Amortization of intangible assets is provided over their estimated useful lives, which can range from three to 15 years, on either a straight-line basis or as revenue is generated by the assets. Impairment of Long-Lived Assets We identify and record impairment losses on long-lived assets used in operations when events and changes in circumstances indicate that the carrying amount of an asset might not be recoverable, but not less than annually. Recoverability is measured by comparison of the anticipated future net undiscounted cash flows to the related assets’ carrying value. If such assets are 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 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. Income Taxes We account for income taxes using the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our assets and liabilities. We calculate current and deferred tax provisions based on estimates and assumptions that could differ from actual results reflected on the income tax returns filed during the following years. Adjustments based on filed returns are recorded when identified in the subsequent years. The effect on deferred taxes for a change in tax rates is recognized in income in the period that the tax rate change is enacted. In assessing our deferred tax assets, we consider whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The 2017 U.S. Tax Cuts and Jobs Act changes IRC Section 174, regarding capitalization of book research and development (“R&D”) expenses for income tax purposes. Effective for tax years beginning in 2022, IRC Section 174 requires the capitalization of book R&D expenses which are capitalized and amortized over 5 years for domestic R&D expenses and over 15 years for foreign R&D expenses. To date there has been limited guidance from the IRS on how to quantify the amount of book R&D expenses subject to capitalization, including the indirect expenses supporting the R&D function. Due to the limited guidance, some assumptions were made in our estimates. 9 Index A valuation allowance is provided for deferred income tax assets when, in our judgment, based upon currently available information and other factors, it is more likely than not that all or a portion of such deferred income tax assets will not be realized. The determination of the need for a valuation allowance is based on an on-going evaluation of current information including, among other things, historical operating results, estimates of future earnings in different taxing jurisdictions and the expected timing of the reversals of temporary differences. We believe the determination to record a valuation allowance to reduce a deferred income tax asset is a significant accounting estimate because it is based, among other things, on an estimate of future taxable income in the United States and certain other jurisdictions, which is susceptible to change and may or may not occur, and because the impact of adjusting a valuation allowance may be material. In determining when to release the valuation allowance established against our net deferred income tax assets, we consider all available evidence, both positive and negative. We continually assess our ability to generate sufficient taxable income during future periods in which our deferred tax assets may be realized. If and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our statements of operations. We account for our uncertain tax positions in accordance with U.S. GAAP, which utilizes a two-step approach to evaluate tax positions. Step one, recognition, requires evaluation of the tax position to determine if based solely on technical merits it is more likely than not to be sustained upon examination. Step two, measurement, is addressed only if a position is more likely than not to be sustained. In step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement with tax authorities. If a position does not meet the more likely than not threshold for recognition in step one, no benefit is recorded until the first subsequent period in which the more likely than not standard is met, the issue is resolved with the taxing authority, or the statute of limitations expires. Positions previously recognized are reversed if and when we subsequently determine the position no longer is more likely than not to be sustained. Evaluation of tax positions, their technical merits, and measurements using cumulative probability are highly subjective management estimates. Actual results could differ materially from these estimates. Stock-Based Compensation We account for stock-based compensation using the fair value recognition method in accordance with U.S. GAAP. We recognize these compensation costs on a straight-line basis over the requisite service period of the award, which is generally a vesting term of four 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). Earnings per Share Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Additionally, weighted average shares outstanding for both basic and diluted earnings per share include all vested restricted shares issued and outstanding. New Accounting Pronouncements In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): 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. In March 2024, the FASB issued ASU No. 2024-01, Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards. 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. 10 Index Fair Value of Financial Instruments Fair value is the price that would result from an orderly transaction between market participants at the measurement date. A fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Level 2 measurements utilize either directly or indirectly observable inputs in markets other than quoted prices in active markets. Our financial instruments are stated at amounts that equal, or approximate, fair value. When we estimate fair value, we utilize market data or assumptions that we believe market participants would use in pricing the financial instrument, including assumptions about risk and inputs to the valuation technique. We use valuation techniques, primarily the income and market approach, which maximizes the use of observable inputs and minimize the use of unobservable inputs for recurring fair value measurements. Mutual funds: Valued at the quoted net asset value of shares held. U.S. agency and treasury securities : Fair value measured at the closing price reported on the active market on which the individual securities are traded. The following 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, 2024 and December 31, 2023. March 31, 2024 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Investments Available for Sale Cash $ 3,303 $ — $ — $ 3,303 $ 3,303 $ — Level 1: Mutual funds 20,036 — — 20,036 20,036 — U.S. agency and treasury securities 26,676 — ( 12 ) 26,666 4,254 22,412 46,712 — ( 12 ) 46,702 24,290 22,412 Total $ 50,015 $ — $ (12 ) $ 50,005 $ 27,593 $ 22,412 December 31, 2023 Adjusted Cost Unrealized Gains Unrealized Losses Fair Value Cash and Cash Equivalents Investments Available for Sale Cash $ 1,452 $ — $ — $ 1,452 $ 1,452 $ — Level 1: Mutual funds 20,040 — — 20,040 20,040 — U.S. agency and treasury securities 32,046 27 ( 18 ) 32,055 4,797 27,258 52,086 27 ( 18 ) 52,095 24,837 27,258 Total $ 53,538 $ 27 $ (18 ) $ 53,547 $ 26,289 $ 27,258 Note 3 — Income Taxes For the three months ended March 31, 2024, we recognized no income tax benefit on loss before taxes of $ 4,291 , which is an effective tax rate of 0.0 %. For the three months ended March 31, 2023, we recognized an income tax benefit of $ 78 on loss before income taxes of $ 4,545 , which is an effective tax rate of 1.71 %. For both 2024 and 2023, the effective rate is lower than the statutory federal rate primarily due to the change in the valuation allowance. 11 Index Our tax years for 2005 and forward are subject to examination by the U.S. 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 expires 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 March 31, 2024, we have no uncertain tax positions. Our policy is to recognize interest and penalties accrued on uncertain tax positions as a component of income tax expense. We had no accrued interest or penalties related to uncertain tax positions at March 31, 2024. Note 4 — Commitments and Related Party Transactions We entered into a service agreement for the use of an aircraft from K2 Investment Fund LLC (“LLC”) for business travel for employees of the Company. We incurred approximately $ 372 compared to $ 287 in fees and reimbursements to the LLC during the three months ended March 31, 2024 and 2023, 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. 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 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 8 for further discussion of our lease commitments. Note 5 — Stock-Based Compensation Our stockholders approved the Amended and Restated 2013 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, but 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 March 31, 2024, there were 97,031 shares available for grant under the A&R Plan. Stock-based compensation expense included in general and administrative expense was $ 230 and $ 371 , and in research and development expense was $ 258 and $ 311 , for the three months ended March 31, 2024 and 2023, respectively. During the three months ended March 31, 2024, we granted 71,000 shares of restricted stock with a weighted average grant date fair value of $ 6.80 . During the three months ended March 31, 2024, we paid $ 3 in withholding taxes on shares issued upon granting of restricted stock; the underlying shares were cancelled. The amounts are reflected as financing costs in the accompanying statement of cash flows. No restricted stock was issued during the three months ended March 31, 2023. No options or RSUs were granted during the three months ended March 31, 2024 or 2023. No options were exercised during the three months ended March 31, 2024 or 2023, and no shares were issued as a result of vesting RSUs in the three months ended March 31, 2024 or 2023. As of March 31, 2024 and 2023, the unrecognized stock-based compensation expense related to unvested stock options, RSUs, and restricted stock was $ 2,757 and $ 3,484 , respectively, which will be amortized over an estimated weighted average period of approximately 2.63 years and 2.47 years, respectively. During the three months ended March 31, 2024 we returned 24,750 options, 1,752 RSUs and 6,581 Restricted Stock to the plan due to termination of employees. During the three months ended March 31, 2023, we returned 2,000 options to the plan due to the 10-year expiration for unexercised options. 12 Index Note 6 — Equity Common Stock During the three months ended March 31, 2024 we issued 71,000 shares of restricted stock. During the three months ended March 31, 2023, we did no t issue restricted stock, no r did we issue any shares for vested options or RSUs. Warrants In 2020, we issued warrants for the purchase of 1,250 shares of common stock at an exercise price of $ 115 per share, exercisable on the date of grant, expiring in April 2025 . 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 Exercise Price Outstanding and Exercisable December 31, 2023 Issued Exercised Terminated / Cancelled Outstanding and Exercisable March 31, 2024 Expiration Date 1,250 $ 115 1,250 — — — 1,250 April 30, 2025 Note 7 — Litigation (all dollar amounts in this section are expressed in thousands except for rates per device) VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”) This case began on November 6, 2012, when we filed a complaint against Apple Inc. (“Apple”) in United States District Court (“USDC”) in which we alleged that Apple infringed on certain of our patents, (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages and injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and the latest Macintosh computers. The USDC entered a Final Judgment and issued its Memorandum Opinion and Order regarding post- trial motions, affirming the jury’s verdict of $ 502,600 and granting VirnetX motions for supplemental damages, a sunset royalty, and the royalty rate of $ 1.20 per infringing iPhone, iPad and Mac products, pre-judgment and post-judgment interest and costs. Apple filed a notice of appeal with the United States Court of Appeals for the Federal Circuit (“USCAFC”) in the Apple II case. On October 9, 2018, USCAFC docketed the appeal as Case No. 19-1050 - VirnetX Inc. v. Apple Inc. On 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, 2021, the USCAFC docketed the appeal as Case No. 19-1672. Apple’s opening brief was filed on June 2, 2021. VirnetX filed its responsive brief on July 26, 2021. Apple filed its reply brief on September 13, 2021. 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 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. This case is now closed. 13 Index VirnetX Inc. v. Mangrove Partners Master Fund, Ltd., Apple Inc. (USCAFC Case 20-2271) and VirnetX Inc. v. Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp, LLC (USCAFC Case 20-2272) On September 15, 2020, we filed with the USCAFC an appeal of the invalidity findings by the Patent Trial and Appeal Board (“PTAB”) in inter-partes review proceedings IPR2015-01046 and IPR2016-00062 involving our U.S. Patent No. 6,502,135, and an appeal of the invalidity findings by the PTAB in inter-partes review proceedings IPR2015-1047, IPR2016-00063, and IPR2016-00167 involving our U.S. Patent No. 7,490,151. On September 25, 2020, the USCAFC issued an order consolidating the two appeals. On December 15, 2020, we filed a motion to vacate the PTAB decisions below and to remand these appeals to the PTAB. On March 16, 2021, the USCAFC denied the motion without prejudice to us raising the challenges made in the motion in our opening brief. Our opening brief was filed on June 7, 2021. On June 23, 2021, the USCAFC entered an order directing us (and parties in other appeals that raised Appointments Clause challenges) to file a brief explaining how they believe their cases should proceed in light of the Supreme Court’s decision in United States v. Arthrex, Inc., 141 S. Ct. 1970 (2021). On July 7, 2021, we filed a brief in response to the court’s order. Other parties, including the U.S. Patent and Trademark Office (“USPTO”) filed their responses on July 21, 2021. On August 19, 2021, USCAFC issued an order remanding these appeals for the limited purpose of allowing VirnetX the opportunity to request rehearing of the PTAB’s final written decisions by the Director of the USPTO. The USCAFC retained jurisdiction over the appeals in the meantime. On September 20, 2021, we filed our requests for Director rehearing with the USPTO. On October 29, 2021, our requests for Director rehearing were denied. We subsequently filed an amended opening brief to the USCAFC on December 10, 2021, the other parties filed response briefs on February 2, 2022, and we filed a reply brief on February 22, 2022. All the briefings have been completed. The oral arguments in this matter were held on September 8, 2022. On March 30, 2023, the USCAFC issued its decision affirming PTAB’s decisions finding certain claims of the ‘135 patent and the ‘151 patent to be unpatentable. 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. On February 20, 2024, the Supreme Court denied our petition. This case is now closed. VirnetX Inc. v. Hirshfeld (USCAFC Case 17-2593, -2594) On September 22, 2017, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes review proceeding IPR2016-00693 involving our U.S. Patent No. 7,418,504, and an appeal of the invalidity findings by the PTAB in inter-partes review proceeding IPR2016-00957 involving our U.S. Patent No. 7,921,211. On September 16, 2021, USCAFC issued an order remanding these appeals for the limited purpose of allowing VirnetX the opportunity to request rehearing of the PTAB’s final written decisions by the Director of the USPTO. The USCAFC retained jurisdiction over the appeals in the meantime. On October 18, 2021, we filed our requests for Director rehearing with the USPTO. On January 7, 2022, our requests for Director rehearing were denied. On January 21, 2022, we informed the USCAFC about the denial of Director rehearing and requested that the court dismiss the appeal involving IPR2016-00957 as moot and vacate the PTAB’s underlying decision. On April 4, 2022, the USCAFC vacated the PTAB’s decision in IPR2016-00957 and remanded Appeal No. 17-2594 with instructions to dismiss. In the April 4, 2022 order, the USCAFC further set a briefing schedule, in Appeal No. 17-2593. VirnetX filed its opening brief on September 12, 2022. The USPTO filed its response brief on December 20, 2022. VirnetX filed its reply brief on February 14, 2023. 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 United States Supreme Court’s disposition of a pending petition for a writ of certiorari in Arthrex, Inc. v. Smith & Nephew, Inc. , No. 22-639. 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. 22-2234. VirnetX sought rehearing, which was denied, and the mandate to close the case was issued on January 12, 2024. This case is now closed. VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 19-1671) On March 18, 2019, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes re-examination proceeding 95/001,679 involving our U.S. Patent No. 6,502,135. On October 5, 2021, USCAFC issued an order remanding these appeals for the limited purpose of allowing VirnetX the opportunity to request rehearing of the PTAB’s final written decisions by the Director of the PTO. The USCAFC retained jurisdiction over the appeals in the meantime. Our request for Director rehearing with the PTO was filed on November 5, 2021. On January 10, 2022, our request for Director rehearing was denied. We informed the USCAFC about the denial of Director rehearing. VirnetX’s opening brief was filed on June 23, 2022. The USPTO’s response brief was filed on August 2, 2022, and Cisco’s response brief was filed on September 2, 2022. VirnetX filed its reply brief on October 7, 2022. 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. v. Smith & Nephew, Inc. , No. 22-639. 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. 20-2271. VirnetX sought rehearing, which was denied, and the mandate to close the case was issued on January 12, 2024. This case is now closed. 14 Index VirnetX Inc. v. Apple Inc. (USCAFC Case 22-1523) (“Apple Reexam I”) On March 10, 2022, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes re-examination proceeding 95/001,682 involving our U.S. Patent No. 6,502,135. Our opening brief was filed on August 22, 2022. Apple and USPTO each filed a response brief on December 28, 2022. VirnetX filed its reply brief on February 8, 2023. 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. v. Smith & Nephew, Inc. , No. 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. This case is now closed. VirnetX Inc. v. Apple Inc. (USCAFC Case 22-1997 ) (“Apple Reexam II”) On July 6, 2022, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes re-examination proceeding 95/001,697 involving our U.S. Patent No. 7,490,151. On October 17, 2022, we filed a motion to remand the appeal in light of the PTAB’s refusal to permit Director rehearing. On January 23, 2023, the USCAFC denied that motion without prejudice to the parties raising their arguments in the merits briefs. VirnetX 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. On April 10, 2024, we filed a motion voluntarily dismissing the appeal, which USCAFC granted on April 11, 2024. This case is now closed. VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 22-2234) On September 16, 2022, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes re-examination proceeding 95/001,851 involving our U.S. Patent No. 7,418,504. We filed our opening brief on February 28, 2023. 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. This case is now closed. VirnetX Inc. v. 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. Patent No. 7,490,151. 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. That motion 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. On April 3, 2024, VirnetX and Cisco filed a joint stipulation dismissing the appeal and cross-appeal. USCAFC issued an order dismissing the appeal and cross-appeal on April 8, 2024. This case is now closed. Other Legal Matters One or more potential intellectual property infringement claims may also be available to us against certain other companies who have the resources to defend against any such claims. Although we believe these potential claims are likely valid, commencing a lawsuit can be expensive and time-consuming, and there is no assurance that we could prevail on such potential claims if we made them. Currently, we are not a party to any other pending legal proceedings and are not aware of any proceeding threatened or contemplated against us. 15 Index Note 8 — Leases We lease office space in Nevada. The operating lease requires monthly payments of $ 4.6 and expires in October 2025. At March 31, 2024, our ROU asset and lease liability totaled $ 80 . Lease expense totaled $ 14 for both the three months ended March 31, 2024 and 2023. We lease a facility in Utah to be used for technical integration and as a training facility. This operating lease requires monthly payments starting at $ 72 , includes periodic increases, provides six months of free rent, and expires in April 2029. At March 31, 2024, our ROU asset and lease liability totaled $ 3,364 and $ 3,641 , respectively. Lease expense totaled $ 210 for the three months ended March 31, 2024. We also lease a facility in California for corporate promotional and marketing purposes which was prepaid at inception and expires in 2025. In March 2024, we renewed the lease. The renewal period begins in 2025, continues through 2035, and requires either a single payment of $ 6,000 or annual payments each March beginning at $ 600 , increasing annually, for a total commitment of approximately $ 7,500 . At March 31, 2024, our ROU asset totaled $ 5,803 and our lease liability totaled $ 5,551 . Lease expense totaled $ 98 and $ 75 , for the three months ended March 31, 2024 and 2023. Payments due under the above leases as of March 31, 2024 are as follows: Due in 2024 $ 481 Due in 2025 6,946 Due in 2026 927 Due in 2027 954 Due in 2028 983 Thereafter 335 10,626 Less imputed interest ( 1,353 ) Total $ 9,273 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 $ 372 compared to $ 287 in rental fees and reimbursements to the entity during the three months ended March 31, 2024 and 2023, respectively. Note 9 — Earnings Per Share Basic earnings per share are based on the weighted average number of common shares outstanding for the period. Diluted earnings per share are based on the weighted average number of common shares and potentially dilutive common shares outstanding. Unvested restricted shares ( 92,317 in 2024 and zero in 2023) are excluded from weighted average 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, 2024 and 2023 (in thousands, except per share amounts): Three Months Ended March 31 , 2024 2023 Numerator: Net (loss) $ ( 4,291 ) $ ( 4,467 ) Denominator: Weighted-average basic shares outstanding 3,616 3,571 Effect of dilutive securities — — Weighted-average diluted shares 3,616 3,571 Basic (loss) per share $ ( 1.19 ) $ ( 1.25 ) Diluted (loss) per share $ ( 1.19 ) $ ( 1.25 ) We incurred a net loss for the three months ended March 31, 2024 and 2023; therefore, all potentially dilutive securities representing shares of common stock ( 322,215 in 2024 and 367,656 in 2023) were excluded from the computation of diluted earnings per share, because their effect would have been antidilutive. 16 Index