UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2017~~2022.

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission ~~file number:~~File Number: 001-33852

VirnetX Holding Corporation

(Exact name of registrant as specified in its charter)

Delaware		77-0390628
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification ~~Number)~~No.)

308 Dorla Court, Suite 206 Zephyr Cove, Nevada		89448
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (775) 548-1785

Former name, former address and former fiscal year, if changed since last report: N/A

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	VHC	NYSE

Indicate by check mark whether the ~~Registrant:~~registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

~~Yes~~☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No  ☐

~~Yes~~ ☒No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth ~~company~~company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☒
~~Non-accelerated filer~~ ☐	~~(Do not check if a smaller reporting company)~~	Smaller reporting company ☐	Non-accelerated filer ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the ~~registrant~~Registrant is a shell company (as defined in Rule 12b-2 of the Exchange ~~Act.~~Act). Yes ☐ No ☒

~~The number~~71,424,650 shares of ~~shares outstanding of the~~ Registrant’s Common Stock were outstanding as of November ~~2, 2017, was 58,836,073.~~4, 2022.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

We have included or incorporated by reference in this Quarterly Report on Form 10-Q (this “Report”), and from time to time we may make statements that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are based upon our current expectations, estimates, assumptions, and beliefs concerning future events and conditions and may discuss, among other things, anticipated future performance (including sales and earnings), expected growth, future business plans and costs and the impact of potential and ongoing litigation. Any statement that is not historical in nature is a forward- looking statement and may be identified by the use of words and phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result in,” and similar expressions. These statements include our beliefs and statements regarding general industry and market conditions and growth rates, as well as general domestic and international economic conditions. Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements are necessarily subject to risks, uncertainties, and other factors, many of which are outside our control, which could cause actual results to differ materially from such statements and from our historical results and experience. These risks, uncertainties and other factors include, but are not limited to those described in Item 1A - Risk Factors of this report and elsewhere in this report and those described from time to time in our future reports filed with the Securities and Exchange Commission (the “SEC”). Readers are cautioned that it is not possible to predict or identify all the risks, uncertainties and other factors that may affect future results and that the risks described herein should not be considered a complete list. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Among others, the forward-looking statements appearing in this Quarterly Report that may not occur include statements that:

•

In the VirnetX Inc. v. Apple, Inc. (Case Nos. 6:11-cv-00563-RWS, 6:12-cv-00855-RWS) (“Apple II”) litigation, the United States Court of Appeals for the Federal Circuit (the “Federal Circuit”) in November 2019, affirmed-in-part, and reversed-in-part the judgment issued by the United States District Court for the Eastern District of Texas (the “district court”) in the case awarding VirnetX damages of $595.9 million. On October 30, 2020, after a trial in the district court, a jury returned a verdict in favor of VirnetX, awarding VirnetX over $502 million in damages. On January 15, 2021, the district court denied Apple’s motion for judgment as a matter of law and affirmed the jury findings. This may imply that VirnetX may soon receive over $500 million in cash; however, Apple has appealed to the Federal Circuit with regards to the judgement from the district court. Oral arguments for this appeal were heard on September 8, 2022. We are currently waiting for the court’s ruling. In addition, the patents in this case are being challenged in the United States Patent and Trademark Office. If those challenges are successful, the award in the case may be reduced, eliminated and/or delayed for a lengthy period. The continuation of this litigation is distracting to our management, expensive, and these distractions and expenses may continue.

•

We have undertaken activities to commercialize our products and patent portfolio in and outside the United States including the successful launch of War Room™ and VirnetX Matrix™. These statements may imply that the worldwide market for our commercialized products is large and will result in significant future licensing or software revenue for us. However, commercialization of products such as ours is subject to significant obstacles and risks, including but not limited to a perception by some potential partners and customers that they should await the outcome of the Apple II litigation before entering or considering entering any agreement with us, and that or other factors may prevent significant future revenues for us.

EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

VIRNETX HOLDING CORPORATION

INDEX

		Page
		~~Page~~
PART I — FINANCIAL INFORMATION		12
	Item 1 ~~—Condensed Consolidated~~— Financial ~~Statements.~~Statements	12

	Condensed Consolidated Balance Sheets at September 30, ~~2017~~2022 (unaudited) and December 31, ~~2016~~2021	12
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2017~~2022 and ~~2016~~2021 (unaudited)	23
	Condensed Consolidated Statements of Comprehensive ~~Loss~~Income (Loss) for the three and nine months ended September 30, ~~2017~~2022 and ~~2016~~2021 (unaudited)	24
	Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2022 and 2021 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2022 and ~~2016~~2021 (unaudited)	36
	Notes to Condensed Consolidated Financial Statements	47
	Item 2 ~~—Management’s~~— Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
		18
	Item 3 ~~—Quantitative~~— Quantitative and Qualitative Disclosures About Market Risk	20
		22
	Item 4 —Controls and Procedures	2022

PART II ~~— OTHER~~—OTHER INFORMATION		21 23
	Item 1 —Legal Proceedings	21
		23
	Item 1A —Risk Factors	24
		23
	Item 65 —Exhibits	34 40

SIGNATURES		35
~~EXHIBIT INDEX~~		36 41

Index

PART I — FINANCIAL INFORMATION

ITEM 1-~~ITEM 1. -~~ FINANCIAL STATEMENTS.

VIRNETX HOLDING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

	As of September 30, 2017			As of December 31, 2016			As of September 30, 2022			As of December 31, 2021
ASSETS	(unaudited)						(unaudited)
Current assets:
Cash and cash equivalents	$	1,647		$	6,627		$	105,805		$	142,018
Investments available for sale		2,665			9,249			53,195			27,254
Accounts receivables								20			17
Prepaid expenses and other current assets		692			588			370			203
Total current assets		5,004			16,464			159,390			169,492
Prepaid expenses, non-current		2,086			2,374
Prepaid expenses and other assets								791			1,056
Property and equipment, net		12			33			13			18
Deferred tax assets								17,122			15,950
Total assets	$	7,102		$	18,871		$	177,316		$	186,516

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	802		$	1,806		$	1,477		$	338
Accrued payroll and related expenses		210			1,522			367			270
Accrued licensing costs								—			355
Income tax liability		394			396			2			6
Other current liabilities		140			—
Deferred revenue, current portion		1,500			1,500
Other liabilities, current								54			52
Total current liabilities		3,046			5,224			1,900			1,021

Deferred revenue, non-current portion		1,375			2,500
Other liabilities								4			46
Total liabilities		4,421			7,724			1,904			1,067

Commitments and contingencies (Note 4)		—			—

Stockholders’ equity:
Preferred stock, par value $0.0001 per share Authorized: 10,000,000 shares at September 30, 2017 and December 31, 2016, Issued and outstanding: 0 shares at September 30, 2017 and December 31, 2016		—			—
Common stock, par value $0.0001 per share
Authorized: 100,000,000 shares at September 30, 2017 and December 31, 2016, Issued and outstanding: 58,309,034 shares and 58,144,888 shares, at September 30, 2017 and December 31, 2016, respectively		6			6
Preferred stock, par value $0.0001 per share Authorized: 10,000,000 shares at September 30, 2022 and December 31, 2021; Issued and outstanding: 0 shares at September 30, 2022 and December 31, 2021								—			—
Common stock, par value $0.0001 per share Authorized: 100,000,000 shares at September 30, 2022 and December 31, 2021; Issued and outstanding: 71,424,650 shares at September 30, 2022 and 71,232,856 at December 31, 2021								7			7
Additional paid-in capital		172,171			169,391			238,880			236,445
Accumulated deficit		(169,482	)		(158,238	)		(62,972	)		(50,935	)
Accumulated other comprehensive loss		(14	)		(12	)		(503	)		(68	)
Total stockholders’ equity		2,681			11,147			175,412			185,449
Total liabilities and stockholders’ equity	$	7,102		$	18,871		$	177,316		$	186,516

See accompanying notes to condensed consolidated financial statements.

Index

VIRNETX HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(in thousands, except per share amounts)

Three Months Ended
Nine Months Ended

September 30,
2017

September 30,
2016

September 30,
2017

September 30,
2016

Revenue $ 375 $ 375 $ 1,146 $ 1,148
Operating expense:
Royalty expense — 884 — 884
Research and development 481 460 1,473 1,391
Selling, general and administrative expenses 3,456 6,318 10,953 20,132
Total operating expense 3,937 7,662 12,426 22,407
Loss from operations (3,562 ) (7,287 ) (11,280 ) (21,259 )
Interest and other income, net 9 19 40 50
Loss before taxes (3,553 ) (7,268 ) (11,240 ) (21,209 )
Income tax benefit (expense) 1 (119 ) (4 ) (126 )
Net loss $ (3,552 ) $ (7,387 ) $ (11,244 ) $ (21,335 )
Basic and diluted loss per share $ (0.06 ) $ (0.13 ) $ (0.19 ) $ (0.38 )
Weighted average shares outstanding basic and diluted 58,306 56,651 58,216 55,503

	Three Months Ended						Nine Months Ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Revenue	$	4		$	4		$	43		$	24
Operating expense:
Licensing costs		—			—			(4	)		(9,438	)
Research and development		1,216			1,151			3,698			3,452
Selling, general and administrative		4,143			3,089			10,374			48,040
Total operating expense		5,359			4,240			14,068			42,054
Income (loss) from operations		(5,355	)		(4,236	)		(14,025	)		(42,030	)
Interest and other income, net		589			10			817			36
Income (loss) before taxes		(4,766	)		(4,226	)		(13,208	)		(41,994	)
Income tax (expense) benefit		486			895			1,171			5,369
Net income (loss)	$	(4,280	)	$	(3,331	)	$	(12,037	)	$	(36,625	)
Basic income (loss) per share	$	(0.06	)	$	(0.05	)	$	(0.17	)	$	(0.51	)
Diluted income (loss) per share	$	(0.06	)	$	(0.05	)	$	(0.17	)	$	(0.51	)
Weighted average shares outstanding - basic		71,425			71,233			71,305			71,135
Weighted average shares outstanding - diluted		71,425			71,233			71,305			71,135

~~VIRNETX HOLDING CORPORATION~~

~~CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)~~

~~(in thousands)~~

Three Months Ended
Nine Months Ended

September 30,
2017

September 30,
2016

September 30,
2017

September 30,
2016

Net loss $ (3,552 ) $ (7,387 ) $ (11,244 ) $ (21,335 )
Other comprehensive gain (loss), net of tax:
Change in equity adjustment from foreign currency translation, net of tax — — — 4
Change in unrealized gain (loss) on investments, net of tax 3 (1 ) (2 ) 12
3 (1 ) (2 ) 16
Comprehensive loss $ (3,549 ) $ (7,388 ) $ (11,246 ) $ (21,319 )

See accompanying notes to condensed consolidated financial statements.

Index

VIRNETX HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~ COMPREHENSIVE INCOME (LOSS) (Unaudited)

(in thousands)

Nine Months
Ended
September 30,
2017

Nine Months
Ended
September 30,
2016

Cash flows from operating activities:
Net loss $ (11,244 ) $ (21,335 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 21 22
Amortization of warrant issuance costs — 30
Stock-based compensation 2,780 3,979
Changes in assets and liabilities:
Prepaid expenses and other assets 184 238
Accounts payable and accrued liabilities (1,004 ) 549
Accrued payroll and related expenses (1,270 ) (1,290 )
Other current liabilities 140 —
Royalty payable — 884
Related-party payable — 83
Income tax liability (2 ) —
Deferred revenue (1,125 ) 1,375
Net cash used in operating activities (11,520 ) (15,465 )
Cash flows from investing activities:
Purchase of property and equipment — (14 )
Purchase of investments (756 ) (7,888 )
Proceeds from sale or maturity of investments 7,338 8,615
Net cash provided by investing activities 6,582 713
Cash flows from financing activities:
Proceeds from exercise of options — 20
Proceeds from sale of common stock — 14,626
Payments of taxes on cashless exercise of restricted stock units (42 ) (93 )
Net cash (used in) provided by financing activities (42 ) 14,553
Net decrease in cash and cash equivalents (4,980 ) (199 )
Cash and cash equivalents, beginning of period 6,627 8,726
Cash and cash equivalents, end of period $ 1,647 $ 8,527
Cash paid for income taxes $ — $ 126

	Three Months Ended						Nine Months Ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Net income (loss)	$	(4,280	)	$	(3,331	)	$	(12,037	)	$	(36,625	)
Other comprehensive income (loss):
Change in unrealized gain (loss) on investments, net of tax		(153	)		(3	)		(434	)		(1	)
Change in foreign currency translation, net of tax		5			—			(1	)		(3	)
Total other comprehensive income (loss)		(148	)		(3	)		(435	)		(4	)
Comprehensive income (loss)	$	(4,428	)	$	(3,334	)	$	(12,472	)	$	(36,629	)

See accompanying notes to condensed consolidated financial statements.

Index

VIRNETX HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

(in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Total shareholders’ equity, beginning balances	$	178,966		$	192,799		$	185,449		$	224,437

Common stock and additional paid-in capital:
Beginning balances		238,013			234,121			236,452			232,464
Common stock issued for options/RSUs, net		—			—			(29	)		(196	)
Stock-based compensation		874			1,176			2,464			3,029
Ending balances		238,887			235,297			238,887			235,297

Accumulated deficit (retained earnings):
Beginning balances		(58,692	)		(41,308	)		(50,935	)		(8,014	)
Net (loss) income		(4,280	)		(3,331	)		(12,037	)		(36,625	)
Ending balances		(62,972	)		(44,639	)		(62,972	)		(44,639	)

Accumulated other comprehensive loss:
Beginning balances		(355	)		(14	)		(68	)		(13	)
Change in unrealized investment gain/loss, net		(153	)		(3	)		(434	)		(1	)
Change in foreign currency translation, net		5			—			(1	)		(3	)
Ending balances		(503	)		(17	)		(503	)		(17	)

Total shareholders’ equity, ending balances	$	175,412		$	190,641		$	175,412		$	190,641

See accompanying notes to condensed consolidated financial statements.

Index

VIRNETX HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

	Nine Months Ended September 30,
	2022			2021
Cash flows from operating activities:
Net (loss) income	$	(12,037	)	$	(36,625	)
Adjustments to reconcile net (loss) income to cash flows from operating activities:
Depreciation		5			3
Deferred tax assets		(1,171	)		(5,372	)
Amortization of warrant issuance costs		—			34
Stock-based compensation		2,464			3,029
Changes in assets and liabilities:
Accounts receivables		(3	)		(7	)
Prepaid expenses and other assets		98			169
Accounts payable		1,139			(407	)
Accrued payroll and related expenses		97			99
Accrued licensing costs		(355	)		(9,438	)
Income tax payable		(4	)		2
Other liabilities		(40	)		(40	)
Net cash (used in) operating activities		(9,807	)		(48,553	)
Cash flows from investing activities:
Purchase of property and equipment					(11	)
Purchase of investments		(36,737	)		(18,735	)
Proceeds from sale or maturity of investments		10,360			22,629
Net cash (used in) provided by investing activities		(26,377	)		3,883
Cash flows from financing activities:
Payment of payroll taxes on vested restricted stock units		(29	)		(196	)
Net cash used in financing activities		(29	)		(196	)
Net change in cash and cash equivalents		(36,213	)		(44,866	)
Cash and cash equivalents, beginning of period		142,018			192,908
Cash and cash equivalents, end of period	$	105,805		$	148,042
Cash paid for income taxes	$	2		$	—

See accompanying notes to condensed consolidated financial statements.

Index

VIRNETX HOLDING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except ~~share and~~ per share amounts)

(Unaudited)

Note 1 — Business Description and Basis of Presentation

VirnetX Holding Corporation, which we refer to as “we,” “us,” “our,” “the Company” or ~~“VirnetX”~~“VirnetX,” is engaged in the business of commercializing a portfolio of patents. We ~~seek to license our~~derive revenue licensing technology, including GABRIEL Connection Technology™, to various original equipment manufacturers ~~or OEMs,~~(“OEMs”), that use our technologies in the development and manufacturing of their own products within the IP-telephony, mobility, fixed-mobile convergence, and unified communications markets. ~~Prior to 2012, our~~We also may derive future revenue ~~was limited to an insignificant amount~~from sales of software royalties pursuant to the terms of a single license agreement. Since 2012 we had revenues from settlements of patent infringement disputes whereby we received consideration for past sales of licenses that utilized our technology, where there was no prior patent license agreement, as well as license agreement revenues from settlements providing licensing for the continued use of our technology (see “Revenue Recognition”)services, including War Room™ and VirnetX Matrix™.

Our portfolio of intellectual property is the foundation of our business model. We currently own approximately 49205 total patents and pending applications, including 72 U.S. ~~and 69 foreign patents with approximately 50 pending~~ patents/patent applications ~~worldwide.~~and 133 foreign patents/validations/pending applications. Our patent portfolio is primarily focused on securing real-time communications over the Internet, as well as related services such as the establishment and maintenance of a secure domain name registry. Our patented methods also have additional applications in the key areas of device operating systems and network security for Cloud services, ~~Machine-to-Machine (“M2M”)~~M2M communications in areas ~~including “Smart~~of Smart City,~~” “Connected Car”~~ Connected Car and ~~“Connected~~Connected Home.~~” All~~ The subject matter of all our ~~U.S.~~U.S and foreign patents and pending ~~patent~~ applications ~~relate~~relates generally to securing communications over the Internet and as such ~~cover~~covers all our technology and other products. ~~Our~~Some of our issued U.S. and foreign patents expire at various times during the period from ~~2019~~2022 to 2024. Some of our issued patents and pending patent applications were acquired by our principal operating subsidiary, VirnetX, Inc., from Leidos, Inc. (“Leidos”) (f/k/a Science Applications International Corporation or SAIC) in 2006 and we are required to make payments to Leidos, in certain cases that result in cash or certain other values generated from those patents. The amount of such payments depends upon the type of value generated, and certain categories are subject to maximums and other limitations.2034.

Note 2 — ~~Basis of Presentation and~~ Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying Condensed Consolidated Balance Sheet as of September 30, 2022, the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021, the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2021, the Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2022 and 2021, and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. 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 September 30, 2022, our results of operations for the three and nine months ended September 30, 2022 and 2021, and our cash flows for the nine months ended September 30, 2022 and 2021. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.

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

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.

Index

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.

~~Unaudited Interim Financial Information~~

Leases

The ~~accompanying~~Company determines if an arrangement is a lease at inception in accordance with Accounting Standards Codification (“ASC”) Topic 842. Operating lease right-of-use (“ROU”) assets are included in Prepaid expenses, and other assets on the Condensed Consolidated Balance ~~Sheet as of September 30, 2017,~~Sheets. ROU assets represent the ~~Condensed Consolidated Statements of Operations~~Company’s right to use an underlying asset for the ~~three~~lease term and ~~nine months ended September 30, 2017~~lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and ~~2016,~~lease liabilities are recognized at the ~~Condensed Consolidated Statements~~commencement date based on the present value of ~~Comprehensive Loss~~lease payments over the lease term (see Note 8 – Leases).

Revenue Recognition

The Company derives revenue from licensing and royalty fees from contracts with customers which can span several years. We account for the three and nine months ended September 30, 2017 and 2016, and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 are unaudited. These unaudited interim condensed consolidated financial statements have been preparedthis revenue in accordance with ~~generally accepted accounting principles~~ASC Topic 606, Revenue from Contracts with Customers. A performance obligation is a promise in ~~the United States (“U.S. GAAP”). In our opinion, the unaudited interim condensed consolidated financial statements include all adjustments of~~ a normal recurring nature necessary for the fair presentation of our financial position as of September 30, 2017, our results of operations for the three and nine months ended September 30, 2017 and 2016, and our cash flows for the nine months ended September 30, 2017 and 2016. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the resultscontract to ~~be expected for the year ending December 31, 2017.~~

These unaudited interim condensed 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, 2016, filed with the SEC on March 16, 2017.

~~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 our accounting estimates are reasonably likely to occur. 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 conditiontransfer a distinct good 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, at the time they are made 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.

~~Index~~

~~Reclassifications~~

~~Certain prior period amounts were reclassified to conform~~service to the ~~current year’s presentation. None of these reclassifications had an impact on reported net income for any of the periods presented.~~

~~Revenue Recognition~~

We derive our revenue from patent licensing. The timing and amount of revenue recognized from each licensee depends upon a variety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations. Such agreements may be complex and include multiple elements. These agreements may include, without limitation, elements related to the settlement of past patent infringement liabilities, up-front and non-refundable license fees for the use of patents, patent licensing royalties on covered products sold by licensees, and the compensation structure and ownership of intellectual property rights associated with contractual technology development arrangements. Licensing agreements are accounted for under the Financial Accounting Standards Board (“FASB”) revenue recognition guidance, “Revenue Arrangements with Multiple Deliverables.” This guidance requires consideration to becustomer. A contract’s transaction price is allocated to each ~~element of an agreement that has stand-alone value using the relative fair value method. In other circumstances, such as those agreements involving consideration for past~~distinct performance obligation and expected future patent royalty obligations, after consideration of the particular facts and circumstances, the appropriate recording of revenue between periods may require the use of judgment. In all cases, revenue is only recognized after all the following criteria are met: (1) written agreements have been executed; (2) delivery of technology or intellectual property rights has occurred or services have been rendered; (3) fees are fixed or determinable; and (4) collectability of fees is reasonably assured.

~~Patent License Agreements~~: Upon signing a patent license agreement, including licenses entered into upon settlement of litigation, we provide the licensee permission to use our patented technology in specific applications. We account for patent license agreements in accordance with the guidance for revenue recognition for arrangements with multiple deliverables, with amounts allocated to each element based on their fair values. We have elected to utilize the leased-based model for revenue recognition with revenue being recognized over the expected period of benefit to the licensee. Under our patent license agreements, we do or expect to typically receive one or a combination of the following forms of payment as consideration for permitting our licensees to use our patented inventions in specific applications and products:

• ~~Consideration for Past Sales~~: Consideration related to a licensee’s product sales from prior periods may result from a negotiated agreement with a licensee that utilized our patented technology prior to signing a patent license agreement with us or from the resolution of a litigation, disagreement or arbitration with a licensee over the specific terms of an existing license agreement. We may also receive royalty for past sales in connection with the settlement of patent litigation where there was no prior patent license agreement. These amounts are negotiated, typically based upon application of a royalty rate to historical sales prior to the execution of the license agreement. In each of these cases, because delivery has occurred, we record the consideration as revenue when, ~~we have obtained a signed agreement, identified a fixed~~ or ~~determinable price, and determined that collectability~~as, the performance obligation is ~~reasonably assured.~~

• ~~Current Royalty Payments: Ongoing royalty payments cover a licensee’s obligations to us related to its sales~~satisfied. Our revenue arrangements may consist of ~~covered products in~~multiple-element arrangements, with revenue for each unit of accounting recognized as the ~~current contractual reporting period. Licensees that owe these current royalty payments are obligated to provide us with quarterly~~product or ~~semi-annual royalty reports that summarize their sales of covered products and their related royalty obligations to us. We expect to receive these royalty reports subsequent~~service is delivered to the ~~period~~customer.

With the licensing of our patents, performance obligations are generally satisfied at a point in ~~which~~time as work is complete when our ~~licensees’ underlying sales occurred. As a result, it is impractical for us~~patent rights are transferred to recognize revenue in the period in which the underlying sales occur, and, in most cases, we will recognize revenue in the period in which the royalty report is received and other revenue recognition criteria are met due to the fact that without royalty reports from our ~~licensees, our visibility into our licensees’ sales is limited.~~

• ~~Non-Refundable Up-Front Fees and Minimum Fee Contracts: For licenses that provide for non-refundable up-front or fixed minimum fees over their term, for which we~~customers. We generally have no ~~future obligations or performance requirements,~~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 ~~generally~~ recognized over the license term. For licenses that provide for fees that are not fixed or determinable, including licenses that provide for extended payment terms and/or payment of a significant portion of the fee after expiration of the license or more than 12 months after delivery, the fees aretime, generally ~~presumed not to be fixed or determinable, and revenue is deferred and recognized as earned, but generally not in advance of collection.~~

• ~~Non-Royalty Elements~~: Elements that are not related to royalty revenue in nature, such as settlement fees, expense reimbursement, and damages, if any, are recorded as gain from settlement which is reflected as a separate line item within the operating expenses section in the consolidated statements of operations.

~~Index~~

~~Deferred revenue~~

In August 2013, we began receiving annual payments on a contract requiring payment to us over 4 years totaling $10,000 (“August 2013 Contract Settlement”). In accordance with our revenue recognition policy we defer and recognize revenue over the life of the ~~contract, but~~servicing contract.

The Company actively monitors and enforces its intellectual property rights, including seeking appropriate compensation from third parties that utilize the Company’s intellectual property without a license. As a result, the Company may, from time to time, receive payments as part of a settlement or compensation for a patent infringement dispute. Proceeds received are allocated to each element identified in the settlement or compensation, based on the fair value of each element. Generally, settlements and compensation may include the following elements: the value of a license or royalty agreement, cost reimbursement, damages, and interest. Elements identified related to licensing and royalty are recognized as revenue. Elements identified as reimbursed costs are generally recorded as a reduction to the reported expenses. Elements identified as damages or interest are generally recorded in other income in the condensed consolidated statement of operations.

Licensing Costs

Included in operating expenses primarily in 2021 are licensing costs we incurred in conjunction with the proceeds received from Apple Inc., pursuant to a favorable court decision relating to a patent infringement case.

Contingent Gains

ASC Topic 450-30-25, Contingent Gains, prohibits recognition of contingent gains until realized. Accordingly, we do not record contingent gains ahead of ~~collection.~~ such realization. Management generally considers any such gains as realized only upon the collection of cash.

Index

Cash and Cash Equivalents

We ~~collected~~consider all highly liquid investments purchased with maturities of three months or less at the ~~final payment under the contract in 2016. During the nine months ended September 30, 2017 we recognized $1,125~~date of ~~revenue related~~purchase to be cash equivalents. Our cash and cash equivalents are not subject to significant interest rate risk due to the ~~August 2013 Contract Settlement.~~short maturities of these investments.

~~Activity under~~

Investments

Investments are classified as available-for-sale and are recorded at fair market value. Unrealized gains and losses are reported as other comprehensive income. Realized gains and losses are recorded in income in the ~~August 2013 Contract Settlement was as follows:~~

Deferred Revenue, December 31, 2016 $ 4,000
Less: Amount amortized as revenue 1,125
Deferred Revenue, September 30, 2017 $ 2,875

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.

~~Earnings Per Share~~

~~Basic earnings per share~~

Property and Equipment

Property and equipment are stated at historical cost, less accumulated depreciation and amortization. Depreciation and amortization are computed ~~by dividing earnings available~~using the accelerated and straight-line methods over the estimated useful lives of the assets, which range from five to ~~common stockholders by the weighted average number of outstanding common shares during the period. Diluted earnings per share~~seven years. Repair and maintenance costs are ~~computed by dividing net income by the weighted average number of shares outstanding during the period increased~~charged to ~~include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued.~~expense as incurred.

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.~~Corporation, or FDIC. During the nine months ended September 30, ~~2017~~2022, we had, at times, funds ~~which~~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 with major financial institutions.~~relationships. We have not experienced any losses on our deposits of cash and cash equivalents.

~~Prepaid Expenses~~

Fair Value

~~Prepaid expenses~~

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 ~~September 30, 2017 include~~cost, less accumulated amortization. Amortization of intangible assets is provided over their estimated useful lives, which can range from 3 to 15 years, on either a straight-line basis or as revenue is generated by the current portion of prepaid rent for a facility lease for corporate promotional and marketing purposes. From inception, the prepayment totaling $4,000 is being amortized over the 10-year term of the lease. The unamortized non-current portion of the prepayment is included in Prepaid expenses, non-current on the consolidated balance sheet.assets.

Impairment of Long-Lived Assets

~~On an annual basis, we~~

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.~~recoverable, but not less than annually. Recoverability is measured by comparison of the anticipated future net undiscounted cash flows to the related assets’ carrying value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset.

Research and Development

Research and development costs include expenses paid to outside development consultants and compensation related expenses for our engineering staff. Research and development costs are expensed as incurred.

Index

Income Taxes

We account for income taxes using the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our assets and liabilities. We calculate current and deferred tax provisions based on estimates and assumptions that could differ from actual results reflected on the income tax returns filed during the following years. Adjustments based on filed returns are recorded when identified in the subsequent years. The effect on deferred taxes for a change in tax rates is recognized in income in the period that the tax rate change is enacted. In assessing our deferred tax assets, we consider whether it is more likely than not that all or some portion of the deferred tax assets will not be realized.

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 4 years. We recognize forfeitures, if any, when they occur. In addition, we record stock-based compensation expense for awards granted to non-employees at fair value of the consideration received or the fair value of the equity instruments issued, as they vest, over the performance period (See Note 5 - Stock-Based Compensation).

Earnings per Share

Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued.

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:~~funds: Valued at the quoted net asset value of shares held.

U.S. ~~Government~~agency and ~~U.S. Agency Securities~~treasury securities: Fair value measured at the closing price reported on the active market on which the individual securities are traded.

~~Index~~

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 September 30, ~~2017,~~2022 and December 31, ~~2016.~~2021.

September 30, 2017

Adjusted
Cost

Unrealized
Gains

Unrealized
Losses

Fair
Value

Cash
and Cash
Equivalents

Investments
Available
for Sale

Cash $ 1,427 $ - $ - $ 1,427 $ 1,427 $ -

Level 1:
Mutual funds 220 - - 220 220 -
U.S. agency securities 2,667 - (2 ) 2,665 - 2,665
2,887 - (2 ) 2,885 220 2,665
Total $ 4,314 $ - $ (2 ) $ 4,312 $ 1,647 $ 2,665

	December 31, 2016													September 30, 2022
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Investments Available for Sale		Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Investments Available for Sale
Cash	$	3,432	$	—	$	—		$	3,432	$	3,432	$	—	$	24,921	$	—	$	—		$	24,921	$	24,921	$	—

Level 1:
Mutual funds		3,195		—		—			3,195		3,195		—		65,437		—		—			65,437		65,437		—
U.S. government securities		1,254		—		—			1,254		—		1,254
U.S. agency securities		7,996		2		(3	)		7,995		—		7,995		40,127		2		(312	)		39,817		10,450		29,367
U.S. treasury securities															28,998		1		(174	)		28,825		4,997		23,828
		12,445		2		(3	)		12,444		3,195		9,249		134,562		3		(486	)		134,079		80,884		53,195
Total	$	15,877	$	2	$	(3	)	$	15,876	$	6,627	$	9,249	$	159,483	$	3	$	(486	)	$	159,000	$	105,805	$	53,195

	December 31, 2021
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Investments Available for Sale
Cash	$	35,428	$	—	$	—		$	35,428	$	35,428	$	—
Level 1:
Mutual funds		106,590		—		—			106,590		106,590		—
U.S. agency securities		16,658		—		(26	)		16,632		—		16,632
U.S. treasury securities		10,646		—		(24	)		10,622		—		10,622
		133,894		—		(50	)		133,844		106,590		27,254
Total	$	169,322	$	-	$	(50	)	$	169,272	$	142,018	$	27,254

New Accounting Pronouncements

In ~~June 2016,~~December 2019, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~No. 2016-13, Financial Instruments-Credit Losses~~2019-12 Income Taxes (Topic ~~326) “ASU 2016-13”~~740). The ~~purpose~~amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify U. S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU 2016-13 is to require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU 2016-13 isare effective for fiscal years, and interim ~~and annual reporting~~ periods within those fiscal years, beginning after December 15, ~~2019.~~2020. We ~~are evaluating the~~adopted this ASU on January 1, 2021 and there was no material impact ~~this guidance will have~~ on our financial position or cash flows as a result.

Index

Note 3 — Income Taxes

For the three months ended September 30, 2022, we recognized an income tax benefit of $486 on loss before taxes of $4,766, which is an effective tax rate of 10.3%. For the nine months ended September 30, 2022, we recognized an income tax benefit of $1,171 on loss before taxes of $13,208 which is an effective rate of 8.3%. The effective tax rate was lower than the statutory federal income tax rate primarily due to the effect of stock-based compensation and ~~statement of operations.~~expiring options, requiring us to reduce our deferred tax asset. During the nine months ended September 30, 2022, our deferred tax asset increased to $17,122.

~~In March 2016,~~On May 13, 2022, the ~~FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”), which simplified certain aspects~~Company notified the public of the ~~accounting for share-based payment transactions, including~~restatement via Form 8-K stating the Company’s previously issued 2021 Financials because of an error in our deferred tax assets affecting the annual period covered by the financial statements. The Company determined that the nine months ended September 30, 2021 interim statements should be revised as the 2021 restatement related primarily to options expiring in second quarter 2021. The accompanying Deferred tax asset previously reported as $17,749 has now been reduced to $14,421 as of September 30, 2021. The income ~~taxes, classification of awards and classification in the statement of cash flows. We adopted this ASU in 2017 with the following affects:~~

~~• ASU 2016-9 requires excess~~ tax ~~benefits to be recognized regardless of whether the~~ benefit ~~reduces taxes payable. We had zero excess tax benefits recognized~~ for the nine months ended September 30, ~~2017.~~2021, previously reported as $8,697 has been reduced to $5,369.

~~• Certain prior period amounts were reclassified to conform to~~

For the ~~current year’s presentation. None~~three months ended September 30, 2021, we recognized an income tax benefit of ~~these reclassifications had an impact~~$895 on ~~reported net income for any~~loss before taxes of ~~the periods presented. As a result of the implementation of ASU 2016-09, our condensed consolidated statements of cash flow for~~$4,226. For the nine months ended September 30, 2016 has been restated to reflect the reclassification of $93 for payments of taxes on cashless exercise of restricted stock units, previously reported in cash flows from operation activities to the current presentation in cash flows from financing activities.

~~• The Company has elected to not estimate forfeitures expected to occur to determine the amount of stock-based compensation cost to be~~2021, we recognized ~~in each period. The guidance relating to forfeitures did not have~~ an ~~impact on our accumulated deficit as of January 1, 2017.~~

~~Index~~

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We are evaluating the impact this guidance will have on our financial position and statement of operations.

In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) “ASU 2014-09”. ASU 2014-09 was subsequently amended by ASU No. 2016-10 and 2016-12. As amended, Topic 606 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments create a new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For a public entity, the amendments to ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We will adopt the new revenue standards in our first quarter of 2018 utilizing the full retrospective transition method. The new revenue standards are not expected to have a material impact on the amount and timing of revenue recognized in our consolidated financial statements.

~~Note 3 - Income Taxes~~

~~We had $1~~ income tax benefit of $5,369 on loss before income taxes of $41,994. Income tax for the ~~three~~nine months ~~ended September 30, 2017~~was primarily affected by expiring options and ~~$4 of income tax expense for~~research and development credits. During the nine months ended September 30, ~~2017. During the three and nine-month period ended September 30, 2017, we had net operating losses (“NOLs”) which generated~~2021, our deferred tax asset increased by $5,372 to $14,421.

A valuation allowance is provided for deferred tax assets ~~for NOL carryforwards. We have provided valuation allowances against the net deferred tax assets including the deferred tax assets for NOL carryforwards. Valuation allowances provided for~~when, in our ~~net deferred tax assets increased by $1,404~~judgment, based upon currently available information and ~~$5,152 for the three and nine months ended September 30, 2017, respectively.~~

We had $119 income tax expense for the three months ended September 30, 2016 and $126 of income tax expense for the nine months ended September 30, 2016. During the three and nine-month periods ended September 30, 2016, we had NOLs which generated deferred tax assets for NOL carryforwards. We provided valuation allowances against the net deferred tax assets including the deferred tax assets for NOL carry-forwards. Valuation allowances provided for our net deferred tax assets increased by $2,707 and $7,942 for the three and nine months ended September 30, 2016, respectively.

~~In assessing the realization of deferred tax assets, management considers whether~~other factors, it is more likely than not that ~~some~~all or a portion ~~or all~~of such deferred income tax assets will not be realized. The ~~ultimate realization~~determination of the need for a valuation allowance is based on an on-going evaluation of current information including, among other things, historical operating results, estimates of future earnings in different taxing jurisdictions and the expected timing of the reversals of temporary differences. We believe the determination to record, or reduce, a valuation allowance associated with a deferred income tax ~~assets~~asset is ~~dependent upon the generation~~a significant accounting estimate because it is based, among other things, on an estimate of future taxable income ~~during~~in the ~~periods in~~United States and certain other jurisdictions, which ~~those temporary differences become deductible. Based on~~is susceptible to change and may or may not occur, and because the ~~available objective evidence, including our history~~impact of operating losses and the uncertainty of generating future taxable income, management believes it is more likely than not that the net deferred tax assets at September 30, 2017 will not be fully realizable. Accordingly, management has maintainedadjusting a valuation allowance may be material. In determining when to release the valuation allowance established against our net deferred income tax assets, ~~at September 30, 2017. The valuation allowance provided against our net deferred tax assets was approximately $50,000~~we consider all available evidence, both positive and ~~$44,000 at September 30, 2017 and December 31, 2016, respectively.~~negative.

At September 30, 2017, we have federal and state NOL carry-forwards of approximately $85,000 and $69,000, respectively, with the federal NOL carry-forwards expiring beginning in 2027. The state NOL carry-forward began expiring in 2016.

We have adopted accounting guidance for income taxes, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return. We are required to recognize in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position.

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 ~~net operating losses~~NOLs, and tax credits ~~remaining unutilized from such years.~~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.

We are required to recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. At December 31, 2021 and September 30, 2022, we have no uncertain tax positions. Our policy is to recognize interest and penalties accrued on ~~any unrecognized~~uncertain tax ~~benefits~~positions as a component of income tax expense. ~~As of September 30, 2017, we~~We had no accrued ~~immaterial amounts of~~ interest ~~and~~or penalties related to uncertain tax ~~positions.~~positions at September 30, 2022.

Note 4 — Commitments and Related Party Transactions

We lease our ~~offices~~office under an operating lease with a third party ~~expiring in~~which expires on October ~~2019. We recognize rent expense on a straight-line basis over the term of the lease.~~31, 2023 (see Note 8 - Leases).

We ~~lease~~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 ~~$218~~$268 and ~~$690~~$782 compared to ~~$228~~$280 and ~~$596~~$454 in ~~rental~~ fees and reimbursements to the LLC during the three and nine months ended September 30, ~~2017~~2022 and ~~2016,~~2021, 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. ~~On January 31, 2015, we~~We entered into a 12-month non-exclusive ~~lease~~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 ~~lease~~agreement renews on an annual basis unless terminated by ~~the lessor or lessee.~~either party. Neither party has exercised their termination rights.

Note 5 — ~~Stock-Based~~Stock Based Compensation

We have a stock incentive plan for employees and others called the VirnetX Holding Corporation 2013 Equity Incentive Plan (the ~~“Plan”~~“2013 Plan”), which has been approved by our stockholders. ~~In May 2017,~~To the ~~Board approved an amendment and restatement of the Plan to, among other things, increase~~extent that any award should expire, become un-exercisable or is otherwise forfeited, the shares ~~reserved~~subject to such award will again become available for issuance under the ~~Plan by 2,500,000 shares (the “Plan Amendment”). Our stockholders approved of the Plan Amendment at the 2017 Annual Meeting of Stockholders held on June 1, 2017.~~2013 Plan. The 2013 Plan provides for ~~grants~~the granting of ~~16,624,469 shares of our common stock, including~~ stock options and restricted stock units purchase rights (“RSUs”), to our employees and ~~will expire~~consultants. Stock options granted under the 2013 Plan may be incentive stock options or nonqualified stock options. Incentive stock options (“ISOs”) may only be granted to our employees (including officers and directors). Nonqualified stock options (“NSOs”) and stock purchase rights may be granted to our employees and consultants. The 2013 Plan expires in 2023.

Options may be granted under the 2013 Plan with an exercise price determined by our Board of Directors, or a duly appointed committee thereof, provided, however, that the exercise price of an option granted to any employee shall be not less than 100% of the fair market value at the date of grant in the case of ISOs or 85% of the fair market value at the date of grant in the case of an NSO. The exercise price of an ISO or NSO granted to one of our Named Executive Officers shall not be less than 100% of the fair market value of the shares at the date of grant and the exercise price of an ISO granted to a 10% shareholder shall not be less than 110% of the fair market value of the shares on the date of grant. Stock options granted under the 2013 Plan typically vest over four years and have a 10-year term. All RSUs are considered to be granted at the fair value of our stock on the date of grant because they have no exercise price. RSUs typically vest over four years. As of September 30, ~~2017, 2,244,631~~2022, there were 1,513,345 shares ~~remained~~ available for grant under the 2013 Plan.

Stock-based compensation expense included in general and administrative expense was $573 and $703, and in research and development expense was $301 and $473, for the three months ended September 30, 2022 and 2021, respectively. Stock-based compensation expense included in general and administrative expense was $1,526 and $1,549, and in research and development expense was $938 and $1,480, for the nine months ended September 30, 2022 and 2021, respectively.

During the three months ended September 30, ~~2017,~~2022, we did not grant any options. During the three months ended September 30, 2021, we granted options for a total of ~~1,377,500~~170,000 shares with a weighted average grant date fair value of ~~$3.01 During the three months ended September 30, 2016, no options were granted.~~$3.10 per option.

During the nine months ended September 30, ~~2017,~~2022, we granted options for a total of 1,733,500 shares. The weighted average fair values at the grant dates for options issued during the nine months ended September 30, 2017 was $2.93 per option. The fair values of options at the grant date were estimated utilizing the Black-Scholes valuation model with the following weighted average assumptions for the nine months ended September 30, 2017 (i) dividend yield on our common stock of 0 percent (ii) expected stock price volatility of 85 percent (iii) a risk-free interest rate of 1.93 percent and (iv) and expected option term of 6 years.

~~During the nine months ended September 30, 2016, we granted options for a total of 429,000~~801,004 shares with a weighted average grant date fair value of ~~$3.25. The~~$1.09 per option. We estimated the fair ~~values~~value of the options aton the ~~grant~~ date ~~were estimated~~of grant utilizing the Black-Scholes valuation model with the following ~~weighted average assumptions for~~assumptions: (i) 0 percent dividend yield, (ii) 86 percent volatility, (iii) 3 percent risk free rate and (iv) 6 years expected term. During the nine months ended September 30, ~~2016~~2021, we granted options for a total of 949,500 shares with a weighted average grant date fair value of $3.39 per option. We estimated the fair value of the options on the date of grant utilizing the Black-Scholes valuation model with the following assumptions: (i) 0 percent dividend yield, ~~on our common stock of 0~~(ii) 90 percent ~~(ii) expected stock price~~ volatility, ~~of 80~~(iii) 1 percent ~~(iii) a risk-free interest~~risk free rate ~~of 1.84 percent~~ and (iv) an6 years expected ~~option term of 6 years.~~term.

During the three months ended September 30, ~~2017~~ 2022 and ~~2016,~~ 2021, we ~~granted no~~did not grant any RSUs.

During the nine months ended September 30, ~~2017~~2022 and ~~2016,~~2021, we granted ~~220,664~~258,363 and ~~219,331~~236,661 RSUs ~~respectively. The~~respectively, with weighted average fair values of at the date of grant ~~dates for RSUs issued during the nine months ended September 30, 2017~~of $1.46 and ~~2016 were $3.83 and $4.75 per RSU,~~$4.61, respectively. RSUs, which are subject to forfeiture if service terminates prior to the shares vesting, are expensed ratably over the vesting period.

~~Stock-based compensation expense included in general and administrative expense was $1,064 and $2,780 for~~ During the ~~three and~~ nine months ended September 30, ~~2017, respectively,~~2022 and ~~$1,423~~2021, we paid $29 and ~~$3,979 for~~$196 in withholding taxes on shares issued upon conversion of RSUs, respectively. The underlying shares were cancelled. The amounts are reflected as financing costs in the ~~three and nine months ended September 30, 2016, respectively.~~accompanying statement of cash flows.

As of September 30, ~~2017,~~2022, the unrecognized stock-based compensation expense related to non-vested stock options and RSUs was ~~$7,180~~$4,571 and ~~$2,241~~,$1,716, respectively, which will be amortized over an estimated weighted average period of approximately ~~3.34~~2.86 and 2.68 years, respectively.

Index

During the ~~nine-month period~~three and nine months ended September 30, ~~2017~~2022, and 2021 no options were exercised.

During the nine months ended September 30, 2022 and 2021, we issued ~~164,146 new~~191,795 and 174,285 shares, ~~of common stock~~respectively, as a result of vesting ~~RSUs.~~RSUs, all of which occurred in the second quarter of each respective year.

During the nine months ended September 30, 2022 and 2021, there were 332,416 and 390,000 options returned to the plan due to the expiration of unexercised options, respectively.

~~On August 21, 2015, we filed a universal shelf registration statement with the SEC enabling us to offer and sell from time to time up to $100 million of equity, debt or other types of securities.~~

We ~~also entered an at-the-market (“ATM”) equity offering sales agreement with Cowen & Company, LLC on August 20, 2015, under which we may offer and sell~~issued no shares ~~of our common stock having an aggregate value of up to $35 million. We have and expect to use proceeds from this offering~~ for GABRIEL product development and marketing, and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products, technologies or businesses. From August 20, 2015 through December 30, 2016, we sold 5,595,650 shares under the ATM. The average sales price per common share was $4.14 and the aggregate proceeds from the sales totaled $23,169options exercised during the ~~period. Sales commissions, fees~~three and ~~other costs associated with~~nine months ended September 30, 2022 or 2021, respectively. No shares were issued during the ~~ATM totaled $695. During~~three months ended September 30, 2022 or 2021 as a result of vesting RSUs. We issued 191,795 and 174,285 shares as a result of vesting RSUs during the nine months ended September 30, 2017 no shares were sold under the ATM. At September 30, 2017 $65 million remains available for sale under the shelf offering, with $11.8 million remaining in the ATM. (see “Note 8 - Subsequent Events”) 2022 and 2021, respectively.

~~Information about warrants outstanding during the nine months ended September 30, 2017 follows:~~

~~Stock Purchase and Revenue Sharing Agreement~~

As previously disclosed in the Company’s public filings, on May 31, 2017, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Public Intelligence Technology Associates kk (“PITA”), (Japanese Corporation), pursuant to which the Company would issue and sell to PITA 5,494,505 shares of Common Stock (the “Shares”) as promptly as practicable following the satisfaction or waiver of certain closing conditions (the “Share Purchase”). The Share Purchase did not close and the Purchase Agreement was terminated effective as of October 18, 2017.

Note 7 — Litigation (all dollar amounts in this section are expressed in thousands except for rates per device)

We have ~~eleven~~several intellectual property infringement lawsuits pending in the ~~United States District Court for the Eastern District of Texas, Tyler Division, and~~ United States Court of Appeals for the Federal Circuit (“USCAFC”).

~~VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED)~~

On March 30, 2015, the United States Court for the Eastern District of Texas, Tyler Division, issued an order finding substantial overlap between the remanded portions of the Civil Action Case 6:10-CV-00417-LED (VirnetX vs. Cisco et. al.), and the ongoing Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case. The jury trial in this case was held on January 25, 2016. On February 4, 2016, a jury in the United States Court for the Eastern District of Texas, Tyler Division, awarded us $625.6 million in a verdict against Apple Inc. for infringing four of our US patents, marking it the second time a federal jury has found Apple liable for infringing VirnetX’s patented technology. The verdict includes royalties awarded to us based on an earlier patent infringement finding ~~(Case 6:10-CV-00417-LED)~~ against Apple. The jury found that Apple’s modified VPN On-Demand, iMessage and FaceTime services infringed VirnetX’s patents and that Apple’s infringement was willful. In addition to determining the royalty owed by Apple for its prior infringement, this verdict also includes an award based on the jury’s finding that Apple’s modified VPN On Demand, iMessage and FaceTime services have continued to infringe VirnetX’s patents. The post-trial hearing was held on May 25, 2016 in the United States Court for the Eastern District of Texas, Texarkana Division. On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases (Case No. 6:10-cv-417, Docket No. 878 (“Apple I case”); Case No. 6:12-cv-855, Docket No. 220 (“Apple II case”)), ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II case will be retried after Apple I case. Events and developments subsequent to the order from the court are described to support Apple I and Apple II matters.

~~VirnetX Inc. v. Cisco Systems, Inc. et al. (Case 6:10-CV-00417-LED) (“Apple I”)~~

On August 11, 2010, we initiated a lawsuit by filing a complaint against Aastra USA. Inc. (“Aastra”), Apple, Cisco Systems, Inc. (“Cisco”), and NEC Corporation (“NEC”) in the United States District Court for the Eastern District of Texas, Tyler Division, pursuant to which we alleged that these parties infringe on certain of our patents. We sought damages and injunctive relief. Aastra and NEC agreed to sign license agreements with us and we agreed to drop all the accusations of infringement against them. At the pre-trial hearing, the judge decided to conduct separate jury trial for each defendant, and try only the case against Apple on the scheduled trial date. The jury trial of our case against Cisco was held on March 4, 2013. The jury in our case against Cisco came back with a verdict of non-infringement also determined that all our patents-in-suit patents are not invalid. Our motions for a new trial and Cisco’s infringement of certain VirnetX patents were denied and the case against Cisco was closed.

The jury trial of our case against Apple was held on October 31, 2012. On November 6, 2012, a jury in the United States Court for the Eastern District of Texas, Tyler Division, awarded us over $368 million in a verdict against Apple for infringing four of our patents. On February 26, 2013, the court issued its Memorandum Opinion and Order regarding post-trial motions resulting from the prior jury verdict denying Apple’s motion to reduce the damages awarded by the jury for past infringement. The Court further denied Apple’s request for a new trial on the liability and damages portions of the verdict and granted our motions for pre-judgment interest, post-judgment interest, and post-verdict damages to date. The Court ordered that Apple pay $34 thousand in daily interest up to final judgment and $330 thousand in daily damages for infringement up to final judgment for certain Apple devices included in the verdict. The Court denied our request for a permanent injunction and severed the future infringement portion into its own separate proceedings under Case 6:13-CV-00211-LED.

On July 3, 2013, Apple filed an appeal of the judgment dated February 27, 2013 and order dated June 4, 2013 denying Apple’s motion to alter or amend the judgment to the USCAFC. On September 16, 2014, USCAFC issued their opinion, affirming the jury’s finding that all 4 of our patents are valid, confirming the jury’s finding of infringement of VPN on Demand under many of the asserted claims of our ‘135 and ‘151 patents, and confirming the district’s court’s decision to allow evidence concerning our licenses and royalty rates in connection with the determination of damages. In its opinion, the USCAFC also vacated the jury’s damages award and the district court’s claim construction with respect to parts of our ‘504 and ‘211 patents and remanded the damages award and determination of infringement with respect to FaceTime –for further proceedings consistent with its opinion. On October 16, 2014, we filed a petition with the USCAFC, requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decision concerning VirnetX’s litigation against Apple Inc. On December 16, 2014, USCAFC denied our petition requesting a rehearing and rehearing en banc of the Federal Circuit’s September 14, 2014, decision and remanded the case back to the Eastern District of Texas, Tyler Division, for further proceedings consistent with its opinion. On February 25, 2015, USCAFC granted Apple’s motions to lift stay of proceedings and vacate Case 6:13-CV-00211-LED. On March 30, 2015, the court issued an order finding substantial overlap between the remanded portions of this case and the ongoing Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case.

On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases Apple I case and Apple II case, ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II will be retried after Apple I case. The jury trial in this case was held on September 26, 2016. On September 30, 2016, a Jury in the United States Court for the Eastern District of Texas, Tyler Division, in the case VirnetX Inc., et al. v. Apple Inc., No. Apple I, awarded VirnetX $302.4 million in a verdict against Apple for infringing four VirnetX patents, marking the third time a federal jury has found Apple liable for infringing VirnetX’s patented technology.

The verdict includes royalties awarded to VirnetX, for unresolved issues in the Apple I case, remanded back from the USCAFC, related to (1) damages owed to VirnetX for infringement by Apple’s original VPN-on-Demand (VOD) and (2) the alleged infringement by Apple’s original FaceTime product, under the new claim construction of “secure communication link” pertaining to the ’504 and ’211 patents by the USCAFC, and the damages associated with that infringement. The hearing on all the post-trial motions was held on November 22, 2016.

On September 29, 2017, the United States District Court for the Eastern District of Texas, Tyler Division, entered Final Judgement and issued its Memorandum Opinion and Order regarding post-trial motions resulting from the prior $302.4 million jury verdict for VirnetX in the Apple I case.

In the Order, the Court denied all of Apple’s post-trial motions including motion for judgment as a matter of law of non-infringement, motion for judgment as a matter of law on damages, motion for a new trial on infringement, and motion for a new trial on damages. The Court granted all VirnetX’s post-trial motions including motion for willful infringement and enhanced the royalty rate during the willfulness period by 50 percent, from $1.20 to $1.80 per device, awarding VirnetX, enhanced damages in the amount of $41,271 against Apple thereby, granting VirnetX a total sum of $343,699 in pre-interest damages. The Court also awarded costs, certain attorneys’ fees, and prejudgment interest to VirnetX, and directed the parties to meet and confer regarding these amounts. On October 13, 2017, having met and conferred and having reached agreements on all amounts, parties jointly filed a motion asking the Court to grant VirnetX an additional sum in the amount of $96,028 in agreed Bill of Costs, Attorneys’ Fees, and Prejudgment Interest. The Final Judgement is only subject to appeal stemming from new issues unresolved in the Apple I case, remanded back from the United States Court of Appeals for the Federal Circuit. The total Final Judgement amount including Jury Verdict, Willful Infringement, Interest, Costs and Attorney Fees is $439,727. (see “Note 8 - Subsequent Events”).

VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”)

This case began on November 6, 2012, when we filed a complaint against Apple in ~~the~~ United States District Court ~~for the Eastern District of Texas, Tyler Division for willfully infringing four~~(“USDC”) in which we alleged that Apple infringed on certain of our patents, ~~U.S.~~(U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and ~~7,490,151, and seeking both an unspecified amount of~~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. ~~Due to their release dates, these~~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, ~~were not included in the previous lawsuit that concluded~~pre-judgment and post-judgment interest and costs. Apple filed a notice of appeal with ~~a Jury verdict on November 6, 2012 that was subsequently upheld by~~ the United States ~~District~~ Court of Appeals for the Eastern District of Texas, Tyler Division, on February 26, 2013. On July 1, 2013, we filed a consolidated and amended complaint to include U.S. Patent No. 8,051,181 and consolidate Civil Action No. 6:11-cv-00563-LED. On August 27, 2013, we filed an amended complaint including allegations of willful infringement related to U.S. Patent No. 8,504,697 seeking both damages and injunctive relief. The Markman hearingFederal Circuit (“USCAFC”) in this case was held on May 20, 2014 and on August 8, 2014, issued its Markman Order, denying Apple’s motion for summary judgment of indefiniteness, in which Apple alleged that some of the disputed claims terms in the patents asserted by us were invalid for indefiniteness. In a separate order, the court granted in part and denied in part our motion for partial summary judgment on Apple’s invalidity counterclaims, precluding Apple from asserting invalidity as a defense against infringement of the claims that were tried before a jury in our prior litigation against Apple (VirnetX vs. Cisco et. al., Case 6:10-CV-00417-LED). The jury trial in this case was scheduled for October 13, 2015. On March 30, 2015, the court issued an order finding substantial overlap between this case and the remanded portions of Case 6:10-CV-00417-LED (VirnetX vs. Cisco et. al.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case. On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases Apple I case and Apple II case, ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II ~~will be retried after Apple I~~ case.

On ~~September 29, 2017,~~October 9, 2018, USCAFC docketed the Court issued an order denying Apple’s Motion to Stay. The Court ordered the parties to meet and confer and file a joint motion with a proposed trial date by October 13, 2017. The parties have met, conferred and filed a joint motion on the proposed trial dates. We are awaiting court order setting the date for a new jury trial in Apple II case.

appeal as Case No. 19-1050 - VirnetX Inc. v. Apple Inc. ~~(Case 15-1934)~~On January 24, 2019 Apple filed its opening brief. We filed our response brief on March 1, 2019. Apple filed its reply brief on April 5, 2019. The oral arguments were heard on October 4, 2019. On November 22, 2019, the USCAFC issued an opinion affirming the district court’s findings that Apple is precluded from making certain invalidity arguments and that Apple infringed the ‘135 and ‘151 patents; reversing the USDC’s finding that Apple infringed the ‘504 and ‘211 patents; and remanding the case for proceedings on damages. Apple sought panel and en banc rehearing, which the USCAFC denied on February 10, 2020.

On February 22, 2020, the USDC issued a scheduling order for the parties to brief the court about the need for a new trial for recalculating the damages. We filed our motion for entry of judgment on February 28, 2020. The arguments on this matter were heard on April 14, 2020. In its order, unsealed on May 1, 2020, the USDC denied VirnetX’s motion for entry of a new judgment based on the prior jury verdict and ordered a new jury trial on damages. On August 10, 2020, the USDC granted Apple’s motion for continuance and reset the date to October 26, 2020. On October 30, 2020, a jury returned a $502,800 verdict in favor of VirnetX based on Apple’s infringement of two network security patents: VirnetX US Patents No. 6,502,135 and No. 7,490,151. The jury verdict called for damages of $0.84 per accused device since the 2013 launch of Apple’s iOS 7 operating system and represents 598,629,580 infringing units from US sales only. On January 15, 2021, the district court denied Apple’s motion for judgment as a matter of law, and on February 4, 2021, Apple filed a notice of appeal to the USCAFC.

On February 22, 2021, USCAFC docketed the appeal as Case No. 19-1672. Apple’s opening brief was filed on June 2, 2021. VirnetX filed its responsive brief on July ~~10, 2015,~~26, 2021. Apple filed its reply brief on September 13, 2021. The briefing is complete, and oral arguments were held on September 8, 2022. We are currently waiting for the USCAFC ruling.

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 ~~appeals~~ with the USCAFC ~~appealing~~an appeal of the invalidity findings by the ~~United States Patent and Trademark Office,~~ Patent Trial and Appeal Board (“PTAB”) in ~~IPR2014-00237~~inter-partes review proceedings IPR2015-01046 and IPR2014-00238, related to U.S. Patent No. 8,504,697. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on the grounds discussed in IPR2014-00238. We are currently evaluating our options in this case.

~~VirnetX Inc. v. Apple, Inc. (Case 16-1211)~~

~~On September 28, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2014-00403 and IPR2014-00404 and on October 22, 2015 for IPR2014-00481 and IPR2014-00482~~IPR2016-00062 involving our U.S. Patent ~~Nos. 7,188,180,~~No. 6,502,135, and 7,987,274. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on the grounds discussed in IPR2014-00403 and IPR2014-00481. We are currently evaluating our options in this case.

~~VirnetX Inc. v. Apple, Inc. (Case 16-1480)~~

~~On November 30, 2015, we filed appeals with the USCAFC, appealing~~an appeal of the invalidity findings by the PTAB in inter-partes ~~reexamination no. 95/001,949 related to~~review proceedings IPR2015-1047, IPR2016- 00063, and IPR2016-00167 involving our U.S. Patent No. ~~8,051,181. The oral arguments in this case were heard on November 7, 2016.~~7,490,151. On September 25, 2020, the USCAFC issued an order consolidating the two appeals. On December ~~9, 2016, the USCAFC affirmed the PTAB based on certain grounds. We are currently evaluating our options in this case.~~

~~VirnetX Inc. v. Apple, Inc. (Case 16-119)~~

~~On March 4, 2016,~~15, 2020, we filed a ~~petition for writ of mandamus with~~motion to vacate the ~~USCAFC, requesting~~PTAB decisions below and to remand these appeals to the ~~USCAFC’s intervention to revoke the PTAB’s decision joining Apple to IPR2015-01046 and IPR2015-01047, related to U.S. Patent Nos. 6,502,135 and 7,490,151.~~PTAB. On March ~~18, 2016,~~16, 2021, the USCAFC denied the ~~petition~~motion without prejudice to us raising the ~~arguments~~challenges made in the motion in our opening brief. Our opening brief was filed on ~~appeal after~~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 ~~decisions.~~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. We are currently ~~evaluating our options in this case.~~waiting for the USCAFC ruling.

VirnetX Inc. v. ~~Apple, Inc. (Case 17-1131)~~Hirshfeld (USCAFC Case 17-2593, -2594)

On ~~October 31, 2016,~~September 22, 2017, we filed ~~appeals~~ with the USCAFC appealing the invalidity findings by the PTAB in IPR2015-00810 and IPR2015-00812, on November 9, 2016 for IPR2015-00811, and on November 28, 2016 for IPR2015-00866, IPR2015-00868, IPR2015-00870 and IPR2015-00871 involving our U.S. Patent Nos.8,868,705, 8,850,009, 8,458,341, 8,516,131, and 8,560,705. These appeals have been consolidated. The briefing in these appeals has been concluded; oral arguments have not yet been scheduled.

~~VirnetX Inc. v. The Mangrove Partners (Case 17-1368)~~

On December 16, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2015-01046, and on December 20, 2016 for IPR2015-1047, involving our U.S. Patent Nos. 6,502,135, and 7,490,151. These appeals also involve Apple, Inc. and onean appeal of ~~them involves Black Swamp IP, LLC. On April 27, 2017, the USCAFC stayed these appeals pending the USCAFC’s en banc decision in~~ ~~Wi-Fi One, LLC v. Broadcom Corporation,~~ ~~No. 2015-1944.~~

~~VirnetX Inc. v. Apple Inc., Cisco Systems, Inc. (Case 17-1591)~~

~~On February 7, 2017, we filed appeals with the USCAFC, appealing~~ the invalidity findings by the PTAB in inter-partes ~~reexamination nos. 95/001,788, 95/001,789, and 95/001,856 related to~~review proceeding IPR2016-00693 involving our U.S. Patent ~~Nos. 7,921,211~~No. 7,418,504, and ~~7,418,504. These appeals have been consolidated. The briefing in these appeals is ongoing.~~

~~VirnetX Inc. v. Apple Inc. (Case 17-2490)~~

~~On August 23, 2017, we filed appeals with the USCAFC, appealing~~an appeal of the invalidity findings by the PTAB in ~~IPR2016-00331 and IPR2016-00332~~inter-partes review proceeding IPR2016-00957 involving our U.S. Patent No. ~~8,504,696. These appeals have been consolidated. The briefing in~~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’s response brief is ~~ongoing.~~currently due December 2, 2022.

~~In re~~

Index

VirnetX Inc. ~~(Case 17-2593)~~v. Cisco Systems, Inc. (USCAFC Case 19-1671)

On ~~September 22, 2017,~~March 18, 2019, we filed ~~appeals~~ with the USCAFC ~~appealing~~an appeal of the invalidity findings by the PTAB in ~~IPR2016-00693 and IPR2016-00957~~inter-partes re-examination proceeding 95/001,679 involving our U.S. Patent ~~Nos. 7,418,504 and 7,921,211. These appeals have been consolidated. The briefing in~~No. 6,502,135. On October 5, 2021, USCAFC issued an order remanding these appeals ~~is ongoing.~~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 ~~entity that initiated~~USCAFC retained jurisdiction over the ~~IPRs, Black Swamp IP, LLC, indicated~~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 ~~18, 2017,~~7, 2022, and we currently await scheduling of oral arguments.

VirnetX Inc. v. Apple Inc. (USCAFC Case 22-1523) (“Apple Reexam I”)

On March 10, 2022, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes re-examination proceeding 95/001,682 involving our U.S. Patent No. 6,502,135. Our opening brief was filed on August 22, 2022. Apple’s response brief is currently due November 17, 2022.

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.

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. Our opening brief is currently due December 30, 2022.

McKool Smith P.C. v. VirnetX, Inc., AAA Case No. 01-20-0003-7975

On March 23, 2020, the law firm of McKool Smith, P.C. (“McKool”) filed a Demand for Arbitration against VirnetX, Inc. with the American Arbitration Association (“AAA”). In its demand, McKool claimed that a retention agreement it ~~would not participate~~entered into in 2010 with VirnetX entitled it to a contingency fee arising from the recent 2020 payment made in the ~~appeals.~~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 ~~October 20, 2017,~~April 19, 2021, the ~~USCAFC ordered the United States Patent and Trademark Office to inform it within 30 days whether it wishes to participate~~arbitrator awarded McKool $36,323 in damages, plus pre-judgment interest in the ~~appeals.~~amount of 5% simple interest from March 23, 2020 to April 18, 2021, and post-judgment interest in the amount of 5%, compounded annually, until payment of the award. We accrued the resulting $38,284 as of March 31, 2021 and paid that amount to McKool on April 20, 2021. This matter is now closed.

Other Legal Matters

One or more potential intellectual property infringement claims may also be available to us against certain other companies who have the resources to defend against any such claims. Although we believe these potential claims are ~~worth pursuing,~~likely valid, commencing a lawsuit can be expensive and time-consuming, and there is no assurance that we ~~will~~could prevail on such potential ~~claims.~~claims if we made them. In addition, bringing a lawsuit may lead to potential counterclaims which may ~~preclude~~distract our ~~ability~~management and our other resources, including capital resources, from efforts to successfully commercialize our ~~initial products, which are currently in development.~~ products.

Currently, we are not a party to any other pending legal proceedings and are not aware of any proceeding threatened or contemplated against ~~us by any governmental authority or other party.~~us.

Index

Note 8 — ~~Subsequent Events~~Leases

We lease office space under an operating lease which expires on October 31, 2023. On ~~October 16, 2017, we received~~September 30, 2022, the underlying ROU asset and lease liability totaled $58. On December 31, 2021, the underlying ROU asset and lease liability totaled $98. For the three and nine months ended September 30, 2022, lease expense totaled $13 and $40, respectively. For the three and nine months ended September 30, 2021, the lease expense totaled $14 and $42, respectively.

We also lease a ~~final judgment affirming a jury’s verdict~~facility for corporate promotional and marketing purposes which was prepaid at inception and expires in 2025, as amended. On September 30, 2022 and December 31, 2021, the ROU asset totaled $724 and $948, respectively. For the three and nine months ended September 30, 2022, lease expense totaled $75 and $224, respectively. For the three and nine months ended September 30, 2021, lease expense totaled $75 and $225, respectively.

Note 9 — Earnings Per Share

Basic earnings per share are based on the weighted average number of ~~$1.20 per iPhone royalty in the United States Court~~common shares outstanding for the ~~Eastern District~~period. Diluted earnings per share are based on the weighted average number of ~~Texas, Tyler Division in~~common shares and potentially dilutive common shares outstanding. Potential common shares outstanding principally include stock options, RSUs and warrants, excluding any potentially dilutive shares convertible at a price higher than the ~~case VirnetX, Inc. et al. v. Apple Inc., No. 6:10-cv-00417-RWS (Apple I), awarding~~closing price of our stock at the ~~Company a total~~end of ~~$439.8 million including jury verdict, willful infringement, interest, costs~~each reporting period. The following table shows the computation of basic and attorney fees, following the previously disclosed jury trial and verdict in the amount of $302.4 million. The Final Judgement is subject to appeal stemming from new issues unresolved in the Apple I case, remanded back from the United States Court of Appealsdiluted earnings per share for the ~~Federal Circuit. On October 27, 2017 Apple filed its notice of appeal of the Final Judgment entered on~~three and nine months ended September ~~29, 2017 to the United States Court of Appeals~~30, 2022 and 2021 (in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Numerator:
Net (loss) income	$	(4,280	)	$	(3,331	)	$	(12,037	)	$	(36,625	)

Denominator:
Weighted-average basic shares outstanding		71,425			71,233			71,305			71,135
Effect of dilutive securities		—			—			—			—
Weighted-average diluted shares		71,425			71,233			71,305			71,135

Basic (loss) earnings per share	$	(0.06	)	$	(0.05	)	$	(0.17	)	$	(0.51	)
Diluted (loss) earnings per share	$	(0.06	)	$	(0.05	)	$	(0.17	)	$	(0.51	)

We incurred a net loss for the ~~Federal Circuit. (See “Note 7 – Litigation”).~~

~~Subsequent to~~three and nine months ended September 30, ~~2017, we sold 527,039~~2022 and 2021; therefore, all potentially dilutive securities representing shares of common stock ~~under the ATM. The average sales price per common share was $5.49~~(7,443,130 in 2022 and ~~the aggregate proceeds~~6,906,176 in 2021) were excluded from the ~~sales totaled $2,806 during the period. Sales commissions, and other costs associated with the ATM totaled $87.~~computation of diluted earnings per share, because their effect would have been antidilutive.

~~On October~~ ~~26th,~~ 2017, we signed a Strategic Service Provider (SSP) Agreement with Benefit One Solutions, Inc., Japan, a company which provides welfare services to employees of over 3,000 government, and corporate organizations in Japan. Benefit One Solutions will be a Strategic Service Provider and a non-exclusive reseller of VirnetX's Gabriel Collaboration Suite of Products in Japan. Under the terms of the agreement, Benefit One will adopt the use of VirnetX Gabriel products within its own organization of approximately 1,300 employees for intra-company communication, and will integrate Gabriel Collaboration Suite of Products into its benefits application platform and offer VirnetX Secure Domain Names and Gabriel Client as a value-added service to its outside businesses. Under the terms of agreement with Benefit One Solutions, public notification of this agreement, in the form of public event(s) and/or press releases, will occur by both parties simultaneously.

14Note 10 — Subsequent Events

None

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ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF ~~OPERATIONS~~OPERATIONS.

~~Note About Forward-Looking Statements~~

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may appear throughout this report, including without limitation, the following sections: “Management’s Discussion and Analysis,” and “Risk Factors.” These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” (Part II, Item 1A of this Form 10-Q). We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.

Company Overview

We are an Internet security software and technology company with industry-leading, patented technology for Zero Trust Network Access (“ZTNA”) based secure ~~communications including 4G Long Term Evolution (“LTE”), security. Our software and technology solutions, including our~~network communications. VirnetX’s patented Secure Domain Name Registry and GABRIEL Connection Technology™, are ~~designed to facilitate secure communications and provide~~ the ~~security platform required by next-generation Internet-based applications such as instant messaging, or IM, voice over Internet Protocol, (“VoIP”)~~foundation for its VirnetX One^TM, ~~mobile services, streaming video, file transfer, remote desktop and Machine-to-Machine (“M2M”) communications. Our~~software-as-a-services (SaaS) platform. VirnetX’s technology generates secure connections on a ~~‘‘zero-click’’~~“zero-click” or ~~‘‘single-click’’~~“single-click” basis, significantly simplifying the deployment ~~of secure real-time communication~~network security solutions by eliminating the need for end-users to enter any encryption information. Our portfolio of intellectual property is the foundation of our business model. We currently own approximately 49205 total patents and pending applications, including 72 U.S. ~~and 69 foreign patents with approximately 50 pending~~ patents/patent applications ~~worldwide.~~and 133 foreign patents/validations/pending applications. Our patent portfolio is primarily focused on securing real-time communications over the Internet, ~~as well as~~and related services, ~~such as the establishment~~ and ~~maintenance of a secure domain name registry. Our patented methods also have additional applications~~is used in the key areas of device operating systems and network security for Cloud services, M2M communications in new initiatives including ‘‘Smart City’’, ‘‘Connected Car’’ and ‘‘Connected Home’’ that would connect everything from social services and citizen engagement to public safety, transportation and economic development to the internet to enable more productivity, features and efficiency in our everyday lives. The subject matter of all our U.S. and foreign patents and pending applications relates generally to securing communication over the internet, and as such covers all our technology and ~~other products. Our issued U.S. and foreign patents expire at various times during the period from 2019 to 2024. Some~~products, some of ~~our issued patents and pending patent applications~~which were acquired by our principal operating ~~subsidiary;~~subsidiary; VirnetX, Inc., from Leidos, Inc. ~~(“Leidos”)~~, or Leidos, (f/k/a Science Applications International Corporation, or SAIC) in 2006 and we are required to make payments to Leidos, based on cash or certain other values generated from those patents. The amount of such payments depends upon the type of value generated, and certain categories are subject to maximums and other limitations.2006.

Our product ~~Gabriel Secure Communication Platform™, unlike other collaboration and communication~~portfolio includes sophisticated technologies, products and services that are available for sale worldwide. On March 1, 2022, we launched War Room™ software, and on April 7, 2022, we launched VirnetX Matrix™ software on our next-generation, VirnetX One™ platform. This new platform builds upon our patented Secure Domain Names and GABRIEL Connection Technology™ to further enhance the ~~market today, does~~security and efficiency of our patented secure communication links. Our VirnetX One™ platform is a security-as-a-service platform that protects enterprise applications, services, and infrastructure from cyber-attacks.

Our new War Room™ software product provides an industry leading, safe, and secure video conferencing meeting environment where sensitive communications and data is invisible to those not ~~require~~authorized to view it. War Room™ validates permissions of all the users, and devices requesting access to ~~user’s~~any secure meeting room prior to granting access. We believe our War Room™ will be an attractive solution for government agencies as well as all professional sectors such as legal, financial, and medical where limiting access to confidential data is a critical requirement.

Our VirnetX Matrix™ product provides industry's best safeguards for applications and ~~reduces the threat~~contemporary remote workforce from sophisticated hackers and mitigates threats by enabling corporate applications to be invisible from unauthorized users. We believe our VirnetX Matrix™ software will be an attractive solution for all businesses, cloud and on-premise application service providers, and OEMs, looking to improve visibility and management of ~~hacking~~their networks to mitigate morphing attacks on their networks and ~~data mining. It enables individuals and organizations to maintain complete ownership~~for real time access and control ~~over~~of their ~~personal and confidential data, secured within their own private network, while enabling authorized secure encrypted access from anywhere at any time.~~ users.

Our ~~Gabriel~~GABRIEL Collaboration Suite™ is a set of communication applications and tools that ~~run-on top of~~use our ~~Gabriel~~GABRIEL Secure Communication Platform™. It enables seamless and secure ~~cross-platform~~cross platform communications between ~~user’s~~ devices that are enrolled in our “VIRNETX SECURED” network and have our software installed. Our ~~Gabriel~~GABRIEL Collaboration Suite™ is available for download and free trial, for Android, iOS, Windows, Linux, and Mac OS X platforms, at ~~http:~~ https://~~www.gabrielsecure.com/~~. We continue to enhance our products and add new functionality to our products. We will provide updates to new and existing customers as they are released to the public. Over 80 small and medium businesses have installed our Gabriel Secure Communication Platform™ and Gabriel Collaboration Suite™ products in their corporate networks. We seek to expand our customer base with targeted promotions and direct sales initiatives.virnetx.com.

We have executed a number of patent and technology licenses and intend to seek further licensees for our technology, including our GABRIEL Connection Technology™ to original equipment manufacturers, or OEMs, of chips, servers, smart phones, tablets, e-Readers, laptops, net books and other devices, within the IP-telephony, mobility, fixed-mobile convergence and unified communications markets including 4G/LTE Advanced.

We have submitted a declaration with the 3rd Generation Partnership Project, or 3GPP, identifying a group of our patents and patent applications that we believe are or may become essential to certain developing specifications in the 3GPP LTE, SAE project. We have agreed to make available a non-exclusive patent license under fair, reasonable and non-discriminatory, or FRAND, terms and conditions, with compensation to 3GPP members desiring to implement the technical specifications identified by us. We believe that we are positioned to license our essential security patents to 3GPP members as they move into deploying 4G/LTE Advanced devices and solutions.

~~Index~~

We have an ongoing ~~Gabriel Licensing Program~~licensing program under which we offer licenses to a portion of our patent portfolio, technology, and software, including our secure domain name registry service, to domain infrastructure providers, communication service providers as well as to system integrators. Our GABRIEL Connection Technology™ License is offered to ~~OEM~~original equipment manufacturer (“OEM”) customers who want to adopt the GABRIEL Connection Technology™ as their solution for establishing secure connections using secure domain names within their products. We have developed GABRIEL Connection Technology™ Software Development Kit ~~(SDK)~~(“SDK”) to assist with rapid integration of these techniques into existing software implementations with minimal code changes and include object libraries, sample code, testing and quality assurance tools and the supporting documentation necessary for a customer to implement our technology.implementations. Customers who want to develop their own implementation of the VirnetX patented techniques for supporting secure domain names, or other techniques that are covered by our patent portfolio for establishing secure communication links, can purchase a patent license. The number of patents licensed, and therefore the cost of the patent license to the customer, will depend upon which of the patents are used in a particular product or service. These licenses will typically include an initial license fee, as well as an ongoing royalty.

We have signed Patent License Agreements with Avaya Inc., Aastra USA, Inc., Microsoft Corporation, Mitel Networks Corporation, NEC Corporation and NEC Corporation of America, Siemens Enterprise Communications GmbH & Co. KG, and Siemens Enterprise Communications Inc. to license certain of our patents, for a one-time payment and/or an ongoing royalty for all future sales through the expiration of the licensed patents with respect to certain current and future IP-encrypted products. We have engaged IPVALUE Management Inc. to assist us in commercializing our portfolio of patents on securing real-time communications over the Internet. Under the multi-year agreement, IPVALUE is expected to originate and assist us with negotiating transactions related to patent licensing worldwide with respect to certain third parties. We have entered into a patent standstill agreement with HTC Corporation, facilitated by IPVALUE, ~~giving both parties more time to discuss and negotiate a broad license, including a license to VirnetX’s LTE-related patents~~.

Index

We ~~believe that the market opportunity for our~~expect to continue to launch new and enhanced security platforms, software products, and technology solutions is large and expanding as secure domain names are now an integral part of securing the next generation 4G/LTE Advanced wireless networks and M2M communications in areas including Smart City, Connected Car and Connected Home. We also believe that all 4G/LTE Advanced mobile devices will require unique secure domain names and become part of a secure domain name registry.

We intend to license our patent portfolio, technology and software, including our secure domain name registry service, to domain infrastructure providers, communication service providers as well as to system integrators. We intend to seek further license of our technology, includingservices based on our GABRIEL Connection Technology™. We expect to ~~enterprise~~provide updates to new and existing customers ~~developers~~as they are released to the public. Many small and ~~original equipment manufacturers, or OEMs, of chips, servers, smart phones, tablets, e-Readers, laptops, net books~~medium businesses have installed our software products in their corporate networks. We intend to continue to expand our customer base with targeted promotions and ~~other devices, within the IP-telephony, mobility, fixed-mobile convergence and unified communications markets including 4G/LTE.~~direct sales initiatives.

Our employees include the core development team behind our patent portfolio, technology, and software. ~~This~~Some members of this team ~~has~~have worked together for over ~~ten~~twenty years and ~~is the~~were on same team that invented and developed this technology while working at Leidos, Inc. (‘‘Leidos’’). Leidos is a FORTUNE 500® scientific, engineering and technology applications company that uses its deep domain knowledge to solve problems of vital importance to the nation and the world, in national security, energy and the environment, critical infrastructure and health.Leidos. The team has continued its research and development work ~~started at Leidos,~~ and expanded the set of patents we acquired in 2006 from Leidos, into a larger ~~portfolio of over 110 U.S. and international patents and with over 75 pending applications.~~patent portfolio. This portfolio now serves as the foundation of our products, services, and our licensing ~~business and planned service offerings and~~business. It is expected to generate ~~the majority~~most of our future revenue in license fees and royalties. We intend to continue our ~~research~~efforts to develop new products and ~~development efforts to~~technologies and further strengthen and expand our patent portfolio.

We intend to continue using an outsourced and leveraged model to maintain efficiency and manage costs as we grow our licensing business by, for example, offering incentives to early licensing targets or asserting our rights for use of our patents. We also intend to expand our design pilot in participation with leading 4G/LTE companies (domain infrastructure providers, chipset manufacturers, service providers and others) and build our secure domain name registry.

New Accounting Pronouncements

In ~~June 2016,~~December 2019, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~No. 2016-13, Financial Instruments-Credit Losses~~2019-12 Income Taxes (Topic ~~326) “ASU 2016-13”~~740). The ~~purpose~~amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify U. S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU 2016-13 is to require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. ASU 2016-13 isare effective for fiscal years, and interim ~~and annual reporting~~ periods within those fiscal years, beginning after December 15, ~~2019.~~2020. We ~~are evaluating the~~adopted this ASU on January 1, 2021 with no material impact ~~this guidance will have~~ on our financial position, ~~and statement~~results of ~~operations.~~

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) (“ASU 2016-09”), which simplified certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards and classification in the statement ofoperations or cash flows. ~~We adopted this ASU in 2017 with the following affects:~~

• ASU 2016-9 requires excess tax benefits to be recognized regardless of whether the benefit reduces taxes payable. We had zero excess tax benefits recognized for the nine months ended September 30, 2017.

• Certain prior period amounts were reclassified to conform to the current year’s presentation. None of these reclassifications had an impact on reported net income for any of the periods presented. As a result of the implementation of ASU 2016-09, our condensed consolidated statements of cash flow for the nine months ended September 30, 2016 has been restated to reflect the reclassification of $93 for payments of taxes on cashless exercise of restricted stock units, previously reported in cash flows from operation activities to the current presentation in cash flows from financing activities.

~~Index~~

• The Company has elected to not estimate forfeitures expected to occur to determine the amount of stock-based compensation cost to be recognized in each period. As such, the guidance relating to forfeitures did not have an impact on our accumulated deficit as of January 1, 2017.

Index

Results of ~~Operations~~Operation

Three and Nine Months Ended September 30, ~~2017~~2022

Compared with the Three and Nine Months Ended September 30, ~~2016~~2021

(in thousands, except per share amounts)

Revenue

We ~~had revenues~~recognized revenue of ~~$375~~$4 and ~~$1,146 for~~$4, and $43 and $24 in the three and nine months ended September 30, ~~2017, respectively,~~2022 and ~~revenues~~2021 respectively.

Licensing Costs

Accrued licensing costs of ~~$375 and $1,148 for~~$9,438 were reversed during the ~~three and~~ nine months ended September 30, ~~2016, respectively.~~

~~Revenues for~~2021, as a result of the ~~three and~~McKool award; these licensing costs were reduced an additional $4, during the nine months ended September 30, 2017 included recognized revenue of $375 and $1,125, respectively, from non-refundable up-front fees earned during the period. In August 2013, we began receiving annual payments on this contract which totaled $10,000 over the 4-year period. Revenues from these fees have been deferred and recognized as revenue when earned in accordance with our revenue recognition policy, but not in advance of collection.2022. (See Note 7 — Litigation).

Research and Development Expenses

~~Research~~Our research and development expenses ~~were $481 and $460~~increased by $65 to $1,216 for the three months ended September 30, ~~2017~~2022. And increased by $246 for the nine months ended September 30, 2022. Our research and ~~2016, respectively, representing an increase of $21 due primarily to an~~development expenses were $3,698 and $3,452 for the nine months ended September 30, 2022 and 2021, respectively. The increase in 2022 was primarily due to the addition of staff ~~expense~~and higher engineering employee benefits.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses increased by $1,054 to $4,143 for the three months ended September 30, ~~2017. Research~~2022, and ~~development expenses were $1,473 and $1,391~~decreased by $37,666 from $48,040 for the nine months ended September 30, ~~2017 and 2016, respectively, representing an increase of $82 due primarily to an increase in staff expense.~~

~~Selling, General and Administrative Expenses~~

~~Selling, general and administrative expenses includes wages and benefits of management and administrative personnel, as well as outside legal, accounting, and consulting services.~~

~~Our selling, general and administrative expenses for the three months ended September 30, 2017 compared to September 30, 2016 decreased by $2,862 to $3,456.~~2021, respectively. The ~~change~~decrease is primarily due to ~~a decrease in~~$38,284 disputed legal fees ~~associated with our patent infringement actions. For the nine months ended September 30, 2017 our selling, general and administrative expenses decreased by $9,179~~accrued to ~~$10,953 compared to the nine months ended September 30, 2016. The change was primarily due to an $8,200 decrease~~McKool in legal fees associated with our patent infringement actions. We expect to incur the same or increased levels of legal fees over the next two quarters and expect to report losses from operations as a result.2021 (See ~~“Legal Proceedings” for additional information regarding these infringement actions.)~~Note — 7 Litigation).

~~Other Income and Expenses~~

Interest income decreased by $10 to $9 for the three months ended September 30, 2017, from $19 for the comparable 2016 period, and decreased by $10 to $40 for the nine months ended September 30, 2017 from $50 for the nine months ended September 30, 2016.

~~Net loss~~

Net loss for the three months ended September 30, 2017 and September 30, 2016 was $3,552 and $7,387, respectively. Net loss for the nine months ended September 30, 2017 and September 30, 2016 was $11,244 and $21,335, respectively. The changes are primarily due to decreases in legal fees associated with our patent infringement actions and reported in our selling, general and administrative expenses.

Liquidity and Capital Resources

As of September 30, ~~2017,~~2022, our cash and cash equivalents totaled approximately ~~$1,647~~$105,805 and our short-term investments totaled approximately ~~$2,665,~~$53,195, compared to cash and cash equivalents of approximately ~~$6,627~~$142,018 and short-term investments of approximately ~~$9,249~~$27,254 at December 31, ~~2016.~~2021, respectively. Working capital was ~~$1,958~~$157,490 at September 30, ~~2017,~~2022, and ~~$11,240~~$168,471 at December 31, 2016. The decrease in cash and investments during the nine months ended September 30, 2017 was primarily attributed to costs incurred for legal expenses in defense of our patent infringement actions and the loss incurred during the period.2021.

We expect that our cash and cash equivalents and short-term investments as of September 30, 2017, the $2,806 in proceeds subsequent to September 30, 2017, from sales of common shares under the ATM, as well as the possibility of future sales of common shares under the ATM and the universal shelf registration statement, described below,2022, will be sufficient to fund our current level of ~~selling, general and administration costs,~~operating expense, including legal expenses and provide related working capital for the foreseeable future. Over the longer term, we expect to derive the majority of our future revenue from license fees and royalties associated with our patent portfolio, technology, software and secure domain name registry in the United States and other markets around the world.

~~Index~~

~~Universal Shelf Registration Statement and ATM Offering~~

On August 21, 2015, we filed a universal shelf registration statement with the U.S. Securities and Exchange Commission (the “SEC”) enabling us to offer and sell from time to time up to $100 million of equity, debt or other types of securities. We entered into an at-the-market (“ATM”) equity offering sales agreement with Cowen & Company, LLC on August 20, 2015, under which we may offer and sell shares of our common stock having an aggregate value of up to $35 million. We expect to use proceeds from this offering for GABRIEL product development and marketing, and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products, technologies or businesses. At September 30, 2017 $65 million remains available for sale under the shelf offering, with $11.8 million remaining in the ATM. Subsequent to September 30, 2017, we sold 527,039 shares of common stock under the ATM. The average sales price per common share was $5.49 and the aggregate proceeds from the sales totaled $2,806 during the period. Sales commissions, and other costs associated with the ATM totaled $87.

~~Stock Purchase and Revenue Sharing Agreement~~

Concurrently with the termination of the Purchase Agreement, the Company and PITA amended and restated the Revenue Sharing Agreement (the “Amended and Restated Revenue Sharing Agreement”) to have it survive the termination of the Purchase Agreement.

Income Taxes

~~We had $1 income tax benefit for~~For the three months ended September 30, ~~2017 and $4 of~~2022, we recognized an income tax ~~expense for~~benefit of $486 on loss before taxes of $4,766, which is an effective tax rate of 10.3%. For the nine months ended September 30, ~~2017.~~2022, we recognized an income tax benefit of $1,171 on loss before taxes of $13,208, which is an effective rate of 8.3%. The effective tax rate was lower than the statutory federal income tax rate primarily due to the effect of stock-based compensation and expiring options, requiring us to reduce our deferred tax asset. During the ~~three and nine-month period~~nine months ended September 30, ~~2017, we had net operating losses (“NOLs”) which generated~~2022, our deferred tax assets for NOL carryforwards. We have provided valuation allowances against the net deferred tax assets including the deferred tax assets for NOL carryforwards. Valuation allowances provided for our net deferred tax assetsasset increased ~~by $1,404 and $5,152 for~~to $17,122.

For the three and nine months ended September 30, ~~2017, respectively.~~

~~We had $119~~2021, we recognized an income tax ~~expense for~~benefit of $895 and $5,369. For the three months, ~~ended September 30, 2016 and $126 of~~ income tax ~~expense~~was primarily affected by net operating loss for the period; for the nine months, ended September 30, 2016. During the three and nine-month periods ended September 30, 2016, we had NOLs which generated deferred tax assets for NOL carryforwards. We provided valuation allowances against the net deferred tax assets including the deferred tax assets for NOL carry-forwards. Valuation allowances provided for our net deferred tax assets increased by $2,707 and $7,942 for the three and nine months ended September 30, 2016, respectively.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all deferred assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based on the available objective evidence, including our history of operating losses and the uncertainty of generating future taxable income, management believes it is more likely than not that the net deferred tax assets at September 30, 2017 will not be fully realizable. Accordingly, management has maintained a valuation allowance against our net deferred tax assets at September 30, 2017. The valuation allowance provided against our net deferred tax assets was approximately $50,000 and $44,000 at September 30, 2017 and December 31, 2016, respectively.

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 net operating losses and tax credits remaining unutilized from such years.

~~Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of~~ income tax ~~expense. As of September 30, 2017, we had accrued immaterial amounts of interest~~was primarily affected by expiring options and ~~penalties related to uncertain tax positions.~~research and development credits.

Index

Contractual Obligations

There have been no material changes to the contractual obligations disclosed in our Annual Report on Form ~~10-K~~10-K/A for the fiscal year ended December 31, ~~2016.~~2021.

~~Index~~

Off-Balance Sheet Arrangements

~~We do not have any off-balance sheet arrangements and did not have any such arrangements as of September 30, 2017.~~None.

Index

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk

We invest our excess cash primarily in highly liquid instruments including time deposits, money market, ~~mutual funds and U.S. government~~ and U.S. agency and treasury securities. We seek to limit the amount of our credit exposure to any one issuer.

Investments in fixed rate instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates. Due in part to these factors, our income from investments may decrease in the future.

We considered the historical volatility of short-term interest rates and determined that it was reasonably possible that an adverse change of 100 basis points could be experienced in the near term but would have an immaterial impact in the fair value of our marketable securities, which generally mature within ~~one year~~eighteen months of September 30, ~~2017.~~2022.

Other Market Risks

We considered the historical volatility of our stock prices and determined that it was reasonably possible that the fair market value of our stock price could increase or decrease substantially in the near term and could have a material impact to our consolidated balance sheets and statement of ~~operations.~~operations with respect to future stock-based compensation costs and other equity transactions.

ITEM 4 — CONTROLS AND ~~PROCEDURES~~PROCEDURES.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of September 30, ~~2017,~~2022.

The purpose of this evaluation was to determine whether as of September 30, ~~2017~~2022 our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in our filings with the SEC, (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, ~~2017,~~2022, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial ~~Reporting~~Reporting.

~~There were no changes~~Upon identification of our material weakness that resulted in the restatement of our December 31, 2021 consolidated financial statements, we immediately began remediating our internal control over financial reporting. Specifically, we modified our supervisory review procedures over our tax professionals who perform the accounting and reporting ~~during the quarter ended September 30, 2017~~of deferred taxes, to include detailed discussions with our tax professionals of current operations and changes in accounting standards and tax law that ~~have materially affected, or are reasonably likely to materially~~could affect our calculations, and detailed review including walkthrough of infrequent transactions and complex matters affecting deferred tax calculations. We have tested these procedures and believe the enhanced control is operating effectively. Additionally, our accounting professionals participated in deferred tax training to further enhance the technical ability of our personnel.

We have not experienced any material impact to our internal ~~control~~controls over financial ~~reporting.~~reporting despite the fact that most of our employees are working remotely; we are continually monitoring and assessing the impact on our internal controls to minimize the impact on their design and operating effectiveness.

Index

PART II — OTHER INFORMATION

ITEM 1 — LEGAL PROCEEDINGS

~~We have eleven intellectual property infringement lawsuits pending~~ – (See Note 7 — Litigation in the ~~United States District Court for the Eastern District of Texas, Tyler Division, and United States Court of Appeals for the Federal Circuit (“USCAFC”).~~

~~VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED)~~

On March 30, 2015, the United States Court for the Eastern District of Texas, Tyler Division, issued an order finding substantial overlap between the remanded portions of the Civil Action Case 6:10-CV-00417-LED (VirnetX vs. Cisco et. al.), and the ongoing Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case. The jury trial in this case was held on January 25, 2016. On February 4, 2016, a jury in the United States Court for the Eastern District of Texas, Tyler Division, awarded us $625.6 million in a verdict against Apple Inc. for infringing four of our US patents, marking it the second time a federal jury has found Apple liable for infringing VirnetX’s patented technology. The verdict includes royalties awarded“Notes to ~~us based on an earlier patent infringement finding~~ ~~(Case 6:10-CV-00417-LED)~~ against Apple. The jury found that Apple’s modified VPN On-Demand, iMessage and FaceTime services infringed VirnetX’s patents and that Apple’s infringement was willful. In addition to determining the royalty owed by Apple for its prior infringement, this verdict also includes an award based on the jury’s finding that Apple’s modified VPN On Demand, iMessage and FaceTime services have continued to infringe VirnetX’s patents. The post-trial hearing was held on May 25, 2016 in the United States Court for the Eastern District of Texas, Texarkana Division. On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases (Case No. 6:10-cv-417, Docket No. 878 (“Apple I case”); Case No. 6:12-cv-855, Docket No. 220 (“Apple II case”)), ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II case will be retried after Apple I case. Events and developments subsequent to the order from the court are described to support Apple I and Apple II matters.

~~VirnetX Inc. v. Cisco Systems, Inc. et al. (Case 6:10-CV-00417-LED) (“Apple I”~~Condensed Consolidated Financial Statements”)

~~Index~~

On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases Apple I case and Apple II case, ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II will be retried after Apple I case. The jury trial in this case was held on September 26, 2016. On September 30, 2016, a Jury in the United States Court for the Eastern District of Texas, Tyler Division, in the case VirnetX Inc., et al. v. Apple Inc., No. Apple I, has awarded VirnetX $302.4 million in a verdict against Apple for infringing four VirnetX patents, marking the third time a federal jury has found Apple liable for infringing VirnetX’s patented technology.

~~VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED) (“Apple II”)~~

On November 6, 2012, we filed a complaint against Apple in the United States District Court for the Eastern District of Texas, Tyler Division for willfully infringing four of our patents, U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151, and seeking both an unspecified amount of 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. Due to their release dates, these products were not included in the previous lawsuit that concluded with a Jury verdict on November 6, 2012 that was subsequently upheld by the United States District Court for the Eastern District of Texas, Tyler Division, on February 26, 2013. On July 1, 2013, we filed a consolidated and amended complaint to include U.S. Patent No. 8,051,181 and consolidate Civil Action No. 6:11-cv-00563-LED. On August 27, 2013, we filed an amended complaint including allegations of willful infringement related to U.S. Patent No. 8,504,697 seeking both damages and injunctive relief. The Markman hearing in this case was held on May 20, 2014 and on August 8, 2014, issued its Markman Order, denying Apple’s motion for summary judgment of indefiniteness, in which Apple alleged that some of the disputed claims terms in the patents asserted by us were invalid for indefiniteness. In a separate order, the court granted in part and denied in part our motion for partial summary judgment on Apple’s invalidity counterclaims, precluding Apple from asserting invalidity as a defense against infringement of the claims that were tried before a jury in our prior litigation against Apple (VirnetX vs. Cisco et. al., Case 6:10-CV-00417-LED). The jury trial in this case was scheduled for October 13, 2015. On March 30, 2015, the court issued an order finding substantial overlap between this case and the remanded portions of Case 6:10-CV-00417-LED (VirnetX vs. Cisco et. al.). The court consolidated the two civil actions under Civil Action Case 6:12-CV-00855-LED (VirnetX Inc. v. Apple, Inc.) and designated it as the lead case. On July 29, 2016, the court issued a new order, vacating its previous orders consolidating the cases Apple I case and Apple II case, ordering that the two cases be retried separately, and setting the retrial date for Apple I case with jury selection to begin on September 26, 2016. The court also ordered that the issue of willfulness in both cases is bifurcated and that the Apple II will be retried after Apple I case.

On September 29, 2017, the Court issued an order denying Apple’s Motion to Stay. The Court ordered the parties to meet and confer and file a joint motion with a proposed trial date by October 13, 2017. The parties have met, conferred and filed a joint motion on the proposed trial dates. We are awaiting court order setting the date for a new jury trial in Apple II case.

~~VirnetX Inc. v. Apple, Inc. (Case 15-1934)~~

On July 10, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the United States Patent and Trademark Office, Patent Trial and Appeal Board (“PTAB”) in IPR2014-00237 and IPR2014-00238, related to U.S. Patent No. 8,504,697. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on the grounds discussed in IPR2014-00238. We are currently evaluating our options in this case.

~~Index~~

~~VirnetX Inc. v. Apple, Inc. (Case 16-1211)~~

On September 28, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2014-00403 and IPR2014-00404 and on October 22, 2015 for IPR2014-00481 and IPR2014-00482 involving our U.S. Patent Nos. 7,188,180, and 7,987,274. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on the grounds discussed in IPR2014-00403 and IPR2014-00481. We are currently evaluating our options in this case.

~~VirnetX Inc. v. Apple, Inc. (Case 16-1480)~~

On November 30, 2015, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,949 related to U.S. Patent No. 8,051,181. The oral arguments in this case were heard on November 7, 2016. On December 9, 2016, the USCAFC affirmed the PTAB based on certain grounds. We are currently evaluating our options in this case.

~~VirnetX Inc. v. Apple, Inc. (Case 16-119)~~

On March 4, 2016, we filed a petition for writ of mandamus with the USCAFC, requesting the USCAFC’s intervention to revoke the PTAB’s decision joining Apple to IPR2015-01046 and IPR2015-01047, related to U.S. Patent Nos. 6,502,135 and 7,490,151. On March 18, 2016, the USCAFC denied the petition without prejudice to us raising the arguments on appeal after the PTAB’s final decisions. We are currently evaluating our options in this case.

~~VirnetX Inc. v. Apple, Inc. (Case 17-1131)~~

On October 31, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2015-00810 and IPR2015-00812, on November 9, 2016 for IPR2015-00811, and on November 28, 2016 for IPR2015-00866, IPR2015-00868, IPR2015-00870 and IPR2015-00871 involving our U.S. Patent Nos.8,868,705, 8,850,009, 8,458,341, 8,516,131, and 8,560,705. These appeals have been consolidated. The briefing in these appeals has been concluded; the oral arguments have not yet been scheduled.

~~VirnetX Inc. v. The Mangrove Partners (Case 17-1368)~~

On December 16, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2015-01046, and on December 20, 2016 for IPR2015-1047, involving our U.S. Patent Nos. 6,502,135, and 7,490,151. These appeals also involve Apple, Inc. and one of them involves Black Swamp IP, LLC. On April 27, 2017, the USCAFC stayed these appeals pending the USCAFC’s en banc decision in ~~Wi-Fi One, LLC v. Broadcom Corporation,~~ ~~No. 2015-1944.~~

~~VirnetX Inc. v. Apple Inc., Cisco Systems, Inc. (Case 17-1591)~~

On February 7, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-partes reexamination nos. 95/001,788, 95/001,789, and 95/001,856 related to our U.S. Patent Nos. 7,921,211 and 7,418,504. ~~These appeals have been consolidated. The briefing in these appeals is ongoing.~~

~~VirnetX Inc. v. Apple Inc. (Case 17-2490)~~

On August 23, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2016-00331 and IPR2016-00332 involving our U.S. Patent No. 8,504,696. These appeals have been consolidated. The briefing in these appeals is ongoing.

~~In re VirnetX Inc. (Case 17-2593)~~

On September 22, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in IPR2016-00693 and IPR2016-00957 involving our U.S. Patent Nos. 7,418,504 and 7,921,211. These appeals have been consolidated. The briefing in these appeals is ongoing. The entity that initiated the IPRs, Black Swamp IP, LLC, indicated on October 18, 2017, that it would not participate in the appeals. On October 20, 2017, the USCAFC ordered the United States Patent and Trademark Office to inform it within 30 days whether it wishes to participate in the appeals.

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 worth pursuing, commencing a lawsuit can be expensive and time-consuming, and there is no assurance that we will prevail on such potential claims. In addition, bringing a lawsuit may lead to potential counterclaims which may preclude our ability to commercialize our initial products, which are currently in development. Currently, we are not a party to any other pending legal proceedings, and are not aware of any proceeding threatened or contemplated against us by any governmental authority or other party.

~~Index~~

ITEM 1A — RISK FACTORS

Our operations and financial results are subject to various risks and uncertainties, including those described below, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common and capital stock. You should carefully consider the ~~following material~~ risks and uncertainties described below in addition to the other information set forth in this ~~Quarterly~~ Report, ~~on Form 10-Q, as well as~~including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our ~~Annual Form 10-K filed March 16, 2017~~consolidated financial statements and related notes, before making any investment in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. If any of these risk factors occur, you could lose substantial value or your entire investment in our ~~shares~~.shares.

Summary Risk Factors

An investment in our common stock involves a high degree of risk, and the following is a summary of key risk factors when considering an investment. You should read this summary together with the more detailed description of each risk factor contained in the subheadings further below.

We may not generate significant sales revenues from our new software products and services.

We are involved and will continue to be involved in litigation defending our patent portfolio, which can be time-consuming and costly, and we cannot anticipate the results.

We may not be able to capitalize on market opportunities related to our product strategy, our licensing strategy or our patent portfolio.

If we are not able to adequately protect our patent rights, our business would be negatively impacted.

Because our business is conducted or expected to be conducted in an environment that is subject to rapid change, we may be subject to various developments in regulation, law, and consumer preferences to which we may not be able to adapt successfully.

Our exposure to outside influences beyond our control, including new legislation, court rulings or actions by the USPTO could adversely affect our licensing and enforcement activities and results of operations.

New legislation, regulations or court rulings related to enforcing patents could harm our business and operating results.

Privacy and data security concerns, and data collection and transfer restrictions and related domestic or foreign regulations may limit the use and adoption of our solutions and adversely affect our business.

If we are unable to expand our revenue sources or establish, sustain, grow, or replace relationships with a diversified customer base, our revenues may be limited.

We have limited technical resources and are at an early stage in commercialization of our software products.

Our international expansion will subject us to additional costs and risks, and our plans may not be successful.

We have had to restate our previously issued financial statements and in connection with such process identified a material weakness in our internal control over financial reporting.

We may face litigation over the restatement of our previously issued financial statements.

Index

Risks Related to Our Business and Our Financial Reporting

We may not generate significant sales revenues from our new software products and services.

In March and April 2022, we launched War Room™ and VirnetX Matrix™ on our VirnetX One™ platform. During this year, we expect to launch these products in Asia Pacific and Europe. We also intend to continue to introduce new products on our VirnetX One™ platform in the future. The introduction and launch of new products is subject to significant costs, risks of slow market acceptance, and variable costs of customer acquisition. While we believe our software products will be attractive to all businesses, government agencies, cloud and on-premise application service providers, and OEMs, if we are unable to overcome these risks, we may never generate significant revenue from the sales of these products.

We are involved and will continue to be involved in litigation defending our patent portfolio, which can be time-consuming and costly, and we cannot anticipate the results.

We spend a significant amount of our financial and management resources to pursue our current litigation. We believe that this litigation and others that we may pursue in the future could continue for years and consume significant financial and management resources. The ~~counterpart~~counterparties to our litigation ~~includes~~include large, well-financed companies with substantially greater resources than us. WePatent litigation is risky, and the outcome is uncertain, and we cannot assure you that any of our current or future litigation matters will result in a favorable outcome for us. In addition, even if we obtain favorable interim rulings or verdicts, they may be inconsistent with the ultimate resolution of the dispute. Furthermore, any awards we receive may be subject to obligations to Leidos and fee arrangements with outside counsel. Also, we cannot assure you that we will not be exposed to claims or sanctions against us which may be costly or impossible for us to defend. Unfavorable or adverse outcomes may result in losses, exhaustion of financial resources or other adverse effects, which could encumber our ability to develop and commercialize our products.

~~We may need to raise additional capital to support our business growth, and this capital will be dilutive, may cause our stock price to drop or may not be available on acceptable terms, if at all.~~

We may need to raise additional capital, which may not be available to use when needed or may not be available on terms acceptable to us, to support our business growth or to respond to business opportunities, challenges or unforeseen circumstances, including sales under our ATM or our universal shelf registration statement. As previously disclosed in the Company’s public filings and elsewhere in this Quarterly Report on Form 10-Q, we have terminated our Stock Purchase Agreement dated May 31, 2017 (the “Purchase Agreement”) with Public Intelligence Technology Associates, kk (Japanese Corporation) (“PITA”) and we will not receive the $20 million investment from PITA contemplated by the Purchase Agreement, which may require us to accelerate other efforts to obtain capital. Our ability to obtain additional capital, if and when required, will depend on our business plans, investor demand, our operating performance, the condition of the capital markets, the terms of our current contractual obligations and other factors. If we raise additional funds through the issuance of equity, equity-linked or debt securities, including those under our ATM or our Universal Shelf Registration Statement, those securities may have rights, preferences, or privileges senior to the rights of our common stock, and our existing stockholders may experience dilution. Additionally, we are unable to predict the success of our current ATM offering. Sales of a substantial number of shares of our common stock in the public market, the perception that these sales or other financings might occur, could depress the market price of our common stock and could also impair our ability to raise capital through the sale of additional equity securities. If we issue debt securities or incur indebtedness, the incurrence of indebtedness would result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to obtain additional capital, or are unable to obtain additional capital on satisfactory terms, our ability to continue to support our business growth or to respond to business opportunities, challenges, or other circumstances could be adversely affected, and our business may be harmed.

~~We can provide no assurance that the revenue sharing arrangement we have with PITA will be successful or generate the financial results we expect.~~

On October 18, 2017, we entered into the Amended and Restated Revenue Sharing Agreement (the “Amended and Restated Revenue Sharing Agreement”) with PITA pursuant to which, among other things, PITA agreed to pay us a percentage of PITA’s and its affiliates’ worldwide revenues. PITA is a new organization with limited operating history. Our ability to generate revenue and profits from PITA depends significantly on the management and actions of PITA, over which we have limited control. In addition, PITA operates principally in Japan and we cannot be sure PITA will generate significant revenues whether in Japan or worldwide. Additionally, under the Amended and Restated Revenue Sharing Agreement, we agreed to pay PITA a percentage of our revenues recognized from cash or cash equivalents received by our Japanese subsidiary from a Japanese company that is incorporated in, or otherwise created under the laws of, Japan and is headquartered in Japan (a “Japanese Company”) that is directly attributable to (i) patent license fees or royalties for licenses granted under the our Japanese patents with respect to the products and services of a Japanese Company sold in Japan, (ii) licensing of the Gabriel Collaboration Suite to a Japanese Company for end use in Japan, or (iii) provision of other commercial services by the Company to the Japanese Company in Japan, such as the Company’s Secure Domain Name services.

We can provide no assurance that our revenue sharing arrangement with PITA will generate significant revenue or income for us and we may have to pay PITA more than what we receive from them under this arrangement.

~~Index~~

We may not be able to capitalize on market opportunities related to our product strategy, our licensing strategy or our patent portfolio.

~~Our~~A large part of our business strategy includes licensing our patents and technology to other companies in order to reach a larger end-user base than we could reach through direct sales and marketing efforts; as such, our business strategy and revenues ~~will~~may depend on intellectual property licensing fees and royalties for the majority of our revenues. We currently derive minimal revenue from licensing activities, and royalties, and we cannot assure you that we will successfully capitalize on our market opportunities or that this portion of our ~~current~~ business strategy will succeed. ~~Factors that may affect our ability to execute our current business strategy include, but are not limited to, the following:~~

Although to date we have entered into a limited number of settlement and license agreements, we may not be successful in entering into further licensing relationships, or if we are successful in entering into such relationships, the acquisition of them may be expensive, and they, as well as our existing settlement and our existing and pending license agreements may not generate the financial results, we ~~expect;~~

expect.

Factors that may affect our ability to execute our current business strategy include, but are not limited to, the following:

Third parties may challenge the validity of our patents;

The pendency of our various litigations may cause potential licensees not to do business with us;

Our patents may expire before we can make our business strategy successful;

We face, and we expect to continue to face, intense competition from new and established competitors who may have superior products and services or better marketing, financial or other capacities than we do; and

It is possible that one or more of our potential customers or licensees develops or otherwise sources products or technologies similar to, competitive with or superior to ours.

Index

If we are not able to adequately protect our patent rights, our business would be negatively impacted.

We believe our patents are valid, enforceable, and valuable. Notwithstanding this belief, third parties may make claims of infringement or invalidity claims with respect to our patents and such claims could give rise to material cost for defense or settlement or both, jeopardize or substantially delay a successful outcome of litigation we are or may become involved in, divert resources away from our other activities, limit or cease our revenues related to such patents, or otherwise materially and adversely affect our business. Similar challenges could also prevent us from obtaining additional patents in the future. Additionally, several of our patents are currently, and other patents may in the future be, subject to ~~United States Patent and Trademark Office (“USPTO”)~~USPTO post-grant inter partes review proceedings (“IPR”) which may result in all, or part of these patents being invalidated, or the claims of our patents being limited. Unfavorable or adverse outcomes in our litigation or IPRs may result in losses, exhaustion of financial resources, reduction in our ability to enforce our intellectual property rights, or other adverse effects, which could encumber our ability to develop and commercialize our products. Even if we are successful in enforcing our intellectual property rights, our patents may not ultimately provide us with any competitive advantages and may be less valuable than we currently expect. These risks may be heightened in countries other than the United States where laws regarding patent protection are less developed and may be negatively affected by the fact that legal standards in the United States and elsewhere for protection of intellectual property rights in Internet-related businesses are uncertain and still evolving. In addition, there are a significant number of United States and foreign patents and patent applications in our areas of interest, and we expect that significant litigation in these areas will continue and will add uncertainty to the value of certain patents and other intellectual property rights in our areas of interest. If we are unable to protect our intellectual property rights or otherwise realize value from them, our business would be negatively affected.

We can provide no assurances that the licensing of our essential security patents under FRAND will be successful.

At the request of the European Telecommunications Standards Institute (“ETSI”), and the Alliance for Telecommunications Industry Solutions (“ATIS”), we agreed to update our licensing declaration to ETSI and ATIS under their respective Intellectual Property Rights policies. This was in response to our Statement of Patent Holder identifying a group of our patents and patent applications that we believe are or may become essential to certain developing specifications in the 3rd Generation Partnership Project ~~(3GPP)~~ Long Term Evolution (“LTE”), Systems Architecture Evolution ~~(“SAE”)~~ project. We will make available a non-exclusive patent license under FRAND (fair, reasonable and ~~non-discriminatory~~non- discriminatory terms, and conditions, with compensation) for the patents identified by us that are or become essential to applicants desiring to implement the Technical Specifications identified by us, as set forth in the updated licensing declaration under the ATIS and ETSI Intellectual Property Rights policies. Our licensing declarations under the ATIS and ETSI Intellectual Property Rights policies may limit our flexibility in determining royalties and license terms for certain of our patents. Consequently, we cannot assure you that the licensing of the essential security patents will be successful or that third parties will be willing to enter into licenses with us on reasonable terms or at all, which could have an adverse effect on our business and harm our competitive position.

The current regulatory environment for our products and services remains unclear. We can give no assurance that our planned product offerings will be in compliance with laws and regulations of local, state, United States federal or foreign authorities. Further, we can give no assurance that we will not unintentionally violate such laws or regulations or that such laws or regulations will not be modified, or that new laws or regulations will be enacted in the future which would cause us to be in violation of such laws or regulations. For example, Voice-Over-Internet Protocol ~~o(VoIP”~~(“VoIP”) services are not currently subject to all the same regulations that apply to traditional telephony, but it is possible that similar regulations may be applied to VoIP in the future and that these could result in substantial costs to us which could adversely affect the marketability of our products and planned products related to VoIP. For further example, the use of the Internet and private Internet Protocol (“IP”) networks for communication is largely unregulated within the United States, but may become regulated in the future; ~~Additionally,~~additionally, several foreign governments have enacted measures that could restrict or prohibit voice communications services over the Internet or private IP networks.

~~Index~~

Our business depends on the growth of instant messaging, VoIP, mobile services, streaming video, file transfer and remote desktop and other next-generation Internet-based applications. A decline in the use of these applications due to complexity or cost ~~of these applications~~ relative to alternate traditional or newly developed communications channels, or development of alternative technologies, could cause a material decline in the number of users in these areas.

Index

More aggressive domestic or international regulation of the Internet in general, and Internet telephony providers and services specifically may materially and adversely affect our business, financial condition, operating results, and future ~~prospects.~~prospects.

Our exposure to outside influences beyond our control, including new legislation, court rulings or actions by the ~~United States Patent and Trademark Office,~~USPTO, could adversely affect our licensing and enforcement activities and results of operations.

Our licensing and enforcement activities are subject to numerous risks from outside influences, including the following:

New legislation, regulations or rules related to obtaining patents or enforcing patents could significantly increase our operating costs and decrease our revenue. For instance, the United States Supreme Court has ~~recently~~ modified some tests used by the USPTO in granting patents during the past 20 years which may decrease the likelihood that we will be able to obtain patents and increase the likelihood of challenge of any patents we obtain or license. In addition, in 2012 the United States ~~recently~~ enacted sweeping changes to the United States patent system under the Leahy-Smith America Invents Act, including changes that transition the United States from a “first-to-invent” system to a “first to file” system and alter the processes for challenging issued ~~patents.~~

patents;

More patent applications are filed each year resulting in longer delays in getting patents issued by the ~~USPTO.~~

USPTO;

Federal courts are becoming more crowded, and as a result, patent enforcement litigation is taking ~~longer.~~

longer; and

As patent enforcement becomes more prevalent, it may become more difficult for us to voluntarily license our patents.

New legislation, regulations or court rulings related to enforcing patents could harm our business and operating results.

Intellectual property is the subject of intense scrutiny by the courts, legislatures, and executive branches of governments around the world. Various patent offices, governments or intergovernmental bodies may implement new legislation, regulations or rulings that impact the patent enforcement process, or the rights of patent holders and such changes could negatively affect licensing efforts and/or litigations. For example, limitations on the ability to bring patent enforcement claims, limitations on potential liability for patent infringement, lower evidentiary standards for invalidating patents, increases in the cost to resolve patent disputes and other similar developments could negatively affect our ability to assert our patent or other intellectual property rights.

It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become enacted as laws. Compliance with any new or existing laws or regulations could be difficult and expensive, affect the manner in which we conduct our business and negatively impact our business, prospects, financial condition, and results of operations.

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If we experience security breaches or incidents, we could be exposed to liability and our reputation and business could suffer.

We expect to retain certain confidential and proprietary customer information in our secure data centers and secure domain name registry, as well as personal data and other confidential and proprietary information relating to our business. It will be critical to our business strategy that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Our secure domain name registry operations will also depend on our ability to maintain our computer and telecommunications equipment in effective working order and to reasonably protect our systems against interruption, and potentially depend on protection by other registrars in the shared registration system. The secure domain name servers that we will operate will be critical hardware to our registry services operations. Therefore, we expect to have to expend significant time and money to maintain or increase the security of our products, facilities, and infrastructure. Security technologies are constantly being tested by computer professionals, academics and “hackers.” Advances in computer capabilities and the techniques for attacking security solutions, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security measures and could make some or all our products obsolete or unmarketable. Likewise, ~~if any of our products are found to have significant security vulnerabilities, then~~ we may need to dedicate engineering and other resources to eliminate ~~the~~security vulnerabilities and may find it necessary or appropriate to repair or replace products already sold or licensed to our customers. Despite ~~our~~the security measures that we and our service providers utilize, our infrastructure and that of our service providers may be vulnerable to physical break-ins, ransomware, computer viruses, other malicious code attacks by hackers, phishing attacks, social engineering, or similar disruptive problems. It is possible that we may have to expend additional financial and other resources to address such problems. The COVID-19 pandemic is increasing vulnerability to cyber-attacks, as more individuals and companies work online, which increases these risks. As a provider of Internet security software and technology, we may be the target of dedicated efforts by hackers and other third parties to overcome or defeat our security measures. Any physical or electronic break-in or other security breach or incident or compromise ~~of the~~impacting our products or any information stored at our secure data centers and domain name registration systems, including any compromise due to human error or employee or contractor malfeasance, may jeopardize the security of information stored on our premises or in the computer systems and networks of our customers. In such an event, we could face significant liability and current or potential customers could be reluctant to use our services. Additionally, any such data security incident, or the perception that one has occurred could also result in adverse publicity, harm to our reputation and competitive position, and therefore adversely affect the market’s perception of the security of electronic commerce and communications over IP networks as well as the security or reliability of our services.

A security breach or other security incident could require a substantial level of financial resources to ~~rectify~~address and otherwise respond to, may be difficult to identify or address in a timely manner, and could result in ~~a claim~~claims, investigations, inquiries, and ~~investigation~~other proceedings or actions by private parties or governmental entities that may divert management’s attention and require the expenditure of significant time and resources, and which may cause us to incur substantial fines, penalties, or other liability and related legal and other costs. Any actual or perceived security breach or other security incident may also harm our reputation and make it more difficult or impossible for us to successfully market to others. Any of the foregoing matters could harm our operating results and financial condition.

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Personal privacy, information security, and data protection are significant issues in the United States, Europe, and many other jurisdictions where we have operations or offer our products. The regulatory framework governing the collection, processing, storage and use of confidential and proprietary business information and personal data is rapidly evolving. The United ~~States.~~States federal and various state and foreign governments have adopted or proposed requirements regarding the collection, distribution, use, security and storage of personally identifiable information and other data relating to individuals, and federal and state consumer protection laws are being applied to enforce regulations related to the online collection, use and dissemination of data.

Further, many foreign countries and governmental bodies, including the European Union ~~(EU”~~(“EU”), where we conduct business, have laws and regulations concerning the collection and use of personal data obtained from their residents or by businesses operating within their jurisdiction. These laws and regulations often are more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure, and security of data that identifies or may be used to identify or locate an individual, such as names, email addresses and, in some jurisdictions, IP addresses.

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We also expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the EU, and other jurisdictions. For example, the European Commission ~~recently~~ adopted a General Data Protection Regulation (the “GDPR”) that became fully effective inon May 25, 2018, ~~that will supersede current~~superseding prior EU data protection legislation, ~~impose~~imposing more stringent EU data protection requirements, and ~~provide~~providing for greater penalties for noncompliance. The United Kingdom has enacted a Data Protection Act and legislation referred to as the UK GDPR that substantially implements the GDPR. We are evaluating obligations imposed on us by the GDPR and we may be required to incur substantial expense in order to make significant changes to our product and business operations in connection with obtaining and maintaining compliance with the GDPR and similar legislation, such as the UK GDPR and UK Data Protection Act, all of which may adversely affect our revenue and product sales. California has enacted legislation, the California Consumer Privacy Act (the “CCPA”) that, among other things, requires covered companies to provide disclosures to California consumers, and afford such consumers abilities to opt-out of certain sales of personal information. Additionally, the California Privacy Rights Act (the “CPRA”), was approved by California voters in the November 2020 election. The CPRA significantly modifies the CCPA, creating obligations relating to consumer data which began on January 1, 2022, with implementing regulations expected on or before July 1, 2022, and enforcement beginning July 1, 2023. Additionally, other U.S. states continue to propose, and in certain cases adopt, privacy-focused legislation. For example, in March 2021, Virginia enacted the Virginia Consumer Data Protection Act, which becomes effective on January 1, 2023, in June 2021, Colorado enacted the Colorado Privacy Act, which takes effect July 1, 2023, and in March 2022, Utah enacted the Utah Consumer Privacy Act, which takes effect December 31, 2023. We cannot yet fully determine the impact ~~such~~these or future laws, regulations and standards may have on our ~~business. Such~~business, but they may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. Privacy, data protection and information security laws and regulations are often subject to differing interpretations, may be inconsistent among jurisdictions, and may be alleged to be inconsistent with our current or future practices. Additionally, we may be bound by contractual requirements applicable to our collection, use, processing, and disclosure of various types of data, including personal data, and may be bound by, or voluntarily comply with, self-regulatory or other industry standards relating to these matters. These and other requirements could reduce demand for our products, increase our costs, impair our ability to grow ourbusiness, or restrict our ability to store and process data or, in some cases, impact our ability to offer our service in some locations and may subject us to liability. Any failure or perceived failure to comply with applicable laws, regulations, industry standards, and contractual obligations may adversely affect our business. Further, in view of new or modified federal, state, or foreign laws and regulations, industry standards, contractual obligations and other legal obligations, or any changes in their interpretation, we may find it necessary or desirable to fundamentally change our business activities and practices or to expend significant resources to modify our product and otherwise adapt to these changes. We may be unable to make such changes and modifications in a commercially reasonable manner or at all, and our ability to develop new products and features could be limited.

The costs of compliance with and other burdens imposed by laws, regulations and standards may limit the use and adoption of our service and reduce overall demand for it, or lead to significant fines, penalties, or liabilities for any noncompliance. Privacy, information security, and data protection concerns, whether valid or not valid, may inhibit market adoption of our platform, particularly in certain industries and foreign ~~countries.~~countries.

We expect that we will experience long and unpredictable sales cycles, which may impact our operating results.

The sales cycle between initial customer contact and execution of a contract or license agreement with a customer or purchaser of our products can vary widely. We expect that our sales cycles will be long and unpredictable due to several factors, including but not limited to:

The need to educate potential customers about our patent rights and our product and service capabilities;

Our customers’ willingness to invest potentially substantial resources and modify their network infrastructures to take advantage of our products;

Our customers’ budgetary constraints;

The timing of our customers’ budget cycles;

Delays caused by customers’ internal review processes; and

Long sales cycles that may increase the risk that our financial resources are exhausted before we are able to generate significant revenue.

In addition, potential customers of our products include local, state, federal and foreign government authorities. Sales to government authorities can be extended and unpredictable. Government authorities generally have complex budgeting, purchasing, and regulatory processes that govern their capital spending, and their spending is likely to be adversely impacted by economic conditions. In addition, in many instances, sales to government authorities may require field trials and may be delayed by the time it takes for government officials to evaluate multiple competing bids, negotiate terms, and award contracts.

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For these reasons, the sales cycle associated with our products is subject to a number of significant risks that are beyond our control. Consequently, if customer orders are not realized or delayed, our revenues and results of operations could be materially and adversely affected.

If we are unable to expand our revenue sources or establish, sustain, grow, or replace relationships with a diversified customer base, our revenues may be limited.

We currently generate revenue from a limited number of customers that have entered ~~Settlement~~settlement and ~~License Agreements. Although our GABRIEL Collaboration Suite is not~~license agreements. Our software products and services currently generating limited revenue, and it will take time for us to grow our installed user base and generate new customers. Additionally, there is no guarantee that we will be able to derive revenue from new customers, sustain or increase revenue from existing customers or replace customers from whom we currently generate revenue. As a result, our revenue may be limited or static.

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We have limited technical resources and are at an early stage in ~~the development and~~ commercialization of our ~~GABRIEL Collaboration Suite.~~VirnetX One™ platform and software products.

~~We currently have only one~~Part of our business includes the internal development of commercial ~~product, the GABRIEL Collaboration Suite.~~products we seek to monetize. This aspect of our business may require significant capital, time and resources and we cannot guarantee that it will be successful or meet our expectations. As such, we have a small technical team, which may limit our ability to rapidly adapt our product to customer requirements or add new product features to maintain our competitive edge and drive ~~adoption.~~ adoption.

Based on the scale of our technical resources, our limited historical financial data upon which to base our projected revenue or planned operating expenses related to our ~~GABRIEL Collaboration Suite,~~software products and services, we may not be able to effectively:

~~generate~~Generate revenues or profit from product sales;

~~drive~~Drive adoption of our products;

~~attract~~Attract and retain customers for our products;

~~provide~~Provide appropriate levels of customer training and support for our products;

~~implement~~Implement an effective marketing strategy to promote awareness of our products;

~~focus~~Focus our research and development efforts in areas that generate returns on our efforts;

~~anticipate~~Anticipate and adapt to changes in our market; or

~~protect~~Protect our products from any system failures or other breaches.

In addition, a high percentage of our expenses are and will continue to be fixed. Accordingly, if we do not generate revenue as and when anticipated, our losses may be greater than expected and our operating results will suffer.

Our products are highly technical and may contain undetected errors, which could cause harm to our reputation and adversely affect our business.

Our products are highly technical and complex and, when deployed, may contain errors or defects. Despite testing, some errors in our products may only be discovered after a product has been installed and used by customers. Any errors or defects discovered in our products after commercial release could result in failure to achieve market acceptance, loss of revenue or delay in revenue recognition, loss of customers and increased service and warranty cost, any of which could adversely affect our business, operating results, and financial condition. In addition, we could face claims for product liability, tort, or breach of warranty, including claims relating to changes to our products made by our channel partners. The performance of our products could have unforeseen or unknown adverse effects on the networks over which they are delivered as well as on third-party applications and services that utilize our services, which could result in legal claims against us, harming our business. Furthermore, we expect to provide implementation, consulting, and other technical services in connection with the implementation and ongoing maintenance of our products, which typically involves working with sophisticated software, computing, and communications systems. We expect that our contracts with customers will contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and adversely affect the market’s perception of us and our products. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business, operating results, and financial condition could be adversely impacted.

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Malfunctions of third-party communications infrastructure, hardware and software expose us to a variety of risks that we cannot control.

Our business will depend upon, among other things, the capacity, reliability, security, and ~~security~~unimpeded access of the infrastructure owned by third parties that we will use to deploy our offerings. We have no control over the operation, quality, or maintenance of a significant portion of that infrastructure or whether ~~or not~~ those third parties will upgrade or improve their equipment. We depend on these companies to maintain the operational integrity of our connections. If one or more of these companies is unable or unwilling to supply or expand its levels of service to us in the future, our operations could be severely interrupted. Also, to the extent that the number of users of networks utilizing our current or future products suddenly increases, the technology platform and secure hosting services which will be required to accommodate a higher volume of traffic may result in slower response times or service interruptions. System interruptions or increases in response time could result in a loss of potential or existing users and, if sustained or repeated, could reduce the appeal of the networks to users. In addition, users depend on real-time communications; outages caused by increased traffic could result in delays and system failures. These types of occurrences could cause users to perceive that our solution does not function properly and could therefore adversely affect our ability to attract and retain licensees, strategic partners, and customers.

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System failure or interruption or our failure to meet increasing demands on our systems could harm our business.

The success of our license and service offerings will depend on the uninterrupted operation of various systems, secure data centers and other computer and communication networks that we establish. To the extent, the number of users of networks utilizing our future products suddenly increases, the technology platform and hosting services which will be required to accommodate a higher volume of traffic may result in slower response times, service interruptions or delays or system failures. Our systems and operations will also be vulnerable to damage or interruption from, among other things:

~~power~~Power loss, transmission cable cuts and other telecommunications failures;

~~damage~~Damage or interruption caused by fire, earthquake, and other natural disasters;

~~computer~~Computer viruses or software defects; and

~~physical~~Physical or electronic break-ins, sabotage, intentional acts of vandalism, terrorist attacks and other events beyond our control.

System interruptions or failures and increases or delays in response time could result in a loss of potential or existing users and, if sustained or repeated, could reduce the appeal of the networks to users. These types of occurrences could cause users to perceive that our solution does not function properly and could therefore adversely affect our ability to attract and retain licensees, strategic partners, and customers.

Any significant problem with our systems or operations could result in lost revenue, customer dissatisfaction or lawsuits against us. A failure in the operation of our secure domain name registration system could result in the inability of one or more registrars to register and maintain secure domain names for a period of time. A failure in the operation or update of the master directory that we plan to maintain could result in deletion or discontinuation of assigned secure domain names for a period of time. The inability of the registrar systems we establish, including our back-office billing and collections infrastructure, and telecommunications systems to meet the demands of an increasing number of secure domain name requests could result in substantial degradation in our customer support service and our ability to process registration requests in a timely manner.

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Our ability to sell our solutions will be dependent on the quality of our technical support, and our failure to deliver high-quality technical support services could have a material adverse effect on our sales and results of operations.

If we do not effectively assist our customers in deploying our products, succeed in helping our customers quickly resolve ~~post-deployment~~post deployment issues and provide effective ongoing support, or if potential customers perceive that we may not be able achieve to the foregoing, our ability to sell our products would be adversely affected, and our reputation with current and potential customers could be harmed. In addition, as we expand our operations internationally, our technical support team will face additional challenges, including those associated with delivering support, training, and documentation in languages other than English. Our failure to deliver and maintain high-quality technical support services to our customers could result in customers choosing to use our competitors’ products and support services instead of ours in the ~~future.~~future.

Telephone carriers have petitioned governmental agencies to enforce regulatory tariffs, which, if granted, would increase the cost of online communication, and such increase in cost may impede the growth of online communication and adversely affect our business.

Use of the Internet has over-burdened existing telecommunications infrastructures, and many high traffic areas have begun to experience interruptions in service. As a result, certain local telephone carriers have petitioned governmental agencies to enforce regulatory tariffs on ~~IP telephony~~IP-telephony traffic that crosses over their traditional telephone networks. If the relief sought in these petitions is granted, the costs of communicating via online could increase substantially, potentially adversely affecting the growth in the use of online secure communications. Any of these developments could have an adverse effect on our business.

Our international expansion will subject us to additional costs and risks, and our plans may not be successful.

We expect to expand our presence internationally in Japan and elsewhere through third party arrangements such as international partnerships, joint ventures and potentially establishing international subsidiaries and offices. Our international expansion may present challenges and risks, including those inherent in international operations, to us and may require significant attention from management. For example, the COVID-19 pandemic has and could continue to disrupt and slow our international expansion and partnership efforts, as our international partners’ businesses could continue to be disrupted. We may not be successful in our international partnerships, expansion efforts, and we may incur significant operating expenses in our efforts to expand internationally.

The ~~departure~~global COVID-19 pandemic may harm our business, financial condition, and results of ~~Kendall Larsen,~~operations.

In December 2019, a novel coronavirus, COVID-19 was reported in China and in March 2020, the World Health Organization declared it a pandemic. This contagious disease outbreak and related variants have continued to spread across the globe and impact worldwide economic activity and financial markets. In light of the uncertain and rapidly evolving situation relating to the spread of COVID-19, we continue to take precautionary measures intended to minimize the risk of the virus to our ~~Chief Executive Officer~~employees, our customers, and ~~President, and/~~other third parties with whom we interact. We continue to require all employees to work remotely and have also suspended all non-essential travel worldwide for our employees. While we have a distributed workforce and our employees are accustomed to working remotely or working with other ~~key personnel~~remote employees, our workforce is not fully remote. Our employees and consultants travel frequently to establish and maintain relationships with one another, our customers and prospective customers, partners, and investors. Although we continue to monitor the situation and may adjust our current policies as more information and public health guidance becomes available, temporarily suspending travel and restricting the ability to do business in person could ~~compromise~~negatively affect our customer success efforts, sales and marketing efforts, challenge our ability to ~~execute~~enter into customer contracts in a timely manner, slow down our ~~strategic plan and may result in additional severance costs to us.~~

~~Our success largely depends on the skills, experience and~~recruiting efforts, of our key personnel, including Kendall Larsen, our Chief Executive Officer and President. We have no employment agreements with any of our key executives that prevent them from leaving us at any time. In addition, we do not maintain key person life insurance for any of our officers or ~~key employees. The loss of Mr. Larsen,~~create operational or ~~our failure to retain~~ other ~~key personnel, would jeopardize our ability to execute our strategic plan and materially harm our business.~~

~~We will need to recruit and retain additional qualified personnel to successfully grow our business.~~

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~~We may identify future material weakness which may result in late filings, increased costs or declines in our share price.~~

Although we believe that we currently maintain effective control over our disclosures and procedures and internal control over financial reporting, we may in the future identify deficiencies regarding the design and effectiveness of our system of internal control over financial reporting. If we experience any material weaknesses in our internal control over financial reporting the future or are unable to provide unqualified management or attestation reports about our internal controls, we may be unable to meet financial and other reporting deadlines and may incur costs associated with remediation, andchallenges, any of which could ~~cause~~harm our ~~share price~~business, financial condition and results of operations. Furthermore, if a natural disaster, power outage, connectivity issue, or other event occurred that impacted our employees’ ability to ~~decline.~~work remotely, it may be difficult or, in certain cases, not possible, for us to continue our business for a substantial period of time. The increase in remote working may also result in consumer privacy, IT security and fraud concerns as well as increase our exposure to potential wage and hour issues. In addition, the COVID-19 pandemic may disrupt the operations of our customers, partners, suppliers, and other third-party providers for an indefinite period of time, including as a result of travel restrictions, adverse effects on budget planning processes, and/or business shutdowns, all of which could negatively impact our business, financial condition, and results of operations. More generally, despite continued actions taken by governments and businesses to attempt to contain and treat the disease, and related variants, including the distribution and administration of effective vaccines, the COVID-19 pandemic could continue to adversely affect economies and financial markets globally, potentially leading to an economic downturn, which could decrease technology spending and adversely affect our business.

~~Risks Related to Our Common Stock~~

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We do not ~~currently~~regularly pay dividends on our common stock and thus stockholders must look to appreciation of our common stock to realize a gain on their investments.

Our dividend policy is within the discretion of our Board of Directors and will depend upon various factors, including our business, financial condition, results of operations, capital requirements, and investment opportunities. We therefore cannot make assurances that our Board of Directors will determine to pay regular or special dividends in the future. Accordingly, unless our Board of Directors determines to pay dividends, stockholders will be required to look to appreciation of our common stock to realize a gain on their ~~investment. This appreciation~~investment, which may not occur.

The exercise of our outstanding stock options, warrants, and RSUs and issuance of new shares would result in a dilution of our current stockholders’ voting power and an increase in the number of shares eligible for future resale in the public market which may negatively impact the market price of our stock.

The exercise of our outstanding vested stock options, warrants, and RSUs would dilute the ownership interests of our existing stockholders. As of September 30, ~~2017,~~2022, we had outstanding options, warrants and RSUs to purchase an aggregate of ~~5,834,497~~7,443,130 shares of common stock representing approximately ~~10%~~10.4% of our total shares outstanding of which ~~3,516,258~~5,109,386 were vested and therefore exercisable. To the extent outstanding stock options are exercised, additional shares of common stock will be issued, existing stockholders’ percentage voting interests will decline and the number of shares eligible for resale in the public market will increase. Such increase may have a negative effect on the value or market trading price of our common stock.

~~Trading in our common stock is limited and the price of our common shares may be subject to substantial volatility.~~

Our common stock is listed on NYSE MKT. Over the past years, the market price of our common stock has experienced significant fluctuations. Between October 1, 2016, and September 30, 2017, the reported last adjusted closing price on NYSE MKT for our common stock ranged between $1.85 and $5.30 per share. The price of our common stock may continue to be volatile as a result of several factors, some of which are beyond our control. These factors include, but not limited to, the following:

~~developments or lack thereof in any then-outstanding litigation;~~

~~quarterly variations in our operating results;~~

~~large purchases or sales of common stock or derivative transactions related to our stock;~~

~~actual or anticipated announcements of new products or services by us or competitors;~~

~~general conditions in the markets in which we compete; and~~

general social, political, economic and financial conditions, including the significant volatility in the global financial markets as a result of the announcement of the Referendum of the United Kingdom’s membership of the European Union, referred to as Brexit and concerns regarding the impact of the recent U.S. presidential election on domestic and international regulations.

In addition, we believe there has been and may continue to be substantial trading in derivatives of our stock, including short selling activity or related similar activities, which are beyond our control and which may be beyond the full control of the SEC and Financial Institutions Regulatory Authority or “FINRA”. While the SEC and FINRA rules prohibit some forms of short selling and other activities that may result in stock price manipulation, such activity may nonetheless occur without detection or enforcement. We have held conversations with regulators concerning trading activity in our stock; however, there can be no assurance that should there be any illegal manipulation in the trading of our stock, it will be detected, prosecuted or successfully eradicated. Significant short selling or other types of market manipulation could cause our stock trading price to decline, to become more volatile, or both.

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~~The market price of our common stock may decline because our operating results may not be consistent and may be difficult to predict.~~

Our reported net income has fluctuated in the past due to several factors. We expect that our future operating results may also fluctuate due to the same or similar factors. We had a net loss of $29.2 million for the year ended December 31, 2015, a net loss of $28.6 million for the year ended December 31, 2016, and a net loss of $11.2 million for the period ended September 30, 2017, with an accumulated deficit of $169 million. The following include some of the factors that may cause our operating results to fluctuate:

~~the outcome of actions to enforce our intellectual property rights currently in progress or that we may undertake in the future, and the timing thereof;~~

~~the amount and timing of receipt of license fees from potential infringers, licensees or customers;~~

~~the rate of adoption of our patented technologies;~~

the number of new license arrangements we may execute, or that may expire, within a particular period and the scope of those licenses, including the number of our patents which are licensed, the extent of prior infringement of our patent rights, royalty rates, timing of payment obligations, expiration date etc.;

~~the success of a licensee in selling products that use our patented technologies; and~~

~~the amount and timing of expenses related to our patent filings and enforcement proceedings, including litigation, related to our intellectual property rights.~~

These fluctuations may make our business particularly difficult to manage, adversely affect our business and operating results, make our operating results difficult for investors to predict and, further, cause our results to fall below investor’s expectations and adversely affect the market price of our common stock.

~~The market price of our common stock has been and may continue to be volatile, and you could lose all or part of your investment.~~

The trading price of our common stock has been volatile since our initial public offering, and is likely to continue to be volatile. Factors that could cause fluctuations in the market price of our common stock include, but are not limited to the following:

~~price and volume fluctuations in the overall stock market from time to time;~~

~~volatility in the market prices and trading volumes of companies in our industry or companies that investors consider comparable;~~

~~changes in operating performance and stock market valuations of other companies generally, or those in our industry;~~

~~sales of shares of our common stock by us or our stockholders;~~

~~failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow us, or our failure to meet these estimates or the expectations of investors;~~

~~the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;~~

~~announcements by us or our competitors of new products or services;~~

~~the public’s reaction to our press releases, other public announcements and filings with the SEC;~~

~~rumors and market speculation involving us or other companies in our industry;~~

~~actual or anticipated changes in our results of operations;~~

~~actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;~~

~~litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;~~

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~~announced or completed acquisitions of businesses or technologies by us or our competitors;~~

~~new laws or regulations or new interpretations of existing laws or regulations applicable to our business;~~

~~changes in accounting standards, policies, guidelines, interpretations or principles;~~

~~any significant change in our management; and~~

~~general economic conditions and slow or negative growth of our markets.~~

Further, in recent years the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. In addition, the stock prices of many technology companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, government shutdowns, interest rate changes the stability of the EU and the exit of the United Kingdom or international currency fluctuations, may cause the market price of our common stock to decline. In the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies.

Because ownership of our common stock is concentrated, investors may have limited influence on stockholder decisions.

As of September 30, ~~2017,~~2022, our executive officers and directors beneficially owned approximately ~~18%~~14% of our outstanding common stock. In addition, a group of stockholders that, as of December 31, 2007, held 4,766,666 shares, or approximately 8%7% of our outstanding common stock, have entered into a voting agreement with us that requires them to vote all of their shares of our voting stock in favor of the director nominees approved by our Board of Directors at each director election going forward, and in a manner that is proportional to the votes cast by all other voting shares as to any other matters submitted to the stockholders for a vote. However, we cannot be certain how many shares of our common stock this group of stockholders currently owns. Because of their beneficial ownership interest, our officers and directors could significantly influence stockholder actions of which you disapprove or that are contrary to your interests. This ability to exercise significant influence could prevent or significantly delay another company from acquiring or merging with ~~us.~~us.

Our protective provisions in our amended and restated certificate of incorporation and bylaws could make it difficult for a third party to successfully acquire us even if you would like to sell your stock to them.

We have a number of protective provisions in our amended and restated certificate of incorporation and bylaws that could delay, discourage, or prevent a third party from acquiring control of us without the approval of our Board of Directors. These protective provisions include:

A staggered Board of ~~Directors~~:Directors: This means that only one or two directors (since we have a five-person Board of Directors) will be up for election at any given annual meeting. This has the effect of delaying the ability of stockholders to affect a change in control of us because it would take two annual meetings to effectively replace a majority of the Board of Directors.

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Blank check preferred ~~stock~~:stock: Our Board of Directors has the authority to establish the rights, preferences, and privileges of our 10,000,000 authorized, but unissued, shares of preferred stock. Therefore, this stock may be issued at the discretion of our Board of Directors with preferences over your shares of our common stock in a manner that is materially dilutive to you. In addition, blank check preferred stock can be used to create a “poison pill” which is designed to deter a hostile bidder from buying a controlling interest in our stock without the approval of our Board of Directors. We have not adopted such a “poison pill;” but our Board of Directors has the ability to do so in the future, very rapidly and without stockholder approval.

Advance notice requirements for director nominations and for new business to be brought up at stockholder meetings: Stockholders wishing to submit director nominations or raise matters to a vote of the stockholders must provide notice to us within very specific date windows and in very specific form in order to have the matter voted on at a stockholder meeting. This has the effect of giving our Board of Directors and management more time to react to stockholder proposals generally and could also have the effect of disregarding a stockholder proposal or deferring it to a subsequent meeting to the extent such proposal is not raised properly.

•

~~Advance notice requirements for director nominations and for new business to be brought up at stockholder meetings~~: Stockholders wishing to submit director nominations or raise matters to a vote of the stockholders must provide notice to us within very specific date windows and in very specific form in order to have the matter voted on at a stockholder meeting. This has the effect of giving our Board of Directors and management more time to react to stockholder proposals generally and could also have the effect of disregarding a stockholder proposal or deferring it to a subsequent meeting to the extent such proposal is not raised properly.

No stockholder actions by written ~~consent~~:consent: No stockholder or group of stockholders may take actions rapidly and without prior notice to our Board of Directors and management or to the minority stockholders. Along with the advance notice requirements described above, this provision also gives our Board of Directors and management more time to react to proposed stockholder actions.

~~Index~~

Super majority requirement for stockholder amendments to the ~~By-laws~~:bylaws: Stockholder proposals to alter or amend our ~~By-laws~~bylaws or to adopt new ~~By-laws~~bylaws can only be approved by the affirmative vote of at least 66 2/3% of the outstanding shares of our common stock.

•

No ability of stockholders to call a special meeting of the stockholders: Only the Board of Directors or management can call special meetings of the stockholders. This could mean that stockholders, even those who represent a significant percentage of our shares of common stock, may need to wait for the annual meetingbefore nominating directors or raising other business proposals to be voted on by the stockholders.

~~No ability of stockholders to call a special meeting of the stockholders~~: Only the Board of Directors or management can call special meetings of the stockholders. This could mean that stockholders, even those who represent a significant percentage of our shares of common stock, may need to wait for the annual meeting before nominating directors or raising other business proposals to be voted on by the stockholders.

In addition, the provisions of Section 203 of the Delaware General ~~Corporate~~Corporation Law govern us. These provisions may prohibit large stockholders, ~~in particular~~particularly those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time.

These and other provisions in our amended and restated certificate of incorporation, our bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.

Our amended and restated bylaws designate a state or federal court located within the State of Delaware as the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers, or employees.

Our amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, stockholders, officers, or other employees to us or our stockholders, (3) any action arising pursuant to any provision of the Delaware General Corporation Law, or our amended and restated certificate of incorporation or amended and restated bylaws or (4) any other action asserting a claim that is governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another State court in Delaware or the federal district court for the District of Delaware), in all cases subject to the court having jurisdiction over indispensable parties named as defendants.

However, notwithstanding the exclusive forum provisions, our amended and restated bylaws explicitly state that they would not preclude the filing of claims brought to enforce any liability or duty created under federal securities laws, including the Securities Act or the Exchange Act.

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~~ITEM 6 —EXHIBITS.~~Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to this provision. This exclusive-forum provision may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If a court were to find this exclusive-forum provision in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm our results of operations.

General Risk Factors

We may need to raise additional capital to support our business growth, and this capital may be dilutive, may cause our stock price to drop or may not be available on acceptable terms, if at all.

We may need to raise additional capital, which may not be available to us when needed or may not be available on terms acceptable to us, to support our business growth or to respond to business opportunities, challenges, or unforeseen circumstances, including sales under our past and any future shelf registration statements. Our ability to obtain additional capital, if and when required, will depend on our business plans, investor demand, our operating performance, the condition of the capital markets, the terms of our current contractual obligations and other factors.

If we raise additional funds through the issuance of equity, equity-linked or debt securities, including those under our past and any future shelf registration statements, those securities may have rights, preferences, or privileges senior to the rights of our common stock, and our existing stockholders may experience dilution. Additionally, we are unable to predict the future success of any future offerings. Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales or other financings might occur, could depress the market price of our common stock, and could also impair our ability to raise capital through the sale of additional equity securities. If we issue debt securities or incur indebtedness, we could experience increased future payment obligations and a need to comply with restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to obtain additional capital or are unable to obtain additional capital on satisfactory terms, our ability to continue to support our business growth or to respond to business opportunities, challenges, or other circumstances could be adversely affected, and our business may be harmed.

The ~~documents listed~~departure of Kendall Larsen, our Chief Executive Officer and President, and/or other key personnel could compromise our ability to execute our strategic plan and materially harm our business.

Our success depends on the skills, experience, and performance of our key personnel. Due to the specialized nature of our business and limited staff, we are particularly dependent on Kendall Larsen, our Chief Executive Officer and President. We have no employment agreements with any of our key executives that prevent them from leaving us at any time. In addition, we do not maintain key person life insurance for any of our officers or key employees. The loss of Mr. Larsen, or our failure to retain other key personnel or plan for the succession of key personnel, would jeopardize our ability to execute our strategic plan and materially harm our business.

We will need to recruit and retain additional qualified personnel to successfully grow our business.

Our future success will depend, in part, on our ability to attract and retain qualified engineering, operations, marketing, sales and executive personnel. Inability to attract and retain such personnel could adversely affect our business. Competition for engineering, operations, marketing, sales, and executive personnel is intense, particularly in the ~~Exhibit Index~~technology and Internet sectors and in the regions where we conduct our business. We may need to invest significant amounts of cash and equity to attract and retain employees and expend significant time and resources to identify, recruit, train and integrate such employees, and we may never realize returns on these investments. Additionally, we can provide no assurance that we will attract or retain such personnel.

Index

We have incurred and will continue to incur significant costs as a result of operating as a public company, and our management will be required to continue to devote substantial time to various compliance initiatives.

The Sarbanes-Oxley Act of 2002, the ~~Quarterly Report~~Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as other rules implemented by the SEC and the New York Stock Exchange (“NYSE”), impose various requirements on ~~Form 10-Q~~public companies, including requiring changes in corporate governance practices. These and proposed corporate governance laws and regulations under consideration may further increase our compliance costs. If compliance with these various legal and regulatory requirements diverts our management’s attention from other business concerns, it could have a material adverse effect on our business, financial condition, and operating results. The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and disclosure controls and procedures quarterly. If we are ~~incorporated by reference~~unable to assert in any future reporting periods that our internal control over financial reporting is effective (or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls), such as our restatement of our previously issued consolidated financial statements and related material weakness as described in this report, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our share price.

Although we believe that we currently maintain effective control over our disclosures and procedures and internal control over financial reporting, we have identified in the past and may identify in the future deficiencies regarding the design and effectiveness of our system of internal control over financial reporting. If we experience any material weaknesses in our internal control over financial reporting in the future or are ~~filed~~unable to provide unqualified management or attestation reports about our internal controls, we may be unable to meet financial and other reporting deadlines and may incur costs associated with ~~this Quarterly Report on Form 10-Q,~~remediation, and any of which could cause our share price to decline. Moreover, if we identify deficiencies in ~~each case as indicated therein (numbered~~our internal control over financial reporting that are deemed to be material weaknesses in future periods, the market price of our common stock could decline, and we could be subject to potential delisting by the NYSE and review by the NYSE, the SEC, or other regulatory authorities, which would require the expenditure by us of additional financial and management resources. As a result, our shareholders could lose confidence in our financial reporting, which would harm our business and the market price of our common stock.

There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with ~~Item 601~~U.S. GAAP. Any changes in estimates, judgments and assumptions could have a material adverse effect on our business, financial condition, and operating results.

The preparation of ~~Regulation S-K).~~financial statements in accordance with U.S. GAAP involves making estimates, judgments and assumptions that affect reported amounts of assets (including intangible assets), liabilities and related reserves, revenues, expenses, and income. Estimates, judgments, and assumptions are inherently subject to change in the future, and any such changes could result in corresponding changes to the amounts of assets, liabilities, revenues, expenses, and income. Any such changes could have a material adverse effect on our business, financial condition, and operating results.

Our results of operations and financial condition could be materially affected by the enactment of legislation implementing changes in the U.S. or foreign taxation of international business activities or the adoption of other tax reform policies.

As we expand the scale of our international business activities, any changes in the U.S. or foreign taxation of such activities may increase our worldwide effective tax rate and harm our business, results of operations, and financial condition. For example, the current administration has proposed to increase the U.S. corporate income tax rate, increase U.S. taxation of international business operations, and impose a global minimum tax which has agreement from, many countries and the Organization for Economic Cooperation and Development. Also, starting in fiscal year 2022, the Tax Cuts and Jobs Act requires taxpayers to capitalize research and development expenditures and to amortize domestic expenditures over five years and foreign expenditures over fifteen years. If Congress does not modify or repeal this provision, it may reduce our cash flows beginning in fiscal year 2022. Other countries have recently proposed or recommended changes to existing tax laws or have enacted new laws that could impact our tax obligations in countries where we do business or cause us to change the way we operate our business. The impact of future changes to U.S. and foreign tax law on our business is uncertain and could be adverse, and we will continue to monitor and assess the impact of any such changes on our future tax provisions.

Index

~~SIGNATURES~~War, terrorism, other acts of violence, or natural or manmade disasters may affect the markets in which we operate, our clients and our service delivery.

~~Pursuant~~Our business may be adversely affected by instability, disruption, or destruction in a geographic region in which we operate, regardless of cause, including war, terrorism, riot, civil insurrection, or social unrest, and natural or manmade disasters, including famine, flood, fire, earthquake, storm, or pandemic events and spread of disease, such as the COVID-19 pandemic and the Russian invasion of Ukraine. Such events may cause our customers to delay their decisions on spending for the services we provide and give rise to sudden significant changes in regional and global economic conditions and cycles. These events may also pose risks to our personnel and to physical facilities and operations, which could adversely affect our financial results.

Trading in our common stock is limited and the price of our common shares may be subject to substantial volatility.

Our common stock is currently listed on the NYSE and was previously listed on the NYSE American LLC (formerly the NYSE MKT LLC). Over the past years, the market price of our common stock has experienced significant fluctuations. Between October 1, 2021, and September 30, 2022, the reported last adjusted closing price on the NYSE American LLC, and now NYSE, for our common stock ranged between $1.03 and $4.36 per share. The price of our common stock may continue to be volatile as a result of several factors, some of which are beyond our control. These factors include, but not limited to, the ~~requirements~~following:

Developments or lack thereof in any then-outstanding litigation;

Quarterly variations in our operating results;

Large purchases or sales of common stock or derivative transactions related to our stock;

Actual or anticipated announcements of new products or services by us or competitors;

General conditions in the markets in which we compete; and

General social, political, economic, and financial conditions, including the significant volatility in the global financial markets.

In addition, we believe there has been and may continue to be substantial trading in derivatives of our stock, including short selling activity or related similar activities, which are beyond our control, and which may be beyond the full control of the ~~Securities Exchange~~SEC and Financial Institutions Regulatory Authority or “FINRA.” While the SEC and FINRA rules prohibit some forms of short selling and other activities that may result in stock price manipulation, such activity may nonetheless occur without detection or enforcement. We have held conversations with regulators concerning trading activity in our stock; however, there can be no assurance that should there be any illegal manipulation in the trading of our stock, it will be detected, prosecuted, or successfully eradicated. Significant short selling market manipulation could cause our stock trading price to decline, to become more volatile, or both.

The market price of our common stock has been and may continue to be volatile, and you could lose all or part of your investment.

The trading price of our common stock has been historically volatile and is likely to continue to be volatile. Factors that could cause fluctuations in the market price of our common stock include, but are not limited to the following:

Price and volume fluctuations in the overall stock market from time to time, including fluctuations due to general economic uncertainty or negative market sentiment;

Volatility in the market prices and trading volumes of companies in our industry or companies that investors consider comparable;

Changes in operating performance and stock market valuations of other companies generally, or those in our industry;

Sales of shares of our common stock by us or our stockholders;

Failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow us, or our failure to meet these estimates or the expectations of investors;

Index

The financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;

Announcements by us or our competitors of new products or services;

The public’s reaction to our press releases, other public announcements, and filings with the SEC;

Rumors and market speculation involving us or other companies in our industry;

Actual or anticipated changes in our results of operations;

Actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape generally;

Litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;

Announced or completed acquisitions of businesses or technologies by us or our competitors;

New laws or regulations or new interpretations of existing laws or regulations applicable to our business;

Changes in accounting standards, policies, guidelines, interpretations, or principles;

Any significant change in our management; and

General economic conditions and slow or negative growth of our markets, including any economic downturn from the COVID-19 pandemic.

Further, in recent years the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. In addition, the stock prices of many technology companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, government shutdowns, global pandemics (such as the COVID-19 pandemic), interest rate changes the stability of the EU (including, but not limited to, effects from the exit of the United Kingdom or international currency fluctuations, may cause the market price of our common stock to decline. In the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies.

We have broad discretion in how we apply our funds, and we may not use these funds effectively, which could affect our results of operations and cause our stock price to decline.

Our management has broad discretion in the application of our existing cash, cash equivalents and investments and could spend these funds in ways that do not improve our results of operations or enhance the value of our common stock. Pending their use, we may invest our available funds in a manner that does not produce income or that loses value. The failure by our management to apply our available funds effectively could result in financial losses that could cause the price of our common stock to decline and delay the development of our products.

In addition, an entity that, among other things, is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, owning, trading, or holding certain types of securities would be deemed an Investment Company under the Investment Company Act of ~~1934,~~1940 (the “1940 Act”). If we do not manage our investments and business in a manner that meets the ~~registrant~~requirements for an exemption under the 1940 Act, we may be deemed to be an investment company under the 1940 Act and subject to additional limitations on operating our business including limitations on the issuance of securities, which may make it difficult for us to raise capital.

Index

The market price of our common stock may decline because our operating results may not be consistent and may be difficult to predict.

Our reported net income has ~~duly caused~~fluctuated in the past due to several factors. We expect that our future operating results may also fluctuate due to the same or similar factors. We had a net loss of $12.0 million for the nine months ended September 30, 2022. We had a net loss of $42.9 million for the year ended December 31, 2021 and net income of $280.4 million for the year ended December 31, 2020. As of September 30, 2022, we had an accumulated deficit of $63.0 million. The following include some of the factors that may cause our operating results to fluctuate:

The outcome of actions to enforce our intellectual property rights currently in progress or that we may undertake in the future, and the timing thereof;

The impact of the COVID-19 pandemic on our sales cycle and results;

The amount and timing of receipt of license fees from potential infringers, licensees, or customers;

The rate of adoption of our patented technologies;

The number of new license arrangements we may execute, or that may expire, within a particular period and the scope of those licenses, including the number of our patents which are licensed, the extent of prior infringement of our patent rights, royalty rates, timing of payment obligations, expiration date etc.;

The success of a licensee in selling products that use our patented technologies; and

The amount and timing of expenses related to our patent filings and enforcement proceedings, including litigation, related to our intellectual property rights.

Risks Related to Restatement of our Consolidated Financial Statements

We have had to restate our previously issued consolidated financial statements and as part of that process have identified a material weakness in our internal control over financial reporting as of December 31, 2021. If we are unable to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us and materially and adversely affect our business and results of operations.

On May 9, 2022, the audit committee of our board of directors concluded, after discussion with our management and Farber Hass Hurley LLP, our auditors, that the previously issued financial statements during the year ended December 31, 2021 (1) should no longer be relied upon due to an overstatement of the Company’s deferred tax asset, as described in the Amendment, and (2) require restatement. As part of the restatement process, we identified a material weakness in our internal control over financial reporting. We remediated our procedures to address the material weakness and believe the enhanced control is operating effectively. Any failure to maintain effective internal controls could adversely impact our ability to report our financial position and results of operations on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed on a timely basis, we could be subject to sanctions or investigations by the stock exchange on which our ordinary shares and other securities are listed, the SEC or other regulatory authorities. In either case, there could result a material adverse effect on our business. Ineffective internal controls could also cause investors to lose confidence in our reported financial information which could have a negative effect on the trading price of our stock.

Index

We may face litigation and other risks as a result of the restatement and material weakness in our internal control over financial reporting.

As part of the restatement, we identified a material weakness in our internal control over financial reporting. As a result of such material weakness and the restatement, we face potential for litigation or other disputes which may include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the restatement and the material weakness in our internal control over financial reporting and the preparation of our financial statements. As of the date of this report, ~~to be signed~~we have no knowledge of any such litigation or dispute. However, we can provide no assurance that such litigation or dispute will not arise in the future. Any such litigation or dispute, whether successful or not, could have a material adverse effect on ~~its behalf by the undersigned thereunto duly authorized.~~our business, results of operations and financial condition.

	~~VIRNETX HOLDING CORPORATION~~

	~~By:~~	~~/s/ Kendall Larsen~~
		~~Name~~	~~Kendall Larsen~~

		~~Title~~	~~Chief Executive Officer (Principal Executive Officer)~~

	~~By:~~	~~/s/ Richard H. Nance~~
		~~Name~~	~~Richard H. Nance~~

		~~Title~~	~~Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)~~

~~Date: November 9, 2017~~

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ITEM 5~~EXHIBIT INDEX~~ — EXHIBITS

Exhibit Number	Description
10.1*	~~Amended and Restated Revenue Sharing Agreement between Registrant and Public Intelligence Technology Associates, kk, dated as of October 18, 2017.~~
~~10.2~~	~~Amended and Restated Gabriel License Agreement between Registrant and Public Intelligence Technology Associates, kk, dated as of October 18, 2017.~~
31.1**31.1	Certification of the President and Chief Executive Officer, pursuant to Exchange Act Rules ~~13a – 14(a)~~13a-14(a) and ~~15d – 14(a)~~15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**31.2	Certification of the Chief Financial Officer, pursuant to Exchange Act Rules ~~13a – 14(a)~~13a-14(a) and ~~15d – 14(a)~~15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1***	Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2***	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
~~101~~101.INS	Inline XBRL Instance Document.
101.SCH	Inline XBRL Taxonomy Extension Schema Document.
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104	Cover Page Interactive Data ~~Files~~File (formatted as inline XBRL and contained in Exhibit 101).

*	~~Portions of this Exhibit have been omitted pursuant to a request for confidential treatment. The omitted portions were filed separately with the Securities and Exchange Commission.~~

**	~~Filed herewith.~~

~~***~~

~~The certifications attached as Exhibit 32.1 and Exhibit 32.2 that accompany this Quarterly Report on Form 10-Q are~~This exhibit is furnished herewith, but not deemed ~~furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing~~“filed” for purposes of ~~VirnetX Holding Corporation under the Securities Act~~Section 18 of ~~1933, as amended, or~~ the Securities Exchange Act of 1934, as amended, ~~whether made before~~ or ~~after~~otherwise subject to liability under that section. Such certifications will not be deemed to be incorporated by reference in any filing under the ~~date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.~~Securities Act or the Exchange Act, except to the extent that we explicitly incorporate them by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	VIRNETX HOLDING CORPORATION

	By:	/s/ Kendall Larsen
		Name	Kendall Larsen

			Chief Executive Officer (Principal Executive Officer)

	By:	/s/ Katherine Allanson
		Name	Katherine Allanson

			Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Date: November 8, 2022

Warrants Issued				Exercise Price				Outstanding and Exercisable December 31, 2021				Issued				Exercised				Terminated / Cancelled				Outstanding and Exercisable September 30, 2022			Expiration Date
	25,000			$	5.75				25,000				—				—				—				25,000		April 30, 2025

Original Number of Warrants Issued		Exercise Price per Common Share		Exercisable at December 31, 2016		Became Exercisable		Exercised		Terminated / Cancelled / Expired		Exercisable at September 30, 2017		Expiration Date
	25,000	$	7.00		25,000		—		—		—		25,000	April 2020
					25,000		—		—		—		25,000

	Three Months Ended						Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
Revenue	$	375		$	375		$	1,146		$	1,148
Operating expense:
Royalty expense		—			884			—			884
Research and development		481			460			1,473			1,391
Selling, general and administrative expenses		3,456			6,318			10,953			20,132
Total operating expense		3,937			7,662			12,426			22,407
Loss from operations		(3,562	)		(7,287	)		(11,280	)		(21,259	)
Interest and other income, net		9			19			40			50
Loss before taxes		(3,553	)		(7,268	)		(11,240	)		(21,209	)
Income tax benefit (expense)		1			(119	)		(4	)		(126	)
Net loss	$	(3,552	)	$	(7,387	)	$	(11,244	)	$	(21,335	)
Basic and diluted loss per share	$	(0.06	)	$	(0.13	)	$	(0.19	)	$	(0.38	)
Weighted average shares outstanding basic and diluted		58,306			56,651			58,216			55,503

	Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016
Cash flows from operating activities:
Net loss	$	(11,244	)	$	(21,335	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		21			22
Amortization of warrant issuance costs		—			30
Stock-based compensation		2,780			3,979
Changes in assets and liabilities:
Prepaid expenses and other assets		184			238
Accounts payable and accrued liabilities		(1,004	)		549
Accrued payroll and related expenses		(1,270	)		(1,290	)
Other current liabilities		140			—
Royalty payable		—			884
Related-party payable		—			83
Income tax liability		(2	)		—
Deferred revenue		(1,125	)		1,375
Net cash used in operating activities		(11,520	)		(15,465	)
Cash flows from investing activities:
Purchase of property and equipment		—			(14	)
Purchase of investments		(756	)		(7,888	)
Proceeds from sale or maturity of investments		7,338			8,615
Net cash provided by investing activities		6,582			713
Cash flows from financing activities:
Proceeds from exercise of options		—			20
Proceeds from sale of common stock		—			14,626
Payments of taxes on cashless exercise of restricted stock units		(42	)		(93	)
Net cash (used in) provided by financing activities		(42	)		14,553
Net decrease in cash and cash equivalents		(4,980	)		(199	)
Cash and cash equivalents, beginning of period		6,627			8,726
Cash and cash equivalents, end of period	$	1,647		$	8,527
Cash paid for income taxes	$	—		$	126

Deferred Revenue, December 31, 2016	$	4,000
Less: Amount amortized as revenue		1,125
Deferred Revenue, September 30, 2017	$	2,875

	September 30, 2017
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Investments Available for Sale
Cash	$	1,427	$	-	$	-		$	1,427	$	1,427	$	-

Level 1:
Mutual funds		220		-		-			220		220		-
U.S. agency securities		2,667		-		(2	)		2,665		-		2,665
		2,887		-		(2	)		2,885		220		2,665
Total	$	4,314	$	-	$	(2	)	$	4,312	$	1,647	$	2,665