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, 20192020
or

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


Commission file number: 001-33852




graphic
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  Classeach classTrading SymbolSymbolsName of Exchangeeach exchange on Whichwhich Registered
Common Stock, par value $0.0001 per shareVHCNYSE American LLCNew York Stock Exchange


Indicate by check mark whether the 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 ☐


Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files). Yes ☒ No  ☐


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

Large accelerated filer ☐
Accelerated filer ☒
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒


69,510,09771,058,570 shares of Registrant’s Common Stock were outstanding as of November 6, 2019.

4, 2020.


SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS


We have included or incorporated by reference in this Quarterly Report on Form 10-Q10-Q (including in the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations), and from time to time we may make statements that may constitute “forward-looking statements” within the meaning of Section 27A27A of the Securities Act of 1933, as amended, and Section 21E21E of the Securities Exchange Act of 1934, as amended. 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 1A1A - Risk Factors of this Quarterly Report on Form 10-Q and elsewhere in this Quarterly Report and those described from time to time in our future reports filed with the Securities and Exchange Commission. 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 to be 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:


•          We have been awarded damages in the amount of $439.7 million in the VirnetX Inc. v. Cisco Systems, Inc. et al. (Case 6:10-CV-00417-LED) (“Apple I”) litigation and $595.9 million in●In the VirnetX Inc. v. Apple, Inc. (Case 6:12-CV-00855-LED)Nos. 6:11-cv-00563-RWS, 6:12-cv-00855-RWS) (“Apple II”) litigation. Taken together, these statements may imply that we may soon receive over $1 billionlitigation, in cash. TheNovember 2019, the United States Court of Appeals for the Federal Circuit (“USCAFC”(the “Federal Circuit”) affirmed-in-part and reversed-in-part the judgment issued a Rule 36 order affirming the District Court Judgment in the Apple I case and subsequently denied the request for rehearing and rehearing en-banc filed by Apple. However, (1) Apple may file a petition for a writ of certiorari with the Supreme Court of the United States District Court for the Eastern District of Texas (the “district court”) in the case awarding VirnetX damages of $595.9 million. The Federal Circuit affirmed the district court’s ruling that Apple Inc. (“Apple”) was precluded from challenging the USCAFC decisionvalidity of the asserted patents, and also affirmed the jury’s finding of infringement with respect to Apple’s VPN on Demand feature. The Federal Circuit reversed, however, the finding of infringement with respect to Apple’s FaceTime feature. The Federal Circuit remanded to the district court for an assessment of whether, given that only VPN on Demand infringed. In its order, unsealed on May 1,2020, the district court 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 district court granted Apple’s motion for continuance and reset the jury selection and trial to October 26,2020.On October 30, 2020, a federal jury in Apple I litigationthe U.S. District Court for the Eastern District of Texas issued a $502,848,847 verdict in favor of VirnetX. The jury verdict called for damages of $0.84 per accused device since the 2013 launch of Apple's iOS 7 operating system and ifrepresents 598,629,580 infringing units from US sales only. On March 13, 2020, VirnetX was paid a $454,033,859 judgment in a separate case against Apple. In addition, the Supreme Court grants certiorari,patents in issue are being challenged in the USCAFC’s decision may be reversed or vacated, or (2) Apple has appealedUnited States Patent and Trademark Office. If those challenges are successful, they could also impact the awardsaward in Apple II litigations and the court’s or jury’s decisions may be reversed or amended upon appeal, or (3) we may be unsuccessful in our appeal of certain actions by the Patent Trial and Appeals Board that have been initiated by Apple or other parties -- if any of these occur, they may have the effect of thwarting entirely, or reducing or delaying payments to us.case. The continuation of these litigationsthis litigation is distracting to our management,  and expensive, and this distractionthese distractions and expenseexpenses may continue.


•●          We have undertaken activities to commercialize our products and patent portfolio in and outside the United States. These statements may imply that the worldwide market for our commercialized products is large and will result in significant future revenues for us. However, commercialization of products such as ours are 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 I and Apple II litigationslitigation before entering or considering to enter any agreement with us, and that or other factors may lead us to be unsuccessful in obtaining further licensing agreements or making arrangements or entering contracts which create 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.


Index
VIRNETX HOLDING CORPORATION

INDEX


  Page
   
PART I — FINANCIAL INFORMATION
12
 
Item 1 —Condensed— Condensed Consolidated Financial Statements.
12
   
 
Condensed Consolidated Balance Sheets at September 30, 20192020 (unaudited) and December 31, 20182019
12
 
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 20192020 and 20182019 (unaudited)
23
 
Condensed Consolidated Statements of Comprehensive LossIncome (Loss) for the three and nine months ended September 30, 20192020 and 20182019 (unaudited)
23
 
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for each of the three and nine months ended September 30, 20192020 and September 30, 20182019 (unaudited)
34
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20192020 and 20182019 (unaudited)
56
 
Notes to Condensed Consolidated Financial Statements
6
7
 
Item 2 —Management’s— Management's Discussion and Analysis of Financial Condition and Results of Operations
14
15
 
Item 3 —Quantitative— Quantitative and Qualitative Disclosures About Market Risk
18
20
 
Item 4 —Controls and Procedures
1820
   
PART II — OTHER—OTHER INFORMATION
1921
 
Item 1 —Legal Proceedings
19
21
 
Item 1A —Risk Factors
22
23
 
Item 6 —Exhibits
3335
   
SIGNATURES
3436
EXHIBIT INDEX
3537



1
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,
2019
  
As of
December 31, 2018
  
As of
September 30,
2020
  
As of
December 31, 2019
 
ASSETS (unaudited)     (unaudited)    
      
Current assets:            
      
Cash and cash equivalents $2,572  $7,611  $225,911  $3,135 
Investments available for sale 2,621  1,803   22,077   2,394 
Accounts receivables 6  6 
Accounts receivable  6   5 
Prepaid expenses and other current assets  315   718   396   237 
Total current assets  5,514   10,138   248,390   5,771 
Other assets 1,721  1,604 
Prepaid expenses and other assets  1,389   1,711 
Property and equipment, net  5   9   12   16 
Deferred tax asset  8,754   0 
Total assets $7,240  $11,751  $258,545  $7,498 
              
LIABILITIES AND STOCKHOLDERS’ EQUITY              
Current liabilities:        
Accounts payable and accrued liabilities $583  $1,346 
Accrued licensing costs  9,438   0 
Accrued payroll and related expenses  299   287 
Other liabilities, current  53   193 
Income taxes payable  17,414   0 
Total current liabilities  27,787   1,826 
              
Current liabilities:      
      
Accounts payable and accrued liabilities $1,168  $1,050 
Accrued payroll and related expenses 292  277 
Other current liabilities 140  140 
Income tax liability  —   396 
Total current liabilities  1,600   1,863 
Other liabilities  4   44 
Total liabilities  27,791   1,870 
              
Commitments and contingencies (Note 4) —  —       
              
Stockholders’ equity:              
Preferred stock, par value $0.0001 per share Authorized: 10,000,000 shares at September 30, 2019 and December 31, 2018 Issued and outstanding: 0 shares at September 30, 2019 and December 31, 2018 —  — 
Common stock, par value $0.0001 per share Authorized: 100,000,000 shares at September 30, 2019 and December 31, 2018 Issued and outstanding: 68,958,301 shares and 66,879,847 shares, at September 30, 2019 and December 31, 2018, respectively 7  7 
Preferred stock, par value $0.0001 per share authorized: 10,000,000 shares at September 30, 2020 and December 31, 2019, issued and outstanding: 0 shares at September 30, 2020 and December 31,2019  0   0 
Common stock, par value $0.0001 per share authorized: 100,000,000 shares at September 30, 2020 and December 31, 2019, issued and outstanding: 71,058,570 shares and 69,586,764 shares, at September 30, 2020 and December 31, 2019, respectively  7   7 
Additional paid-in capital 218,761  208,317   231,322   223,237 
Accumulated deficit (213,116) (198,422)  (563)  (217,602)
Accumulated other comprehensive loss  (12
)
  (14)  (12)  (14)
Total stockholders’ equity  5,640   9,888   230,754   5,628 
Total liabilities and stockholders’ equity $7,240  $11,751  $258,545  $7,498 


See accompanying notes to condensed consolidated financial statements.


2
1
Index

VIRNETX HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share amounts)


 Three Months Ended  Nine Months Ended  Three Months Ended  Nine Months Ended 
 
September 30,
2019
  
September 30,
2018
  
September 30,
2019
  
September 30,
2018
  September 30, 2020  September 30, 2019  September 30, 2020  September 30, 2019 
Revenue $4  $7  $50  $28  $26  $4  $302,620  $50 
Operating expense:                            
Licensing costs  0   0   90,101   0 
Research and development 964  932  2,886  3,123   1,091   964   6,799   2,886 
Selling, general and administrative expenses  4,016   4,023   12,326   15,923   4,270   4,016   38,347   12,326 
Total operating expense  4,980   4,955   15,212   19,046   5,361   4,980   135,247   15,212 
Loss from operations (4,976) (4,948) (15,162) (19,018)
Income (loss) from operations  (5,335)  (4,976)  167,373   (15,162)
Gain  0   0   41,271   0 
Interest and other income, net  20   14   75   34   17   20   108,272   75 
Loss before taxes (4,956) (4,934) (15,087) (18,984)
Income (loss) before taxes  (5,318)  (4,956)  316,916   (15,087)
Income tax benefit (expense)  —   —   393   (5
)
  1,293   0   (29,036)  393 
Net loss $(4,956
)
 $(4,934
)
 $(14,694
)
 $(18,989
)
Basic and diluted loss per share $(0.07
)
 $(0.08
)
 $(0.22
)
 $(0.31
)
Weighted average shares outstanding basic and diluted  68,943   63,385   68,278   61,691 
Net income (loss) $(4,025) $(4,956) $287,880  $(14,694)
Basic earnings (loss) per share $(0.06) $(0.07) $4.07  $(0.22)
Diluted earnings (loss) per share $(0.06) $(0.07) $4.02  $(0.22)
Weighted average shares outstanding, basic  71,059   68,943   70,780   68,278 
Weighted average shares outstanding, diluted  71,059   68,943   71,663   68,278 


VIRNETX HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSINCOME (LOSS) (Unaudited)
(in thousands)


 Three Months Ended  Nine Months Ended  Three Months Ended  Nine Months Ended 
 
September 30,
2019
  
September 30,
2018
  
September 30,
2019
  
September 30,
2018
  September 30, 2020  September 30, 2019  September 30, 2020  September 30, 2019 
Net loss $(4,956) $(4,934) $(14,694) $(18,989)
Net income (loss) $(4,025) $(4,956) $287,880  $(14,694)
Other comprehensive gain (loss), net of tax:                            
Change in unrealized gain (loss) on investments, net of tax  1   (1
)
  2   (1)  0   1   1   2 
Change in foreign currency translation, net  0   0   1   0 
  1   (1
)
  2   (1
)
  0   1   2   2 
Comprehensive loss $(4,955
)
 $(4,935
)
 $(14,692
)
 $(18,990
)
Comprehensive income (loss) $(4,025) $(4,955) $287,882  $(14,692)


See accompanying notes to condensed consolidated financial statements.


3
2
Index
VIRNETX HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(in thousands, except per share amounts)

For the Three and Nine Months Ended September 30, 2019

  Common Stock  
Additional
Paid-in
Capital
  
Accumulated
Deficit
  
Accumulated
Other
Comprehensive
Loss
  
Total
Stockholders’
Equity
(Deficit)
 
  Shares
  Amount
             
Balance, December 31, 2018  66,879,847  $7  $208,317  $(198,422) $(14) $9,888 
Stock issued for cash at $5.05 -$5.42 per share, net  560,338       2,848           2,848 
Stock-based compensation          785           785 
Exercise of options  663,816       816           816 
Comprehensive loss:                        
Net Loss              (5,608)      (5,608)
Other comprehensive income (loss), net of tax                  1   1 
Comprehensive loss                      (5,607)
Balance, March 31, 2019  68,104,001  $7  $212,766  $(204,030) $(13) $8,730 
Stock issued for cash at $6.02 -$6.49 per share, net  467,928       2,849           2,849 
Stock-based compensation          928           928 
Stock issued for vested RSUs  182,618                     
Comprehensive loss:                        
Net Loss              (4,130)      (4,130)
Comprehensive loss                      (4,130)
Balance, June 30, 2019  68,754,547  $7  $216,543  $(208,160) $(13) $8,377 
Stock issued for cash at $5.53 -$6.28 per share, net  203,754       1,219           1,219 
Stock-based compensation          999           999 
Comprehensive loss:                        
Net Loss              (4,956)      (4,956)
Other comprehensive income (loss), net of tax                  1   1 
Comprehensive loss                      (4,955)
Balance, September 30, 2019  68,958,301  $7  $218,761  $(213,116) $(12) $5,640 

VIRNETX HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(in thousands, except per share amounts)


 Common Stock  
Additional
Paid-in
  
Retained Earnings
(Accumulated
  
Accumulated
Other
Comprehensive
  
Total
Stockholders’
Equity
 
  Shares  Amount  Capital  Deficit)  Loss  (Deficit) 
Balance, December 31, 2019  69,586,764  $7  $223,237  $(217,602) $(14) $5,628 
Stock issued for cash, $4.00 - $4.96, net  1,049,382       4,488           4,488 
Stock-based compensation          778           778 
Stock issued for options and RSUs, net  202,031       768           768 
Comprehensive income:                        
Net income              299,945       299,945 
Change in unrealized gain, net                  2   2 
Change in foreign currency, net                  1   1 
Comprehensive income                      299,948 
Balance, March 31, 2020  70,838,177   7   229,271   82,343   (11)  311,610 
Stock-based compensation          953           953 
Warrant issued for services          104           104 
Stock issued for options and RSUs, net  220,393       (78)          (78)
Dividends paid              (70,841)      (70,841)
Comprehensive loss:                        
Net loss              (8,040)      (8,040)
Change in unrealized loss, net                  (1)  (1)
Comprehensive loss                      (8,041)
Balance, June 30, 2020  71,058,570  $7  $230,250  $3,462  $(12) $233,707 
Stock-based compensation          1,072           1,072 
Comprehensive loss:                        
Net loss              (4,025)      (4,025)
Comprehensive loss                      (4,025)
Balance, September 30, 2020  71,058,570  $7  $231,322  $(563) $(12) $230,754 

ForDividends paid in the Threethree and Nine Months Ended nine months ended September 30, 20182020 totaled $0 and $1.00 per share, respectively.

  Common Stock  
Additional
Paid-in
Capital
  
Accumulated
Deficit
  
Accumulated
Other
Comprehensive
Loss
  
Total
Stockholders’
Equity
(Deficit)
 
  Shares  Amount             
Balance, December 31, 2017  59,051,978  $6  $177,076  $(175,516) $(13) $1,553 
Cumulative effects of accounting change ASC 606              2,500       2,500 
Stock issued for cash at $4.02 per share, net  1,751,689       6,830           6,830 
Stock-based compensation          887           887 
Stock issued for vested RSUs  20,000                     
Comprehensive loss:                        
Net Loss              (7,605)      (7,605)
Other comprehensive income (loss), net of tax                  1   1 
Comprehensive loss                      (7,604)
Balance, March 31, 2018  60,823,667  $6  $184,793  $(180,621) $(12) $4,166 
Stock issued for cash at $3.45 - $4.13 per share, net  1,320,921       4,809           4,809 
Stock-based compensation          1,121           1,121 
Stock issued for vested RSUs  148,219                     
Comprehensive loss:                        
Net Loss              (6,450)      (6,450)
Comprehensive loss                      (6,450)
Balance, June 30, 2018  62,292,807  $6  $190,723  $(187,071) $(12) $3,646 
Stock issued for cash at $3 - $4.89 per share, net  4,083,377   1   13,634           13,635 
Stock-based compensation          1,018           1,018 
Comprehensive loss:                        
Net Loss              (4,934)      (4,934)
Other comprehensive income (loss), net of tax                  (2
)
  (2
)
Comprehensive loss                      (4,936)
Balance, September 30, 2018  66,376,184  $7  $205,375  $(192,004) $(14) $13,363 

VIRNETX HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)

  Nine Months Ended 
  
September 30,
2019
  
September 30,
2018
 
Cash flows from operating activities:      
Net loss $(14,694) $(18,989)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation  4   14 
Stock-based compensation  2,712   3,026 
Changes in assets and liabilities:        
Prepaid expenses and other assets  286   89 
Accounts payable and accrued liabilities  118   (18)
Accrued payroll and related expenses  62   (1,882)
Accounts receivable  —   (4)
Income tax liability  (396)  5 
Net cash used in operating activities  (11,908)  (17,759)
Cash flows from investing activities:        
Purchase of investments  (5,319)  (1,430)
Proceeds from sale or maturity of investments  4,503   2,219 
Net cash (used in) provided by investing activities  (816)  789 
Cash flows from financing activities:        
Proceeds from exercise of options  816   — 
Proceeds from sale of common stock  6,916   25,273 
Payments of taxes on cashless exercise of restricted stock units  (47)  (42
)
Net cash provided by financing activities  7,685   25,231 
Net increase (decrease) in cash and cash equivalents  (5,039)  8,261 
Cash and cash equivalents, beginning of period  7,611   3,135 
Cash and cash equivalents, end of period $2,572  $11,396 
Cash paid for income taxes $—  $3 
Non-cash transactions        
Deferred revenue reclassified to retained earnings – ASC 606 adoption $—  $2,500 


See accompanying notes to condensed consolidated financial statements.

4
5
Index

 Common Stock  
Additional
Paid-in
  
Retained Earnings
(Accumulated
  
Accumulated
Other
Comprehensive
  
Total
Stockholders’
Equity
 
  Shares  Amount  Capital  Deficit)  Loss  (Deficit) 
Balance, December 31, 2018  66,879,847  $7  $208,317  $(198,422) $(14) $9,888 
Stock issued for cash, $5.05 - $5.42, net  560,338       2,848           2,848 
Stock-based compensation          785           785 
Stock issued for options and RSUs, net  663,816       816           816 
Comprehensive loss:                        
Net loss              (5,608)      (5,608)
Change in unrealized gain, net                  1   1 
Comprehensive loss                      (5,607)
Balance, March 31, 2019  68,104,001   7   212,766   (204,030)  (13)  8,730 
Stock issued for cash, $6.02 - $6.49, net  467,928       2,849           2,849 
Stock-based compensation          928           928 
Stock issued for options and RSUs, net  182,618                   0 
Comprehensive loss:                        
Net loss              (4,130)      (4,130)
Comprehensive loss                      (4,130)
Balance, June 30, 2019  68,754,547  $7  $216,543  $(208,160) $(13) $8,377 
Stock issued for cash, $5.53 - $6.49, net  203,754       1,219           1,219 
Stock-based compensation          999           999 
Comprehensive loss:                        
Net loss              (4,956)      (4,956)
Change in unrealized gain, net                  1   1 
Comprehensive loss                      (4,955)
Balance, September 30, 2019  68,958,301  $7  $218,761  $(213,116) $(12) $5,640 

NaN dividends declared or paid in 2019.
See accompanying notes to condensed consolidated financial statements.

5
Index

VIRNETX HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)

 Nine Months Ended 
  
September 30,
2020
  
September 30,
2019
 
Cash flows from operating activities:      
Net income (loss) $287,880  $(14,694)
Adjustments to reconcile net loss to net cash from operating activities:        
Depreciation  4   4 
Stock-based compensation  2,803   2,712 
Amortization of warrant issued for services  43   — 
Deferred income taxes  (8,754)  0 
Changes in assets and liabilities:        
Prepaid expenses and other assets  224   286 
Accounts payable and accrued liabilities  (763)  118 
Accrued licensing costs  9,438   0 
Accrued payroll and related expenses  12   62 
Other liabilities  (180)  0 
Accounts receivable  (1)  0 
Income taxes payable  17,414   (396)
Net cash provided by (used in) operating activities  308,120   (11,908)
Cash flows from investing activities:        
Purchase of investments  (22,519)  (5,319)
Proceeds from sale or maturity of investments  2,838   4,503 
Net cash used in investing activities  (19,681)  (816)
Cash flows from financing activities:        
Proceeds from exercise of options  1,046   816 
Proceeds from sale of common stock  4,488   6,916 
Dividends paid  (70,841)  0 
Payments of taxes on cashless exercise of restricted stock units  (356)  (47)
Net cash (used in) provided by financing activities  (65,663)  7,685 
Net increase (decrease) in cash and cash equivalents  222,776   (5,039)
Cash and cash equivalents, beginning of period  3,135   7,611 
Cash and cash equivalents, end of period $225,911  $2,572 
Supplemental cash flow information:        
Cash paid for income taxes $20,377   0 

See accompanying notes to condensed consolidated financial statements.

6
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”, is engaged in the business of commercializing a portfolio of patents. We seek to license our technology, including GABRIEL Connection Technology™, to various original equipment manufacturers, or 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 revenue was limited to an insignificant amount 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 licensees 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”).


Our portfolio of intellectual property is the foundation of our business model. We currently own approximately 191194 total patents and pending applications, including 7570 U.S. patents/patent applications and 116124 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”), and communications in areas including “Smart City,” “Connected Car” and “Connected Home.” All our U.S. and foreign patents and pending patent applications relate generally to securing communications over the internet and as such, cover all our technology and other products. Our issued U.S. and foreign patents expire at various times during the period from 20192020 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 based on cash or certain other values generated from those patents in certain circumstances. The amount of such payments depends upon the type of value generated and certain categories are subject to maximums and other limitations.


Note 2 — Summary of Significant Accounting Policies


Unaudited Interim Financial Information


The accompanying Condensed Consolidated Balance Sheet as of September 30, 2019,2020, the Condensed Consolidated Statements of Operations, the Condensed Consolidated Statements of Comprehensive Income (Loss), the Condensed Consolidated Statements of Shareholders’ Equity (Deficit) for the three and nine months ended September 30, 20192020 and 2018, the Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2019, and 2018, the Condensed Consolidated Statements of Stockholders’ Equity for each of the three and nine months ended September 30, 2019 and 2018, and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20192020 and 20182019 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, 2019,2020, our results of operations for the three and nine months ended September 30, 20192020 and 2018,2019, and our cash flows for the nine months ended September 30, 20192020 and 2018.2019. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.


These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019, filed with the SEC on March 18, 2019.16, 2020.


Use of Estimates


We prepare our consolidated financial statements in accordance with U.S. GAAP. In doing so, we must 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 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, 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.


7
Index
Reclassifications


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

Basis of Consolidation

The consolidated financial statements include the accounts of VirnetX Holding Corporation and our wholly ownedwholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.


Leases


The Company determines if an arrangement, giving the Company a right-of-use (“ROU”) asset, is a lease at inception in accordance with Accounting Standards Codification (“ASC”) Topic 842.inception. Operating lease right-of-use (“ROU”)ROU assets are included in other assets on the Condensed Consolidated Balance Sheet. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date of the arrangement based on the present value of lease payments over the lease term. Other assets at September 30, 2020, includes a ROU asset related to a facility lease for corporate promotional and marketing purposes. The facility lease was paid in full at inception and the ROU is being amortized over the  term of the lease. Other assets also include an ROU related to our office operating lease which expires in October 2021 (See Note 8 - Leases).


Revenue Recognition


Most of ourThe Company derives revenue is derived from licensing and royalty fees from contracts with customers which often span several years. We account for this revenue in accordance with ASCAccounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our revenue arrangements may consist of multiple-element arrangements, with revenue for each unit of accounting recognized as the product or service is delivered to the customer.


With thelicensing of our patents, performance obligations are generally satisfied at a point in time as work is complete when our patent rights are transferred to our customers. We generally have no further obligation to our customers regarding our technology.


Certain contracts may require our customers to enter into a hosting arrangement with us and for these arrangements, revenue is recognized over time, generally over the life of the servicing contract.


Deferred revenue

From 2013The Company actively monitors and enforces its intellectual property (“IP”) rights, including seeking appropriate compensation from third parties that utilize the Company’s IP without a license. As a result, the Company may, from time to 2016, wetime, receive payments as part of a settlement or compensation for a patent infringement dispute. Proceeds received contractual payments totaling $10,000. In accordance with our revenue recognition policy, we deferredare allocated to each element identified in the settlement or compensation, based on the fair value of each element. Generally, settlements and thencompensation 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 revenue overas revenue. Elements identified as reimbursed costs are generally recorded as a reduction to the lifereported expenses. Elements identified as damages or interest are generally recorded in other income in the condensed consolidated statement of operations. During the nine months ended September 30, 2020, the Company collected a lump sum payment of $454,034 from Apple, Inc., because of a favorable court decision relating to a patent infringement case. The court decision identified the following as the basis of the contract, butaward: $302,428 for past royalties, $41,271 in damages for willful infringement, $108,221 for interest, and $2,114 in reimbursement for court costs and attorney’s fees (see Note 7 - Litigation). Elements of the payment were recognized in the Company’s condensed consolidated statement of operations as follows:

Classification of Payment Received in the Company’s Condensed Consolidated Statement of Operations
Nine Months Ended

 
September 30,
2020
 
Revenue (royalties) $302,428 
Operating expenses: selling, general and administrative (reimbursed litigation costs)  2,114 
Other income: gain (willful infringement)  41,271 
Other income: interest income (pre and post judgment interest)  108,221 
Total cash received $454,034 

Licensing Costs

Included in operating expenses for the nine months ended September 30, 2020, is $90,101 in 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. On January 1, 2018, we adopted Topic 606 and appliedsuch realization. Management generally considers any such gains as realized only upon the modified retrospective approach.collection of cash.


8
Index
Earnings (Loss) Per Share


Basic earnings (loss) per share are computed by dividing earnings (loss) available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted earnings per share are 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.


Concentration of Credit Risk and Other Risks and Uncertainties


Our cash and cash equivalents are primarily maintained at two2 major financial institutions in the United States. A portion of those balances are insured by the Federal Deposit Insurance Corporation. During the nine months ended September 30, 20192020, we had funds which 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. We have not experienced any losses on our deposits of cash and cash equivalents.

Other Assets

Other assets at September 30, 2019 include a right-of-use asset related to a facility lease for corporate promotional and marketing purposes. The facility lease was paid in full at inception and the ROU asset is being amortized over the remaining term of the lease. Other assets also include an ROU asset related to our office operating lease which expires in October 2019, and had subsequently been extended to October 2021 (See Note 8).


Impairment of Long-Lived Assets


On an annual basis, we identify and record impairment losses on long-lived assets when events and changes in circumstances indicate that the carrying amount of an asset might not be recoverable. Recoverability is measured by comparison of the anticipated future net undiscounted cash flows to the related assets’ carrying value. If such assets are 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.

Fair Value of Financial Instruments

Fair value is the price that would result from an orderly transaction between market participants at the measurement date. A fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Level 2 measurements utilize either directly or indirectly observable inputs in markets other than quoted prices in active markets.


Our financial instruments are stated at amounts that equal, or approximate, fair value. When we estimate fair value, we utilize market data or assumptions that we believe market participants would use in pricing the financial instrument, including assumptions about risk and inputs to the valuation technique. We use valuation techniques, primarily the income and market approach, which maximizes the use of observable inputs and minimize the use of unobservable inputs for recurring fair value measurements.


Mutual Funds: Valued at the quoted net asset value of shares held.


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


The following tables show the adjusted cost, gross unrealized gains, gross unrealized losses and fair value of our securities by significant investment category as of September 30, 2019,2020 and December 31, 2018.2019.


 September 30, 2019  September 30, 2020 
 
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 $1,756  $—  $—  $1,756  $1,756  $—  $144,133  $—  $—  $144,133  $144,133  $— 
                  
Level 1:                                          
Mutual funds 624  —  —  624  624  —   71,061   0   0   71,061   71,061   0 
U. S. government securities  15,020   1       15,021   3,400   11,621 
U.S. agency securities  2,811   2   —   2,813   192   2,621   17,772   1   0   17,773   7,317   10,456 
Total investments  3,435   2   —   3,437   816   2,621   103,853   2   0   103,855   81,778   22,077 
Total $5,191  $2  $—  $5,193  $2,572  $2,621  $247,986  $2  $—  $247,988  $225,911  $22,077 


 December 31, 2018  December 31, 2019 
 
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 $5,048  $—  $—  $5,048  $5,048  $—  $2,076  $—  $—  $2,076  $2,076  $— 
Level 1:                                          
Mutual funds 1,107  —  —  1,107  1,107  —   613   0   0   613   613   0 
U.S. agency securities  3,259   —   —   3,259   1,456   1,803   2,837   3   0   2,840   446   2,394 
Total investments  4,366   —   —   4,366   2,563   1,803   3,450   3   0   3,453   1,059   2,394 
Total $9,414  $—  $—  $9,414  $7,611  $1,803  $5,526  $3  $—  $5,529  $3,135  $2,394 


9
Index
New Accounting Pronouncements


In June 2016,December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses2019-12 Income Taxes (Topic 326)740). The purpose ofamendments in this ASU issimplify the accounting for income taxes by removing certain exceptions 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 allowancegeneral principles in Topic 740. The amendments also improve consistent application of and simplify U.S. GAAP for credit losses. Thisother areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU isare effective for fiscal years, and interim and annual reporting periods within those fiscal years, beginning after December 15, 2019.2020. We will adopt ASU 2016-13 effective January 1, 2020 with any cumulative effect of adoption recorded as an adjustment to retained earnings. The effect on our consolidated financial statements will largely depend on the composition and credit' quality of our investment portfolio and the economic conditions and forecasts at the time of adoption. Based on the current composition of our investment portfolio, current market conditions, and historical credit loss activity,are currently evaluating the impact, if any this ASU will have on our consolidated financial statements and related disclosures is not expected to be material..


In FebruaryJune 2016, FASBthe Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments, and issued subsequent amendments to the initial guidance within ASU No. 2016-02, Leases (Topic 842) as amended2019-04 and supplemented by subsequent ASU’s, (“ASU 2016-02”2019-05 (collectively, "ASU 2016-13"). The amendments in ASU 2016-022016-13 replace the incurred loss impairment methodology with the current expected credit loss model, which requires an entityconsideration of a broader range of reasonable and supportable information to recognize ROU 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. Weestimate credit losses. The Company adopted this ASU oneffective January 1, 2019 which had no2020 and the adoption did not have a material impact on our condensed consolidated statementsthe Company's financial position, results of operations or cash flow (See Note 8 for impact on our Condensed Consolidated Balance Sheets)flows.


8
Note 3 -— Income Taxes

WeFor the three months ended September 30, 2020, we recognized an income tax benefit of $1,293 on a loss before income taxes of $5,318, which is an effective tax rate of a 24.3%. For the nine months ended September 30, 2020, we recognized income tax expense of $29,036 on income before income taxes of $316,916 which is an effective tax rate of 9.2%. For the three and nine months ended September 30, 2019, we had an income tax benefit of 0 and $393, for the nine months ended September 30, 2019,respectively, due to a release of a state reserve as the statute of limitation for the tax return expired during the year.  We had an incomeexpired. The effective tax expense of ($5)rate for the same2020 nine-month period was favorably impacted by the reversal of valuation allowance reserves totaling $37,585, which were established in 2018.We had incomeprior years on our deferred tax expense of $0 forassets primarily associated with net operating loss (“NOL”) carryforwards. For the three and nine months ended September 30, 2019, and 2018.  During the three and nine-month periods ended September 30, 2019 and 2018, we had net operating losses (“NOLs”)NOLs which generated deferred tax assets for NOL carryforwards. WeDuring 2019, we provided valuation allowances against the net deferred tax assets including the deferred tax assets for NOL carryforwards.

In assessing the realization of At September 30, 2020, we had deferred tax assets management considers whetherof $8,754.

A valuation allowance is provided for deferred tax assets when, in our judgment, based upon currently available information and other factors, it is more likely than not that someall or a portion or all of thesuch deferred income tax assets will not be realized.  The ultimate realizationdetermination 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 assetsasset is dependent upon the generationa significant accounting estimate because it is based, among other things, on an estimate of future taxable income duringin the periodsUnited 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.
As a result of the significant taxable income recognized in which those temporary differences become deductible. Based on the available objective evidence, management believesnine months ended September 30, 2020, we determined that it iswas more likely than not that the netwe will recover our deferred tax assets at September 30,and accordingly the valuation allowances were reduced during the period.  During 2019, willconsistent with our policy, and because of our history of operating losses, we did not be fully realizable. Accordingly, management has maintained a full valuation allowance against its netrecognize the benefit of our deferred tax assets, at September 30, 2019. The valuation allowance carried againstincluding NOL carryforwards, that may have been used to offset future taxable income.  We continually assess our netability to generate sufficient taxable income during future periods in which our deferred tax assets was approximately $37,000 at September 30, 2019 and $36,000 at December 31, 2018.may be realized.

AsInternal Revenue Code Section 382 places a limitation (the ‘‘IRC Section 382 Limitation’’) on the amount of September 30, 2019, we have federal and state net operating loss carryforwards that can be used to offset taxable income after a change in control (generally greater than 50% change in ownership) of approximately $127,000a loss corporation. California, the state in which our headquarters was once located, has similar rules. Generally, after a control change, a loss corporation cannot deduct net operating loss carryforwards generated in years prior to the deemed change of control under IRC Section 382 in excess of the Section 382 Limitation. Because we have concluded that the Company has not experienced a change in control under Section 382, all NOL carryforwards were utilized to offset taxable income generated in the period.
Our tax years for 2005 and $108,000, respectively, expiring beginning in 2027forward are subject to examination by the U.S. tax authority and 2028, respectively.various state tax authorities. These years are open due to NOLs and tax credits to be utilized from such years.


Our policy is to recognize interest and penalties accrued on uncertain tax positions as a component of income tax expense. As of September 30, 2020, we had accrued immaterial amounts of interest and penalties related to the uncertain tax positions. 


10
Index

Note 4 — Commitments and Related Party Transactions


We lease our offices under an operating lease with a third party which expires in October 2019, and has subsequently been extended to October 2021 (see Note 8)“Note 8 - Leases”).


We entered into a service agreement for the use of an aircraft from K2 Investment Fund LLC (“LLC”(the “LLC”) for business travel for employees of the Company. We incurred approximately $67, and $157 compared to $442, and $1,327 compared to $579 and $1,262 in rental fees and reimbursements to the LLC during the three and nine months ended September 30, 20192020 and 2018,2019, respectively. We pay for the Company’s usage of the aircraft and have no rights to purchase. Our Chief Executive Officer and Chief Administrative Officer are the managing partners of the LLC and control the equity interests of the LLC. We entered into a 12-month non-exclusive agreement with the LLC for use of the plane at a rate of $8 per flight hour, with no minimum usage requirement. The agreement contains other terms and conditions normal in such transactions and can be cancelled by either us or the LLC with 30 days’ notice. The agreement renews on an annual basis unless terminated by either party. Neither party has exercised their termination rights.rights.


Note 5 — Stock-Based Compensation


We have a stock incentive plan for employees and others called the VirnetX Holding Corporation 2013 Equity Incentive Plan (the “Plan”), which has been approved by our stockholders. In April 2017, the Board approved an amendment and restatement of the Plan to, among other things, increase the shares reserved under the Plan by 2,500,000 shares (the “Plan Amendment��Amendment”). Our stockholders approved of the Plan Amendment at the 2017 Annual Meeting of Stockholders held on June 1, 2017. The Plan provides for grants of 16,624,469 shares of our common stock, including stock options and restricted stock units (“RSUs”), and will expire in 2023. As of September 30, 2019, 1,128,9032020, 675,210 shares remained available for grant under the Plan.


During the three months ended September 30, 2020 and 2019, we did not0t grant any options. During the three months ended September 30, 2018, we granted options totaling 85,000 shares with a weighted average grant date fair value of $3.16.or RSUs.


During the nine months ended September 30, 2020, we granted options for a total of 617,500 shares. The weighted average fair value at the grant dates was $4.77 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: (i) dividend yield on our common stock of 0 percent (ii) expected stock price volatility of 94 percent (iii) a risk-free interest rate of 0.65 percent and (iv) and expected option term of 6 years.

During the nine months ended September 30, 2019, we granted options for a total of 345,000 shares. The weighted average fair value at the grant dates for options issued during the nine months ended September 30, 2019 was $4.63 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, 2019assumptions: (i) dividend yield on our common stock of 0 percent (ii) expected stock price volatility of 92 percent (iii) a risk-free interest rate of 2.09 percent and (iv) anand expected option term of 6 years.

During the nine months ended September 30, 2018,2020 and 2019, we granted options for a total of 1,095,000 shares with a weighted average grant date fair value of $2.58. 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, 2018 (i) dividend yield on our common stock of 0 percent (ii) expected stock price volatility of 84 percent (iii) a risk-free interest rate average of 2.73 percent218,329 and (iv) an expected option term of 6 years.

During the three months ended September 30, 2019 and 2018, we did not grant any RSUs.

During the nine months ended September 30, 2019 and 2018, we granted 229,996 and 243,997 RSUs, respectively. The weighted average fair values at the grant dates for RSUs issued during the nine months ended September 30, 2020 and 2019 were $6.89 and 2018 were $6.06 and $3.26 per RSU, respectively. RSUs, which are subject to forfeiture if service terminates prior to the shares vesting, are expensed ratably over the vesting period. During

Stock-based compensation expense included in general and administrative expense was $576 and $1,399 and in research and development expense was $496 and $1,404 for the three and nine months ended September 30, 2019 and 2018, we paid $47 and $42 in withholding taxes on shares issued upon conversion of RSUs. The underlying shares were canceled. These amounts are reflected as financing costs in the accompanying condensed consolidated statements of cash flows.

2020, respectively.  Stock-based compensation expense included in general and administrative expense was $565 and $1,437 and in research and development expense was $434 and $1,275 for the three and nine months ended September 30, 2019, respectively, and $592 and $1,447 for general and administrative expense and $425 and $1,580 for research and development expense for the three and nine months ended September 30, 2018, respectively.


As of September 30, 2019,2020, the unrecognized stock-based compensation expense related to non-vested stock options and RSUs was $5,542$5,571 and $2,139,$2,522, respectively, which will be amortized over an estimated weighted average period of approximately 2.312.2 and 2.592.6 years, respectively.


During the three months ended September 30, 2020 and 2019, 0 shares were issued as a result of exercised options or vested RSUs.  During the nine months ended September 30, 2020, we issued 262,031 shares of common stock as a result of the exercise of options and 160,393 shares of common stock as a result of vesting RSUs. During the nine months ended September 30, 2019, we issued 663,816 shares of common stock as a result of the exercise of options and 182,618 shares of commons stock as a result of vesting RSUs.


11
Index

Note 6 — Equity


Common Stock


On July 30, 2018 we filed a $100,000 universal shelf registration statement on SEC Form S-3 which was declared effective by the SEC on August 16, 2018. We also entered an at-the-market equity offering sales agreement (“ATM”) with Cowen & Company, LLC on August 31, 2018, under which we can offer and sell shares of our common stock having an aggregate value of up to $50,000.


We use the ATM proceeds for GABRIEL product development, marketing and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products, technologies or businesses. As of September 30, 2019,2020, common stock with an aggregate value of up to $30,327$21,964 remained available for offer and sale under the ATM agreement.


We did 0t sell any shares under the ATM during the three months ended September 30, 2020.  During the nine months ended September 30, 2020, we sold 1,049,382 shares under the ATM. The average price per common share was $4.41 and the aggregate proceeds from the sales totaled $4,627. Sales commissions, fees and other costs associated with the ATM totaled $139.

During the three months ended September 30, 2019, we sold 203,754 shares under the ATM. The average sales price per common share was $6.17 and the aggregate proceeds from the sales totaled $1,257 during the period. Sales commissions, fees and other costs associated with the ATM totaled $38. During the nine months ended September 30, 2019, we sold 1,232,020 shares under the ATM. The average sales price per common share was $5.79 and the aggregate proceeds from the sales totaled $7,131 during the period. Sales commissions, fees and other costs associated with the ATM totaled $214.


Dividends
10
On May 8, 2020, we declared a one-time cash dividend to shareholders of record as of the close of business on May 18, 2020 of $1 per share of common stock, payable on May 26, 2020. The timing and amounts of future dividends, if any, will depend on market conditions, corporate business and financial considerations and regulatory requirements.
Index

Warrants

In 20152020, we issued warrants for the purchase of 25,000 shares of common stock at an exercise price of $7$5.75 per share, which will expire in April 2020. Information about warrants outstanding as2025. The weighted average fair value at the grant date was $4.16 per warrant. The fair value at the grant date was estimated utilizing the Black-Scholes valuation model with the following weighted average assumptions (i) dividend yield on our common stock of September 30, 2019 is as follows:0 percent (ii) expected stock price volatility of 97 percent (iii) a risk-free interest rate of 0.27 percent and (iv) and expected option term of 5 years.

Original
Number
of
Warrants
Issued
  
Exercise
Price per
Common
Share
  
Exercisable at
December 31,
2018
  
Became
Exercisable
  Exercised  
Terminated /
Cancelled /
Expired
  
Exercisable
at September 30,
2019
 
Expiration
Date
 25,000  $7.00   25,000   —   —   —   25,000 April 2020
         25,000   —   —   —   25,000  


Warrants IssuedExercise Price
Exercisable at
December 31, 2019
Newly ExercisableExercised
Terminated /
Cancelled
Exercisable at
September 30, 2020
Expiration Date
25,000$7.0025,00000(25,000)0April 30, 2020
25,000$5.75025,0000025,000April 30, 2025
 _25,00025,0000(25,000)25,000_

Note 7 — Litigation


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


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


On August 11, 2010, we filed a complaint against Aastra USA. Inc. (“Aastra”), Apple Inc. (“Apple”), Cisco Systems, Inc. (“Cisco”), and NEC Corporation (“NEC”) the USDC in which we alleged that these parties infringe on certain of our patents (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages and injunctive relief. The cases against each defendant were separated by the judge. Aastra and NEC agreed to sign license agreements with us, and we dropped all accusations of infringement against them. A jury in USDC decided that our patents were not invalid and rendered a verdict of non-infringement by Cisco on March 4, 2013. Our motion for a new Cisco trial was denied and the case against Cisco was closed.


On November 6, 2012, a jury in the USDC awarded us over $368,000 for Apple’s infringement of four4 of our patents, plus daily interest up to the final judgment.


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Index
Apple filed an appeal of the judgment to the USCAFC. On September 16, 2014, USCAFC affirmed the USDC jury’s finding that all four of our patents at issue are valid and confirmed the USDC jury’s finding of infringement of VPN on Demand under many of the asserted claims of our ‘135 and ‘151 patents, and the USDC’s decision to allow evidence about our license and royalty rates regarding the determination of damages. However, the USCAFC vacated the USDC jury’s damages award and some of the USDC’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 back to the USDC for further proceedings.


On September 30, 2016, pursuant to the 2014 remand from the USCAFC, a jury in the USDC awarded us $302,400 for Apple’s infringement of four4 of our patents. On September 29, 2017, the USDC entered its final judgement,judgment, denied all of Apple’s post-trial motions, granted all our post-trial motions, including our motion for willful infringement and enhanced the royalty rate during the willfulness period from $1.20 to $1.80 per device, and awarded us costs, certain attorneys’ fees, and prejudgment interest. The total amount in the final judgementjudgment was $439,700, including $302,400 (jury verdict), $41,300 (enhanced damages) and $96,000 (costs, fees and interest).


On October 27, 2017 Apple filed its notice of appeal of thisappealed the final judgementjudgment entered on September 29, 2017 to the USCAFC. Oral arguments in this case were held on January 8, 2019. On January 15, 2019 the Court issued a Rule 36 order affirming the district court’s final judgment. Apple filed its openinga petition for panel rehearing and rehearing en-banc in this matter on February 21, 2019. On October 1, 2019, USCAFC issued an order denying Apple’s petition. Apple filed a petition for a writ of certiorari with the SCOTUS, which was denied on February 24, 2020. Prior to the SCOTUS decision denying Apple’s petition for a writ of certiorari, on February 20, 2020, Apple filed a Rule 60(b) motion for relief from judgment with the USDC, seeking relief from the district court’s September 29, 2017 final judgment. VirnetX filed a responsive brief in opposition on March 19, 2018. We filed our response on April 4, 2018.5, 2020.

On March 13, 2020, the Company received payment of $454,034 from Apple, representing the previously announced final judgment with interest in this case. Apple has indicated that it will seek restitution of the payment if relief sought in its Rule 60(b) motion is awarded. On April 11, 2018, USCAFC designated Cases 18-1197-CB, Case 17-1368 and Case 17-1591 as companion cases and assigned16, 2020, the USDC ordered Apple to the same merits panel. Events and developments after thisfile a supplemental brief with respect to its Rule 60(b) motion within 7 days. On September 1, 2020 USDC issued an order are described below under VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368) (“Consolidated Appeal”).denying Apple’s motion for relief of judgement. This case is now closed.


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


This case began on November 6, 2012, when we had filed a complaint against Apple in USDC in which we alleged that Apple infringed on certain of our patents, (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages and injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4 th4th Generation, iPad mini, and the latest Macintosh computers;computers; these products were not included in the Apple I case because they were released after the Apple I case was initiated. Post-Trial MotionsPost-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’sVirnetX motions for supplemental damages, a sunset royalty and the royalty rate of $1.20 per infringing iPhone, iPad and Mac products, pre-judgment and post-judgment interest and costs. On September 20, 2018, pursuant to a Court’s order, attorneys from VirnetX and Apple conferred and agreed, without dispute, to add an amount totaling $93,300 for Bill of Costs and Prejudgment Interest to the $502,600 jury verdict. The total amount in the final judgement in the Apple II case is now $595,900. Apple has filed a notice of appeal with the USCAFC in the Apple II case.

On October 9, 2018, USCAFC accepteddocketed the notice and docketed itappeal as Case No. 19-1050 - VirnetX Inc. v. Apple Inc. All subsequent events and developments in this case are described below under VirnetX Inc. v. Apple Inc.   (USCAFC Case 19-1050) (“Apple II Appeal”).

VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368) (“Consolidated Appeal”)

On April 11, 2018, the USCAFC in an order designated the following appeals as companion cases and assigned to the same merits panel;

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

On December 16, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the Patent Trial and Appeal Board (“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 and one of them involves Black Swamp IP, LLC. Oral arguments in this case were argued on January 8, 2019.

On July 8, 2019, the USCAFC issued its opinion vacating and remanding both decisions. The court agreed with us that the PTAB misconstrued the patent claims, that many of the PTAB’s invalidity findings lacked substantial evidence, and that the PTAB Board abused its discretion in denying us the opportunity to file a motion for additional discovery as to the real party-in-interest issues. The underlying inter partes review (“IPR”) proceedings are currently pending before the PTAB.

VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case)

On October 27, 2017, Apple appealed the Final Judgment entered on September 29, 2017 to the USCAFC. Oral arguments in this case were held on January 8, 2019. On January 15, 2019 the Court issued a Rule 36 order affirming the District Court Judgement. Apple filed a request for panel rehearing and rehearing en-banc in this matter on February 21, 2019. On March 12, 2019, the Court invited us to respond to Apple’s petition on or before March 26, 2019. We filed our response on March 22, 2019.

On July 1, 2019 Apple filed a motion for leave to file a supplemental brief regarding the impact of the USCAFC’s decision in VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1751), issued on June 28, 2019 (described below). We filed a response to Apple’s motion and a contingent motion for leave to file a responsive supplemental brief on July 11, 2019. On July 17, 2019, the USCAFC granted both motions and ordered Apple’s and our supplemental briefs filed. On August 1, 2019, USCAFC issued an order denying Apple’s petition for panel and en banc rehearing. On August 7, 2019, Apple filed a motion to vacate the August 1, 2019 order and for leave to file a second request for panel rehearing and rehearing en-banc. On October 1, 2019, USCAFC issued an order denying Apple’s motion. Apple subsequently requested an extension for its deadline to petition for a writ of certiorari, and that deadline was extended until December 29, 2019.

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

On February 7, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-parties’ 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.   Oral arguments in this case were argued on January 8, 2019.

On July 1, 2019 Apple filed a motion for leave to file a supplemental brief regarding the impact of the USCAFC’s decision in VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1751), issued on June 28, 2019 (described below). We filed a response to Apple’s motion and a contingent motion for leave to file a responsive supplemental brief on July 11, 2019. On July 15, 2019, we filed a corrected response and a corrected supplemental brief. On July 17, 2019, the USAFC granted both motions and ordered Apple’s and supplemental briefs filed.

On August 1, 2019, the USCAFC issued an opinion in this case agreeing with us that the PTAB could not maintain two of those reexaminations (initiated by Apple) with respect to claims as to which there has been a prior “final decision” on patent validity entered by a federal court. The court instructed PTAB to terminate those reexamination proceedings with respect to claims 1-35 of the ‘504 patent and claims 36-59 of the ‘211 patent. The court affirmed PTAB’s invalidity findings with respect to the remaining patent claims. Apple filed a request for panel rehearing and rehearing en-banc in this matter on August 26, 2019.  We filed a separate request for panel rehearing on September 3, 2019. Our request was denied on September 19, 2019, and Apple’s request was denied on October 11, 2019.

VirnetX Inc. v. Apple Inc. (USCAFC Case 19-1050) (“Apple II Appeal”)

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. A decision by the USCAFC has not yet been issued.

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

On August 23, 2017, we filed with the USCAFC appeals of the invalidity findings by the PTAB in IPR2016-00331 and IPR2016-00332 involving our U.S. Patent No. 8,504,696. On December 10, 2018,November 22, 2019, the USCAFC issued an opinion affirming the PTAB’sdistrict court’s findings that Apple is precluded from making certain invalidity findings.

VirnetX Inc. (USCAFC Case 17-2593)

On September 22, 2017, we filed witharguments 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 appealsdenied 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 invalidity findings byUSDC denied VirnetX’s motion for entry of a new judgment based on the PTAB in IPR2016-00693prior jury verdict and IPR2016-00957 involving our U.S. Patent Nos. 7,418,504ordered a new jury trial on damages. On August 10, 2020, the USDC granted Apple’s motion for continuance and 7,921,211. The briefing in these appeals has not taken place. The entity that initiatedreset the IPRs, Black Swamp IP, LLC, indicated ontrial date to October 18, 2017, that it would not participate26, 2020. On October 30, 2020, a federal jury in the appeals. On November 27, 2017,U.S. District Court for the USPTO indicated that it would interveneEastern District of Texas issued a $502,800 verdict in favor of VirnetX based on Apple's infringement of 2 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 appeals. On January 19, 2018,2013 launch of Apple's iOS 7 operating system and represents 598,629,580 infringing units from US sales only. We are currently awaiting court order scheduling the USCAFC stayed these appeals pendinghearing for the USCAFC’s decision in Case 17-1591. On October 25, 2019, we and the USPTOjudgement as a matter of law (JMOL) motions filed a joint request that the deadline to inform the USCAFC how these appeals should proceed be extended until November 1, 2019.by both parties.

VirnetX Inc. v. Cisco Systems,Mangrove Partners Master Fund, Ltd., Apple Inc. (USCAFC Case 18-1751)20-2271) and VirnetX Inc. v. Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp, LLC (USAFC Case 20-2272)

On March 30, 2018,September 15, 2020, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,851review proceedings IPR2015-01046 and IPR2016-00062 involving our U.S. Patent No. 7,418,504. Oral arguments in this case were held on June 4, 2019.

On June 28, 2019, the USCAFC issued its opinion vacating the PTAB’s invalidity findings with respect to claims 5, 12,6,502,135, and 13 and remanding to the PTAB for further proceedings.  The court affirmed the PTAB’s invalidity findings with respect to the remaining patent claims. Cisco filed a request for panel rehearing and rehearing en-banc in this matter on August 12, 2019.  Cisco’s request was denied on October 1, 2019.

VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 19-1043)

On October 1, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,746inter partes review proceedings IPR2015-1047, IPR2016- 00063, and IPR2016-00167 involving our U.S. Patent No. 6,839,759. We filed our opening brief on March 15, 2019. Cisco filed its response brief on June 19, 2019. We filed our reply brief on August 14, 2019. Cisco filed a motion to submit a sur-reply brief on August 26, 2019, which we opposed.7,490,151. On September 27, 2019,25, 2020, the USCAFC issued an order deferring resolutionconsolidating the two appeals. Our initial briefs are due by December 21, 2020.

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Iancu v. Luoma (SCOTUS Case 20-74)

On July 23, 2020, the United States and the USPTO (collectively, “the United States”) filed a petition for a writ of Cisco’s motion forcertiorari from several decisions by the merits panel. The oral arguments have not yet been scheduled.

USAFC, including decisions in VirnetX Inc. v. Cisco Systems, Inc. (USCAFC, Nos. 2019-1671, and VirnetX Inc. v. Iancu, Nos. 2017-2593, -2594.  In those cases, the USAFC granted VirnetX’s motions to vacate the underlying decisions of the PTAB on the basis of Arthrex, Inc. v. Smith & Nephew, Inc., 941 F.3d 1320 (Fed. Cir. 2019), and remanded for further proceedings.  The United States requested that the SCOTUS hold its certiorari petition pending the disposition of the United States’ separate petition in United States v. Arthrex, Inc., No. 19-1434 (filed June 25, 2020).  On August 26, 2020, VirnetX filed a response, agreeing that the United States’ certiorari petition should be held pending the disposition of the petition for a writ of certiorari in No. 19-1434 (and related petitions filed by private parties in Nos. 19-1452 and 19-1458), and any further SCOTUS proceedings.

On October 13, 2020, SCOTUS granted the United States’ petition for a writ of certiorari in No. 19-1434 as to USAFC Case 19-1671)No. 2018-2140, and the petitions for writs of certiorari in Nos. 19-1452 and 19-1458, all limited to Questions 1 and 2 as set forth in the July 22, 2020 Memorandum for the United States filed in No. 19-1434. The consolidated petition is seeking review of decisions by the USCAFC holding that administrative patent judges (“APJ”) of the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office must be appointed by the president and confirmed by the Senate; and, whether the remedy imposed by USCAFC that federal laws that place restrictions on when officials can be removed from office cannot apply to APJ, was the appropriate one.


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

On March 18, 2018, we23, 2020, the law firm of McKool Smith, P.C. (“McKool”) filed a Demand for Arbitration against VirnetX, Inc. with the USCAFC an appealAmerican Arbitration Association (“AAA”). In its demand, McKool claims that a retention agreement it entered into in 2010 with VirnetX entitles it to a contingency fee arising from the recent 2020 payment made by Apple. McKool claims it is owed $36,300 (or 8% of the invalidity findings bypayment). We have filed a general response with AAA denying McKool’s claim and intend to vigorously contest the PTABmatter.

Neal Hurwitz v. Kendall Larsen et al. (Case 2020-0425-JRS)

On June 2, 2020, stockholder Neal Hurwitz filed a verified derivative complaint in inter-partes reexamination no. 95/001,679 involving our U.S. Patent No. 6,502,135. Wethe Delaware Court of Chancery against Kendall Larsen, Robert D. Short Ill, Gary Feiner, Michael F. Angelo, and Thomas M. O'Brien and naming the Company as nominal defendant. The lawsuit alleges breaches of fiduciary duty, corporate waste, and unjust enrichment arising out of a series of previously-disclosed transactions and compensation awards and seeks an award of monetary damages and equitable relief. On July 1, 2020, the defendants filed a motion to remanddismiss the complaint based on a failure to plead demand futility and a failure to state a claim on which relief can be granted and, on August 23, 2019, which19, 2020, the USCAFC denied ondefendants filed an opening brief in support of their motion to dismiss. On October 1, 2019, directing16, 2020, plaintiff amended his complaint rather than respond to the parties to address the issuesarguments in the merits briefs. Ourdefendants' opening brief is currently due on November 12, 2019.

VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 19-1725)

brief. On March 29, 2019, we filed withOctober 23, 2020, the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,792 involving our U.S. Patent No. 7,188,180. Wedefendants filed a renewed motion to remanddismiss plaintiff's amended complaint based on September 10, 2019,a failure to plead demand futility and a failure to state a claim on which remains pending.relief can be granted.


Other Legal Matters

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


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


Note 8 — Leases


We determine if an arrangement is a lease at inception. Operating lease ROU assets are included in other assets on the Condensed Consolidated Balance Sheet as of September 30, 2019. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term.

We lease office space under an operating lease which initially expiredexpires in October 2019. On October 31,2021; at September 30, 2020, the underlying ROU asset and lease liability totaled $57. For the three and nine months ended September 30, 2020, we recorded lease expense of $14 and $42.  For the three and nine months ended September 30, 2019, we executed a two-year extension to therecorded lease extending existing rates through October 31, 2021.  Our extended office lease continues as an operating lease. expense of $14 and $42.

We also entered into an operating lease for a facility used for corporate promotional and marketing purposes which was prepaid in full in a prior yearat inception and expireswould have originally expired in 2024.

As described under New Accounting Pronouncements above, we adopted ASU 2016-02 effective January 1, 2019. As a result  In September 2020, this lease was extended for one year to 2025, due to COVID use-restrictions in 2020.  No other terms of the adoption,original contract were affected and there was no impact on January 1, 2019 we reclassified $385 of prepaid lease payments for the promotional and marketing facility from current assets to non-current assets.cash flow.   At January 1, 2019 we recorded an ROU asset and lease liability of $45 for the office lease with a balance of $4 at September 30, 2019.  On October 31, 2019,2020, the lease extension date, we increased our ROU and lease liability by $111, of which $9 is due in 2019, $56 is due in 2020, and $46 is due in 2021.  totaled $1,323.  For the three and nine months ended September 30, 2020, we recorded promotional and marketing lease expense of $89 and $282.  For the three and nine months ended September 30, 2019, we recorded lease expense of $14$96 and $41, respectively. Adoption of the ASU had no impact on the Condensed Consolidated Statement of Operations.$289.


Note 9 — Subsequent EventsEarnings (Loss) Per Share

Between October 1,Basic earnings (loss) per are share based on the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share are based on the weighted average number of common shares and potentially dilutive securities which for the Company include stock options, RSUs and warrants.
The following table shows the computation of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2020 and 2019 and November 6, 2019, we sold 551,795(shares in thousands):

 Three Months Ended  Nine Months Ended 
  
September 30,
2020
  
September 30,
2019
  
September 30,
2020
  
September 30,
2019
 
Weighted-average basic shares outstanding  71,059   68,943   70,780   68,278 
Effect of dilutive securities  0   0   883   0 
Weighted-average diluted shares outstanding  71,059   68,943   71,663   68,278 
                 
Basic earnings (loss) per share $(0.06) $(0.07) $4.07  $(0.22)
Diluted earnings (loss) per share $(0.06) $(0.07) $4.02  $(0.22)


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Potentially dilutive securities representing 2,814,179 shares of common stock underwere excluded from the ATM program. The average sales pricecomputation of diluted earnings per common share sold was $6.09for the nine months ended September 30, 2020, because their effect would have been antidilutive. We incurred a net loss for the three months ended September 30, 2020, and the aggregate proceedsthree and nine months ended September 30, 2019;  therefore, all potentially dilutive securities representing shares of common stock were excluded from the sales totaled $3,360. Sales commissions, fees and other costs associated with these ATM transactions totaled $101.computation of diluted loss per share for those periods, because their effect would have been antidilutive.


Note 10 — Subsequent Events
13
IndexOn October 30, 2020, a federal jury in the U.S. District Court for the Eastern District of Texas issued a $502,800 verdict in favor of VirnetX based on Apples infringement of 2 network security patents. The verdict calls for damages of $0.84 per accused device since the 2013 launch of Apples iOS 7 operating system (see "Note 7 - Litigation").

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

Company OverviewNew Accounting Pronouncements


In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12 Income Taxes (Topic 740). The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We are currently evaluating the impact, if any this ASU will have on our consolidated financial statements and related disclosures.

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments, and issued subsequent amendments to the initial guidance within ASU 2019-04 and ASU 2019-05 (collectively, "ASU 2016-13"). The amendments in ASU 2016-13 replace the incurred loss impairment methodology with the current expected credit loss model, which requires consideration of a broader range of reasonable and supportable information to estimate credit losses. The Company adopted this ASU effective January 1, 2020 and the adoption did not have a material impact on the Company's financial position, results of operations or cash flows.

Note 3 — Income Taxes

For the three months ended September 30, 2020, we recognized an Internet security software and technology company with patented technology for secure communications including 5G and 4G LTE security. Our software and technology solutions, including our 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, or VoIP, mobile services, streaming video, file transfer, remote desktop and Machine-to-Machine, or M2M communications. Our technology generates secure connectionsincome tax benefit of $1,293 on a “zero-click”loss before income taxes of $5,318, which is an effective tax rate of a 24.3%. For the nine months ended September 30, 2020, we recognized income tax expense of $29,036 on income before income taxes of $316,916 which is an effective tax rate of 9.2%. For the three and nine months ended September 30, 2019, we had an income tax benefit of 0 and $393, respectively, due to a release of a state reserve as the statute of limitation for the tax return expired. The effective tax rate for the 2020 nine-month period was favorably impacted by the reversal of valuation allowance reserves totaling $37,585, which were established in prior years on our deferred tax assets primarily associated with net operating loss (“NOL”) carryforwards. For the three and nine months ended September 30, 2019, we had NOLs which generated deferred tax assets for NOL carryforwards. During 2019, we provided valuation allowances against the net deferred tax assets including the deferred tax assets for NOL carryforwards. At September 30, 2020, we had deferred tax assets of $8,754.

A valuation allowance is provided for deferred tax assets when, in our judgment, based upon currently available information and other factors, it is more likely than not that all or “single-click” basis, significantly simplifying the deploymenta portion of secure real-time communication solutions by eliminatingsuch deferred income tax assets will not be realized.  The determination of the need for end-usersa 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 enter any encryption information. Our portfoliorecord, or reduce, a valuation allowance associated with a deferred income tax asset is a significant accounting estimate because it is based, among other things, on an estimate of intellectual propertyfuture taxable income in the United States and certain other jurisdictions, which is susceptible to change and may or may not occur, and because the foundationimpact 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.
As a result of the significant taxable income recognized in the nine months ended September 30, 2020, we determined that it was more likely than not that we will recover our deferred tax assets and accordingly the valuation allowances were reduced during the period.  During 2019, consistent with our policy, and because of our business model.history of operating losses, we did not recognize the benefit of our deferred tax assets, including NOL carryforwards, that may have been used to offset future taxable income.  We currently own approximately 191 total patents and pending applications, including 75 U.S. patents/patent applications and 116 foreign patents/validations/pending applications. Our patent portfolio is primarily focusedcontinually assess our ability to generate sufficient taxable income during future periods in which our deferred tax assets may be realized.
Internal Revenue Code Section 382 places a limitation (the ‘‘IRC Section 382 Limitation’’) on securing real-time communications over the Internet, as well as related services such as the establishment and maintenanceamount of net operating loss carryforwards that can be used to offset taxable income after a change in control (generally greater than 50% change in ownership) of a secure domain name registry. Our patented methods alsoloss corporation. California, the state in which our headquarters was once located, has similar rules. Generally, after a control change, a loss corporation cannot deduct net operating loss carryforwards generated in years prior to the deemed change of control under IRC Section 382 in excess of the Section 382 Limitation. Because we have additional applicationsconcluded that the Company has not experienced a change in control under Section 382, all NOL carryforwards were utilized to offset taxable income generated in the key areas of device operating systemsperiod.
Our tax years for 2005 and network security for Cloud services, M2M communications in the new initiatives like “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 of our issued patents and pending patent applications were acquired by our principal operating subsidiary; VirnetX, Inc., from Leidos, Inc., or Leidos, (f/k/a Science Applications International Corporation, or SAIC) in 2006 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 categoriesforward are subject to maximumsexamination by the U.S. tax authority and other limitations.various state tax authorities. These years are open due to NOLs and tax credits to be utilized from such years.


Our product GABRIEL Secure Communication Platform™, unlike other collaborationpolicy is to recognize interest and communication productspenalties accrued on uncertain tax positions as a component of income tax expense. As of September 30, 2020, we had accrued immaterial amounts of interest and services onpenalties related to the market today, does not require accessuncertain tax positions. 

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Note 4 — Commitments and Related Party Transactions

We lease our offices under an operating lease with a third party which expires in October 2021 (see “Note 8 - Leases”).

We entered into a service agreement for the use of an aircraft from K2 Investment Fund LLC (the “LLC”) for business travel for employees of the Company. We incurred approximately $67, and $157 compared to user’s confidential data$442, and reduces$1,327 in rental fees and reimbursements to the threatLLC during the three and nine months ended September 30, 2020 and 2019, respectively. We pay for the Company’s usage of hackingthe aircraft and data mining. It enables individualshave no rights to purchase. Our Chief Executive Officer and organizations to maintain complete ownershipChief Administrative Officer are the managing partners of the LLC and control overthe equity interests of the LLC. We entered into a 12-month non-exclusive agreement with the LLC for use of the plane at a rate of $8 per flight hour, with no minimum usage requirement. The agreement contains other terms and conditions and can be cancelled by either us or the LLC with 30 days’ notice. The agreement renews on an annual basis unless terminated by either party. Neither party has exercised their personal and confidential data, secured within their own private network, while enabling authorized secure encrypted access from anywhere at any time. Our GABRIEL Collaboration Suite™ is a set of applications that run on top of our GABRIEL Secure Communication Platform™termination rights. It enables seamless and secure cross-platform communications between user’s devices that have our software installed. Our GABRIEL Collaboration Suite™ is available for download and free trial, for Android, iOS, Windows, Linux and Mac OS X platforms, at http://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 general public. Over 80 small and medium businesses have installed our GABRIEL Secure Communication Platform™ and GABRIEL Collaboration Suite™ products in their corporate networks. We intend to continue to expand our customer base with targeted promotions and direct sales initiatives.


We are actively recruiting best-of-breed partners in various vertical markets including, healthcare, finance, government, etc., to help us rapidly expand our enterprise customer base. A number of information sharing and analysis organizations (each, an “ISAO”) in the International Association of Certified ISAO (the “IACI”) including, ISAO’s for Maritime & Ports, ISAO Credit Union ISAO, City of Chicago, ISAO Human Trafficking ISAO have chosen to deploy our software as private and secure e-technology to protect their communications. Several other ISAOs are completing their evaluations before deploying our products within their networks.
Note 5 — Stock-Based Compensation


We have executed a numberstock incentive plan for employees and others called the VirnetX Holding Corporation 2013 Equity Incentive Plan (the “Plan”), which has been approved by our stockholders. In April 2017, the Board approved an amendment and restatement of patentthe Plan to, among other things, increase the shares reserved 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. The Plan provides for grants of 16,624,469 shares of our common stock, including stock options and technology licensesrestricted stock units (“RSUs”), and intendwill expire in 2023. As of September 30, 2020, 675,210 shares remained available for grant under the Plan.

During the three months ended September 30, 2020 and 2019, we did 0t grant options or RSUs.

During the nine months ended September 30, 2020, we granted options for a total of 617,500 shares. The weighted average fair value at the grant dates was $4.77 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: (i) dividend yield on our common stock of 0 percent (ii) expected stock price volatility of 94 percent (iii) a risk-free interest rate of 0.65 percent and (iv) and expected option term of 6 years.

During the nine months ended September 30, 2019, we granted options for a total of 345,000 shares. The weighted average fair value at the grant dates was $4.63 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: (i) dividend yield on our common stock of 0 percent (ii) expected stock price volatility of 92 percent (iii) a risk-free interest rate of 2.09 percent and (iv) and expected option term of 6 years.

During the nine months ended September 30, 2020 and 2019, we granted 218,329 and 229,996 RSUs, respectively. The weighted average fair values at the grant dates for RSUs issued during the nine months ended September 30, 2020 and 2019 were $6.89 and $6.06 per RSU, respectively. RSUs, which are subject to seek further licenseesforfeiture 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 $576 and $1,399 and in research and development expense was $496 and $1,404 for the three and nine months ended September 30, 2020, respectively.  Stock-based compensation expense included in general and administrative expense was $565 and $1,437 and in research and development expense was $434 and $1,275 for the three and nine months ended September 30, 2019, respectively.

As of September 30, 2020, the unrecognized stock-based compensation expense related to non-vested stock options and RSUs was $5,571 and $2,522, respectively, which will be amortized over an estimated weighted average period of approximately 2.2 and 2.6 years, respectively.

During the three months ended September 30, 2020 and 2019, 0 shares were issued as a result of exercised options or vested RSUs.  During the nine months ended September 30, 2020, we issued 262,031 shares of common stock as a result of the exercise of options and 160,393 shares of common stock as a result of vesting RSUs. During the nine months ended September 30, 2019, we issued 663,816 shares of common stock as a result of the exercise of options and 182,618 shares of commons stock as a result of vesting RSUs.


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Note 6 — Equity

Common Stock

On July 30, 2018 we filed a $100,000 universal shelf registration statement on SEC Form S-3 which was declared effective by the SEC on August 16, 2018. We also entered an at-the-market equity offering sales agreement (“ATM”) with Cowen & Company, LLC on August 31, 2018, under which we can offer and sell shares of our technology, including ourcommon stock having an aggregate value of up to $50,000.

We use the ATM proceeds for GABRIEL Connection Technology™product development, marketing and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products, technologies or businesses. As of September 30, 2020, common stock with an aggregate value of up to original equipment manufacturers, or OEMs, of chips, servers, smart phones, tablets, e-Readers, laptops, net books$21,964 remained available for offer and sale under the ATM agreement.

We did 0t sell any shares under the ATM during the three months ended September 30, 2020.  During the nine months ended September 30, 2020, we sold 1,049,382 shares under the ATM. The average price per common share was $4.41 and the aggregate proceeds from the sales totaled $4,627. Sales commissions, fees and other devices, withincosts associated with the IP-telephony, mobility, fixed-mobile convergenceATM totaled $139.

During the three months ended September 30, 2019, we sold 203,754 shares under the ATM. The average sales price per common share was $6.17 and unified communications markets including 5Gthe aggregate proceeds from the sales totaled $1,257 during the period. Sales commissions, fees and 4G/LTE Advanced.other costs associated with the ATM totaled $38. During the nine months ended September 30, 2019, we sold 1,232,020 shares under the ATM. The average sales price per common share was $5.79 and the aggregate proceeds from the sales totaled $7,131 during the period. Sales commissions, fees and other costs associated with the ATM totaled $214.


Dividends

On May 8, 2020, we declared a one-time cash dividend to shareholders of record as of the close of business on May 18, 2020 of $1 per share of common stock, payable on May 26, 2020. The timing and amounts of future dividends, if any, will depend on market conditions, corporate business and financial considerations and regulatory requirements.

Warrants

In 2020, we issued warrants for the purchase of 25,000 shares of common stock at an exercise price of $5.75 per share, which will expire in April 2025. The weighted average fair value at the grant date was $4.16 per warrant. The fair value at the grant date was estimated utilizing the Black-Scholes valuation model with the following weighted average assumptions (i) dividend yield on our common stock of 0 percent (ii) expected stock price volatility of 97 percent (iii) a risk-free interest rate of 0.27 percent and (iv) and expected option term of 5 years.

Warrants IssuedExercise Price
Exercisable at
December 31, 2019
Newly ExercisableExercised
Terminated /
Cancelled
Exercisable at
September 30, 2020
Expiration Date
25,000$7.0025,00000(25,000)0April 30, 2020
25,000$5.75025,0000025,000April 30, 2025
 _25,00025,0000(25,000)25,000_

Note 7 — Litigation

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 specificationsseveral intellectual property infringement lawsuits pending in the 3GPP LTE, Systems Architecture Evolution. We have agreed to make available a non-exclusive patent license under fair, reasonableUnited States District Court for the Eastern District of Texas, Tyler Division (“USDC”), and non-discriminatory terms and conditions, with compensation, or FRAND, to 3GPP members desiring to implementUnited States Court of Appeals for 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 5G and 4G/LTE Advanced devices and solutions.

We have an ongoing GABRIEL 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 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 KitFederal Circuit (“SDK”USCAFC”) 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 forSupreme Court of the United States (“SCOTUS”).

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

On August 11, 2010, we filed a customer to implement our technology.  Customers who want to develop their own implementation of our 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. These licenses will typically include an initial license fee, as well as an ongoing royalty.
We have signed Patent License Agreements with Avayacomplaint against Aastra USA. Inc. (“Aastra”), Aastra USA,Apple Inc. (“Apple”), Microsoft Corporation, Mitel Networks Corporation, NEC CorporationCisco Systems, Inc. (“Cisco”), and NEC Corporation of America, Siemens Enterprise Communications GmbH & Co. KG, and Siemens Enterprise Communications Inc. to license(“NEC”) the USDC in which we alleged that these parties infringe on certain of our patents (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages and injunctive relief. The cases against each defendant were separated by the judge. Aastra and NEC agreed to sign license agreements with us, and we dropped all accusations of infringement against them. A jury in USDC decided that our patents were not invalid and rendered a verdict of non-infringement by Cisco on March 4, 2013. Our motion for a one-time payment and/ornew Cisco trial was denied and the case against Cisco was closed.

On November 6, 2012, a jury in the USDC awarded us over $368,000 for Apple’s infringement of 4 of our patents, plus daily interest up to the final judgment.

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Apple filed an ongoing royalty for all future sales through the expirationappeal of the licensedjudgment to the USCAFC. On September 16, 2014, USCAFC affirmed the USDC jury’s finding that all four of our patents at issue are valid and confirmed the USDC jury’s finding of infringement of VPN on Demand under many of the asserted claims of our ‘135 and ‘151 patents, and the USDC’s decision to allow evidence about our license and royalty rates regarding the determination of damages. However, the USCAFC vacated the USDC jury’s damages award and some of the USDC’s claim construction with respect to certain currentparts of our ‘504 and future IP-encrypted products. We have also been working with IPVALUE Management Inc. in commercializing our portfolio‘211 patents and remanded the damages award and determination of patents on securing real-time communications over the Internetinfringement with respect to certain third parties.
We believe that the market opportunity for our software and technology solutions is large and expanding as secure domain names are now an integral part of securing the next generation 5G and 4G/LTE Advanced wireless networks and M2M communications in areas including Smart City, Connected Car and Connected Home. We also believe that all 5G and 4G/LTE Advanced mobile devices will require unique secure domain names and become part of a secure domain name registry.

We will continue 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, including our GABRIEL Connection Technology™ to enterprise customers, developers and 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 5G and 4G/LTE.

Our employees include the core development team behind our patent portfolio, technology and software. This team has worked together for over ten years and is the same team that invented and developed this technology while working at SAIC, now Leidos, on critical notional security projects. Leidos is a FORTUNE 500® scientific, engineering and technology applications company that uses its deep domain knowledge to solve problems of vital importanceFaceTime back to the nation andUSDC for further proceedings.

On September 30, 2016, pursuant to the world,2014 remand from the USCAFC, a jury in national security, energy and the environment, critical infrastructure and health. The team has continued its research and development work started at Leidos and expanded the setUSDC awarded us $302,400 for Apple’s infringement of patents we acquired in 2006 from Leidos, into a larger portfolio of approximately 191 total patents and pending applications, including 75 U.S. patents/patent applications and 116 foreign patents/validations/pending applications This portfolio now serves as the foundation of our licensing business and planned service offerings and is expected to generate the majority of our future revenue in license fees and royalties. We intend to continue our research and development efforts to further strengthen and expand our patent portfolio.

We will continue using a primarily 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 use4 of our patents. On September 29, 2017, the USDC entered its final judgment, denied all of Apple’s post-trial motions, granted all our post-trial motions, including our motion for willful infringement and enhanced the royalty rate during the willfulness period from $1.20 to $1.80 per device, and awarded us costs, certain attorneys’ fees, and prejudgment interest. The total amount in the final judgment was $439,700, including $302,400 (jury verdict), $41,300 (enhanced damages) and $96,000 (costs, fees and interest).

On October 27, 2017 Apple appealed the final judgment entered on September 29, 2017 to the USCAFC. Oral arguments in this case were held on January 8, 2019. On January 15, 2019 the Court issued a Rule 36 order affirming the district court’s final judgment. Apple filed a petition for panel rehearing and rehearing en-banc in this matter on February 21, 2019. On October 1, 2019, USCAFC issued an order denying Apple’s petition. Apple filed a petition for a writ of certiorari with the SCOTUS, which was denied on February 24, 2020. Prior to the SCOTUS decision denying Apple’s petition for a writ of certiorari, on February 20, 2020, Apple filed a Rule 60(b) motion for relief from judgment with the USDC, seeking relief from the district court’s September 29, 2017 final judgment. VirnetX filed a responsive brief in opposition on March 5, 2020.

On March 13, 2020, the Company received payment of $454,034 from Apple, representing the previously announced final judgment with interest in this case. Apple has indicated that it will seek restitution of the payment if relief sought in its Rule 60(b) motion is awarded. On April 16, 2020, the USDC ordered Apple to file a supplemental brief with respect to its Rule 60(b) motion within 7 days. On September 1, 2020 USDC issued an order denying Apple’s motion for relief of judgement. This case is now closed.

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

This case began on November 6, 2012, when we had filed a complaint against Apple in USDC in which we alleged that Apple infringed on certain of our patents, (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages and injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and the latest Macintosh computers; these products were not included in the Apple I case because they were released after the Apple I case was initiated. Post-trial motions hearing was held on July 18, 2018. On August 31, 2018, the USDC entered a Final Judgment and issued its Memorandum Opinion and Order regarding post-trial motions, affirming the jury’s verdict of $502,600 and granting VirnetX motions for supplemental damages, a sunset royalty and the royalty rate of $1.20 per infringing iPhone, iPad and Mac products, pre-judgment and post-judgment interest and costs. Apple filed a notice of appeal with the USCAFC in the Apple II case.

On October 9, 2018, USCAFC docketed the appeal as Case No. 19-1050 - VirnetX Inc. v. Apple Inc . On January 24, 2019 Apple filed its opening brief. We filed our response brief on March 1, 2019. Apple filed its reply brief on April 5, 2019. The oral arguments were heard on October 4, 2019. On November 22, 2019, the USCAFC issued an opinion affirming the district court’s findings that Apple is precluded from making certain invalidity arguments and that Apple infringed the ’135 and ’151 patents; reversing the USDC’s finding that Apple infringed the ’504 and ’211 patents; and remanding the case for proceedings on damages. Apple sought panel and en banc rehearing, which the USCAFC denied on February 10, 2020.

On February 22, 2020, the USDC issued a scheduling order for the parties to brief the court about the need for a new trial for recalculating the damages. We filed our motion for entry of judgment on February 28, 2020. The arguments on this matter were heard on April 14, 2020. In its order, unsealed on May 1, 2020, the USDC denied VirnetX’s motion for entry of a new judgment based on the prior jury verdict and ordered a new jury trial on damages. On August 10, 2020, the USDC granted Apple’s motion for continuance and reset the trial date to October 26, 2020. On October 30, 2020, a federal jury in the U.S. District Court for the Eastern District of Texas issued a $502,800 verdict in favor of VirnetX based on Apple's infringement of 2 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. We are currently awaiting court order scheduling the hearing for the judgement as a matter of law (JMOL) motions filed by both parties.

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 (USAFC Case 20-2272)

On September 15, 2020, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes review proceedings IPR2015-01046 and IPR2016-00062 involving our U.S. Patent No. 6,502,135, and an appeal of the invalidity findings by the PTAB in inter partes review proceedings IPR2015-1047, IPR2016- 00063, and IPR2016-00167 involving our U.S. Patent No. 7,490,151. On September 25, 2020, the USCAFC issued an order consolidating the two appeals. Our initial briefs are due by December 21, 2020.

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Iancu v. Luoma (SCOTUS Case 20-74)

On July 23, 2020, the United States and the USPTO (collectively, “the United States”) filed a petition for a writ of certiorari from several decisions by the USAFC, including decisions in VirnetX Inc. v. Cisco Systems, Inc., Nos. 2019-1671, and VirnetX Inc. v. Iancu, Nos. 2017-2593, -2594.  In those cases, the USAFC granted VirnetX’s motions to vacate the underlying decisions of the PTAB on the basis of Arthrex, Inc. v. Smith & Nephew, Inc., 941 F.3d 1320 (Fed. Cir. 2019), and remanded for further proceedings.  The United States requested that the SCOTUS hold its certiorari petition pending the disposition of the United States’ separate petition in United States v. Arthrex, Inc., No. 19-1434 (filed June 25, 2020).  On August 26, 2020, VirnetX filed a response, agreeing that the United States’ certiorari petition should be held pending the disposition of the petition for a writ of certiorari in No. 19-1434 (and related petitions filed by private parties in Nos. 19-1452 and 19-1458), and any further SCOTUS proceedings.

On October 13, 2020, SCOTUS granted the United States’ petition for a writ of certiorari in No. 19-1434 as to USAFC Case No. 2018-2140, and the petitions for writs of certiorari in Nos. 19-1452 and 19-1458, all limited to Questions 1 and 2 as set forth in the July 22, 2020 Memorandum for the United States filed in No. 19-1434. The consolidated petition is seeking review of decisions by the USCAFC holding that administrative patent judges (“APJ”) of the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office must be appointed by the president and confirmed by the Senate; and, whether the remedy imposed by USCAFC that federal laws that place restrictions on when officials can be removed from office cannot apply to APJ, was the appropriate one.

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 claims that a retention agreement it entered into in 2010 with VirnetX entitles it to a contingency fee arising from the recent 2020 payment made by Apple. McKool claims it is owed $36,300 (or 8% of the payment). We have filed a general response with AAA denying McKool’s claim and intend to vigorously contest the matter.

Neal Hurwitz v. Kendall Larsen et al. (Case 2020-0425-JRS)

On June 2, 2020, stockholder Neal Hurwitz filed a verified derivative complaint in the Delaware Court of Chancery against Kendall Larsen, Robert D. Short Ill, Gary Feiner, Michael F. Angelo, and Thomas M. O'Brien and naming the Company as nominal defendant. The lawsuit alleges breaches of fiduciary duty, corporate waste, and unjust enrichment arising out of a series of previously-disclosed transactions and compensation awards and seeks an award of monetary damages and equitable relief. On July 1, 2020, the defendants filed a motion to dismiss the complaint based on a failure to plead demand futility and a failure to state a claim on which relief can be granted and, on August 19, 2020, the defendants filed an opening brief in support of their motion to dismiss. On October 16, 2020, plaintiff amended his complaint rather than respond to the arguments in the defendants' opening brief. On October 23, 2020, the defendants filed a renewed motion to dismiss plaintiff's amended complaint based on a failure to plead demand futility and a failure to state a claim on which relief can be granted.

Other Legal Matters

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

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

Note 8 — Leases

We lease office space under an operating lease which expires in October 2021; at September 30, 2020, the underlying ROU asset and lease liability totaled $57. For the three and nine months ended September 30, 2020, we recorded lease expense of $14 and $42.  For the three and nine months ended September 30, 2019, we recorded lease expense of $14 and $42.

We also intendentered into an operating lease for a facility used for corporate promotional and marketing purposes which was prepaid at inception and would have originally expired in 2024.  In September 2020, this lease was extended for one year to expand our design pilot2025, due to COVID use-restrictions in participation with leading 5G2020.  No other terms of the original contract were affected and 4G/LTE companies (domain infrastructure providers, chipset manufacturers, service providersthere was no impact on cash flow.   At September 30, 2020, the ROU totaled $1,323.  For the three and others)nine months ended September 30, 2020, we recorded promotional and build our secure domain name registry.marketing lease expense of $89 and $282.  For the three and nine months ended September 30, 2019, we recorded lease expense of $96 and $289.


Note 9 — Earnings (Loss) Per Share
Basic earnings (loss) per are share based on the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share are based on the weighted average number of common shares and potentially dilutive securities which for the Company include stock options, RSUs and warrants.
The following table shows the computation of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2020 and 2019 (shares in thousands):

 Three Months Ended  Nine Months Ended 
  
September 30,
2020
  
September 30,
2019
  
September 30,
2020
  
September 30,
2019
 
Weighted-average basic shares outstanding  71,059   68,943   70,780   68,278 
Effect of dilutive securities  0   0   883   0 
Weighted-average diluted shares outstanding  71,059   68,943   71,663   68,278 
                 
Basic earnings (loss) per share $(0.06) $(0.07) $4.07  $(0.22)
Diluted earnings (loss) per share $(0.06) $(0.07) $4.02  $(0.22)


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Potentially dilutive securities representing 2,814,179 shares of common stock were excluded from the computation of diluted earnings per share for the nine months ended September 30, 2020, because their effect would have been antidilutive. We incurred a net loss for the three months ended September 30, 2020, and the three and nine months ended September 30, 2019;  therefore, all potentially dilutive securities representing shares of common stock were excluded from the computation of diluted loss per share for those periods, because their effect would have been antidilutive.

Note 10 — Subsequent Events

On October 30, 2020, a federal jury in the U.S. District Court for the Eastern District of Texas issued a $502,800 verdict in favor of VirnetX based on Apples infringement of 2 network security patents. The verdict calls for damages of $0.84 per accused device since the 2013 launch of Apples iOS 7 operating system (see "Note 7 - Litigation").

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

New Accounting Pronouncements


In June 2016,December 2019, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments-Credit LossesAccounting Standards Update (“ASU”) 2019-12 Income Taxes (Topic 326)740). The purpose ofamendments in this ASU issimplify the accounting for income taxes by removing certain exceptions 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 allowancegeneral principles in Topic 740. The amendments also improve consistent application of and simplify U.S. GAAP for credit losses. Thisother areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU isare effective for fiscal years, and interim and annual reporting periods within those fiscal years, beginning after December 15, 2019.2020. We will adopt ASU 2016-13 effective January 1, 2020 with any cumulative effect of adoption recorded as an adjustment to retained earnings. The effect on our consolidated financial statements will largely depend on the composition and credit quality of our investment portfolio and the economic conditions and forecasts at the time of adoption. Based on the current composition of our investment portfolio, current market conditions, and historical credit loss activity,are currently evaluating the impact, if any this ASU will have on our consolidated financial statements and related disclosures is not expected to be material..


In FebruaryJune 2016, FASBthe Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments, and issued subsequent amendments to the initial guidance within ASU No. 2016-02, Leases (Topic 842) as amended2019-04 and supplemented by subsequent ASU’s, (“ASU 2016-02”2019-05 (collectively, "ASU 2016-13"). The amendments in ASU 2016-022016-13 replace the incurred loss impairment methodology with the current expected credit loss model, which requires an entityconsideration of a broader range of reasonable and supportable information 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. Weestimate credit losses. The Company adopted this ASU oneffective January 1, 2019 which had no2020 and the adoption did not have a material impact on our consolidated statementthe Company's financial position, results of operations or cash flow (see Note 8 for impact on our Condensed Consolidated Balance Sheets)flows.


Note 3 — Income Taxes
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Results of Operations
Three and Nine Months Ended September 30, 2019
Compared with Three and Nine Months Ended September 30, 2018
(in thousands, except per share amounts)

Revenue

We had revenues of $4 and $7 forFor the three months ended September 30, 2019 and 2018, respectively, and revenues2020, we recognized an income tax benefit of $50 and $28 for the nine months ended September 30, 2019 and 2018, respectively.

Research and Development Expenses

Research and development expenses were $964 and $932 for the three months ended September 30, 2019 and 2018, respectively, representing$1,293 on a loss before income taxes of $5,318, which is an increaseeffective tax rate of $32 due primarily to an increase in staff expense. Research and development expenses were $2,886 and $3,123 for the nine months ended September 30, 2019 and 2018, respectively, representing a decrease of $237 due primarily to a decrease 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, 2019 compared to the same period in 2018 decreased by $7 to $4,016.24.3%. For the nine months ended September 30, 2020, we recognized income tax expense of $29,036 on income before income taxes of $316,916 which is an effective tax rate of 9.2%. For the three and nine months ended September 30, 2019, we had an income tax benefit of 0 and $393, respectively, due to a release of a state reserve as the statute of limitation for the tax return expired. The effective tax rate for the 2020 nine-month period was favorably impacted by the reversal of valuation allowance reserves totaling $37,585, which were established in prior years on our selling, generaldeferred tax assets primarily associated with net operating loss (“NOL”) carryforwards. For the three and administrative expenses decreased by $3,597nine months ended September 30, 2019, we had NOLs which generated deferred tax assets for NOL carryforwards. During 2019, we provided valuation allowances against the net deferred tax assets including the deferred tax assets for NOL carryforwards. At September 30, 2020, we had deferred tax assets of $8,754.

A valuation allowance is provided for deferred tax assets when, in our judgment, based upon currently available information and other factors, it is more likely than not that all or a portion of such deferred income tax assets will not be realized.  The determination of the need for a valuation allowance is based on an on-going evaluation of current information including, among other things, historical operating results, estimates of future earnings in different taxing jurisdictions and the expected timing of the reversals of temporary differences.  We believe the determination to $12,326 comparedrecord, or reduce, a valuation allowance associated with a deferred income tax asset is a significant accounting estimate because it is based, among other things, on an estimate of future taxable income in the United States and certain other jurisdictions, which is susceptible to change and may or may not occur, and because the impact of adjusting a valuation allowance may be material.  In determining when to release the valuation allowance established against our net deferred income tax assets, we consider all available evidence, both positive and negative.
As a result of the significant taxable income recognized in the nine months ended September 30, 2018.  The2020, we determined that it was more likely than not that we will recover our deferred tax assets and accordingly the valuation allowances were reduced during the period.  During 2019, consistent with our policy, and because of our history of operating losses, we did not recognize the benefit of our deferred tax assets, including NOL carryforwards, that may have been used to offset future taxable income.  We continually assess our ability to generate sufficient taxable income during future periods in which our deferred tax assets may be realized.
Internal Revenue Code Section 382 places a limitation (the ‘‘IRC Section 382 Limitation’’) on the amount of net operating loss carryforwards that can be used to offset taxable income after a change in control (generally greater than 50% change in ownership) of a loss corporation. California, the state in which our headquarters was primarilyonce located, has similar rules. Generally, after a control change, a loss corporation cannot deduct net operating loss carryforwards generated in years prior to the deemed change of control under IRC Section 382 in excess of the Section 382 Limitation. Because we have concluded that the Company has not experienced a change in control under Section 382, all NOL carryforwards were utilized to offset taxable income generated in the period.
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 a $3,955 decrease in legal fees associated with our patent infringement actions. We expectNOLs and tax credits to incur the same levels or decreased levels of legal fees over the foreseeable futurebe utilized from such years.

Our policy is to recognize interest and expect to report losses from operationspenalties accrued on uncertain tax positions as a result.component of income tax expense. As of September 30, 2020, we had accrued immaterial amounts of interest and penalties related to the uncertain tax positions. 

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Note 4 — Commitments and Related Party Transactions

We lease our offices under an operating lease with a third party which expires in October 2021 (see “Legal Proceedings”“Note 8 - Leases”).

We entered into a service agreement for additional information regarding these infringement actions)the use of an aircraft from K2 Investment Fund LLC (the “LLC”) for business travel for employees of the Company. We incurred approximately $67, and $157 compared to $442, and $1,327 in rental fees and reimbursements to the LLC during the three and nine months ended September 30, 2020 and 2019, respectively. We pay for the Company’s usage of the aircraft and have no rights to purchase. Our Chief Executive Officer and Chief Administrative Officer are the managing partners of the LLC and control the equity interests of the LLC. We entered into a 12-month non-exclusive agreement with the LLC for use of the plane at a rate of $8 per flight hour, with no minimum usage requirement. The agreement contains other terms and conditions and can be cancelled by either us or the LLC with 30 days’ notice. The agreement renews on an annual basis unless terminated by either party. Neither party has exercised their termination rights.


Other Income
Note 5 — Stock-Based Compensation

We have a stock incentive plan for employees and Expensesothers called the VirnetX Holding Corporation 2013 Equity Incentive Plan (the “Plan”), which has been approved by our stockholders. In April 2017, the Board approved an amendment and restatement of the Plan to, among other things, increase the shares reserved 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. The Plan provides for grants of 16,624,469 shares of our common stock, including stock options and restricted stock units (“RSUs”), and will expire in 2023. As of September 30, 2020, 675,210 shares remained available for grant under the Plan.


Interest income increased by $6 to $20 forDuring the three months ended September 30, 2020 and 2019, from $14 for the comparable 2018 period, and increased by $41 to $75 forwe did 0t grant options or RSUs.

During the nine months ended September 30, 2020, we granted options for a total of 617,500 shares. The weighted average fair value at the grant dates was $4.77 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: (i) dividend yield on our common stock of 0 percent (ii) expected stock price volatility of 94 percent (iii) a risk-free interest rate of 0.65 percent and (iv) and expected option term of 6 years.

During the nine months ended September 30, 2019 from $34, we granted options for a total of 345,000 shares. The weighted average fair value at the grant dates was $4.63 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: (i) dividend yield on our common stock of 0 percent (ii) expected stock price volatility of 92 percent (iii) a risk-free interest rate of 2.09 percent and (iv) and expected option term of 6 years.

During the nine months ended September 30, 2018. Income tax benefit (expense) changed by $02020 and $3982019, we granted 218,329 and 229,996 RSUs, respectively. The weighted average fair values at the grant dates for RSUs issued during the nine months ended September 30, 2020 and 2019 were $6.89 and $6.06 per RSU, 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 $576 and $1,399 and in research and development expense was $496 and $1,404 for the three and nine months ended September 30, 2020, respectively.  Stock-based compensation expense included in general and administrative expense was $565 and $1,437 and in research and development expense was $434 and $1,275 for the three and nine months ended September 30, 2019, respectively.

As of September 30, 2020, the unrecognized stock-based compensation expense related to non-vested stock options and RSUs was $5,571 and $2,522, respectively, (see “Income Taxes” below).which will be amortized over an estimated weighted average period of approximately 2.2 and 2.6 years, respectively.


Net loss

Net loss forDuring the three months ended September 30, 2020 and 2019, 0 shares were issued as a result of exercised options or vested RSUs.  During the nine months ended September 30, 2020, we issued 262,031 shares of common stock as a result of the exercise of options and 2018 was $4,956 and $4,934, respectively. Net loss for160,393 shares of common stock as a result of vesting RSUs. During the nine months ended September 30, 2019, and 2018 was $14,694 and $18,989, respectively. The changes in the nine months periods are primarily due to decreases in legal fees associated with our patent infringement actions which are reported in our selling, general and administrative expenses.

Liquidity and Capital Resources

As of September 30, 2019, our cash and cash equivalents totaled approximately $2,572 and our short-term investments totaled approximately $2,621, compared to cash and cash equivalents of approximately $7,611 and short-term investments of approximately $1,803 at December 31, 2018. Working capital was $3,914 at September 30, 2019, and $8,275 at December 31, 2018. The decrease in cash and investments during the nine months ended September 30, 2019 was primarily attributed to operating losses incurred during the period.

We expect that our cash and cash equivalents and short-term investments as of September 30, 2019, as well as our ability to obtain cash from saleswe issued 663,816 shares of common stock as a result of the exercise of options and 182,618shares under the ATM and the universal shelf registration statement, described below, will be sufficient to fund our current level of selling, general and administration costs, including legal expenses and provide related working capital for the foreseeable future.  Over the longer term, we expect to derive the majoritycommons stock as a result 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.vesting RSUs.



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Universal Shelf Registration Statement and ATM Offering
Note 6 — Equity

Common Stock

On July 30, 2018 we filed a $100,000 universal shelf registration statement on SEC Form S-3 which was declared effective by the SEC on August 16, 2018. We also entered an at-the-market equity offering sales agreement (“ATM”) with Cowen & Company, LLC on August 31, 2018, under which we can offer and sell shares of our common stock having an aggregate value of up to $50,000.


We use the ATM proceeds for GABRIEL product development, marketing and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products, technologies or businesses. As of September 30, 2019,2020, common stock with an aggregate value of up to $30,327$21,964 remained available for offer and sale under the ATM agreement.


We did 0t sell any shares under the ATM during the three months ended September 30, 2020.  During the nine months ended September 30, 2020, we sold 1,049,382 shares under the ATM. The average price per common share was $4.41 and the aggregate proceeds from the sales totaled $4,627. Sales commissions, fees and other costs associated with the ATM totaled $139.

During the three months ended September 30, 2019, we sold 203,754 shares under the ATM. The average sales price per common share was $6.17 and the aggregate proceeds from the sales totaled $1,257 during the period. Sales commissions, fees and other costs associated with the ATM totaled $38. During the nine months ended September 30, 2019, we sold 1,232,020 shares under the ATM. The average sales price per common share was $5.79 and the aggregate proceeds from the sales totaled $7,131 during the period. Sales commissions, fees and other costs associated with the ATM totaled $214.


Income TaxesDividends


On May 8, 2020, we declared a one-time cash dividend to shareholders of record as of the close of business on May 18, 2020 of $1 per share of common stock, payable on May 26, 2020. The timing and amounts of future dividends, if any, will depend on market conditions, corporate business and financial considerations and regulatory requirements.

Warrants

In 2020, we issued warrants for the purchase of 25,000 shares of common stock at an exercise price of $5.75 per share, which will expire in April 2025. The weighted average fair value at the grant date was $4.16 per warrant. The fair value at the grant date was estimated utilizing the Black-Scholes valuation model with the following weighted average assumptions (i) dividend yield on our common stock of 0 percent (ii) expected stock price volatility of 97 percent (iii) a risk-free interest rate of 0.27 percent and (iv) and expected option term of 5 years.

Warrants IssuedExercise Price
Exercisable at
December 31, 2019
Newly ExercisableExercised
Terminated /
Cancelled
Exercisable at
September 30, 2020
Expiration Date
25,000$7.0025,00000(25,000)0April 30, 2020
25,000$5.75025,0000025,000April 30, 2025
 _25,00025,0000(25,000)25,000_

Note 7 — Litigation

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

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

On August 11, 2010, we filed a complaint against Aastra USA. Inc. (“Aastra”), Apple Inc. (“Apple”), Cisco Systems, Inc. (“Cisco”), and NEC Corporation (“NEC”) the USDC in which we alleged that these parties infringe on certain of our patents (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages and injunctive relief. The cases against each defendant were separated by the judge. Aastra and NEC agreed to sign license agreements with us, and we dropped all accusations of infringement against them. A jury in USDC decided that our patents were not invalid and rendered a verdict of non-infringement by Cisco on March 4, 2013. Our motion for a new Cisco trial was denied and the case against Cisco was closed.

On November 6, 2012, a jury in the USDC awarded us over $368,000 for Apple’s infringement of 4 of our patents, plus daily interest up to the final judgment.

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Apple filed an appeal of the judgment to the USCAFC. On September 16, 2014, USCAFC affirmed the USDC jury’s finding that all four of our patents at issue are valid and confirmed the USDC jury’s finding of infringement of VPN on Demand under many of the asserted claims of our ‘135 and ‘151 patents, and the USDC’s decision to allow evidence about our license and royalty rates regarding the determination of damages. However, the USCAFC vacated the USDC jury’s damages award and some of the USDC’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 back to the USDC for further proceedings.

On September 30, 2016, pursuant to the 2014 remand from the USCAFC, a jury in the USDC awarded us $302,400 for Apple’s infringement of 4 of our patents. On September 29, 2017, the USDC entered its final judgment, denied all of Apple’s post-trial motions, granted all our post-trial motions, including our motion for willful infringement and enhanced the royalty rate during the willfulness period from $1.20 to $1.80 per device, and awarded us costs, certain attorneys’ fees, and prejudgment interest. The total amount in the final judgment was $439,700, including $302,400 (jury verdict), $41,300 (enhanced damages) and $96,000 (costs, fees and interest).

On October 27, 2017 Apple appealed the final judgment entered on September 29, 2017 to the USCAFC. Oral arguments in this case were held on January 8, 2019. On January 15, 2019 the Court issued a Rule 36 order affirming the district court’s final judgment. Apple filed a petition for panel rehearing and rehearing en-banc in this matter on February 21, 2019. On October 1, 2019, USCAFC issued an order denying Apple’s petition. Apple filed a petition for a writ of certiorari with the SCOTUS, which was denied on February 24, 2020. Prior to the SCOTUS decision denying Apple’s petition for a writ of certiorari, on February 20, 2020, Apple filed a Rule 60(b) motion for relief from judgment with the USDC, seeking relief from the district court’s September 29, 2017 final judgment. VirnetX filed a responsive brief in opposition on March 5, 2020.

On March 13, 2020, the Company received payment of $454,034 from Apple, representing the previously announced final judgment with interest in this case. Apple has indicated that it will seek restitution of the payment if relief sought in its Rule 60(b) motion is awarded. On April 16, 2020, the USDC ordered Apple to file a supplemental brief with respect to its Rule 60(b) motion within 7 days. On September 1, 2020 USDC issued an order denying Apple’s motion for relief of judgement. This case is now closed.

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

This case began on November 6, 2012, when we had filed a complaint against Apple in USDC in which we alleged that Apple infringed on certain of our patents, (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages and injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and the latest Macintosh computers; these products were not included in the Apple I case because they were released after the Apple I case was initiated. Post-trial motions hearing was held on July 18, 2018. On August 31, 2018, the USDC entered a Final Judgment and issued its Memorandum Opinion and Order regarding post-trial motions, affirming the jury’s verdict of $502,600 and granting VirnetX motions for supplemental damages, a sunset royalty and the royalty rate of $1.20 per infringing iPhone, iPad and Mac products, pre-judgment and post-judgment interest and costs. Apple filed a notice of appeal with the USCAFC in the Apple II case.

On October 9, 2018, USCAFC docketed the appeal as Case No. 19-1050 - VirnetX Inc. v. Apple Inc . On January 24, 2019 Apple filed its opening brief. We filed our response brief on March 1, 2019. Apple filed its reply brief on April 5, 2019. The oral arguments were heard on October 4, 2019. On November 22, 2019, the USCAFC issued an income tax benefitopinion 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 $393judgment 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 trial date to October 26, 2020. On October 30, 2020, a federal jury in the U.S. District Court for the Eastern District of Texas issued a $502,800 verdict in favor of VirnetX based on Apple's infringement of 2 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. We are currently awaiting court order scheduling the hearing for the judgement as a matter of law (JMOL) motions filed by both parties.

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 (USAFC Case 20-2272)

On September 15, 2020, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes review proceedings IPR2015-01046 and IPR2016-00062 involving our U.S. Patent No. 6,502,135, and an appeal of the invalidity findings by the PTAB in inter partes review proceedings IPR2015-1047, IPR2016- 00063, and IPR2016-00167 involving our U.S. Patent No. 7,490,151. On September 25, 2020, the USCAFC issued an order consolidating the two appeals. Our initial briefs are due by December 21, 2020.

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Iancu v. Luoma (SCOTUS Case 20-74)

On July 23, 2020, the United States and the USPTO (collectively, “the United States”) filed a petition for a writ of certiorari from several decisions by the USAFC, including decisions in VirnetX Inc. v. Cisco Systems, Inc., Nos. 2019-1671, and VirnetX Inc. v. Iancu, Nos. 2017-2593, -2594.  In those cases, the USAFC granted VirnetX’s motions to vacate the underlying decisions of the PTAB on the basis of Arthrex, Inc. v. Smith & Nephew, Inc., 941 F.3d 1320 (Fed. Cir. 2019), and remanded for further proceedings.  The United States requested that the SCOTUS hold its certiorari petition pending the disposition of the United States’ separate petition in United States v. Arthrex, Inc., No. 19-1434 (filed June 25, 2020).  On August 26, 2020, VirnetX filed a response, agreeing that the United States’ certiorari petition should be held pending the disposition of the petition for a writ of certiorari in No. 19-1434 (and related petitions filed by private parties in Nos. 19-1452 and 19-1458), and any further SCOTUS proceedings.

On October 13, 2020, SCOTUS granted the United States’ petition for a writ of certiorari in No. 19-1434 as to USAFC Case No. 2018-2140, and the petitions for writs of certiorari in Nos. 19-1452 and 19-1458, all limited to Questions 1 and 2 as set forth in the July 22, 2020 Memorandum for the United States filed in No. 19-1434. The consolidated petition is seeking review of decisions by the USCAFC holding that administrative patent judges (“APJ”) of the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office must be appointed by the president and confirmed by the Senate; and, whether the remedy imposed by USCAFC that federal laws that place restrictions on when officials can be removed from office cannot apply to APJ, was the appropriate one.

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 claims that a retention agreement it entered into in 2010 with VirnetX entitles it to a contingency fee arising from the recent 2020 payment made by Apple. McKool claims it is owed $36,300 (or 8% of the payment). We have filed a general response with AAA denying McKool’s claim and intend to vigorously contest the matter.

Neal Hurwitz v. Kendall Larsen et al. (Case 2020-0425-JRS)

On June 2, 2020, stockholder Neal Hurwitz filed a verified derivative complaint in the Delaware Court of Chancery against Kendall Larsen, Robert D. Short Ill, Gary Feiner, Michael F. Angelo, and Thomas M. O'Brien and naming the Company as nominal defendant. The lawsuit alleges breaches of fiduciary duty, corporate waste, and unjust enrichment arising out of a series of previously-disclosed transactions and compensation awards and seeks an award of monetary damages and equitable relief. On July 1, 2020, the defendants filed a motion to dismiss the complaint based on a failure to plead demand futility and a failure to state a claim on which relief can be granted and, on August 19, 2020, the defendants filed an opening brief in support of their motion to dismiss. On October 16, 2020, plaintiff amended his complaint rather than respond to the arguments in the defendants' opening brief. On October 23, 2020, the defendants filed a renewed motion to dismiss plaintiff's amended complaint based on a failure to plead demand futility and a failure to state a claim on which relief can be granted.

Other Legal Matters

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

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

Note 8 — Leases

We lease office space under an operating lease which expires in October 2021; at September 30, 2020, the underlying ROU asset and lease liability totaled $57. For the three and nine months ended September 30, 2020, we recorded lease expense of $14 and $42.  For the three and nine months ended September 30, 2019, we recorded lease expense of $14 and $42.

We also entered into an operating lease for a facility used for corporate promotional and marketing purposes which was prepaid at inception and would have originally expired in 2024.  In September 2020, this lease was extended for one year to 2025, due to COVID use-restrictions in 2020.  No other terms of the original contract were affected and there was no impact on cash flow.   At September 30, 2020, the ROU totaled $1,323.  For the three and nine months ended September 30, 2020, we recorded promotional and marketing lease expense of $89 and $282.  For the three and nine months ended September 30, 2019, we recorded lease expense of $96 and $289.

Note 9 — Earnings (Loss) Per Share
Basic earnings (loss) per are share based on the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share are based on the weighted average number of common shares and potentially dilutive securities which for the Company include stock options, RSUs and warrants.
The following table shows the computation of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2020 and 2019 (shares in thousands):

 Three Months Ended  Nine Months Ended 
  
September 30,
2020
  
September 30,
2019
  
September 30,
2020
  
September 30,
2019
 
Weighted-average basic shares outstanding  71,059   68,943   70,780   68,278 
Effect of dilutive securities  0   0   883   0 
Weighted-average diluted shares outstanding  71,059   68,943   71,663   68,278 
                 
Basic earnings (loss) per share $(0.06) $(0.07) $4.07  $(0.22)
Diluted earnings (loss) per share $(0.06) $(0.07) $4.02  $(0.22)


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Potentially dilutive securities representing 2,814,179 shares of common stock were excluded from the computation of diluted earnings per share for the nine months ended September 30, 2020, because their effect would have been antidilutive. We incurred a net loss for the three months ended September 30, 2020, and the three and nine months ended September 30, 2019;  therefore, all potentially dilutive securities representing shares of common stock were excluded from the computation of diluted loss per share for those periods, because their effect would have been antidilutive.

Note 10 — Subsequent Events

On October 30, 2020, a federal jury in the U.S. District Court for the Eastern District of Texas issued a $502,800 verdict in favor of VirnetX based on Apples infringement of 2 network security patents. The verdict calls for damages of $0.84 per accused device since the 2013 launch of Apples iOS 7 operating system (see "Note 7 - Litigation").

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

Company Overview

We are an Internet security software and technology company with patented technology for secure communications including 5G and 4G LTE security. Our software and technology solutions, including our 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, or VoIP, mobile services, streaming video, file transfer, remote desktop and Machine-to-Machine, or M2M communications. Our technology generates secure connections on a “zero-click” or “single-click” basis, significantly simplifying the deployment of secure real-time communication solutions by eliminating the need for end-users to enter any encryption information. Our portfolio of intellectual property is the foundation of our business model. We currently own approximately 194 total patents and pending applications, including 70 U.S. patents/patent applications and 124 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, M2M communications in the new initiatives like “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 2020 to 2024. Some of our issued patents and pending patent applications were acquired by our principal operating subsidiary; VirnetX, Inc., from Leidos, Inc., or Leidos, (f/k/a Science Applications International Corporation, or SAIC) in 2006 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.

Our product GABRIEL Secure Communication Platform™ includes a set of sophisticated software libraries with application interfaces available for securing third-party applications seamlessly across multiple operating system platforms. Unlike other collaboration and communication products and services on the market today, this product does not require access to user’s confidential data and reduces the threat of hacking and data mining. It enables individuals and organizations to maintain complete ownership and control over their personal and confidential data, secured within their own private network, while enabling authorized secure encrypted access from anywhere at any time.

Our GABRIEL Gateway product extends our Secure Communication Platform™ by allowing existing Networked Devices and Services to seamlessly join the “GABRIEL SECURED” network without requiring any modifications. All these devices or services, including cloud-based services, can now be assigned a VirnetX Secure Domain Name and use a fully authenticated secure communication channels for its communications.

Our GABRIEL Collaboration Suite™ is a set of communication tools that use our GABRIEL Secure Communication Platform™. It enables seamless and secure cross-platform communications between devices that are enrolled in our security fabric and have our software installed. Our GABRIEL Collaboration Suite™ is available for download and free trial, for Android, iOS, Windows, Linux and Mac OS X platforms, at http://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 general public. A large number of small and medium businesses have installed our GABRIEL Secure Communication Platform™ and GABRIEL Collaboration Suite™ products in their corporate networks. We intend to continue to expand our customer base with targeted promotions and direct sales initiatives.

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We are actively recruiting partners in various vertical markets including, healthcare, finance, government, etc., to help us rapidly expand our enterprise customer base. A number of International Association of Certified ISAO (IACI) including ISAO’s for Maritime & Ports ISAO, Credit Union ISAO, City of Chicago ISAO, Human Trafficking ISAO, have chosen to deploy our software as private and secure e-technology to protect their communications. Several other ISAOs are completing their evaluations before deploying our products within their networks.

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 5G and 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, Systems Architecture Evolution, or SAE project. We have agreed to make available a non-exclusive patent license under fair, reasonable and non-discriminatory terms and conditions, with compensation, or FRAND, 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 5G and 4G/LTE Advanced devices and solutions.

We have an ongoing GABRIEL 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 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) 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. 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 believe that the market opportunity for our software and technology solutions is large and expanding as secure domain names are now an integral part of securing the next generation 5G and 4G/LTE Advanced wireless networks and M2M communications in areas including Smart City, Connected Car and Connected Home. We also believe that all 5G and 4G/LTE Advanced mobile devices will require unique secure domain names and become part of a secure domain name registry.

We intend to continue 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, including our GABRIEL Connection Technology™ to enterprise customers, developers and 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 5G and 4G/LTE.

Our employees include the core development team behind our patent portfolio, technology and software. This team has worked together for over ten years and is the 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. 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 approximately 194 U.S. and foreign patents, patent validations and pending applications. This portfolio now serves as the foundation of our licensing business and planned service offerings and is expected to generate the majority of our future revenue in license fees and royalties. We intend to continue our research and development efforts to 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 5G and 4G/LTE companies (domain infrastructure providers, chipset manufacturers, service providers and others) and build our secure domain name registry.

New Accounting Pronouncements

In December 2019 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12 Income Taxes (Topic 740). The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We are currently evaluating the impact, if any this ASU will have on our consolidated financial statements and related disclosures.

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Measurement of Credit Losses on Financial Instruments, and issued subsequent amendments to the initial guidance within ASU 2019-04 and ASU 2019-05 (collectively, "ASU 2016-13"). The amendments in ASU 2016-13 replace the incurred loss impairment methodology with the current expected credit loss model, which requires consideration of a broader range of reasonable and supportable information to estimate credit losses. The Company adopted this ASU effective January 1, 2020 and the adoption did not have a material impact. on the Company's financial position, results of operations or cash flows.

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Results of Operations

Three and Nine Months Ended September 30, 2020
Compared with Three and Nine Months Ended September 30, 2019
(in thousands, except per share amounts)

Revenue

For the three and nine months ended September 30, 2020 we recognized revenue of $26 and $302,620, respectively compared to the three and nine months ended September 30, 2019 of $4 and $50, respectively.  During the nine months ended September 30, 2020, the Company collected a lump sum payment of $454,034 from Apple, Inc. (see “Legal Proceedings”), as a result of a favorable court decision relating to a patent infringement case. The one-time payment includes past royalties, damages for willful infringement, interest, court costs and attorneys’ fees. The elements of the payment were recognized in the Company’s condensed consolidated statement of operations as follow (see Note 2 in the Condensed Consolidated Financial Statements):

Classification of Payment Received in the Company’s Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 2020   
Revenue (royalties) $302,428 
Operating expenses: selling, general and administrative (reimbursed litigation costs)  2,114 
Other income: gain (willful infringement)  41,271 
Other income: interest income (pre and post judgment interest)  108,221 
Total cash received $454,034 

Licensing Costs

Included in operating expenses for the nine months ended September 30, 2020, is $90,101 in licensing costs we have incurred in conjunction with the proceeds received from Apple, Inc., pursuant to a favorable court decision relating to a patent infringement case.

Research and Development Expenses

Research and development expenses were $1,091 and $964 for the three months ended September 30, 2020 and 2019, respectively, representing an increase of $127 due primarily to an increase in staff expense. Research and development expenses were $6,799 and $2,886 for the nine months ended September 30, 2020 and 2019, respectively, representing an increase of $3,913 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, 2020 compared to September 30, 2019 increased by $254 to $4,270. The change is primarily due to an increase in staff expenses. For the nine months ended September 30, 2020 our selling, general and administrative expenses increased by $26,021 to $38,347 compared to the nine months ended September 30, 2019. The change was primarily due to a $22,445 increase in legal fees associated with our patent infringement actions, after reflecting reimbursement of $2,114, pursuant to a judgment collected from Apple.  We expect to incur the same levels or decreased levels of legal fees over the next two quarters and expect to report losses from operations as a result. (See “Legal Proceedings” for additional information regarding these infringement actions.)

Other Income and Expenses

For the nine months ended September 30, 2020, we recognized a gain of $41,271 and interest and other income of $108,272 which included interest received of $108,221 pursuant to a judgment collected from Apple.

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Income Taxes

For the three months ended September 30, 2020, we recognized an income tax benefit of $1,293 on loss before income taxes of $5,318, which is an effective tax rate of a 24.3%. For the nine months ended September 30, 2020, we recognized income tax expense of $29,036 on income before income taxes of $316,916 which is an effective tax rate of 9.2%. For the three and nine months ended September 30, 2019, we had an income tax benefit of zero and $393, respectively, due to a release of a state reserve as the statute of limitation for the tax return expired during the year.  We had an incomeexpired. The effective tax expense of $(5)rate for the same2020 nine-month period was favorably impacted by the reversal of valuation allowance reserves totaling $37,585, which were established in 2018.We had incomeprior years on our deferred tax expense of $0 forassets primarily associated with net operating loss (“NOL”) carryforwards. For the three and nine months ended September 30, 2019, and 2018.  During the three and nine-month periods ended September 30, 2019 and 2018, we had net operating losses (“NOLs”)NOLs which generated deferred tax assets for NOL carryforwards. WeDuring 2019, we provided valuation allowances against the net deferred tax assets including the deferred tax assets for NOL carryforwards.

In assessing the realization of At September 30, 2020, we had deferred tax assets management considers whether it is more likely than not that some portion or all of $8,754. (see Note 3 in the deferred tax assets will not be realized. The ultimate realizationCondensed Consolidated Financial Statements for a further discussion of income taxes)

Net Income (Loss)

Net (loss) income for the deferred tax assets is dependent uponthree and nine months ended September 30, 2020 was ($4,025) and $287,880, respectively. Net losses for the generation of future taxable income during the periods in which those temporary differences become deductible. Based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets atthree and nine months ended September 30, 2019 will not be fully realizable. Accordingly, management has maintained a full valuation allowance against its net deferred tax assets at September 30, 2019.were ($4,956) and ($14,694), respectively. The valuation allowance carried againstchange is primarily due to the judgment collected from Apple associated with our net deferred tax assets was approximately $37,000 at September 30, 2019patent infringement action.

Liquidity and $36,000 at December 31, 2018.Capital Resources


As of September 30, 2019, we have federal2020, our cash and state net operating loss carryforwardscash equivalents totaled approximately $225,911 and our short-term investments totaled approximately $22,077, compared to cash and cash equivalents of approximately $127,000$3,135 and $108,000, respectively, expiring beginningshort-term investments of approximately $2,394 at December 31, 2019, respectively. Working capital was $220,603 at September 30, 2020, and $3,945 at December 31, 2019. The increase in 2027cash and 2028, respectively.investments during the nine months September 30, 2020, will be sufficient to fund our current level of selling, general and administration costs, 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.


Our policy isDividends

On May 8, 2020, we declared a one-time cash dividend to recognize interestshareholders of record as of the close of business on May 18, 2020 of $1 per share of common stock, payable on May 26, 2020. The timing and penalties accruedamounts of future dividends, if any, will depend on uncertain tax positions asmarket conditions, corporate business and financial considerations and regulatory requirements.

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Universal Shelf Registration Statement and ATM Offering

On July 30, 2018 we filed a component$100,000 universal shelf registration statement on SEC Form S-3 which was declared effective by the SEC on August 16, 2018. We also entered an at-the-market equity offering sales agreement (“ATM”) with Cowen & Company, LLC on August 31, 2018, under which we can offer and sell shares of income tax expense.our common stock having an aggregate value of up to $50,000.


We use the ATM proceeds for GABRIEL product development, marketing and general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products, technologies or businesses. As of September 30, 2020, common stock with an aggregate value of up to $21,964 remained available for offer and sale under the ATM agreement.

During the nine months ended September 30, 2020, we sold 1,049,382 shares under the ATM. The average sales price per common share was $4.41 and the aggregate proceeds from the sales totaled $4,627 during the period. Sales commissions, fees and other costs associated with the ATM totaled $139.  No sales were made under the ATM during the three months ended September 30, 2020.

Contractual Obligations


There have been no material changes to the contractual obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019.


Off-Balance Sheet Arrangements


None.


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ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk


We invest our excess cash primarily in highly liquid instruments including money market, mutual funds and U.S. government and U.S. agency 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 of September 30, 2019.2020.


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 condensed consolidated balance sheets and statement of operations.


ITEM 4 — CONTROLS AND 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, 2019.2020.


The purpose of this evaluation was to determine whether as of September 30, 20192020 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, 2019,2020, our disclosure controls and procedures were effective.


Changes in Internal Control Over Financial Reporting


There were no changes in our internal control over financial reporting during the quarter ended September 30, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II — OTHER INFORMATION

ITEM 1 — — LEGAL PROCEEDINGS


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


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


On August 11, 2010, we filed a complaint against Aastra USA. Inc. (“Aastra”), Apple Inc. (“Apple”), Cisco Systems, Inc. (“Cisco”), and NEC Corporation (“NEC”) the USDC in which we alleged that these parties infringe on certain of our patents (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages and injunctive relief. The cases against each defendant were separated by the judge. Aastra and NEC agreed to sign license agreements with us, and we dropped all accusations of infringement against them. A jury in USDC decided that our patents were not invalid and rendered a verdict of non-infringement by Cisco on March 4, 2013. Our motion for a new Cisco trial was denied and the case against Cisco was closed.


On November 6, 2012, a jury in the USDC awarded us over $368,000 for Apple’s infringement of four of our patents, plus daily interest up to the final judgment.


Apple filed an appeal of the judgment to the USCAFC. On September 16, 2014, USCAFC affirmed the USDC jury’s finding that all four of our patents at issue are valid and confirmed the USDC jury’s finding of infringement of VPN on Demand under many of the asserted claims of our ‘135 and ‘151 patents, and the USDC’s decision to allow evidence about our license and royalty rates regarding the determination of damages. However, the USCAFC vacated the USDC jury’s damages award and some of the USDC’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 back to the USDC for further proceedings.


On September 30, 2016, pursuant to the 2014 remand from the USCAFC, a jury in the USDC awarded us $302,400 for Apple’s infringement of four of our patents. On September 29, 2017, the USDC entered its final judgement,judgment, denied all of Apple’s post-trial motions, granted all our post-trial motions, including our motion for willful infringement and enhanced the royalty rate during the willfulness period from $1.20 to $1.80 per device, and awarded us costs, certain attorneys’ fees, and prejudgment interest. The total amount in the final judgementjudgment was $439,700, including $302,400 (jury verdict), $41,300 (enhanced damages) and $96,000 (costs, fees and interest).


On October 27, 2017 Apple filed its notice of appeal of thisappealed the final judgementjudgment entered on September 29, 2017 to the USCAFC. Oral arguments in this case were held on January 8, 2019. On January 15, 2019 the Court issued a Rule 36 order affirming the district court’s final judgment. Apple filed its openinga petition for panel rehearing and rehearing en-banc in this matter on February 21, 2019. On October 1, 2019, USCAFC issued an order denying Apple’s petition. Apple filed a petition for a writ of certiorari with the SCOTUS, which was denied on February 24, 2020. Prior to the SCOTUS decision denying Apple’s petition for a writ of certiorari, on February 20, 2020, Apple filed a Rule 60(b) motion for relief from judgment with the USDC, seeking relief from the district court’s September 29, 2017 final judgment. VirnetX filed a responsive brief in opposition on March 19, 2018. We filed our response on April 4, 2018.5, 2020.

On March 13, 2020, the Company received payment of $454,034 from Apple, representing the previously announced final judgment with interest in this case. Apple has indicated that it will seek restitution of the payment if relief sought in its Rule 60(b) motion is awarded. On April 11, 2018, USCAFC designated Cases 18-1197-CB, Case 17-1368 and Case 17-1591 as companion cases and assigned16, 2020, the USDC ordered Apple to the same merits panel. Events and developments after thisfile a supplemental brief with respect to its Rule 60(b) motion within 7 days. On September 1, 2020 USDC issued an order are described below under VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368) (“Consolidated Appeal”).denying Apple’s motion for relief of judgement. This case is now closed.


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


This case began on November 6, 2012, when we had filed a complaint against Apple in USDC in which we alleged that Apple infringed on certain of our patents, (U.S. Patent Nos. 6,502,135, 7,418,504, 7,921,211 and 7,490,151). We sought damages and injunctive relief. The accused products include the iPhone 5, iPod Touch 5th Generation, iPad 4 th4th Generation, iPad mini, and the latest Macintosh computers;computers; these products were not included in the Apple I case because they were released after the Apple I case was initiated. Post-Trial MotionsPost-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’sVirnetX motions for supplemental damages, a sunset royalty and the royalty rate of $1.20 per infringing iPhone, iPad and Mac products, pre-judgment and post-judgment interest and costs. On September 20, 2018, pursuant to a Court’s order, attorneys from VirnetX and Apple conferred and agreed, without dispute, to add an amount totaling $93,300 for Bill of Costs and Prejudgment Interest to the $502,600 jury verdict. The total amount in the final judgement in the Apple II case is now $595,900. Apple has filed a notice of appeal with the USCAFC in the Apple II case.

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On October 9, 2018, USCAFC accepteddocketed the notice and docketed itappeal as Case No. 19-1050 - VirnetX Inc. v. Apple Inc. All subsequent events and developments in this case are described below under VirnetX Inc. v. Apple Inc.   (USCAFC Case 19-1050) (“Apple II Appeal”).

VirnetX Inc. v. The Mangrove Partners (USCAFC Case 17-1368) (“Consolidated Appeal”)

On April 11, 2018, the USCAFC in an order designated the following appeals as companion cases and assigned to the same merits panel;

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

On December 16, 2016, we filed appeals with the USCAFC, appealing the invalidity findings by the Patent Trial and Appeal Board (“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, and one of them involves Black Swamp IP, LLC. Oral arguments in this case were argued on January 8, 2019.

On July 8, 2019, the USCAFC issued its opinion vacating and remanding both decisions. The court agreed with us that the PTAB misconstrued the patent claims, that many of the PTAB’s invalidity findings lacked substantial evidence, and that the PTAB Board abused its discretion in denying us the opportunity to file a motion for additional discovery as to the real party-in-interest issues. The underlying inter partes review (“IPR”) proceedings are currently pending before the PTAB.

VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1197-CB) (Appeal of Apple I Case)

On October 27, 2017 Apple appealed the Final Judgment entered on September 29, 2017 to the USCAFC. Oral arguments in this case were held on January 8, 2019. On January 15, 2019 the Court issued a Rule 36 order affirming the District Court Judgement. Apple filed a request for panel rehearing and rehearing en-banc in this matter on February 21, 2019. On March 12, 2019, the Court invited us to respond to Apple’s petition on or before March 26, 2019. We filed our response on March 22, 2019.

On July 1, 2019 Apple filed a motion for leave to file a supplemental brief regarding the impact of the USCAFC’s decision in VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1751), issued on June 28, 2019 (described below). We filed a response to Apple’s motion and a contingent motion for leave to file a responsive supplemental brief on July 11, 2019. On July 17, 2019, the USCAFC granted both motions and ordered Apple’s and our supplemental briefs filed. On August 1, 2019, USCAFC issued an order denying Apple’s petition for panel and en banc rehearing. On August 7, 2019, Apple filed a motion to vacate the August 1, 2019 order and for leave to file a second request for panel rehearing and rehearing en-banc. On October 1, 2019, USCAFC issued an order denying Apple’s motion. Apple subsequently requested an extension for its deadline to petition for a writ of certiorari, and that deadline was extended until December 29, 2019.

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

On February 7, 2017, we filed appeals with the USCAFC, appealing the invalidity findings by the PTAB in inter-parties’ 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.   Oral arguments in this case were argued on January 8, 2019.

On July 1, 2019 Apple filed a motion for leave to file a supplemental brief regarding the impact of the USCAFC’s decision in VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 18-1751), issued on June 28, 2019 (described below). We filed a response to Apple’s motion and a contingent motion for leave to file a responsive supplemental brief on July 11, 2019. On July 15, 2019, we filed a corrected response and a corrected supplemental brief. On July 17, 2019, the USAFC granted both motions and ordered Apple’s and supplemental briefs filed.

On August 1, 2019, the USCAFC issued an opinion in this case agreeing with us that the PTAB could not maintain two of those reexaminations (initiated by Apple) with respect to claims as to which there has been a prior “final decision” on patent validity entered by a federal court. The court instructed PTAB to terminate those reexamination proceedings with respect to claims 1-35 of the ‘504 patent and claims 36-59 of the ‘211 patent. The court affirmed PTAB’s invalidity findings with respect to the remaining patent claims. Apple filed a request for panel rehearing and rehearing en-banc in this matter on August 26, 2019.  We filed a separate request for panel rehearing on September 3, 2019. Our request was denied on September 19, 2019, and Apple’s request was denied on October 11, 2019.

VirnetX Inc. v. Apple Inc. (USCAFC Case 19-1050) (“Apple II Appeal”)

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. A decision by the USCAFC has not yet been issued.

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

On August 23, 2017, we filed with the USCAFC appeals of the invalidity findings by the PTAB in IPR2016-00331 and IPR2016-00332 involving our U.S. Patent No. 8,504,696. On December 10, 2018,November 22, 2019, the USCAFC issued an opinion affirming the PTAB’sdistrict court’s findings that Apple is precluded from making certain invalidity findings.

VirnetX Inc. (USCAFC Case 17-2593)

On September 22, 2017, we filed witharguments 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 appealsdenied 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 invalidity findings byUSDC denied VirnetX’s motion for entry of a new judgment based on the PTAB in IPR2016-00693prior jury verdict and IPR2016-00957 involving our U.S. Patent Nos. 7,418,504ordered a new jury trial on damages. On August 10, 2020, the USDC granted Apple’s motion for continuance and 7,921,211. The briefing in these appeals has not taken place. The entity that initiatedreset the IPRs, Black Swamp IP, LLC, indicated ondate to October 18, 2017, that it would not participate26, 2020. On October 30, 2020, a federal jury in the appeals. On November 27, 2017,U.S. District Court for the USPTO indicated that it would interveneEastern District of Texas issued 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 appeals. On January 19, 2018,2013 launch of Apple's iOS 7 operating system and represents 598,629,580 infringing units from US sales only. We are currently awaiting court order scheduling the USCAFC stayed these appeals pendinghearing for the USCAFC’s decision in Case 17-1591. On October 25, 2019, we and the USPTOjudgement as a matter of law (JMOL) motions filed a joint request that the deadline to inform the USCAFC how these appeals should proceed be extended until November 1, 2019.by both parties.

VirnetX Inc. v. Cisco Systems,Mangrove Partners Master Fund, Ltd., Apple Inc. (USCAFC Case 18-1751)20-2271) and VirnetX Inc. v. Mangrove Partners Master Fund, Ltd., Apple Inc., and Black Swamp, LLC (USAFC Case 20-2272)

On March 30, 2018,September 15, 2020, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,851review proceedings IPR2015-01046 and IPR2016-00062 involving our U.S. Patent No. 7,418,504. Oral arguments in this case were held on June 4, 2019.

On June 28, 2019, the USCAFC issued its opinion vacating the PTAB’s invalidity findings with respect to claims 5, 12,6,502,135, and 13 and remanding to the PTAB for further proceedings.  The court affirmed the PTAB’s invalidity findings with respect to the remaining patent claims. Cisco filed a request for panel rehearing and rehearing en-banc in this matter on August 12, 2019.  Cisco’s request was denied on October 1, 2019.

VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 19-1043)

On October 1, 2018, we filed with the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,746inter partes review proceedings IPR2015-1047, IPR2016- 00063, and IPR2016-00167 involving our U.S. Patent No. 6,839,759. We filed our opening brief on March 15, 2019. Cisco filed its response brief on June 19, 2019. We filed our reply brief on August 14, 2019. Cisco filed a motion to submit a sur-reply brief on August 26, 2019, which we opposed.7,490,151. On September 27, 2019,25, 2020, the USCAFC issued an order deferring resolutionconsolidating the two appeals. Our initial briefs are due by December 21, 2020.

Iancu v. Luoma (SCOTUS Case 20-74)

On July 23, 2020, the United States and the USPTO (collectively, “the United States”) filed a petition for a writ of Cisco’s motion forcertiorari from several decisions by the merits panel. The oral arguments have not yet been scheduled.

USAFC, including decisions in VirnetX Inc. v. Cisco Systems, Inc. (USCAFC, Nos. 2019-1671, and VirnetX Inc. v. Iancu, Nos. 2017-2593, -2594.  In those cases, the USAFC granted VirnetX’s motions to vacate the underlying decisions of the PTAB on the basis of Arthrex, Inc. v. Smith & Nephew, Inc., 941 F.3d 1320 (Fed. Cir. 2019), and remanded for further proceedings.  The United States requested that the SCOTUS hold its certiorari petition pending the disposition of the United States’ separate petition in United States v. Arthrex, Inc., No. 19-1434 (filed June 25, 2020).  On August 26, 2020, VirnetX filed a response, agreeing that the United States’ certiorari petition should be held pending the disposition of the petition for a writ of certiorari in No. 19-1434 (and related petitions filed by private parties in Nos. 19-1452 and 19-1458), and any further SCOTUS proceedings.

On October 13, 2020, SCOTUS granted the United States’ petition for a writ of certiorari in No. 19-1434 as to USAFC Case 19-1671)No. 2018-2140, and the petitions for writs of certiorari in Nos. 19-1452 and 19-1458, all limited to Questions 1 and 2 as set forth in the July 22, 2020 Memorandum for the United States filed in No. 19-1434. The consolidated petition is seeking review of decisions by the USCAFC holding that administrative patent judges (“APJ”) of the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office must be appointed by the president and confirmed by the Senate; and, whether the remedy imposed by USCAFC that federal laws that place restrictions on when officials can be removed from office cannot apply to APJ, was the appropriate one.


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

On March 18, 2018, we23, 2020, the law firm of McKool Smith, P.C. (“McKool”) filed a Demand for Arbitration against VirnetX, Inc. with the USCAFC an appealAmerican Arbitration Association (“AAA”). In its demand, McKool claims that a retention agreement it entered into in 2010 with VirnetX entitles it to a contingency fee arising from the recent 2020 payment made by Apple. McKool claims it is owed $36,200 (or 8% of the invalidity findings bypayment). We have filed a general response with AAA denying McKool’s claim and intend to vigorously contest the PTABmatter.

Neal Hurwitz v. Kendall Larsen et al. (Case 2020-0425-JRS)

On June 2, 2020, stockholder Neal Hurwitz filed a verified derivative complaint in inter-partes reexamination no. 95/001,679 involving our U.S. Patent No. 6,502,135. Wethe Delaware Court of Chancery against Kendall Larsen, Robert D. Short Ill, Gary Feiner, Michael F. Angelo, and Thomas M. O'Brien and naming the Company as nominal defendant. The lawsuit alleges breaches of fiduciary duty, corporate waste, and unjust enrichment arising out of a series of previously-disclosed transactions and compensation awards and seeks an award of monetary damages and equitable relief. On July 1, 2020, the defendants filed a motion to remanddismiss the complaint based on a failure to plead demand futility and a failure to state a claim on which relief can be granted and, on August 23, 2019, which19, 2020, the USCAFC denied ondefendants filed an opening brief in support of their motion to dismiss. On October 1, 2019, directing16, 2020, plaintiff amended his complaint rather than respond to the parties to address the issuesarguments in the merits briefs. Ourdefendants' opening brief is currently due on November 12, 2019.

VirnetX Inc. v. Cisco Systems, Inc. (USCAFC Case 19-1725)

brief. On March 29, 2019, we filed withOctober 23, 2020, the USCAFC an appeal of the invalidity findings by the PTAB in inter-partes reexamination no. 95/001,792 involving our U.S. Patent No. 7,188,180. Wedefendants filed a renewed motion to remanddismiss plaintiff's amended complaint based on September 10, 2019,a failure to plead demand futility and a failure to state a claim on which remains pending.relief can be granted.


Other Legal Matters

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


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


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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 risks and uncertainties described below in addition to the other information set forth in this Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our condensed 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.


Risks Related to Our Business and Our Financial Reporting


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 counterparties to our litigation include large, well-financed companies with substantially greater resources than us. Patent 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. 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 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 ATM or our universal shelf registration statement. 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 future success of our ATM offering or any other offering. 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.


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


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 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 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;
•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;


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;


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.

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”) 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-relatedinternet-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.


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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 3rd3rd Generation Partnership Project Long Term Evolution (“LTE”), Systems Architecture Evolution project. We will make available a non-exclusive patent license under FRAND (fair, reasonable and 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.


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.


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 (“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, several foreign governments have enacted measures that could restrict or prohibit voice communications services over the Internet or private IP networks.

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.

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, 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;

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


Federal courts are becoming more crowded, and as a result, patent enforcement litigation is taking 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. 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 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 ATM or our universal shelf registration statement. 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 future success of our ATM or any other offering. 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.

If we experience security breaches, 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 vulnerabilities and to repair or replace products already sold or licensed to our customers. Despite 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, computer viruses, 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 compromise of the 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.

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A security breach or other security incident could require a substantial level of financial resources to rectify and otherwise respond to, may be difficult to identify or address in a timely manner, and could result in claims, investigations, and inquires 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.
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.


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 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”), 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.


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 adopted a General Data Protection Regulation (the “GDPR”) that became fully effective on May 25, 2018, superseding prior EU data protection legislation, imposing more stringent EU data protection requirements, and providing for greater penalties for noncompliance. The United Kingdom enacted a Data Protection Act in 2018 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 Data Protection Act, all of which may adversely affect our revenue and product sales. Additionally, California recently enacted legislation, the California Consumer Privacy Act (the “CCPA”) that, will, among other things, requirerequires covered companies to provide new disclosures to California consumers, and afford such consumers new abilities to opt-out of certain sales of personal information, when it goes into effect on January 1, 2020.information. We cannot fully predict the impact of the CCPA on our business or operations, but it may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. Additionally, a new privacy law, the California Privacy Rights Act ("CPRA"), recently was certified by the California Secretary of State to appear on the ballot for the November 3, 2020 election. If this initiative is approved by California voters, the CPRA would significantly modify the CCPA, potentially resulting in further uncertainty and requiring us to incur additional costs. More generally, we cannot yet fully determine the impact these or future laws, regulations and standards may have on our business. 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 our business, 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.


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


The impact of the COVID-19 pandemic on our potential customers and their business operations, including their budgetary constraints and resources devoted to adopting new products.

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.conditions, including impacts from the COVID-19 pandemic. 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.


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 our forecasted 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 Settlementsettlement and License Agreements.license agreements. Our GABRIEL Collaboration Suite™ is 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.


We have limited technical resources and are at an early stage in commercialization of our GABRIEL Collaboration Suite™.


Part of our business includes the internal development of commercial 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. We currently have only one commercial product, the GABRIEL Collaboration Suite™. 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. 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™, we may not be able to effectively:


Generate revenues or profit from product sales;


Drive adoption of our products;


Attract and retain customers for our products;

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

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

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

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

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


Anticipate and adapt to changes in our market; or

•Anticipate and adapt to changes in our market; or

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.

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 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 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.


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 loss, transmission cable cuts and other telecommunications failures;


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

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

Computer viruses or software defects; and


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

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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.


Our ability to sell our solutions will be dependent on the quality of our technical support, and our failure to deliver high-qualityhigh- 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-deploymentpost- 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 Internetinternet 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 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.

The 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 may result in additional severance costs to us.materially harm our business.


Our success largely 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 failure to adequately 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 technology and Internetinternet 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.


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, for example,third party arrangements such as international partnerships, joint ventures and other arrangements with third parties and the possibility ofpotentially 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 could disrupt and slow our international expansion and partnership efforts, as our international partners’ businesses could be disrupted. We may not be successful in our international partnerships, expansion efforts, and we may incur significant operating expenses. For instance, as previously disclosedexpenses in our public filings, we terminated certain agreements with Public Intelligence Technology Associates in March 2018.efforts to expand internationally.


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We have incurred and will continue to incur significant increased 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 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 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 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), 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 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 in 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, and any of which could cause our share price to decline. Moreover, if we identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses in future periods, the market price of our ordinary shares 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 ordinary shares.


There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with 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 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.


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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.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, in December 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted, which contained significant changes to U.S. tax law, including, but not limited to, a reduction in the corporate tax rate and a transition to a new territorial system of taxation. The impact of the Tax Actfuture changes to U.S. and foreign tax law on our business is subject to ongoing technical guidanceuncertain and accounting interpretation, whichcould be adverse, and we will continue to monitor and assess. However, there are still some areasassess the impact of any such changes.

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

Our business may be adversely affected by instability, disruption or destruction in a geographic region in which we operates, 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. 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.

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The global COVID-19 pandemic may harm our business, financial condition, and results of 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 has continued to spread across the globe and is impacting worldwide economic activity and financial markets. In light of the Tax Actuncertain and rapidly evolving situation relating to the spread of COVID-19, we have taken precautionary measures intended to minimize the risk of the virus to our employees, our customers, and other third parties with whom we interact. We are requiring 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 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 negatively affect our customer success efforts, sales and marketing efforts, challenge our ability to enter into customer contracts in a timely manner, slow down our recruiting efforts, or create operational or other challenges, any of which could harm our 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 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, 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. It is not possible at this time to estimate the impact that the COVID-19 pandemic could have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be clarified for some time.predicted.

Risks Related to 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 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 JulyOctober 1, 2018,2019, and September 30, 2019,2020, the reported last adjusted closing price on the NYSE American LLC, and now NYSE,  for our common stock ranged between $2.40$2.92 and $7.63$7.54 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 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.
markets, and impacts from the COVID-19 pandemic.


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.


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;
time, including fluctuations due to general economic uncertainty or negative market sentiment, in particular related to the COVID-19 pandemic;


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

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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;

•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;

•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;


•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;
•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;


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;

•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.
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 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.


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 will have broad discretion in the application of our existing cash, cash equivalents and marketable securities 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 1940 (the "1940 Act"). If we do not manage our investments and business in a manner that meets the 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.

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We do not currentlyregularly 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 may not occur.


The exercise of our outstanding stock options, 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 would dilute the ownership interests of our existing stockholders. As of September 30, 2019,2020, we had outstanding options to purchase an aggregate of 5,680,0215,682,521 shares of common stock representing approximately 8% of our total shares outstanding of which 3,900,5344,184,000 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.


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. WeWhile we had a net lossincome of $17.3 million for the year ended December 31, 2017, a net loss of $25.4 million for the year ended December 31, 2018, and a net loss of $14.7$287.9 million for the nine months ended September 30, 2020, we had net losses of $19.2 million for 2019 with anand $25.4 million for 2018, and through the nine month ended September 30, 2020, we had accumulated deficitdeficits of $213$0.6 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 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 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.


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


As of September 30,December 31, 2019, our executive officers and directors beneficially owned approximately 13.2% 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.


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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: 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.

Blank check preferred 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.

•
A staggered Board of 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.

•
Blank check preferred 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.


•
No stockholder actions by written 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.


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

•
Super majority requirement for stockholder amendments to the bylaws: Stockholder proposals to alter or amend our bylaws or to adopt new 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 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 CorporateCorporation Law govern us. These provisions may prohibit large stockholders, 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 provisionsprovisions.


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.

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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 of 1933 or the Securities Exchange Act of 1934.

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.

ITEM 5 — OTHER INFORMATION

None.

ITEM 6 ——EXHIBITS.

The documents listed in the Exhibit Index of the Quarterly Report on Form 10-Q are incorporated by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).


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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
  NameKendall Larsen
    
  TitleChief Executive Officer (Principal Executive Officer)
    
 By:/s/ Richard H. Nance
  NameRichard H. Nance
    
  TitleChief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
    
Date: November 8, 20196, 2020   



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EXHIBIT INDEX

Exhibit
Number
Description
31.1**
Certification of the President and Chief Executive Officer pursuant to Exchange Act Rules 13a – 14(a) and 15d – 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**
Certification of the Chief Financial Officer pursuant to Exchange Act Rules 13a – 14(a) and 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.
101Interactive Data Files


**Filed herewith.


***The certifications attached as Exhibit 32.1 and Exhibit 32.2 that accompany this Quarterly Report on Form 10-Q are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of VirnetX Holding Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.





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