VirnetX Holding Corp
Annual Report 2011

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K(Mark One) xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2011or oTRANSITION REPORT PURSUANT TO SECTION 13 Or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _________________ to _______________________Commission File Number: 001-33852 VirnetX Holding Corporation(Exact name of registrant as specified in its charter) Delaware 77-0390628(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) 308 Dorla Court, Suite 206 Zephyr Cove, Nevada 89448(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: 775-548-1785Former name, former address and former fiscal year, if changed since last report:Securities registered pursuant to Section 12(b) of the Act:Title of Class Name of Exchange on Which RegisteredCommon Stock, par value $0.0001 per share NYSE Amex Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act:NoneIndicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes x No o Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o No x 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 1934during 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 filingrequirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes x No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not becontained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer xAccelerated filer oNon-accelerated filer oSmaller reporting company o(Do not check if a smaller reporting company) Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2011, was$1,173,043,513 based upon the closing price of the common shares of the Registrant on June 30, 2011. This calculation does not reflect a determination thatcertain persons are affiliates of the Registrant for any other purpose. 50,671,136 shares of Registrant’s Common Stock were outstanding as of February 22, 2012. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of this Annual Report on Form 10-K incorporate by reference information from the Registrant’s Proxy Statement to be filed with theSecurities and Exchange Commission not later than 120 days after December 31, 2011 in connection with the solicitation of proxies for the Registrant’s 2012Annual Meeting of Stockholders.  VirnetX Holding Corporation INDEX Page PART I Item 1.Business5Item 1A.Risk Factors12Item 1B.Unresolved Staff Comments17Item 2.Properties17Item 3.Legal Proceedings17Item 4.Mine Safety Disclosure17 PART II Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities18Item 6.Selected Financial Data20Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations21Item 7A.Quantitative and Qualitative Disclosures about Market Risk27Item 8.Financial Statements and Supplementary Data28Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure45Item 9A.Controls and Procedures45Item 9B.Other Information45 PART III Item 10.Directors, Executive Officers and Corporate Governance46Item 11.Executive Compensation46Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matter46Item 13.Certain Relationships and Related Transactions, and Director Independence46Item 14.Principal Accountant Fees and Services46 PART IV Item 15.Exhibits and Financial Statement Schedules47 2Index WARNING CONCERNING FORWARD LOOKING STATEMENTS THIS ANNUAL REPORT ON FORM 10-K CONTAINS STATEMENTS THAT CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THEMEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER FEDERAL SECURITIES LAWS. ALSO, WHENEVER WEUSE WORDS SUCH AS "BELIEVE", "EXPECT", "ANTICIPATE", "INTEND", "PLAN", "ESTIMATE" OR SIMILAR EXPRESSIONS, WE ARE MAKINGFORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OREXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. ACTUAL RESULTS MAYDIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUSFACTORS. AMONG OTHERS, THE FORWARD LOOKING STATEMENTS WHICH APPEAR IN THIS REPORT THAT MAY NOT OCCUR INCLUDE: ●THE DESCIPTION OF OUR BUSINESS INCLUDES A STATEMENT THAT WE INTEND TO MARKET OUR GABRIEL CONNECTIONTECHNOLOGY™. AN IMPLICATION OF THIS STATEMENT MAY BE THAT WE WILL BE ABLE TO SUCCESSFULLY MARKET THISTECHNOLOGY AND THAT IT WILL GENERATE REVENUE IN THE FUTURE. IN FACT, THERE ARE MANY FACTORS WHICH WILLIMPACT THE SUCCESS OF THIS TECHNOLOGY FOR US, INCLUDING SEVERAL FACTORS WHICH ARE BEYOND OUR CONTROL, SUCHAS THE DEMAND FOR THIS TECHNOLOGY BY POTENTIAL CUSTOMERS AND THE LEVEL OF COMPETITION IN OUR BUSINESS. ●THE DESCRIPTION OF OUR BUSINESS INCLUDES STATEMENTS RELATING TO OUR INTENT TO ESTABLISH A SECURE DOMAIN NAMEREGISTRY IN THE U.S. AND OTHER PARTS OF THE WORLD AND THAT WE ARE CONSIDERING MAKING APPLICATIONS TO BECOMEACCREDITED TO DO SO UNDER AUTHORITY OF THE U.S. GOVERNMENT. THE IMPLICATION OF THOSE STATEMENTS MAY BE THATWE WILL BE ABLE TO ESTABLISH A REGISTRY THAT WILL HAVE MARKET ACCEPTANCE AND THAT IT WILL GENERATE REVENUEFOR US IN THE FUTURE. THERE ARE MANY FACTORS WHICH WILL IMPACT OUR ABILITY TO SUCCESSFULLY ESTABLISH A DOMAINNAME REGISTRY, INCLUDING SEVERAL FACTORS WHICH ARE BEYOND OUR CONTROL, SUCH AS THE ACCREDITATIONAPPLICATION PROCESS OR THE ACCEPTANCE OF OUR REGISTRY OVER OTHERS IN THE MARKET, PARTICULARLY IF WEDETERMINE TO ESTABLISH A REGISTRY WITHOUT ACCREDITATION. ●THE STATEMENTS THAT WE HAVE SUBMITTED A LICENSING DECLARATION TO THE 3RD GENERATION PARTNERSHIP, OR 3GPP,UPDATED SUCH DECLARATIONS AT THE REQUEST OF THE EUROPEAN TELECOMMUNICATIONS STANDARDS INSTITUTE, ORETSI, AND THE ALLIANCE FOR TELECOMMUNICATIONS INDUSTRY SOLUTIONS, OR ATIS, AND THAT WE BELIEVE WE AREPOSITIONED TO LICENSE OUR PATENTS TO 3GPP MEMBERS DESIRING TO IMPLEMENT THE TECHNICAL SPECIFICATIONS IDENTIFIEDBY US, MAY IMPLY THAT THE PATENTS WE HAVE IDENTIFIED TO 3GPP WILL GENERATE LICENSING REVENUE FOR US IN THEFUTURE. WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN LICENSING OUR PATENTS OR THAT THIRD PARTIES WILL BEWILLING TO ENTER INTO LICENSES WITH US ON REASONABLE TERMS OR AT ALL. ●OUR STATEMENT THAT WE BELIEVE WE HAVE THE FINANCIAL AND OTHER RESOURCES TO COMPLETE OUR BUSINESS PLAN MAYIMPLY THAT OUR RESOURCES WILL BE SUFFICIENT TO COMPLETE THAT PLAN SUCCESSFULLY. HOWEVER, WE MAY NOT BE ABLETO SUCCESSFULLY IMPLEMENT OUR BUSINESS PLAN FOR MANY REASONS, INCLUDING MANY REASONS THAT ARE BEYOND OURCONTROL, SUCH AS THE POSSIBILITY THAT OUR FINANCIAL RESOURCES BECOME EXHAUSTED DUE TO INCREASED COSTSASSOCIATED WITH OUR ATTEMPTS TO COMPETE WITH OTHERS WHO MAY HAVE GREATER RESOURCES, OR DUE TO OUR OTHERACTIVITIES, INCLUDING OUR LITIGATION ACTIVITIES. ●STATEMENTS DESCRIBING OUR CONTINUED LITIGATION EFFORTS MAY IMPLY THAT WE WILL PREVAIL IN SOME OR ALL OF OURLITIGATION. HOWEVER, WE CANNOT ASSURE YOU WE WILL PREVAIL IN OUR PENDING LITIGATION MATTERS AND ANY ADVERSERULING MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. ALSO, THE LEGAL AND OTHER COSTS WE MAY INCUR INCONNECTION WITH LITIGATION MATTERS WILL DEPEND, IN PART, UPON ACTIONS TAKEN BY OTHER PARTIES, WHICH ACTIONSARE NOT WITHIN OUR CONTROL AND THESE COSTS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. ●OUR REFERENCES TO THE FACTS THAT OUR CORE DEVELOPMENT TEAM HAS SPENT OVER TEN YEARS WORKING TOGETHER, ANDHAS HAD PRIOR SUCCESS AT SAIC MAY IMPLY THAT OUR TEAM WILL BE SUCCESSFUL IN THE FUTURE. HOWEVER, THIS TEAMMAY NOT BE SUCCESSFUL FOR MANY REASONS, INCLUDING MANY REASONS THAT ARE BEYOND OUR CONTROL, SUCH AS THEPOSSIBILITY THAT ONE OR MORE KEY MEMBERS OF THE TEAM BECOMES INCAPACITATED, OR THAT COMPETITORS ARESUCCESSFUL IN DEVELOPING SUPERIOR PRODUCTS. ●OUR STATEMENT WITH RESPECT TO OUR INTENT TO MARKET AND SELL LICENSE AND SERVICES TO OTHERS MAY IMPLY THATOUR PLANS TO DO SO ARE IMMINENT OR WILL BE SUCCESSFUL. HOWEVER, MARKETING AND SELLING OUR PRODUCT ANDSERVICES WHILE SIMULTANEOUSLY PURSUING OUR LITIGATION AND OUR FURTHER DEVELOPMENT ACTIVITIES CAN PRESENTSIGNIFICANT CHALLENGES. OUR MARKETING AND SALES PLANS MAY TAKE LONGER TO IMPLEMENT THAN WE NOW EXPECT, MAYNOT BE IMPLEMENTED, OR MAY FAIL. THESE AND OTHER UNEXPECTED RESULTS MAY BE CAUSED BY VARIOUS FACTORS, SOME OF WHICH ARE BEYOND OUR CONTROL,INCLUDING: ●THE IMPACT OF CHANGES IN THE US AND GLOBAL ECONOMIES IN GENERAL AND THE CAPITAL MARKETS ON US AND OURINTENDED CUSTOMERS; ●COMPLIANCE WITH, AND CHANGES TO, U.S. FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS, FOREIGN LAWS ANDREGULATIONS, ACCOUNTING RULES, TAX RATES AND SIMILAR MATTERS; AND ●COMPETITION WITHIN OUR INDUSTRY. 3Index WE HAVE GENERATED NET INCOME IN ONLY ONE ANNUAL REPORTING PERIOD SINCE WE BECAME A PUBLICLY OWNED. ALTHOUGH OURPLANS ARE INTENDED TO GENERATE NET INCOME, THERE CAN BE NO ASSURANCE THAT THESE PLANS WILL SUCCEED. RESULTS THAT DIFFER FROM THOSE STATED OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS MAY ALSO BE CAUSED BY VARIOUSCHANGES IN OUR BUSINESS OR MARKET CONDITIONS AS DESCRIBED MORE FULLY UNDER "PART I. ITEM 1A. RISK FACTORS" ANDELSEWHERE IN THIS REPORT. YOU SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD LOOKING STATEMENT ASA RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. 4IndexPART I Item 1. Business. The CompanyVirnetX, Inc. (“we” or “VirnetX”) develop software and technology solutions for securing real-time communications over the Internet. Our patentedGABRIEL Connection Technology™ combines industry standard encryption protocols with our patented techniques for automated domain name system, orDNS, lookup mechanisms, and enables users to create a secure communication link using secure domain names over wired or wireless (4G/LTE) networks. Weare currently beta testing our GABRIEL Connection Technology™ as part of our Secure Domain Name Initiative, or SDNI, on various platforms includingPCs, smart phones and tablets. We also intend to establish the exclusive secure domain name registry in the United States and other key markets around theworld. Our portfolio of intellectual property is the foundation of our business model. We currently own 20 patents in the United States and 26 foreign patents, aswell as several pending U.S. and foreign patent applications. Our patent portfolio is primarily focused on securing real-time communications over theInternet, as well as related services such as the establishment and maintenance of a secure domain name registry. Our patented methods also have additionalapplications in operating systems and network security. On December 1, 2009, we submitted a licensing declaration to the 3rd Generation PartnershipProject, or 3GPP, identifying those of our U.S. and international patents which may be relevant to Long Term Evolution, or LTE. On March 14, 2011, wesupplemented our licensing declaration to include five additional specifications. On April 28, 2011, at the request of the European TelecommunicationsStandards Institute, or ETSI, we agreed to update our licensing declaration to ETSI under ETSI's Intellectual Property Rights or IPR policy. We agreed withETSI that we will make available a non-exclusive patent license under fair, reasonable and non-discriminatory terms and conditions, with compensation, orFRAND, to 3GPP members desiring to implement the Technical Specifications identified by us, as set forth in the updated licensing declaration under ETSI’sIPR policy. On June 17, 2011, in response to a request from the Alliance for Telecommunications Industry Solutions, or ATIS, the North AmericanOrganizational Partner for 3GPP, we also agreed to make available a non-exclusive patent license to 3GPP members desiring to implement the technicalspecifications identified by us, as set forth in the updated licensing declaration under ATIS' IPR policy. We believe that we are positioned to license ouressential security patents to 3GPP members as they move into 4G.We intend to license our patent portfolio, technology and software, including our secure domain name registry service, to domain infrastructure providers,communication service providers as well as to system integrators. We believe that the market opportunity for our software and technology solutions is largeand expanding as secure domain names are now an integral part of securing the next generation 4G/LTE wireless networks. We also believe that all 4Gmobile devices will require unique secure domain names and become part of a secure domain name registry.Our software and technology solutions provide the security platform required by next-generation Internet-based applications such as instant messaging, orIM, voice over Internet protocol, or VoIP, mobile services, streaming video, file transfer and remote desktop. Our technology generates secure connections ona “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. Microsoft Corporation is our first licensee and has been granted a worldwide, irrevocable, nonexclusive, non-sublicenseable fully paid up license of ourpatents for Microsoft products. We intend to seek further license of our technology, including our GABRIEL Connection Technology™ to enterprisecustomers, developers and original equipment manufacturers, or OEMs, of chips, servers, smart phones, tablets, e-Readers, laptops, net books and otherdevices, within the IP-telephony, mobility, fixed-mobile convergence and unified communications markets including 4G/LTE. Our employees include the core development team behind our patent portfolio, technology and software. This team has worked together for over ten yearsand is the same team that invented and developed this technology while working at Science Application International Corporation, or SAIC. SAIC is aFORTUNE 500® scientific, engineering and technology applications company that uses its deep domain knowledge to solve problems of vital importance tothe nation and the world, in national security, energy and the environment, critical infrastructure and health. The team has continued its research anddevelopment work started at SAIC and expanded the set of patents we acquired in 2006 from SAIC into a larger portfolio with 46 issued U.S. and foreignpatents and numerous pending U.S. and foreign patents applications. This portfolio now serves as the foundation of our licensing business and plannedservice offerings and is expected to generate the majority of our future revenue in license fees and royalties. We intend to continue our research anddevelopment efforts to further strengthen and expand our patent portfolio. Please see Item 7 – Management’s Discussion and Analysis of FinancialCondition and Results of Operations – Operations – Research and Development Expenses for a description of our research and development expenses for thepast three fiscal years. We intend to continue using an outsourced and leveraged model to maintain efficiency and manage costs as we grow our licensing business by offeringincentives to early licensing targets or asserting our rights for use of our patents. We also intend to expand our design pilot in participation with leading4G/LTE companies (domain infrastructure providers, chipset manufacturers, service providers and others) and build our secure domain name registry.In 2011, we moved our corporate headquarters from California to Nevada.Industry Overview We believe that the Internet is an evolving, rich and complex medium used by individuals and businesses to conduct commerce, share information andengage in real-time communications including email, text messaging, IM, and voice and video calls. We believe that users have grown accustomed to havingbroadband access wherever they go, and not just at home or in the office. Users can browse the Internet or send e-mails using their mobile broadband enablednotebooks, replace their fixed DSL modems with mobile broadband modems or other devices, and send and receive video or music using 3G phones. Webelieve that Long Term Evolution, or LTE, will further advance a transition from the cellular 3G services to an all internet packet, or "IP", based network thatcan provide mobile data access speeds closer to fixed DSL speeds and allow for more bandwidth intensive applications like interactive TV, mobile videoblogging, advanced games or professional services. Session initiation protocol, or SIP, was developed to enable the convergence of voice and data networksand today is the predominant industry standard for establishing multimedia communications over the Internet such as voice, video, instant messaging,presence information and file transfer. SIP, XMPP and other real-time collaboration protocols use DNS lookup as the primary means of connecting Internetdevices. However, because these protocols use "open architecture", we believe that they are inherently unsecure. We also believe that many enterprises have concluded that security provided to communication by way of an optional add-on solution is less secure thansecurity that can be provided by upgrading core information technology, or "IT", infrastructure (systems, networks, and management) with integratedsecurity. We believe that, because of the complexity of today's networks and the requirement to connect users from any location at any time on any device,enterprises are reevaluating numerous parts of their technology systems, including but not limited to software solutions for smartphones, routers and switcheswith integrated security, massive security appliances for data centers, cloud-based security services and security solutions for virtualized environments andpublic and private clouds. The portions of the IP-telephony, mobility, fixed-mobile convergence and unified communications markets that could benefitfrom our software and technology solutions are forecasted by Infonetics and our internal estimates to grow from approximately $128 billion of worldwiderevenues in 2010 to approximately $226 billion by 2015, representing a compound annual growth rate, or CAGR, of approximately 12%. We believe thatthis growing trend represents a significant opportunity for us to license our technology and software, and establish our secure domain name registry. 5IndexWe also believe that various enterprises have concluded that optional add-on solution, and enterprises everywhere are currently upgrading core ITinfrastructure (systems, networks, and management) to integrate security into everything. Because of the complexity of today’s networks, and the requirementto connect users from any location at any time on any device, enterprise IT is having to reevaluate everything from software solutions for smartphones torouters and switches with integrated security, massive security appliances for data centers, cloud-based security services, and security solutions for virtualizedenvironments and public and private clouds. The portions of the IP-telephony, mobility, fixed-mobile convergence and unified communications markets thatcould benefit from our software and technology solutions are forecasted by Infonetics and our internal estimates to grow from approximately $128 billion ofworldwide revenues in 2010 to approximately $226 billion by 2015, representing a compound annual growth rate, or CAGR, of approximately 12%. Webelieve that this growing trend represents a significant opportunity for VirnetX to license its technology and software, and establish its secure domain nameregistry.IP Telephony – VoIP, Telepresence and Video Conferencing IP telephony includes technologies that use Internet Protocol’s packet-switched connections to exchange voice, fax, and other forms of informationtraditionally carried over the dedicated circuit-switched connections of the public switched telephone network, or PSTN. The adoption of IP telephony hashelped businesses significantly lower network operating costs by using a common network for voice and data. As the workforce becomes increasinglydispersed, mobile features enabled by Internet protocol-based communications such as presence, unified messaging, peer-to-peer applications, find me/followme, white-boarding and document sharing have become more commonplace. However, the development of the related security infrastructure has laggedbehind, leaving next-generation networks vulnerable to a multitude of threats including man-in-middle, eavesdropping, domain hijacking, distributed denialof service, or DDoS, spam over Internet telephony, or SPIT, and spam over instant messaging, or SPIM. These threats continue to highlight the need forsecuring next-generation networks. As the use of IP telephony systems extends beyond the boundaries of an organization’s private network, security is likelyto become an even bigger concern. Worldwide revenue from IP telephony products like IP-PBX including IP phones, service provider VoIP and IMSequipment, VoIP gateways, Enterprise Telepresence and Video Conferencing for businesses is forecasted by Infonetics and our internal estimates to growfrom approximately $30 billion in 2010 to approximately $59 billion in 2015, representing a CAGR of approximately 15%. We believe our unique andpatented solution provides the robust security platform required for providing on-demand secure communication links between enterprises intending tocommunicate securely without manually configuring the connections. We believe a standard security solution such as ours will further accelerate theadoption of IP telephony products in the market and allow enterprises to take full advantage of these rich content applications and real-time communicationsover the Internet, thereby significantly increasing their return on investment.Unified Communications We believe that the need to enhance productivity is rapidly increasing demand for the management of and instant access to real-time information. We believethat mobile collaboration, instant Internet access and the ability to conduct business whether inside or outside of the office, are high priorities. We alsobelieve that the ability to establish multiple secure simultaneous network connections and provide IP sessions with security and encryption will be critical towidespread deployment of next-generation networks. However, one possible shortcoming of this new communications environment is that the various modesof communication operate independently from one another and do not integrate easily, if at all. We believe that the number of individual points of contact inthese environments will grow and that as a result, communication will become more sophisticated and increasingly vulnerable. An array of communication methodologies integrated into a single communications experience is often referred to as unified communications. We believethat unified communications have higher utility and can increase productivity for users. The basic components of unified communications include: adirectory for storing addresses, various modes of communication with each user/contact (desk phone, mobile phone, 1M, etc.), message storage for allmessages regardless of communication method and secure presence of a user's status for each mode of communication (available, away, busy, etc.).Worldwide unified communications market generated approximately $462 million in revenue in 2010 and is forecasted to grow rapidly over the next fewyears generating approximately $1.04billion in revenue in 2015, representing a CAGR of approximately 11%. We believe the growth in unifiedcommunication products may not reach its full potential due to the lack of transparent and seamless security as users hesitate to place their presenceinformation online for all to see and as organizations block access due to the lack of credentials verified by a neutral third party. We believe that oursolutions help address these concerns and should enable significant growth in the unified communications market. IP Mobility-LTE, Fixed-Mobile Convergence We believe that telecommunication markets are rapidly changing and presenting new challenges to the equipment and service providers, including but notlimited to increasing user demand for mobile, always-on connections with multiple devices. We also believe that traffic growth, video acceleration, cloudservices and a rapidly growing number of subscribers challenge currently available network architectures and that, because of this, service providers andcarriers will eventually use a single network for fixed and mobile communications, private/premium communications and Internet access, in spite of thedifficulties involved challenging their business models and forcing the consideration of new network architectures. We believe that LTE technology willdeliver users the benefits of faster data speeds and new services by creating a new radio access technology that's optimized for IP-based traffic and offersoperators a simple upgrade path from 3G networks. Smartphones are multi-functional devices that handle a wide variety of business-critical applications andsupport increasingly complex functions including enhanced data processing, Internet access, e-mail access, calendars and scheduling, contact managementand the ability to view electronic documents. Users have continual access to these applications while on the move making them an increasingly essentialbusiness tool for the mobile worker. These devices enable mobile workers to have similar functionality inside or outside the office thereby increasingemployee efficiency. However, it is critical that this mobile environment have the same level of security as an enterprise's internal network. Fixed-mobileconvergence is an environment where wired and wireless phones work together with Internet Protocol to deliver services (voice, video, data andcombinations thereof) uniformly across multiple access networks, including, among others, WiMAX, WiFi cellular and fixed. Worldwide revenue from IPmobility products like smartphones and mobile data cards, femtocell equipment, rich communication devices and services is expected to grow fromapproximately $98 billion in 2010 to approximately $166 billion by 2015, representing a CAGR of approximately 11%. We believe in order to realize thefull functionality of IP mobility, several challenges including security must be overcome. When users are mobile, connections and data need to cross multiplenetwork boundaries, each of which poses a security threat. Wireless networks may be threatened or compromised by rogue users who enter through (insecurewireless access points. We believe that providing authenticated access to the wireless networks and enterprise applications through the wireless domain areimportant requirements and represent a significant market opportunity for our patented technology and secure domain names to provide users fullyauthenticated secure access on a "zero-click" or "single-click" basis. 6IndexOur Solutions Our software and technology solutions, including our secure domain name registry, our patents and our GABRIEL Connection Technology™ are designed tosecure all types of real-time communications over the Internet. Our technology uses industry standard encryption methods with our patented DNS lookupmechanisms to create a secure communication link between users intending to communicate in real time over the Internet. Our technology can be built intonetwork infrastructure, operating systems or silicon chips developed for a communication or computing device to secure real-time communications over theInternet between numerous devices. Our technology automatically encrypts data allowing organizations and individuals to establish communities of secure,registered users and transmit information between multiple devices, networks and operating systems. These secure network communities, which we callsecure private domains, or SPDs, are designed to be fully-customizable and support rich content applications such as IM, VoIP, mobile services, streamingvideo, file transfer and remote desktop in a completely secure environment. Our approach is a unique and patented solution that we believe provides therobust security platform required by these rich content applications and real-time communications over the Internet. We believe the key benefits and featuresof our technology include the following: ●Automatic and seamless to the user. After a one-time registration, users connect securely on a “zero-click” or “single-click” basis. ●Secure data communications. Users create secure networks with people they trust and communicate over a secure channel. ●Control of data at all times. Users can secure and customize their unified communication and collaboration applications such as file sharing andremote desktop with policy-based access and secure presence information. ●Authenticated users. Users know they are communicating with authenticated users with secure domain names. ●Application-agnostic technology. Our solution provides security at the IP layer of the network by using patented DNS lookup mechanisms to makeconnections between secure domain names, thereby obviating the need to provide application specific security.Competitive Strengths We believe the following competitive strengths will enable our success in the marketplace: ●Unique patented technology. We are focused on developing innovative technology for securing real-time communications over the Internet, andestablishing the exclusive secure domain name registry in the United States and other key markets around the world. Our unique solutions combineindustry standard encryption methods and communication protocols with our patented techniques for automated DNS lookup mechanisms. Ourtechnology and patented approach enables users to create a secure communication link by generating secure domain names. We have a portfoliocomprised of twenty (20) patents in the United States and twenty-six (26) foreign patents, as well as several pending U.S. and foreign patentapplications. Our portfolio includes patents and pending patent applications in the United States and other key markets that support our securedomain name registry service for the Internet. ●Scalable licensing business model. We are actively engaged in pursuing licensing agreements with OEMs, service providers and system integratorswithin the IP-telephony, mobility, fixed-mobile convergence and unified communications end-markets. ●Highly experienced research and development team. Our research and development team is comprised of nationally recognized network securityand encryption technology scientists and experts that have worked together as a team for over ten years. During their careers, this team hasdeveloped several cutting-edge technologies for U.S. national defense, intelligence and civilian agencies, many of which remain critical to ournational security today. Prior to joining VirnetX, our team worked for SAIC during which time they invented the technology that is the foundationof our technology, and software. Based on the collective knowledge and experience of our development team, we believe that we have one of themost experienced and sophisticated groups of security experts researching vulnerability and threats to real-time communication over the Internetand developing solutions to mitigate these problems. Our Strategy Our strategy is to become the market leader in securing real-time communications over the Internet and to establish our GABRIEL CommunicationsTechnology™ as the industry standard security platform. Key elements of our strategy are to: ●Implement a technology licensing program to commercialize our intellectual property, including our GABRIEL Connection Technology™. ●Establish VirnetX as the exclusive universal registry of secure domain names and to enable our customers to act as registrars for their users andbroker secure communication between users on different registries. ●Leverage our existing technology to develop a suite of products that can be sold directly to end-user enterprises. On December 2, 2009, we submitted a licensing declaration to the 3rd Generation Partnership Project, or 3GPP,identifying those of our U.S. and internationalpatents which may be relevant to Long Term Evolution, or LTE. On March 14, 2011, we supplemented our licensing declaration to include five additionalspecifications. On April 28, 2011, at the request of the European Telecommunications Standards Institute, or ETSI, we agreed to update our licensingdeclaration to ETSI under ETSI's Intellectual Property Rights (IPR) policy. We agreed with ETSI that we will make available a non-exclusive patent licenseunder fair, reasonable and non-discriminatory terms and conditions, with compensation, or FRAND, to 3GPP members desiring to implement the technicalspecifications identified by us, as set forth in the updated licensing declaration under ETSI’s IPR policy. On June 17, 2011, in response to a request from theAlliance for Telecommunications Industry Solutions, or ATIS, the North American Organizational Partner for 3GPP, we also agreed to make available a non-exclusive patent license to 3GPP members desiring to implement the Technical Specifications identified by us, as set forth in the updated licensingdeclaration under ATIS' IPR policy. We believe that we are positioned to license our essential security patents to 3GPP members as they move into 4G. Webelieve that we hold the patents relevant to compliance with the 3GPP Series 33 specifications that define security requirements for LTE/4G networks. 7IndexLicense and Service Offerings We plan to offer a diversified portfolio of license and service offerings focused on securing real-time communications over the Internet, including: ●VirnetX technology licensing: Customers who want to develop their own implementation of the VirnetX code module for supporting secure domainnames, or who want to use their own techniques that are covered by our patent portfolio for establishing secure communication links, will purchase atechnology license. We anticipate that these licenses would typically include an initial license fee, as well as an ongoing royalty. We expect thatthese licenses will include a one-time delivery of Gabriel software development kit including object libraries, sample code, testing and qualityassurance tools and the supporting documentation necessary for a customer to implement of the techniques we have developed. ●GABRIEL Connection Technology™ Software Development Kit or SDK: OEM customers who want to adopt the GABRIEL ConnectionTechnology™ as their solution for establishing secure connections using secure domain names within their products will purchase an SDKlicense. The software development kit consists of object libraries, sample code, testing and quality assurance tools and the supportingdocumentation necessary for a customer to implement our technology. These tools are comprised of software for a secure domain name connectiontest server, a relay test server and a registration test server. We expect that customers would pay an up-front license fee to purchase an SDK licenseand a royalty fee for every product shipped with the embedded VirnetX code module. ●Secure domain name registrar service: Customers, including service providers, telecommunication companies, ISPs, system integrators and OEMscould purchase a license to our secure domain name registrar service. We would provide the software suite and technology support to enable suchcustomers to provision devices with secure domain names and facilitate secure connections between registered devices. This suite includes thefollowing server software modules: ●Registrar server software: We anticipate that our registrar server software would enable customers to operate as a secure domain name registrar thatprovisions devices with secure domain names. The registrar server software is designed to provide an interface for our customers to register newvirtual private domains and sub-domain names. This server module must be enrolled with the VirnetX secure domain name master registry to obtainits credentials before functioning as an authorized registrar. ●Connection server software: We anticipate that our connection server software would allow customers to provide connection services to enrolleddevices. The connection services include registration of presence information for authenticated users and devices, presence information queryrequest services, enforcement of policies and support for communication with peers behind firewalls. ●Relay server software: We anticipate that our relay server software would allow customers to dynamically maintain connections and relay data toprivate IP addresses for network devices that reside behind firewalls. Secure domain name registrar service customers will enter into a technologylicensing and revenue sharing agreement with VirnetX whereby we will typically receive an up-front licensing fee for the secure domain nameregistrar technology, as well as ongoing annual royalties for each secure domain name issued by the customer. ●Secure domain name master registry and connection service: As part of enabling the secure domain name registrar service, we expect that we willmaintain and manage the secure domain name master registry. This service is expected to enroll all secure domain name registrar customers andgenerate the credentials required to function as an authorized registrar. It also is expected to provide connection services and universal nameresolution, presence information and secure connections between authorized devices with secure domain names. ●Technical support services: We intend to provide high-quality technical support services to licensees and customers for the rapid customizationand deployment of GABRIEL Connection Technology™ in an individual customer’s products and services. Our research and development team was the team responsible for inventing the claimed subject matter of the patents that form the foundation of ourtechnology. This team has worked together for over ten years. We intend to leverage this experience and continue investing in research and developmentand, over time, expect to strengthen and expand our patent portfolio, technology, and software. While we are currently focused on securing real-timecommunications over the Internet and establishing the first and only secure domain name registry, we believe our existing and future intellectual propertyportfolio will extend to additional areas including, among others, network security and operating systems for fixed and mobile devices. Customers Our primary source of income since inception has been from the Settlement and License Agreement we entered into with Microsoft Corporation, our firstlicensee, on May 14, 2010, or the Settlement and License Agreement. Pursuant to the Settlement and License Agreement, Microsoft paid us $200,000,000 inJune 2010, which has been classified as gain on settlement. As a consequence, we dismissed the two patent infringement lawsuits we initiated againstMicrosoft in February 2007 and March 2010 and granted Microsoft a worldwide, irrevocable, nonexclusive, non-sub licensable fully paid up license underour patents. The Settlement and License Agreement with Microsoft will not impact our plans to operate a secure domain name service. We are currently focused on commercializing our technology and are actively offering our GABRIEL Connection Technology™ to original equipmentmanufacturers, or OEMs, within the IP-telephony, mobility, fixed-mobile convergence and unified communications markets. We also intend to provide technology licenses and software offerings, including our secure domain name registry service, to communication serviceproviders as well as to system integrators. 8IndexMarketing and Sales We plan to employ a leveraged, partner-oriented, marketing strategy for our technology licenses and software offerings. We expect the marketing strategywill primarily be focused on OEMs. We plan to directly market our domain name registry services to our service provider and system integrator customers. We hope to leverage our relationshipwith SAIC to extend our offering to departments and agencies within the federal government. SAIC is a FORTUNE 500® scientific, engineering andtechnology applications company that uses its deep domain knowledge to solve problems of vital importance to the nation and the world, in nationalsecurity, energy and the environment, critical infrastructure, and health. We intend to build a sales force that will be responsible for managing accounts andpursuing technology licensing and sales opportunities with new customers. Competition We believe our technology and solutions will compete primarily against various proprietary security solutions. We group these solutions into three maincategories: ●Proprietary or home-grown application specific security solutions have been developed by vendors and integrated directly into their products forour target markets including IP-telephony, mobility, fixed-mobile convergence, and unified communications. These proprietary solutions havebeen developed due to the lack of standardized approaches to securing real-time communications. This approach has led to corporate networks thatare isolated and, as a result, restrict enterprises to using these next-generation networks within the boundaries of their private network. Thesesolutions generally do not provide security for communications over the Internet or require network administrators to manually exchange keys andother security parameters with each destination network outside their corporate network boundary. The cost-savings and other benefits of IP-basedreal-time communications are significantly limited by this approach to securing real-time communications. ●A session border controller, or SBC, is a device used in networks to exert control over the signaling and media streams involved in establishing,conducting and terminating VoIP calls. A traditional firewall or network address translation, or NAT, device typically block information likeendpoint IP addresses and port numbers required by signaling protocols, such as SIP and XMPP, to reach and communicate with their intendeddestination. SBCs are used in physical networks to address these limitations and enable real-time session traffic to cross the boundaries created byfirewalls and other NAT devices and enable VoIP calls to be established successfully. However, SBCs must decrypt and analyze every single datapacket for the information to be transmitted successfully, thereby preventing end-to-end encryption. This network design results in SBCs becominga single point of congestion on the network, as well as a single point of failure. SBCs are also limited to the physical network they secure. ●SIP firewalls, or SIP-aware firewalls, and application layer gateways, manage and protect the traffic, flow and quality of VoIP and other SIP-relatedcommunications. They perform real-time network address translation, dynamic firewall functions; support multiple signaling protocols, and mediafunctionality, allowing secure interconnection and the flow of IP media streams across multiple networks. While SIP firewalls assist in analyzing SIPtraffic transmitted over the corporate network to filter out various threats, they do not necessarily encrypt the traffic. As a result, this traffic is notentirely secure from end-to-end nor is it protected against threats like man-in-middle and eavesdropping. Intellectual Property and Patent Rights Our intellectual property is primarily comprised of trade secrets, patented know-how, issued and pending patents, copyrights and technological innovation. We have a portfolio comprised of twenty (20) patents in the United States and twenty six (26) foreign patents, as well as several pending U.S. and foreignpatent applications. Our portfolio includes a number of patents that describe unique systems and methods for securing real-time communications over theInternet, as well as related services such as the establishment and maintenance of a secure domain name registry. Our software and technology solutions alsohave additional applications relating to operating systems and network security. We have included a list of our U.S. patents below. Each patent below is publicly accessible on the Internet website of the U.S. Patent and Trademark Office atwww.uspto.gov. The term of each of our issued U.S. and foreign patents will expire during the period from 2019 to 2024. U.S. Patent Number Link toPatent Title of Patent6,502,135 Agile network protocol for secure communications with assured system availability6,618,761 Agile network protocol for secure communications with assured system availability6,826,616 Method for establishing secure communication link between computers of virtual private network6,834,310 Preventing packet flooding of a computer on a computer network6,839,759 Method for establishing secure communication link between computers of virtual private network without user entering anycryptographic information6,907,473 Agile network protocol for secure communications with assured system availability7,010,604 Agile network protocol for secure communications with assured system availability7,133,930 Agile network protocol for secure communications with assured system availability7,188,180 Method for establishing secure communication link between computers of virtual private network7,209,479 Third party VPN certification7,418,504 Agile network protocol for secure communications using secure domain names7,490,151 Establishment of a secure communication link based on a domain name service (DNS) request7,921,211 Agile network protocol for secure communications using secure domain names7,933,990 Agile network protocol for secure communications with assured system availability7,945,654 Agile network protocol for secure communications using secure domain names7,944,915 Third party VPN certification7,897,274 Method for establishing secure communication link between computers of virtual private network7,986,688 Third party VPN certification7,996,539 Agile network protocol for secure communications with assured system availability8,051,181 Method for establishing secure communication link between computers of virtual private network 9Index Notwithstanding anything to the contrary set forth in any of the Company’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934that might incorporate future filings, the information set forth on the United States Patent and Trademark Office, or the USPTO Website, shall not bedeemed to be a part of or incorporated by reference into any such filings. The Company does not warrant the accuracy, or completeness or adequacy of theUSPTO Website, and expressly disclaims liability for errors or omissions on such website. Assignment of Patents Some of our issued patents and pending patent applications were acquired by our principal operating subsidiary, VirnetX, Inc., from Science ApplicationsInternational Corporation, or SAIC, pursuant to an Assignment Agreement dated December 21, 2006, and a Patent License and Assignment Agreement datedAugust 12, 2005, as amended on November 2, 2006, including documents prepared pursuant to the November amendment, and as further amended on March12, 2008. We recorded the assignment from SAIC with the U.S. Patent Office on December 21, 2006.Key terms of these agreements are as follows:Patent Assignment. SAIC unconditionally and irrevocably conveyed, transferred, assigned and quitclaimed all its right, title and interest in and to the patentsand patent applications, as specifically set forth on Exhibit A to the assignment document recorded with the U.S. Patent Office, including, without limitation,the right to sue for past infringement.License to SAIC Outside the Field of Use. On November 2, 2006, we granted to SAIC an exclusive, royalty free, fully paid, perpetual, worldwide, irrevocable,sublicensable and transferable right and license permitting SAIC and its assignees to make, have made, import, use, offer for sale, and sell products andservices covered by, and to make improvements to, the patents and patent applications we acquired from SAIC, solely outside our field of use. We have, andretain, all right, title and interest to all our patents within our field of use. On March 12, 2008, SAIC relinquished the November 2, 2006, exclusive right andlicense outside our field of use referred to above, as well as any right to obtain such exclusive license in the future. Effective March 12, 2008, we granted toSAIC a non-exclusive, royalty free, fully paid, perpetual, worldwide, irrevocable, sublicensable and transferable right and license permitting SAIC and itsassignees to make, have made, import, use, offer for sale, and sell products and services covered by, and to make improvements to, the patents and patentapplications we acquired from SAIC, solely outside our field of use.Compensation Obligations. As consideration for the assignment of the patents and for the rights we obtained from SAIC as amended, we are required to makepayments to SAIC based on cash or certain other values generated from those patents. The amount of such payments depends upon the type of valuegenerated, and certain categories are subject to maximums and other limitations. As of June 30, 2010, we met our maximum royalty payment requirement;however, SAIC is also entitled under certain circumstances to receive a portion of the proceeds paid to us for certain acquisitions of VirnetX, from thesettlement of certain patent infringement claims of ours. Government Regulation The laws governing online secure communications remain largely unsettled, even in areas where there has been legislative action. It may take years todetermine whether and how existing laws governing intellectual property, privacy and libel apply to online communications and media. Such legislationmay interfere with the growth in use of online secure communications and decrease the acceptance of online secure communications as a viable solution,which could adversely affect our business. Due to the Internet’s popularity and increasing use, new laws regulating secure communications may be adopted. These laws and regulations may cover,among other things, issues relating to privacy, pricing, taxation, telecommunications over the Internet, content, copyrights, distribution and quality ofproducts and services. We intend to comply with all new laws and regulations as they are adopted. The U.S. government has controlled the authoritative domain name system, or DNS, root server since the inception of the Internet. On July 1, 1997, thePresident of the United States directed the U.S. Secretary of Commerce to privatize the management of the domain name system in a manner that increasescompetition and facilitates international participation in its management. On September 29, 2006, the U.S. Department of Commerce extended its delegation of authority by entering into a new agreement with the InternetCorporation for Assigned Names and Numbers, or ICANN, a California non-profit corporation headquartered in Marina Del Rey, California. ICANN isresponsible for managing the accreditation of registry providers and registrars that manage the assignment of top level domain names associated with theauthoritative DNS root directory. Although it is possible to create and manage other DNS root directories privately without accreditation from ICANN, thepossibility of conflicting name and number assignments makes it less likely that users would widely adopt a top level domain name associated with analternative DNS root directory provided by a non-ICANN-accredited registry service. We are currently evaluating whether we will apply to become an ICANN-accredited registry provider with respect to one or more customized generic top-level domain (gTLD), or create our own alternative DNS root directory to manage the assignment of non-standard secure domain names. We have not yetbegun discussions with ICANN and we cannot assure you that we will be successful in obtaining ICANN accreditation for our registry service on termsacceptable to us or at all. Whether or not we obtain accreditation from ICANN, we will be subject to the ongoing risks arising out of the delegation of theU.S. government’s responsibilities for the domain name system to the U.S. Department of Commerce and ICANN and the evolving government regulatoryenvironment with respect to domain name registry services.Employees As of December 31, 2011, we had 13 full-time employees. 10IndexCorporate Overview and History VirnetX, Inc., was incorporated in the State of Delaware in August 2005. In November 2006, VirnetX acquired certain patents from SAIC. In July 2007, weeffected a reverse merger between PASW, Inc. and VirnetX, which became our principal operating subsidiary. As a result of this merger, the former securityholders of VirnetX came to own a majority of our outstanding common stock. On October 29, 2007, we changed our name from PASW, Inc. to VirnetXHolding Corporation. Available Information We file or furnish various reports, such as registration statements, periodic and current reports, proxy statements and other materials with the SEC. OurInternet website address is www.virnetx.com. You may obtain, free of charge on our Internet website, copies of our annual report on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act,as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information we post is intended for referencepurposes only; none of the information posted on our website is part of this report or incorporated by reference herein. In addition to the materials that are posted on our website, you may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and other information statements, and other information regarding issuers,including us, that file electronically with the SEC. The Internet address of the SEC’s Internet site is http://www.sec.gov. 11Index Item 1A. Risk Factors. You should carefully consider the following material risks in addition to the other information set forth in this Quarterly Report on Form 10-Q beforemaking any investment in the offered securities. The risks and uncertainties described below are not the only ones we face. Additional risks anduncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. If any of these risk factorsoccurs, you could lose substantial value or your entire investment in our shares.Risks Related to Financial Reporting ObligationsOur consolidated financial statements have been restated in the past year in connection with our identification of a material weakness in our internalcontrol over financial reporting; we may identify future material weakness which may result in late filings, increased costs or declines in our share price.In early 2011, we restated our previously filed financial statements for the fiscal quarter ended September 30, 2010, each of the then previous five fiscalquarters and the fiscal year ended December 31, 2009, to adjust our accounting for our Series I Warrants. In connection with these restatements, wedetermined that we had not maintained effective control over our accounting for these Series I Warrants and, as a result, that a material weakness existed withrespect to our reporting of complex, non-routine transactions as of the end of the periods covered by the Form 10-K and Form 10-Qs that included thefinancial statements referenced above. Although we believe that we currently maintain effective control over our disclosure controls and procedures andinternal control over financial reporting as regards this issue, we may in the future identify deficiencies regarding the design and effectiveness of our systemof internal control over financial reporting. In addition, we expect that we will continue to be required to provide a management report in our Form 10-Kregarding our internal control over financial reporting and that our independent registered public accounting firm will continue to be required to attest to ourinternal control matters. If we experience any material weaknesses in our internal control over financial reporting the future or are unable to provideunqualified management or attestation reports about our internal controls, we may be unable to meet financial and other reporting deadlines and may incurcosts associated with remediation, and any of which could cause our share price to decline.Our litigation can be time-consuming, costly and we cannot anticipate the results.We spend a significant amount of our financial and management resources to pursue our current litigation matters. We believe that these litigation mattersand others that we may in the future determine to pursue could continue for years and continue to consume significant financial and managementresources. The counterparties to our litigation are all large, well-financed companies with substantially greater resources than us. We cannot assure you thatany of our current or future litigation matters will result in a favorable outcome for us. Also, we cannot assure you that we will not be exposed to claims orsanctions against us which may be costly or impossible for us to defend. Unfavorable or adverse outcomes may result in losses, exhaustion of financialresources or other adverse affect our ability to develop and commercialize products.Risks Related to Our Business and Our IndustryWe 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 throughdirect sales and marketing efforts; as such our business strategy and revenues will depend on intellectual property licensing fees and royalties for the majorityof our revenues. We currently derive minimal revenue from licensing activities and we cannot assure you that we will successfully capitalize on our marketopportunities or that our current business strategy will succeed. Factors on-going that may affect our ability to execute our current business strategyincluding, but are not limited to: ●Although we entered into a Settlement and License Agreement with Microsoft Corporation, we may not be successful in entering into furtherlicensing relationships; ●Third parties may challenge the validity of certain of our patents; ●The pendency of our various litigations may cause potential licensees not to do business with us; ●We expect that we will face intense competition 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, competitivewith or superior to ours.If we are not able to adequately protect our patented 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 claimswith respect to our patents and such claims could give rise to material cost for defense or settlement or both, jeopardize or substantially delay a successfuloutcome of litigation we are or may become involved in, divert resources away from our other activities, or otherwise materially and adversely affect ourbusiness. Similar challenges could also prevent us from obtaining additional patents in the future. Even if we are successful in enforcing our rights, ourpatents may not ultimately provide us with any competitive advantages and may be less valuable than we currently expect. These risks may be heightened incountries other than the U.S., and may be negatively affected by the fact that legal standards in the U.S. and elsewhere for protection of intellectual propertyrights in Internet-related businesses are uncertain and still evolving. In addition, there are a significant number of U.S. and foreign patents and patentapplications in our areas of interest, and we expect that significant litigation in these areas will continue, and will add uncertainty to the value of certainpatents and other intellectual property rights in our areas of interest. If we are unable to protect our intellectual property rights or otherwise realize value fromthem, our business would be negatively affected.We can provide no assurances that the licensing of our essential security patents under FRAND will be successful.At the request of the European Telecommunications Standards Institute (ETSI), and the Alliance for Telecommunications Industry Solutions (ATIS), weagreed to update our licensing declaration to ETSI and ATIS under their respective Intellectual Property Rights (IRP) 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 developingspecifications in the 3rd Generation Partnership Project (3GPP) Long Term Evolution (LTE), Systems Architecture Evolution (SAE) project. We will makeavailable a non-exclusive patent license under FRAND (fair, reasonable and non-discriminatory terms and conditions, with compensation) for the patentsidentified by VirnetX that are or become essential, to applicants desiring to implement the Technical Specifications identified by VirnetX, as set forth in theupdated licensing declaration under the ATIS and ETSI IPR policies. While we believe that our FRAND commitment positions us to license our essentialsecurity patents for the Technical Specifications identified by VirnetX, our licensing declarations under the ATIS and ETSI IPR policies may limit ourflexibility in determining royalties and license terms for certain of our patents. Consequently, we cannot assure you that the licensing of the essentialsecurity patents will be successful or that third parties will be willing to enter into licenses with VirnetX on reasonable terms or at all, which could have anadverse effect on our business and harm our competitive position. 12IndexBecause our business is conducted or expected to be conducted in an environment that is subject to rapid change, we may be subjected to variousdevelopments in regulation, law and consumer preferences that we may not be able to adapt to successfully. The current regulatory environment for our products and services remains unclear. We can give no assurance that our planned product offerings will be incompliance with laws and regulations of local, state, U.S. federal or foreign authorities. Further, we can give no assurance that we will not unintentionallyviolate 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 whichwould cause us to be in violation of such laws or regulations. For example, VoIP services are not currently subject to all of the same regulations that apply totraditional telephony, but it is possible that similar regulations may be applied to VoIP in the future and that these could result in substantial costs andadversely affect of the marketability of our products and planned products related to VoIP. For further example, the use of the Internet and private IPnetworks for communication is largely unregulated within the United States, but may become regulated in the future; also several foreign governments haveenacted measures that could restrict or prohibit voice communications services over the Internet or private IP networks. Our business depends on the growth of IM, VoIP, mobile services, streaming video, file transfer and remote desktop and other next-generation Internet-basedapplications which are relatively new. The Internet may ultimately prove not to be a viable commercial marketplace which could cease growth or causematerial decline in the number of users in these areas due to complexity or cost of these applications relative to alternate traditional or newly developedcommunications channels. More aggressive domestic or international regulation of the Internet in general, and Internet telephony providers and services specifically or a lack of growthin acceptance of the Internet as a long term viable marketplace for communications services may materially and adversely affect our business, financialcondition, operating results and future prospects.Our exposure to outside influences beyond our control, including new legislation, court rulings or actions by the United States Patent and TrademarkOffice, 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 decreaseour revenue. . For instance, the U.S. Supreme Court has recently modified some tests used by the U.S. Patent and Trademark Office in grantingpatents during the past 20 years which may decrease the likelihood that we will be able to obtain patents and increase the likelihood of challenge ofany patents we obtain or license. In addition, the U.S. recently enacted sweeping changes to the U.S. patent system under the Leahy-Smith AmericaInvents Act (“AIA”), including changes that would transition the U.S. from a “first-to-invent” system to a “first to file” system and alter the processesfor challenging issued patents ·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. ·As patent enforcement becomes more prevalent, it may become more difficult for us to voluntarily license our patents.If we experience security breaches, we could be exposed to liability and our reputation and business could suffer.We expect to retain certain confidential customer information in our secure data centers and secure domain name registry. It will be critical to our businessstrategy that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Our secure domain name registry operationswill also depend on our ability to maintain our computer and telecommunications equipment in effective working order and to reasonably protect oursystems against interruption, and potentially depend on protection by other registrars in the shared registration system. The secure domain name servers thatwe will operate will be critical hardware to our registry services operations. Therefore, we expect to have to expend significant time and money to maintainor increase the security of our facilities and infrastructure.Security technologies are constantly being tested by computer professionals, academics and“hackers.” Advances in the techniques for attacking security solutions could make some or all of our products obsolete or unmarketable. Likewise, if any ofour products are found to have significant security vulnerabilities, then we may need to dedicate engineering and other resources to eliminate thevulnerabilities and to repair or replace products already sold or licensed to our customers. Despite our security measures, our infrastructure may be vulnerableto physical break-ins, computer viruses, attacks by hackers or similar disruptive problems. It is possible that we may have to expend additional financial andother resources to address such problems. Any physical or electronic break-in or other security breach or compromise of the information stored at our securedata centers and domain name registration systems may jeopardize the security of information stored on our premises or in the computer systems andnetworks of our customers. In such an event, we could face significant liability and customers could be reluctant to use our services. Such an occurrencecould also result in adverse publicity and therefore adversely affect the market’s perception of the security of electronic commerce and communications overIP networks as well as the security or reliability of our services.A security breach could require a substantial amount of expense to rectify and could result in a product liability claim that causes us to incur substantialliability and related legal and other costs. A security breach may also harm our reputation and make it more difficult or impossible for us to successfullymarket to others. These matters could harm our operating results and financial condition. 13Index We expect that we will experience long and unpredictable sales cycles, which may impact our operating results.We expect that our sales cycles will be long and unpredictable due to a number of uncertainties such as: ·The need to educate potential customers about our patent rights and our product and service capabilities; ·Customers’ willingness to invest potentially substantial resources and modify their network infrastructures to take advantage of our products; ·Customers’ budgetary constraints; ·The timing of customers’ budget cycles; and ·Delays caused by customers’ internal review processes. ·Long sales cycles may increase the risk that our financial resources are exhausted before we are able to generate significant revenue. We expect that we will be substantially dependent on a concentrated number of customers. If we are unable to establish, maintain or replace ourrelationships with customers and develop a diversified customer base, our revenues may fluctuate and our growth may be limited.We expect that in the future, a significant portion of our revenues will be generated from a limited number of customers. Substantially all of our incomeduring 2010 was from the payments to us resulting from the Settlement and License Agreement we entered into with Microsoft. There can be no guaranteethat we will be able to obtain additional customers, or if we do so, to sustain our revenue levels from these prospective customers. If we are not able toestablish, maintain or replace the limited group of prospective customers that we anticipate may generate a substantial majority of our revenues in the future,or if they do not generate revenues at the levels or at the times that we anticipate, our ability to maintain or grow our revenues will be adversely affected.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 bediscovered after a product has been installed and used by customers. Any errors or defects discovered in our products after commercial release could result infailure to achieve market acceptance, loss of revenue or delay in revenue recognition, loss of customers and increased service and warranty cost, any of whichcould adversely affect our business, operating results and financial condition. In addition, we could face claims for product liability, tort or breach ofwarranty, including claims relating to changes to our products made by our channel partners. The performance of our products could have unforeseen orunknown adverse effects on the networks over which they are delivered as well as on third-party applications and services that utilize our services, whichcould result in legal claims against us, harming our business. Furthermore, we expect to provide implementation, consulting and other technical services inconnection with the implementation and ongoing maintenance of our products, which typically involves working with sophisticated software, computingand 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’sperception of us and our products. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptableterms 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 we cannot control.Our business will also depend upon the capacity, reliability and security of the infrastructure owned by third parties that we will use to deploy ourofferings. We have no control over the operation, quality or maintenance of a significant portion of that infrastructure or whether or not those third partieswill upgrade or improve their equipment. We depend on these companies to maintain the operational integrity of our connections. If one or more of thesecompanies 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 extentthe number of users of networks utilizing our future products suddenly increases, the technology platform and secure hosting services which will be requiredto accommodate a higher volume of traffic may result in slower response times or service interruptions. System interruptions or increases in response timecould 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 onreal-time communications; outages caused by increased traffic could result in delays and system failures. These types of occurrences could cause users toperceive that our solution does not function properly and could therefore adversely affect our ability to attract and retain licensees, strategic partners andcustomers.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 andcommunication networks that we establish. To the extent the number of users of networks utilizing our future products suddenly increases, the technologyplatform and hosting services which will be required to accommodate a higher volume of traffic may result in slower response times, service interruptions ordelays or system failures. Our systems and operations will also be vulnerable to damage or interruption from: ·power loss, transmission cable cuts and other telecommunications failures; ·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. 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, couldreduce the appeal of the networks to users. These types of occurrences could cause users to perceive that our solution does not function properly and couldtherefore 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 operationof 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 periodof 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 securedomain names for a period of time. The inability of the registrar systems we establish, including our back office billing and collections infrastructure, andtelecommunications systems to meet the demands of an increasing number of secure domain name requests could result in substantial degradation in ourcustomer support service and our ability to process registration requests in a timely manner. 14IndexOur ability to sell our solutions will be dependent on the quality of our technical support, and our failure to deliver high-quality technical support servicescould have a material adverse effect on our sales and results of operations.If we do not effectively assist our customers in deploying our products, succeed in helping our customers quickly resolve post-deployment issues and provideeffective ongoing support, or if potential customers perceive that we may not be able achieve to the foregoing, our ability to sell our products would beadversely affected, and our reputation with potential customers could be harmed. In addition, as we expand our operations internationally, our technicalsupport team will face additional challenges, including those associated with delivering support, training and documentation in languages other thanEnglish. Our failure to deliver and maintain high-quality technical support services to our customers could result in customers choosing to use ourcompetitors’ products instead of ours in the future.Telephone carriers have petitioned governmental agencies to enforce regulatory tariffs, which, if granted, would increase the cost of onlinecommunication, and such increase in cost may impede the growth of online communication and adversely affect our business.Use of the Internet has over-burdened existing telecommunications infrastructures, and many high traffic areas have begun to experience interruptions inservice. As a result, certain local telephone carriers have petitioned governmental agencies to enforce regulatory tariffs on IP telephony traffic that crossesover their traditional telephone networks. If the relief sought in these petitions is granted, the costs of communicating via online could increasesubstantially, potentially adversely affecting the growth in the use of online secure communications. Any of these developments could have an adverseeffect 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 ourstrategic plan and may result in additional severance costs to us.Our success largely depends on the skills, experience and efforts of our key personnel, including Kendall Larsen, our Chief Executive Officer andPresident. We have no employment agreements with any of our key executives that prevent them from leaving us at any time. In addition, we do notmaintain 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, wouldjeopardize 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 operations, marketing and sales personnel as well as engineers. Inability toattract and retain such personnel could adversely affect our business. Competition for engineering, sales, marketing and executive personnel is intense,particularly in the technology and Internet sectors and in the regions where our facilities are located. We can provide no assurance that we will attract orretain such personnel.Risks Related to Our StockWe do not intend to pay regular future dividends on our common stock and thus stockholders must look to appreciation of our common stock to realize again on their investments.Although we paid a special cash dividend to holders of our common stock with a record date of July 1, 2010, we do not have any plans to pay regulardividends in the foreseeable future. Instead, we generally intend to retain future earnings to fund our business plan. Our future dividend policy is within thediscretion of our Board of Directors and will depend upon various factors, including our business, financial condition, results of operations, capitalrequirements, and investment opportunities. Accordingly, stockholders must generally look to appreciation of our common stock to realize a gain on theirinvestment. This appreciation may not occur.The exercise of our outstanding stock options would result in a dilution of our current stockholders' voting power and an increase in the number of shareseligible 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 December 31, 2011, we hadoutstanding options to purchase an aggregate of 4,906,998 shares of common stock (representing 9.7% of our total shares outstanding as of December 31,2011) of which 3,965,140 are vested and therefore exercisable. To the extent outstanding stock options are exercised, additional shares of common stock willbe issued, and such issuance would dilute non-exercising stockholders' percentage voting interests and increase the number of shares eligible for resale in thepublic market. The fair value of accounting for our Series I Warrants as derivative liabilities may materially impact our results of our operations in future periods.We record the Series I Warrants as a derivative liability in accordance with ASC 815-40, “Derivatives and Hedging – Contracts in Entity’s OwnEquity.” These derivative liabilities are reported at fair value each reporting period with changes in the fair value recognized as gain or loss during eachreporting period. An increase in our share price or measure of our share price volatility, for example, will generally result in an increase in the fair value ofour warrant liability and a non-cash charge during the period of such increase, which could materially and negatively impact our results of operations infuture periods. 15IndexTrading in our common shares is limited and the price of our common shares may be subject to substantial volatility, particularly in light of the instabilityin the financial and capital markets.Our common stock is listed on NYSE Amex, but its daily trading volume has been limited, sporadic and volatile. Over the past years the market price of ourcommon stock has experienced significant fluctuations. Between January 1, 2011, and December 31, 2011, the reported last sale price for our common stockranged between $11.53 and $39.88 per share. The price of our common stock may continue to be volatile as a result of a number of factors, some of which arebeyond our control. These factors include, but not limited to, the following: ●developments in any then-outstanding litigation; ●quarterly variations in our operating results; ●large purchases or sales of common stock; ●actual or anticipated announcements of new products or services by us or competitors; ●general conditions in the markets in which we compete; and ●economic and financial conditions.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 orsimilar factors. We had a net loss of $12.5 million for the year ended December 31, 2009, a net income of $41.4 million for the year ended December 31,2010, and we have had a net loss of $17.3 million for the year ended December 31, 2011. The following include some of the factors that may cause ouroperating results to fluctuate: ●the outcome of enforcement actions currently in progress or that we may undertake in the future, and the timing thereof; ●the amount and timing of receipt of license fees from potential infringers, licensees or customers; ●the outcome of actions we have taken and may take in the future to enforce our intellectual property rights; ●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 thenumber of our patents which are licensed, the extent of prior infringement of our patent rights, royalty rates, timing of payment obligations,expiration date etc; ●the success of a licensee in selling products that use our patented technologies; and ●the amount and timing of expenses related to our patent filings and enforcement proceedings, including litigation, related to our intellectualproperty rights.These fluctuations may make our business particularly difficult to manage, adversely affect our business and operating results, make our operating resultsdifficult 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 December 31, 2011, our executive officers and directors beneficially owned approximately 21% of our then outstanding common stock. In addition, agroup of stockholders that, as of December 31, 2007, held 4,766,666 shares, or approximately 12%, of our then outstanding common stock, have entered intoa 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 ofDirectors 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 matterssubmitted to the stockholders for a vote. However, we cannot be certain how many shares of our common stock this group of stockholders currentlyowns. Because of their beneficial ownership interest, our officers and directors could significantly influence stockholder actions of which you disapprove orthat are contrary to your interests. This ability to exercise significant influence could prevent or significantly delay another company from acquiring ormerging with us.Our protective provisions 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 that could delay, discourage or prevent a third party from acquiring control of us without the approval of ourBoard of Directors. Our 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 atany given annual meeting. This has the effect of delaying the ability of stockholders to effect a change in control of us because it would take twoannual 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 10,000,000authorized, but unissued, shares of preferred stock. Therefore, this stock may be issued at the discretion of our Board of Directors with preferencesover 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 ofDirectors. 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 withoutstockholder approval. ●Advance notice requirements for director nominations and for new business to be brought up at stockholder meetings: Stockholders wishing tosubmit director nominations or raise matters to a vote of the stockholders must provide notice to us within very specific date windows and in veryspecific form in order to have the matter voted on at a stockholder meeting. This has the effect of giving our Board of Directors and managementmore time to react to stockholder proposals generally and could also have the effect of disregarding a stockholder proposal or deferring it to asubsequent meeting to the extent such proposal is not raised properly. 16Index ●No stockholder actions by written consent: No stockholder or group of stockholders may take actions rapidly and without prior notice to our Boardof Directors and management or to the minority stockholders. Along with the advance notice requirements described above, this provision alsogives our Board of Directors and management more time to react to proposed stockholder actions. ●Super majority requirement for stockholder amendments to the By-laws: Stockholder proposals to alter or amend our By-laws or to adopt newBy-laws 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 ofthe stockholders. This could mean that stockholders, even those who represent a significant percentage of our shares of common stock, may need towait for the annual meeting before nominating directors or raising other business proposals to be voted on by the stockholders.In addition, the provisions of Section 203 of the Delaware General Corporate Law govern us. These provisions may prohibit large stockholders, in particularthose 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 By-laws and under Delaware law could discourage potential takeoverattempts, 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 itwould be without these provisions.Item 1B. Unresolved Staff Comments. Not applicable Item 2. Properties. Our principal executive offices are located at 308 Dorla Court, Suite 206, Zephyr Cove, Nevada 89448. We lease this property, which comprisesapproximately 2,090 square feet of office space, from a third party for a term that ends in 2013. We have no other properties and believe that our officefacility is suitable and appropriately supports our current business needs. Until October 2011, our principal executive offices were located at 5615 ScottsValley Drive, Suite 110, Scotts Valley, California 95066, which we leased for a term that was scheduled to end in 2012. In connection with the move of ourcorporate offices to Nevada, we terminated the Scotts Valley lease effective October 2011. Item 3. Legal Proceedings.On August 11, 2010, we initiated a lawsuit by filing a complaint against Aastra, Apple, Cisco, and NEC in the United States District Court for the EasternDistrict of Texas, Tyler Division, pursuant to which we allege that these parties infringe on certain of our patents. We seek damages and injunctive relief. OnFebruary 4, 2011, we amended our original complaint, filed on August 11, 2010, against Aastra, Apple, Cisco and NEC in the United States District Court forthe Eastern District of Texas, Tyler Division, to assert U.S. Patent No. 7,418,504 against Apple and Aastra. On April 5, 2011, we again amended our complaintagainst Aastra, Apple, Cisco and NEC in the United States District Court for the Eastern District of Texas, Tyler Division, to include Apple’s iPad 2 in the listof Apple products that are accused of infringing our patents. We also asserted our newly-issued patent, U.S. Patent No. 7,921,211 against all of the defendantsin that lawsuit. A claim construction hearing was held on January 5, 2012 and a ruling is awaited. A jury trial is scheduled for November 13, 2012, in thatlawsuit. On January 12, 2011, we initiated a lawsuit by filing a complaint against Siemens and Mitel in the United States District Court for the Eastern District ofTexas, Tyler Division, pursuant to which we allege that these companies infringe three of our patents. We seek damages and injunctive relief. On April 12,2011 we again amended our complaint against Siemens and Mitel in the United States District Court for the Eastern District of Texas, Tyler Division, to addAvaya Inc. as a defendant. A claim construction hearing date has been scheduled for July 12, 2011, and trial dates has been set for November 13, 2011, in that lawsuit.On November 1, 2011, we initiated a new lawsuit against Apple in the United States District Court for the Eastern District of Texas, Tyler Division, pursuantto which we allege that Apple products infringe one or more claims of our U.S. Patent No. 8,051,181. We seek damages and injunctive relief. No hearing ortrial dates have been set. On December 15, 2011, the court entered a stay of this matter pending the completion of ITC investigation. On November 4, 2011, we filed a complaint with the United States International Trade Commission (ITC) alleging that Apple Inc has engaged in unfair tradepractices by the importation, sale for importation, and sale after importation of certain devices with secure communication capabilities that infringe one ormore claims of our U.S. Patent No. 8,051,181. The accused products include the latest iPhones, iPads, iPods and Macintosh computers. We have requestedthat the ITC institute an investigation into Apple’s allegedly infringing imports and ultimately bar Apple from importing those Apple products or furtherselling the infringing Apple products that have already been imported. A 16 month target date of April 6, 2013, has been set in this Case A 5 day hearing infront of the Administrative Law Judge (AJL) is scheduled for September 5 through September 11, 2012.One or more potential intellectual property infringement claims may also be available to us against certain other companies who have the resources to defendagainst any such claims. Although we believe these potential claims are worth pursuing, commencing a lawsuit can be expensive and time-consuming, andthere is no assurance that we will prevail on such potential claims. In addition, bringing a lawsuit may lead to potential counterclaims which may precludeour ability to commercialize our initial products, which are currently in development.Currently, we are not a party to any other pending legal proceedings, and are not aware of any proceeding threatened or contemplated against us by anygovernmental authority or other party.Item 4. Mine Safety Disclosure. Not applicable 17IndexPART II Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock currently trades under the symbol “VHC” on the NYSE Amex Stock Exchange. Common stock warrants that we issued in our January2009 public offering that remain outstanding trade under the symbols “VHCOZ” and “VHCOL” on the OTC Bulletin Board. The following table shows the price range of our common stock, as reported on the NYSE Amex Stock Exchange, for each quarter ended during the last threefiscal years. Quarter Ended High Low 3/31/10 $7.99 $3.00 6/30/10 $7.09 $4.03 9/30/10 $14.88 $5.42 12/31/10 $20.00 $11.61 3/31/11 $21.75 $11.43 6/30/11 $30.50 $19.66 9/30/11 $41.77 $14.81 12/31/11 $29.45 $11.61 The closing price of our common stock on the NYSE Amex Stock Exchange on February 22, 2012 was $23.61 per share. Holders As of February 22, 2012, we had 49 stockholders of record. Because many of our shares of common stock are held of record by brokers and other institutionson behalf of stockholders, we are unable to estimate the total number of beneficial stockholders represented by such record holders. Dividends On June 15, 2010, the Company’s Board of Directors declared a special cash dividend of $0.50 per share of the Company’s common stock to holders ofrecord on July 1, 2010. We currently intend to retain all available funds and any future earnings to support the operation of and to finance the growth anddevelopment of our business. We do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividendswill be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general businessconditions and other factors that our board of directors may deem relevant. 18Index Performance Graph This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the ExchangeAct), or incorporated by reference into any filing of VirnetX under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expresslyset forth by specific reference in such filing. The following graph compares the cumulative 5-year total return attained by shareholders on VirnetX Holding Corp's common stock relative to thecumulative total returns of the S&P 500 index and the RDG Technology Composite index. An investment of $100 (with reinvestment of all dividends) isassumed to have been made in our common stock and in each of the indexes on 12/31/2006 and its relative performance is tracked through 12/31/2011. The stock price performance reflected on this graph is not necessarily indicative of future stock price performance. See the disclosure in part I, Item1A. “Risk Factors” 12/06 12/07 12/08 12/09 12/10 12/11 VirnetX Holding Corp 100.00 675.86 170.11 337.93 1850.33 3111.30 S&P 500 100.00 105.49 66.46 84.05 96.71 98.75 RDG Technology Composite 100.00 115.01 65.30 105.06 118.52 118.29 Recent Sales of Unregistered SecuritiesDuring the year ended December 31, 2011, the Company had no sales of unregistered securities and no repurchases of stock. 19Index Item 6. Selected Financial Data. The statement of operations data for the three years ended December 31, 2011, 2010 and 2009 and the balance sheet data at December 31, 2011 and 2010,respectively, are derived from, and qualified by reference to, our audited financial statements included elsewhere in this Annual Report on Form 10-K. Thestatements of operations data for the for the two years ended December 31, 2008 and 2007 and the balance sheet data at December 31, 2009, 2008 and 2007,respectively, are derived from our audited financial statements not included in this Annual Report on Form 10-K.The selected consolidated financial data below are not necessarily indicative of future performance and should be read in conjunction with Item 7,“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notesthereto included in Item 8 of this Annual Report on Form 10-K. For the year ended December 31, 2011 2010 2009 2008 2007 Consolidated Statement of Operations Data: Revenue $20 $68 $26 $134 $75 Gain on settlement (200,000) — — — Other operating expenses 17,396 95,383 13,114 12,355 8,725 Net operating expenses (17,376) (104,617) 13,114 12,355 8,725 Income tax expense (benefit) (5,480) 34,062 — — — Net (loss) income (17,263) 41,417 (12,524) (12,072) (8,692)Earnings (loss) per share $(0.35) $0.91 $(0.33) $(0.35) $(0.36)Dividends declared per common share $0.00 $0.50 $0.00 $0.00 $0.00 Consolidated Balance Sheet Data: Cash and cash equivalents $49,482 $34,635 $2,011 $457 8,589 Investments available for sale 14,438 43,457 — — — Total assets $74,633 $81,694 $2,242 $979 9,279 Long-term obligation — — 120 160 204 Stockholders’ equity (deficit) $68,277 $59,453 $(8,708) $(894) $8,495 20IndexItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Company Overview We develop software and technology solutions for securing real-time communications over the Internet. Our patented GABRIEL Connection Technology™combines ndustry standard encryption protocols with our patented techniques for automated domain name system, or DNS, lookup mechanisms, and enablesusers to create a secure communication link using secure domain names over wired or wireless (4G/LTE) networks. We are currently beta testing ourGABRIEL Connection Technology™ as part of our Secure Domain Name Initiative, or (SDNI), on various platforms including PCs, smart phones andtablets. We also intend to establish the exclusive secure domain name registry in the United States and other key markets around the world. Our portfolio of intellectual property is the foundation of our business model. We currently own 20 patents in the United States and 26 foreign patents, aswell as several pending U.S. and foreign patent applications. Our patent portfolio is primarily focused on securing real-time communications over theInternet, as well as related services such as the establishment and maintenance of a secure domain name registry. Our patented methods also have additionalapplications in operating systems and network security. On December 2, 2009, we submitted a licensing declaration to the 3rd Generation PartnershipProject, or 3GPP,identifying those of our U.S. and international patents which may be relevant to Long Term Evolution, or LTE. On March 14, 2011, wesupplemented our licensing declaration to include five additional specifications. On April 28, 2011, at the request of the European TelecommunicationsStandards Institute, or ETSI, we agreed to update our licensing declaration to ETSI under ETSI's Intellectual Property Rights or IPR policy. We agreed withETSI that we will make available a non-exclusive patent license under fair, reasonable and non-discriminatory terms and conditions, with compensation, orFRAND, to 3GPP members desiring to implement the technical specifications identified by us, as set forth in the updated licensing declaration under ETSI’sIPR policy. On June 17, 2011, in response to a request from the Alliance for Telecommunications Industry Solutions, or ATIS, the North AmericanOrganizational Partner for 3GPP, we also agreed to make available a non-exclusive patent license to 3GPP members desiring to implement the technicalspecifications identified by us, as set forth in the updated licensing declaration under ATIS' IPR policy. We believe that we are positioned to license ouressential security patents to 3GPP members as they move into 4G.We intend to license our patent portfolio, technology and software, including our secure domain name registry service, to domain infrastructure providers,communication service providers as well as to system integrators. We believe that the market opportunity for our software and technology solutions is largeand expanding as secure domain names are now an integral part of securing the next generation 4G/LTE wireless networks. We also believe that all 4Gmobile devices will require unique secure domain names and become part of a secure domain name registry.Our software and technology solutions provide the security platform required by next-generation Internet-based applications such as instant messaging, orIM, voice over Internet protocol, or VoIP, mobile services, streaming video, file transfer and remote desktop. Our technology generates secure connections ona “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. In connection with the settlement of our lawsuit against Microsoft Corporation in 2010, Microsoft became our first licensee. Pursuant to the Settlement andLicense Agreement between us and Microsoft, Microsoft paid us $200 million, which has been recognized as gain on settlement and Microsoft was granted aworldwide, irrevocable, nonexclusive, non-sublicenseable fully paid up license for our patents for Microsoft products. We intend to seek further license ofour technology, including our GABRIEL Connection Technology™ to enterprise customers, developers and original equipment manufacturers, or OEMs, ofchips, servers, smart phones, tablets, e-Readers, laptops, net books and other devices, within the IP-telephony, mobility, fixed-mobile convergence andunified communications markets including 4G/LTE. Our employees include the core development team behind our patent portfolio, technology and software. This team has worked together for over ten yearsand is the same team that invented and developed this technology while working at Science Application International Corporation, or SAIC. SAIC is aFORTUNE 500® scientific, engineering and technology applications company that uses its deep domain knowledge to solve problems of vital importance tothe nation and the world, in national security, energy and the environment, critical infrastructure and health. The team has continued its research anddevelopment work started at SAIC and expanded the set of patents we acquired in 2006 from SAIC into a larger portfolio with 46 issued U.S. and foreignpatents and numerous pending U.S. and foreign patent applications. This portfolio now serves as the foundation of our licensing business and plannedservice offerings and is expected to generate the majority of our future revenue in license fees and royalties. We intend to continue our research anddevelopment efforts to further strengthen and expand our patent portfolio. Please see Item 7 – Management’s Discussion and Analysis of FinancialCondition and Results of Operations – Operations – Research and Development Expenses for a description of our research and development expenses for thepast three fiscal years. We intend to continue using an outsourced and leveraged model to maintain efficiency and manage costs as we grow our licensing business by offeringincentives to early licensing targets or asserting our rights for use of our patents. We also intend to expand our design pilot in participation with leading4G/LTE companies (domain infrastructure providers, chipset manufacturers, service providers, and others) and build our secure domain name registry. 21Index Developments in the Year Ended December 31, 2011 LitigationOn January 12, 2011, we initiated a lawsuit by filing a complaint against Siemens and Mitel in the United States District Court for the Eastern District ofTexas, Tyler Division, pursuant to which we allege that these companies infringe two of our patents. On February 4, 2011, we amended our original complaint, filed on August 11, 2010, against Aastra, Apple, Cisco and NEC in the United States District Courtfor the Eastern District of Texas, Tyler Division, to assert U.S. Patent No. 7,418,504 against Apple and Aastra.On April 5, 2011, we again amended our complaint against Aastra, Apple, Cisco and NEC in the United States District Court for the Eastern District of Texas,Tyler Division, to include Apple's iPad 2 in the list of Apple products that are accused of infringing our patents. We also asserted our newly-issued patent,U.S. Patent No. 7,921,211 against all of the defendants in that lawsuit.Also on April 5, 2011, we amended our original complaint, filed on January 12, 2011, against Siemens and Mitel in the United States District Court for theEastern District of Texas, Tyler Division, to assert our newly-issued patent, U.S. Patent No. 7,921,211 against all of the defendants in that lawsuit.On April 12, 2011, we again amended our complaint against Siemens and Mitel in the United States District Court for the Eastern District of Texas, TylerDivision, to add Avaya Inc. as a defendant. On November 1, 2011, we filed a new complaint against Apple Inc. in the United States District Court for theEastern District of Texas, Tyler Division. The complaint includes allegations of patent infringement regarding our '181 patent. In our complaint, we seek bothdamages and injunctive relief.On November 4, 2011, we filed a complaint with the United States International Trade Commission (ITC) alleging that Apple Inc. has engaged in unfair tradepractices by the importation, sale for importation, and sale after importation of certain devices with secure communication capabilities that infringe one ormore claims of our U.S. Patent No. 8,051,181. The accused products include the latest iPhones, iPads, iPods, and Macintosh computers. We have requestedthat the ITC institute an investigation into Apple's allegedly infringing imports and ultimately bar Apple from importing those Apple products or furtherselling the infringing Apple products that have already been imported. PatentsOn March 15, 2011, we updated our original patent declaration from December 2, 2009 to ETSI and ATIS, to include five additional specifications in the (3rdGeneration Partnership Project) or 3GPP Long-Term Evolution or (LTE) project and we indicated that we are willing, upon request, to make available a non-exclusive license under what is commonly referred to as RAND (reasonable terms and conditions that are free of any unfair discrimination) with respect tonecessary claims that may issue from our identified patents and patent applications for the specifications indicated in our Statement of Patent Holder, asupdated, to the extent adopted as a final standard, and subject to the conditions set forth in the Statement of Patent Holder.On April 5, 2011, we were granted a new patent by the USPTO: U.S. Patent # 7,921,211, Agile Network Protocol for Secure Communications Using SecureDomain Names.On April 26, 2011, we were granted a new patent by the USPTO: U.S. Patent # 7,933,990, Agile Network Protocol for Secure Communications with AssuredSystem Availability.On April 28, 2011, at the request of the European Telecommunications Standards Institute (ETSI), we agreed to update our licensing declaration and makeavailable a non-exclusive patent license under FRAND (fair, reasonable and non-discriminatory terms and conditions, with compensation), to 3GPP membersdesiring to implement the Technical Specifications identified by VirnetX, as set forth in the updated licensing declaration under ETSI’s IPR policy.On May 17, 2011, we were granted two patents by the United States Patent and Trademark Office, or USPTO: U.S. Patent No.# 7,944,915, Third Party VPNCertification and U.S. Patent # 7,945,654, Agile Network Protocol for Secure Communications Using Secure Domain Names.On July 08, 2011, Cisco filed with the USPTO a request for a reexamination of our US Patent# 6,502,135. The USPTO accepted this request and issued anorder granting the reexamination on October 03, 2011. This was followed by the first non-final office action on February 15, 2012. Our response is due onApril 15, 2012.On July 11, 2011, Apple filed with the USPTO a request for a reexamination of our US Patent# 6,502,135. The USPTO accepted this request and issued anorder granting the reexamination on October 03, 2011. This was followed by the first non-final office action on February 15, 2012. Our response is due onApril 15, 2012.On July 25, 2011, Apple filed with the USPTO a request for a reexamination of our US Patent# 7,490,151. The USPTO accepted this request and issued anorder granting the reexamination on October 21, 2011. The USPTO has not issued the first non-final office action for this reexamination.On July 26, 2011, we were granted two patents by the United States Patent and Trademark Office, or USPTO: U.S. Patent # 7,987,274 Method for EstablishingSecure Communication Link Between Computers of Virtual Private Network and U.S. Patent # 7,986,688, Third Party Virtual Private Network Certification.On August 2, 9011, we were granted a new patent by the USPTO: U.S. Patent # 7,996,539, Agile Network Protocol for Secure Communications with AssuredSystem Availability.On August 16, 2011, Cisco filed with the USPTO a request for a reexamination of our US Patent# 7,490,151. The USPTO accepted this request and issued anorder granting the reexamination on October 31, 2011. The USPTO has not issued the first non-final office action for this reexamination.On September 07, 2011, Cisco filed with the USPTO a request for a reexamination of our US Patent# 6,839,759. The USPTO accepted this request and issuedan order granting the reexamination along with the first non-final office action on October 14, 2011. We responded to the first non-final office action onJanuary 17, 2012. Cisco submitted its comments on our response to the USPTO on February 15, 2012. We are currently awaiting a response back from theUSPTO.On October 18, 2011, Apple filed with the USPTO a request for a reexamination of our US Patent# 7,418,504. The USPTO accepted this request and issued anorder granting the reexamination along with the first non-final office action on December 29, 2011. Our response is due on March 29, 2012.On October 18, 2011, Apple filed with the USPTO a request for a reexamination of our US Patent# 7,921,211. The USPTO accepted this request and issued anorder granting the reexamination along with the first non-final office action on January 18, 2012. Our response is due on April 18, 2012.On October 25, 2011, Cisco filed with the USPTO a request for a reexamination of our US Patent# 7,188,180. The USPTO denied this request on December17, 2011. On January 17, Cisco filled a petition seeking a review of the order denying the reexamination request. No decision has been issued by the USPTOon this petition. 22Index On November 1, 2011, we were granted a new patent by the USPTO: U.S. Patent # 8,051,181, ("the '181 patent"), Method for Establishing SecureCommunication Link Between Computers of Virtual Private Network.On December 13, 2011, Cisco filed with the USPTO a request for a reexamination of our US Patent # 7,418,504.The USPTO has not issued its decision on therequest.On December 16, 2011, Cisco filed with the USPTO a request for a reexamination of our US Patent # 7,921,211.The USPTO has not issued its decision on therequest.CommitmentsOn October 30, 2011, we entered into a new lease agreement with Sierra Tahoe Professional Center, LLC., for our corporate headquarters located at 308 DorlaCourt, Suite 206, Zephyr Cove, Nevada 89448. The lease commencement date was October 30, 2011 and the lease term expires in 2013.AuditOn January 25, 2011, our audit committee determined that the previously filed financial statements for: (i) the fiscal quarter ended September 30, 2009included in the Form 10-Q filed with the SEC on November 9, 2009, (ii) the fiscal year ended December 31, 2009 included the Form 10-K filed with the SECon March 31, 2010, (iii) the fiscal quarter ended March 31, 2010 included in the Form 10-Q filed with the SEC on May 7, 2010, (iv) the fiscal quarter endedJune 30, 2010 included in the Form 10-Q filed with the SEC on August 9, 2010 and (v) the fiscal quarter ended September 30, 2010 included in the Form 10-Q filed with the SEC on November 8, 2010 (collectively, the “Periodic Reports”) should no longer be relied upon. We determined that the financialstatements contained in the Periodic Reports needed to be restated to correct our accounting for certain derivative instruments (the Series I Warrants weissued in 2009) in such financial statements, which were previously recorded as equity instruments. On January 31, 2011, amendments to the PeriodicReports were filed with the SEC with the restated financial statements. Recent DevelopmentsOn January 5, 2012, a claims construction hearing was held in our case against Aastra, Apple, Cisco and NEC in the United States Distric Court for theEastern District of Texas, Tyler Division. As of February 22, 2012 the judge had not issued his Markman order. Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reported period. The critical accounting policies we employ in the preparation of ourconsolidated financial statements are those which involve impairment of long-lived assets, income taxes, fair value of financial instruments and stock-basedcompensation. We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP"). In doing so, wehave to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosure ofcontingent assets and liabilities. In some cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in theaccounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extentthat there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base ourestimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoingbasis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below. We have reviewed ourcritical accounting policies and estimates with the audit committee of our board of directors. Reclassification of Gain on SettlementIn June 2010, we received $200,000 from Microsoft Corporation related to a licensing agreement and originally classified it as revenue. Upon furtheranalysis, we determined that we could not practically and objectively separate any settlement portion from the revenue element as discussed under theguidance of U.S. GAAP Accounting Standards Codification Topic 605: Revenue Recognition, or ASC Topic 605. As a result, we reclassified this amount inour 2010 financial statements to present it as a gain on settlement. This reclassification had no impact on our net income, financial position or cash flows forany period.Revenue Recognition We defer recognition of revenue in accordance with ASC Topic 605 until such time as all of the criteria below have been met: ●persuasive evidence of sales arrangements; ●delivery has occurred or services have been rendered; ●the buyer’s price is fixed or determinable; and ●collection is reasonably assured.We expect that some or all of our future licensing agreements will provide for payments to us over an extended period of time. For a licensing agreementwith fixed royalty payments, we expect to recognize revenue as amounts become due. For a licensing agreement with variable royalty payments we expect torecognize royalty revenue at the time that the licensees' sales occur; however, because we expect that a licensee may report sales information to us on adelayed basis, we expect our revenue recognition criterion may also be met on a delayed basis. Complex revenue arrangements may require us to make significant judgments, assumptions and estimates about when substantial delivery of contractelements will occur, whether any significant ongoing obligations exist subsequent to contract execution, whether amounts due are collectible and theappropriate period in which the completion of the earning process occurs. If new information subsequently becomes known to us which causes us to makedifferent judgments, assumptions or estimates regarding material contracts, our financial results may be materially affected. 23Index Earnings Per ShareBasic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of outstanding commonshares during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding during theperiod increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had beenissued. During 2011 and 2009, the Company has incurred losses; therefore, the effect of any Common Stock equivalent would be anti-dilutive during thatperiod.Concentration of Credit Risk and Other Risks and UncertaintiesOur cash and cash equivalents are primarily maintained at two financial institutions in the United States. Deposits held with these financial institutions mayexceed the amount of insurance provided on such deposits. The balances are insured by the Federal Deposit Insurance Corporation, or FDIC. During the yearended December 31, 2011, 2010 and 2009, we had, at times, funds that were uninsured. The uninsured balance at December 31, 2011, was approximately$29,185 compared to $9,900 for 2010 and $1,310 for 2009. We do not believe that we are subject to any unusual financial risk beyond the normal riskassociated with commercial banking relationships. We have not experienced any losses on our deposits of cash and cash equivalents.Derivative Instruments Our Series I Warrants contain an anti-dilutive provision which causes it to not be considered indexed to our stock. As a result, the warrants are required to beaccounted for as derivative instruments. We recognize derivative instruments as either assets or liabilities on the accompanying Consolidated Balance Sheets at fair value. We record changes in thefair value (i.e., gains or losses) of the derivatives in the accompanying Consolidated Statements of Operations.Impairment of Long-Lived Assets We identify and record impairment losses on long-lived assets used in operations when events and changes in circumstances indicate that the carryingamount of an asset might not be recoverable, but not less than annually. Recoverability is measured by comparison of the anticipated future netundiscounted cash flows to the related assets’ carrying value. If such assets are considered to be impaired, the impairment to be recognized is measured bythe amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset.Income TaxesBecause of our history of operating losses, we do not currently recognize the benefit of all of our deferred tax assets, including tax loss carry forwards, thatmay be used to offset future taxable income. We will, however, continue to assess our ability to generate sufficient taxable income during future periods inwhich our deferred tax assets may be realized. If and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse thevaluation allowance as an income tax benefit in our statements of operations.Stock-based CompensationWe account for share-based compensation in accordance with the fair value method, which requires the measurement and recognition of compensationexpense in the statement of operations for all share-based payment awards made to employees and directors including employee stock options based onestimated fair values. Using the modified retrospective transition method of adopting this standard, the financial statements presented herein reflectcompensation expense for stock-based awards as if the provisions of this standard had been applied from the date of our inception. In addition, we record stock and options granted to non-employees at fair value of the consideration received or the fair value of the equity investmentsissued as they vest over the performance period. Fair Value of Financial InstrumentsFair value is the price that would result from an orderly transaction between market participants at the measurement date. A fair value hierarchy prioritizes theinputs 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 observable inputs in marketsother than active markets.Our financial instruments are stated at amounts that equal, or are intended to approximate, fair value. When we approximate fair value, we utilize market dataor assumptions that we believe market participants would use in pricing the financial instrument, including assumptions about risk and inputs to thevaluation technique. We use quoted valuation techniques, primarily the income and market approach that maximize the use of observable inputs andminimize the use of unobservable inputs for recurring fair value measurements. 24Index New Accounting Pronouncements In May 2011, the FASB issued a new accounting standard update, which amends the fair value measurement guidance and includes some enhanceddisclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based onunobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The adoption will not have a material impact on ourconsolidated financial statements and disclosures. In June 2011, the FASB issued an amendment to an existing accounting standard which requires companies to present net income and other comprehensiveincome in one continuous statement or in two separate, but consecutive, statements. In addition, in December 2011, the FASB issued an amendment to anexisting accounting standard which defers the requirement to present components of reclassifications of other comprehensive income on the face of theincome statement. We will adopt this standard in the first quarter of 2012. In September 2011, the FASB issued an amendment to an existing accounting standard, which provides entities an option to perform a qualitative assessmentto determine whether further impairment testing on goodwill is necessary. Specifically, an entity has the option to first assess qualitative factors to determinewhether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not thatthe fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. Thisstandard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption will nothave a material impact on our consolidated financial statements. 25IndexOperations Revenue - Royalties Revenue generated for the twelve months ended December 31, 2011 was approximately $20 compared to $68 for the twelve months ended December 31,2010 and $26 for the twelve months ended December 31, 2009. Our revenue in 2011, 2010 and 2009, was solely limited to the royalties earned under oursingle license agreement through our Japanese subsidiary. We expect the revenue from this license will continue to be insignificant in the future. We do notintend to seek additional licenses or other revenue through our Japanese subsidiary.Gain on SettlementIn June 2010, we received $200,000 from Microsoft Corporation related to a licensing agreement and originally classified it as revenue. Upon furtheranalysis, we determined that we could not practically and objectively separate any settlement portion from the revenue element as discussed under theguidance of U.S. GAAP Accounting Standards Codification Topic 605: Revenue Recognition, or ASC Topic 605. As a result, we reclassified this amount inour 2010 financial statements to present it as a gain on settlement. This reclassification had no impact on our net income, financial position or cash flows forany period. We did not receive a gain on settlement for the twelve months ended December 31, 2011 or 2009, respectively.Royalty ExpenseThere was no royalty expense for the year ended December 31, 2011, compared to $59,207 for the year ended December 31, 2010, and zero for the year endedDecember 31, 2009. Under our agreements with SAIC, we were obligated to pay SAIC 35% of the proceeds from the settlement of litigation with Microsoftafter reduction for costs, including legal fees and expenses, incurred by us and SAIC in connection with the Microsoft litigation. Research and Development ExpensesResearch and development costs include expenses paid to outside development consultants and compensation-related expenses for our engineering staff.Research and development costs are expensed as incurred.Our research and development expenses for the year ended December 31, 2011 was $1,464 compared to $2,412 for the year ended December 31, 2010 and$864 for the year ended December 31, 2009. The decrease in 2011 was primarily due to the decrease in bonuses paid in 2011 compared to 2010. The increasein 2010 as compared to 2009, was primarily due to the increase in wages and medical costs and bonuses paid to our research and development staff. Selling, General and Administrative ExpensesSelling, general and administrative expenses include compensation expense for management and administrative personnel, as well as expenses for outsidelegal, accounting, and consulting services.Our selling, general and administrative expenses for the year ended December 31, 2011 was $15,932 compared to $33,764 for the year ended December 31,2010 and $12,250 for the year ended December 31, 2009. The decrease in 2011 and increase in 2010 was primarily due to the increase in legal fees associatedwith the settlement of the Microsoft litigation in 2010. Legal fees represent approximately 40% of general and administrative expenses for 2011 as comparedto 75% for 2010 and 57% for 2009.Within selling, general and administrative expenses, legal fees for the year ended December 31, 2011 was $6,342 compared to $25,353 for the year endedDecember 31, 2010 and $6,942 for the year ended December 31, 2009. The increase in 2010 was primarily due to the increase in legal fees associated with thesettlement of the Microsoft litigation.Other Income and ExpensesOur non-cash loss related to the periodic revaluation of our Series I Warrants liability for the year ended December 31, 2011 was $5,595 compared to $30,516for the year ended December 31, 2010 and $559 for the year ended December 31, 2009. Our non-cash loss related to the periodic revaluation of our Series IWarrants liability decreased by $9,665 in the year ended December 31, 2011, as compared to the comparable period in 2010 as a result of a higher commonshare price and warrant exercises during the year ended 2011. Our Series I Warrants liability increased by $7,495 in the year ended December 31, 2010 ascompared to the comparable period in 2009 mainly as a result of a higher common share price in 2010 as compared to 2009.Interest income for the year ended December 31, 2011 was $228 compared to $1,310 for the year ended December 31, 2010, and $5 for the year endedDecember 31, 2009. These changes are due to timing on the maturity of the investments as well as the amount of cash available for investments. Liquidity and Capital ResourcesFor the year ended December 31, 2011, our cash and cash equivalents totaled $49,482 and our short-term investments totaled $14,438 compared to $34,635and $43,457, respectively, for the year ended December 31, 2010 and $2,011 and zero, respectively, as of December 31, 2009.We recognized an unrealized loss on our investments of $4 for the year ended December 31, 2011 compared to $984 for the year ended December 31, 2010and no gain or loss for the twelve months ended December 31, 2009, as we did not have any investments available for sale as of December 31, 2009. We havedetermined that this loss in 2011 and 2010 is temporary because the fair value of our investment securities is below the carrying value due to the changes ininterest rates and we anticipate that this loss will be reversed over the securities remaining lives. 26Index Before entering into the Microsoft Settlement, we allocated a large amount of cash to legal fees and other expenses associated with the Microsoft litigation. We expect that our cash and cash equivalents as of December 31, 2011, will be sufficient to fund our operations and provide working capital for generalcorporate purposes and legal expenses including the expenses for our ongoing complaints against Aastra, Apple, Cisco, NEC, Siemens, Mitel and Avaya inthe United States District Court of the Eastern District of Texas, Tyler Division, as well as the complaint with the U.S. International Trade Commission, for atleast the next 36 months. While we do not expect to generate net income in the near term similar to in the net income generated during the year endedDecember 31, 2010, generally attributable to the Microsoft Settlement, we do expect to derive the majority of our future revenue from license fees androyalties associated with our patent portfolio, technology, software and secure domain name registry in the United States and other markets around the worldover the long term. However, we will not receive any proceeds from these claims unless and until they may be resolved in our favor, and we expect tocontinue to incur substantial legal and other costs associated with pursuit of our claims.Contractual Commitments The following table summarizes our contractual obligations, including interest expense, and commitments as of December 31, 2011 Operating Obligations Total Less than 1 year 1 - 3 Years 3 - 5 Years More than 5 Years Operating Lease Obligations 102 56 46 --- --- Total 102 56 46 --- --- Off-Balance Sheet Arrangements As of December 31, 2011, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K. Item 7A. Quantitative and Qualitative Disclosures about Market RiskInterest Rate RiskWe invest our excess cash primarily in highly liquid debt instruments of the time deposits, money market, and corporate debt securities. By policy, we limitthe amount of credit exposure to any one issuer.Investments in fixed rate earning securities carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due toa 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 pointscould be experienced in the near term but would have an immaterial impact in the fair value of our marketable securities as they will be maturing in sixmonths or less.Although we have no obligation to settle our Series I Warrant obligations in cash or an unknown number of shares, the embedded liability in the Series IWarrant obligations is recorded at estimated fair value. That estimated fair value is determined in large part by reference to our assumptions and estimates ofvarious factors. Notably, our liability will increase and we may incur significant non-cash expenses, all other factors being constant, if the market price of ourcommon shares increases. Conversely, our liability will decrease and we may recognize significant non-cash gains, all other factors being constant, if themarket price of our common shares decreases 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 coulddrastically increase in the near term but would have an immaterial impact to our consolidated balance sheets and statement of operations as there are onlyapproximately 205,000 warrants outstanding. 27IndexItem 8. Financial Statements and Supplementary Data.FINANCIAL STATEMENTS Financial Statements Index PageReport of Farber Hass Hurley LLP, Independent Registered Public Accounting Firm29Consolidated Balance Sheets of VirnetX Holding Corporation as of December 31, 2011 and December 31, 201030Consolidated Statements of Operations of VirnetX Holding Corporation for the years ended December 31, 2011, December 31, 2010 andDecember 31, 200931Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) of VirnetX Holding Corporation for the years endedDecember 31, 2011, December 31, 2010 and December 31, 200932Consolidated Statements of Cash Flows of VirnetX Holding Corporation for the years ended December 31, 2011, December 31, 2010 andDecember 31, 200933Notes to Financial Statements of VirnetX Holding Corporation34 28IndexREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and ShareholdersVirnetX Holding Corporation We have audited the accompanying consolidated balance sheets of VirnetX Holding Corporation (the “Company”) as of December 31, 2011 and 2010, andthe related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011.VirnetX Holding Corporation’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of VirnetX HoldingCorporation, Inc. as of December 31, 2011and 2010, and the consolidated results of their operations, and cash flows for each of the three years in the periodended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), VirnetX Holding Corporation’sinternal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 29, 2012 expressed an unqualified opinion asto the effectiveness of the Company’s control over financial reporting. /s/ Farber Hass Hurley LLP Granada Hills, California February 29, 2012 29Index VirnetX Holding Corporation CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share amounts) As of December 31,2011 As of December 31,2010 ASSETS Current assets: Cash and cash equivalents $49,482 $34,635 Investments available for sale 14,438 43,457 Accounts receivable, net — 3 Prepaid taxes 10,459 — Deferred tax benefit — 1,735 Prepaid expenses and other current assets 91 86 Total current assets 74,470 79,916 Property and equipment, net 56 25 Intangible and other assets 60 108 Deferred tax benefit 47 1,645 Total assets $74,633 $81,694 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $1,227 $519 Income tax liability 430 7,358 Derivative liability 4,699 14,364 Total current liabilities 6,356 22,241 Stockholders' equity: Preferred stock, par value $0.0001 per share Authorized: 10,000,000 shares at December 31, 2011 and 2010, respectively Issued and outstanding: 0 shares at December 31, 2011 and 2010, respectively — — Common stock, par value $0.0001 per share Authorized: 100,000,000 shares at December 31, 2011 and 2010, respectively Issued and outstanding: 50,619,136 shares and 49,341,028 shares, at December 31, 2011 and 2010, respectively 5 5 Additional paid-in capital 104,277 78,187 Accumulated deficit (36,001) (17,755)Accumulated other comprehensive loss (4) (984) Total stockholders' equity 68,277 59,453 Total liabilities and stockholders' equity $74,633 $81,694 The accompanying notes are an integral part of these consolidated financial statements 30Index VirnetX Holding Corporation CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except share and per share amounts) Year EndedDecember 31,2011 Year EndedDecember 31,2010 Year EndedDecember 31,2009 Revenue - Royalties $20 $68 $26 Operating expenses: Royalty expense — 59,207 — Research and development 1,464 2,412 864 General, selling and administrative 15,932 33,764 12,250 Gain on settlement — (200,000) — Total operating expenses 17,396 (104,617) 13,114 Income (loss) from operations (17,376) 104,685 (13,088)Gain (loss) on change in value of embedded derivative and warrants (5,595) (30,516) 559 Interest income, net 228 1,310 5 Income (loss) before taxes (22,743) 75,479 (12,524)Income tax expense (benefit) (5,480) 34,062 — Net Income (loss) $(17,263) $41,417 $(12,524)Basic earnings (loss) per share: $(0.35) $0.91 $(0.33)Diluted earnings (loss) per share: $(0.35) $0.84 $(0.33)Weighted average shares outstanding basic 50,028,413 45,452,550 37,911,340 Weighted average shares outstanding dilutive 50,028,413 49,066,704 37,911,340 Dividends declared per common share $— $0.50 $— The accompanying notes are an integral part of these consolidated financial statements 31Index VirnetX Holding Corporation CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYAND COMPREHENSIVE INCOME (LOSS)(in thousands, except share and per share amounts) Other Total Additional Accumulated Comprehensive Stockholders' Common Stock Paid-in Deficit Income Equity Shares Amount Capital (Expense) (Deficit) Balance at December 31, 2008 34,899,985 $3.50 $22,150 $(23,048) $- $(895)Stock issued for cash at $1.50 per share,net 2,470,000 .30 3,273 3,274 Stock issued for cash at $2.52 per share,net 2,380,942 .20 5,400 5,400 Deferred offering costs (125) (125)Stock-based compensation 3,032 3,032 Derivative liability (6,869) (6,869)Net loss (12,524) (12,524)Balance at December 31, 2009 39,750,927 4.00 26,861 (35,572) - (8,707) Stock issued for cash exercise of warrants at$2.52 per share, net 2,380,943 .24 5,395 5,395 Stock issued for cash exercise of warrants at$2.00 per share, net 1,233,741 .12 2,354 2,354 Stock issued for cash exercise of warrants at$3.00 per share, net 1,235,000 .12 3,750 3,750 Stock issued for cash exercise of warrants at$4.00 per share, net 1,235,000 .12 4,945 4,945 Stock issued for cash exercise of warrants at$1.80 per share, net 220,000 .02 396 396 Stock issued for cash exercise of warrants at$4.80 per share, net 228,648 .02 1,098 1,098 Stock issued for cash exercise of warrants at$3.93-3.59 per share, net 1,787,620 .17 6,593 6,593 Stock issued for cash exercise of options,net 1,269,149 .12 1,404 1,404 Stock-based compensation 3,381 3,381 Deferred tax benefit related to stock basedcompensation 528 528 Fees and commissions (980) (980)Derivative liability 22,462 22,462 Dividend (23,600) (23,600)Components of comprehensive income: Net Income 41,417 41,417 Change in unrealized loss on investment (984) (984)Comprehensive income 40,433 Balance at December 31, 2010 49,341,028 4.93 78,187 (17,755) (984) 59,453 Stock issued for cash exercise of warrants at$3.93-3.59 per share, net 855,536 .09 3,063 3,063 Stock-based compensation 4,368 4,368 Deferred tax benefit related to stock basedcompensation 2,331 2,331 Derivative liability 15,260 15,260 Cashless exercise of $4.80 underwriterwarrants 24,178 -- Exercise of options 398,394 .04 1,068 1,068 Components of comprehensive income: Reclassification adjustment for net lossincluded in net income (983) 983 -- Net loss (17,263) (17,263)Change in unrealized loss on investment (3) (3)Comprehensive loss (17,266)Balance at December 31, 2011 50,619,136 $5.06 $104,277 $(36,001) $(4) $68,277 The accompanying notes are an integral part of these consolidated financial statements 32IndexVirnetX Holding Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands, except share and per share amounts) Year EndedDecember 31,2011 Year EndedDecember 31,2010 Year EndedDecember 31,2009 Cash flows from operating activities: Net income (loss) $(17,263) $41,417 $(12,524)Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 68 59 63 Stock-based compensation 4,367 3,381 3,032 Net change in deferred taxes (benefit) 5,663 (2,851) — Change in value of derivative liability 5,595 30,516 (559)Changes in assets and liabilities: Receivables and other current assets (3) (39) 140 Prepaid taxes (10,459) — 94 Accounts payable and accrued liabilities 708 (3,960) 2,809 Income tax liability (6,928) 7,358 Net cash provided by (used in) operating activities (18,252) 75,881 (6,945)Cash flows from investing activities: Purchase of property and equipment (51) (13) (6)Purchase of investments (34,082) (44,441) — Proceeds from sale, maturity of investments 63,101 — — Net cash provided by (used in) investing activities 28,968 (44,454) (6)Cash flows from financing activities: Payment of royalty obligation less imputed interest — (160) (44)Payment of dividend — (23,599) — Proceeds from exercise of options 1,068 1,341 — Proceeds from exercise of warrants 3,063 23,615 — Proceeds from sales of common stock — — 8,549 Net cash provided by financing activities 4,131 1,197 8,505 Net increase in cash and cash equivalents 14,847 32,623 1,554 Cash and cash equivalents, beginning of year 34,635 2,011 457 Cash and cash equivalents, end of year $49,482 $34,635 $2,011 Supplemental disclosure of cash flow information: Cash paid during the year for taxes $9,600 $29,556 $2 Cash paid during the year for interest $— $10 $6 The accompanying notes are an integral part of these consolidated financial statements 33IndexVirnetX Holding CorporationNOTES TO FINANCIAL STATEMENTS(in thousands except share and per share amounts) Note 1 - Formation and Business of the Company 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 ourtechnologies in the development and manufacturing of their own products within the IP-telephony, mobility, fixed-mobile convergence and unifiedcommunications markets. To date our revenue has been limited to an insignificant amount of software royalties pursuant to the terms of a single licenseagreement. Note 2 - Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of VirnetX Holding Corporation and all wholly-owned subsidiaries. All material intercompanyaccounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to current year presentations. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management tomake estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Revenue Recognition We defer recognition of revenue in accordance with ASC Topic 605 until such time as all of the criteria below have been met: ●persuasive evidence of sales arrangements; ●delivery has occurred or services have been rendered; ●the buyer’s price is fixed or determinable; and ●collection is reasonably assured.We expect that some or all of our future licensing agreements will provide for payments to us over an extended period of time. For a licensing agreementwith fixed royalty payments, we expect to recognize revenue as amounts become due. For a licensing agreement with variable royalty payments we expect torecognize royalty revenue at the time that the licensees' sales occur; however, because we expect that a licensee may report sales information to us on adelayed basis, we expect our revenue recognition criterion may also be met on a delayed basis. Complex revenue arrangements may require us to make significant judgments, assumptions and estimates about when substantial delivery of contractelements will occur, whether any significant ongoing obligations exist subsequent to contract execution, whether amounts due are collectible and theappropriate period in which the completion of the earning process occurs. If new information subsequently becomes known to us which causes us to makedifferent judgments, assumptions or estimates regarding material contracts, our financial results may be materially affected. Cash and Cash Equivalents We consider all highly liquid investments purchased with original maturities of three months or less at the date of purchase to be cash equivalents.Investments Investments are classified as available-for-sale and are recorded at fair market value. Unrealized gain and losses are reported as other comprehensive income.Realized gains and losses are included in income in the period they are realized. The Company's investments consist of debt securities with maturity datesprimarily less than nine months. Property and Equipment Property and equipment are stated at historical cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using theaccelerated and straight line methods over the estimated useful lives of the assets, which range from five to seven years. Repair and maintenance costs arecharged to expense as incurred. Concentration of Credit Risk and Other Risks and Uncertainties Our cash and cash equivalents are primarily maintained at two financial institutions in the United States. Deposits held with these financial institutions mayexceed the amount of insurance provided on such deposits. The balances are insured by the Federal Deposit Insurance Corporation or (FDIC). Duringthe year ended December 31, 2011, we had, at times, funds that were uninsured. The uninsured balance at December 31, 2011 was $29,185. We do notbelieve that we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships. We have not experiencedany losses on our deposits of cash and cash equivalents. 34Index Fair Value of Financial Instruments The carrying amounts of our financial instruments, including cash equivalents, accounts receivable, accounts payable, and accrued liabilities, approximatefair value because of their generally short maturities.Intangible Assets We record intangible assets at cost, less accumulated amortization. Amortization of intangible assets is provided over their estimated useful lives, which canrange from 3 to 15 years, on either a straight-line basis or as revenue is generated by the assets. Impairment of Long-Lived Assets We identify and record impairment losses on long-lived assets used in operations when events and changes in circumstances indicate that the carryingamount of an asset might not be recoverable, but not less than annually. Recoverability is measured by comparison of the anticipated future netundiscounted cash flows to the related assets’ carrying value. If such assets are considered to be impaired, the impairment to be recognized is measured bythe amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset. Research and Development Research and development costs include expenses paid to outside development consultants and compensation related expenses for our engineeringstaff. Research and development costs are expensed as incurred. Income Taxes The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for theexpected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses andtax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for theyears in which those tax assets are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amountthat is believed more likely than not to be realized.The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination bythe taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are thenmeasured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. See Note 12, “Income Taxes” of this Form 10-K for additional information. Derivative Instruments Our Series I Warrants contain an anti-dilutive provision which causes it to not be considered indexed to our stock. As a result, the warrants are required to beaccounted for as derivative instruments. We recognize derivative instruments as either assets or liabilities on the accompanying Consolidated Balance Sheets at fair value. We record changes in thefair value (i.e., gains or losses) of the derivatives in the accompanying Consolidated Statements of Operations. Stock-Based Compensation Our accounting for share-based compensation is in accordance with the fair value method which requires the measurement and recognition of compensationexpense in the statement of operations for all share-based payment awards made to employees and directors including employee stock-options based onestimated fair values. Using the modified retrospective transition method of adopting this standard, the financial statements presented herein reflectcompensation expense for stock-based awards as if the provisions of this standard had been applied from the date of inception. In addition, as required we record stock and options granted to non-employees at fair value of the consideration received or the fair value of the equityinstruments issued as they vest over the performance period. Earnings Per Share Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of outstanding commonshares during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding during theperiod increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had beenissued. During 2011 and 2009, the Company has incurred losses; therefore the effect of any Common Stock equivalent would be anti-dilutive during thatperiod. New Accounting Pronouncements In May 2011, the FASB issued a new accounting standard update, which amends the fair value measurement guidance and includes some enhanceddisclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based onunobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. We do not expect the adoption to have a material impacton our consolidated financial statements and disclosures. In June 2011, the FASB issued an amendment to an existing accounting standard which requires companies to present net income and other comprehensiveincome in one continuous statement or in two separate, but consecutive, statements. In addition, in December 2011, the FASB issued an amendment to anexisting accounting standard which defers the requirement to present components of reclassifications of other comprehensive income on the face of theincome statement. We will adopt this standard in the first quarter of 2012. In September 2011, the FASB issued an amendment to an existing accounting standard, which provides entities an option to perform a qualitative assessmentto determine whether further impairment testing on goodwill is necessary. Specifically, an entity has the option to first assess qualitative factors to determinewhether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not thatthe fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. Thisstandard is effective for annual and interim goodwill impairment test performed for fiscal years beginning after December 15, 2011. We do not expect theadoption to have a material impact on our consolidated financial statements. 35Index Note 3 - Property Our major classes of property and equipment were as follows: December 31 2011 2010 2009 Office furniture $57 $22 $22 Computer equipment 91 75 62 Total 148 97 84 Less accumulated depreciation (92) (72) (61) $56 $25 $23 Depreciation expense for the years ended December 31, 2011, 2010 and 2009 was $20, $11 and $15 respectively. Note 4 - Commitments We lease our offices under an operating lease with a third party that requires minimum payments monthly until it ends in June 2013. We recognize rentexpense on a straight-line basis over the term of the lease. For the Year MinimumRequired LeasePayments inPeriod 2012 $56 2013 46 Total $102 36Index Note 5 - Stock Plan In 2005, VirnetX, Inc. adopted the 2005 Stock Plan (the "Plan"), which was assumed by us upon the closing of the transaction between VirnetX HoldingCorporation and VirnetX, Inc. on July 5, 2007. Our Board of Directors renamed this Plan the VirnetX Holding Corporation 2007 Stock Plan and ourstockholders approved the Plan at our 2008 annual stockholders' meeting. The Plan provides for the issuance of up to 11,624,469 shares of our commonstock. To the extent that any award should expire, become unexercisable or is otherwise forfeited, the shares subject to such award will again becomeavailable for issuance under the Plan. The Plan provides for the granting of stock options and stock purchase rights to our employees and consultants. Stockoptions granted under the Plan may be incentive stock options or nonqualified stock options. Incentive stock options ("ISO") may only be granted to ouremployees (including officers and directors). Nonqualified stock options ("NSO") and stock purchase rights may be granted to our employees andconsultants. The Plan will expire 10 years after it was approved by our Board of Directors. Options may be granted under the Plan with an exercise price determined byour Board of Directors, or a duly appointed committee thereof, provided, however, that the exercise price of an option granted to any employee shall be notless than 100% of the fair market value at the date of grant in the case of ISO or 85% of the case of an NSO, the exercise price of an ISO or NSO granted to oneof our Named Executive Officers shall not be less than 100% fair market value of the shares at the date of grant and the exercise price of an ISO granted to a10% shareholder shall not be less than 110% of the fair market value of the shares on the date of grant. Activity under the Plan is as follows: Options Outstanding SharesAvailable forGrant Number ofShares WeightedAverageExercise Price Balance at December 31, 2008 2,651,392 4,468,595 $2.98 Restricted stock granted — — — Options granted (1,317,195) 1,317,195 1.18 Options exercised — — — Options cancelled 83,031 — — Balance at December 31, 2009 1,417,228 5,785,790 2.57 Restricted stock granted — — — Options granted (345,250) 345,250 5.53 Options exercised (1,269,149) 1.11 Options cancelled 31,500 (31,500) 5.48 Balance at December 31, 2010 1,103,478 4,830,391 $3.14 Restricted stock granted — — — Options granted (475,000) 475,000 23.80 Options exercised (398,393) 2.68 Options cancelled — — — Balance at December 31, 2011 628,478 4,906,998 $5.12 37Index Note 6 - Stock-Based Compensation We account for equity instruments issued to employees in accordance with the fair value method which requires that such issuances be recorded at their fairvalue on the grant date. The recognition of the expense is subject to periodic adjustment as the underlying equity instrument vests. Stock-based compensation expense is included in general and administrative expense for each period as follows: Stock-Based Compensation by Type of Award Year EndedDecember 31, 2011 Year EndedDecember 31, 2010 Year EndedDecember 31, 2009 Employee stock options $ 4,367 $ 3,381 $ 3,032 Total stock-based compensation $4,367 $3,381 $3,032 As of December 31, 2011, the unrecorded deferred stock-based compensation balance related to stock options was $9,697, which will be amortized asexpense over an estimated weighted average vesting amortization period of approximately 0.7 years, as compared to $4,027 and 1.2 years for 2010 and$5,741 and 1.6 years for 2009. The fair value of each option grant was estimated on the date of grant using the following weighted average assumptions: Year EndedDecember 31, 2011 Year EndedDecember 31, 2010 Year EndedDecember 31, 2009Expected stock price volatility 123% 110% 120%Risk-free interest rate 3.05% 3.66% 2.93%Expected life term (in years) 6.6 years 7.0 years 6.6 yearsExpected dividends 0% 0% 0%Based on the Black-Scholes option pricing model, the weighted average estimated fair value of employee stock options granted was $21.13, $4.83 and $1.06during the years ended December 31, 2011, 2010 and 2009 respectively. The expected life was determined using the simplified method outlined in FASB Codification Topic 718, taking the average of the vesting term and thecontractual term of the option. Expected volatility of the stock options was based upon historical data and other relevant factors, such as the volatility ofcomparable publicly-traded companies at a similar stage of life cycle. We have not provided an estimate for forfeitures because we have no history offorfeited options and believe that all outstanding options at December 31, 2011, will vest. In the future, the Company may change this estimate based onactual and expected future forfeiture rates. The following table summarizes activity under the Plan for the indicated periods: Number ofShares WeightedAverageExercisePrice WeightedAverageRemainingContractualLife (Years) AggregateIntrinsicValue Outstanding at December 31, 2008 4,468,595 $2.98 — — Options granted 1,317,195 1.18 — — Options exercised — — — — Options cancelled — — — — Outstanding at December 31, 2009 5,785,790 2.57 — — Options granted 345,250 5.53 — — Options exercised (1,269,149) 1.11 — — Options cancelled (31,500) 5.48 — — Outstanding at December 31, 2010 4,830,391 3.14 Options granted 475,000 23.30 — — Options exercised (398,393) 2.68 — — Options cancelled — — — — Outstanding at December 31, 2011 4,906,998 $5.12 6.43 $97,385 Intrinsic value is calculated at the difference between the per share market price of our common stock on the last trading day of 2011 was $24.97 and theexercise price of the options. For options exercised, the intrinsic value is the difference between market price and the exercise price on the date of exercise. 38IndexThe following table summarizes information about stock options outstanding at December 31, 2011: Options Outstanding Options Vested and Exercisable Date of Option Issue Range ofExercise Prices NumberOutstanding WeightedAverageRemainingContractualLife (Years) Weighted AverageExercise Price Number Exercisable WeightedAverageRemainingContractualLife (Years) Weighted AverageExercise Price 2006 $0.24 690,612 4.22 $0.24 690,612 4.22 $0.24 2007 4.20 1,312,899 5.56 4.20 1,312,899 5.56 4.20 2007 5.88-6.47 697,026 6.00 6.06 697,026 6.00 6.06 2008 1.74-6.20 250,016 6.46 4.39 221,294 6.45 4.52 2009 1.15- 1.58 1,167,695 7.26 1.16 799,297 7.27 1.17 2010 5.48-6.03 313,750 8.18 5.47 160,055 8.21 5.41 2011 19.85-23.62 475,000 9.42 23.30 83,957 9.38 23.58 4,906,998 6.43 $5.12 3,965,140 5.99 $3.70 Note 7 - Earnings Per Share Basic earnings per share are based on the weighted average number of shares outstanding for a period. Diluted earnings per share are based upon theweighted average number of shares and potentially dilutive common shares outstanding. Potential common shares outstanding principally include stockoptions, warrants, under our stock plan. During 2011 and 2009, the Company has incurred losses; therefore the effect of any common stock equivalent wouldbe anti-dilutive during that period. The table below sets forth the basic loss per share calculations: Period Ended December 31, 2011 2010 2009 Net income (loss)$(17,263) $41,417 $(12,524)Weighted average number of shares outstanding 50,547 45,453 37,911 Diluted weighted average number of shares outstanding 50,547 49,067 37,911 Basic earnings (loss) per share$(0.35) $0.91 $(0.33)Diluted earnings (loss) per share$(0.35) $0.84 $(0.33) For the years ended December 31, 2011, 2010 and 2009, there were the following stock equivalents: 2011 2010 2009 Options 4,906,998 4,830,391 5,785,790 Warrants 204,908 1,090,444 12,271,946 Note 8 - Preferred Stock Our Amended and Restated Certificate of Incorporation, as amended in October 2007, authorizes us to issue 10,000,000 shares of $0.0001 par value per sharepreferred stock having rights, preferences and privileges to be designated by our Board of Directors. There were no shares of preferred stock outstanding atDecember 31, 2011. Note 9 - Common Stock Each share of common stock has the right to one vote. The holders of common stock are entitled to receive dividends whenever funds are legally availableand when declared by our Board of Directors, subject to the prior rights of holders of all classes of stock outstanding having priority rights as todividends. On June 15, 2010, the Company's Board of Directors declared a special cash dividend of $0.50 per share of the Company's common stock toholders of record on July 1, 2010. Our restated articles of incorporation authorize us to issue up to 100,000,000 shares of $.0001 par value common stock. 39IndexNote 10 - Warrants Information about warrants outstanding during the twelve months ended December 31, 2011 follows:Original Number ofWarrants Issued ExercisePrice perCommonShare ExercisableatDecember 31,2010 BecameExercisable Exercised Terminated /Cancelled /Expired Exercisableat December31, 2011 ExpirationDate 300,000 $4.80 30,000 — (30,000) — — December2012 2,619,036(1) $3.59 1,060,444 — (855,536) — 204,908 March 2015Total 1,090,444 (885,536) — 204,908 (1)Referred to as our Series I Warrants.Note 11 - Employee Benefit Plan We sponsor a defined contribution, 401k plan, covering substantially all our employees. The Company's matching contribution to the plan wasapproximately, $36 in 2011, $36 in 2010 and $36 in 2009 respectively. Note 12 - Income Taxes The components of the income tax expense for the years ended December 31, 2011, 2010 and 2009 are as follows: Year EndedDecember 31, 2011 Year EndedDecember 31, 2010 Year Ended December 31, 2009 Current: Federal $(8,036) $27,822 - State (767) 9,609 - Foreign (9) 11 - (8,812) 37,442 - Deferred: Federal 3,331 (3,380) - State 1 - - Foreign - - - 3,332 (3,380) - Total provision for income taxes $(5,480) $34,062 - A reconciliation of the United States federal statutory income tax rate to our effective income tax rate is as follows: Year EndedDecember 31, 2011 Year EndedDecember 31, 2010 Year EndedDecember 31, 2009 United States federal statutory rate 35.00% 35.00% 35.00%State taxes, net of federal benefit 2.19% 8.28% 0.00%Valuation allowance (4.39%) (9.69%) (33.96%)Stock options (1.92%) 0.00% 0.00%Warrants (8.60%) 14.15% (2.07%)Other 1.79% (3.64%) 1.03%Balance at the end of the year 24.07% 44.10% 0.00%As allowed by ASC 740, Income Taxes, we used the actual effective tax rate for the year ended December 31, 2011 because our 2011 annual profit before taxis not estimable at this time. To the extent our expected profitability changes during the year, the effective tax rate would be revised to reflect the change. 40IndexDeferred tax assets (liabilities) consist of the following: Year Ended December 31, 2011 Year Ended December 31, 2010 Year EndedDecember 31, 2009 Deferred tax assets: Reserves and accruals $46 $53 $- State tax 1 3,326 - Research and development credits and other credits - 225 500 Net operating loss carry forward 2,822 372 10,500 Stock based compensation 3,155 3,109 - Other 211 - - Total deferred tax assets 6,235 7,085 11,000 Valuation allowance (6,168) (3,687) (11,000)Deferred tax assets after valuation allowance 67 3,398 - Deferred tax liability Depreciation and amortization (20) (18) - - - Total deferred tax liability (20) (18) - Net deferred tax assets $47 $3,380 $- In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred assets will notbe realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which thosetemporary differences become deductible.Based on the available objective evidence, we believe it is more likely than not that the net deferred tax assets as of December 31, 2011 will not be fullyrealizable. Accordingly, management has maintained partial valuation allowance against its net deferred tax assets at December 31, 2011. The net change inthe total valuation allowance for the year ended December 31, 2011 was an increase of $1,000 and $2,488 for state and federal deferred tax assets,respectively. At December 31, 2011, the Company has federal and state net operating loss carryforwards of approximately $913 and $43,565, respectivelyexpiring in 2027 and 2012, respectively. At December 31, 2011, the Company has federal research and development credits carryforwards of approximatelyzero expiring beginning in 2031. Internal Revenue Code Section 382 places a limitation (the "Section 382 Limitation") on the amount of taxable income can be offset by net operatingcarryforwards after a change in control (generally greater than 50% change in ownership) of a loss corporation. California has similar rules. Our capitalizationdescribed herein may have resulted in such a change. Generally, after a control change, a loss corporation cannot deduct net operating loss carryforward inexcess of the Section 382 Limitation. Management has analyzed analysis on the utilization of its net operating loss carryforward against taxable income infuture periods and determined on a more likely than not basis it will be able to use all its recognized net operating losses before they expire. We are required to recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the positionwill be sustained upon examination. As a result, we have reduced our gross deferred tax assets by zero and $128 at December 31, 2011 and December 31,2010, respectively, for certain tax benefits which may not be sustained upon examination, and we have provided an offset through equal reductions in ourdeferred tax asset, which offsets by an equal reduction in the valuation allowance. Our tax returns are subject to review by various tax authorities. The returnsare subject to review those from 2008 forward. Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We did not haveassociated accrued interest or penalties nor was any interest expense or penalties recognized during the year ended December 31, 2011. A reconciliation of beginning and ending amounts of unrecognized tax benefits follows: Year EndedDecember 31, 2011 Year EndedDecember 31, 2010 Year EndedDecember 31, 2009 Balance at the beginning of the year $128 $- $- Additions based on tax positions related to the current year - - - Additions for tax positions of prior years - 128 - Settlements - - - Lapse of applicable statute of limitations - - - Balance at the end of the year $128 $128 $- 41IndexNote 13 - Fair Value Measurement Fair value is the price that would result from an orderly transaction between market participants at the measurement date. A fair value hierarchy prioritizes theinputs 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 observable inputs in marketsother than active markets. Our financial instruments are stated at amounts that equal, or are intended to approximate, fair value. When we approximate fair value, we utilize market dataor assumptions that we believe market participants would use in pricing the financial instrument, including assumptions about risk and inputs to thevaluation technique. We use valuation techniques, primarily the income and market approach that maximize the use of observable inputs and minimize theuse of unobservable inputs for recurring fair value measurements. Certificate of deposits: Fair value measured at face value plus accrued interest. Corporate bonds: Fair value measured at the closing price reported on the active market on which the individual securities are traded. Series I Warrants: Fair value measured by using a Binomial valuation model. As of December 31, 2011, the assumptions used to measure fair valueof the liability embedded in our outstanding Series I Warrants included a warrant exercise price of $3.59 per share, a common share price of $24.97, adiscount rate of 0.83%, and a volatility of 123%. The following table sets forth by level, within the fair value hierarchy, our financial instrument assets as of December 31, 2011: Level 1 Level 2 Level 3 Total Certificates of deposit $2,584 — — $2,584 Corporate Bonds: AA 2,011 — — 2,011 A 9,843 — — 9,843 Total Corporate Bonds 11,854 — — 11,854 Total Investments at Fair Value $14,438 — — $14,438 The following table sets forth, by level within the fair value hierarchy, our financial instrument liabilities as of December 31, 2011 (in thousands): QuotedPrices inActiveMarkets forIdenticalAssets SignificantOtherObservableInputs SignificantUnobservableInputs (Level 1) (Level 2) (Level 3) Total Series l Warrants $— $— $4,699 $4,699 Total $— $— $4,699 $4,699 The following table sets forth a summary of changes in the fair value of our Level 3 financial instrument liability for the year ended December 31, 2011 (inthousands): Fair ValueMeasurementsUsingSignificantUnobservableInputs (Level 3) Balance December 31, 2010 $14,364 Net loss included in earnings 5,595 Settlements (15,260)Balance December 31, 2011 $4,699 42IndexNote 14 - Patent Portfolio As of September 30, 2011, we own 20 issued U.S. and 26 issued foreign patents, in addition to several pending U.S. and foreign patent applications. Ourissued U.S. and foreign patents expire at various times during the period from 2019 to 2024. Some of our issued patents and pending patent applicationswere acquired by our principal operating subsidiary, VirnetX, Inc., from Science Applications International Corporation, or SAIC, in 2006 and we are requiredto make payments to SAIC based on cash or certain other values generated from those patents. The amount of such payments depends upon the type of valuegenerated, and certain categories are subject to maximums and other limitations. As of June 30, 2010, we met our maximum royalty payment requirement;however, SAIC is also entitled under certain circumstances to receive a portion of the proceeds paid to us for certain acquisitions of VirnetX or from thesettlement of certain patent infringement claims of ours. As of December 31, 2011, the expected future amortization of the intangible assets is as follows: 2012 $48 2013 12 Total $60 Note 15 - Litigation We have three intellectual property infringement lawsuits pending against multiple parties in the United States District Court for the Eastern District ofTexas, Tyler Division, pursuant to which we allege that these parties infringe on certain of our patents. We seek damages and injunctive relief in allthe complaints. We have one complaint with the United States International Trade Commission (ITC) alleging that Apple Inc has engaged in unfair tradepractices by the importation, sale for importation, and sale after importation of certain devices with secure communication capabilities that infringe one ormore claims of our U.S. Patent No. 8,051,181. On August 11, 2010, we initiated a lawsuit by filing a complaint against Aastra Technologies, Inc., Apple, Inc., Cisco Systems, Inc., and NEC Corporation. On January 12, 2011, we initiated a new lawsuit by filing a complaint against Siemens Enterprise Communications and Mitel Networks Corp. OnApril 12, 2011, we amended this complaint to add Avaya, Inc., as a defendant. We believe that Aastra, Apple, Cisco, NEC, Siemens, Mitel and Avaya infringe on certain of our patents, but obtaining and collecting a judgment againstthese parties may be difficult or impossible. Patent litigation is inherently risky and the outcome is uncertain. Aastra, Apple, Cisco, NEC, Siemens, Mitel andAvaya are all large, well-financed companies with substantially greater resources than us. We believe that these parties will devote a substantial amount ofresources in an attempt to prove that either their products do not infringe our patents or that our patents are invalid and unenforceable. At this time, wecannot predict the final outcome of these litigation matters.On November 1, 2011, we initiated a lawsuit against Apple in the United States District Court, Tyler Division, pursuant to which we allege that Appleinfringes an additional patent of ours. We seek damages and injunctive relief. No hearing or trial dates have been set.On November 4, 2011, We filed a complaint with the United States International Trade Commission (ITC) alleging that Apple Inc has engaged in unfair tradepractices by the importation, sale for importation, and sale after importation of certain devices with secure communication capabilities that infringe one ormore claims of our U.S. Patent No. 8,051,181. The accused products include the latest iPhones, iPads, iPods and Macintosh computers. We have requestedthat the ITC institute an investigation into Apple’s allegedly infringing imports and ultimately bar Apple from importing those Apple products or furtherselling the infringing Apple products that have already been importedOne or more potential intellectual property infringement claims may also be available to us against certain other companies who have the resources to defendagainst any such claims. Although we believe these potential claims are worth pursuing, commencing a lawsuit can be expensive and time-consuming, andthere is no assurance that we will prevail on such potential claims. In addition, bringing a lawsuit may lead to potential counterclaims which may precludeour ability to commercialize our initial products, which are currently in development. Note 16 - Quarterly Financial Information (unaudited) First Second Third Fourth (in thousands except per share) 2011 Revenue $16 $1 $3 $- Income (loss) from operations (2,752) (3,754) (4,180) (6,690)Net (loss) income (7,122) (9,805) 5,879 (6,215)Basic earnings (loss) per common share $(0.14) $(0.20) $0.12 $(0.12)Diluted earnings (loss) per common share $(0.14) $(0.20) $0.11 $(0.12) First Second Third Fourth (in thousands except per share)2010 Revenue $21 $23 $16 $8 Income (loss) from operations (4,457) 115,101 (2,434) (3,525)Net (loss) income (8,900) 78,576 (25,420) (2,839)Basic earnings (loss) per common share $(0.23) $1.77 $(0.54) $(0.06)Diluted earnings (loss) per common share $(0.23) $1.67 $(0.54) $(0.06) First Second Third Fourth (in thousands except per share) 2009 Revenue $3 $7 $3 $13 Income (loss) from operations (3,405) (3,928) (2,624) (3,131)Net (loss) income (3,403) (3,927) (2,623) (2,571)Basic earnings (loss) per common share $(0.09) $(0.11) $(0.07) $(0.07)Diluted earnings (loss) per common share $(0.09) $(0.11) $(0.07) $(0.07) 43IndexReport of Independent Registered Public Accounting Firm To the Board of Directors andStockholders of VirnetX Holding Corporation We have audited the internal control over financial reporting of VirnetX Holding Corporation (the “Company” as of December 31, 2011, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). TheCompany's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is toexpress an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing therisk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Ouraudit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basisfor our opinion. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principalfinancial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition ofthe company’s assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override ofcontrols, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on thecriteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financialstatements as of and for the year ended December 31, 2011, of the Company and our report dated February 29, 2012, expressed an unqualified opinion onthose financial statements. /s/ Farber Hass Hurley LLP Granada Hills, CaliforniaFebruary 29, 2012 44Index Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted anevaluation 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 theSecurities Exchange Act of 1934, as amended, December 31, 2011. The purpose of this evaluation was to determine whether as of December 31, 2011 our disclosure controls and procedures were effective to provide reasonableassurance that the information we are required to disclose in our filings with the SEC, (i) is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and ChiefFinancial 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 December 31, 2011, our disclosure controls andprocedures were effective. Management's Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control overfinancial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance withaccounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that inreasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation ofour financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with managementauthorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect onour financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is notintended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, managementconcluded that the Company’s internal control over financial reporting was effective as of December 31, 2011. There were no changes in our internal controlover financial reporting during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internalcontrol over financial reporting. Farber Hass Hurley LLP has audited our internal control over financial reporting as of December 31, 2011; their report isincluded elsewhere herein. Item 9B. Other Information. As previously reported on the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 29, 2011 by the Company, theCompensation Committee of the Board of Directors (the "Compensation Committee") exercised its discretion in determining to pay Messrs. Larsen andSliney 100% of their 2011 target bonuses in light of the Company's overall strong performance for the year and their contributions in achieving thisperformance (collectively, the "2011 Annual Incentive Bonuses"). As a result, the Compensation Committee determined to award Mr. Larsen a cash bonus for2011 equal to $210,000 and Mr. Sliney a cash bonus for 2011 equal to $30,000. On February 27, 2012, the Compensation Committee confirmed that the cash bonus amounts awarded to Mr. Larsen and Mr. Sliney, include, in addition tothe foregoing amounts, an additional payment equal to the estimated amount of payroll withholding taxes (as calculated by the Company's payrollprocessing agent) to be incurred by Mr. Larsen and Mr. Sliney (but that the executives would be responsible for any incremental taxes associated with suchadditional payment). The resulting aggregate 2011 Annual Incentive Bonus payments, including these additional amounts, paid to Mr. Larsen and Mr.Sliney were $287,671 and $43,717, respectively. 45Index PART III Certain information required by Part III is omitted from this report and is incorporated by reference to our definitive proxy statement pursuant to Regulation14A for our 2012 annual meeting of stockholders (the “Definitive Proxy Statement”) which will be filed within 120 days of our fiscal year end. Item 10. Directors, Executive Officers and Corporate Governance. The information required by this item is incorporated by reference to the information set forth in the Definitive Proxy Statement under the sections “Board ofDirectors,” “Nominee and Continuing Directors,” “Executive Officers,” “Composition of the Board of Directors,” “Board Meetings and Committees andAnnual Meeting Attendance,” “Audit Committee Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance.” Information regardingdelinquent filers pursuant to Item 405 of Regulation S-K is included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in ourProxy Statement for the 2012 Annual Meeting of Stockholders and is incorporated herein by reference.Code of EthicsWe have adopted a Code of Ethics for all employees and directors to prohibit conflicts of interest between them and the Company. A copy of our Code ofEthics is available on our website at http://www.virnetx.com in the “Highlights” link in the “Corporate Governance” subcategory under the “Investors” tab,or by writing to us at VirnetX Holding Corporation, PO Box 439, Zephyr Cove, NV 89448, Attention: Investor Relations.We intend to post on our website any amendment to, or waiver from, a provision of our Code of Ethics within four business days following the date of suchamendment or waiver. We do not anticipate any such amendments or waivers. Item 11. Executive Compensation. The information required by this item is incorporated by reference to the information set forth in the Definitive Proxy Statement under the sections“Compensation Committee Matters,” “Director Compensation,” “Executive Compensation,” “Compensation Committee Report,” “Summary CompensationTable,” “Outstanding Equity Awards at 2011 Fiscal Year-End,” and “Option Exercises in Fiscal Year 2011.”Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item is incorporated by reference to the information set forth in the Definitive Proxy Statement under the section “VotingSecurities and Principal Holders.”Securities Authorized for Issuance Under Equity Compensation PlansWe have a stock incentive plan for employees and others called the “VirnetX Holding Corporation 2007 Stock Plan”, or the Plan, which has been approvedby our stockholders. The Plan provides for the granting of up to 11,624,469 shares of our common stock, including stock options and stock purchase rights,and will expire in 2018. As of December 31, 2011, there were 628,478 shares available to be granted under the Plan. We had 4,906,998 and 4,830,391options outstanding at December 31, 2011, and December 31, 2010, respectively, with an average exercise price of $5.12 and $3.14, respectively. Plan Category Numberof Securities tobe IssuedUpon Exerciseof OutstandingOptions,Warrants andRights (a) Weighted-AverageExercise PriceofOutstandingOptions,Warrants andRights (b) Number ofSecuritiesRemainingAvailable forFutureIssuanceUnderEquityCompensationPlansExcludingSecuritiesReflected inColumn (a) (c) Equity compensation plans approved by security holders 5,111,906 5.07 628,478 Equity compensation plans not approved by security holders — — Total 5,111,906 5.07 628,478 On May 13, 2011 the Compensation Committee granted an additional 435,000 options to the employees of VirnetX Inc. Then on November 22,2011 the Compensation Committee granted an additional 40,000 options to the employees of VirnetX, Inc. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item is incorporated by reference to the information set forth in the Definitive Proxy Statement under the sections“Transactions with Related Persons” and “Composition of Board of Directors.” Item 14. Principal Accountant Fees and Services. The information required by this item is incorporated by reference to the information set forth in the Definitive Proxy Statement for the 2012 Annual Meetingof Stockholders under “Principal Accountant Fees & Services.” 46Index PART IV Item 15. Exhibits and Financial Statement Schedules. (a)The following documents are filed as part of this Annual Report on Form (1)Financial Statements: See the Index to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K. (2)Financial Statement Schedule: Financial statement schedules are omitted because they are not applicable or the required information is shown inthe financial statements or notes thereto. All other schedules are omitted because of the absence of conditions under which they are required orbecause the required information is given in the financial statements or the notes thereto. (3)Exhibits: See Exhibit Index immediately following the signature page of this Form 10-K. 47Index SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-Kto be signed on its behalf by the undersigned, thereunto duly authorized. VirnetX Holding Corporation By: /s/ Kendall Larsen Name: Kendall Larsen Title: Chief Executive Officer and President Dated: February 29, 2012 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kendall Larsen his or her attorney-in-fact, with full power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same,with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all thatsaid attorney-in-fact, or his or her substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons onbehalf of the registrant and in the capacities indicated. Name Capacity Date /s/ Kendall Larsen Director, Chief Executive Officer and President February 29, 2012Kendall Larsen (Principal Executive Officer) /s/ William E. Sliney Chief Financial Officer February 29, 2012William E. Sliney (Principal Financial Officer and Principal AccountingOfficer) /s/ Robert D. Short III Director February 29, 2012Robert D. Short III /s/ Scott C. Taylor Director February 29, 2012Scott C. Taylor /s/ Michael F. Angelo Director February 29, 2012Michael F. Angelo /s/ Thomas M. O'Brien Director February 29, 2012Thomas M. O'Brien EXHIBIT INDEX ExhibitNumber Description3.1 Certificate of Incorporation of the Company. (1)3.2 By-Laws of the Company. (1)4.1 Form of Warrant Issued to Gilford Securities Incorporated. (2)4.2 Form of Warrant Agency Agreement by and between the Company and Corporate Stock Transfer, Inc. as Warrant Agent. (2)4.3 Form of Underwriter's Warrant. (2)4.4 Form of Series I Warrant. (3)4.5 Amended Form of Stock Option Agreement - 2007 Stock Plan. (12)10.1 Form of Indemnification Agreement by and between the Company and each of Kendall Larsen, Robert D. Short III, Scott C. Taylor, Michael F.Angelo, Thomas M. O'Brien and William E. Sliney. (1)10.2 Voting Agreement among the Company and certain of its stockholders, dated as of December 12, 2007. (5)10.3 2007 Stock Plan. (4)10.4 Securities Purchase Agreement, dated as of September 2, 2009, by and between the Company and the Purchasers. (3)10.5 Form of Registration Rights Agreement by and between the Company and the Purchasers. (3)10.6 Form of Underwriting Agreement between VirnetX Holding Corporation and Gilford Securities Incorporated. (2)10.7 Patent License and Assignment Agreement by and between the Company and Science Applications International Corporation, dated as ofAugust 12, 2005. (6)10.8 Security Agreement by and between the Company and Science Applications International Corporation, dated as of August 12, 2005. (6)10.9 Amendment No. 1 to Patent License and Assignment Agreement by and between the Company and Science Applications InternationalCorporation, dated as of November 2, 2006. (6)10.10 Assignment Agreement between the Company and Science Applications International Corporation, dated as of December 21, 2006. (6)10.11 Professional Services Agreement by and between the Company and Science Applications International Corporation, dated as of August 12,2005. (6)  48Index 10.12 Amendment No. 2 to Patent License and Assignment Agreement by and between VirnetX, Inc. and Science Applications InternationalCorporation, dated as of March 12, 2008. (7)10.13 IP Brokerage Agreement by and between ipCapital Group, Inc. and VirnetX, Inc., effective as of March 13, 2008. (7)10.14 Engagement Letter by and between VirnetX Holding Corporation and ipCapital Group, Inc. dated March 12, 2008. (7)10.15 Lease Agreement by and between the Company and Granite Creek Business Center, dated as of March 15, 2006, as amended in April 2007and April 2008. (8)10.16* Engagement Letter dated June 9, 2009, by and between McKool Smith, a professional corporation, and the Company. (9)10.17 Engagement Letter dated April 15, 2010, by and between McKool Smith, a professional corporation, and the Company. (10)10.18* Settlement and License Agreement, by and between Microsoft Corporation, a Washington corporation, and VirnetX, Inc., a Delawarecorporation. (11)10.19 Fiscal Year 2011 Director Compensation (13)21.1 Subsidiaries of VirnetX Holding Corporation.23.1 Consent of Farber Hass Hurley LLP, Independent Registered Public Accounting Firm.31.1 Chief Executive Officer Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act.31.2 Chief Financial Officer Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act.32.1† Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002.32.2† Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002.101.INS†† XBRL Instance Document 101.SCH†† XBRL Taxonomy Extension Schema Document101.CAL†† XBRL Taxonomy Extension Calculation Linkbase Document101.DEF†† XBRL Taxonomy Extension Definition Linkbase Document101.LAB†† XBRL Taxonomy Extension Label Linkbase Document101.PRE†† XBRL Taxonomy Extension Presentation Linkbase Document (1)Incorporated herein by reference to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 1,2007.(2)Incorporated herein by reference to the Company's Registration Statement on Form S-1/A filed with the Securities and Exchange Commission onJanuary 16, 2009.(3)Incorporated herein by reference to the Company's Form 8-K filed with the Securities and Exchange Commission on September 3, 2009.(4)Incorporated herein by reference to the Company's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on March25, 2008.(5)Incorporated herein by reference to the Company's Form 10-K filed with the Securities and Exchange Commission on March 31, 2008.(6)Incorporated by reference to the Company's Form 8-K (Commission File No. 001-33852) filed with the Securities and Exchange Commission on July12, 2007.(7)Incorporated by reference to the Company's Form 8-K (Commission File No. 001-33852) filed with the Securities and Exchange Commission onMarch 18, 2008.(8)Incorporated by reference to the Company's Form 10-K (Commission File No. 001-33852) filed with the Securities and Exchange Commission onMarch 31, 2009.(9)Incorporated by reference to the Company's Form 10-Q (Commission File No. 001-33852) filed with the Securities and Exchange Commission onAugust 10, 2009. (10)Incorporated by reference to the Company's Form 10-Q (Commission File No. 001-33852) filed with the Securities and Exchange Commission onMay 7, 2010.(11)Incorporated by reference to the Company's Form 10-Q/A (Commission File No. 001-33852) for the period ended June 30, 2010, filed with theSecurities and Exchange Commission on January 31, 2011. (12)Incorporated by reference to the Company's Form 10-Q (Commission File No. 001-33852) filed with the Securities and Exchange Commission onMay 10, 2011.(13)Incorporated by reference to the Company's Form 10-Q (Commission File No. 001-33852) filed witth the Securities and Exhange Commission onAugust 9, 2011. *Confidential treatment has been granted by the U.S. Securities and Exchange Commission as to certain portions of this Exhibit. † The certifications attached as Exhibit 32.1 and 32.2 that accompany this Annual Report on Form 10-K are not deemed filed with the Securities andExchange Commission and are not to be incorporated by reference into any filing of VirnetX Holding Corporation under the Securities Act of 1933, asamended, or the Securities Act of 1934, as amended, whether before or after the date of this Form 10-K, irrespective of any general incorporation languagecontained in such filing. †† XBRL (eXtensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement orprospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of1934, and otherwise is not subject to liability under these sections. 49EXHIBIT 21.1 Subsidiaries of Registrant Name of EntityJurisdiction ofIncorporation orOrganization Network Research Corporation Japan Ltd. (known as Network Research Corporation Japan Kabushiki Kaisha in Japan)Japan VirnetX Inc.Delaware EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-149884, 333-153645 and 333-162145) and FormS-8 (No. 333-149883) of our reports dated February 29, 2012, relating to the consolidated financial statements of VirnetX Holding Corporation (the“Company”), and the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of theCompany for the year ended December 31, 2011. /s/ Farber Hass Hurley LLP Granada Hills, CA February 29, 2012 EXHIBIT 31.1 CERTIFICATIONS I, Kendall Larsen, certify that: 1.I have reviewed this Annual Report on Form 10-K of VirnetX Holding Corporation for the fiscal year ended December 31, 2011; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscalquarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control overfinancial reporting. /s/ Kendall Larsen Kendall Larsen President and Chief Executive Officer (Principal Executive Officer) Date: February 29, 2012 EXHIBIT 31.2 CERTIFICATIONS I, William E. Sliney, certify that: 1.I have reviewed this Annual Report on Form 10-K of VirnetX Holding Corporation for the fiscal year ended December 31, 2011; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscalquarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likelyto adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control overfinancial reporting. /s/ William E. Sliney William E. Sliney Chief Financial Officer (Principal Accounting and Financial Officer) Date: February 29, 2012 EXHIBIT 32.1 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of VirnetX Holding Corporation (the "Company") on Form 10-K for the fiscal year ended December 31, 2011as filed with the Securities and Exchange Commission on February 29, 2012 (the "Report"), I, Kendall Larsen, President and Chief Executive Officer of theCompany, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Kendall Larsen Kendall Larsen President and Chief Executive Officer (Principal Executive Officer) Date: February 29, 2012 EXHIBIT 32.2 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of VirnetX Holding Corporation (the "Company") on Form 10-K for the fiscal year ended December 31, 2011as filed with the Securities and Exchange Commission on February 29, 2012 (the "Report"), I, William E. Sliney, Chief Financial Officer of the Company,certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ William E. Sliney William E. Sliney Chief Financial Officer (Principal Accounting and Financial Officer) Date: February 29, 2012 

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